OREANDA-NEWS. Sotheby’s (NYSE:BID) today reported its financial results for the second quarter and six months ended 30 June 2016.

For the three months ended 30 June 2016, Sotheby’s reported net income of $89.0 million and diluted earnings per share of $1.52 which compares to $67.6 million and $0.96, respectively, a year ago. Sotheby’s reported Adjusted Net Income* of $88.6 million and Adjusted Diluted Earnings Per Share* of $1.51 which compares to $73.1 million and $1.04, respectively, in the prior period. This represents a 21% increase in Adjusted Net Income*, but a 45% improvement in Adjusted Diluted Earnings Per Share* due to the common stock repurchases over the past year. Adjustments between GAAP and non-GAAP figures are largely the result of $5.8 million of after-tax leadership transition severance costs in the prior period.

The comparison to second quarter results of 2015 is impacted by a 16% decrease in Net Auction Sales reflecting a comparable decline in the global art market. The effect of lower sales levels is somewhat mitigated by improved auction commission margin, from 15.5% in the second quarter of 2015 to 16.4% in the current quarter. The comparison of the current and prior year periods is also significantly influenced by a change in the timing of the summer Contemporary Art sales in London, which were held in the second quarter of 2016 after occurring in the third quarter in 2015. Also favorably impacting the comparison of second quarter results is lower variable compensation costs ($16.8 million, or 51%, decrease in incentive compensation expense and a $7.3 million, or 76%, decline in share-based payment expense), a decrease in inventory losses and a lower effective income tax rate.

“While we would certainly prefer to see a stronger art market, we are pleased with the progress we have been making on our strategic initiatives and the beneficial changes to our team and organization,” said Tad Smith, Sotheby’s President and Chief Executive Officer. "When the art market improves – and it certainly will – our company is poised to do very well for shareholders.  Until then, we continue burnishing Sotheby’s for even more success and being very careful on capital allocation."

For the six months ended 30 June 2016, Sotheby’s reported net income of $63.1 million and diluted earnings per share of $1.03 which compares to $72.8 million and $1.04, respectively, in the prior year first half. This decrease is largely due to the same factors as affected the second quarter – lower sales volumes associated with the decline in the art market, partially offset by increased auction commission margin, lower variable compensation expenses, a favorable effective income tax rate, and the benefit of share repurchases on diluted earnings per share.

Chief Financial Officer Mike Goss said, “Given the pronounced seasonality of the art auction market, we believe investors should focus on six month results versus prior periods, rather than merely a single quarter. The comparison of quarterly results can be skewed by changes in the timing of when auctions occur, such as the summer Contemporary sales in London. Looking at the first six months of this year, investors will have a realistic view of the current market, but they will also see our improved auction commission margins, meaningful cost control, and the impact of our ongoing share repurchase program.” Goss also noted that the Company had 55.1 million common shares outstanding at 30 June 2016, a 21% reduction in the past twelve months.

Non-GAAP Financial Measures

*Adjusted Net Income and Adjusted Diluted Earnings Per Share are non-GAAP financial measures. See Appendix B for a description of these non-GAAP financial measures and reconciliation to the most comparable GAAP amount.

Forward-Looking Statements

This release contains certain “forward-looking statements” (as such term is defined in Section 21E of the Securities and Exchange Act of 1934, as amended) relating to future events and the financial performance of Sotheby’s. Such statements are only predictions and involve risks and uncertainties, resulting in the possibility that the actual events or performances will differ materially from such predictions. Major factors, which Sotheby’s believes could cause the actual results to differ materially from the predicted results in the “forward-looking statements” include, but are not limited to, the overall strength of the global economy and financial markets, political conditions in various countries, competition with other auction houses and art dealers, the amount and quality of property available for consignment and the marketability at auction of such property. Please refer to our most recently filed Form 10-Q (and/or 10-K) for a complete list of Risk Factors.

 

About Sotheby’s

Sotheby’s has been uniting collectors with world-class works of art since 1744. Sotheby’s became the first international auction house when it expanded from London to New York (1955), the first to conduct sales in Hong Kong (1973), India (1992) and France (2001), and the first international fine art auction house in China (2012). Today, Sotheby’s presents auctions in nine different salesrooms, including New York, London, Hong Kong and Paris, and Sotheby’s BidNow program allows visitors to view all auctions live online and place bids in real-time from anywhere in the world. Sotheby’s offers collectors the resources of Sotheby’s Financial Services, the world’s only full-service art financing company, as well as private sale opportunities in more than 70 categories, including S|2, the gallery arm of Sotheby’s Contemporary Art department, and two retail businesses, Sotheby’s Diamonds and Sotheby’s Wine. Sotheby’s has a global network of 80 offices in 40 countries and is the oldest company listed on the New York Stock Exchange (BID).

