HF Foods Group Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. HF Foods distributes Asian specialty foods and other foodservice products, primarily to Asian restaurants, across the United States. Figures below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $292.3 | $299.6 | $586.2 | $577.9 |
| Gross profit / margin | $50.7 / 17.3% | $52.6 / 17.5% | $100.8 / 17.2% | $103.3 / 17.9% |
| Operating income (loss) | $(1.6) | $6.7 | $(4.3) | $17.0 |
| Net income (loss), consolidated | $(1.6) | $4.5 | $(7.4) | $7.6 |
| Net income (loss) attributable to HF Foods | $(0.9) | $4.6 | $(6.8) | $7.7 |
| Adjusted EBITDA | $6.9 | $13.9 | $12.2 | $31.8 |
Q2 diluted loss per share was $0.02; six-month diluted loss per share was $0.13. Adjusted EBITDA is a non-GAAP measure.
- Revenue and margins: Q2 revenue fell 2.4%, mainly from lower meat and poultry sales amid poultry deflation. Six-month revenue rose 1.4%, reflecting Sealand-related seafood revenue and product-cost inflation, partly offset by a $16.0 million decline in meat and poultry revenue. Gross margin contracted year over year in both periods, attributed to product mix and deflationary pressure.
- Costs and earnings: Distribution, selling and administrative expenses increased 14.0% in Q2 and 21.9% in the first half. Management cited higher labor costs, professional fees and a $1.2 million HFFI machinery impairment. Interest expense rose 83.8% in Q2 and 102.2% for the first half, primarily due to higher rates.
- Cash flow: First-half operating cash flow was $8.7 million, versus $13.7 million a year earlier. Investing used $1.5 million, compared with $48.7 million in the prior period, which included acquisitions. Financing used $16.6 million; cash declined $9.3 million to $14.9 million.
- Liquidity and debt: At June 30, cash was $14.9 million, checks issued but not presented were $20.9 million, and the company reported $57.8 million of additional availability under its $100 million line of credit, subject to borrowing-base calculations. The line balance was $42.2 million; long-term debt carrying value was $118.6 million. Management said operating cash flow should meet normal working-capital needs and debt obligations for at least 12 months. The company was in compliance with debt covenants at quarter-end.
Material changes, outlook and risks
- Management provided no specific financial guidance. It cautioned that results for the interim periods are not necessarily indicative of full-year results.
- The company began winding down HF Foods Industrial, LLC (HFFI) during Q2 and recorded a $1.2 million machinery impairment.
- In March 2023, HF Foods entered a $120 million notional interest-rate swap, paying a fixed 4.11% against Term SOFR through March 2028. The filing reports $42.2 million of unhedged floating-rate debt and estimates that a 1% rate change would affect annual interest expense by approximately $0.4 million.
- A proposed settlement of a stockholder derivative action provides for former executives to pay the company $9.25 million and for governance changes. Court approval was pending, with a hearing scheduled for September 8, 2023; the filing does not establish that the payment had been received.
- An SEC investigation remains ongoing. The company is cooperating; it says no SEC demand has been made and potential fines or penalties cannot currently be estimated. The related putative class actions were dismissed and are closed.
- The company disclosed five continuing material weaknesses in internal controls and concluded disclosure controls were ineffective as of June 30, 2023. Remediation efforts include adding experienced finance staff and strengthening transaction documentation and controls.
- Other key risks include food-distribution margin pressure, labor and fuel costs, customer and supplier disruption, interest rates, debt and liquidity, related-party dealings, litigation, and execution of acquisitions. The company also reports a $5.6 million liability tied to its guarantee of AnHeart’s Manhattan lease; related litigation remains pending.
Important facts for investors to verify
- Whether the $9.25 million settlement received court approval and was paid, and the status or outcome of the SEC investigation.
- Actual borrowing availability under the line of credit’s borrowing-base terms, including the implications of checks issued but not presented exceeding cash on hand.
- Progress in remediating material weaknesses and whether subsequent testing supports effective controls.
- Whether operating performance, gross margins and cash generation stabilize amid higher operating expenses and interest costs.
- Developments in the AnHeart lease exposure and collection risk on related-party receivables, including the 90% reserve against the Enson Seafood GA balance.