HF Foods Group Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. HF Foods distributes Asian specialty foods and other products primarily to Asian restaurants and foodservice customers in the United States. Financial figures below are in U.S. dollars; amounts are in millions unless stated otherwise.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $281.5 | $300.7 | $867.6 | $878.6 |
| Gross profit / margin | $50.9 / 18.1% | $51.5 / 17.1% | $151.8 / 17.5% | $154.8 / 17.6% |
| Operating income (loss) | $2.1 | $(3.1) | $(2.3) | $14.0 |
| Net income (loss) attributable to HF Foods | $1.9 | $(3.9) | $(4.9) | $3.8 |
| Diluted EPS | $0.03 | $(0.07) | $(0.09) | $0.07 |
| Adjusted EBITDA | $10.0 | $4.0 | $24.0 | $35.8 |
| Operating cash flow | Not separately stated | Not separately stated | $20.6 | $6.9 |
Financial position and liquidity
- At September 30, cash was $14.3 million, down from $24.3 million at year-end 2022. Current assets were $197.3 million and current liabilities $161.6 million.
- Outstanding line-of-credit borrowings were $47.6 million. The company reported approximately $48.6 million of additional availability under its $100 million facility, subject to borrowing-base limits.
- Debt carrying value was $117.1 million, including $111.2 million long-term and $5.9 million current. Finance lease obligations totaled $13.0 million. The company was in compliance with its debt covenants at quarter-end.
- Nine-month investing cash use was $2.6 million; financing cash use was $28.0 million. Cash declined by $10.0 million over the period.
Material changes and management commentary
- Q3 revenue fell 6.4% year over year, mainly from lower meat and poultry and seafood sales; management cited deflationary poultry and shrimp pricing and a difficult comparison with prior-year poultry inflation. Nine-month revenue declined 1.2%.
- Q3 gross margin improved to 18.1%, which management attributed to product mix, centralized purchasing and exiting a lower-margin chicken-processing business. Nine-month gross margin was broadly flat at 17.5%.
- Q3 selling, distribution and administrative expense fell 10.5%, including lower professional fees and delivery costs. For the first nine months, however, these expenses rose 9.4%, reflecting higher labor and insurance costs, professional fees, and a $1.2 million impairment of machinery related to winding down a chicken-processing operation.
- Nine-month interest expense increased 65.3% to $8.4 million, primarily due to higher floating rates. The company has interest-rate swaps, including a $120 million initial-notional swap at a fixed 4.11% through March 2028. Management estimated that a 1% rate change on unhedged floating-rate debt would change annual interest expense by approximately $0.5 million.
- Operating cash flow increased year over year, which management attributed mainly to working-capital timing. The company said implementation of new finance applications caused temporary September processing delays affecting working capital. Advances to suppliers increased to $15.2 million from $4.5 million at year-end 2022.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management said operating cash flow should meet normal working-capital needs for at least 12 months, while noting that weaker demand, economic conditions, competitive pricing, or reduced bank or supplier support could pressure liquidity.
- The company is pursuing a transformation plan covering centralized purchasing, fleet and transportation, digital systems, and facility upgrades, with intended efficiency and cost benefits; results are not assured.
- Five previously disclosed material weaknesses in internal control over financial reporting remained at September 30, 2023. Management concluded disclosure controls were ineffective, while stating the reported financial statements fairly present the company’s results in all material respects. Remediation efforts include added finance personnel, training, standardized controls and new systems.
- After receiving an SEC Wells Notice on October 13, 2023, the company submitted a response; SEC staff then determined it would not recommend an enforcement action against the company at that time. The company said future SEC outcomes remain uncertain.
- A court-approved $9.25 million derivative-action settlement was partly unpaid after quarter-end. Former executives paid $1.5 million in cash; an amendment provides for the remaining $7.75 million, plus 7.5% annual interest, to be paid in company shares at $3.88 per share. Verify whether the share transfer was completed.
- The company reported a $5.6 million liability related to its guarantee of AnHeart’s 275 Fifth Avenue lease. It also said AnHeart and Minsheng owed it $474,000 and that it had filed a new legal action to pursue recovery.
- Related-party transactions remain relevant: the filing reports purchases and sales with related parties and a related-party receivable for which 90% was reserved. The company also ceased Ocean West operations during the quarter and began winding down HFFI.
Important investor verification points
- Reconcile the Q3 Adjusted EBITDA narrative: the table shows an increase from $4.0 million to $10.0 million, but the accompanying text incorrectly describes a decrease.
- Track revenue, margins and expense trends as deflationary pricing, lower product volumes and transformation initiatives affect results.
- Assess working-capital quality, including the temporary process delays, supplier advances, accounts payable movements and reduced cash balance.
- Confirm collection or share settlement of the outstanding $7.75 million settlement balance and interest, and monitor the AnHeart lease guarantee and recovery litigation.
- Monitor remediation of the five internal-control material weaknesses, debt and interest-rate exposure, and the status of SEC matters.