Good afternoon, ladies and gentlemen, and welcome to today's HireQuest, Inc. third quarter 2022 earnings conference call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, John Nesbett of IMS Investor Relations. John, the floor is yours.
Thank you and good afternoon. I'd like to welcome everyone to the call. Hosting the call today are HireQuest CEO, Rick Hermanns, and the Chief Financial Officer, David Burnett. I'd 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 and other comparable terms involve risks and uncertainties because they relate to events and dependent 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 in 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 CEO of HireQuest, Rick Hermanns. Go ahead, Rick.
Thank you for joining us for today's call. To begin, I will provide an overview of the financial and strategic highlights for the quarter. Then David will share more details surrounding our third quarter results. This was a very strong quarter for us in which we saw continued revenue growth. Franchise royalties increased 13.7% to $7.4 million. Excluding acquisitions made in 2022, royalty growth was 7.3%. Staffing revenue from owned locations was $1.5 million. Gross profit increased 19.7% to $8.2 million, compared to $6.9 million in the prior year period. We continued to drive very strong profitability in the business with net income from continuing operations, increasing 29.9% to $4.1 million or $0.30 per diluted share.
We also reported adjusted EBITDA of $6.6 million, up from $5.3 million in the prior year period. I'd also like to point out that for the first nine months of 2022, we've reported adjusted EBITDA of $17.8 million, up 86% from $9.6 million for the first nine months of 2021. This growth really starts to demonstrate the magnitude and success of the growth strategy we are executing. Multiple factors drove our strong performance for the quarter. First, our franchise locations continued to perform well. A key component of our model is supporting our franchisees as they build out their own businesses. For example, our franchise expansion incentive program helps with startup costs by providing existing franchisees with credits on the royalty fees they pay for existing offices.
Freeing franchises from financial constraints and giving them access to growth capital empowers their organic growth. We also eliminate two of the highest cost barriers for franchise expansion, capital and workers' comp. Second, we continue to see the benefit of the strategic diversification of our geographical coverage and end markets. The three acquisitions we consummated in Q1 significantly advanced this strategy. We have substantially expanded our geographical and industry coverage and now have a foothold in a majority of all the segments of the $168 billion staffing and recruiting marketplace. Third, the current economic backdrop of rising wages and labor shortages continues to be a favorable demand factor for our franchisees, in contrast to the experience of some others in our industry have reported.
As we all know, interest rates and inflation continue to rise. By utilizing HireQuest, companies are reducing the costs of permanent hiring while gaining access to quality workers in a supply-constrained environment. Fourth, the team here has become quite adept at executing and integrating acquisitions. Our recent Happy Faces deal at the end of the quarter is an excellent example of our strategy to add new franchisees and locations, and our flexibility to ensure the best and most aligned outcome for all parties. By joining forces with our existing Atlanta Snelling franchise, Happy Faces and its owner benefit from the strength and support that HireQuest brings to the Snelling franchise system while remaining an independent provider of staffing services.
Happy Faces generated over $14 million in sales in 2021, and we're excited to help them in their next stage of growth as a Snelling franchisee. With that, I'll pass it on to our CFO, David Burnett, for a closer look at our third quarter results. David?
Thank you, Rick, and good afternoon, everyone. Thanks for joining us today. As Rick mentioned, gross profit for the third quarter was $8.2 million, compared to $6.9 million for the same quarter last year, an increase of 19.7%.
Our gross profit is comprised of three components. Franchise royalties, which is our primary source of revenue. Service revenue, which is generated from fees for various optional services and interest charged to our franchisees on overdue accounts. Third is gross staffing revenue from owned locations, net of direct staffing costs for those locations. Franchise royalties and service revenue are derived from our franchise base. From time to time, we may have owned location staffing revenue, typically from acquired businesses that are not converted to franchises. Franchise royalties for the quarter were $7.4 million compared to $6.5 million last year, an increase of 13.7%. In addition to the contribution from acquired locations, royalties from our existing franchises saw a strong growth of 15.4% during the third quarter.
