Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
BID > SEC Filings for BID > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for SOTHEBYS | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SOTHEBYS


8-Nov-2012

Quarterly Report


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Seasonality
The worldwide art auction market has two principal selling seasons, which generally occur in the second and fourth quarters of the year. Accordingly, Sotheby's auction business is seasonal, with peak revenues and operating income generally occurring in those quarters. Consequently, first and third quarter results have historically reflected a lower volume of auction activity when compared to the second and fourth quarters and, typically, a net loss due to the fixed nature of many of Sotheby's operating expenses. Use of Non-GAAP Financial Measures
GAAP refers to generally accepted accounting principles in the United States of America. Included in Management's Discussion and Analysis of Financial Condition and Results of Operations (or "MD&A") are financial measures presented in accordance with GAAP and also on a non-GAAP basis. Net Liquidity, as presented in MD&A under "Key Performance Indicators," is a supplemental financial measure that is not required by or presented in accordance with GAAP.
Sotheby's is predominantly an agency business that collects and remits cash on behalf of its clients. Consequently, Sotheby's defines Net Liquidity as the amount of cash and cash equivalents that would remain assuming that all accounts receivable were collected and that all consignor payables, accounts payable and current accrued liabilities were paid as of each balance sheet date. This measure, among others, is used by management to assess the amount of Sotheby's available liquidity, excluding borrowings available under its revolving credit facility. Net Liquidity should not be considered as an alternative to cash and cash equivalents as reported in accordance with GAAP. A reconciliation of Net Liquidity to cash and cash equivalents reported in accordance with GAAP is presented below under "Reconciliation of Non-GAAP Financial Measures." RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
This discussion should be read in conjunction with Note 4 ("Segment Reporting") of Notes to Condensed Consolidated Financial Statements. Overview
As discussed above, due to the seasonality of Sotheby's auction business, the third quarter typically reflects a net loss. Accordingly, in the third quarter of 2012, Sotheby's reported a pre-tax loss of ($46.4) million as compared to a pre-tax loss of ($57.9) million in the prior year. The $11.5 million (20%) improvement in Sotheby's pre-tax results for the quarter is largely the result of a $6.8 million (13%) increase in auction and related revenues, which was driven by a $4.9 million (50%) improvement in private sale commission revenues, and a $1.6 million (56%) increase in Finance segment revenues.
For the three months ended September 30, 2012, Sotheby's reported a net loss of ($32.6) million, which compares unfavorably to the net loss of ($29.7) million reported in the prior year due to an $11.6 million tax benefit recognized in the third quarter of 2011 as a result of the reversal of a valuation allowance against certain of Sotheby's deferred tax assets.
For the nine months ended September 30, 2012, Sotheby's net income decreased $57.7 million (58%) when compared to the prior year. This decrease is primarily due to lower auction commission revenues resulting from a $433.5 million (16%) reduction in Net Auction Sales, as 2011 included an unprecedented level of sales of single-owner collections. The decline in year-to-date auction commission revenues is partially offset by an $8.2 million (17%) increase in private sale commission revenues and a $6.4 million decrease in Dealer inventory writedowns, as well as $4.5 million of charges recorded in 2011 as a result of restructuring actions implemented to streamline Sotheby's European selling operations. See the discussion below for greater detail on the significant factors impacting Sotheby's results for the three and nine months ended September 30, 2012 and the comparison to the prior period.
Outlook
Management remains confident in the global art market, where demand and prices continue to be strong, particularly at the high-end of the market, although competition for these consignments is particularly fierce. Management continues to focus on stabilizing auction commission margins and maximizing revenues, as well as maintaining a rational cost structure while proceeding with measured investments in the strategic initiatives that are vital to Sotheby's future. (See statement on Forward Looking Statements. In addition, the art market has historically been cyclical; please refer to Item 1A, "Risk Factors," which summarizes the factors that could significantly influence and cause variability in Sotheby's operating results and liquidity.)

