Hirequest Inc (HQI) 2022 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to today's HireQuest, Inc. Third Quarter 2022 Earnings Conference Call. (Operator Instructions)

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's CEO, Rick Hermanns; and 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 in terms such as anticipate, expect, intend, may, will, should and 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. And 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, and we continue 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 9 months of 2022, we've reported adjusted EBITDA of $17.8 million, up 86% from $9.6 million for the first 9 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 continue 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 start-up 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 2 of the highest cost barriers for franchisee -- 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 3 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 that 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 location 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 3 components: franchise royalties, which is our primary source of revenue; service revenue, which is generated from fees for various optional services and interest charge to our franchisees on overdue accounts; and 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 '22, 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 runoff 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 and 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 nontaxable 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 noncash 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 in our latest 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 30, 2022, were $50.9 million compared to $42 million at December 31, 2021. Current assets at September 30 included $1.5 million of cash and $45.7 million of net accounts receivable, while current assets at December 31, 2021, included $1.3 million of cash and $38.2 million of net accounts receivable. Our current liabilities at September 30, 2022, were $25.6 million, resulting in net working capital of $25.3 million. At December 31, 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 3 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 5 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 15, 2022, to shareholders of record as of September 1. 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'm 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.

(Operator Instructions) And your first question today is coming from Mike Baker from D.A. Davidson.

Okay. So a couple of questions. One, just -- how would you characterize your results, sales, gross profit, EBITDA relative to your internal expectations? What I'm getting at is there are estimates out there. They're my estimates, and I'm the only one with estimates. I do my best job to project, my numbers are a little bit higher than yours. But what's more important, I think, is how the results were relative to your own internal expectations rather than my estimates?

So I appreciate the question, Mike. So I would say a couple of things is, one, the sales really were not significantly different than what really than what I would have expected. And I realize historically, we offer -- and we kind of 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. And so part of that, your expectations weren't necessarily probably as wrong based on history as much as we're just more influenced now by Snelling. But if you look at the billings by sort of individual week, they were definitely well within our expectations.

And as far as EBITDA, I would also say that they were pretty much within our expectations. Frankly, every quarter has -- always has a number of sort of adjustments, both positive and -- both positive and negative. And I would say that this was one of those quarters where it was probably kind of balanced. There were a few things that maybe I wasn't expecting, and there were a couple of both ways. And so I would say that it was a fairly indicative quarter. The one thing I will admit that took me by surprise is it just me not being a tax accountant was the increase in the effective tax rate. Otherwise, we would probably hit almost exactly where I would have expected.

Okay. That makes sense. I appreciate that. I wanted to ask you, I always like to ask, you were -- it's a very confusing employment situation -- I think everyone keeps expecting employment to go down, but the unemployment rate is still very low. It looks like everyone still hire people. Yes, 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?

So those are a lot of good questions, and I'll do my best to answer all of them, hopefully. The -- it's interesting that different -- this is true the pandemic and it's true throughout, I guess, basically throughout the -- throughout history is states, each region tends to have a different effect. So some areas in the country do better than others in a recession. I found it interesting, for example, our -- probably our closest competitor would be TrueBlue's PeopleReady division, and 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%, 7.3%. It was reported that maybe it was 9%. Anyway, so we did significantly better than PeopleReady. Now I'd like to say that that's partially because of the validation of our franchise model, but they're also heavier in certain other markets.

I would say -- 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. For us, it's even the last unemployment numbers are still holding at 3.5%. So it's a very strong employment market as far as our customers are. I would say that part of that might be and 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, certain large e-commerce companies that you're seeing some of the larger layoffs with as an example. And so I think that we've -- I mean, even, let's say, a FedEx or something like that, like we're not -- we're really not very heavily exposed, certainly not directly to those companies. So maybe some of the companies that were -- whose results were really jacked up by the pandemic. We -- certainly, we need to get the benefit of their upswing, but we're also now not maybe getting hammered by sort of their numbers dropping back to more historical normative numbers.

