A-Mark Precious Metals, Inc. Form 10-Q Summary
Filing-period note: The supplied filing is for A-Mark Precious Metals, Inc. (NASDAQ: AMRK), not Gold.Com, Inc., and covers the quarter and nine months ended March 31, 2014. The request metadata identifies “2013 Q3,” but the filing period is fiscal 2014 third quarter.
Business Context and Reporting Period
A-Mark is a full-service precious-metals trading company dealing in gold, silver, platinum and palladium, with related financing, consignment, hedging, storage and customized financial services. Its subsidiaries include Collateral Finance Corporation, A-Mark Trading AG and Transcontinental Depository Services.
The company was spun off from Spectrum Group International, Inc. on March 14, 2014, and began trading on Nasdaq under “AMRK” on March 17, 2014. The financial statements are unaudited and present one operating segment. Historical share and per-share amounts were retrospectively adjusted for the distribution.
Financial Performance and Position
| Metric | Three Months Ended March 31 | Nine Months Ended March 31 |
|---|---|---|
| Revenue | $1,581.5 million, down 13.7% | $4,566.2 million, down 11.3% |
| Gross profit | $7.5 million; approximately 0.5% margin | $22.4 million; approximately 0.5% margin |
| Net income | $2.1 million, down 19.7% | $6.7 million, down 1.0% |
| Basic diluted EPS | $0.28 | Basic $0.87; diluted $0.87 |
| Cash flow from operations | Not separately presented | $(38.4) million |
At March 31, 2014, cash was $7.9 million, total assets were $300.0 million, and stockholders’ equity was $47.9 million. Inventory was $193.8 million, including $49.7 million of restricted inventory supporting a product-financing obligation. Receivables were $81.6 million.
Lines of credit totaled $119.8 million against a $170.0 million Trading Credit Facility, leaving $50.2 million of formula-based availability. Borrowings are due on demand, secured by receivables and inventory, and bear interest based primarily on LIBOR plus a margin. The company reported tangible net worth of $39.2 million versus a $25.0 million covenant requirement and stated that it was in compliance with its covenants.
Financing activities provided $25.9 million during the nine months, primarily from $24.8 million of net line-of-credit borrowings and an $11.1 million increase in product-financing obligations. The company paid $10.0 million of dividends to the Former Parent. Cash declined from $21.6 million at June 30, 2013 to $7.9 million at March 31, 2014.
Material Changes Versus the Prior Comparable Period
- Revenue decreased primarily because of lower gold and silver prices and lower gold ounces sold, partly offset by higher silver volumes.
- Nine-month gross profit increased 18.6% to $22.4 million, despite lower revenue, aided by demand for higher-margin custom silver products and distribution contracts.
- General and administrative expense increased 24.1% for the nine months to $12.5 million, reflecting additional personnel, legal and accounting costs, public-company expenses, and the absence of a prior-year $0.7 million favorable adjustment.
- Interest income declined 29.8% for the nine months to $4.3 million, reflecting lower financing activity and lower precious-metals prices; interest expense increased 8.7% to $2.9 million because of greater credit-facility usage.
- Operating cash flow shifted from $44.9 million provided in the prior-year nine-month period to $38.4 million used, principally because of increased inventory and reductions in accounts payable and borrowed-metals liabilities.
- Inventory increased to $193.8 million from $162.4 million, while borrowed-metals liabilities declined to $8.6 million from $20.1 million and product-financing obligations increased to $49.7 million from $38.6 million.
- The company entered into a $0.5 million cost-method investment and recorded a $2.2 million obligation to repurchase 379,033 A-Mark shares in connection with the spinoff-related purchase agreement.
Outlook, Risks, Contingencies and Unusual Items
Management stated that existing cash, expected operating cash flow and available borrowing capacity should be sufficient for working capital, capital expenditures, investments and commitments for at least the next twelve months. No formal revenue or earnings guidance was provided.
The company substantially hedges its commodity exposure. At March 31, 2014, inventory and related commitments subject to price risk were $326.1 million, versus $326.5 million of corresponding forwards and futures contracts, leaving reported net commodity exposure of approximately $(0.4) million. Nevertheless, results remain sensitive to trading volume, commodity-price volatility, counterparty performance and exchange liquidity.
- The Trading Credit Facility is a demand facility; lenders may require repayment or withdraw participation, and availability declined from $66.0 million at June 30, 2013 to $50.2 million.
- Customer concentration is material. HSBC Bank USA represented 25.4% of nine-month revenue; the filing states that loss of significant customers could materially affect operations.
- The business depends on government-mint purchaser and distributor relationships, precious-metals volatility, access to financing, collateral values and effective hedging.
- The company disclosed a material weakness in internal control over financial reporting caused by inadequate accounting and finance resources. Management planned to add personnel and formalize review and oversight procedures but provided no assurance that remediation would be successful.
- The company had $0.7 million of unrecognized tax benefits and $0.3 million related to interest and penalties. No valuation allowance was recorded against deferred tax assets.
- The company was required to purchase 10,000 one-ounce gold bullion coins under a sovereign-mint agreement; 5,000 had been purchased by March 31, 2014.
- Management reported no legal proceeding expected to have a material adverse effect, but the filing discusses potential risks involving the Former Parent, including tax separation, spinoff-related indemnities, possible Former Parent insolvency and Spanish proceedings involving entities formerly associated with SGI.
Important Facts for Investors to Verify
- Confirm the correct issuer and period: the source is A-Mark Precious Metals’ March 31, 2014 Form 10-Q, not Gold.Com’s 2013 third-quarter filing.
- Assess liquidity under a $119.8 million demand borrowing balance, $50.2 million of remaining availability and only $7.9 million of cash.
- Review the unresolved material weakness in internal controls and the status of remediation.
- Evaluate customer concentration, especially HSBC Bank USA’s 25.4% share of nine-month revenue.
- Reconcile the negative nine-month operating cash flow with reported net income and increased inventory financing.
- Review the terms and maturity requirements of the Trading Credit Facility, product-financing arrangement and 379,033-share repurchase obligation.
- Monitor commodity-price volatility, derivative counterparties, government-mint relationships and the tax and legal consequences of the SGI spinoff.