NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
Basis of Presentation
Accounting Principles
—The unaudited Condensed Consolidated Financial Statements included herein have been prepared by Sotheby’s (the "Company" or "Sotheby's") in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. In the opinion of management, the unaudited Condensed Consolidated Financial Statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year (see Note 2). It is suggested that these Condensed Consolidated Financial Statements be read in conjunction with the information included in Sotheby’s 2015 Form 10-K filed with the SEC on February 26, 2016.
Principles of Consolidation
—The unaudited Condensed Consolidated Financial Statements include the accounts of Sotheby’s wholly-owned subsidiaries and Sotheby's (Beijing) Auction Co., Ltd. ("Sotheby's Beijing"), a joint venture formed in 2012 in which Sotheby's has a controlling
80%
ownership interest. The net (loss) income attributable to the minority owner of Sotheby's Beijing is reported as "Net (Loss) Income Attributable to Noncontrolling Interest" in the Condensed Consolidated Statements of Operations and the non-controlling
20%
ownership interest is reported as "Noncontrolling Interest" within the Equity section of the Condensed Consolidated Balance Sheets. Intercompany transactions and balances among Sotheby's subsidiaries have been eliminated.
Equity investments through which Sotheby’s exercises significant influence over the investee, but does not control, are accounted for using the equity method. Under the equity method, Sotheby’s share of investee earnings or losses is recorded within Equity in Earnings of Investees in the Condensed Consolidated Statements of Operations. Sotheby’s interest in the net assets of its investees is recorded within Equity Method Investments on the Condensed Consolidated Balance Sheets. Sotheby's equity method investees include Acquavella Modern Art and RM Sotheby's (formerly RM Auctions), an auction house for investment-quality automobiles. Sotheby's acquired a
25%
ownership interest in RM Auctions on February 18, 2015 for
$30.7 million
. In addition to the initial
25%
ownership interest in RM Sotheby's, Sotheby’s has governance participation and a comprehensive partnership agreement to work together to drive growth in the business. Over time, Sotheby’s will have opportunities to increase its ownership stake as the partnership evolves and grows. For the
three months ended March 31, 2016
and 2015, Sotheby's results include
$0.3 million
and
$0.7 million
, respectively, of equity earnings related to RM Sotheby's.
Estimates and Assumptions
—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Adoption of Recently Issued Accounting Standards
—In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-17,
Balance Sheet Classification of Deferred Taxes
, which requires entities to present deferred tax assets and liabilities as non-current in a classified balance sheet, instead of separating them into current and non-current amounts. ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016, with early adoption permitted in any intervening interim or annual period. Sotheby's early adopted ASU 2015-17 as of December 31, 2015 on a prospective basis. Accordingly, prior period information presented in this report has not been adjusted to reflect the updated presentation of deferred tax assets and liabilities.
In April 2015, the FASB issued ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs
, and in August 2015 issued ASU 2015-15,
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.
These standards require unamortized debt issuance costs to be included as a direct deduction from the related debt liability on the balance sheet, but permit companies to continue to record unamortized debt issuance costs related to revolving credit facility arrangements as assets. Under previous guidance, all unamortized debt issuance costs were reported as assets on the balance sheet. Sotheby's adopted and applied ASU 2015-03 on a retrospective basis on its January 1, 2016 effective date. As permitted by ASU 2015-15, Sotheby's will continue to present debt issuance costs related to revolving credit facility arrangements as an asset on its balance sheet, regardless of whether there are any outstanding borrowings under the arrangement. The following tables summarize the effect of adopting ASU 2015-03 on Sotheby's previously issued financial statements (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
Condensed Consolidated Balance Sheets:
|
|
As Previously Reported
|
|
ASU 2015-03 Adjustments
|
|
As Adjusted
|
Other long-term assets
|
|
$
|
26,512
|
|
|
$
|
(10,816
|
)
|
|
$
|
15,696
|
|
York Property Mortgage, current
|
|
$
|
7,302
|
|
|
$
|
(1,010
|
)
|
|
$
|
6,292
|
|
Long-term debt, net
|
|
$
|
614,767
|
|
|
$
|
(9,806
|
)
|
|
$
|
604,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2015
|
Condensed Consolidated Balance Sheets:
|
|
As Previously Reported
|
|
ASU 2015-03 Adjustments
|
|
As Adjusted
|
Other long-term assets
|
|
$
|
19,317
|
|
|
$
|
(4,764
|
)
|
|
$
|
14,553
|
|
York Property Mortgage, current
|
|
$
|
218,642
|
|
|
$
|
(88
|
)
|
|
$
|
218,554
|
|
Long-term debt, net
|
|
$
|
300,000
|
|
|
$
|
(4,676
|
)
|
|
$
|
295,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
Condensed Consolidated Statements of Cash Flows:
|
|
As Previously Reported
|
|
ASU 2015-03 Adjustments
|
|
As Adjusted
|
Operating Activities:
|
|
|
|
|
|
|
Adjustments to reconcile net income attributable to Sotheby's to net cash used by operating activities:
|
|
|
|
|
|
|
Amortization of debt discount and issuance costs
|
|
$
|
891
|
|
|
$
|
260
|
|
|
$
|
1,151
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
Other long-term assets
|
|
$
|
(2
|
)
|
|
$
|
(260
|
)
|
|
$
|
(262
|
)
|
Net cash used by operating activities
|
|
$
|
(277,363
|
)
|
|
$
|
—
|
|
|
$
|
(277,363
|
)
|
2.
