Business Context and Reporting Period
The supplied filing is A-Mark Precious Metals, Inc.’s unaudited Form 10-Q for the quarter and nine months ended March 31, 2015, not Gold.Com, Inc. “2014 Q3.” A-Mark is a full-service precious-metals trading, financing, logistics, hedging and storage company, operating primarily in gold, silver, platinum and palladium. Its fiscal year ends June 30.
The company operates in a high-volume, low-margin industry. Revenue is substantially affected by transaction volumes and precious-metals prices, while inventory and transaction exposures are generally hedged with futures and forward contracts.
Key Financial Metrics
| Metric | Three months ended March 31, 2015 | Three months ended March 31, 2014 | Nine months ended March 31, 2015 | Nine months ended March 31, 2014 |
|---|---|---|---|---|
| Revenue | $1.624 billion | $1.582 billion | $4.617 billion | $4.566 billion |
| Gross profit | $5.6 million | $7.6 million | $18.5 million | $22.5 million |
| Gross margin | 0.346% | 0.479% | 0.402% | 0.492% |
| Net income | $1.7 million | $2.1 million | $4.5 million | $6.7 million |
| Basic and diluted EPS | $0.24 | $0.28 | $0.64 | $0.87 |
| Interest income | $1.6 million | $1.3 million | $4.5 million | $4.2 million |
| Interest expense | $1.2 million | $1.0 million | $3.2 million | $2.9 million |
At March 31, 2015, cash was $16.2 million, total assets were $334.1 million, and stockholders’ equity was $53.8 million. Current liabilities were $280.3 million, including $132.8 million of borrowings under lines of credit and a $48.1 million product-financing obligation.
For the nine months, operating activities used $10.8 million of cash, investing activities used $6.9 million, and financing activities provided $20.8 million. Cash increased by $3.0 million from June 30, 2014, ending at $16.2 million.
The Trading Credit Facility had a maximum capacity of $220.0 million, borrowings of $132.8 million, and approximately $17.0 million available under the latest borrowing-base calculations. Borrowings are due on demand and bear interest based on LIBOR plus a margin. The company reported compliance with its covenants, including a $35.0 million minimum tangible-net-worth requirement.
Material Changes Versus Prior Comparable Period
- Revenue increased 2.7% in the quarter and 1.1% year to date, primarily from higher silver volumes, partly offset by lower gold volumes and lower gold and silver prices.
- Gross profit declined 25.8% in the quarter and 17.5% year to date. Management attributed the reduction primarily to lower premium spreads on primary products, partly offset by higher-margin value-added products.
- Net income declined 19.6% in the quarter and 33.2% year to date. Lower gross profit and higher interest expense more than offset lower income-tax expense and higher interest income.
- The effective tax rate decreased to 9.5% from 40.4% for the quarter and to 31.7% from 40.5% year to date, reflecting changes in state apportionment and the completion of a state tax disclosure process.
- Interest income increased 19.1% in the quarter and 7.5% year to date, while secured loans increased to $46.3 million from $41.3 million at June 30, 2014. The number of secured loans at quarter-end declined to 111 from 124 in the prior-year comparable period.
- Product-financing obligations increased to $48.1 million from $24.6 million at June 30, 2014. Lines-of-credit borrowings declined modestly from $135.2 million.
- Inventory increased to $186.6 million from $175.6 million, while restricted inventory increased to $48.1 million from $24.6 million.
- Gross margin pressure and lower quarterly inventory turnover, which fell to 7.9 from 8.9, were associated with lower premium spreads and increased inventory carried in foreign locations.
Guidance, Outlook, Risks and Unusual Items
Management did not provide numerical earnings or revenue guidance. Management expects existing cash, operating cash generation and available borrowing capacity to fund working capital, capital expenditures, investments and commitments for at least the next twelve months. The company was expanding its Las Vegas logistics center, with build-out expected in mid-2015, under a five-year warehouse lease costing approximately $252,000 annually before escalations.
- Commodity and foreign-exchange derivatives are used for hedging rather than speculation. At March 31, 2015, commodity-price exposure was approximately $329.8 million compared with $330.1 million of corresponding forwards and futures. The reported net inventory subject to commodity-price risk was approximately negative $0.3 million.
- Derivative losses were $10.3 million in the quarter and $44.8 million year to date; management stated that these losses were substantially offset by changes in the fair value of the underlying inventory and commitments.
- The principal liquidity risk is reliance on a secured, variable-rate, demand credit facility that lenders may cancel or demand repayment under its terms. The latest approved borrowing-base availability was only $17.0 million.
- Credit risk exists in customer receivables, secured lending, advances and derivative counterparties. One secured loan with a balance of $176,000 had a loan-to-value ratio above 100% at March 31, 2015.
- Customer concentration is significant: HSBC Bank USA represented 29.6% of quarterly revenue and 31.7% of nine-month revenue. Management states that loss of significant customers could materially affect operations.
- The company identified a historical material weakness in internal control over financial reporting as of June 30, 2013 and March 31, 2014. Management believes remediation steps were taken, but the first assessment for the year ending June 30, 2015 had not yet occurred.
- The company remains exposed to precious-metals volatility, counterparty default, theft or loss of high-value inventory, fraud and counterfeiting, regulatory changes, foreign operations, competition, cybersecurity and dependence on key personnel.
- The company began a quarterly cash-dividend policy of $0.05 per share. A $0.3 million dividend was paid in March 2015, and another $0.05 per-share dividend was declared on May 1, 2015, subject to board approval and financing-covenant limitations.
- On April 1, 2015, the company completed the second tranche of an investment in a customer, bringing its ownership to 9% for an aggregate $2.0 million.
- The company had $4.0 million receivable from former parent Spectrum Group International for tax-sharing matters and remained subject to potential tax-related obligations under the tax separation agreement. The filing states that the risk of the spinoff being treated as taxable was considered remote and no liability was recorded.
Most Important Facts to Verify
- Confirm the correct issuer and reporting period: the supplied document is for A-Mark Precious Metals, Inc. for the quarter ended March 31, 2015, not Gold.Com, Inc. or 2014 Q3.
- Verify the company’s ability to maintain and renew its demand Trading Credit Facility and the amount of borrowing-base availability under current metal prices and collateral values.
- Assess whether the sharp decline in gross margin and earnings is temporary or reflects sustained pressure on premium spreads and trading economics.
- Review the composition, liquidity and collateral coverage of the $46.3 million secured-loan portfolio and the concentration of receivables and customers.
- Evaluate the $48.1 million product-financing obligation, related restricted inventory and total leverage relative to tangible net worth.
- Reconcile derivative gains and losses with the fair-value changes in inventory and commitments, including counterparty exposures and margin requirements.
- Confirm remediation and year-end testing results for the previously reported material weakness in internal control over financial reporting.
- Monitor dividend declarations against cash generation, borrowing-base availability and credit-facility restrictions.