HF Foods Group Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are primarily with FY2022. HF Foods distributes Asian specialty foods, seafood, produce and other products mainly to Asian restaurants. Its network comprised 18 distribution centers and cross-docks serving 46 states, approximately 15,000 restaurants, and a fleet of more than 400 refrigerated vehicles.
Financial performance and position
| Metric | FY2023 | FY2022 | Change / context |
|---|---|---|---|
| Net revenue | $1,148.5 million | $1,170.5 million | Down 1.9%; primarily deflationary pricing, partly offset by higher volume and a full year of Sealand revenue. |
| Gross profit / margin | $204.0 million / 17.8% | $205.5 million / 17.6% | Gross profit down 0.7%; margin improved 0.2 percentage points. |
| Distribution, selling and administrative expenses | $195.1 million | $195.0 million | Approximately flat; included net legal settlement recoveries and a $1.2 million impairment related to exiting chicken processing. |
| Income from operations / margin | $9.0 million / 0.8% | $10.6 million / 0.9% | Down $1.6 million. |
| Net income (loss) attributable to HF Foods | $(2.2) million; $(0.04) per share | $0.5 million; $0.01 per share | Net loss primarily reflected lower operating income, higher interest expense and swap fair-value changes, partly offset by lower lease-guarantee expense. |
| Adjusted EBITDA | $44.6 million | $40.1 million | Up $4.5 million; non-GAAP measure with adjustments including settlement-related effects and other specified items. |
| Cash from operating activities | $15.8 million | $31.3 million | Down $15.5 million, mainly due to working-capital timing and reduced accounts payable following finance-system changes. |
At year-end, cash was $15.2 million; current assets were $178.8 million and current liabilities $143.3 million. The company reported $58.6 million drawn on its $100 million asset-secured revolving facility, with approximately $37.6 million of additional availability subject to borrowing-base limits. Long-term debt principal was $114.4 million. The company said it was in compliance with debt covenants and believed operating cash flow and available resources would meet normal working-capital and debt needs for at least 12 months.
Cash used in investing activities was $1.5 million, versus $50.8 million in 2022, when acquisition payments were made. Cash used in financing activities was $23.3 million, compared with $29.0 million provided in 2022. Cash declined by $9.1 million during 2023. Variable-rate borrowings remain an exposure; the company reported $60.8 million of unhedged floating-rate debt and estimated that a 1 percentage-point rate change would affect annual interest expense by approximately $0.6 million.
Material changes and unusual items
- Revenue declined as prices deflated in frozen seafood, Asian Specialty, poultry and packaging; higher volume and a full year of Sealand operations partly offset the decrease.
- HF Foods exited both of its low-margin chicken processing businesses during the second half of 2023, and recorded a $1.2 million machinery impairment related to the exit.
- Interest expense rose $4.0 million, or 53.9%, to $11.5 million, primarily reflecting higher floating interest rates.
- The company recorded $10.0 million of net legal settlement recoveries as a reduction of distribution, selling and administrative expenses. Consideration included $1.5 million cash and 1,997,423 company shares placed in treasury, valued at $7.75 million, plus accrued interest.
- Goodwill was $85.1 million. The year-end impairment test found estimated fair value approximately 10% above carrying value; no goodwill impairment was recorded. The relatively limited headroom makes assumptions about forecasts and valuation multiples relevant.
Outlook, risks and contingencies
No specific revenue, earnings or other numerical guidance is provided. Management stated it expects resources to cover normal working-capital needs and debt obligations for at least the next 12 months, while cautioning that demand, economic conditions, competitive pricing and lender or supplier support could affect cash flows. Management’s strategy includes focusing on its core distribution business, pursuing operational and technology improvements, and seeking growth through acquisitions; future acquisitions are not assured.
- Key operating risks include the foodservice industry’s low margins; inflation or deflation in product and labor costs; competition; fuel prices; labor availability; supply disruptions; customer losses; food-safety and regulatory exposure; and changing restaurant demand.
- The company is negotiating with the SEC over a potential resolution of its investigation. After receiving a Wells Notice, the company responded; SEC staff stated it would not recommend an enforcement action against the company at that time, pending a potential agreed resolution. Terms were not set, no formal settlement offer had been made, and any fines or penalties could not be reasonably estimated. The Wells Notice is not a formal charge or final determination.
- Two shareholder class actions have been dismissed and are closed. The filing also describes a lease-guarantee exposure involving AnHeart, including a recorded liability of approximately $5.5 million at year-end and ongoing litigation to recover amounts owed.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2023 due to material weaknesses involving entity-level controls, IT general controls and financial reporting controls. BDO issued an adverse opinion on internal control, while issuing an unqualified opinion on the consolidated financial statements. Remediation remains in progress.
- The filing refers to a prior financial-statement restatement and describes related-party transactions and past governance concerns. Management says it has implemented governance and compliance improvements.
Important facts for investors to verify
- Progress and effectiveness of remediation for the material weaknesses, particularly IT controls and review of non-routine transactions and estimates.
- Outcome, timing and potential financial consequences of the SEC negotiations.
- Whether cash generation, working-capital management and revolver availability remain sufficient as debt service costs and interest rates change.
- Whether core-business focus and the chicken-processing exits improve margins without impairing revenue or service capacity.
- Assumptions supporting goodwill valuation and the company’s ability to sustain forecasts given the limited reported valuation headroom.
- Developments in the AnHeart lease-guarantee matter and the recoverability of amounts owed.