APPENDIX A

SOTHEBY’S
CONDENSED CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
(Thousands of dollars, except per share data)

    Three Months Ended   Six Months Ended
    June 30, 2016   June 30, 2015   June 30, 2016   June 30, 2015
Revenues:                
Agency commissions and fees   $ 273,764     $ 310,377     $ 354,829     $ 438,259  
Inventory sales   5,281     7,005     12,075     19,988  
Finance   14,750     11,970     29,505     24,657  
License fees   2,897     2,468     5,059     4,442  
Other   1,973     186     3,728     335  
Total revenues   298,665     332,006     405,196     487,681  
Expenses:                
Agency direct costs   31,243     32,730     40,782     44,569  
Cost of inventory sales   7,381     16,989     18,119     28,702  
Cost of finance revenues   4,153     3,874     8,547     7,262  
Marketing   4,408     4,748     9,421     8,808  
Salaries and related   75,227     108,182     143,398     171,112  
General and administrative   40,909     44,731     76,585     79,460  
Depreciation and amortization   5,492     4,781     10,788     9,563  
Voluntary separation incentive programs (net)   (231 )   —     (538 )   —  
CEO separation and transition costs   —     43     —     4,232  
Restructuring charges (net)   —     (530 )   —     (889 )
Total expenses   168,582     215,548     307,102     352,819  
Operating income   130,083     116,458     98,094     134,862  
Interest income   275     630     671     759  
Interest expense   (7,638 )   (9,074 )   (15,184 )   (17,735 )
Other income (expense)   374     245     421     (1,714 )
Income before taxes   123,094     108,259     84,002     116,172  
Equity in earnings of investees   191     1,982     587     3,126  
Income tax expense   34,355     42,789     21,569     46,713  
Net income   88,930     67,452     63,020     72,585  
Less: Net loss attributable to noncontrolling interest   (34 )   (120 )   (60 )   (189 )
Net income attributable to Sotheby's   $ 88,964     $ 67,572     $ 63,080     $ 72,774  
Basic earnings per share - Sotheby’s common shareholders   $ 1.54     $ 0.97     $ 1.04     $ 1.04  
Diluted earnings per share - Sotheby's common shareholders   $ 1.52     $ 0.96     $ 1.03     $ 1.04  
Weighted average basic shares outstanding   57,104     69,332     60,063     69,211  
Weighted average diluted shares outstanding   57,712     69,884     60,682     69,794  
Cash dividends declared per common share   $ —     $ 0.10     $ —     $ 0.20  
                                 

APPENDIX B

NON-GAAP FINANCIAL MEASURES

GAAP refers to generally accepted accounting principles in the United States of America. Included in this earnings release are financial measures presented in accordance with GAAP and also on a non-GAAP basis. The non-GAAP financial measures presented in this earnings release are: Adjusted Net Income and Adjusted Diluted Earnings Per Share. Sotheby's definition of these non-GAAP financial measures is provided in the following paragraphs. Management cautions users of Sotheby's financial statements that amounts presented in accordance with its definitions of these non-GAAP financial measures may not be comparable to similar measures disclosed by other companies because not all companies and analysts calculate such measures in the same manner.

Adjusted Net Income is defined as Net Income Attributable to Sotheby's, excluding the after-tax impact of charges related to certain contractual severance agreements (net, recorded within Salaries and Related Costs), leadership transition severance costs (recorded within Salaries and Related Costs), charges related to Sotheby's voluntary separation incentive programs (net), CEO Separation and Transition Costs, and Restructuring Charges (net). Adjusted Diluted Earnings Per Share is defined as Diluted Earnings Per Share excluding the per share impact of charges related to certain contractual severance agreements (net, recorded within Salaries and Related Costs), leadership transition severance costs (recorded within Salaries and Related Costs), charges related to Sotheby's voluntary separation incentive programs (net), CEO Separation and Transition Costs, and Restructuring Charges (net).

Adjusted Net Income and Adjusted Diluted Earnings Per Share are important supplemental measures used by the Board of Directors and management in their financial and operational decision making processes, for internal reporting, and as part of Sotheby's forecasting and budgeting processes, as they provide helpful measures of Sotheby's core operations. These measures allow the Board of Directors and management to view operating trends, perform analytical comparisons, and benchmark performance between periods. Management also believes that these measures may be used by securities analysts, investors, financial institutions, and other interested parties in their evaluation of Sotheby's.