SUPPLEMENTAL FINANCIAL INFORMATION FOR THE SIX MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017

Transcription

1 SUPPLEMENTAL FINANCIAL INFORMATION FOR THE SIX MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017 November 1, 2018 The following presentation provides supplemental financial information for the six month periods ended September 30, 2018 and This presentation includes information derived from our consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) and presented in our quarterly and annual filings with the U.S. Securities and Exchange Commission (SEC). In this presentation, we also use non-gaap financial measures. The definitions of these non-gaap financial measures and the reconciliations to their most directly comparable GAAP financial measures are included in Appendix C to this presentation. We urge you to read this presentation in conjunction with the information included in our most recently filed quarterly report on Form 10-Q and our most recent Form 10-K covering the years ended December 31, 2017 and In addition, refer to our Press Release announcing our Third Quarter 2018 Financial Results. All our Press Releases and SEC filings are available on our web site at 1

2 SEASONALITY The global art auction market has two principal selling seasons, which generally occur in the second and fourth quarters of the year. In the aggregate, second and fourth quarter Net Auction Sales represented 80% and 82% of our total annual Net Auction Sales in 2017 and 2016, respectively, with auction commission revenues comprising approximately comprising approximately 66% and 75% of our total revenues in each of those years, respectively. Accordingly, our financial results are seasonal, with peak revenues and operating income generally occurring in the second and fourth quarters. Consequently, first and third quarter results have historically reflected lower revenues when compared to the second and fourth quarters and, typically, a net loss due to the fixed nature of many of our operating expenses. In quarterly reporting periods, the comparison of our results between reporting periods can be significantly influenced by a number of factors, such as changes in the timing of when certain auctions occur, the level of non-recurring single-owner auction sale events, the level and timing of individually negotiated private sale transactions, and changes in certain accounting estimates that rely upon forecasted results such as variable incentive and share-based compensation expense and our estimated annual effective income tax rate. Accordingly, when evaluating our performance, we believe that investors should also consider results for rolling six and twelve month periods, which better reflect the business cycle of the global art auction market. 2

3 ROLLING SIX MONTHS ENDED SEPTEMBER 30, 2018 AND 2017 (In Thousands, Except Per Share Data and Percentage Information) Variance Six Months Ended September 30, $/% % Revenues: Agency commissions and fees $ 387,600 $ 383,032 $ 4,568 1% Inventory sales 46, ,438 (54,834) (54%) Finance 21,064 25,056 (3,992) (16%) Other 9,529 10,341 (812) (8%) Total revenues 464, ,867 (55,070) (11%) Expenses: Agency direct costs 79,071 73,777 5,294 7% Cost of inventory sales 48, ,989 (52,253) (52%) Cost of finance revenues (a) 1,793 11,132 (9,339) (84%) Other expenses 282, ,870 21,168 8% Total expenses 411, ,768 (35,130) (8%) Operating income 53,159 73,099 (19,940) (27%) Net interest expense (a) (17,994) (14,994) (3,000) (20%) Write-off of credit facility fees (3,982) (3,982) N/A Non-operating income 5,621 4,074 1,547 38% Income before taxes 36,804 62,179 (25,375) (41%) Income tax expense 10,079 10,140 (61) (1%) Equity in earnings of investees 2,710 1,367 1,343 98% Net income 29,435 53,406 (23,971) (45%) Less: Net loss attributable to noncontrolling interest (9) (6) (3) (50%) Net income attributable to Sotheby's $ 29,444 $ 53,412 $ (23,968) (45%) Basic earnings per share - Sotheby s common shareholders $ 0.57 $ 1.00 $ (0.43) (43%) Diluted earnings per share - Sotheby s common shareholders $ 0.56 $ 0.99 $ (0.43) (43%) Statistical Metrics (b): Aggregate Auction Sales $ 2,476,465 $ 2,187,277 $ 289,188 13% Net Auction Sales $ 2,080,584 $ 1,830,053 $ 250,531 14% Auction Commission Margin 15.0% 17.0% (2.0%) N/A Private Sales $ 428,812 $ 309,331 $ 119,481 39% Consolidated Sales $ 2,951,881 $ 2,598,046 $ 353,835 14% Non-GAAP Financial Measures (c): Adjusted Expenses $ 274,738 $ 260,870 $ 13,868 5% Adjusted Operating Income $ 60,459 $ 73,099 $ (12,640) (17%) Adjusted Net Income $ 37,236 $ 54,054 $ (16,818) (31%) Adjusted Diluted Earnings Per Share $ 0.71 $ 1.00 $ (0.29) (29%) EBITDA $ 70,574 $ 89,929 $ (19,355) (22%) Adjusted EBITDA $ 80,286 $ 90,969 $ (10,683) (12%) Refer to the appendices included in this presentation for definitions and any relevant reconciliations related to: (a) Financial Statement Line Items; (b) Statistical Metrics, and; (c) Non-GAAP Financial Measures. 3

