A-Mark Precious Metals, Inc. Form 10-Q Summary
Filing discrepancy: The request identifies Gold.Com, Inc., but the supplied filing is for A-Mark Precious Metals, Inc. (NASDAQ: AMRK). The report is for the quarter ended December 31, 2015, within fiscal 2016, and was filed February 10, 2016. Financial statements are unaudited and presented in thousands unless otherwise noted.
Business Context and Reporting Period
A-Mark is a full-service precious-metals trading company dealing in gold, silver, platinum and palladium. Its activities include wholesale trading, financing, consignment, hedging, logistics, storage and secured lending through Collateral Finance Corporation. A-M Global Logistics began operations in July 2015. The Company operates as one reporting segment.
Key Financial Metrics
| Metric | Three months ended Dec. 31, 2015 | Three months ended Dec. 31, 2014 | Six months ended Dec. 31, 2015 | Six months ended Dec. 31, 2014 |
|---|---|---|---|---|
| Revenue | $1,529.1 million | $1,538.9 million | $3,536.1 million | $2,992.3 million |
| Gross profit | $5.7 million | $7.2 million | $20.1 million | $12.9 million |
| Gross margin | 0.371% | 0.467% | 0.568% | 0.432% |
| Net income | $1.3 million | $1.7 million | $6.7 million | $2.8 million |
| Diluted EPS | $0.19 | $0.24 | $0.94 | $0.40 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $(30.7) million | $(80.6) million |
- Cash was $3.4 million at December 31, 2015, compared with $20.9 million at June 30, 2015.
- Total assets were $363.1 million, including $239.8 million of inventory and $57.7 million of secured loans receivable.
- Total liabilities were $301.0 million and stockholders’ equity was $62.1 million.
- Lines of credit were $162.5 million, up from $147.0 million at June 30, 2015. The Trading Credit Facility had a $205.0 million maximum and $32.2 million of availability at December 31, 2015.
- Product financing obligations were $50.5 million, compared with $39.4 million at June 30, 2015.
- Investing cash flow was $(12.7) million, primarily reflecting secured loan activity, capital expenditures and investments. Financing cash flow was $25.9 million, including $15.5 million of net credit-line borrowings, $11.1 million of product-financing proceeds and $0.7 million of dividends paid.
- The Company had a 38.2% effective tax rate for the six-month period and reported no impairment of goodwill or long-lived assets.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 0.6%, while six-month revenue increased 18.2%. Management attributed the six-month increase primarily to higher gold and silver volumes, despite lower average spot prices.
- Gold ounces sold increased 25.9% in the quarter and 59.8% year to date. Silver ounces sold increased 27.3% in the quarter and 66.7% year to date.
- Second-quarter gross profit decreased 21.1% and gross margin narrowed to 0.371%, primarily because of a less favorable product mix, lower premium spreads and reduced volatility. Six-month gross profit increased 55.5%, reflecting stronger spreads and volatility in the first fiscal quarter.
- Second-quarter net income decreased 19.9%; six-month net income increased 139.1%. Second-quarter trading-ticket volume fell 24.5%, while six-month volume increased 9.9%.
- Interest income increased 56.1% in the quarter and 43.1% for six months, primarily because of growth in the secured-loan portfolio. Secured loans at period-end increased to 670 from 123.
- SG&A declined 4.8% in the quarter but increased 21.9% for six months, reflecting performance-based compensation and operating costs for the new logistics center.
- Net cash used in operating activities improved from $80.6 million to $30.7 million, but the Company continued to consume operating cash. Cash declined by $17.6 million during the six months.
Guidance, Outlook, Risks and Unusual Items
- No formal financial guidance was provided. Management stated that current cash, available credit and expected operating cash generation should be sufficient for working capital, capital expenditures, investments and commitments for at least the next twelve months.
- Management expects results to remain sensitive to precious-metals prices, trading volumes, volatility, supply constraints, product mix and premium spreads. The Company noted that unusually strong volatility and demand in the first fiscal quarter may not represent normal market conditions.
- The Company substantially hedges its inventory and open commitments with futures and forwards. Net inventory subject to commodity-price risk was approximately $0.3 million at December 31, 2015, but counterparty default, hedging ineffectiveness and exchange disruptions remain risks.
- The Trading Credit Facility is a demand facility secured by Company assets. Lenders may withdraw lines or demand repayment, and borrowings carry variable rates based on LIBOR plus a margin. The Company was in compliance with its covenants at December 31, 2015.
- Santa Monica challenged the Company’s historical classification as an agent/broker for business-license-fee purposes and issued a preliminary assessment for potentially underreported fees, penalties and interest. The Company disputes the claim, and the amount and outcome cannot currently be determined.
- Customer concentration is significant: HSBC Bank USA and JM Bullion represented 28.8% of six-month revenue collectively. The Company also identifies risks related to customer credit, precious-metal loss or theft, fraud and counterfeiting, regulatory compliance, foreign operations, technology systems, competition and retention of key personnel.
- On January 15, 2016, the Company paid $2.3 million to increase its ownership in an online precious-metals retailer to 20%. On February 2, 2016, the Board declared a quarterly dividend of $0.07 per share, up from the previously stated $0.05 policy.
- The Chief Accounting Officer resigned effective February 2, 2016 for personal reasons and agreed to serve as a consultant through August 14, 2016. The Company appointed an acting chief accounting officer and expected its newly appointed CFO to assume the principal financial officer role.
Facts Investors Should Verify
- Confirm that the issuer and ticker are A-Mark Precious Metals, Inc., not Gold.Com, Inc.
- Reconcile the Company’s low cash balance with $162.5 million of demand borrowings, $50.5 million of product financing obligations and reliance on weekly borrowing-base availability.
- Assess the sustainability of profitability given the substantial quarter-to-quarter impact of precious-metals volatility, product mix and trading spreads.
- Review the secured-loan portfolio’s collateral values and loan-to-value profile; 59.8% of precious-metal-collateralized loans had loan-to-value ratios of 75% or more at December 31, 2015.
- Monitor the Santa Monica business-license assessment and any potential tax liabilities under the Tax Separation Agreement with the former parent.
- Evaluate customer concentration, counterparty exposure and the adequacy of insurance and controls for high-value metals held at Company, third-party and logistics facilities.
- Confirm the impact and accounting treatment of the January 2016 investment and the increased quarterly dividend.