A-MARK PRECIOUS METALS, INC. CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K ("Form 10-K") contains statements that are
considered forward-looking statements. Forward-looking statements give the
Company's current expectations and forecasts of future events. All statements
other than statements of current or historical fact contained in this Annual
Report, including statements regarding the Company's future financial position,
business strategy, budgets, projected costs and plans, and objectives of
management for future operations, are forward-looking statements. The words
"anticipate," "believe," "continue," "estimate," "expect," "intend," "may,"
"plan," and similar expressions, as they relate to the Company, are intended to
identify forward-looking statements. These statements are based on the Company's
current plans, and the Company's actual future activities and results of
operations may be materially different from those set forth in the
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from the statements made. Any or all of the forward-looking statements in this
Annual Report may turn out to be inaccurate. The Company has based these
forward-looking statements largely on its current expectations and projections
about future events and financial trends that it believes may affect its
financial condition, results of operations, business strategy, and financial
needs. The forward-looking statements can be affected by inaccurate assumptions
or by known or unknown risks, uncertainties and assumptions. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect events occurring after the date hereof. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the cautionary statements
contained in this Form 10-K.
In addition to the risks and uncertainties that may ordinarily influence our
business, the Company is exposed to the effects of the COVID-19 pandemic. The
extent to which this outbreak ultimately impacts our results of operations, cash
flows and financial condition will depend on future developments, which are
highly uncertain and unpredictable, including new information which may emerge
concerning the severity and duration of this outbreak and the actions taken by
governmental authorities and us to contain it or treat its impact.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and notes contained elsewhere in this Form 10-K. This discussion
contains forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those discussed in
these forward-looking statements. Factors that could cause or contribute to
these differences include those factors discussed below and elsewhere in this
Annual Report, particularly in " Risk Factors ."
INTRODUCTION
Management's discussion and analysis of financial condition and results of operations is provided as a supplement to the accompanying consolidated financial statements and related notes to aid in the understanding of our results of operations and financial condition. Our discussion is organized as follows:
• Executive overview . This section provides a general description of our
business, as well as significant transactions and events that we believe
are important in understanding the results of operations.
• Results of operations . This section provides an analysis of our
results of operations presented in the accompanying consolidated
statements of income by comparing the results for the respective periods
presented. Included in our analysis is a discussion of five performance
metrics: (i) ounces of gold and silver sold, (ii) wholesale trading ticket
volume, (iii) direct sales ticket volume, (iv) inventory turnover ratio
and (v) number of secured loans at period-end.
• Segment results of operations . This section provides an analysis of
our results of operations presented for our three segments:
o Wholesale Trading & Ancillary Services,
o Secured Lending , and
o Direct Sales
for the comparable periods.
• Liquidity and financial condition . This section provides an analysis
of our cash flows, as well as a discussion of our outstanding debt as of
outstanding debt, the amount of financial capacity available to fund our
future commitments and other financing arrangements.
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• Critical accounting policies . This section discusses criticalaccounting policies that are considered both important to our financial
condition and results of operations, and require management to make
significant judgment and estimates. All of our significant accounting
policies, including the critical accounting policies are also summarized
in Note 2 of the notes to the consolidated financial statements.
• Recent accounting pronouncements . This section discusses new
accounting pronouncements, dates of implementation and their expected
impact on our accompanying consolidated financial statements.
EXECUTIVE OVERVIEW Our Business
We conduct our operations in three reportable segments: (i) Wholesale Trading & Ancillary Services, (ii) Secured Lending and (iii) Direct Sales.
Wholesale Trading & Ancillary Services Segment
The Company operates its Wholesale Trading & Ancillary Services segment throughA-Mark Precious Metals, Inc. , and its wholly-owned subsidiaries,A-Mark Trading AG ("AMTAG"), Transcontinental Depository Services ("TDS" or "Storage"), andA-M Global Logistics, LLC . ("AMGL" or "Logistics"), and its partially-owned subsidiary,AM&ST Associates, LLC . ("AMST" or "SilverTowne" or the "Mint"). The Wholesale Trading & Ancillary Services segment operates as a full-service precious metals trading company. We offer gold, silver, platinum, and palladium in the form of bars, plates, powder, wafers, grain, ingots, and coins. Our Industrial unit services manufacturers and fabricators of products utilizing or incorporating precious metals. Our Coin and Bar unit deals in over 200 coin and bar products in a variety of weights, shapes, and sizes for distribution to dealers and other qualified purchasers. We have a marketing support office inVienna, Austria , and a trading center inEl Segundo, California . The trading center, for buying and selling precious metals, is available to receive orders 24 hours every day, even when many major world commodity markets are closed. In addition to wholesale trading activity, A-Mark offers its customers a variety of services, including financing, storage, consignment, logistics, and various customized financial programs. As aU.S. Mint-authorized purchaser of gold, silver, platinum, and palladium coins, A-Mark purchases product directly from theU.S. Mint and other sovereign mints for sale to its customers.
Through its wholly owned subsidiary, AMTAG, the Company promotes A-Mark's products and services throughout the European continent. Through our wholly-owned subsidiary TDS, we offer a variety of managed storage options for precious metals products to financial institutions, dealers, investors, and collectors around the world. Our storage business generated less than 1% of total revenues for each of the periods presented.
The Company's wholly-owned subsidiary, AMGL, is based inLas Vegas, Nevada , and provides our customers an array of complementary services, including receiving, handling, inventorying, processing, packing, and shipping of precious metals and custom coins on a secure basis. Our logistics business generated less than 1% of the total revenues for each of the periods presented. Through our partially-owned subsidiary, AMST, the Company designs and produces minted silver products. The Company operates the Mint pursuant to a joint venture agreement withSilverTowne, L.P. The Company andSilverTowne L.P. own 69% and 31%, respectively, of AMST. AMST acquired the entire minting operations (referred to as SilverTowne Mint) ofSilverTowne, L.P. , with the goal of providing greater product selection to our customers and greater pricing stability within the supply chain, as well as to gain increased access to silver during volatile market environments, which have historically resulted in higher demand for precious metals products.
Secured Lending Segment
The Company operates its Secured Lending segment through its wholly-owned
subsidiaries,
CFC is aCalifornia licensed finance lender that originates and acquires commercial loans secured by bullion and numismatic coins. CFC's customers include coin and precious metal dealers, investors, and collectors. As ofJune 30, 2020 , CFC and AMCF had, in aggregate, approximately$63.7 million in secured loans outstanding, of which approximately 39.1% were acquired from third-parties (some of which may be customers of A-Mark) and approximately 60.9% were originated by CFC. 25
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AMCF, a wholly-owned subsidiary of CFC, was formed for the purpose of securitizing eligible secured loans of CFC. AMCF issued, administers, and owns Secured Senior Term Notes: Series 2018-1, Class A, with an aggregate principal amount of$72.0 million and Secured Subordinated Term Notes, Series 2018-1, Class B in the aggregate principal amount of$28.0 million . The Class A Notes bear interest at a rate of 4.98%, and the ClassB Notes bear interest at a rate of 5.98% (collectively referred to as the "Notes"). The Notes have a maturity date ofDecember 15, 2023 . For additional information regarding this securitization. (See Note 14 of the notes to consolidated financial statements.) Direct Sales Segment
The Company operates its Direct Sales segment through its wholly-owned
subsidiaries
The Company acquired Goldline inAugust 2017 through an asset purchase transaction withGoldline LLC .Goldline LLC . had been in operation since 1960. Goldline is a direct retailer of precious metals to the investor community. Goldline markets its precious metal products on television, radio, and the internet, as well as through telephonic sales efforts. Goldline's business has enhanced the Company's distribution capabilities by adding a direct-to-client distribution channel that has diversified the product and services offered to Goldline's customers, through access to the Company's wider assortment of precious metal coins and bars, including TDS's storage and asset protection services.
AMIP, a wholly owned subsidiary of Goldline, manages its intellectual property.
In fiscal 2019, the Company formed and capitalized PMPP, a 50%-owned subsidiary of Goldline, pursuant to terms of a joint venture agreement, for the purpose of purchasing precious metals from the partners' retail customers, and then reselling the acquired products back to affiliates of the partners. In fiscal 2020, PMPP commenced its operations.
Our Strategy
The Company was formed in 1965 and has grown into a significant participant in the bullion and coin markets, with approximately$5.5 billion in revenues for fiscal year 2020. Our strategy continues to focus on growth, including the volume of our business, our geographic presence, and the scope of complementary products, services, and technological tools that we offer to our customers. We intend to promote our growth by leveraging off the strengths of our existing integrated operations:
• the depth of our customer relationships;
• our access to market makers, suppliers, and sovereign and private mints;
• our trading systems in theU.S. andEurope ; • our expansive precious metals dealer network; • our depository relationships around the world; • our knowledge of secured lending; • our logistics capabilities; • our trading expertise; and • the quality and experience of our management team. Our Customers Our customers include financial institutions, bullion retailers, industrial manufacturers and fabricators, sovereign mints, refiners, coin and metal dealers, investors, and collectors. The Company makes a two way market, which results in many customers also operating as our suppliers. This diverse base of customers purchases a variety of products from the Company in a multitude of grades, primarily in the form of coins and bars. 26
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Factors Affecting Revenues, Gross Profits, Interest Income, and Interest Expense
Revenues. The Company enters into transactions to sell and deliver gold, silver, platinum, and palladium to industrial and commercial users, coin and bullion dealers, mints, and financial institutions. The metals are investment or industrial grade and are sold in a variety of shapes and sizes. The Company also sells precious metals on forward contracts at a fixed price based on current prevailing precious metal spot prices with a certain delivery date in the future (up to six months from inception date of the forward contract). The Company also uses other derivative products (primarily futures contracts) or a combinations thereof to hedge commodity risks. We enter into these forward and future contracts as part of our hedging strategy to mitigate our price risk of holding inventory; they are not entered into for speculative purposes. However, unlike futures contracts which do not impact the Company's revenue, forward sales contracts by their nature are required to be included in revenues. The decision to use a forward contract verses another derivative type product (e.g., a futures contract) for hedging purposes is based on the economics of the transaction. Since the volume of hedging can be significant, the movement in and out of forwards can substantially impact revenues, either positively or negatively, from period to period. For this reason, the Company believes ounces sold (excluding ounces sold on forward sales contracts) is a meaningful metric to assess our top line performance.
