A-Mark Precious Metals, Inc. Form 10-Q Summary
Filing identification: The supplied filing is for A-Mark Precious Metals, Inc. (NASDAQ: AMRK), not Gold.Com, Inc. It covers the quarter and six months ended December 31, 2016, representing the second quarter of fiscal 2017. The financial statements are unaudited.
Business Context and Reporting Period
A-Mark is a full-service precious-metals trading company handling gold, silver, platinum and palladium. Its businesses include wholesale trading, financing, storage, logistics, hedging and customized financial programs. Through CFC, it makes secured loans collateralized primarily by precious metals and collectibles. During the quarter, A-Mark also operated AM&ST Associates, a 55%-owned minting joint venture formed with Silvertowne on August 31, 2016.
The company operates in one reportable segment and uses mark-to-market accounting for most precious-metals inventories and related derivatives. Revenue and profit are materially influenced by trading volume, metal prices, market volatility and bid-ask spreads.
Key Financial Metrics
| Metric | Three months ended December 31, 2016 | Three months ended December 31, 2015 | Six months ended December 31, 2016 | Six months ended December 31, 2015 |
|---|---|---|---|---|
| Revenue | $2.126 billion | $1.529 billion | $3.932 billion | $3.536 billion |
| Gross profit | $9.9 million | $5.7 million | $17.9 million | $20.1 million |
| Gross margin | 0.464% | 0.371% | 0.456% | 0.568% |
| Net income attributable to company | $2.8 million | $1.4 million | $4.7 million | $7.0 million |
| Diluted EPS | $0.39 | $0.20 | $0.66 | $0.99 |
| Interest income | $3.0 million | $2.2 million | $5.8 million | $4.1 million |
| Interest expense | $2.4 million | $1.3 million | $4.7 million | $2.6 million |
| Effective tax rate | 36.7% | 38.3% | 36.1% | 38.2% |
- Balance sheet at December 31, 2016: Cash was $13.3 million; total assets were $537.0 million; total liabilities were $465.9 million; and total stockholders’ equity, including non-controlling interest, was $71.1 million.
- Working capital assets: Receivables were $81.9 million, secured loans receivable were $80.9 million and inventories were $290.9 million, including $121.5 million of restricted inventory subject to product financing arrangements.
- Debt and liquidity: Lines of credit totaled $185.0 million versus $212.0 million at June 30, 2016. The Trading Credit Facility provides access of up to $275.0 million, subject to borrowing-base requirements; approved availability after borrowings was $81.4 million at December 31, 2016. The company reported compliance with all restrictive covenants.
- Cash flow for the six months: Operating activities used $16.4 million, investing activities used $21.8 million and financing activities provided $34.3 million. Cash declined by $3.9 million to $13.3 million.
- Derivatives and market exposure: Net derivative assets were $39.6 million and derivative liabilities were $74.4 million. The company reported a $19.0 million net loss on derivative instruments for the six months, compared with a $17.0 million net gain in the prior-year period; these amounts are substantially offset by changes in the value of hedged inventory and commitments.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 39.1%, driven by higher gold volume, higher precious-metals prices and increased forward sales. Gold ounces sold rose 10.4%, while silver ounces sold fell 30.5%.
- Second-quarter gross profit increased 73.7% and gross margin improved to 0.464%, primarily due to improved trading profits. Trading ticket volume more than doubled to 35,198.
- Six-month revenue increased 11.2%, despite gold ounces sold declining 18.4% and silver ounces sold declining 39.2%. Management attributed the revenue increase primarily to higher metal prices and forward sales.
- Six-month gross profit declined 10.8% and gross margin fell to 0.456%, reflecting unusually high premium spreads, volatility and supply constraints in the prior-year period.
- Six-month net income attributable to the company declined 32.9%, and diluted EPS declined from $0.99 to $0.66. Higher interest expense, lower gross profit and lower equity-method investment income were important factors.
- Interest expense increased 83.4% for the six months because of greater credit-facility usage, higher inventory and product-financing balances, and higher LIBOR.
- Secured loans receivable increased to $80.9 million from $70.5 million, while the number of secured loans at period-end increased to 1,698 from 670 in the comparable period, primarily following acquisitions of bullion-based loan portfolios.
- Product financing arrangements increased to $121.5 million from $59.4 million at June 30, 2016. Restricted inventory increased by the same amount.
- The AMST minting transaction added approximately $4.3 million of goodwill and $2.5 million of identifiable intangible assets. The company recorded a $1.5 million estimated contingent earn-out obligation and agreed to contribute an additional $0.5 million in August 2017.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expects current cash, borrowing availability, product-financing arrangements and anticipated operating cash flows to provide sufficient liquidity for at least the next twelve months.
- Management describes the business as high-volume and low-margin. Higher volatility can widen trading spreads and support gross profit, while stagnant prices or lower trading activity could reduce demand and profitability.
- The company substantially hedges inventory and open commitments, but remains exposed to hedge-counterparty default, exchange disruption, liquidity constraints and imperfect hedging.
- The company depends heavily on its one-year, uncommitted Trading Credit Facility. A default, non-renewal or inability to obtain replacement financing could materially impair operations.
- Customer concentration increased: three customers represented 46.9% of six-month revenue versus 31.8% in the prior-year period. One customer represented 79.7% of net accounts receivable at December 31, 2016.
- AMST commitments include an obligation for A-Mark to order at least 300,000 ounces of fabricated silver products per week on average over each consecutive four-week period during the initial three-year term. A-Mark also guaranteed certain AMST obligations related to refined silver leased from Asahi.
- The company is implementing a new enterprise resource planning system. Management identifies potential implementation, financial-reporting, internal-control and operational risks.
- The IRS commenced an examination of the company’s fiscal 2015 tax return; the outcome was not determinable at the filing date.
- The board declared a quarterly dividend of $0.08 per share on January 26, 2017, payable on or about February 24, 2017. Future dividends remain subject to board approval, cash needs and debt covenants.
- No material legal proceedings were reported, and management concluded that disclosure controls and procedures were effective as of December 31, 2016.
Most Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is A-Mark Precious Metals, Inc., despite the request metadata naming Gold.Com, Inc.
- Review the maturity, renewal terms, borrowing-base mechanics and covenants of the $275.0 million Trading Credit Facility.
- Assess the sustainability of extremely low gross margins and the sensitivity of earnings to precious-metals volume, price and volatility.
- Reconcile the sharp increase in product financing arrangements and restricted inventory with liquidity and interest-expense trends.
- Evaluate customer and receivable concentration, particularly the customer representing 79.7% of net accounts receivable.
- Review AMST’s purchase minimums, supply arrangements, contingent earn-out valuation, additional capital contribution and execution risks.
- Monitor derivative fair values, counterparty exposure and the substantial difference between reported derivative gains or losses and the corresponding hedged inventory changes.
- Follow the IRS examination, ERP implementation and future dividend declarations for potential effects on cash flow, controls and shareholder returns.