So that said, I will say the third quarter probably -- not probably, definitely represents the last quarter that had, let's say, pandemic influence to it, meaning part of our organic growth was the result of a weaker Q3 '21 and with -- but at Q4 of last year, we pretty much had -- there were no really lingering pandemic effects anymore. So we're basically at fair comparisons at that point. And so I wouldn't -- I would say that the numbers are probably 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 almost -- we're at least more than 1/3 of the way through the quarter. And I would simply say that to this point, we've still been -- our numbers have been holding up well. So we're not really seeing it. Again, part of it might just be to the mix of our numbers.

That said, a decrease in -- a significant pullback in the economy is not helpful to us. I'm not going to -- I'm certainly not going to 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 it's sort of interesting, the old saying where people who are ignorant of history are doomed to repeat it sort of comes into this where -- and I personally have led my company through 4 different recessions already. And frankly, each one is a little bit different. And I think that for the longer term, I mean whether we're in a recession a year from now, 6 months from now or 5 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.

And by that, I mean that when you look at labor participation rates, they've dropped significantly, which is part of the reason, 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 ad or an article in the Wall Street Journal maybe a month ago. And 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. And so that will create probably a bit of an environment that we're not used to in the recession. Hopefully, that might be wishful thinking, but I just know that there is a real shortage still out there of quality workers.

And I think that, therefore, demand for our services will remain higher than what they otherwise were. We're not back in the 1980s or the 1990s when there were huge numbers of baby boomers that were in their sort of prime working years. Things have changed. The world is a different world. And 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 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.

Yes. No, that's fascinating. Really great color on how it all works, and I appreciate it. I'll pass it off to someone else.

The next question is coming from Kevin Steinke from Barrington Research.

Rick, I wanted to make sure I heard correctly in your comments. Did you say you're now -- 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 spoken anything differently. We do -- that said, obviously, we are not nearly as heavy -- we have a lot of room to grow, let's say, for example, in health care. But we do have a presence in health care now as an example.

Right. Okay. Yes. So I guess, given that you're touching most or a large majority of the industry, I just kind of wanted to focus on really 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. So 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 kind of 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. The -- so one of the sweet spots we need to try to hit is creating -- and there's sort of like 2 different ways we can go about this. One is we want to hit that sweet spot where we have enough of a name recognition that Snelling franchises becomes easier. Obviously, it's far more difficult if we were to just sort of hang a shingle out and say higher class 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. And so for example, buying Snelling was important that way. And yet, obviously, although our Snelling division is reasonably large, we have a long ways that we can continue to develop that. And so we -- and we'll continue to do that probably in other areas as well.

So for example, our -- on the other hand, our health care, for example, is miniscule, really what we offer is minuscule. And therefore, without forecasting it, but we -- going out and buying, let's say, for example, a health care staffing company is reasonable, if only to put up bigger -- to have a bigger presence to improve our ability to sell more units. And so 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 in the overall economy. So 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 niches within the industry where we might be able to add value. So for example, using the dental as an example, the dental is never going to drive the company, but 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. And so I do see us moving in the future is consistently seeking those specialty markets as well because even within our existing office network, we have a lot of very, very talented franchisees, some that have very unique experiences. And so to the extent that we can utilize that and create that sort of specialty offering, I do see that as part of our future. Now again, that doesn't mean that that's going to drive everything. But again, our goal is to be able to be -- to have a credible offering to our clients as well. And so like I said, going to a DSO, a dental service organization, we have a lot more credibility going in with our current offering than what we would have been able to do before we bought it. So I hope that answers your question.

Yes, it does. I mean, I guess you have to kind of build up that brand recognition or that prove that you can be able to provide that capability. And I mean, I guess that might entail perhaps more acquisitions in the future. Or do you feel like you can develop some things organically as well? What does that mix will play?

If we can do it without acquiring someone, we'd much -- we'd rather do that. The -- and I think there are certain product lines that that's easier to do within what we already have. But sometimes it just depends on what type of traction we get. I don't kind of want to tip the cards, but there's something that we have in the offering as far as a sort of a new product line, I'll call it. Well, whether or not we buy anything in that really depends on how well it's received by our franchisees. And if it takes off, we're not really going to -- I wouldn't do an acquisition to build on to it. So I don't know if that answers the question, but ultimately, you have to have enough scale to -- you need that certain amount of scale before the franchise itself has value to a prospective franchisee, if that makes any sense.