System-wide sales for the quarter were $123.2 million, compared to $101.9 million for the same period in 2021, an increase of 21%. Excluding acquisitions made in 2022, system-wide sales increased 13.1%. System-wide sales include sales at all offices, whether owned and operated by us or our franchisees. Selling, general, and administrative expenses for the quarter were $2.4 million or 1.9% of system-wide sales, compared to $3 million or 3% of system-wide sales in the same quarter last year. The decrease in SG&A was driven by a $982,000 third quarter benefit and net workers' compensation expense. During this quarter, we reduced our reserves based on recent claims resolution and experience.
Most of this benefit relates to the Snelling workers' compensation reserves assumed at the time of acquisition that are now in run-off mode. This decrease was offset by a net increase in compensation expense of $557,000 , which includes additional headcount to keep pace with growth in system-wide sales. Income tax expense for the quarter was approximately $946,000 , an effective tax rate of 18.6%. This was over double the effective tax rate for the third quarter of 2021, which was 9.2%. Income tax expense is generally calculated by forecasting a full year effective tax rate and applying that rate to year-to-date ordinary income. The lower rate for last year was the result of the large non-taxable bargain purchase gain recognized in 2021 after the Snelling acquisition.
Our normal effective tax rate is expected to be in the 15% to 20% range and will fluctuate based on significant permanent items like the Work Opportunity Tax Credit. Net income from continuing operations for the quarter was $4.1 million or $0.30 per basic and diluted share, compared to net income from continuing operations of $3.2 million in the third quarter last year, or $0.24 per basic share and $0.23 per diluted share. Net income from discontinued operations, which is the available-for-sale franchise that we are currently operating, contributed another $0.01 per share in the quarter. This quarter, we generated adjusted EBITDA of $6.6 million compared with $5.3 million in the third quarter of last year.
We believe adjusted EBITDA is a relevant metric for us due to the size of non-cash operating expenses running through our income statement. Adjusted EBITDA is also exclusive of acquisition-related charges. A detailed reconciliation of adjusted EBITDA to GAAP net income is provided, pardon me, in our latest Form 10-Q, which we plan on filing later this evening. Moving on now to the balance sheet and cash flow. Our current assets at September 30th, 2022 were $50.9 million, compared to $42 million at December 31st, 2021. Current assets at September 30th included $1.5 million of cash and $45.7 million of net accounts receivable, while current assets at December 31st, 2021 included $1.3 million of cash and $38.2 million of net accounts receivable.
Our current liabilities at September 30th, 2022 were $25.6 million, resulting in net working capital of $25.3 million. At December 31st, 2021, net working capital was $20.5 million. At the end of the third quarter, we had approximately $26.1 million in availability under our credit facility, even after the three acquisitions completed earlier this year and the growth since then. We believe that this facility, combined with our existing cash flow from operations, continues to provide us with the flexibility and room for both organic growth as well as the capacity to capitalize on potential future acquisitions.
Since the facility was finalized in the second quarter of 2021, we have closed five acquisitions with aggregate consideration of $27.1 million and finished the third quarter with a modest balance of $2.2 million on the credit facility and $1.2 million in seller financing. We have paid a regular quarterly dividend since the third quarter of 2020. Continuing that pattern, we paid a $0.06 per common share dividend on September 15th, 2022 to shareholders of record as of September 1st. We expect to continue to pay a dividend, including the fourth quarter, subject to the board's discretion. With that, I will turn the call back over to Rick for some closing comments. Rick?
Thanks, David. Our solid third quarter was very telling of the strengths across our business and the success we've seen in acquiring companies that significantly broaden the scope of our offerings.
I would like to thank our team, our franchisees, and their workers for the continued excellence demonstrated throughout the quarter, especially given the unusual economic environment we are all currently facing. We have a long-established history, and this is not the first time we have experienced economic uncertainty. I am confident we are well-positioned to handle any challenges that may come. As always, we remain focused on providing unparalleled support for our dedicated team of franchisees. With that, I'll now open the line to questions. Thank you.