26#


Results of Operations for the Three and Nine Months Ended September 30, 2012 and 2011
The table below presents a summary of Sotheby's results of operations for the three and nine months ended September 30, 2012 and 2011, as well as a comparison between the two periods (in thousands of dollars):

                                                                            Favorable/(Unfavorable)
Three Months Ended September 30,              2012           2011           $ Change          % Change
Revenues:
Auction and related revenues              $   59,711     $   52,916     $        6,795            13 %
Finance revenues                               4,572          2,923              1,649            56 %
Dealer revenues                                1,815            591              1,224             *
License fee revenues                           2,046          1,408                638            45 %
Other revenues                                   317            372                (55 )         (15 %)
Total revenues                                68,461         58,210             10,251            18 %
Expenses                                     106,370        103,695             (2,675 )          (3 %)
Operating loss                               (37,909 )      (45,485 )            7,576            17 %
Net interest expense                         (10,110 )       (9,800 )             (310 )          (3 %)
Extinguishment of debt, net                        -         (1,529 )            1,529           100 %
Other income (expense)                         1,596         (1,086 )            2,682             *
Loss before taxes                            (46,423 )      (57,900 )           11,477            20 %
Equity in earnings (losses) of
investees, net of taxes                           17            (25 )               42             *
Income tax benefit                           (13,841 )      (28,206 )          (14,365 )         (51 %)
Net loss                                  $  (32,565 )   $  (29,719 )   $       (2,846 )         (10 %)
Key Performance Indicators:
Aggregate Auction Sales (a)               $  230,930     $  247,907     $      (16,977 )          (7 %)
Net Auction Sales (b)                     $  192,874     $  207,760     $      (14,886 )          (7 %)
Items sold at auction with a hammer
(sale) price greater than $1 million              23             13                 10            77 %
Total hammer (sale) price of items sold
at auction with a price greater than $1
million                                   $   57,369     $   62,575     $       (5,206 )          (8 %)
Auction Commission Margin (c)                   21.8 %         19.7 %              N/A            10 %
Private Sales (d)                         $  181,792     $   84,329     $       97,463             *
Consolidated Sales (e)                    $  414,537     $  332,827     $       81,710            25 %
Average Loan Portfolio (f)                $  343,639     $  195,160     $      148,479            76 %
Net Liquidity (g) (h)                     $  616,747     $  414,686     $      202,061            49 %

27#


                                                                             Favorable/(Unfavorable)
Nine Months Ended September 30,             2012            2011             $ Change          % Change
Revenues:
Auction and related revenues            $   447,272     $   516,841     $       (69,569 )        (13 %)
Finance revenues                             12,727           9,022               3,705           41 %
Dealer revenues                              11,887          16,848              (4,961 )        (29 %)
License fee revenues                          4,539           4,119                 420           10 %
Other revenues                                  944             757                 187           25 %
Total revenues                              477,369         547,587             (70,218 )        (13 %)
Expenses                                    387,599         393,454               5,855            1 %
Operating income                             89,770         154,133             (64,363 )        (42 %)
Net interest expense                        (29,580 )       (27,610 )            (1,970 )         (7 %)
Extinguishment of debt, net                       -          (1,529 )             1,529          100 %
Other income (expense)                        2,391          (1,455 )             3,846            *
Income before taxes                          62,581         123,539             (60,958 )        (49 %)
Equity in earnings of investees, net
of taxes                                        194              28                 166            *
Income tax expense                           20,574          23,631               3,057           13 %
Net income                              $    42,201     $    99,936     $       (57,735 )        (58 %)
Key Performance Indicators:
Aggregate Auction Sales (a)             $ 2,699,564     $ 3,211,745     $      (512,181 )        (16 %)
Net Auction Sales (b)                   $ 2,297,956     $ 2,731,410     $      (433,454 )        (16 %)
Items sold at auction with a hammer
(sale) price greater than $1 million            352             464                (112 )        (24 %)
Total hammer (sale) price of items
sold at auction with a price greater
than $1 million                         $ 1,293,271     $ 1,490,036     $      (196,765 )        (13 %)
Auction Commission Margin (c)                  16.3 %          16.6 %               N/A           (2 %)
Private Sales (d)                       $   695,436     $   532,743     $       162,693           31 %
Consolidated Sales (e)                  $ 3,406,887     $ 3,761,336     $      (354,449 )         (9 %)
Average Loan Portfolio (f)              $   308,485     $   217,435     $        91,050           42 %
Net Liquidity (g) (h)                   $   616,747     $   414,686     $       202,061           49 %

