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| BID > SEC Filings for BID > Form 10-Q on 5-Aug-2009 | All Recent SEC Filings |
5-Aug-2009
Quarterly Report
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 (or together with its subsidiaries, unless the context otherwise requires, the "Company") auction business is seasonal, with peak revenues and operating income generally occurring in those quarters. Consequently, first and third quarter results have historically reflected lower Net Auction Sales (as defined below under "Key Performance Indicators") 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. (See Note 2 of Notes to Condensed Consolidated Financial Statements.)
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
This discussion should be read in conjunction with Note 4 ("Segment Reporting") of Notes to Condensed Consolidated Financial Statements.
Overview
For the three and six months ended June 30, 2009, Sotheby's reported net income of $12.2 million and a net loss of ($22.3) million, respectively. These current period results compare unfavorably to the three and six months ended June 30, 2008 when Sotheby's reported net income of $95.3 million and $82.9 million, respectively. The lower level of second quarter net income and the net loss reported for the six months ended June 30, 2009 are due to a decrease of 67% in Net Auction Sales caused by the downturn in the international art market. Partially offsetting the impact of the substantial decrease in Net Auction Sales is an improvement of just over 40% in auction commission margin in the current periods, as well as decreases in second quarter and June year-to-date expenses of $50.3 million, or 30%, and $87.7 million, or 28%, respectively. These lower expense levels are due to an array of factors, including management's cost reduction initiatives, a lower volume of Sotheby's auction offerings and favorable changes in foreign currency exchange rates. The overall reduction in expenses versus the prior periods is partially offset by restructuring charges of $4.8 million and $10.5 million incurred in the three and six months ended June 30, 2009, respectively, as well as the $18.4 million benefit recorded in the second quarter of 2008 as a result of the reversal of the remaining liability related to the settlement of antitrust related civil litigation. A more detailed discussion of each of the significant factors impacting Sotheby's results for the three and six months ended June 30, 2009 is provided below.
Outlook
The international art market has significantly declined from the peak levels experienced prior to 2009. In particular, the markets for Impressionist Art and Contemporary Art, which had experienced substantial growth from 2004 to 2007, have been significantly impacted by this downturn and are not expected to approach recent peaks in the near term. However, there has been a steady improvement in the percentage of lots successfully sold at Sotheby's Impressionist Art and Contemporary Art auctions since the fourth quarter of 2009. Management believes that this improvement, along with the 46% increase in Private Sales (as defined below) in the second quarter of 2009 as compared to the prior year second quarter, are indications that the market is adjusting to current price levels and should give confidence to consignors and buyers that there is now a more stable marketplace. (See statement on Forward Looking Statements.)
Results of Operations for the Three and Six Months Ended June 30, 2009 and 2008
Sotheby's results for the three and six months ended June 30, 2009 and 2008
are summarized below (in thousands of dollars):
Three Months Ended June 30, Favorable/(Unfavorable)
--------------------------------- ------------------------------
2009 2008 $ Change % Change
------------- ---------------- ---------------- ----------
Revenues:
Auction and related revenues $ 151,007 $ 290,393 ($ 139,386 ) (48.0 %)
Finance revenues 2,245 3,650 (1,405 ) (38.5 %)