No. Yes. Understood. Yes, I wanted to circle back on just the labor market as well. And you've talked about the last couple of quarters here that demand has been good, if demand has been strong, but maybe a bit of a gating factor has just been labor supply. 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 improvement in your ability to find supply? And to what extent is that a factor now that you think is playing into your growth?

Yes, I don't think there's any question that in certain markets, 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 the point where 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 it because we have a reservoir of potential clients that we're sitting there and we've intentionally not even engaged because we don't want to stimulate orders that we can't properly fill. So I would still -- and now that's just one segment within all of that we serve. So I'm not suggesting that that's throughout our network. But I'm just saying that there's still more of a struggle to find good people than there is to find good clients.

Your next question is coming from Mike Albanese from EF Hutton.

Rick, David, congratulations on a really strong quarter. That was some really nice contracts you gave kind of regarding the macro outlook and what your organic growth is. And I just want to build on that just a little bit. First, in regards to kind of the macro environment and this, let's just say, undersupply of temp workers. Are you seeing an improvement kind of and pricing power at the franchisee level?

I would say that, 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. That said, margins are definitely generally better. The -- but 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 as 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, 4 years ago, it would have been more -- the buyer had more purchasing power and could lay down a bunch of conditions, which were very unfavorable for staffing companies.

And frankly, our franchisees are able to walk away from a lot more business now. Now at some point, they may want to bring it back, and there's always that fine line of, let's say, allowing a client to walk. But 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 service as much as another client does, so you go to who values you the most.

Got it. No, that makes a lot of sense. And then just to kind of touch back on organic growth, and I think this is a go in line with what you're just talking about. But you saw a really strong organic growth. Obviously, part of that was due to a weaker 2021. But 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 and you do have the number off the top of your head, but you've opened a number of new locations, but you're also kind of dealing with that undersupply of temp workers, which I feel like would kind of negate the ability to do that. So my question really is, what is the sentiment you're seeing from your franchisees about growing organically through opening new locations?

So I think that where we're seeing most of our growth isn't organic growth. Is it necessarily, let's say, our franchisee in Omaha saying, let me open in Lincoln as well, rather it's our franchisee in Milwaukee -- this is really -- I'm using a hypothetical, this has really never happened. But 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. And part of that is because right now, it's very difficult. The recruiting environment is still very difficult. And so I'm not suggesting that we have all sorts of people looking to open all sorts of offices.

But by the same token, like I said, to extend their existing product line, we're seeing a fair bit of demand for that. And 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 again, in Colorado Springs to where we only have a HireQuest Direct, it'd be far easier for him and for us for that matter to say, hey, I'm going to open a Snelling in HireQuest in Colorado Springs as well versus opening in Santa Fe, New Mexico. It's simpler. So the more we can offer, the more they can leverage their local staff, the more we can drive organic growth without in a way that's easier for them, I think.

Yes. 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. And then my last question, it kind of goes with that or at least with how you've expanded across industry verticals. My understanding is Q3 is typically the peak in terms of seasonality that you see. But now that you've expanded and you did 3 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?

So I would say that if you pull out acquisitions made in the prior 4 quarters, right, so in other words, we're going to have growth as long as we continue to do acquisitions, our number comparisons are always going to look -- I'm saying are going look strong. 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 is making up a smaller percentage of our overall system-wide sales. So I would just say, we'll still have it. You got to realize, too, is even like Q3 has more business days than any other quarter. So just based on the number of business days, it's going to always be in almost probably any business other than like retail or something, it's going to be fairly common for the Q3 to be bigger. Why? Because there's more business days, so it makes sense. So seasonality will absolutely always exist. And Q1 will always be somewhat lower. It won't be as pronounced.

The next question is coming from Aaron Edelheit from Mindset Capital.

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're generating $4.5 million a quarter, so $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%, 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 in the new year with your cash flow?