Thank you. Ladies and gentlemen, the floor is now open for questions. If you would like to ask a question at this time, please press star one on your telephone keypad to enter the queue. We do ask, if listening on speakerphone today, that you pick up your handset while asking your question to provide optimal sound quality. Once again, ladies and gentlemen, that'll be star one on your telephone keypad at this time to enter the queue to ask a question. Please hold a moment while we poll for questions. Your first question today is coming from Michael Baker from D.A. Davidson. Mike, your line is live. Please go ahead.
Okay. A couple questions. One, just how would you characterize your results, sales, gross profit, EBITDA, relative to your internal expectations? What I'm getting at is, you know, there are estimates out there. They're my estimates. I'm the only one with estimates. I do my best job to project. My numbers are a little bit higher than yours. You know, but what's more important, I think, is how the results were relative to your own internal expectations rather than, you know, my estimates.
I appreciate the question, Mike. I would say a couple of things is, one, the sales really were not significantly different than what I would have expected. You know, and I realize, you know, you know, historically we kinda look at a bit more of an increase in sales in the third quarter because of the prominence of HQD, HireQuest Direct. That division tends to be more seasonal than our Snelling division and also now with Northbound. You know, part of that, your expectations weren't necessarily, you know, probably is wrong based on history as much as, you know, we're just more influenced now by Snelling.
If you look at the billings by sort of individual week, they were definitely well within, you know, our expectations. As far as, you know, EBITDA, I would also say that they were pretty much within our expectations. Frankly, every quarter, you know, always has a number of sort of adjustments, both positive and negative. I would say that this was one of those quarters where it was probably kind of balanced. There were a few things that, you know, maybe I wasn't expecting, and there were a couple of things both ways. I would say that it was a fairly indicative quarter.
The one thing I will admit that took me by surprise, and this is just me not being a tax accountant, was, you know, the increase in the effective tax rate. Otherwise, we'd have probably hit almost exactly what I would have expected.
Okay. That makes sense. Appreciate that. I wanted to ask you. I always like to ask, you know. It's a very confusing employment situation, I think, you know. Everyone keeps expecting employment to go down, but it. The unemployment rate is still, you know, very low. Looks like everyone's still hiring people, yet we're hearing about all these layoffs and freezes. You're in a unique position, I think, to help us understand what's going on in the labor market in general. So if you could give us your insights into labor in general, and then if we do go into a recession, what do you expect to happen, and how does that impact your business?
Those are a lot of good questions, and I'll do my best to answer all of them, hopefully. It's interesting that this was true of the pandemic, and it's true throughout, I guess, basically throughout history. States, each region tends to have a different effect. You know, some areas in the country do better than others in a recession. I found it interesting, for example. Probably our closest competitor would be TrueBlue's PeopleReady division. I was interested in seeing that, for example, for their Q3, their PeopleReady division was down 4%, whereas even excluding our acquisitions from the past year, we were actually up 7.3%. I think it was 7.3%.
It was reported that maybe it was 9%. Anyway, we did significantly better than PeopleReady. Now, I've, you know, I'd like to say that that's partially because of the, you know, a validation of our franchise model, but they're also heavier in certain other markets. I would say, you know, so with that caveat, that we really haven't seen, certainly not in the third quarter, any real slowdown to speak of in any market. You know, for us, it's, you know, even the last unemployment numbers, you know, still holding at 3.5%. It's a very strong employment market as far as our customers are.
I would say that part of that might be why we haven't maybe experienced the slowdown that's being spoken of is we really don't do a lot of business with, let's say, you know, certain large e-commerce companies that you're seeing some of the larger layoffs with, as an example. I think, I mean, even, let's say, a FedEx or something like that, like we're not, you know, we're really not very heavily exposed, certainly not directly, to those companies. Maybe some of the companies whose results were really jacked up by the pandemic, certainly we need to get the benefit of their upswing, but we're also now not maybe getting hammered by the sort of their numbers dropping back to more, you know, more historical normative numbers.
You know, that said, I will say the third quarter definitely represents the last quarter that had, let's say, pandemic influence to it. Meaning, you know, part of our organic growth was the result of a weaker Q3 2021. But at Q4 of last year, we pretty much, you know, had. There were no really lingering pandemic effects anymore. We're basically at, you know, fair comparisons at that point. I wouldn't, you know, I would say that the numbers are probably, you know. Fourth quarter will give a pretty good indication of maybe where the economy is, at least for us.