Dealer revenues 13,055 24,791 (11,736 ) (47.3 %)
License fee revenues 770 918 (148 ) (16.1 %)
Other revenues 244 409 (165 ) (40.3 %)
-- ---------- -- ------------- --- ------------ -- -------
Total revenues 167,321 320,161 (152,840 ) (47.7 %)
Expenses** 119,021 169,289 50,268 29.7 %
-- ---------- -- ------------- --- ------------ -- -------
Operating income 48,300 150,872 (102,572 ) (68.0 %)
Net interest expense (9,880 ) (5,938 ) (3,942 ) (66.4 %)
Other expense (2,707 ) (3,794 ) 1,087 28.7 %
-- ---------- -- ------------- --- ------------ -- -------
Income before taxes 35,713 141,140 (105,427 ) (74.7 %)
Equity in earnings of
investees, net of taxes 242 300 (58 ) (19.3 %)
Income tax expense 23,774 46,106 22,332 48.4 %
-- ---------- -- ------------- --- ------------ -- -------
Net income $ 12,181 $ 95,334 ($ 83,153 ) (87.2 %)
-- ---------- -- ------------- --- ------------ -- -------
Key performance indicators:
Aggregate Auction Sales (a) $ 757,806 $ 2,171,560 ($ 1,413,754 ) (65.1 %)
Net Auction Sales (b) $ 633,542 $ 1,861,039 ($ 1,227,497 ) (66.0 %)
Private Sales (c) $ 133,637 $ 91,808 $ 41,829 45.6 %
Consolidated Sales (d) $ 904,498 $ 2,288,159 ($ 1,383,661 ) (60.5 %)
Auction commission margin (e) 21.3 % 15.1 % N/A 41.4 %
Average loan portfolio (f) $ 153,664 $ 198,338 ($ 44,674 ) (22.5 %)
Six Months Ended June 30, Favorable/(Unfavorable)
------------------------------ ------------------------------
2009 2008 $ Change % Change
--------------- ----------- ---------------- ----------
Revenues:
Auction and related revenues $ 196,985 $ 398,331 ($ 201,346 ) (50.5 %)
Finance revenues 4,664 7,162 (2,498 ) (34.9 %)
Dealer revenues 17,801 41,476 (23,675 ) (57.1 %)
License fee revenues 1,549 1,509 40 2.7 %
Other revenues 750 944 (194 ) (20.6 %)
--- ----------- - --------- --- ------------ -- -------
Total revenues 221,749 449,422 (227,673 ) (50.7 %)
Expenses ** 229,240 316,960 87,720 27.7 %
--- ----------- - --------- --- ------------ -- -------
Operating (loss) income (7,491 ) 132,462 (139,953 ) *
Net interest expense (19,434 ) (11,276 ) (8,158 ) (72.3 %)
Extinguishment of debt 1,039 - 1,039 100.0 %
Other expense (5,094 ) (1,171 ) (3,923 ) *
--- ----------- - --------- --- ------------ -- -------
(Loss) income before taxes (30,980 ) 120,015 (150,995 ) *
Equity in earnings of
investees, net of taxes 91 1,537 (1,446 ) (94.1 %)
Income tax (benefit) expense (8,578 ) 38,613 47,191 *
--- ----------- - --------- --- ------------ -- -------
Net (loss) income ($ 22,311 ) $ 82,939 ($ 105,250 ) *
--- ----------- - --------- --- ------------ -- -------
Key performance indicators:
Aggregate Auction Sales (a) $ 994,751 $ 2,953,108 ($ 1,958,357 ) (66.3 %)
Net Auction Sales (b) $ 833,197 $ 2,536,724 ($ 1,703,527 ) (67.2 %)
Private Sales (c) $ 198,443 $ 206,245 ($ 7,802 ) (3.8 %)
Consolidated Sales (d) $ 1,210,995 $ 3,200,829 ($ 1,989,834 ) (62.2 %)
Auction commission margin (e) 20.8 % 14.7 % N/A 41.7 %
Average loan portfolio (f) $ 155,701 $ 184,303 ($ 28,602 ) (15.5 %)
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* Represents a change in excess of 100%.
** Expenses for the three and six months ended June 30, 2009 include restructuring charges of $4.8 million and $10.5 million, respectively. Expenses for the three and six months ended June 30, 2008 include a benefit of $18.4 million recognized in the second quarter of 2008 as a result of the reversal of the remaining liability related to the vendor's commission discount certificates issued by Sotheby's in 2003 in conjunction with the settlement of antitrust related civil litigation.
(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 the total purchase price of property sold in private sales brokered by Sotheby's.
(d) Consolidated Sales is equal to the sum of Aggregate Auction Sales, Private Sales and Dealer revenues.
(e) Represents total auction commission revenues as a percentage of Net Auction Sales.
(f) Represents the average loan portfolio of Sotheby's Finance segment.