In addition, the Company earns revenue by providing storage solutions for precious metals and numismatic coins for financial institutions, dealers, investors and collectors worldwide and by providing storage and order-fulfillment services to our retail customers. These revenue streams are complementary to our trading activity, and represent less than 1% of our revenues.
The Company operates in a high volume/low margin industry. Revenues are
impacted by three primary factors: product volume, market prices and market
volatility. A material change in any one or more of these factors may result in
a significant change in the Company's revenues. A significant increase or
decrease in revenues can occur simply based on changes in the underlying
commodity prices and may not be reflective of an increase or decrease in the
volume of products sold.
Gross Profit. Gross profit is the difference between our revenues and the cost
of our products sold. Since we quote prices based on the current commodity
market prices for precious metals, we enter into a combination of forward and
futures contracts to effect a hedge position equal to the underlying precious
metal commodity value, which substantially represents inventory subject to price
risk. We enter into these derivative transactions solely for the purpose of
hedging our inventory, and not for speculative purposes. Our gross profit
includes the gains and losses resulting from these derivative
instruments. However, the gains and losses on the derivative instruments are
substantially offset by the gains and losses on the corresponding changes in the
market value of our precious metals inventory. As a result, our results of
operations generally are not materially impacted by changes in commodity prices.
Volatility also affects our gross profit. Greater volatility typically causes
the premium spreads to widen resulting in an increase in the gross profit.
Product supply constraints during extended periods of higher volatility have
historically resulted in a heightening of wider premium spreads resulting in
further improvement in the gross profit.
Interest Income. The Company enters into secured loans and secured financing
structures with its customers under which it charges interest. CFC acquires loan
portfolios and originates loans that are secured by precious metal bullion and
numismatic material owned by the borrowers and held by the Company for the term
of the loan. Additionally, AMCF acquires certain loans from CFC that are secured
by precious metal bullion to meet the collateral requirements of the
Notes. Also, the Company offers a number of secured financing options to its
customers to finance their precious metals purchases including consignments and
other structured inventory finance products whereby the Company earns a fee
based on the underlying value of the precious metal ("repurchase arrangements
with customers").
Interest Expense. The Company incurs interest expense associated with its: lines
of credit, notes, related-party debt, product financing agreements for the
transfer and subsequent re-acquisition of gold and silver at a fixed price with
a third-party finance company ("product financing arrangements"), and short-term
precious metal borrowing arrangements with our suppliers ("liabilities on
borrowed metals").
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Table of Contents Performance Metrics
In addition to financial statement indicators, management also utilizes certain key operational metrics to assess the performance of our business.
Gold and Silver Ounces Sold and Delivered to Customers. We look at the number of ounces of gold and silver sold and delivered to our customers (excluding ounces recorded on forward contracts). These metrics reflect our business volume without regard to changes in commodity pricing, which impacts revenue but can mask actual business trends. The primary purpose of entering into forward sales transactions is to hedge commodity price risk. Although the revenues realized from these forward sales transactions are often significant, they generally have negligible impact to gross margins. As a result, the Company excludes the ounces recorded on forward contracts from its performance metrics, as the Company does not enter into forward sales transactions for speculative purposes. Wholesale Trading Ticket Volume and Direct Sales Ticket Volume. Another measure of our business that is unaffected by changes in commodity pricing, is ticket volume. Ticket volume for the Wholesale Trading & Ancillary Services and Direct Sales segments measures the total number of orders processed by our trading desks. In periods of higher volatility, there is generally increased trading in the commodity markets, causing increased demand for our products, resulting in higher business volume. Generally, the ounces sold on a per-trading-ticket basis is substantially higher for orders placed telephonically compared to those placed on our online portal platform. Inventory Turnover. Inventory turnover is another performance measure on which we are focused, and is calculated as the cost of sales divided by the average inventory during the relevant period. Inventory turnover is a measure of how quickly inventory has moved during the period. A higher inventory turnover ratio, which we typically experience during periods of higher volatility when trading is more robust, typically reflects a more efficient use of our capital.
The period of time that inventory is held by the Company varies depending upon the nature of our inventory commitments with customers and suppliers. (See
Note 6 of the notes to consolidated financial statements for a description of our classifications of inventory by type.) When management analyzes inventory turnover on a period over period basis, consideration is given to each inventory type and its corresponding impact on the inventory turnover calculation. Management's analysis includes the following:
• The Company enters into various structured borrowing arrangements that
commit the Company's inventory (such as; product financing arrangements or
liabilities on borrowed metals) for an unspecified period of time. While
the Company is able to obtain access to this inventory on demand, there is
a tendency that this type of inventory does not turn over as quickly as
other types of inventory.
• The Company enters into repurchase arrangements with customers under which
A-Mark holds precious metals which are subject to repurchase for an
unspecified period of time. While the Company retains legal title to this
inventory, the Company is required to hold this inventory (or like-kind
inventory) for the customer until the arrangement is terminated or the
material is repurchased by the customer. As a result, there is a tendency
that this type of inventory does not turn over as quickly as other types
of inventory.
Additionally, our inventory turnover ratio can be affected by hedging activity,
as the period over period change of the inventory turnover ratio may be
significantly impacted by a period over period change in hedging volume. For
example, if trading activity were to remain constant over two periods, but there
were significantly higher forward sales in the current period compared to a
prior period, the calculated inventory turnover ratio would indicate an increase
in the ratio rather than remaining constant.
Number of Secured Loans. Finally, as a measure of the size of our secured
lending segment, we look at the number of outstanding secured loans to customers
(that are primarily collateralized by precious metals) at the end of each
quarter. Typically, the number of loans increases during periods of increasing
precious metal pricing and decreases during periods of declining precious metal
prices.
The Company calculates its loan-to-value ("LTV") ratio as the principal amount
of the loan divided by the liquidation value of the collateral, which is based
on daily spot market prices of precious metal bullion. When the market price of
the pledged collateral decreases and thereby increases the LTV ratio of a loan
above a prescribed maximum ratio, usually 85%, the Company has the option to
make a margin call on the loan. As a result, a decline of precious metal market
prices may cause a decrease in the number of loans outstanding in a period.
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Table of Contents COVID-19 OnMarch 11, 2020 , theWorld Health Organization announced that infections of COVID-19 had become pandemic, and onMarch 13 , theU.S. President declared a national emergency due to the spread of the disease inthe United States . The COVID-19 outbreak has caused significant disruption in the financial markets both globally and inthe United States , and has severely constricted the level of economic activity worldwide. The resulting macroeconomic events contributed to an increase in the business conducted by the Company, but also pose certain risks and uncertainties for the Company. It is challenging to predict how long the COVID-19 pandemic will continue, the extent to which the effects that the Company has experienced from the pandemic thus far will persist, or whether other effects on the Company and its businesses will materialize in the short or long term. Macroeconomic events positively affected the Company's trading revenues and gross profit as the volatility of the price of precious metals and numismatics resulted in a material increase the spread between bid and ask prices on these products. We also experienced substantially increased demand for products in each of our coin and bar, industrial and retail (Goldline) businesses, which we attribute to certain customers seeking to assure a supply of precious metals necessary for the operation of their businesses, and other customers' seeking the safety of investments in precious metals. In response to the heightened demand, in certain cases prices for the products we sell have also risen. We have also experienced certain negative effects in the precious metals market. Through our CFC finance subsidiary, we make loans to our customers secured by coins and precious metals. Numerous CFC loans were paid off when the market experienced a temporary drop in precious metal prices, reducing collateral coverage. This had the effect of decreasing the size of our loan portfolio and the interest earned on the portfolio. It has also required us to substitute cash and our own precious metals inventory as collateral under our AMCF securitization program, as the pool of loans securing the program has declined. While we did not experience any related losses, there is no assurance that this might not occur in the future.
