A-Mark Precious Metals, Inc. Form 10-Q Summary
Filing identity: The request identifies Gold.Com, Inc., but the supplied filing is for A-Mark Precious Metals, Inc. (NASDAQ: AMRK). The filing covers the unaudited quarter ended September 30, 2015, the first quarter of fiscal 2016. A-Mark is a precious-metals trading, financing, logistics and storage company operating in one reportable segment.
Business Context and Reporting Period
A-Mark trades gold, silver, platinum and palladium products; provides financing, consignment, hedging, storage and logistics services; and operates Collateral Finance Corporation, A-Mark Trading AG, Transcontinental Depository Services and A-M Global Logistics. The Las Vegas logistics fulfillment center began operations in July 2015.
Revenue is highly volume- and commodity-price-sensitive, while profitability depends more on trading spreads, volatility and product mix. Management stated that the quarter benefited from increased demand, lower precious-metal prices and higher market volatility.
Financial Results and Key Metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $2.007 billion | $1.453 billion | +38.1% |
| Gross profit | $14.4 million | $5.7 million | +151.7% |
| Gross margin | 0.72% | 0.39% | +0.33 percentage points |
| SG&A | $6.4 million | $4.2 million | +51.9% |
| Income before taxes | $8.7 million | $1.9 million | +352.8% |
| Net income | $5.4 million | $1.1 million | +371.4% |
| Basic EPS | $0.77 | $0.16 | +$0.61 |
| Diluted EPS | $0.76 | $0.16 | +$0.60 |
| Effective tax rate | 38.2% | 40.6% | Lower |
| Operating cash flow | $(54.5) million | $5.6 million | $(60.1) million |
Gross profit improved primarily because higher volatility, supply constraints and wider premium spreads increased trading margins. Management noted that the quarter’s demand and volatility conditions may not represent normal market conditions. SG&A increased principally because of performance-based compensation and costs associated with the new logistics center.
Balance Sheet, Debt and Liquidity
| Balance-sheet item | September 30, 2015 | June 30, 2015 |
|---|---|---|
| Cash | $5.0 million | $20.9 million |
| Total assets | $389.2 million | $325.9 million |
| Inventory | $254.5 million | $191.5 million |
| Receivables, net | $47.9 million | $30.0 million |
| Secured loans | $50.4 million | $49.3 million |
| Lines of credit | $176.9 million | $147.0 million |
| Product financing obligation | $50.0 million | $39.4 million |
| Stockholders’ equity | $61.0 million | $56.0 million |
The Trading Credit Facility had a maximum capacity of $205.0 million, with $34.3 million of reported availability after borrowings at September 30, 2015. Borrowings are demand obligations, bear interest at LIBOR plus a margin, and are secured by substantially all relevant company assets. The company was in compliance with its covenants, including a $35.0 million minimum tangible net worth requirement.
Operating cash use was driven primarily by a $63.0 million increase in inventories and a $17.2 million increase in receivables. Financing activities provided $40.2 million, including $29.9 million of net credit-line borrowings and $10.6 million from product financing. Cash declined by $15.9 million to $5.0 million during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue increased $553.5 million, reflecting higher gold and silver volumes and demand associated with lower prices and greater volatility.
- Gross margin expanded from 0.39% to 0.72%, and net income increased nearly fivefold.
- Operating cash flow deteriorated from $5.6 million provided to $54.5 million used, primarily because of inventory and working-capital expansion.
- Inventory increased $63.0 million, while lines of credit increased $29.9 million and product financing increased $10.6 million.
- Interest income increased 30.9% to $1.9 million, partly due to growth in the secured-loan portfolio. Secured loans outstanding totaled $50.4 million, and the number of secured loans increased to 470 from 120.
- Net derivative losses increased to $14.4 million from $6.4 million, although these losses are intended to be substantially offset by changes in the value of hedged inventory and commitments.
- Two customers represented 28.9% of quarterly revenue, compared with 41.4% in the prior-year quarter.
Guidance, Outlook, Risks and Unusual Items
The company provided no quantitative earnings or revenue guidance. Management expects current cash, operating cash generation and available Trading Credit Facility capacity to fund working capital, capital expenditures, investments and commitments for at least the next twelve months.
- Market conditions: Results are sensitive to precious-metal prices, trading volume and volatility. Management cautioned that unusually strong demand, supply constraints and wider spreads may not persist.
- Liquidity and financing: The business relies heavily on a secured, variable-rate, demand credit facility. Lenders may withdraw lines or demand repayment, and higher interest rates could reduce margins and customer demand.
- Commodity and counterparty risk: The company uses forwards and futures to hedge inventory and commitments, but remains exposed to hedge ineffectiveness and counterparty defaults. Net inventory exposure to commodity price risk was reported at only $53,000 at quarter-end.
- Credit risk: Three secured loans, totaling $227,000, had loan-to-value ratios above 100% at quarter-end. No loan impairment costs were recorded.
- Customer concentration: HSBC Bank USA and JM Bullion accounted for 16.6% and 12.3% of revenue, respectively. ABN AMRO represented 20.8% of net receivables.
- Santa Monica business-license dispute: The city challenged the company’s use of an agent/broker classification and issued a preliminary assessment for potentially material fees, penalties and interest. The amount and outcome cannot currently be determined.
- Logistics expansion: The new Las Vegas facility increases direct responsibility for storage, fulfillment and inventory security and may increase operating and insurance risks.
- Subsequent investment: After quarter-end, A-Mark purchased an additional 6.2% interest in an online bullion retailer for $2.3 million and agreed to purchase another 5.8% for $2.3 million, subject to conditions including the retailer’s fourth-quarter gross profit.
- Dividends: The board declared a $0.05 per-share quarterly dividend paid in October 2015 and declared another $0.05 dividend scheduled for November 2015. Future dividends remain discretionary and subject to cash needs and debt covenants.
- Controls: Management concluded that disclosure controls were effective as of September 30, 2015, with no material changes to internal control over financial reporting during the quarter.
Investor Verification Checklist
- Confirm the issuer identity: the supplied filing is A-Mark Precious Metals, Inc., not Gold.Com, Inc.
- Assess whether the quarter’s unusually high volatility, demand and gross-margin expansion are sustainable.
- Reconcile the sharp operating cash outflow with inventory growth, receivables growth and increased debt financing.
- Review the Trading Credit Facility’s demand terms, borrowing-base availability, covenant requirements and lender withdrawal rights.
- Evaluate exposure to customer concentration, secured-loan collateral values and loans with elevated loan-to-value ratios.
- Monitor the Santa Monica business-license assessment and any resulting fees, penalties or interest.
- Review the financial and governance implications of the post-quarter-end investment in the online bullion retailer.
- Confirm the effect of product-financing obligations and restricted inventory on available liquidity.