Seasonality of Business
The worldwide 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
1
represented
78%
and
79%
of total Net Auction Sales in 2015 and 2014, respectively, with auction commission revenues comprising approximately
75%
and
81%
, respectively, of Sotheby's total revenues in those years. Accordingly, Sotheby’s 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 Sotheby’s operating expenses.
___________________________________________________________________
1
Net Auction Sales represents the hammer (sale) price of property sold at auction.
3.
(Loss) Earnings Per Share
Basic (loss) earnings per share
—Basic (loss) earnings per share attributable to Sotheby's common shareholders is computed under the two-class method using the weighted average number of common shares outstanding during the period. The two-class method requires that the amount of net income attributable to participating securities be deducted from consolidated net income in the computation of basic earnings per share. In periods with a net loss, the net loss attributable to participating securities is not deducted from consolidated net loss in the computation of basic loss per share as the impact would be anti-dilutive. Sotheby's participating securities include unvested restricted stock units and unvested restricted stock shares held by employees, both of which have non-forfeitable rights to dividends. See Note 13 for information on Sotheby's share-based payment programs.
Diluted (loss) earnings per share
—Diluted (loss) earnings per share attributable to Sotheby's common shareholders is computed in a similar manner to basic (loss) earnings per share under the two-class method, using the weighted average number of common shares outstanding during the period and, if dilutive, the weighted average number of potential common shares outstanding during the period. Sotheby's potential common shares include unvested performance share units held by employees, incremental common shares issuable upon the exercise of employee stock options, and deferred stock units held by members of the Board of Directors. See Note 13 for information on Sotheby's share-based payment programs.
For the three months ended
March 31, 2016
,
2.6 million
potential common shares related to share-based payment awards were excluded from the computation of diluted loss per share because their inclusion in the computation would be anti-dilutive in a loss period. For the three months ended
March 31, 2015
,
1.3 million
potential common shares related to unvested performance share units were excluded from the computation of diluted earnings per share because the financial performance or stock price targets inherent in such awards were not achieved as of the balance sheet date.
The table below summarizes the computation of basic and diluted (loss) earnings per share for the
three
months ended
March 31, 2016
and
2015
(in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2016
|
|
2015
|
|
Basic:
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net (loss) income attributable to Sotheby’s
|
|
$
|
(25,884
|
)
|
|
$
|
5,202
|
|
|
Less: Net income attributable to participating securities
|
|
—
|
|
|
41
|
|
|
Net (loss) income attributable to Sotheby’s common shareholders
|
|
$
|
(25,884
|
)
|
|
$
|
5,161
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
63,022
|
|
|
69,090
|
|
|
Basic (loss) earnings per share - Sotheby’s common shareholders
|
|
$
|
(0.41
|
)
|
|
$
|
0.07
|
|
|
Diluted
:
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net (loss) income attributable to Sotheby’s
|
|
$
|
(25,884
|
)
|
|
$
|
5,202
|
|
|
Less: Net income attributable to participating securities
|
|
—
|
|
|
41
|
|
|
Net (loss) income attributable to Sotheby’s common shareholders
|
|
$
|
(25,884
|
)
|
|
$
|
5,161
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
63,022
|
|
|
69,090
|
|
|
Weighted average effect of Sotheby's dilutive potential common shares:
|
|
|
|
|
|
Performance share units
|
|
—
|
|
|
440
|
|
|
Deferred stock units
|
|
—
|
|
|
155
|
|
|
Stock options
|
|
—
|
|
|
20
|
|
|
Weighted average dilutive potential common shares outstanding
|
|
—
|
|
|
615
|
|
|
Weighted average diluted shares outstanding
|
|
63,022
|
|
|
69,705
|
|
|
Diluted (loss) earnings per share - Sotheby’s common shareholders
|
|
$
|
(0.41
|
)
|
|
$
|
0.07
|
|
The decrease in weighted average basic and diluted shares outstanding between the two reporting periods is due to Common Stock repurchases executed during the twelve month period ended March 31, 2016. See Note 12 for additional information on Sotheby's share repurchase program.
4.
