Overview of HF Foods Group Inc.

HF Foods Group Inc. is a leading distributor of Asian specialty food products, seafood, fresh produce, frozen and dry food, and non-food products primarily to Asian restaurants and other foodservice customers throughout the United States. The company was formed through a merger between two complementary market leaders, HF Foods Group Inc. and B&R Global, and has expanded through several strategic acquisitions in recent years.

With sixteen distribution centers, three cross-docks, and a fleet of over 400 vehicles, HF Foods’ distribution network now spans 46 states covering approximately 95% of the contiguous United States. The company serves around 15,000 customer locations and is dedicated to providing high-quality and specialized food ingredients at competitive prices to the vast array of Asian restaurants in the U.S.

Financial Performance in 2024

In 2024, HF Foods reported net revenue of $1,201.7 million, an increase of $53.2 million or 4.6% compared to 2023. This growth was primarily driven by volume increases from new wholesale accounts, case count growth, product cost inflation, and improved pricing in certain categories. However, the company also saw a $13.3 million loss in revenue from the exit of its chicken processing businesses during the second half of 2023.

Gross profit for 2024 was $205.2 million, up $1.2 million or 0.6% from the prior year. The increase in gross profit was attributable to the higher net revenue, but this was partially offset by increased costs. Gross profit margin decreased from 17.8% in 2023 to 17.1% in 2024.

Distribution, selling, and administrative expenses increased by $3.0 million or 1.5% in 2024 compared to 2023. This was mainly due to a $4.3 million increase in payroll and related labor costs as well as a $1.1 million increase in insurance costs, partially offset by a $2.8 million reduction in professional fees. As a percentage of net revenue, these expenses decreased from 17.0% in 2023 to 16.5% in 2024.

The company reported a net loss attributable to HF Foods Group Inc. of $48.5 million in 2024, compared to a net loss of $2.2 million in 2023. This significant increase in net loss was primarily driven by $46.3 million in goodwill impairment charges recorded in 2024.

Analysis of Strengths and Weaknesses

Strengths:

• Extensive distribution network spanning 46 states and covering 95% of the contiguous U.S.
• Strong relationships with growers and suppliers of Asian food products
• Dedicated focus on serving the needs of Asian restaurants in the U.S.
• Successful integration of acquisitions like Great Wall Group and Sealand Food
• Diversified product portfolio including specialty foods, seafood, produce, and non-food items

Weaknesses:

• Reliance on the performance of the Asian restaurant industry, which can be volatile
• Exposure to fluctuations in fuel prices and availability, which impact cost of goods sold
• Goodwill impairment charges of $46.3 million in 2024 indicating potential overpayment for past acquisitions
• Net losses in both 2024 and 2023, suggesting profitability challenges
• High debt levels, with 35.9% of total debt on floating interest rates exposing the company to interest rate risk

Outlook and Future Considerations

The exit from the chicken processing businesses in 2023 and the resulting revenue loss suggests HF Foods is focusing more on its core Asian specialty food distribution operations. The company’s extensive distribution network, strong supplier relationships, and diversified product portfolio position it well to capitalize on growth opportunities in the Asian restaurant market.

However, the significant goodwill impairment charges in 2024 raise concerns about the company’s past acquisition strategy and integration efforts. HF Foods will need to carefully evaluate its acquisition approach going forward to ensure it does not overpay for target companies.

Profitability also remains a challenge, with the company reporting net losses in both 2024 and 2023. Addressing the factors contributing to these losses, such as rising costs and operational inefficiencies, will be crucial for HF Foods to achieve sustainable profitability.

The company’s high debt levels, with over one-third of its debt on floating interest rates, expose it to interest rate risk. Actively managing this risk through hedging strategies or debt refinancing will be important, especially in a rising interest rate environment.

Overall, HF Foods has a strong market position and growth potential in the Asian specialty food distribution industry. However, the company must address its profitability challenges, integration issues, and debt management to position itself for long-term success.

Key Financial Metrics

The following tables provide a summary of HF Foods’ key financial metrics for the years ended December 31, 2024 and 2023:

Consolidated Results of Operations

Consolidated Results of Operations as a Percentage of Net Revenue

EBITDA and Adjusted EBITDA

Liquidity and Capital Resources

As of December 31, 2024, HF Foods had cash of $14.5 million and access to $36.1 million in additional funds through its $100.0 million line of credit, subject to a borrowing base calculation. The company believes its cash flow from operations is sufficient to meet its working capital needs for the next twelve months.

However, HF Foods’ liquidity is affected by the $3.9 million civil monetary penalty it paid to the SEC in 2024. Additionally, the company’s high debt levels, with 35.9% of total debt on floating interest rates, expose it to interest rate risk.

The company’s cash flow from operating activities increased by $24.3 million in 2024 compared to 2023, primarily due to the timing of working capital outlays. Cash used in investing activities increased by $11.0 million, mainly due to increased capital project spending. Cash used in financing activities increased by $5.0 million, primarily due to a change in line of credit activity from net proceeds in 2023 to net payments in 2024.

Critical Accounting Estimates

HF Foods’ critical accounting estimates include:

1. Business Combinations: The company accounts for business combinations using the purchase method of accounting, which requires the allocation of the purchase price to the fair value of the assets acquired and liabilities assumed. This process involves significant estimates and judgments, particularly around the valuation of intangible assets and goodwill.

2. Goodwill: HF Foods tests goodwill for impairment at least annually or whenever events or changes in circumstances indicate that goodwill might be impaired. The company’s 2024 goodwill impairment charge of $46.3 million highlights the importance of this critical estimate and the potential impact on the company’s financial performance.

3. Impairment of Long-lived Assets: The company assesses its long-lived assets, such as property and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. This process also involves significant estimates and judgments.

These critical accounting estimates demonstrate the complexity and importance of HF Foods’ financial reporting and the potential impact on the company’s financial statements.