HF Foods Group Inc. — Q1 2024 Form 10-Q
Business and period: HF Foods distributes Asian specialty foods, seafood, produce, frozen and dry foods, and related products primarily to Asian restaurants and other foodservice customers in the United States. This unaudited report covers the three months ended March 31, 2024, compared with the same period in 2023.
Financial results
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net revenue | $295.7 million | $293.9 million | +0.6% |
| Gross profit / margin | $50.4 million / 17.1% | $50.2 million / 17.1% | +$0.2 million |
| Distribution, selling and administrative expenses | $50.5 million | $52.9 million | −4.6% |
| Operating loss | $0.1 million | $2.8 million | Improved $2.7 million |
| Net loss | $0.6 million | $5.8 million | Improved $5.2 million |
| Net loss attributable to HF Foods | $0.7 million | $5.9 million | Improved $5.2 million |
| Adjusted EBITDA (non-GAAP) | $8.7 million | $5.7 million | +$3.0 million, or 51.4% |
| Operating cash flow | $7.1 million | $12.6 million | −$5.5 million |
Revenue growth reflected product-cost inflation and improved pricing in certain categories, partly offset by $2.7 million of revenue lost after exiting chicken processing businesses. Seafood and Asian Specialty revenue increased; Packaging and Other and Commodity revenue declined. Gross margin was unchanged. Lower professional fees, partly offset by higher payroll and labor costs, reduced operating expenses.
The net-loss improvement also reflects a favorable $2.0 million change in the fair value of interest-rate swaps in Q1 2024, versus a $2.7 million expense in Q1 2023. The company reported interest expense of $2.8 million, broadly unchanged. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP results or cash flow.
Liquidity, debt and cash flows
- At March 31, 2024, cash was $18.2 million; current assets were $185.5 million and current liabilities were $150.6 million.
- The company reported $55.2 million outstanding on its line of credit and $112.8 million of long-term debt carrying value, including the current portion. It said approximately $40.9 million remained available under its $100 million credit line, subject to borrowing-base calculations.
- Operating cash flow was $7.1 million; capital expenditures were $2.6 million, and cash increased by $3.0 million to $18.2 million. The company attributed the operating cash-flow decline primarily to working-capital timing.
- Management believes operating cash flow and available resources should meet normal working-capital needs and debt obligations for at least the next 12 months, but notes that demand, economic conditions, competition, and continued bank and supplier support could affect liquidity. Debt covenants were reported as satisfied at quarter-end.
- About 34.2% of debt principal was unhedged floating-rate debt. The filing estimates that a 1% rate change would affect annual interest expense by approximately $0.6 million. Diesel prices averaged 9.7% lower year over year in the quarter; the company does not generally hedge fuel prices.
Outlook, risks and notable items
- No specific revenue, earnings, or margin guidance is provided. Management describes a transformation plan involving centralized purchasing, fleet and transportation improvements, an ERP implementation, and facility upgrades.
- The company began construction in March 2024 on a multi-use facility at 273 Fifth Avenue, committed $7.0 million to the project, and had incurred $1.3 million by quarter-end. Completion is expected in Q1 2025.
- HF Foods has a lease guarantee related to AnHeart’s 275 Fifth Avenue property. The recorded liability was $5.4 million at March 31, 2024; estimated minimum payments total $6.8 million before imputed interest. The company says AnHeart owes it $474,000 and is pursuing legal remedies. Effective April 30, 2024, HF Foods assumed the building lease; the filing says this did not change its guarantee obligations.
- The company disclosed an SEC Wells Notice concerning an investigation into alleged misleading statements. After the company responded, SEC staff said it would not recommend an enforcement action at that time, pending a potential agreed resolution. Negotiations were ongoing; any fines or penalties were not final and could not be reasonably estimated.
- Disclosure controls and procedures were deemed ineffective as of March 31, 2024 because previously identified material weaknesses remained. Management nevertheless concluded the financial statements present fairly in all material respects.
- Goodwill was $85.1 million. The 2023 impairment test found estimated fair value about 10% above carrying value; management reported no Q1 2024 triggering event, while noting that adverse assumptions or a sustained stock-price decline could lead to future impairment.
- Other stated risks include thin industry margins, labor and fuel costs, vendor and customer disruption, food-safety and regulatory matters, competition, interest rates, related-party conflicts, litigation, and the company’s ability to execute its transformation and maintain liquidity.
Important facts for investors to verify
- Whether revenue growth and the improvement in operating expenses are sustainable, and how the transformation plan affects margins and cash generation.
- The drivers of working-capital use and the extent of borrowing-base availability under the credit line.
- Debt and interest-rate exposure, including the effect of rates and the terms of the credit agreement amendments.
- Progress, total costs, and expected returns for the 273 Fifth Avenue construction project and the AnHeart lease obligations.
- Any resolution or financial impact of the SEC matter and the status of the company’s internal-control remediation.
- The assumptions supporting goodwill valuation and the company’s ability to preserve liquidity under weaker operating conditions.