Fiscal Year
Our fiscal year end is
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Table of Contents RESULTS OF OPERATIONS
Overview of Results of Operations for the Years Ended
Consolidated Results of Operations
The operating results of our business for the years ended
in thousands, except per share data
and performance metrics
Years Ended June 30, 2020 2019 $ %
% of % of Increase/ Increase/
$ revenue $ revenue (decrease) (decrease)
Revenues $ 5,461,094 100.000 % $ 4,783,157 100.000 % $ 677,937 14.2 %
Gross profit 66,973 1.226 % 31,958 0.668 % $ 35,015 109.6 %
Selling, general, and administrative
expenses (36,756 ) (0.673 )% (32,502 ) (0.680 )% $ 4,254 13.1 %
Interest income 21,237 0.389 % 19,270 0.403 % $ 1,967 10.2 %
Interest expense (18,859 ) (0.345 )% (17,146 ) (0.358 )% $ 1,713 10.0 %
Other income, net 5,226 0.096 % 1,697 0.035 % $ 3,529 208.0 %
Unrealized gains on foreign exchange 57 0.001 % - - $ 57 -
Net income before provision for
income taxes 37,878 0.694 % 3,277 0.069 % $ 34,601 1055.9 %
Income tax expense (6,387 ) (0.117 )% (1,015 ) (0.021 )% $ 5,372 529.3 %
Net income 31,491 0.577 % 2,262 0.047 % $ 29,229 1292.2 %
Net income attributable to
non-controlling interests 982 0.018 % 37 0.001 % $ 945 2554.1 %
Net income attributable to the
Company $ 30,509 0.559 % $ 2,225 0.047 % $ 28,284 1271.2 %
Basic and diluted net income per
share attributable to
A-Mark Precious Metals, Inc. :
Per Share Data:
Basic $ 4.34 $ 0.32 $ 4.02 1256.3 %
Diluted $ 4.31 $ 0.31 $ 4.00 1290.3 %
Performance Metrics:(1)
Gold ounces sold(2) 2,181,000 1,799,000 382,000 21.2 %
Silver ounces sold(3) 90,385,000 67,620,000 22,765,000 33.7 %
Inventory turnover ratio(4) 17.6 16.6 1.0 6.0 %
Number of secured loans at period
end(5) 717 2,806 (2,089 ) (74.4 )%
(1) See "Results of Segments" for ticket count volume by segment.
(2) Gold ounces sold represents the ounces of gold product sold and delivered to
the customer during the period, excluding ounces of gold recorded on forward
contracts.
(3) Silver ounces sold represents the ounces of silver product sold and delivered
to the customer during the period, excluding ounces of silver recorded on
forward contracts.
(4) Inventory turnover ratio is the cost of sales divided by average inventory
for the period presented above. This calculation excludes precious metals
held under financing arrangements, which are not classified as inventory on
the consolidated balance sheets.
(5) Number of outstanding secured loans to customers that are primarily
collateralized by precious metals at the end of the period.
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Revenues
in thousands, except performance
metrics
Years Ended June 30, 2020 2019 $ %
% of % of Increase/ Increase/
$ revenue $ revenue (decrease) (decrease)
Revenues $ 5,461,094 100.000 % $ 4,783,157 100.000 % $ 677,937 14.2 %
Performance Metrics
Gold ounces sold 2,181,000 1,799,000 382,000 21.2 %
Silver ounces sold 90,385,000 67,620,000 22,765,000 33.7 %
Revenues for the year ended June 30, 2020 increased $677.9 million , or 14.2% to
$5.461 billion from $4.783 billion in 2019. Excluding a decrease of $936.4
million of forward sales, our revenues increased $1.614 billion due to an
increase in the total amount of gold and silver ounces sold and higher selling
prices of gold and silver.
Gold ounces sold for the year ended June 30, 2020 increased 382,000 ounces, or
21.2%, to 2,181,000 ounces from 1,799,000 ounces in 2019. Silver ounces sold for
the year ended June 30, 2020 increased 22,765,000 ounces, or 33.7%, to
90,385,000 ounces from 67,620,000 ounces in 2019. On average, the selling prices
for gold increased by 23.8% and selling prices for silver increased by 8.4%
during the year ended June 30, 2020 as compared to 2019.
A key factor that contributed to the increase in demand for precious metals was
the recent volatility in precious metal prices caused by macroeconomic and other
events. A combination of price volatility, increased demand, and supply
constraints led to a significant expansion in premium spreads in the precious
metals market during the second half of fiscal year 2020. These conditions are
not representative of normal market conditions, and we are uncertain of the
duration of these conditions.
Gross Profit
in thousands, except performance
metric
Years Ended June 30, 2020 2019 $ %
% of % of Increase/ Increase/
$ revenue $ revenue (decrease) (decrease)
Gross profit $ 66,973 1.226 % $ 31,958 0.668 % $ 35,015 109.6 %
Performance Metric
Inventory turnover ratio 17.6 16.6 1.0 6.0 %
Gross profit for the year ended June 30, 2020 increased by $35.0 million , or
109.6%, to $67.0 million from $32.0 million in 2019. The overall gross profit
increase was due to higher gross profits from the Wholesale Trading & Ancillary
Services and Direct Sales segments.
The Company's overall gross margin percentage increased by 55.8 basis points to
1.226% from 0.668% in 2019. The increase in gross margin percentage was mainly
attributable to significantly wider premium spreads due to increased demand,
higher trading profits due to higher volatility; and lower forward
sales. Forward sales increase revenues but are associated with negligible gross
margins that can significantly affect the gross margin percentage. The Company
enters into forward contracts to hedge its precious metals price risk exposure
and not for speculative purposes.
Our inventory turnover rate for the year ended June 30, 2020 increased by 6.0%,
to 17.6 from 16.6 in 2019. The increase in our inventory turnover ratio was
primarily due to higher volume of ounces sold of precious metals, partially
offset by lower volume of ounces sold on forward contracts as well as higher
average inventory balances during the year ended June 30, 2020 as compared to
2019.
Selling, General and Administrative Expense
in thousands
Years Ended June 30, 2020 2019 $ %
% of % of Increase/ Increase/
$ revenue $ revenue (decrease) (decrease)
Selling, general, and
administrative expenses $ (36,756 ) (0.673 )% $ (32,502 ) (0.680 )% $ 4,254 13.1 %
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Table of Contents Selling, general and administrative expenses for the year endedJune 30, 2020 increased$4.3 million , or 13.1%, to$36.8 million from$32.5 million in 2019. The change was primarily due to increases in compensation expense (including performance-based accruals) of$4.5 million , computer software expense of$0.5 million , and depreciation and amortization expense of$0.4 million , which were partially offset by decreases in operating expenses of$1.1 million associated with our Direct Sales segment, and consulting expense of$0.4 million .
Interest Income
in thousands, except performance
metric
Years Ended June 30, 2020 2019 $ %
% of % of Increase/ Increase/
$ revenue $ revenue (decrease) (decrease)
Interest income $ 21,237 0.389 % $ 19,270 0.403 % $ 1,967 10.2 %
Performance Metric
Number of secured loans at
period-end 717 2,806 (2,089 ) (74.4 )%
Interest income for the year ended
The interest income from our Secured Lending segment increased by$1.6 million or by 14.6%, which represents approximately 79.1% of the aggregate increase in interest income compared with the prior year. The increase in interest income earned from the segment's secured loan portfolio was primarily due to higher average monthly loan balances during the current period as compared to the average monthly loan balances for the comparable period. The number of secured loans outstanding decreased by 74.4% to 717 as ofJune 30, 2020 from 2,806 as ofJune 30, 2019 . Typically, the number of loans increases during periods of increasing precious metal prices and decreases during periods of declining precious metal prices. Silver prices declined significantly in the quarter endedMarch 31, 2020 , resulting in an increase in margin calls and borrower loan liquidations due to a decline in the value of the precious metals collateral. The Company did not incur loan losses related to the margin calls or borrower loan liquidations during this or the comparable period. During the quarter endedJune 30, 2020 silver prices rebounded and new loans were originated and acquired.