4 TOTAL EXPENSES ROLLING SIX MONTHS ENDED SEPTEMBER 30, 2018 AND 2017 (In Thousands) Variance Six Months Ended September 30, $ % Agency direct costs $ 79,071 $ 73,777 $ 5,294 7% Cost of inventory sales 48, ,989 (52,253) (52%) Cost of finance revenues 1,793 11,132 (9,339) (84%) Marketing 11,100 11,884 (784) (7%) Salaries and related 163, ,758 12,234 8% General and administrative 87,962 85,845 2,117 2% Depreciation and amortization 13,057 11,383 1,674 15% Restructuring charges 5,927 5,927 N/A Total expenses $ 411,638 $ 446,768 $ (35,130) (8%) 4

5 EARNINGS PER SHARE ROLLING SIX MONTHS ENDED SEPTEMBER 30, 2018 AND 2017 (In Thousands, Except Per Share Data) Six Months Ended September 30, Basic: Numerator: Net income attributable to Sotheby s $ 29,444 $ 53,412 Less: Net income attributable to participating securities Net income attributable to Sotheby s common shareholders $ 29,017 $ 52,610 Denominator: Weighted average basic shares outstanding 51,354 52,624 Basic earnings per share - Sotheby s common shareholders $ 0.57 $ 1.00 Diluted: Numerator: Net income attributable to Sotheby s $ 29,444 $ 53,412 Less: Net income attributable to participating securities Net income attributable to Sotheby s common shareholders $ 29,017 $ 52,610 Denominator: Weighted average common shares outstanding 51,354 52,624 Weighted average effect of Sotheby's dilutive potential common shares: Performance share units Deferred stock units Stock options 28 Weighted average dilutive potential common shares outstanding Weighted average diluted shares outstanding 51,667 52,960 Diluted earnings per share - Sotheby s common shareholders $ 0.56 $

6 APPENDIX A Financial Statement Line Item Definitions (i) (ii) Cost of Finance Revenues: Our previous credit agreements provided for dedicated asset-based revolving credit facilities for the Agency segment and Sotheby's Financial Services ("SFS"). The SFS Credit Facility was used to fund a significant portion of client loans. Accordingly, any borrowing costs associated with the SFS Credit Facility were recorded within cost of finance revenues in our Condensed Consolidated Statements of Operations. In September 2017, we modified our cash management strategy in order to reduce borrowing costs by applying excess cash balances against revolver credit facility borrowings. On June 26, 2018, we refinanced our previous credit agreements. The new credit agreement combined these credit facilities into one asset-based revolving credit facility. Subsequent to this refinancing and the resulting elimination of the SFS Credit Facility, the SFS loan portfolio is no longer being directly funded with revolving credit facility borrowings. Accordingly, all borrowing costs associated with our new revolving credit facility are recorded as interest expense in our Condensed Consolidated Statements of Operations. Net Interest Expense: Represents interest expense principally attributable to long-term debt and, beginning in the third quarter of 2018, revolving credit facility borrowings, less non-operating interest income. 6

7 APPENDIX B Statistical Metric Definitions (i) (ii) (iii) (iv) (v) Aggregate Auction Sales: Represents the total hammer (sale) price of property sold at auction plus buyer's premium, excluding amounts related to the sale of our inventory at auction, which are reported withing inventory sales. Net Auction Sales: Represents the total hammer (sale) price of property sold at auction, excluding amounts related to the sale of our inventory at auction, which are reported withing inventory sales. Auction Commission Margin: Represents total auction commissions, net of fees owed to the counterparties in auction guarantee risk sharing arrangements and fees owed to third parties who introduce us to auction consignors (which are recorded within Auction direct costs), as a percentage of Net Auction Sales. Private Sales: Represents the total purchase price of property sold in private sales that we have brokered, including our commissions. Because private sales are individually negotiated, non-recurring transactions, the volume and value of transactions completed can vary from period to period, with associated variability in revenues. Consolidated Sales: Represents the sum of Aggregate Auction Sales, Private Sales, and inventory sales. 7

8 APPENDIX C Use of Non-GAAP Financial Measures: GAAP refers to generally accepted accounting principles in the United States of America. Included in this presentation are financial measures presented in accordance with GAAP and also on a non-gaap basis. Adjusted Expenses, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted Earnings Per Share, EBITDA, and Adjusted EBITDA are supplemental financial measures that are not required by or presented in accordance with GAAP. To the extent applicable, these non-gaap financial measure exclude the effect of the following items, as detailed in the accompanying reconciliation tables below: (i) (ii) (iii) Restructuring charges; Accelerated depreciation charges related to certain fixed assets that have been removed from service in connection with enhancements being made to the York Property; Credits related to contractual severance agreements entered into with certain former employees; (iv) The write-off of unamortized credit facility fees related to our previous credit agreement, which was refinanced in the second quarter of 2018; (v) The charge resulting from the concurrent amendments to the York Property Mortgage and the related interest rate collar in the second quarter of 2017; (vi) The net charge associated with the effective settlement of an income tax audit; and (vii) Adjustments made to the net income tax expense recorded in the fourth quarter of 2017 upon the enactment of the U.S. Tax Cuts and Jobs Act. 8

