HireQuest, Inc. (NASDAQ:HQI) is a nationwide franchisor of offices providing direct-dispatch, executive search, and commercial staffing solutions primarily in the light industrial and blue-collar segments of the staffing industry. The company's diverse franchise network, which includes brands such as HireQuest Direct, Snelling, HireQuest, DriverQuest, HireQuest Health, and Northbound Executive Search, has demonstrated resilience in the face of ongoing economic challenges.

Business Overview

HireQuest operates as a single reporting segment, providing staffing solutions through a network of 428 franchisee-owned offices and 1 company-owned office across 42 states, the District of Columbia, and 13 countries outside the United States as of March 31, 2023. The company's franchisees offer various types of temporary personnel, permanent placements, and recruitment services to thousands of clients in industries including construction, healthcare, recycling, warehousing, logistics, manufacturing, and more.

HireQuest's growth strategy combines organic expansion and strategic acquisitions. The company's organic growth initiatives include expanding existing client relationships, seeking national and global account opportunities, providing access to capital for franchisees to expand into new markets, and offering new franchises to qualified applicants. On the acquisition front, HireQuest has identified "tuck-in" acquisitions as a key component of its inorganic growth strategy, financing these deals primarily through a combination of cash, debt, and equity.

Recent Developments

In October 2023, HireQuest entered into an agreement to acquire certain assets of TEC, The Employment Company, for approximately $9.8 million. TEC, which operates 10 locations across Arkansas, provides light industrial, clerical, technical, and professional staffing services. The acquisition closed on December 4, 2023, and HireQuest immediately sold the acquired assets to new franchisees, who will operate the locations under the Snelling brand.

Financial Performance

For the full year 2023, HireQuest reported annual revenue of $37,882,000 and net income of $6,135,000. The company generated annual operating cash flow of $10,621,000 and free cash flow of $10,133,000.

In the first quarter of 2024, HireQuest's total revenue was $8,419,000, a decrease of 14.6% compared to the same period in 2023. Franchise royalties, the company's primary revenue source, were $7,831,000, down 16.0% year-over-year. This decline was primarily driven by a 12.7% decrease in underlying system-wide sales, including a $12.3 million drop in system-wide sales for the MRI network. Service revenue, which includes interest charged to franchisees and other fees, increased 10.1% to $588,000 in the first quarter of 2024.

Net income from continuing operations for the first quarter of 2024 was $1,692,000, or $0.12 per diluted share, compared to $2,318,000, or $0.17 per diluted share, in the prior-year period. Adjusted EBITDA, a key performance metric for the company, was $3,357,000 in the first quarter of 2024, down from $4,581,000 in the same quarter of 2023.

Liquidity and Capital Resources

As of March 31, 2024, HireQuest had $1,569,000 in cash and $47,712,000 in net accounts receivable. The company's current assets exceeded current liabilities by $18,000,000, indicating a strong working capital position. HireQuest had $16,107,000 drawn on its $50,000,000 revolving credit facility with Bank of America, N.A., leaving $33,893,000 in available capacity as of the end of the first quarter.

Operational Highlights

During the first quarter of 2024, HireQuest's higher-margin HireQuest Direct franchisees performed the best among the company's three primary business offerings, benefiting from favorable geographic factors. In contrast, the MRI network, which focuses on executive, managerial, and professional recruitment services, struggled the most, consistent with broader industry trends.

HireQuest has made significant progress in addressing its workers' compensation challenges, which have weighed on the company's profitability in recent quarters. In the first quarter of 2024, workers' compensation expense was $572,000, a substantial sequential decrease from $1,300,000 in the fourth quarter of 2023. The company attributes this improvement to proactive changes implemented in the current policy year, which began on March 1, 2024.

Outlook and Risks

Management expects demand for temporary staffing to increase in the second and third quarters of 2024 due to normal seasonal factors, though the magnitude of the seasonal ramp may be more muted compared to historical trends. The company remains focused on controlling costs, with core SG&A expenses decreasing year-over-year in the first quarter of 2024.

Risks facing HireQuest include the continued impact of economic headwinds on the staffing industry, volatility in workers' compensation expenses, and the company's ability to successfully integrate and capitalize on future acquisitions. Additionally, the ongoing military conflict between Israel and Hamas, as well as the broader geopolitical tensions, could potentially impact global economic conditions and disrupt HireQuest's operations.

Conclusion

Despite the challenging macroeconomic environment, HireQuest has demonstrated the resilience of its franchise-based business model. The company's diverse portfolio of staffing solutions, focus on cost control, and proactive approach to managing workers' compensation expenses have enabled it to navigate the current industry downturn better than many of its peers. As the economy and demand for staffing services recover, HireQuest appears well-positioned to leverage its extensive franchise network and strategic growth initiatives to drive increased value for shareholders.