The interest income from our other finance product income increased by
Interest Expense
in thousands
Years Ended June 30, 2020 2019 $ %
% of % of Increase/ Increase/
$ revenue $ revenue (decrease) (decrease)
Interest expense $ (18,859 ) (0.345 )% $ (17,146 ) (0.358 )% $ 1,713 10.0 %
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Interest expense for the year endedJune 30, 2020 increased$1.7 million , or 10.0% to$18.9 million from$17.1 million in 2019. The increase in interest expense was related primarily to our notes payable (which was issued in September of 2018), loan servicing fees, product financing arrangements, and liabilities on borrowed metals, partially offset by reductions in interest expense related to a Trading Credit Facility, and the Goldline Credit Facility. As compared to the same year-ago period, the amount of interest expense that increased by component included: (i)$1.4 million notes payable (including debt amortization costs), (ii)$0.6 million of product financing arrangements, (iii)$0.4 million of loan servicing costs and (iv)$0.4 million of liabilities on borrowed metals, which were partially offset by reductions of (v)$0.6 million of Trading Credit Facility (including debt amortization costs) expenses and (vi)$0.3 million related to the Goldline Credit Facility (including debt amortization costs). The Goldline Credit Facility was paid off in full during the second quarter of fiscal year 2019. Other income, net in thousands Years Ended June 30, 2020 2019 $ % % of % of Increase/ Increase/ $ revenue $ revenue (decrease) (decrease) Other income, net$ 5,226 0.096 %$ 1,697 0.035 %$ 3,529 208.0 % Other income, net for the year endedJune 30, 2020 increased$3.5 million , or 208.0% to$5.2 million from$1.7 million in 2019. The aggregate increase was primarily due to: (i) an increase in the Company's proportionate share of our equity-method investees' earnings of$3.7 million compared to the prior year, (ii) an increase of$0.5 million in royalties earned, (iii)$0.2 million of fees related to the payoff of the Goldline Credit Facility that was recorded as other expense during the year endedJune 30, 2019 , partially offset by (iv) an earn-out revaluation adjustment of$0.6 million that was recorded as other income and recognized during the year endedJune 30, 2019 , and (v)$0.2 million of costs recorded as other expense associated with the settlement of our purchase of Goldline that was recognized during the year endedJune 30, 2020 . Provision for Income Taxes in thousands Years Ended June 30, 2020 2019 $ % % of % of Increase/ Increase/ $ revenue $ revenue (decrease) (decrease) Income tax expense$ (6,387 ) (0.117 )%$ (1,015 ) (0.021 )%$ 5,372 529.3 % Our income tax expense was$6.4 million and$1.0 million for the years endedJune 30, 2020 and 2019, respectively. Our effective tax rate was approximately 16.9% and 31.0% for the years endedJune 30, 2020 and 2019, respectively. For the year endedJune 30, 2020 , our effective tax rate differs from the federal statutory rate primarily due to state taxes (net of federal tax benefit), Section 162(m) executive compensation disallowance, offset by the exclusion of profits related to the Company's minority interests, special deduction relating to foreign-derived intangible income, and income tax rate benefit from the carryback of the Company's fiscal years 2019 and 2018 net operating losses ("NOLs") to prior years under the CARES Act, which allows the NOLs to be availed at the higher corporate tax rate of 35% versus 21%. 33
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SEGMENT RESULTS OF OPERATIONS
The Company conducts its operations in three reportable segments: (i) Wholesale
Trading & Ancillary Services, (ii) Secured Lending and (iii) Direct Sales. Each
of these reportable segments represents an aggregation of operating segments
that meets the aggregation criteria set forth in the Segment Reporting Topic 280
of the FASB Accounting Standards Codification ("ASC").
Results of Operations - Wholesale Trading & Ancillary Services Segment
The Company operates its Wholesale Trading & Ancillary Services segment throughA-Mark Precious Metals, Inc. , and its wholly-owned subsidiaries,A-Mark Trading AG ("AMTAG"), Transcontinental Depository Services ("TDS"), andA-M Global Logistics, LLC . ("Logistics"), and its partially-owned subsidiary,AM&ST Associates, LLC . ("AMST" or "SilverTowne" or the "Mint"). Also, the Wholesale Trading & Ancillary Services segment includes the consolidating eliminations of inter-segment transactions.
Overview of Results of Operations for the Years Ended
- Wholesale Trading & Ancillary Services Segment
The operating results of our Wholesale Trading & Ancillary Services segment for
the years ended
in thousands, except performance
metrics
Years Ended June 30, 2020 2019 $ %
% of % of Increase/ Increase/
$ revenue $ revenue (decrease) (decrease)
Revenues $ 5,360,899 100.000 % $ 4,733,800 100.000 % $ 627,099 13.2 %
Gross profit 56,908 1.062 % 26,270 0.555 % $ 30,638 116.6 %
Selling, general, and
administrative expenses (27,150 ) (0.506 )% (22,274 ) (0.471 )% $ 4,876 21.9 %
Interest income 9,024 0.168 % 8,601 0.182 % $ 423 4.9 %
Interest expense (10,527 ) (0.196 )% (9,626 ) (0.203 )% $ 901 9.4 %
Other income, net 4,868 0.091 % 1,749 0.037 % $ 3,119 178.3 %
Unrealized gains on foreign
exchange 57 0.001 % - - $ 57 -
Net income before provision for
income taxes $ 33,180 0.619 % $ 4,720 0.100 % $ 28,460 603.0 %
Performance Metrics:
Gold ounces sold(1) 2,136,000 1,783,000 353,000 19.8 %
Silver ounces sold(2) 89,612,000 66,553,000 23,059,000 34.6 %
Wholesale Trading ticket
volume(3) 142,690 120,257 22,433 18.7 %
(1) Gold ounces sold represents the ounces of gold product sold and delivered to
the customer during the period, excluding ounces of gold recorded on forward
contracts.
(2) Silver ounces sold represents the ounces of silver product sold and delivered
to the customer during the period, excluding ounces of silver recorded on
forward contracts.
(3) Trading ticket volume represents the total number of product orders processed
by A-Mark.
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Revenues - Wholesale Trading & Ancillary Services
in thousands, except
performance metrics
Years Ended June 30, 2020 2019 $ %
% of % of Increase/ Increase/
$ revenue $ revenue (decrease) (decrease)
Revenues $ 5,360,899 100.000 % $ 4,733,800 100.000 % $ 627,099 13.2 %
Performance Metrics
Gold ounces sold 2,136,000 1,783,000 353,000 19.8 %
Silver ounces sold 89,612,000 66,553,000
23,059,000 34.6 %
Revenues for the year ended June 30, 2020 increased $0.627 billion , or 13.2%, to
$5.361 billion from $4.734 billion in 2019. Excluding a decrease of $936.4
million of forward sales, our revenues increased $1.564 billion due to an
increase in the total amount of gold and silver ounces sold and higher selling
prices of gold and silver.
Gold ounces sold for the year ended June 30, 2020 increased 353,000 ounces, or
19.8%, to 2,136,000 ounces from 1,783,000 ounces in 2019. Silver ounces sold for
the year ended June 30, 2020 increased 23,059,000 ounces, or 34.6%, to
89,612,000 ounces from 66,553,000 ounces in 2019. On average, the selling prices
for gold increased by 23.6% and selling prices for silver increased by 8.7%
during the year ended June 30, 2020 as compared to 2019.
A key factor that contributed to the increase in demand for precious metals was
the recent volatility in precious metal prices caused by macroeconomic and other
events. A combination of price volatility, increased demand, and supply
constraints led to a significant expansion in premium spreads in the precious
metals market during the second half of fiscal year 2020. These conditions are
not representative of normal market conditions, and we are uncertain of the
duration of these conditions.
Gross Profit - Wholesale Trading & Ancillary Services
in thousands, except
performance metric
Years Ended June 30, 2020 2019 $ %
% of % of Increase/ Increase/
$ revenue $ revenue (decrease) (decrease)
Gross profit $ 56,908 1.062 % $ 26,270 0.555 % $ 30,638 116.6 %
Performance Metric
Wholesale trading ticket
volume 142,690 120,257 22,433 18.7 %
Gross profit for the year ended June 30, 2020 increased by $30.6 million , or
116.6%, to $56.9 million from $26.3 million in 2019. The overall gross profit
increase was primarily due to higher sales volumes and increased premium
spreads.
This segment's profit margin percentage increased by 50.7 basis points to 1.062%
from 0.555% in 2019. The increase in gross margin percentage was mainly
attributable to significantly wider premium spreads due to increased demand,
higher trading profits due to higher volatility, and lower forward sales.
Forward sales increase revenues but are associated with negligible gross
margins. The Company enters into forward contracts to hedge its precious metals
price risk exposure and not for speculative purposes.
The wholesale trading ticket volume for the year ended
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Selling, General and Administrative Expenses - Wholesale Trading & Ancillary
Services
in thousands
Years Ended June 30, 2020 2019 $ %
% of % of Increase/ Increase/
$ revenue $ revenue (decrease) (decrease)
Selling, general, and
administrative expenses $ (27,150 ) (0.506 )% $ (22,274 ) (0.471 )% $ 4,876 21.9 %
Selling, general and administrative expenses for the year ended June 30, 2020
increased $4.9 million , or 21.9%, to $27.2 million from $22.3 million in 2019.
The change was primarily due to increases in compensation expense (including
performance-based accruals) of $4.5 million and computer software expense of
$0.5 million , which were partially offset by decrease in consulting expense of
$0.4 million .
Interest Income - Wholesale Trading & Ancillary Services
in thousands
Years Ended June 30, 2020 2019 $ %
% of % of Increase/ Increase/
$ revenue $ revenue (decrease) (decrease)
Interest income $ 9,024 0.168 % $ 8,601 0.182 % $ 423 4.9 %
Interest income for the year ended June 30, 2020 increased $0.4 million , or
4.9%, to $9.0 million from $8.6 million in 2019. The overall increase is
primarily due to $0.4 million of finance fees earned from repurchase
arrangements with customers and $0.4 million of interest income earned from a
note receivable issued in the current year, partially offset by reductions in
interest earned from spot deferred trade orders and other fees.
Interest Expense - Wholesale Trading & Ancillary Services
in thousands
Years Ended June 30, 2020 2019 $ %
% of % of Increase/ Increase/
$ revenue $ revenue (decrease) (decrease)
Interest expense $ (10,527 ) (0.196 )% $ (9,626 ) (0.203 )% $ 901 9.4 %
Interest expense for the year ended June 30, 2020 increased $0.9 million , or
9.4% to $10.5 million from $9.6 million in 2019. The increase was primarily due
to activity related to product financing arrangements, and liabilities on
borrowed metals. As compared to the same year-ago period, the amount of interest
expense that increased by component included: (i) $0.6 million of product
financing arrangements, and (ii) $0.4 million of liabilities on borrowed metals.