I would say that we're obviously at least more than a third of the way through the quarter, and I would simply say that to this point, our numbers have been holding up well. We're not really seeing it. Again, part of it might just be due to the mix of our numbers. That said, a decrease in the economy, a significant pullback in the economy is not helpful to us. I'm certainly not gonna pretend that. I've always said that a recession is bad for our business. It's bad for our franchisees, it's bad for our clients, and thus it's bad for us. However, with that said, I do believe.
You know, it's sort of interesting, you know, the old saying where, you know, people who are ignorant of history are doomed to repeat it sort of comes into this. I personally have led my company through four different recessions already, and frankly, each one is, you know, a little bit different. I think that for the longer term, when I say the longer term, I mean whether we're in a recession a year from now, six months from now, or five years from now, is that I think that the company, the country is undergoing a fundamental shift in demographics that will significantly impact the staffing industry overall.
By that, I mean that, you know, when you look at labor participation rates, they've dropped significantly, which is part of the reason we've well, I believe we've maintained such a low unemployment rate, is simply the number of people who are just no longer working. Basically, people who took early retirement. There was also an article in The Wall Street Journal maybe a month ago, and, you know, it discussed how there's an abnormally high number of 20 to 35-year-old young men who aren't working at all. They're living with their parents, and they're not working. That will create probably a bit of an environment that we're not used to in a recession.
Hopefully, that might be wishful thinking, but I just know that there is a real shortage still out there of quality workers. I think that therefore, demand for our services will remain higher than what they otherwise were. We're not back in the, you know, the 1980s or the 1990s when there were huge numbers of baby boomers that were, you know, in their sort of prime working years. Things have changed. The world is a different world. Like I said, for the staffing industry, I think so long as we retain our focus on candidate quality, is that we will be able to, you know, we will be able to do better than maybe historically what the economic performance of the economy is. I don't know if that answers all your questions, but that would be. That's my view.
Yeah, no, that's fascinating. Really, really great color on how it all works, and I appreciate it. Thanks. I'll pass it on to someone else.
Thank you. The next question is coming from Kevin Steinke from Barrington Research. Kevin, your line is live. Please go ahead.
Thanks. Good afternoon. Rick, I wanted to make sure I heard correctly in your comments. Did you say,
You now touch all segments of the $168 billion U.S. staffing industry?
Well, I would say a majority of it would be the better way of saying it, if it was.
Okay
Spoken anything differently. That said, obviously, we are not nearly as heavy in, you know, we have a lot of room to grow, let's say, for example, in healthcare. You know, we do have a presence in healthcare now, as an example.
Right. Okay. Yeah. I guess, you know, given that you're touching most or a large majority of the industry, I just kinda wanted to focus on really, you know, the long-term organic growth engine here, still massive opportunity to gain share in the market through new office openings, rolling out new service offerings to your franchisees, et cetera. Maybe just any thoughts on that in terms of what you're seeing in terms of new franchisee openings or willingness of franchisees to launch new offices and kinda the pipeline of maybe some of the new services you're thinking about or planning to roll out.
I know you're, I think, still working on the dental offering, but just maybe touch on some of those key long-term organic growth drivers as they're developing now.
Kevin, I'm really glad you asked that question, actually. One of the sweet spots we need to try to hit is creating. There's sort of, like, two different ways we can go about this. One is we wanna hit that sweet spot where we have enough of a name recognition that selling franchises becomes easier. Obviously, it's far more difficult. If we were to just sort of hang a shingle out and say, you know, you know, HireQuest Technical Services, and we're doing engineers, but we only have one office, it's hard to sell that franchise, right? Because you're not getting nearly as much name power, and know-how. For example, buying Snelling was important that way.
Yet, obviously, although our Snelling division is reasonably large, we have a long ways that we can continue to develop that. We'll continue to do that probably in other areas as well. You know, for example, our, you know, on the other hand, our healthcare, for example, is minuscule. Really, what we offer is minuscule. Therefore, you know, without forecasting it, you know, but to going out and buying, let's say, for example, a healthcare staffing company is reasonable, if only to put up bigger, you know, to have a bigger presence to improve our ability to sell more units. I would say this year, going back to your question, is that we've been able to open. I can't.
