HireQuest, Inc. (HQI) Q3 2026 Earnings Call Transcript

Operator: Good afternoon, and welcome to the HireQuest, Inc. Third Quarter 2026 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Walter Frank.

Walter Frank: Thank you, operator. I would like to welcome everybody to the call. Hosting the call today are HireQuest's CEO, Rick Hermanns; and CFO, David Hartley. I would like to take a moment to read the safe harbor statement. This conference call contains forward-looking statements as defined within Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements and terms such as anticipate, expect, intend, may, will, should or other comparable terms involve risks and uncertainties because they relate to events and depend on circumstances that will occur in the future. Those statements include statements regarding the intent, belief or current expectations of HireQuest and members of its management as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those described in HireQuest's periodic reports filed with the SEC and that actual results may differ materially from those contemplated by such forward-looking statements. Except as required by federal securities law, HireQuest undertakes no obligation to update or revise forward-looking statements to reflect changed conditions. I would now like to turn the call over to the CEO of HireQuest, Rick Hermanns.

Richard Hermanns: Good afternoon, and thank you for joining our call today. We saw continued momentum in the third quarter across our core commercial staffing brands as improving demand translated into another quarter of year-over-year revenue growth. Total revenue grew 4% year-over-year to $8.8 million with broad-based growth across our HireQuest Direct and Snelling offices. Our franchise model continues to demonstrate its resilience, allowing us to grow alongside our franchisees as they continue to benefit from a strengthening labor market. On the macro level, market data increasingly suggests a shift to improving staffing demand. According to the Bureau of Labor Statistics, temp positions rose almost 19,000 in October, up 3% year-over-year, the highest since September 2022 and the fifth consecutive month of year-over-year growth. Broader payrolls also came in well above expectations in October, and transportation and warehousing and manufacturing, 2 of the light industrial end markets our franchisees serve, added a combined 44,000 jobs. Staffing Industry Analysts' weekly Bullhorn Staffing Indicator, which shows near real-time weekly trends in temporary staffing volume and hours worked by temporary workers across the United States, also reached a new year-to-date high in late October, a trend also reflected in the American Staffing Association's ASA Staffing Index. We're glad -- while we're glad to see the encouraging market signs, we have consistently delivered results in all types of market environments thanks to our differentiated franchise staffing model. This model has allowed us to navigate a diverse mix of market conditions over the last several years to meet the demands of our customers while remaining solidly profitable. As I mentioned last quarter, and I'd like to say it again now, we've reported GAAP profitability in each quarter since the third quarter of 2024 when we recognized a onetime noncash impairment charge of $6.4 million related to our acquisition of MRI Network, and we have never reported a loss on a non-GAAP basis. We believe that -- we believe the improving demand environment we've seen throughout 2026 positions our franchisees well as we close out the year and look ahead into 2027. As of today, we're seeing momentum continue into the fourth quarter. Weekly system-wide sales have been up double digits year-over-year for the last couple of months, but we've seen that strength continue to build with system-wide sales in the high teens year-over-year through early November. Our results are supported by a strong balance sheet and ample liquidity, and we remain focused on disciplined capital allocation as we work to continue to deliver consistent profitability and enhance value for our shareholders. With that, I'll turn over the call now to David to provide a closer look at our third quarter financial results. David?