Other income, net - Wholesale Trading & Ancillary Services
in thousands
Years Ended June 30, 2020 2019 $ %
% of % of Increase/ Increase/
$ revenue $ revenue (decrease) (decrease)
Other income, net $ 4,868 0.091 % $ 1,749 0.037 % $ 3,119 178.3 %
Other income, net for the year ended June 30, 2020 increased $3.1 million , or
178.3% to $4.9 million from $1.7 million in 2019. The aggregate increase was
primarily related to an increase in the Company's proportionate share of our
equity-method investees' earnings by $3.7 million compared to the prior
comparable year-to-date period offset by a decrease in an earn-out revaluation
adjustment of $0.6 million that was recognized during the year ended June 30,
2019 .
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Results of Operations - Secured Lending Segment
The Company operates its Secured Lending segment through its wholly-owned
subsidiaries,
Overview of Results of Operations for the Years Ended
- Secured Lending Segment
The operating results of our Secured Lending segment for the years ended
in thousands, except performance
metrics
Years Ended June 30, 2020 2019 $ %
% of % of
interest interest Increase/ Increase/
$ income $ income (decrease) (decrease)
Interest income $ 12,213 100.000 % $ 10,657 100.000 % $ 1,556 14.6 %
Interest expense (8,332 ) (68.222 )% (7,178 ) (67.355 )% $ 1,154 16.1 %
Selling, general and
administrative expenses (1,893 ) (15.500 )% (1,456 ) (13.662 )% $ 437 30.0 %
Other income, net 577 4.724 % 105 0.985 % $ 472 449.5 %
Net income before provision for
income taxes $ 2,565 21.002 % $ 2,128 19.968 % $ 437 20.5 %
Performance Metric:
Number of secured loans at
period end(1) 717 2,806 (2,089 ) (74.4 )%
(1) Number of outstanding secured loans to customers at the end of the period.
Interest Income - Secured Lending
in thousands, except performance
metric
Years Ended June 30, 2020 2019 $ %
% of % of
interest interest Increase/ Increase/
$ income $ income (decrease) (decrease)
Interest income $ 12,213 100.000 % $ 10,657 100.000 % $ 1,556 14.6 %
Performance Metric
Number of secured loans at
period-end 717 2,806 (2,089 ) (74.4 )%
Interest income for the year ended June 30, 2020 increased $1.6 million , or
14.6%, to $12.2 million from $10.7 million in 2019. The increase in interest
income earned from the segment's secured loan portfolio was primarily due to
higher average monthly loan balances during the current period as compared to
the average monthly loan balances for the comparable period. The number of
secured loans outstanding decreased by 74.4% to 717 as of June 30, 2020 from
2,806 as of June 30, 2019 . Typically, the number of loans increases during
periods of increasing precious metal prices and decreases during periods of
declining precious metal prices. Silver prices declined significantly in the
quarter ended March 31, 2020 , resulting in an increase in margin calls and
borrower loan liquidations due to a decline in the value of the precious metals
collateral. During the quarter ended June 30, 2020 silver prices rebounded and
new loans were originated and acquired.
The Company did not incur loan losses related to the margin calls or borrower
loan liquidations during the year ended
Interest Expense - Secured Lending
in thousands
Years Ended June 30, 2020 2019 $ %
% of % of
interest interest Increase/ Increase/
$ income $ income (decrease) (decrease)
Interest expense $ (8,332 ) (68.222 )% $ (7,178 ) (67.355 )% $ 1,154 16.1 %
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Interest expense for the year endedJune 30, 2020 increased$1.2 million , or 16.1% to$8.3 million from$7.2 million in 2019. The change in interest expense is primarily due to our Notes, which were outstanding for a full annual period in fiscal 2020, while only outstanding for a partial period in the prior year, accompanied by an increase in loan servicing fees, offset by a reduction in interest related to our Trading Credit Facility. As compared to the same year-ago period, interest expense components changed by the following amounts: (i) an increase of$1.7 million related to our notes payable (which were issued inSeptember 2018 ), and (ii) an increase of$0.4 million related to loan servicing, partially offset by (iii) a reduction of$0.9 million related to our Trading Credit Facility.
Selling, General and Administrative Expenses - Secured Lending
in thousands
Years Ended June 30, 2020 2019 $ %
% of % of
interest interest Increase/ Increase/
$ income $ income (decrease) (decrease)
Selling, general, and
administrative expenses $ (1,893 ) (15.500 )% $ (1,456 ) (13.662 )% $ 437 30.0 %
Selling, general and administrative expenses for the year ended June 30, 2020
increased $0.4 million , or 30.0%, to $1.9 million from $1.5 million in 2019. The
increase was primarily due to an increase in depreciation and amortization
expense.
Other Income, net - Secured Lending
in thousands
Years Ended June 30, 2020 2019 $ %
% of % of
interest interest Increase/ Increase/
$ income $ income (decrease) (decrease)
Other income, net $ 577 4.724 % $ 105 0.985 % $ 472 449.5 %
Other income, net for the year ended June 30, 2020 increased $0.5 million , or
449.5% to $0.6 million from $0.1 million in 2019. The aggregate increase was
primarily due to an increase of $0.5 million in royalties.
Results of Operations - Direct Sales Segment
The Company operates its Direct Sales segment through its wholly-owned subsidiariesGoldline Inc. ("Goldline") andAM IP LLC . ("AMIP"), and through its 50%-owned subsidiaryPrecious Metals Purchasing Partners, LLC . ("PMPP"). In fiscal 2018, management commenced our reporting of Direct Sales segment as a result of the acquisition of Goldline. In connection with our formation of AMIP inMay 2018 , the financial activity of AMIP was incorporated into the Direct Sales segment's fiscal 2019 results. In connection with the commencement PMPP operation inJuly 2019 , the financial activity of PMPP was incorporated into the fiscal 2020 Direct Sales segment's results. 38
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Overview of Results of Operations for the Years Ended
- Direct Sales Segment
The operating results of our Direct Sales segment for the years ended
in thousands, except
performance metrics
Years Ended June 30, 2020 2019 $ %
% of % of Increase/ Increase/
$ revenue $ revenue (decrease) (decrease)
Revenues $ 100,195 (a) 100.000 % $ 49,357 (c) 100.000 % $ 50,838 103.0 %
Gross profit 10,065 10.045 % (b) 5,688 11.524 % (d) $ 4,377 77.0 %
Selling, general and
administrative expenses (7,713 ) (7.698 )% (8,772 ) (17.773 )% $ (1,059 ) (12.1 )%
Interest income - - 12 0.024 % $ (12 ) (100.0 )%
Interest expense - - (342 ) (0.693 )% $ (342 ) (100.0 )%
Other expense, net (219 ) (0.219 )% (157 ) (0.318 )% $ 62 39.5 %
Net income (loss) before
provision for income taxes $ 2,133 2.129 % $ (3,571 ) (7.235 )% $ 5,704 159.7 %
Performance Metrics:
Gold ounces sold(1) 45,000 16,000 29,000 181.3 %
Silver ounces sold(2) 773,000 1,067,000 (294,000 ) (27.6 )%
Direct Sales ticket volume(3) 18,541 16,828 1,713 10.2 %
(a) Includes
to the Wholesale Trading & Ancillary Services segment.
(b) Gross profit percentage, excluding inter-segment sales from the Direct Sales
segment to the Wholesale Trading & Ancillary Services segment, is 12.549% for
the period.
(c) Includes $0.9 million of inter-segment sales from the Direct Sales segment to
the Wholesale Trading & Ancillary Services segment.
(d) Gross profit percentage, excluding inter-segment company sales from the
Direct Sales segment to the Wholesale Trading & Ancillary Services segment,
is 11.773% for the period.
(1) Gold ounces sold represents the ounces of gold product sold during the
period.
(2) Silver ounces sold represents the ounces of silver product sold during the
period.
(3) Direct Sales segment trading ticket volume represents the total number of
product orders processed by Goldline and PMPP.
Segment Results - Direct Sales
Revenues - Direct Sales
in thousands, except
performance metrics
Years Ended June 30, 2020 2019 $ %
% of % of Increase/ Increase/
$ revenue $ revenue (decrease) (decrease)
Revenues $ 100,195 100.000 % $ 49,357 100.000 % $ 50,838 103.0 %
Performance Metrics:
Gold ounces sold 45,000 16,000 29,000 181.3 %
Silver ounces sold 773,000 1,067,000 (294,000 ) (27.6 )%
Revenues for the year ended June 30, 2020 increased $50.8 million , or 103.0%, to
$100.2 million from $49.4 million in 2019. Excluding inter-segment sales from
the Direct Sales segment to the Wholesale Trading & Ancillary Services segment,
revenues for the year ended June 30, 2020 increased $25.3 million or 52.2% to
$73.8 million from $48.5 million in 2019.
Gold ounces sold for the year ended June 30, 2020 increased 29,000 ounces, or
181.3%, to 45,000 ounces from 16,000 ounces in 2019. Silver ounces sold for the
year ended June 30, 2020 decreased 294,000 ounces, or 27.6%, to 773,000 ounces
from 1,067,000 ounces in 2019. On average, the selling prices for gold increased
by 15.8% and selling prices for silver increased by 0.1% during the year ended
June 30, 2020 as compared to 2019.
A combination of price volatility, increased demand, and supply constraints led
to a significant expansion in premium spreads in the precious metals market
during the second half of fiscal year 2020. These factors were brought on by the
recent volatility in precious metal prices caused by macroeconomic and other
events. These conditions are not representative of normal market conditions, and
we are uncertain of the duration of these conditions.