Impact of Changes in Foreign Currency Exchange Rates
For the three months ended June 30, 2009, changes in foreign currency
exchange rates had a net unfavorable impact of approximately $3.3 million on
Sotheby's results. For the six months ended June 30, 2009, changes in foreign
currency exchange rates had a net favorable impact of approximately $2.4 million
on Sotheby's results. The components of the impact of changes in foreign
currency exchange rates are as follows (in thousands of dollars):
Favorable /
Three Months Ended June 30, 2009 (Unfavorable)
---------------------------------------------------- ---------------
Total revenues ($ 15,704 )
Total expenses 11,776
---- ----------
Operating income (3,928 )
Net interest expense and other 609
---- ----------
Impact of changes in foreign currency exchange rates ($ 3,319 )
---- ----------
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Favorable /
Six Months Ended June 30, 2009 (Unfavorable)
---------------------------------------------------- ---------------
Total revenues ($ 24,292 )
Total expenses 25,629
---- ----------
Operating loss 1,337
Net interest expense and other 1,093
---- ----------
Impact of changes in foreign currency exchange rates $ 2,430
---- ----------
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Revenues
For the three and six months ended June 30, 2009 and 2008, revenues
consisted of the following (in thousands of dollars):
Favorable/(Unfavorable)
----------------------------
Three Months Ended June 30 2009 2008 $ Change % Change
---------------------------------- --------- --------- --------------- ---------
Auction and related revenues:
Auction commission revenues $ 135,200 $ 280,941 $ (145,741 ) (51.9 %)
Auction expense recoveries 3,068 6,111 (3,043 ) (49.8 %)
Private sale commissions 9,966 8,952 1,014 11.3 %
Principal activities (209 ) (11,002 ) 10,793 98.1 %
Catalogue subscription revenues 1,309 1,932 (623 ) (32.2 %)
Other 1,673 3,459 (1,786 ) (51.6 %)
- ------- - ------- -- ------------ --- -----
Total auction and related revenues 151,007 290,393 (139,386 ) (48.0 %)
- ------- - ------- -- ------------ --- -----
Other revenues:
Finance revenues 2,245 3,650 (1,405 ) (38.5 %)
Dealer revenues 13,055 24,791 (11,736 ) (47.3 %)
License fee revenues 770 918 (148 ) (16.1 %)
Other 244 409 (165 ) (40.3 %)
- ------- - ------- -- ------------ --- -----
Total other revenues 16,314 29,768 (13,454 ) (45.2 %)
- ------- - ------- -- ------------ --- -----
Total revenues $ 167,321 $ 320,161 $ (152,840 ) (47.7 %)
- ------- - ------- -- ------------ --- -----
|
Favorable/(Unfavorable)
----------------------------
Six Months Ended June 30 2009 2008 $ Change % Change
---------------------------------- --------- --------- --------------- ---------
Auction and related revenues:
Auction commission revenues $ 173,622 $ 373,160 $ (199,538 ) (53.5 %)
Auction expense recoveries 3,944 7,536 (3,592 ) (47.7 %)
Private sale commissions 14,733 20,136 (5,403 ) (26.8 %)
Principal activities (1,059 ) (12,640 ) 11,581 (91.6 %)
Catalogue subscription revenues 2,582 3,688 (1,106 ) (30.0 %)
Other 3,163 6,451 (3,288 ) (51.0 %)
- ------- - ------- -- ------------ --- -----
Total auction and related revenues 196,985 398,331 (201,346 ) (50.5 %)
- ------- - ------- -- ------------ --- -----
Other revenues:
Finance revenues 4,664 7,162 (2,498 ) (34.9 %)
Dealer revenues 17,801 41,476 (23,675 ) (57.1 %)
License fee revenues 1,549 1,509 40 2.7 %
Other 750 944 (194 ) (20.6 %)
- ------- - ------- -- ------------ --- -----
Total other revenues 24,764 51,091 (26,327 ) (51.5 %)
- ------- - ------- -- ------------ --- -----
Total revenues $ 221,749 $ 449,422 $ (227,673 ) (50.7 %)
- ------- - ------- -- ------------ --- -----
|
Auction and Related Revenues
For the three and six months ended June 30, 2009, auction and related revenues decreased $139.4 million, or 48%, and $201.3 million, or 51%, when compared to the same periods in the prior year. These decreases are principally due to lower auction commission revenues and expense recoveries, partially offset by a lower level of principal activities losses in the periods. The comparison of auction and related revenues to the prior year six month period is also unfavorably impacted by a $5.4 million, or 27%, decrease in private sale commissions. Additionally, for the three and six months ended June 30, 2009, auction and related revenues decreased $13.7 million and $21.5 million, respectively, as a result of unfavorable movements in foreign currency exchange rates.
Auction Commission Revenues - For the three and six months ended June 30, 2009, auction commission revenues decreased $145.7 million, or 52%, and $199.5 million, or 54%, when compared to the same periods in the prior year. The lower level of auction commission revenues is principally due to decreases of $1.2 billion, or 66%, and $1.7 billion, or 67%, in Net Auction Sales for the three and six months ended June 30, 2009 and 2008, respectively. The impact of the decreases in Net Auction Sales for the three and six months ended June 30, 2009 is partially offset by improvements of 41% and 42%, respectively, in auction commission margin. See "Net Auction Sales" and "Auction Commission Margin" below for a discussion of these key performance indicators.
Specifically, the decline in Net Auction Sales for the three and six months ended June 30, 2009 is primarily attributable to:
• Decreases of $640 million, or 68%, and $980 million, or 68%, respectively, in worldwide sales of Impressionist Art and Contemporary Art. Significantly fewer works were offered at these auctions in 2009, and works sold at substantially lower prices than in 2008. Sales results for the second quarter of 2009 include the early summer sales of Contemporary Art in London from late June totaling approximately $65 million. In 2008, the equivalent sales were held in early July and resulted in third quarter Net Auction Sales of approximately $213 million.
• Decreases in second quarter sales of Asian Art ($121 million), Jewelry ($60 million), American Paintings ($54 million) and Russian Art ($51 million).