I'll have to get back with you on the actual number of openings we've had this year, but I would say that it's been a fairly good number of offices this year, given the uncertainty you know in the overall economy. I'm not displeased at all with that. On the other hand, one of the things that we're always seeking to do as well is look for you know niches within the industry where we might be able to add value. For example, using the dental as an example, dental is never gonna drive the company. You know, a typical dentist office or a dental service organization isn't going to want to go to a generic staffing company to try to find dental hygienists.
I do see us moving, you know, in the future, is consistently seeking those specialty markets as well. 'Cause even within our existing office network, you know, we have a lot of very, very talented franchisees, some that have very, you know, unique experiences. To the extent that we can utilize that and, you know, create that sort of specialty offering, I do see that as part of our future. Now, again, that doesn't mean that that's gonna drive everything. Again, our goal is to, you know, be able to be, you know, to have a credible offering to our clients as well.
Like I said, going to a DSO, a dental service organization, you know, we have a lot more credibility going in, you know, with our current offering than what we would've been able to do before we bought it. I hope that answers your question.
No, it does. I mean, I guess you have to kinda build up that brand recognition or that you prove that you can, you're able to provide that capability. I mean, I guess that might, you know, entail perhaps more acquisitions in the future or do you feel like you can develop some things organically as well? What does that mix look like going forward?
If we can do it without acquiring, you know, if we can do it without acquiring someone, we'd much rather do that. I think there are certain, you know, there are certain product lines that that's easier to do within what we already have. You know, but sometimes it just depends on what type of traction we get. I don't kinda wanna tip the cards, but there's something we have in the, you know, that we have in the offering as far as sort of a new, sort of a new product line, I'll call it. Well, you know, whether or not we buy anything in that, you know, really depends on how well it's received by our franchisees. And if it takes off, we're not really going to.
You know, I wouldn't do an acquisition to build onto it. I don't know if that answers the question, but ultimately, you have to have enough scale to, you know, you need that certain amount of scale before the franchise itself has value to a prospective franchisee, if that makes any sense.
No, yeah. Understood. Thank you. Yeah, I wanted to circle back on the just the labor market as well. You've talked about the last, you know, couple quarters here that demand has been good or demand has been strong, but maybe a bit of a lagging factor has just been labor supply, you know. That I guess the numbers being recorded on the labor market wouldn't indicate it, but has there been any loosening or has there been any, you know, improvement in your ability to find supply? To what extent is that a factor now that you think is playing into your growth?
Yeah. I don't think there's any question that in certain markets, you know, there's been a bit of a slackening of demand, and perhaps even somewhat of an increase in supply, which would be completely consistent, obviously, with the slowing economy and with interest rates going up, et cetera. However, there's such a pent-up demand, and there's such a large number of openings that I'm, at least in the clients we're servicing, we're just not getting to that point where, you know, we're like, looking around at each other and saying, "Gosh, we need to go out and find new clients." It's still more, we need to find more people to fill the orders we already have. I literally had a conversation with one of my franchisees today, and we were just talking about this kind of.
Because we have a reservoir of potential clients that we're sitting there, and we've intentionally not even engaged because we don't wanna stimulate orders that we can't properly fill. I would still. You know, and now that's just one segment, you know, that's just one segment within all of that we serve. I'm not suggesting that that's, you know, throughout our network, but I'm just saying that, you know, there's still more of a struggle to find good people than there is to find good clients.
Okay. Yeah, that's a helpful color. Appreciate it, and I'll turn it over. Thanks for taking the questions.
Sure.
Thank you. Your next question is coming from Mike Albanese from EF Hutton. Mike, your line is live. Please go ahead.
Yeah. Hey, Rick, David. Hope you guys are doing well. Thanks for, you know, taking my questions here, and, you know, congratulations on a really strong quarter.
Thank you.
really nice context you gave, you know, kinda regarding the macro outlook and what your organic growth is, and I just wanna build on that just a little bit. First, in regards to kind of the macro environment and this we'll just say, under supply of temp workers, are you seeing an improvement, you know, kind of in pricing power at the franchisee level?