Legend:
* Represents a change in excess of 100%.
(a) Represents the hammer (sale) price of property sold at auction plus buyer's premium.
(b) Represents the hammer (sale) price of property sold at auction.
(c) Represents total auction commission revenues as a percentage of Net Auction Sales.
(d) Represents the total purchase price of property sold in private sales brokered by Sotheby's, including commissions.
(e) Represents the sum of Aggregate Auction Sales, Private Sales and Dealer revenues.
(f) Represents the average loan portfolio of Sotheby's Finance segment.
(g) See "Use of Non-GAAP Financial Measures" above and "Reconciliation of Non-GAAP Financial Measures" below.
(h) Represents the amount of cash and cash equivalents that would remain assuming that all accounts receivable were collected and that all consignor payables, accounts payable and current accrued liabilities were paid as of each balance sheet date. See "Net Liquidity" below for a more detailed discussion of this key performance indicator.

28#


Impact of Changes in Foreign Currency Exchange Rates For the three months ended September 30, 2012, foreign currency exchange rates had a net favorable impact of approximately $1.4 million on Sotheby's results when compared to the prior period. For the nine months ended September 30, 2012, foreign currency exchange rates had a net unfavorable impact of approximately $2 million on Sotheby's results when compared to the prior period, as summarized in the following table (in thousands of dollars):

Three Months Ended September 30, 2012                   Favorable/ (Unfavorable)
Total revenues                                         $               (1,282 )
Total expenses                                                          2,653
Operating income                                                        1,371
Net interest expense and other                                             (4 )
Impact of changes in foreign currency exchange rates   $                1,367


Nine Months Ended September 30, 2012                    Favorable/ (Unfavorable)
Total revenues                                         $               (9,559 )
Total expenses                                                          7,523
Operating loss                                                         (2,036 )
Net interest expense and other                                             41
Impact of changes in foreign currency exchange rates   $               (1,995 )

29#


Revenues
For the three and nine months ended September 30, 2012 and 2011, revenues
consisted of the following (in thousands of dollars):
                                                                    Favorable/(Unfavorable)
Three Months Ended September 30,          2012         2011          $ Change        % Change
Auction and related revenues:
Auction commission revenues            $ 41,955     $ 40,962     $         993            2 %
Private sale commission revenues         14,645        9,750             4,895           50 %
Principal activities                       (457 )     (1,213 )             756          (62 %)
Other auction and related revenues**      3,568        3,417               151            4 %
Total auction and related revenues       59,711       52,916             6,795           13 %
Other revenues:
Finance revenues                          4,572        2,923             1,649           56 %
Dealer revenues                           1,815          591             1,224            *
License fee revenues                      2,046        1,408               638           45 %
Other                                       317          372               (55 )        (15 %)
Total other revenues                      8,750        5,294             3,456           65 %
Total revenues                         $ 68,461     $ 58,210     $      10,251           18 %


                                                               Favorable/(Unfavorable)
Nine Months Ended September
30,                               2012          2011           $ Change          % Change
Auction and related
revenues:
Auction commission revenues    $ 375,116     $ 454,485     $      (79,369 )         (17 %)
Private sale commission
revenues                          56,110        47,947              8,163            17 %
Principal activities                 527           148                379             *
Other auction and related
revenues**                        15,519        14,261              1,258             9 %
Total auction and related
revenues                         447,272       516,841            (69,569 )         (13 %)
Other revenues:
Finance revenues                  12,727         9,022              3,705            41 %
Dealer revenues                   11,887        16,848             (4,961 )         (29 %)
License fee revenues               4,539         4,119                420            10 %
Other                                944           757                187            25 %
Total other revenues              30,097        30,746               (649 )          (2 %)
Total revenues                 $ 477,369     $ 547,587     $      (70,218 )         (13 %)

* Represents a change in excess of 100%. ** Principally includes commissions and other fees earned on sales brokered by third parties, fees charged to clients for catalogue production and insurance, catalogue subscription revenues and advertising revenues.

Auction and Related Revenues
For the three months ended September 30, 2012, auction and related revenues increased $6.8 million (13%) primarily due to a 50% increase in private sale commission revenue and, to a lesser extent, slightly higher auction commission revenues. For the nine months ended September 30, 2012, auction and related revenues decreased $69.6 million (13%) due to a $79.4 million (17%) decline in auction commission revenue partially offset by an $8.2 million (17%) increase in private sale commission revenue. The comparisons to the prior periods are also impacted by unfavorable changes in foreign currency exchange rates, which decreased auction and related revenues by approximately $1.2 million and $9.3 million during the three and nine month periods, respectively. See below for a more detailed discussion of these and the other significant factors impacting the comparisons of auction and related revenues between the current and prior periods.