• The (RED) charity auction held in New York in February 2008, which totaled $38 million. The proceeds from this charity auction (including Sotheby's auction commission revenues) were donated to the United Nations Foundation to support HIV/AIDS relief programs in Africa conducted by the Global Fund to fight AIDS, Tuberculosis and Malaria. There was no comparable sale conducted in the first half of 2009.
Additionally, during the three and six months ended June 30, 2009, Net Auction Sales were unfavorably impacted by movements in foreign currency exchange rates, which contributed $58 million and $93 million to the overall decreases, respectively.
Auction Commission Margin - Auction commission margin represents total
auction commission revenues as a percentage of Net Auction Sales. Typically,
auction commission margins are higher for lower value works of art or
collections, while higher valued property earns lower margins. In certain
situations, auction commission margins are adversely impacted by arrangements
whereby auction commissions are shared with consignors or with Sotheby's
partners in auction guarantees. In such situations, in an effort to reduce its
financial exposure under auction guarantees, Sotheby's may: (a) share auction
commissions with consignors in order to secure high value consignments without
issuing auction guarantees or (b) enter into risk and reward sharing
arrangements with unaffiliated partners whereby Sotheby's reduces its financial
exposure under an auction guarantee in exchange for sharing the auction
commission. Sotheby's may also share auction commissions with a consignor as
part of an auction guarantee, typically in exchange for a portion of the hammer
(sale) price in excess of a negotiated amount.
Partly as a result of reduced auction commission margins in early 2008, Sotheby's implemented a buyer's premium rate increase that became effective on June 1, 2008. In salesrooms in the U.S., the buyer's premium became 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. Generally, in foreign salesrooms, these U.S. dollar thresholds were translated into an appropriate fixed local currency amount. For auction sales conducted through May 31, 2008, the buyers' premium charged was generally 25% of the hammer price on the first $20,000, 20% of the hammer price above $20,000 up to and including $500,000 and 12% of any remaining amount over $500,000.
As detailed in the table above under "Key Performance Indicators," for the three and six months ended June 30, 2009, auction commission margin increased approximately 41% (from 15.1% to 21.3%) and 42% (from 14.7% to 20.8%), respectively, when compared to the same periods in the prior year. The increases in auction commission margin versus the prior year are attributable to the following factors:
• A change in sales mix, as a substantially lower portion of Net Auction Sales in 2009 was at the high-end of Sotheby's business where auction commission margins are traditionally lower. Furthermore, auction commission margin in the first half of 2008 was negatively impacted by sales from the (RED) charity auction discussed above, as Sotheby's auction commissions for this sale were donated to the United Nations Foundation. There was no equivalent auction conducted in the first half of 2009.
• A significant decrease in the use of auction guarantees and related risk reduction arrangements and strategies in response to the downturn in the international art market, as well as the current challenging economic environment. As discussed above, when management employs such risk reduction arrangements and strategies, Sotheby's shares its auction commissions with consignors or with its partners in auction guarantees.
• The impact of the increased buyer's premium rate structure that became effective in June 2008, as outlined above.
In response to the downturn in the international art market that began in September 2008, as well as the current challenging economic environment, Sotheby's has substantially reduced its use of auction guarantees for sales occurring in 2009 when compared to the comparable sales occurring in 2008. Sotheby's expects to continue to significantly limit its use of auction guarantees for the foreseeable future. (See statement on Forward Looking Statements.)
For the three and six months ended June 30, 2009, principal activity losses decreased $10.8 million and $11.6 million, respectively, when compared to the same periods in the prior year. This improvement is attributable to the impact of significant losses recognized in the second quarter of 2008 related to property offered and sold under one auction guarantee. There were no comparable losses in 2009.
Finance Revenues
For the three and six months ended June 30, 2009, Finance revenues decreased $1.4 million, or 39%, and $2.5 million, or 35%, respectively, when compared to the same periods in the prior year. These decreases are principally due to lower benchmark interest rates and lower average loan portfolio balances in the periods. (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 Sotheby's Auction segment, which are eliminated in consolidation. See Note 4 of Notes to Condensed Consolidated Financial Statements.)
Dealer Segment Results
Dealer revenues consist of revenues earned from the sale of property held by Noortman Master Paintings and objects purchased by Sotheby's for investment purposes, as well as Sotheby's share of gains or losses resulting from the sale of property purchased by art dealers through unsecured loans from Sotheby's. 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 revenues, cost of sales and gross profit (loss) for the Dealer segment for the three and six months ended June 30, 2009 and 2008 (in thousands of dollars):
Three Months Ended
June 30, Favorable / (Unfavorable)
---------------------- -------------------------------
2009 2008 $ Change % Change
---------- --------- --------------- ------------
. . .
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