I would say that improvement in pricing power was way stronger, let's say, at the beginning of this year and at the end of last year than it is now. A lot of that has somewhat deteriorated. You know, that said, you know, margins are generally, you know, definitely better. The
Part of the issue or part of the benefit is more for, and this is why I'm still kind of bullish on our demand, is most of our franchisees have taken the rational position of, well, okay, I only have X number of workers, and I'm going to focus on clients that are willing to pay a better wage and a better rate and properly value the service. Whereas in, let's say, four years ago, it would've been more, you know, the buyer had more purchasing power and could lay down a bunch of conditions which were very unfavorable for staffing companies. Frankly, our franchisees are able to walk away from a lot more business now. Now, at some point they may wanna bring it back, and there's always that fine line of, let's say, you know, allowing a client to walk.
Right now, if again, you have a fairly limited pool of workers, there's no point in killing yourself trying to fill an order for a client that really doesn't value your services, you know, as much as another client does. So you go to who values you the most.
Got it. No, that makes a lot of sense. You know, just to kinda touch back on organic growth, and I think this will go in line with what you were just talking about. You know, you saw really strong organic growth. Obviously, part of that was due to a weaker 2021. What's kind of the sentiment you're seeing from your franchisees regarding organic growth and the ability to open new locations? I know you mentioned that, I know you didn't have the number off the top of your head, but, you know, you've opened a number of new locations, but you're also kinda dealing with that undersupply of temp workers, which I feel like would kinda negate the ability to do that.
you know, my question really is: What is the sentiment you're seeing from your franchisees about growing organically through, you know, opening new locations?
I think that where we're seeing most of our growth isn't necessarily organic growth, let's say, our franchisee in Omaha saying, "Let me open in Lincoln as well.
Rather it's our franchisee in, you know, Milwaukee, and this really is. I'm using a hypothetical. This has really
Yeah, sure.
not gonna happen. You know, let's say our HireQuest Direct franchise in Milwaukee then saying, "Let me also open a Snelling." That is more the organic growth that we're getting rather than geographic expansion. Part of that is because right now it's very difficult. You know, the recruiting environment is still very difficult. You know, I'm not suggesting that we have all sorts of people looking to open all sorts of offices. By the same token, like I said, to extend their existing product line, we're seeing, you know, a fair bit of demand for that.
I would hope and expect that to be the future, which is part of going back to one of the earlier questions as far as even offering like niche products, is that it's obviously easier for a franchisee. Let's say it would be far easier for our franchisee in, again, in Colorado Springs to where we only have a HireQuest Direct, it'd be far easier for him, you know, and for us, for that matter, to say, "Hey, I'm gonna open a Snelling and HireQuest or in-
Colorado Springs as well, versus opening in Santa Fe, New Mexico. It just, it's simpler. You know, the more we can offer, the more they can leverage their local staff, you know, the more we can drive organic growth without, you know, in a way that's easier for them, I think.
Sure. Yeah, no, that makes a lot of sense. I mean, I think ultimately what you're saying is, rather than geographical expansion, there's opportunities for you to expand within a region across different products and services, and that will be a driver of organic growth. Okay. Then my last question, and it kinda goes with that or at least with how you've expanded across industry verticals. You know, my understanding is Q3 is typically the peak in terms of seasonality that you see. Now that you've expanded and then you've, you know, you did three acquisitions in beginning of the year, and what is your expectation regarding seasonality moving forward? Do you expect that to be exacerbated or dampened in any way, or really just kind of maintained as what you've seen historically?
I would say that if you pull out acquisitions made in the prior four quarters, right? In other words, we're gonna have growth as long as we continue to do acquisitions. Our number comparisons are always gonna look strong. You know what I'm saying?
Yeah, that's gonna-
To the extent you pull out the-
Yep.
