HireQuest, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The company is a nationwide franchisor of temporary staffing offices; it reported 213 franchised offices in 36 states and the District of Columbia.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $6.88 million | $3.38 million | $15.99 million | $10.40 million |
| Operating income | $3.47 million | $1.99 million | $6.00 million | $3.76 million |
| Net income | $3.19 million | $1.97 million | $9.66 million | $4.00 million |
| Diluted EPS | $0.23 | $0.15 | $0.71 | $0.30 |
| Adjusted EBITDA | $5.29 million | $2.92 million | $11.23 million | $7.68 million |
- Revenue rose 103% in Q3 and 54% for the nine-month period. Franchise royalties were $6.54 million and $15.25 million, respectively; royalty revenue accounted for most revenue.
- Operating margin was 50.4% in Q3 versus 58.9% a year earlier, and 37.5% for nine months versus 36.2%. Net income included significant miscellaneous income, particularly the Snelling bargain-purchase gain, so reported earnings growth is not solely indicative of operating performance.
- System-wide sales increased 79.1% in Q3 and 56.7% for nine months year over year. Management attributed royalty growth to both acquisitions and organic improvement as pandemic impacts eased.
- Operating cash flow was $14.82 million for nine months, compared with $6.94 million in 2020. Investing used $24.05 million, primarily for acquisitions; financing provided $0.35 million. Cash fell $8.88 million to $4.79 million.
- At September 30, current assets were $46.71 million and current liabilities $21.80 million, a $24.91 million working-capital surplus. Accounts receivable were $38.43 million.
- Debt included a $3.12 million term loan. The new $60 million revolving facility had $13.6 million of additional borrowing availability at quarter-end, based on eligible collateral. Letters of credit used approximately $14.8 million of facility availability. The company reported compliance with its financial covenants.
Material changes and unusual items
- HireQuest acquired Snelling on March 1 for approximately $17.9 million and Link on March 22 for approximately $11.1 million. These transactions expanded the franchise base; the Snelling acquisition generated a $4.96 million bargain-purchase gain. The company also recorded an approximately $1.2 million net loss related to sales of acquired assets.
- Q3 SG&A increased to $3.04 million from $1.36 million. The filing cites higher compensation and stock compensation, a $307,000 additional note-receivable reserve, and a $200,000 California class-action settlement. Nine-month SG&A also included acquisition-related costs.
- After quarter-end, HireQuest acquired Recruit Media for approximately $4.35 million on October 1 and agreed on November 3 to acquire Dental Power Staffing for $1.48 million. The filing says Recruit Media’s intellectual property is intended to accelerate platform improvements and Dental Power would add a staffing vertical.
- The effective tax rate was 9.2% for Q3 and 4.1% for nine months, versus 17.0% and 14.1% in the comparable 2020 periods. The filing attributes much of the difference from the 21% federal statutory rate to the bargain-purchase gain and Work Opportunity Tax Credits.
Outlook, risks and contingencies
- No numerical revenue or earnings guidance was provided. Management expects sufficient liquidity for at least the next 12 months from cash, operating cash generation and borrowing capacity, while warning that COVID-19 and credit-market conditions could affect that outlook.
- Management said system-wide sales were trending closer to historical levels month to month, but expected pandemic-related pressure on sales and royalties to continue into coming quarters and potentially the following year. COVID-19 effects on demand, worker supply, franchisees and collections remain uncertain.
- The company is effectively self-insured for workers’ compensation claims up to policy deductibles and had a $14.3 million letter of credit securing workers’ compensation obligations. Claims estimates and required collateral are material uncertainties.
- The company reported a material weakness in internal control over financial reporting due to insufficient accounting resources for technical accounting and review. Disclosure controls were therefore deemed ineffective as of September 30. Management was evaluating additional accounting staff and third-party acquisition expertise; timing of remediation was not assured.
- Risks identified include acquisition integration and execution, franchisee financial health, restrictive debt covenants, staffing-industry and pandemic conditions, and compliance with the OSHA vaccination/testing standard described in the filing. Management did not expect material uninsured losses from disclosed legal proceedings.
- Quarterly dividends were $0.06 per share in June and September 2021. The board declared another $0.06 dividend after quarter-end, payable December 15, 2021, subject to the company’s financial position and business results.
Investor verification priorities
- Separate recurring royalty and operating performance from the Snelling bargain-purchase gain, asset-sale results and acquisition-related charges.
- Assess organic system-wide sales trends and the continuing effects of COVID-19, including franchisee health, worker availability and customer demand.
- Review post-acquisition liquidity: quarter-end cash was $4.79 million, and the company said it used approximately $4.4 million for the October Recruit Media purchase.
- Verify revolver availability, borrowing-base limits, letters of credit, covenant compliance and the effect of acquisition funding and dividends on liquidity.
- Monitor workers’ compensation claim estimates and collateral requirements, note-receivable collectability, and the status of the disclosed material weakness and remediation.