C. Hartley: Thank you, Rick, and good afternoon, everyone. Appreciate you joining us today. I'll now provide a summary of our third quarter results. We generated $8.8 million in total revenue in the third quarter of 2026, up 4% from $8.5 million a year ago. The third quarter of 2025 included $540,000 of total revenue related to the MRI Network assets divestiture, so on a pro forma basis, total revenue increased 11.1% year-over-year. We have 2 sources of revenue: franchise royalties, our primary source, which is the larger of the 2; and the other is service revenue, which includes fees for certain services we provide to franchisees, interest we charge them and other miscellaneous revenue. Franchise royalties rose 1.5% to $8.2 million from $8.1 million in the same quarter last year. The third quarter of 2025 included approximately $479,000 in franchise royalties related to the MRI divestiture. And pro forma franchise royalties increased 7.9% in the third quarter of 2026. System-wide sales are the sales behind those royalties. They capture sales at all offices, including those classified as discontinued. We track them as an indicator of franchise performance, and they sit outside our reported revenue. System-wide sales came in at $131.2 million for the third quarter compared to $133.6 million in the third quarter last year. The decrease was primarily driven by $15.8 million in system-wide sales related to the MRI assets divestiture included in our results last year. This was partially offset by an increase of $7.5 million in system-wide sales from HireQuest Direct and $6.6 million in system-wide sales from Snelling. Pro forma for the divestiture, system-wide sales rose 11.4% in the third quarter. Service revenue in the third quarter was $604,000 compared to $387,000 last year, primarily due to an increase of $230,000 related to liability insurance. This was partially offset by the loss of $61,000 in MRI Network national advertising fund fees that are no longer part of our revenue due to the divestiture. Selling, general and administrative expenses in the third quarter were $6.1 million compared to $5.1 million in the third quarter of 2025. SG&A in the third quarter of '26 included a noncash expense of approximately $1.3 million due to write-downs of notes receivable, primarily as a result of a franchise location we repossessed during the quarter. Also included in SG&A is net workers' compensation expense, which totaled $434,000 for the third quarter of 2026 compared with a net benefit of $99,000 in the third quarter of 2025. For the third quarter of '26, core SG&A, which excludes the impact of workers' comp and any nonrecurring operating expenses, was $4.4 million. We provide a table on the press release issued earlier this afternoon with a detailed reconciliation of core SG&A to SG&A, along with tables for the non-GAAP profitability metrics, net income to adjusted net income and net income to adjusted EBITDA, which I'll discuss shortly. Net income was $1.7 million in the third quarter or $0.12 per diluted share compared to $2.3 million or $0.16 per diluted share last year. Net income in the third quarter of 2026 included the noncash expense of $1.3 million related to the repossession of the franchise location. And additionally, our effective tax rate for continuing operations was 17% in the third quarter of this year compared to 5.2% in the third quarter last year. The third quarter of last year primarily benefited from a higher level of work opportunity tax credits. Adjusted net income for the third quarter was $3 million or $0.22 per diluted share compared to adjusted net income of $3.3 million or $0.23 per diluted share last year. Adjusted EBITDA was $4.5 million in the third quarter compared to $4.5 million last year. Moving on now to the balance sheet. Our total assets as of September 30, 2026, were $95.7 million compared to $88.2 million at December 31, 2025. Current assets included $1.1 million in cash and $54.9 million of net accounts receivable, while current assets at 2025 year-end included $3.9 million of cash and $39.3 million of net accounts receivable. Working capital was $38 million as of September 30, 2026, compared with $33 million at the 2025 year-end. As of September 30, 2026, we had approximately $500,000 drawn on our credit facility and $40.5 million in availability, assuming continued covenant compliance. We have paid a regularly -- a regular quarterly dividend since the third quarter of 2020. During the third quarter of 2026, we paid a $0.06 per common share dividend declared on September 1, 2026. We expect to continue to pay a dividend each quarter, subject to the Board's discretion. Additionally, during the first 9 months of 2026, we repurchased approximately 226,000 shares of our common stock for approximately $2.4 million under our share repurchase program. With that, I will turn the call back over to Rick for some closing comments.

Richard Hermanns: Thank you, David. As always, I'd like to thank our employees and franchisees for their hard work and commitment, and we look forward to speaking with you again when we report our fourth quarter and full year 2026 results in March. With that, we can now open the line to questions.

Operator: [Operator Instructions] And your first question will be from Mike Baker at D.A. Davidson.

Michael Baker: So yes, nice quarter, 2 quarters in a row of growth year-over-year. Can you talk a little bit about the pace throughout the quarter? I think you -- just talk about where you ended -- where you started the quarter versus where you ended. And then you made some comments about early 4Q trends. What's reasonable expectation to finish the year in terms of top line growth?