To the extent you pull out those acquisitions, I do believe that our seasonality will be more muted than it has been in the past, simply because HireQuest Direct, which is really, really seasonal, you know, is making up a smaller percentage of our overall system-wide sales. I would just say we'll still have it. You gotta realize, too, is even like Q3 has more business days than any other quarter. Just based on the number of business days, it's gonna always be in almost probably any business other than like a retailer or something. You know, it's gonna be fairly common for the Q3 to be bigger. Why? Because there's, again, there's more business days, so it makes sense. Seasonality will absolutely always exist, and Q1 will always be, you know, somewhat lower.
It's just, it won't be as pronounced.
Got it. Awesome. Thanks for taking my questions, Rick Hermanns.
Sure thing.
Thank you. The next question is coming from Aaron Edelheit from Mindset Capital. Aaron, your line is live. Please go ahead.
Hey, Rick. My question I wanted to ask was more of how you think about capital allocation going forward. When I look at this quarter and I see the machine that you have now built, you know, you're generating $4.5 million a quarter, so you know, $4 million to $5 million a quarter of free cash flow, just assuming kind of flat accounts receivable. You've built this cash machine with, like, 55% to 60% operating margins that doesn't really require CapEx. When I look out into 2023, assuming that it's not the apocalypse, how do you think about, like, what you do with that cash? Obviously there's acquisitions, but you pay a small dividend. I know that you guys are big shareholders, so you could buy back stock, but that lowers the float.
I'm curious if you could share any thoughts you have with what you would do, you know, in the new year with your cash flow.
That's, again, obviously a fair and, you know, fair question. You know, it's interesting and I'm glad you asked the question because there are two number comparisons that I think are really important and kind of bear out what you started your question with. One is that we right now have less debt than what we did at the end of basically on September 30th, 2019, you know, we had more debt than we do right now. Yet, we have obviously made numerous acquisitions, and to the extent that our adjusted EBITDA this year if it just continues at the same rate, will literally exceed our total revenues for 2021, which is pretty amazing, right? I mean, that's like a pretty, you know, that's something that, you know, that's something.
I agree. That is amazing. I didn't realize that.
That rarely happens. Of course, what do you do with the money, right? You know, the funny part about it is that, you know, we have a certain cadence in which we want to grow, and growth takes money. We're frankly pretty conservative. Not pretty conservative, we are conservative when it comes to employing a lot of leverage. We're just not that, you know, we're just generally not that company. You know, part of the reason, even if you go back, I think it was in the second quarter of last year, you know, we filed a shelf registration thinking we would potentially need, you know, from time to time to issue some stock to do, you know, to fund growth.
To be honest with you, our, you know, our cash flow has increased to such a point that I think we have the ability to continue to fund what would be acquisitions at a level of what we've been doing the last three years from, you know, straight out of cash flow, and hopefully maybe even a little bit more. Realistically, I think that, you know, we will probably, you know, we don't have so much extra cash that it's going to be burning a hole in our pocket either.
We have a lot of opportunities out there to continue to grow, and that's why I wanted to draw it back to those two numerical comparisons at the beginning, is to simply say our, you know, the deals we do, you know, we do them or sort of in view of the fact that they provide a fair return on our, you know, on our capital. I don't, you know. There's no shortage of deals out there, I guess, is what I'm saying. The shortage-
Oh, that's good to hear. What you're saying is that with the cash that you're generating every quarter, that in your pipeline, you see enough deals that you could put that cash to work to continue your strategy. And you're confident because that is obviously just based on your previous comment that adjusted EBITDA is now larger than 2021 revenue. Like, I want to see that keep going. If you're confident that you can put that cash to work, that makes me happy as a shareholder.
No, I think that's a fair statement. Again, that can change on a dime. But I don't really, you know, I don't see anything that does. Frankly, we have a very resourceful VP of Corporate Development, you know, David Hartley, who goes out and he finds all sorts of things, you know, he finds all sorts of deals. It's not. We just don't have a shortage, is really what it comes down to. Yeah, I'm not saying we have. There's a lot of. We go through a lot of, you know, we have to go kiss a lot of frogs before we find that prince. We're working, you know. There's plenty out there.
Gotcha. My follow-up question is to that, because you've been able to create so much value through acquisitions, and it's been such a driver of your model, when I think about the economy, in your mind, in a weird way, does a weaker economy help you acquire more companies while it may slightly weaken your business, assuming it's not like a total collapse? Or how do you think about the lens of potential acquisitions or distress? Because you obviously took advantage of it during COVID when there was a lot of distress.
