A-Mark Precious Metals, Inc. Form 10-K Summary
Filing and period: The supplied filing is for A-Mark Precious Metals, Inc. (NASDAQ: AMRK), not Gold.Com, Inc. It reports the fiscal year ended June 30, 2017, with comparison to fiscal 2016; it is not a 2016 Q4 filing. A-Mark is a full-service wholesaler and market maker in gold, silver, platinum and palladium, with related financing, storage, logistics and minting operations.
Financial performance and condition
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $6.990 billion | $6.784 billion | Up 3.0% |
| Gross profit | $31.3 million | $34.5 million | Down 9.2% |
| Gross margin | 0.448% | 0.509% | Down 6.1 basis points |
| Net income attributable to A-Mark | $7.1 million | $9.3 million | Down 23.6% |
| Diluted EPS | $1.00 | $1.30 | Down 23.1% |
| Net cash used in operating activities | $9.8 million | $56.2 million | Lower use by $46.4 million |
| Net cash used in investing activities | $36.5 million | $30.2 million | Use increased $6.3 million |
| Net cash provided by financing activities | $42.2 million | $82.6 million | Down $40.4 million |
- Interest income increased 42.7% to $12.6 million, driven primarily by growth in the secured loan portfolio and financing products.
- Interest expense increased 60.1% to $10.1 million, reflecting greater credit-line usage, higher inventory and product-financing balances, loan-fee amortization and higher LIBOR.
- Effective tax rate decreased to approximately 34.5% from 40.4%, partly due to favorable tax attributes and deductions.
- Cash and cash equivalents were $13.1 million at June 30, 2017, compared with $17.1 million at June 30, 2016. Total assets were $478.5 million and stockholders’ equity was $73.0 million.
- Inventory increased to $284.7 million from $245.1 million, including $135.3 million of restricted inventory subject to product-financing arrangements.
- Secured loans receivable increased to $91.2 million from $70.5 million. Outstanding secured loans rose to 2,375 from 1,173.
Material changes versus the prior period
- Revenue rose despite lower physical volumes: gold ounces sold declined 26.9% to 2.171 million and silver ounces sold declined 37.0% to 79.584 million. Management attributed the revenue increase primarily to higher precious-metal prices and increased forward sales.
- Trading ticket volume increased 27.6% to 112,907, while inventory turnover declined to 26.3 from 30.9. Management cited increased online-portal usage, product-financing activity, foreign-sourced metals, custom products and minting lead times.
- Profitability weakened because subdued second-half market conditions constrained volumes and premium spreads, while the prior year benefited from atypical volatility and supply constraints.
- A-Mark formed AM&ST Associates in August 2016 and owns 55% of the venture, which acquired the SilverTowne Mint. The transaction added minting operations, goodwill and intangible assets and resulted in non-controlling interest of $3.4 million at year-end.
- SG&A increased 5.0% to $23.3 million, including acquisition investigations, ERP implementation costs, AMST expenses and a fixed-asset disposal loss, partly offset by lower incentive compensation.
- The company reduced borrowings under its Trading Credit Facility to $180.0 million from $212.0 million, while increasing product-financing obligations to $135.3 million from $59.4 million.
Liquidity, debt and risk considerations
- The uncommitted Trading Credit Facility provides access of up to $275.0 million, comprising a $225.0 million base and a $50.0 million accordion option. Borrowings bear interest at LIBOR plus 2.50% for revolving loans and 4.50% for bridge loans, are due on demand and were scheduled to mature March 31, 2018.
- Availability after current borrowings was approximately $45.6 million at June 30, 2017. The company stated that it was in compliance with all restrictive covenants, including minimum tangible net worth and a dividend limitation of 35% of consolidated net income.
- Management believed cash, credit availability, product-financing arrangements and anticipated operating cash flow were sufficient for at least the following twelve months.
- The company substantially hedges inventory and open commitments. At June 30, 2017, inventory and commitments subject to price risk totaled approximately $595.9 million, compared with derivative positions of approximately $595.7 million, leaving reported net exposure of $175,000.
- Key risks include reliance on an uncommitted demand credit facility, lender acceleration or withdrawal of funding, variable interest rates, counterparty default, customer and supplier concentration, commodity-price volatility, inventory loss or theft, fraud and counterfeiting, regulatory compliance, cybersecurity and ERP implementation risk.
- Two customers accounted for 38.1% of FY2017 revenue, compared with 25.2% in FY2016. HSBC Bank USA represented 21.4% and Mitsubishi International Corporation 16.7% of FY2017 revenue.
Outlook, unusual items and subsequent events
- Management’s strategy emphasizes higher business volume, international expansion, cross-selling financing, storage, logistics and minting services, and selective acquisitions. The filing does not provide formal revenue or earnings guidance.
- On August 28, 2017, the company acquired substantially all assets of Goldline, LLC for approximately $10.0 million. The acquisition was financed partly with a $7.5 million, three-year credit facility bearing interest at 8.5% annually; the facility is secured by GAC assets and guaranteed by A-Mark.
- The Goldline facility includes an additional maturity payment based on the greater of 3% of principal or 10% of cumulative three-year EBITDA above $10 million. Related obligations are subordinated to A-Mark’s principal credit facility.
- The board declared a quarterly dividend of $0.08 per share on August 30, 2017. Future dividends remain subject to board approval, liquidity, results, capital needs and debt covenants.
- There were no material legal proceedings reported. Tax examinations by the IRS, New York and Utah authorities remained unresolved, and the company stated that outcomes could not be determined.
- Grant Thornton issued an unqualified opinion on the consolidated financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective; the auditor was not required to provide an internal-control attestation because the company was a smaller reporting company.
Investor verification points
- Verify the issuer and reporting period: the source is A-Mark Precious Metals’ FY2017 Form 10-K, not Gold.Com, Inc. or 2016 Q4.
- Reconcile the high-volume, low-margin revenue model with gross profit, cash generation and the effects of precious-metal prices and volatility.
- Review the Trading Credit Facility’s renewal, demand features, borrowing-base availability, covenants and subsequent amendments.
- Assess the increase in product-financing obligations and secured loans, including collateral values, loan-to-value ratios and counterparty exposure.
- Evaluate customer concentration, especially the 38.1% revenue contribution from two customers.
- Review the Goldline acquisition, its integration costs, 8.5% financing, guarantee and subordinated repayment terms.
- Confirm the status and potential exposure from outstanding tax examinations and the company’s tax separation agreement with its former parent.