Richard Hermanns: Well, I mean, obviously -- and thanks for the question, Mike. We don't obviously give guidance as far as what our revenues are, but I can simply say that, by the end of the third quarter, we were -- our year-over-year comparisons were stronger than at the beginning of the quarter, and those trends have actually accelerated into the fourth quarter. And so while I wouldn't want to speculate how the year will end, like I said, the beginning of the fourth quarter has been stronger than the third quarter.

Michael Baker: Okay. Fair enough. It's good to see the growth, of course. But if I could ask it, the growth was up a little bit less than it was in the second quarter, but it sounds like it got better. I guess that implies maybe a little bit of softness early in the quarter. If you could just talk about what -- is that right? And what may have -- is there anything that impacted any of the months in particular that now seems to be behind us?

Richard Hermanns: No, I wouldn't -- so I wouldn't -- what I would say is the -- I think part of the difference is what the comparisons were, let's say, with last year, including MRI because I'm pretty confident -- and David, you can check my numbers. Mike, maybe offline, we can get this for you, is that our actual comparisons were better in Q3 than they were in Q2 year-over-year. And so -- but obviously, we have the MRI divestiture numbers that kind of mess with the top. It's the adjusted numbers that almost count more simply because of the size of those other ones. And so I just -- I don't believe that's possible. The other part that I would say, we did benefit in the third quarter. I don't want to be one of those guys who sits there and if there's a storm in winter and say, yes, our quarter was off because we had some bad weather in the Northwest or something like that. We did benefit a bit in the third quarter of the fact that there really were no major hurricanes that had a significant impact, and so we didn't lose business in the third quarter due to weather events. And so that did actually help us. But again, our year-over-year trends continue to improve throughout the quarter, and so -- but like I said, we'll go back and look at that, but I don't think the initial assertion you made was correct.

Operator: Next question will be from Kevin Steinke at Barrington Research.

Kevin Steinke: So you referenced the broad-based growth that you saw across both HireQuest Direct and Snelling, continued strength in commercial staffing. Are there any particular industry verticals or markets that you would call out that are helping to drive that strength?

Richard Hermanns: Yes. So -- and again, it absolutely was broad-based improvements. So I don't -- so -- and I'm going to go and now I'm going to say it, but there are a couple that were better. But I want -- it's important to state that there was not one single area that like really drove the improvements. But I would call out basically factory automations or warehouse automations. There have been some large projects taking place across the country that we've definitely benefited from. Think of any sort of a large logistics company changing out their equipment and then having it be tested. So a lot of our people have been involved in those upgrades of equipment, and so those have -- we've definitely benefited from that. We've also done a better job this year capturing foodservice business. So I would say those 2, in particular, have been very strong for us.

Kevin Steinke: Great. That's helpful. And so as you talked about the year-over-year comparison strengthened as you went through the third quarter and have continued into the fourth quarter, is there anything that you would attribute that strengthening trend to? Do you think it's just the market? Is it something you're doing internally? I know you've talked about national accounts in the past. I don't know anything you would highlight behind the strengthening.

Richard Hermanns: So it's a combination. So I would put it on to 3 different major factors. Number one is just an improvement in demand. And as we referenced in our prepared remarks, is whether it's SIA, whether it's the American Staffing Association, we have been seeing -- we're seeing what everybody else is seeing, which is there is an improvement in demand for temporary staffing across the industry. So we do now have a tailwind for the last 5 months that we hadn't seen in 3 years. Now the part of it is -- then is, well, why is that. And as I've stated before, without taking a political stance on it whatsoever, the restrictive immigration policies have certainly improved demand for commercial staffing companies, especially those that cater to blue-collar workers, which HireQuest is one of them. And so that is another reason that we see -- we have seen for the improvement in the demand within the industry itself. The other part is -- and we are absolutely doing better on our own sort of targeting of national accounts. We've sort of expanded the reach of our national account department to work in -- more in step with our franchisees to close business instead of just bringing opportunities to our franchisees, is actually working with them to close it, meaning, historically, we might, let's say, pick up a contract with ABC Warehouse, which is across the country and then say to our franchisees, okay, here are 38 locations. Go get them. We are working much more carefully and much more in tandem with our franchisees to go to those -- of those 38 locations, the ones that are in our markets. I would add a final point. That's improved our performance as well as it's allowed us to pick up a number of sites that, let's say, historically, we really wouldn't have probably have attempted. We developed a -- basically a new app for our employees. And as a result, we're able to take on projects that are -- we can recruit far more effectively outside of our branch network. And so for example, we're completing a project now in Upstate New York. Well, our closest branch is in New York City, so we're not even really close to it. We're probably 400 miles away. But because of this app we've developed, along with other technological tools within the industry, have been -- have filled a fairly large order that, historically, like I said, we have never even attempted. And so that's helping as well.