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Gross Profit - Direct Sales
in thousands, except
performance metric
Years Ended June 30, 2020 2019 $ %
% of % of Increase/ Increase/
$ revenue $ revenue (decrease) (decrease)
Gross profit $ 10,065 10.045 % $ 5,688 11.524 % $ 4,377 77.0 %
Performance Metric:
Direct Sales ticket
volume 18,541 16,828 1,713 10.2 %
Gross profit for the year ended June 30, 2020 increased by $4.4 million , or
77.0%, to $10.1 million from $5.7 million in 2019. For the year ended June 30,
2020 , the Company's profit margin percentage decreased by 147.9 basis points to
10.045% from 11.524% in 2019. Excluding the impact of inter-segment sales from
the Direct Sales segment to the Wholesale Trading & Ancillary Services segment,
the Direct Sales segment's gross profit margin percentage increased by 77.6
basis points to 12.549% from 11.773% in 2019.
The Direct Sales ticket volume for the year ended June 30, 2020 increased by
1,713 tickets, or 10.2%, to 18,541 tickets from 16,828 tickets in 2019. The
increase in trading ticket volume was primarily due to higher demand as compared
to 2019.
Selling, General and Administrative Expense - Direct Sales
in thousands
Years Ended June 30, 2020 2019 $ %
% of % of Increase/ Increase/
$ revenue $ revenue (decrease) (decrease)
Selling, general and
administrative
expenses $ (7,713 ) (7.698 )% $ (8,772 ) (17.773 )% $ (1,059 ) (12.1 )%
Selling, general and administrative expenses for the year ended June 30, 2020
decreased $1.1 million , or 12.1%, to $7.7 million from $8.8 million in 2019. The
decrease in selling, general and administrative expenses was primarily due to
cost reduction efforts implemented at Goldline, resulting in reductions of:
personnel costs of $0.8 million , computer costs of $0.3 million , and advertising
cost of $0.2 million , which were partially offset by increases in legal costs of
$0.3 million and the costs of operating PMPP of $0.5 million .
Interest expense - Direct Sales
in thousands
Years Ended June 30, 2020 2019 $ %
% of % of Increase/ Increase/
$ revenue $ revenue (decrease) (decrease)Interest expense $ - -$ (342 ) (0.693 )%$ (342 ) (100.0 )% Interest expense for the year endedJune 30, 2020 decreased$0.3 million , or 100.0% to$0.0 million from$0.3 million in 2019. The decrease primarily relates to the extinguishment of the Goldline Credit Facility in the second quarter of fiscal 2019.
Other income (expense) - Direct Sales
in thousands
Years Ended June 30, 2020 2019 $ %
% of % of Increase/ Increase/
$ revenue $ revenue (decrease) (decrease)
Other expense, net $ (219 ) (0.219 )% $ (157 ) (0.318 )% $ 62 39.5 %
For the year ended June 30, 2020 , the other expense activity of $0.2 million
related to a one-time charge in connection with the settlement of the purchase
price related to the acquisition of Goldline. For the year ended June 30, 2019 ,
the other expense activity of $0.2 million related to a premium associated with
the extinguishment Goldline Credit Facility before its maturity date.
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LIQUIDITY AND FINANCIAL CONDITION
Primary Sources and Uses of Cash
Overview
Liquidity is defined as our ability to generate sufficient amounts of cash to meet all of our cash needs. Liquidity is of critical importance to us and imperative to maintain our operations on a daily basis.
A substantial portion of our assets are liquid. As ofJune 30, 2020 , approximately 93.8% of our assets consisted of cash, receivables, derivative assets, secured loans receivables, precious metals held under financing arrangements and inventories, measured at fair value. Cash generated from the sales of our precious metals products is our primary source of operating liquidity. Typically, the Company acquires its inventory by: (i) purchasing inventory from our suppliers by utilizing its own capital and lines of credit; (ii) borrowing precious metals from its suppliers under short-term arrangements which may bear interest at a designated rate, and (iii) repurchasing inventory at an agreed-upon price based on the spot price on the specified repurchase date. In addition to selling inventory, the Company generates cash from earning interest income. The Company enters into secured loans and secured financing structures with its customers under which it charges interest. The Company offers a number of secured financing options to its customers to finance their precious metals purchases including consignments and other structured inventory finance products. The loans are secured by precious metals and numismatic material owned by the borrowers and held by the Company as security for the term of the loan. Furthermore, our customers may enter into agreements whereby the customer agrees to repurchase our precious metals at the prevailing spot price for delivery of the product at a specific point in time in the future; interest income is earned from the contract date until the material is delivered and paid for in full. We continually review our overall credit and capital needs to ensure that our capital base, both stockholders' equity and available credit facilities, can appropriately support our anticipated financing needs. The Company also continually monitors its current and forecasted cash requirements, and draws upon and pays down its lines of credit so as to minimize interest expense. The Company believes that the Trading Credit Facility (as defined below), the notes payable, liabilities on borrowed metals, and product financing arrangements provide adequate means to capital for its operations. (See Note 14 of the notes to consolidated financial statements.) Lines of Credit in thousands June 30, 2020 Compared to June 30, June 30, June 30, 2020 2019 2019 Lines of credit$ 135,000 $ 167,000 $ (32,000 ) EffectiveMarch 27, 2020 , through an amendment and restatement of the applicable credit documents, A-Mark renewed its uncommitted demand borrowing facility ("Trading Credit Facility") with a syndicate of banks. Under the agreements, Coöperatieve Rabobank U.A. acts as joint lead lender and administrative agent and Natixis acts as joint lead arranger and syndication agent for the syndicate. As ofJune 30, 2020 , the Trading Credit Facility provided the Company with access up to$270.0 million , featuring a$220.0 million base, with a$50.0 million accordion option. The maturity date of the credit facility isMarch 26, 2021 . The Trading Credit Facility was formed onMarch 31, 2016 , and the Company has successfully amended and extended the terms of the Trading Credit Facility each year since its inception. A-Mark routinely uses funds drawn under the Trading Credit Facility to purchase metals from its suppliers and for other operating cash flow purposes. Our CFC subsidiary also uses the funds drawn under the Trading Credit Facility to finance its lending activities. The cash generated from our operations typically increases during periods of high demand for our products, market supply constraints, and increased volatility of the price of precious metals. Such a period occurred during the second half of fiscal 2020, and as a result, increased cash generated from operations provided the Company additional liquidity, thereby decreasing our use of the Trading Credit Facility in the current period. 41
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Notes Payable
in thousands
June 30,
2020
Compared to
June 30, June 30, June 30,
2020 2019 2019
Notes payable $ 92,517 $ 91,859 $ 658
On September 14, 2018 , AM Capital Funding, LLC . ("AMCF"), a wholly owned
subsidiary of CFC, completed an issuance of Secured Senior Term Notes, Series
2018-1, Class A in the aggregate principal amount of $72.0 million and Secured
Subordinated Term Notes, Series 2018-1, Class B in the aggregate principal
amount of $28.0 million . The Class A Notes bear interest at a rate of 4.98% and
the Class B Notes bear interest at a rate of 5.98%. The Notes have a maturity
date of December 15, 2023 .
As of June 30, 2020 , the consolidated aggregate carrying balance of the Notes
was $92.5 million (which excludes the $5.0 million Note that the Company
retained), and the remaining unamortized loan cost balance was approximately
$2.5 million , which is amortized using the effective interest method through the
maturity date. (See Note 14 of the notes to consolidated financial
statements.)
Liabilities on Borrowed Metals
in thousands
June 30,
2020
Compared to
June 30, June 30, June 30,
2020 2019 2019
Liabilities on borrowed metals
We borrow precious metals from our suppliers and customers under short-term arrangements using other precious metal from our inventory or precious metals held under financing arrangements as collateral. Amounts under these arrangements require repayment either in the form of precious metals or cash. Liabilities also arise from unallocated metal positions held by customers in our inventory. Typically, these positions are due on demand, in a specified physical form, based on the total ounces of metal held in the position.
Product Financing Arrangements
in thousands
June 30,
2020
Compared to
June 30, June 30, June 30,
2020 2019 2019
Product financing arrangements
The Company has agreements with financial institutions and other third parties
that allow the Company to transfer its gold and silver inventory to the third
party at an agreed-upon price based on the spot price, which provides
alternative sources of liquidity. During the term of the agreement both parties
intend for inventory to be returned at an agreed-upon price based on the spot
price on the termination (repurchase) date. The third parties charge monthly
interest as a percentage of the market value of the outstanding obligation; such
monthly charges are classified as interest expense. These transactions do not
qualify as sales and therefore have been accounted for as financing arrangements
and reflected in the consolidated balance sheet as product financing
arrangements. The obligation is stated at the amount required to repurchase the
outstanding inventory. Both the product financing arrangements and the
underlying inventory (which is entirely restricted) are carried at fair value,
with changes in fair value included as a component of cost of sales.