30#


Auction Commission Revenues-In its role as auctioneer, Sotheby's represents sellers of artworks by accepting property on consignment and by matching sellers to buyers through the auction process. Sotheby's invoices the buyer for the purchase price of the property (including the commission owed by the buyer), collects payment from the buyer and remits to the seller the net sale proceeds after deducting its commissions, expenses and applicable taxes and royalties. Sotheby's commissions include those paid by the buyer ("buyer's premium") and those paid by the seller ("seller's commission") (collectively, "auction commission revenue"), both of which are calculated as a percentage of Net Auction Sales.
For the three months ended September 30, 2012, auction commission revenues increased approximately $1 million (2%) despite a 7% decrease in Net Auction Sales due to an improvement in Auction Commission Margin from 19.7% to 21.8%. For the nine months ended September 30, 2012, auction and related revenues decreased $79.4 million (17%) due to a 16% decrease in Net Auction Sales and, to a much lesser extent, a decline in Auction Commission Margin. The comparison to the prior periods is unfavorably impacted by changes in foreign currency exchange rates, which decreased auction commission revenues by approximately $0.7 million and $8 million during the three and nine month periods, respectively. See "Net Auction Sales" and "Auction Commission Margin" below for a more detailed discussion of these key performance indicators.
Net Auction Sales-For the three months ended September 30, 2012, Net Auction Sales decreased $14.9 million (7%) when compared to the prior year primarily due to a $24 million decrease in the recurring various-owner Old Master Paintings sales in London, which in 2011 included the sale of Francesco Guardi's Venice, A View of The Rialto Bridge, Looking North, From The Fondamenta Del Carbon for a hammer price of $38 million. This decrease is partially offset by a $12.7 million improvement in recurring various-owner sales of Asian Art in New York. For the nine months ended September 30, 2012, Net Auction Sales decreased $433.5 million (16%) when compared to the prior year due to a number of significant single-owner sales occurring in the prior period, as well as a decrease in the volume of objects sold at recurring various-owner sales. Net Auction Sales are also unfavorably impacted by changes in foreign currency exchange rates, which contributed $44.1 million to the overall decrease versus the prior year. More specifically, the year-to-date decrease in Net Auction Sales is attributable to the following factors:
Excluding collections of Impressionist Art and Contemporary Art, worldwide sales of single-owner collections decreased $274.2 million (62%). The second quarter of 2011, in particular, included an unprecedented level of single-owner collections, including The Meiyingtang Collection of Chinese Porcelain ($76.5 million), The Mei Yun Tang Collection of Paintings by Chang Dai-chien ($76.5 million), The Evill/Frost Collection of 20th Century British Art ($59.8 million) and The Ullens Collection of Contemporary Chinese Art ($46.5 million).

Excluding Impressionist Art and Contemporary Art, recurring various-owner sales decreased $151 million (13%) primarily due to decreases in worldwide sales of Asian Art ($77.4 million), Old Master Paintings ($55 million) and 19th Century Paintings ($20 million), partially offset by an increase in worldwide sales of Jewelry ($33 million).The decreases in sales of Asian Art may be attributable, in part, to the slowdown in the major economies of that region, and in particular, China.

These decreases are partially offset by an increase of $63.7 million (6%) in worldwide sales of Impressionist Art and Contemporary Art. The second quarter auction of Impressionist Art in New York included the sale of Edvard Munch's The Scream for $107 million ($119.9 million including buyer's premium), the highest price ever for a work of art at auction.

Auction Commission Margin-Auction Commission Margin represents total auction commission revenues as a percentage of Net Auction Sales. Typically, the Auction Commission Margin is higher for lower value works of art or collections, while higher valued property earns a lower Auction Commission Margin. For example, in salesrooms in the U.S., the buyer's premium rate structure is 25% on the first $50,000 of hammer (sale) price; 20% on the portion of hammer price above $50,000 up to and including $1 million; and 12% on any remaining amount above $1 million.
In certain situations, Auction Commission Margin is adversely impacted by arrangements whereby Sotheby's buyer's premium is shared with a consignor. In such situations, Sotheby's may share its buyer's premium with a consignor in order to secure a high value consignment without issuing an auction guarantee. Auction Commission Margin may also be adversely impacted by the use of auction guarantees. For example, when issuing an auction guarantee, Sotheby's may enter into a risk and reward sharing arrangement with a counterparty whereby Sotheby's financial exposure under the auction guarantee is reduced in exchange for sharing its auction commission. Also, in situations when guaranteed property sells for less than the guaranteed price, all or a portion of Sotheby's auction commissions are used to reduce the principal loss on the transaction. (See Note 9 of Notes to Condensed Consolidated Financial Statements for additional information on Sotheby's use of auction guarantees.)