Kevin Steinke: Great. Sounds good. That's great color. Just want to ask about just a couple of the expense items. Workers' compensation expense, it's been closer to neutral the last couple of quarters. It trended up some in the third quarter. I don't know if there's anything specific you would attribute that to.

Richard Hermanns: No. I mean, look, obviously, there's medical inflation -- is out there, and that doesn't help us. But that's the whole -- that's part of the reason why we do the reconciliation of the core -- with the core SG&A because we -- earlier in the year, we had a couple of larger claims that just have driven that a bit worse than what we would have normally anticipated. But frankly, we were a little bit surprised even to where it landed because, overall, the trend is not that bad. We're not where we were 3, 4 years ago on our workers' comp situation. So I wish I had a better response for it, but it's -- but there's nothing specifically -- like I said, we're not seeing -- don't be wrong, we still think that workers' comp rates are probably inadequate for the amount of inflation that's within medical costs. But like I said, the rates have increased enough to where we don't expect, again, a reversion back to 2024 and 2023.

Kevin Steinke: All right. Yes, that's helpful. Also, I wanted to ask about the $1.3 million write-down of notes receivable noncash expense. Maybe just any color on what happened with that particular situation. And you noted you repossessed the franchise location. Is that in a market you want to continue to participate in? Is that a location that you'd like another franchisee to take over? Just any more color there?

Richard Hermanns: Yes. And so it's an operation that we had sold a few years back. And the performance deteriorated, especially last year. And so as stated, we repossessed it. We still like the business. We still -- the same client list that used to generate significant profits still exists. And so we're just applying more resources now that it's corporate-owned, that we're applying more resources to it, and our intention is to build it back up and then resell it. And we have a buyer -- a potential buyer. I shouldn't say we have a buyer, but we have a potential buyer already identified. And so our -- again, our goal is absolutely to improve it and resell it. We like the market. Bottom line is we like the segment. We just don't like the results it's had the last 9 months.

Kevin Steinke: Okay. Yes, that makes sense. And then just lastly, just any thoughts on the acquisition landscape opportunities out there, pipeline, valuations or any other color that you could offer?

Richard Hermanns: Yes. And I pretty much say the same thing. There's -- we are always working on 3 to 5 opportunities at any given time, and this is no different. The reality is the improved environment for staffing, I think, has thawed more opportunities, though, because, especially in 2025, there had been sort of 3 laggard years combined with people had received basically ERT (sic) [ ERTC ] refunds and PPP money. And so they had enough liquidity to sort of ride it out. And now there's a more positive outlook in the industry, which means now people are more willing to sell, and yet it's still at reasonable numbers. There aren't -- and one of the things we faced in, let's say, '24 and '25 is people look back to their '21 numbers and '22 numbers and say, oh, yes, my business is worth X. And yes, '24 is just an anomaly. Well, that really obviously wasn't an anomaly. Now you have people who are like, okay, they can legitimately say here's our rebound. And so more people are coming to market is what I'm saying. So we're positive about opportunities coming. That's not me saying, though, that we have anything in the bag. We don't. But I do think that throughout the industry, I think that you will start to see more deals being done.

Operator: [Operator Instructions] And at this time, we have no further questions registered. I will turn the call back over to management.

Richard Hermanns: Great. Thank you, operator, and thank you, everybody, for dialing into our quarterly earnings call. Again, hopefully, you will all agree that it was very good to see the continued improvement in revenues and again, just another quarter of solid cash flow, which, again, has worked its way into the fourth quarter. And so again, we just thank you for our employees and to our franchisees and to our shareholders. Have a good day.

Operator: Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time. Thank you for your participation.