That is the big silver lining for us. Again, I, as I said before, I'd never, you know, never push back on it. A bad economy is bad for our current results. But if it's bad for our results and we maintain a clean capital structure, it's gonna be extraordinarily bad for levered competitors, and that's gonna create more opportunities. The best deals that we tend to see are distressed companies. You know, I'm a believer in the service business, especially. Frankly, I'm not necessarily interested typically in, let's say, finding a company that's like been the best run company for the last 40 years, and the couple that have been running it wanna retire because there's really no place to go but down, right? I mean, kudos to them for running a great ship.
You know, if they're leaving, you know, it's hard to sustain it. You know, the best I can do typically is to sustain it. I'd far rather see somebody who's had some difficulties because they went out and they bought too big of a house or some large client went bad on them and they're in a little bit more of a desperation mode. That creates a lot bigger opportunities for us. All that being said, that's the silver lining. Short run, it's still, you know, it still sucks. Our numbers are down. You know, our numbers, you know, our results are worse and stuff like that. Again, we retain our good capital structure.
We're in a position to scoop up companies at a better price than what we can in a normal, you know, sort of a normal economy. Frankly, Snelling would be the perfect example of that.
Yeah. No, and just the last question I wanna ask, 'cause I just wanna make sure, again, assuming there's not just like this epic collapse, the way I understand at least your accounts receivable is that while you're not seeing any slowdown now, if there was a slowdown, you would your accounts receivable would start falling, so your cash would. I remember from 2020 watching your cash balances explode higher when things slowed down. In a weird way, you become suddenly over-capitalized in a. If there was a significant slowdown, which would probably help your ability to acquire any distressed companies. Am I thinking through that correctly?
No, that's right. To give you an idea, basically, we were never debt-free until the Great Recession. We lost, you know, 40% of our business. Of course, that means our AR dropped by 40%. So we went. You know, we were conservatively leveraged even going into that recession, but obviously that made a big difference. If we're, let's just say for the sake of argument, we did $123 million this last quarter. Let's just say it's, you know, w e'll just use $10 million as a proxy, right? Well, obviously, if our sales go down 40% in a severe recession, you're probably looking at $20 million to $25 million of, you know, of AR coming in. Even, you know, you'll lose some on your accruals and stuff.
Basically, you're talking about, you know, recapturing something like $20 million of working capital. Well, you know, we're sitting with, I don't know, $3 million of total debt. We'd be sitting with $17 million of cash on our balance sheet.
And this is the value-
Using that scenario.
This is your, this is the value of your model of why you have no debt, is because if things do hit the fan, you've built this in a way that you're actually much stronger and then just can keep growing and find those future Snellings, right?
Well, hopefully. That's right. Hopefully. Look, I wanna caution one second to make sure that so that somebody five years from now or eight years from now doesn't sit there and say, "Hey, wait a second, buddy." Because one of the things that the interesting part, and I had said it earlier, that every recession is different. One of the things that made, for example, the Great Recession such a bad event for the staffing industry is how many people didn't pay their bills. How many, you know, real estate projects went bad. Even though AR did collapse, there were also a lot more, you know, there were a lot more bad debts out there which fall on our franchisees.
Historically, we've provided, you know, some support for them to get them through that type of a time. I'm not. I wanna make sure that I'm not completely sweeping it away.
No, no, for sure. I appreciate it. I appreciate how conservative.
There's risk.
One of the things I appreciate the most is how conservative and on top of this you are. As a shareholder, thanks. Great quarter. Thanks for answering my questions.
Thanks, Aaron.
Thank you. This does conclude today's question and answer session. I would now like to pass the floor back to management for closing remarks.
Thank you everybody for tuning in, and I think that, again, it was a very good quarter for us, and I am again confident in the future of the company. I think that if you just look at what we've done over that last three years and project that going forward, I think you can see why we're so excited about the company. Again, I wanna thank our franchisees, I wanna thank my employees, and I just thank the shareholders for supporting us. Again, have a good night.
Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.