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Secured Loans Receivable
in thousands
June 30,
2020
Compared to
June 30, June 30, June 30,
2020 2019 2019
Secured loans receivable $ 63,710 $ 125,298 $ (61,588 ) CFC is a
of
the notes to consolidated financial statements.) AMCF also purchases and holds secured loans from CFC to meet its collateral requirements related to the Notes. (See Note 14 of the notes to consolidated financial statements.) Most of the Company's secured loans are short-term in nature. The renewal of these instruments is at the discretion of the Company and, as such, provides us with some flexibility in regards to our capital deployment strategies. Silver prices declined significantly in the quarter endedMarch 31, 2020 , resulting in an increase in the margin calls and borrower loan liquidations due to a decline in the value of the precious metal collateral. During the quarter endedJune 30, 2020 silver prices rebounded and new loans were originated and acquired. The Company did not incur loan losses related to the margin calls or borrower loan liquidations. Cash Flows The majority of the Company's trading activities involve two day value trades under which payment is received in advance of delivery or product is received in advance of payment. The high volume, rapid rate of inventory turnover, and high average value per trade can cause material changes in the sources of cash used in or provided by operating activities on a daily basis. The Company manages these variances through its liquidity forecasts and counterparty limits by maintaining a liquidity reserve to meet the Company's cash needs. The Company uses various short-term financial instruments to manage the rapid cycle of our trading activities from customer purchase order to cash collections and product delivery, which can cause material changes in the amount of cash used in or provided by financing activities on a daily basis.
The following summarizes components of our consolidated statements of cash flows
for the years ended
in thousands
June 30,
2020
Compared to
June 30, June 30, June 30,
Year Ended 2020 2019 2019
Net cash provided by (used in) operating
activities $ 47,935 $ (14,533 ) $ 62,468
Net cash provided by (used in) investing
activities $ 48,774 $ (14,805 ) $ 63,579
Net cash (used in) provided by financing
activities $ (52,704 ) $ 31,367 $ (84,071 )
Our principal capital requirements have been to fund (i) working capital and
(ii) investing activity. Our working capital requirements fluctuate with market
conditions, the availability of precious metals and the volatility of precious
metals commodity pricing.
Net cash provided by (used in) operating activities
Operating activities provided$47.9 million and used$14.5 million in cash for the years endedJune 30, 2020 and 2019, respectively, representing a$62.5 million increase in the source of cash compared to the year endedJune 30, 2019 . The increase in cash is mainly due to higher net income generated from increased demand for precious metal products and favorable changes in working capital balances. The increase in cash due to changes in working capital balances included: accounts payable and other current liabilities, liabilities on borrowed metals and derivative liabilities, partially offset by a decrease in cash due to changes in working capital balances of: precious metals held under financing arrangements, receivables, inventories, and derivative assets.
Net cash provided by (used in) investing activities
Investing activities provided
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period increase was due to the change in the balance of secured loans of$65.3 million compared to the comparable prior period, as a higher number of loans were liquidated in the current period due to price volatility, partially offset by cash used in providing loans of$3.5 million to customers.
Net cash (used in) provided by financing activities
Financing activities used$52.7 million and provided$31.4 million in cash for the years endedJune 30, 2020 and 2019, respectively, representing a$84.1 million decrease in the source of cash compared to the year endedJune 30, 2019 . This period over period decrease was primarily due to the change in proceeds from issuance of notes payable of$95.0 million received in the prior fiscal year and changes in the balance of product financing arrangements of$0.4 million , partially offset by the change in repayments of notes payable to a related party of$7.5 million , the change in debt issuance costs of$3.0 million , and the change in the balance of the Trading Credit Facility of$1.0 million . CAPITAL RESOURCES We believe that our current cash availability under the Trading Credit Facility, product financing arrangements, financing derived from borrowed metals and the cash we anticipate to generate from operating activities will provide us with sufficient liquidity to satisfy our working capital needs, capital expenditures, investment requirements and commitments through at least the next twelve months.
CONTRACTUAL OBLIGATIONS, CONTINGENT LIABILITIES AND COMMITMENTS
Counterparty Risk
We manage our counterparty risk by setting credit and position risk limits with our trading counterparties. These limits include gross position limits for counterparties engaged in sales and purchase transactions and inventory consignment transactions with us. They also include collateral limits for different types of sale and purchase transactions that counterparties may engage in from time to time.
Commodities Risk and Derivatives
We use a variety of strategies to manage our risk including fluctuations in commodity prices for precious metals. Our inventory consists of, and our trading activities involve, precious metals and precious metal products, whose prices are linked to the corresponding precious metal commodity prices. Inventory purchased or borrowed by us are subject to price changes. Inventory borrowed is considered natural hedges, since changes in value of the metal held are offset by the obligation to return the metal to the supplier or deliver metals to the customer. Open sale and purchase commitments in our trading activities are subject to changes in value between the date the purchase or sale price is fixed (the trade date) and the date the metal is received or delivered (the settlement date). We seek to minimize the effect of price changes of the underlying commodity through the use of forward and futures contracts. Our open sale and purchase commitments generally settle within 2 business days, and for those commitments that do not have stated settlement dates, we have the right to settle the positions upon demand. Our policy is to substantially hedge our underlying precious metal commodity inventory position. We regularly enter into metals commodity forward and futures contracts with financial institutions to hedge price changes that would cause changes in the value of our physical metals positions and purchase commitments and sale commitments. We have access to all of the precious metals markets, allowing us to place hedges. However, we also maintain relationships with major market makers in every major precious metals dealing center, which allows us to enter into contracts with market makers. Our forwards contracts open atJune 30, 2020 are scheduled to settle within 60 days. Futures positions do not have settlement dates. The Company typically uses futures contracts for its shorter term hedge positions and forward contracts for longer term hedge positions. The Company enters into these derivative transactions solely for the purpose of hedging our inventory holding risk, and not for speculative market purposes. Due to the nature of our hedging strategy, we are not using hedge accounting as defined under, Derivatives and Hedging Topic 815 of the Accounting Standards Codification ("ASC".) Unrealized gains or losses resulting from our futures and forward contracts are reported as cost of sales with the related amounts due from or to counterparties reflected as derivative assets or liabilities. The Company adjusts the derivatives to fair value on a daily basis until the transactions are settled. When these contracts are net settled, the unrealized gains and losses are reversed and the realized gains and losses for forward contracts are recorded in revenue and cost of sales and the net realized gains and losses for futures and option contracts are recorded in cost of sales. 44
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The Company's net gains (losses) on derivative instruments for the years endedJune 30, 2020 and 2019, totaled$8.1 million and$(1.1) million , respectively. These net gains (losses) on derivative instruments were substantially offset by the changes in fair market value of the underlying precious metals inventory and open sale and purchase commitments, which is also recorded in cost of sales in the consolidated statements of income. The purpose of the Company's hedging policy is to substantially match the change in the value of the derivative financial instrument to the change in the value of the underlying hedged item. The following table summarizes the results of our hedging activities, showing the precious metal commodity inventory position, net of open sale and purchase commitments, which is subject to price risk, compared to change in the value of the derivative instruments as ofJune 30, 2020 andJune 30, 2019 : in thousands June 30, June 30, 2020 2019 Inventories$ 321,281 $ 292,861 Precious metals held under financing arrangements 178,577
208,792
499,858 501,653
Less unhedgeable inventories: Commemorative coin inventory, held at lower of cost or net realizable value (17 ) (17 ) Premium on metals position (3,684 ) (4,424 ) Precious metal value not hedged (3,701 )
(4,441 )
496,157 497,212
Commitments at market: Open inventory purchase commitments 514,553
166,600
Open inventory sales commitments (309,134 ) (158,870 ) Margin sale commitments (14,652 ) (11,652 ) In-transit inventory no longer subject to market risk (3,605 ) (809 ) Unhedgeable premiums on open commitment positions 2,779
838
Borrowed precious metals (168,206 ) (201,144 ) Product financing arrangements (74,678 ) (94,505 ) Advances on industrial metals 318
8,644
(52,625 ) (290,898 )
Precious metal subject to price risk 443,532 206,314
Precious metal subject to derivative financial instruments: Precious metals forward contracts at market values 73,948
133,612
Precious metals futures contracts at market values 369,842
72,218
Total market value of derivative financial instruments 443,790
205,830
Net precious metals subject to commodity price risk
484
We are exposed to the risk of default of the counterparties to our derivative
contracts. Significant judgment is applied by us when evaluating the fair value
implications. We regularly review the creditworthiness of our major
counterparties and monitor our exposure to concentrations. At June 30, 2020 , we
believe our risk of counterparty default is mitigated based on our evaluation of
the creditworthiness of our major counterparties, the strong financial condition
of our counterparties, and the short-term duration of these arrangements.
Commitments and Contingencies
Refer to Note 15 for information relating Company's commitments and contingencies.
OFF-BALANCE SHEET ARRANGEMENTS
As ofJune 30, 2020 andJune 30, 2019 , we had the following outstanding sale and purchase commitments and open forward and future contracts, which are normal and recurring, in nature: 45
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in thousands
June 30, June 30,
2020 2019
Purchase commitments $ 514,553 $ 166,600
Sales commitments $ (309,134 ) $ (158,870 )
Margin sale commitments $ (14,652 ) $ (11,652 )
Open forward contracts $ 73,948 $ 133,612
Open futures contracts $ 369,842 $ 72,218
Foreign exchange forward contracts $ 4,599 $ 5,934
The notional amounts of the commodity forward and futures contracts and the open
sales and purchase orders, as shown in the table above, are not reflected at the
notional amounts in the consolidated balance sheets. The Company records
commodity forward and futures contracts at the fair value, which is the
difference between the market price of the underlying metal or contract measured
on the reporting date and the trade amount measured on the date the contract was
transacted. The fair value of the open derivative contracts are shown as a
component of derivative assets or derivative liabilities in the accompanying
consolidated balance sheets.
