Sotheby’s (NYSE:BID) today reported its financial results for the third quarter and nine months ended 30 September 2016.
For the three months ended 30 September 2016, Sotheby’s reported a net loss of ($54.5) million and diluted loss per share of ($0.99) which compares to ($17.9) million and ($0.26), respectively, a year ago. Excluding certain acquisition related and other charges, Adjusted Net Loss* for the third quarter of 2016 is ($43.1) million and Adjusted Diluted Loss Per Share* is ($0.78), as compared to ($17.9) million and ($0.26) per share in the third quarter of 2015.
“As we communicated previously, the third quarter results were not expected to be good,” said Tad Smith, President and Chief Executive Officer of Sotheby’s. “Underneath our seasonally low level of sales, there were encouraging but tentative indicators that the market could be looking for a rallying point. At the same time, we are thrilled with the continued results of our internal initiatives.”
The comparison to the 2015 third quarter net loss is significantly influenced by three factors.
First, Net Auction Sales and Auction Commission Revenue were adversely impacted 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. This shift in timing accounted for $197 million, or 93%, of the $211 million decline in Net Auction Sales from quarter to quarter.
Secondly, the Company reported a $15 million swing in Inventory activities, driven by $9 million in net gains, largely from the sale of a single painting in the year ago period, and $6 million in net losses from sales in inventory and other inventory write downs in the current period.
Partially offsetting these factors in the quarter was an improvement in the Company’s Auction Commission Margin and a lower level of share-based compensation expense, continuing trends seen throughout the year. The Company also reported a lower effective tax rate and a significantly lower number of shares outstanding, both of which will benefit the year, but are negative factors for a quarter in which a loss is reported.
Finally, the Company recorded a $17.2 million pre-tax charge in the quarter related to the previously announced earn-out arrangements associated with the acquisition of Art Agency, Partners. These charges are required to be reflected in the financial statements as Salaries and Related Costs, but because they are part of the consideration paid for the acquisition, the Company is excluding them when reporting Adjusted Net Loss* and Adjusted Diluted Loss Per Share*. The timing of this non-cash expense recognition has no bearing on the timing of cash payments due under the earn-out which are limited to no more than $8.75 million per year over a four year period.
“Since integrating AAP into our existing business, we have seen marked improvements ranging from competitive successes and enhanced auction commission margins to improved focus on private sales and the creation of a formidable advisory business which has brought in incremental revenues each quarter. Based on the trajectory of the principals’ progress against certain targets, we need to take the accounting charge now, although the payouts will still be made over the next four years as planned,” said Mike Goss, Sotheby’s Chief Financial Officer.
For the nine months ended 30 September 2016, Sotheby’s reported net income of $8.6 million and diluted earnings per share of $0.14, which compares to $54.9 million and $0.79, respectively, in the prior year period. The lower level of net income is principally due to a decrease of $764.5 million, or 26%, in Net Auction Sales associated with the recent decline in the global art market. Also unfavorably influencing the comparison of year-to-date results to the prior year is $21.6 million in compensation expense related to the aforementioned AAP earn-out expense as well as unfavorable experience with inventory activities. These factors are somewhat mitigated by an increase in Auction Commission Margin from 15.3% to 16.5%, a reduced level of incentive and share-based compensation expense, a lower effective income tax rate, and diluted earnings per share benefited from a lower number of shares outstanding due to share repurchases made over the last twelve months.
Adjusted Net Income* for the nine months ended 30 September 2016 is $25.9 million and Adjusted Diluted Earnings Per Share* is $0.43 which compares to $62.5 million and $0.90, respectively, in the prior period. Adjustments between GAAP and non-GAAP measures are largely the result of $13.2 million of after- tax acquisition earn-out compensation expense and $4.5 million of after-tax contractual severance agreement charges in the current period, as well as $5.8 million of after-tax leadership transition severance costs in the prior period.
“Given the seasonality of our business, we encourage investors to look at our results on a rolling six month basis,” added Mr. Goss. “To make this analysis easier for our investors, we will be posting our six month data to our investor relations website.”
Non-GAAP Financial Measures
*Adjusted Net (Loss) Income and Adjusted Diluted (Loss) Earnings Per Share are non-GAAP financial measures. See Appendix B for a description of these non-GAAP financial measures and reconciliations to the most comparable GAAP amounts.
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.
Investor Relations Information
All Sotheby’s Press Releases and SEC filings are available on our web site at www.sothebys.com. An outline of the conference call as well, as an accompanying presentation detailing our rolling six month results, can be found here: http://investor.shareholder.com/bid/events.cfm.
Sotheby’s will host a conference call at 9:00 AM EST on 7 November 2016, to discuss its third quarter 2016 financial results. Please dial 888-371-8897 and for callers outside the United States, Puerto Rico and Canada, please dial 1-970-315-0479, approximately 15 minutes before the scheduled start of the call. The call reservation number is 86401298. The conference call will also be accessible via webcast on the Investor Relations section of the Sotheby’s web site at http://investor.shareholder.com/bid/events.cfm.
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 10 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 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).