9 APPENDIX C Adjusted Expenses, as reconciled below, also excludes agency direct costs, the cost of inventory sales, and the cost of finance revenues, all of which are variable in nature and can vary significantly from period-to-period. In the second quarter of 2018, we updated our definition of Adjusted Expenses to exclude agency direct costs as a result of the adoption of Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers. As a result of the adoption of ASC 606, the following items previously reported on a net basis within revenues are now reported on a gross basis within agency direct costs: (i) fees owed to the counterparties in auction guarantee risk sharing arrangements and (ii) fees owed to third parties who introduce us to auction or private sale consignors. This change in presentation has added to the variability of our agency direct costs. Adjusted Expenses for the six months ended September 30, 2017 has been recast to reflect the retrospective adoption of ASC 606. Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted Earnings Per Share, EBITDA, and Adjusted EBITDA are important supplemental measures used in our financial and operational decision making processes, for internal reporting, and as part of our forecasting and budgeting processes, as they provide helpful measures of our core operations. These measures allow us to view operating trends, perform analytical comparisons, and benchmark performance between periods. We also believe that these measures may be used by securities analysts, investors, financial institutions, and other interested parties in their evaluation of our performance. We caution users of our financial statements that amounts presented in accordance with our definitions of these non-gaap financial measures as provided below may not be comparable to similar measures disclosed by other companies because not all companies and analysts calculate such measures in the same manner. A reconciliation of the non-gaap measures noted above to the most comparable measures reported in accordance with GAAP is presented in the following tables. 9

10 APPENDIX C (In Thousands of Dollars, Except Percentage Information) Six Months Ended September 30, Total expenses $ 411,638 $ 446,768 Subtract: Agency direct costs 79,071 73,777 Subtract: Cost of inventory sales 48, ,989 Subtract: Cost of finance revenues 1,793 11,132 Subtract: Restructuring charges 5,927 Subtract: Accelerated depreciation charges 1,570 Subtract: Contractual severance agreement credits (197) Adjusted Expenses $ 274,738 $ 260,870 Variance versus prior period - $ $ 13,868 Variance versus prior period - % 5% Six Months Ended September 30, Operating income $ 53,159 $ 73,099 Add: Restructuring charges 5,927 Add: Accelerated depreciation charges 1,570 Add: Contractual severance agreement credits (197) Adjusted Operating Income $ 60,459 $ 73,099 Variance versus prior period - $ $ (12,640) Variance versus prior period - % (17%) 10

11 APPENDIX C (In Thousands of Dollars, Except Percentage Information) Six Months Ended September 30, Net income attributable to Sotheby's $ 29,444 $ 53,412 Add: Restructuring charges, net of tax of ($1,462) and $0 4,465 Add: Accelerated depreciation charges, net of tax of ($390) and $0 1,180 Add: Contractual severance agreement credits, net of tax of $49 and $0 (148) Add: Write-off of credit facility fees, net of tax of ($922) and $0 3,060 Add: Charge related to interest rate collar amendment, net of tax of $0 and ($398) 642 Add: Net charge associated with the effective settlement of an income tax audit 7,062 Subtract: Net income tax benefit related to U.S. Tax Cuts and Jobs Act 7,827 Adjusted Net Income $ 37,236 $ 54,054 Variance versus prior period - $ $ (16,818) Variance versus prior period - % (31%) The income tax effect of each line item in the reconciliation of net income attributable to Sotheby's to Adjusted Net Income is computed using the relevant jurisdictional tax rate for each item. 11

12 APPENDIX C (In Thousands of Dollars, Except Per Share Data and Percentage Information) Six Months Ended September 30, Diluted earnings per share $ 0.56 $ 0.99 Add: Restructuring charges, per share 0.08 Add: Accelerated depreciation charges, per share 0.02 Add: Write-off of credit facility fees, per share 0.06 Add: Charge related to interest rate collar amendment, per share 0.01 Add: Net charge associated with the effective settlement of an income tax audit, per share 0.14 Subtract: Net income tax benefit related to U.S. Tax Cuts and Jobs Act, per share 0.15 Adjusted Diluted Earnings Per Share $ 0.71 $ 1.00 Variance versus prior period - $ $ (0.29) Variance versus prior period - % (29%) Six Months Ended September 30, Net income attributable to Sotheby's $ 29,444 $ 53,412 Add: Income tax expense 10,079 10,140 Add: Net interest expense 17,994 14,994 Add: Depreciation and amortization 13,057 11,383 EBITDA 70,574 89,929 Add: Restructuring charges 5,927 Add: Write-off of credit facility fees 3,982 Add: Contractual severance agreement credits (197) Add: Charge related to interest rate collar amendment 1,040 Adjusted EBITDA $ 80,286 $ 90,969 Variance versus prior period - $ $ (10,683) Variance versus prior period - % (12%) 12