The Company enters into the derivative forward and future transactions solely
for the purpose of hedging its inventory holding risk, and not for speculative
market purposes. The Company's gains (losses) on derivative instruments are
substantially offset by the changes in fair market value of the underlying
precious metals inventory position, including our open sale and purchase
commitments. The Company records the derivatives at the trade date, and any
corresponding unrealized gains or losses are shown as a component of cost of
sales in the consolidated statements of income. We adjust the carrying value of
the derivatives to fair value on a daily basis until the transactions are
physically settled. (See Note 11 of the notes to consolidated financial
statements.)
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States ("U.S. GAAP"). In connection with the preparation of our financial statements, we are required to make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review our accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance withU.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could materially differ from our estimates. Our significant accounting policies are discussed in Note 2 of the Notes to consolidated financial statements. We believe that the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. We have reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors. Revenue Recognition The Company accounts for its metals and sales contracts using settlement date accounting. Pursuant to such accounting, the Company recognizes the sale or purchase of the metals at settlement date. During the period between the trade and settlement dates, the Company has entered into a forward contract that meets the definition of a derivative in accordance with the Derivatives and Hedging Topic 815 of the ASC. The Company records the derivative at the trade date with any corresponding unrealized gains (losses), shown as component of cost of sales in the consolidated statements of income. The Company adjusts the derivatives to fair value on a daily basis until the transactions are settled. When these contracts are settled, the unrealized gains and losses are reversed, and revenue is recognized for contracts that are physically settled. For contracts that are net settled, the realized gains and losses are recorded in cost of sales, with the exception of forward contracts, where their associated realized gains and losses are recorded in revenue and cost of sales, respectively. Also, the Company recognizes its storage, logistics, licensing, and other services revenues in accordance with the FASB's release ASU 2014-09 Revenue From Contracts With Customers Topic 606 and subsequent related amendments ("ASC 606"), which follows five basic steps to determine whether revenue can be recognized: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. 46
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Table of Contents Inventories The Company's inventory primarily includes bullion and bullion coins, which are initially recorded at fair market value. The fair market value of the bullion and bullion coins is comprised of two components: (i) published market values attributable to the cost of the raw precious metal, and (ii) a published premium paid at acquisition of the metal. The premium is attributable to the additional value of the product in its finished goods form and the market value attributable solely to the premium may be readily determined, as it is published by multiple reputable sources. The premium is included in the cost of the inventory, paid at acquisition, and is a component of the total fair market value of the inventory. The precious metal component of the inventory may be hedged through the use of precious metal commodity positions, while the premium component of our inventory is not a commodity that may be hedged. The Company's inventory, except for certain lower of cost or net realizable value basis products (as described below), is subsequently recorded at their fair market values. The daily changes in the fair market value of our inventory are offset by daily changes in the fair market value of hedging derivatives that are taken with respect to our inventory positions; both the change in the fair market value of the inventory and the change in the fair market value of these derivative instruments are recorded in cost of sales in the consolidated statements of income. While the premium component included in inventory is marked-to-market, our commemorative coin inventory, including its premium component, is held at the lower of cost or net realizable value, because the value of commemorative coins is influenced more by supply and demand determinants than on the underlying spot price of the precious metal content of the commemorative coins. Unlike our bullion coins, the value of commemorative coins is not subject to the same level of volatility as bullion coins because our commemorative coins typically carry a substantially higher premium over the spot metal price than bullion coins. Additionally, neither the commemorative coin inventory nor the premium component of our inventory is hedged. Inventory includes amounts borrowed from suppliers and customers arising from various arrangements including unallocated metal positions held by customers in the Company's inventory, amounts due to suppliers for the use of consigned inventory, metals held by suppliers as collateral on advanced pool metals, as well as shortages in unallocated metal positions held by the Company in the supplier's inventory. Unallocated or pool metal represents an unsegregated inventory position that is due on demand, in a specified physical form, based on the total ounces of metal held in the position. Amounts under these arrangements require delivery either in the form of precious metals or cash. The Company mitigates market risk of its physical inventory and open commitments through commodity hedge transactions. (See Note 11 of the notes to consolidated financial statements.) The Company enters into product financing agreements for the transfer and subsequent option to reacquire its gold and silver inventory at an agreed-upon price based on the spot price with a third party finance company. This inventory is restricted and is held at a custodial storage facility in exchange for a financing fee, charged by the third party finance company. During the term of the financing agreement, the third party company holds the inventory as collateral, and both parties intend for the inventory to be returned to the Company at an agreed-upon price based on the spot price on the termination (repurchase) date. The third party charges a monthly fee as percentage of the market value of the outstanding obligation; such monthly charge is classified as interest expense. These transactions do not qualify as sales and have been accounted for as financing arrangements in accordance with ASC 470-40 Product Financing Arrangements, and are reflected in the consolidated balance sheets as product financing arrangements. The obligation is stated at the amount required to repurchase the outstanding inventory. Both the product financing and the underlying inventory (which is restricted) are carried at fair value, with changes in fair value included in cost of sales in the consolidated statements of income. The Company periodically loans metals to customers on a short-term consignment basis. Such inventory is removed at the time the customer elects to price and purchase the metals, and the Company records a corresponding sale and receivable. The Company enters into financing arrangements with certain customers under which A-Mark purchases precious metals products that are subject to repurchase by the customer at the fair value of the product on the repurchase date. The Company or the counterparty may typically terminate any such arrangement with 14 days' notice. Upon termination the customer's rights to repurchase any remaining inventory is forfeited.
We evaluate goodwill and other indefinite-lived intangibles for impairment annually in the fourth quarter of the fiscal year (or more frequently if indicators of potential impairment exist) in accordance with the Intangibles -Goodwill and Other Topic 350 of the ASC. Other finite-lived intangible assets are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be recoverable. We may first qualitatively assess whether relevant events and circumstances make it more likely than not that the fair value of the reporting unit's goodwill is less than its carrying value. If, based on this qualitative assessment, we determine that goodwill is more likely than not to be impaired, a quantitative impairment test is performed. This step requires us to determine the fair value of the business, and compare the calculated fair value of a reporting unit with its 47
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carrying amount, including goodwill. If through this quantitative analysis the Company determines the fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is considered not to be impaired. If the Company concludes that the fair value of the reporting unit is less than its carrying value, a goodwill impairment will be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. The Company also performs impairment reviews on its indefinite-lived intangible assets (i.e., trade names and trademarks). In assessing its indefinite-lived intangible assets for impairment, the Company has the option to first perform a qualitative assessment to determine whether events or circumstances exist that lead to a determination that it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount. If the Company determines that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, the Company is not required to perform any additional tests in assessing the asset for impairment. However, if the Company concludes otherwise or elects not to perform the qualitative assessment, then it is required to perform a quantitative analysis to determine if the fair value of an indefinite-lived intangible asset is less than its carrying value. If through a quantitative analysis the Company determines the fair value of an indefinite-lived intangible asset exceeds its carrying amount, the indefinite-lived intangible asset is considered not to be impaired. If the Company concludes that the fair value of an indefinite-lived intangible asset is less than its carrying value, an impairment will be recognized for the amount by which the carrying amount exceeds the indefinite-lived intangible asset's fair value.
Income Taxes
As part of the process of preparing its consolidated financial statements, the
Company is required to estimate its provision for income taxes in each of the
tax jurisdictions in which it conducts business, in accordance with the Income
Taxes Topic 740 of the ASC ("ASC 740"). The Company computes its annual tax rate
based on the statutory tax rates and tax planning opportunities available to it
in the various jurisdictions in which it earns income. Significant judgment is
required in determining the Company's annual tax rate and in evaluating
uncertainty in its tax positions. The Company has adopted the provisions of ASC
740-10, which clarifies the accounting for uncertain tax positions. ASC 740-10
requires that the Company recognizes the impact of a tax position in the
financial statements if the position is not more likely than not to be sustained
upon examination based on the technical merits of the position. The Company
recognizes interest and penalties related to certain uncertain tax positions as
a component of income tax expense and the accrued interest and penalties are
included in deferred and income taxes payable in the Company's consolidated
balance sheets. See Note 12 for more information on the Company's accounting
for income taxes.
Income taxes are accounted for using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements. Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial statement and tax
basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. The effect of a change in tax
rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date. A valuation allowance is provided when
it is more likely than not that some portion or all of the net deferred tax
assets will not be realized. The factors used to assess the likelihood of
realization include the Company's forecast of the reversal of temporary
differences, future taxable income, and available tax planning strategies that
could be implemented to realize the net deferred tax assets. Failure to achieve
forecasted taxable income in applicable tax jurisdictions could affect the
ultimate realization of deferred tax assets and could result in an increase in
the Company's effective tax rate on future earnings. Based on our assessment, it
appears more likely than not that all of the net deferred tax assets will be
realized through future taxable income.
RECENT ACCOUNTING PRONOUNCEMENTS
For a description of accounting changes and recent accounting standards, including the expected dates of adoption and estimated effects, if any, on our financial position or results of operations, see Note 2 of the notes to consolidated financial statements.
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