31#


For the three months ended September 30, 2012, Auction Commission Margin increased from 19.7% to 21.8% primarily as a result of a lower level of shared auction commissions in the current period.
For the nine months ended September 30, 2012, Auction Commission Margin decreased from 16.6% to 16.3%. This decline is attributable to competitive pressures to win high value consignments, which resulted in a higher level of shared auction commissions in the year-to-date period, and to the sales mix, as there was a shift in the proportion of property sold in the various price bands of Sotheby's buyer's premium rate structure.
Private Sale Commission Revenues-For the three and nine months ended September 30, 2012, private sale commission revenues grew by $4.9 million (50%) and $8.2 million (17%), respectively, primarily due to increased sales of high value property, as well as an overall increase in the volume of sales transacted in the current periods, particularly in the Contemporary Art collecting category. Private sales continue to be a strategic focus for management and have become increasingly important to Sotheby's overall financial performance. Finance Revenues
For the three and nine months ended September 30, 2012, Finance revenues increased $1.6 million (56%) and $3.7 million (41%), respectively, principally due to a $91.1 million (42%) increase in the year-to-date average loan portfolio balance. This growth in the loan portfolio is attributable to increased demand for art-related financing associated with traditional client liquidity needs, the improved global reach of Sotheby's art-financing business and an increase in term loans made to refinance clients' auction and private sale purchases (see Note 5 of Notes to Condensed Consolidated Financial Statements). (Note: For the purposes of Management's Discussion and Analysis, Finance revenues are presented on a consolidated basis and do not include intercompany revenues earned by the Finance segment from the Auction segment, which are eliminated in consolidation. See Note 4 of Notes to Condensed Consolidated Financial Statements.)
Dealer Revenues and Cost of Sales
Dealer revenues consist of revenues earned from the sale of inventory, which includes property owned by Noortman Master Paintings ("NMP") and artworks purchased for investment purposes. To a lesser extent, Dealer revenues also include commissions earned by NMP through the brokering of private art sales. Dealer cost of sales includes the net book value of Dealer inventory sold during the period and any writedowns to the carrying value of Dealer inventory. The table below summarizes Dealer revenues, cost of sales and gross (loss) profit for the three and nine months ended September 30, 2012 and 2011 (in thousands of dollars):

                                                                               Favorable/(Unfavorable)
Three Months Ended September 30,       2012            2011                   $ Change                 % Change
Dealer revenues                    $     1,815     $       591     $          1,224                          *
Dealer cost of sales                    (2,553 )        (6,012 )              3,459                         58 %
Dealer gross loss                  $      (738 )   $    (5,421 )   $          4,683                         86 %


                                                               Favorable/(Unfavorable)
Nine Months Ended September 30,      2012         2011          $ Change        % Change
Dealer revenues                   $ 11,887     $ 16,848     $      (4,961 )        (29 )%
Dealer cost of sales               (11,624 )    (20,267 )           8,643           43  %
Dealer gross profit (loss)        $    263     $ (3,419 )   $       3,682            *

* Represents a change in excess of 100% Dealer results for the three and nine months ended September 30, 2012 reflect an improvement from the same periods in the prior year primarily due to a significantly lower level of inventory writedowns, which totaled $5.7 million and $8.3 million, respectively, in the prior year three and nine month periods. The prior year writedowns were the result of a shift in NMP's selling strategy, as well as a general weakening of the private dealer market for certain categories of lower valued Old Master Paintings and a shift in the collecting tastes of NMP's clients. By comparison, Dealer inventory writedowns for the three and nine months ended September 30, 2012, totaled $1.5 million and $1.9 million, respectively. Partially offsetting the decrease in Dealer inventory writedowns in the current periods is a lower level of profitable sales and fewer privately brokered sales when compared to the prior year.

32# . . .

  Add BID to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for BID - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.