So that's, again, obviously, a fair question. And it's interesting, and I'm glad you asked the question because there are 2 number comparisons that I think are really important and kind of bear out what you started your question with. One is, is that we right now have less debt than what we did at the end of -- basically on September 30, 2019, we had more debt than we do right now. And 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 a pretty -- that's something that...

I agree. That is amazing. I didn't realize that.

That rarely happens. So of course, what do you do with the money, right? So the funny part about it is that we have a certain cadence in which we want to grow and growth takes money. And we're, frankly, pretty conservative when it -- not pretty conservative, we are conservative when it comes to employing a lot of leverage. We're just not that -- we're just generally not that company. So part of the reason even if you go back, I think it was in the second quarter of last year, we filed a shelf registration, thinking we would potentially need from time to time to issue some stock to fund growth. But to be honest with you, our cash flow has increased to such a point that I think that we have the ability to continue to fund what would be acquisitions at a level of what we've been doing the last 3 years from straight out of cash flow and hopefully, maybe even a little bit more.

But realistically, I think that we will probably -- 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 2 numerical comparisons at the beginning is to simply say, our -- the deals we do, we do them in -- sort of in view of the fact that they provide a fair return on our capital. And so I don't -- there's no shortage of deals out there, I guess, is what I'm saying, the shortage...

Well, that's good to hear. So 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 -- you can 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. So if you're confident that, that you can put that cash to work, that makes me happy as a shareholder.

No. And I think that that's a fair statement. Again, that can change on a dime. But I don't really -- I don't see anything that does. And frankly, we have a very resourceful VP of Corporate Development, David Hartley, who goes out and he finds all sorts of deals. So it's not -- we just don't have a shortage is really what it comes down to. I'm not saying we have -- there's a lot -- we go through a lot of -- we have to go kiss a lot of frogs before we find that prince, but we're working -- there's plenty out there.

Got you. 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 should I view the -- 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?

So that is the big silver lining for us. Again, as I said before, I never push back on 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 going to be extraordinarily bad for levered competitors, and that's going to create more opportunities. And so the best deals that we tend to see are distressed companies. And 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 want to retire because there's really no place to go but down, right? I mean, kudos to them for running a great ship. But if they're leaving, it's hard to -- 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 and they had strip -- they had a -- they kind of had a -- 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.

So all that being said, that's the silver lining. Short run, it still sucks. Our numbers are down. Our numbers -- our results are worse and stuff like that. But 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 -- sort of a normal economy. And Snelling would be the perfect example of that.

Yes. No. And just the last question I want to ask because I just want to make sure, again, assuming there's not just like it's 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 exploded higher when things slow down. And so 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 to that correctly?

No, that's right. To give you an idea, basically, we were never debt free until the Great Recession. But we lost 40% of our business. Of course, that means our AR dropped by 40%. So 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. So let's just say it's just shy of -- we'll just use $10 million as a proxy, right? Well, obviously, if our sales go down 40% in a severe recession, well, you're probably looking at $20 million to $25 million of AR coming in, and even you lose some on your accruals and stuff. But basically, you're talking about recapturing something like $20 million of working capital. We're sitting with, I don't know, $3 million of total debt. So we'd be sitting with $17 million of cash on our balance sheet.

And this is the value of your model. Yes. So 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, and I want to caution one to make sure that -- so that somebody 5 years from now or 8 years from now, it 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. And 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 real estate projects went bad. And so even though AR did collapse, there were also a lot more -- there were a lot more bad debts out there, which fall on our franchisees, but historically, we've provided some support for them to get them through that type of a time. So I'm not -- I want to make sure that I'm not completely sweeping away from that.

No, no. For sure. And I appreciate. I just appreciate how conservative -- one of the things I appreciate the most is how conservative and on top of is you are. So as a shareholder, thanks, great quarter.

Thanks, Aaron.

And this does conclude today's question-and-answer session. I would now like to pass the floor back to management for closing remarks.

So 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 the last 3 years and project that going forward, I think you can see why we're so excited about the company. Again, I want to thank our franchisees, I want to 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.