Segment Reporting
Sotheby’s is a global art business whose operations are organized under
two
segments—the Agency segment and the Finance segment, which does business as and is referred to in this report as Sotheby's Financial Services (or "SFS"). The Agency segment earns commissions by matching buyers and sellers of authenticated fine art, decorative art, jewelry, wine, and collectibles (collectively, "art" or "works of art" or "artwork" or "property") through the auction or private sale process. To a much lesser extent, Agency segment activities also include the sale of artworks that are principally acquired as a consequence of the auction process, as well as the activities of RM Sotheby's, an equity investee that operates as an auction house for investment-quality automobiles. Sotheby's Financial Services earns interest income through art-related financing activities by making loans that are secured by works of art (see Note 5).
Prior to the second quarter of 2015, Sotheby's also separately reported the results of the Principal segment, which was comprised of its dealer activities and primarily included the sale of artworks purchased opportunistically by Sotheby’s. In the second quarter of 2015, Sotheby's transitioned to its new Chief Executive Officer ("CEO") and chief operating decision maker, and the information regularly reviewed for the purpose of allocating resources and assessing performance changed, reflecting a simplified internal reporting structure which was implemented in that quarter. As a result, beginning in the second quarter of 2015, the sale of artworks purchased opportunistically by Sotheby’s is reported as part of the Agency segment. The remaining activities of the former Principal segment are reported within All Other. Such activities include Sotheby's retail wine operations, Acquavella Modern Art, an equity investee, and sales of the remaining inventory of Noortman Master Paintings, an art dealer that was owned and operated by Sotheby's from its acquisition in June 2006 until its closure in December 2013. Prior period amounts have been restated to reflect this new segment presentation.
On January 11, 2016, Sotheby's acquired certain entities comprising the business of Art Agency, Partners, a firm that provides a range of art-related services to art collectors. Through this acquisition, Sotheby's aims to grow its auction and private sale revenues within the Agency segment by enhancing its relationships with art collectors and improving its position in the fine art market, particularly in Impressionist, Modern and Contemporary Art. Also, as a result of this acquisition, Sotheby's will add a new revenue stream by integrating AAP's existing art advisory business, which is classified within All Other for segment reporting purposes. See Note 6 for additional information related to the acquisition of Art Agency, Partners.
The table below presents Sotheby’s revenues and (loss) income before taxes by segment for the
three months ended March 31, 2016
and
2015
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
Agency
|
|
SFS
|
|
All Other
|
|
Reconciling items (a)
|
|
Total
|
Revenues
|
|
$
|
85,775
|
|
|
$
|
16,480
|
|
|
$
|
6,001
|
|
|
$
|
(1,725
|
)
|
|
$
|
106,531
|
|
Segment (loss) income before taxes
|
|
$
|
(50,292
|
)
|
|
$
|
10,265
|
|
|
$
|
1,331
|
|
|
$
|
(396
|
)
|
(b)
|
$
|
(39,092
|
)
|
Three Months Ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
139,689
|
|
|
$
|
15,957
|
|
|
$
|
3,299
|
|
|
$
|
(3,270
|
)
|
|
$
|
155,675
|
|
Segment income (loss) before taxes
|
|
$
|
438
|
|
|
$
|
10,820
|
|
|
$
|
1,988
|
|
|
$
|
(5,333
|
)
|
(b)
|
$
|
7,913
|
|
|
|
(a)
|
The reconciling items related to Revenues consist principally of amounts charged by SFS to the Agency segment, including interest and facility fees related to certain loans made to Agency segment clients, as well as fees charged for term loan collateral sold at auction or privately through the Agency segment.
|
|
|
(b)
|
The reconciling items related to segment (loss) income before taxes are detailed in the table below.
|
The table below presents a reconciliation of segment (loss) income before taxes to consolidated (loss) income before taxes for the
three months ended March 31, 2016
and
2015
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
Agency
|
|
$
|
(50,292
|
)
|
|
$
|
438
|
|
SFS
|
|
10,265
|
|
|
10,820
|
|
All Other
|
|
1,331
|
|
|
1,988
|
|
Segment (loss) income before taxes
|
|
(38,696
|
)
|
|
13,246
|
|
Reconciling items:
|
|
|
|
|
CEO separation and transition costs (see Note 15)
|
|
—
|
|
|
(4,189
|
)
|
Equity in earnings of investees (a)
|
|
(396
|
)
|
|
(1,144
|
)
|
(Loss) income before taxes
|
|
$
|
(39,092
|
)
|
|
$
|
7,913
|
|
|
|
(a)
|
For segment reporting purposes, Sotheby's share of earnings related to its equity investees is included as part of segment (loss) income before taxes. However, such earnings are reported separately below (loss) income before taxes in the Condensed Consolidated Statements of Operations. For the
three months ended March 31, 2016
and
2015
, Agency segment results include
$0.3 million
and
$0.7 million
, respectively, of equity earnings related to RM Sotheby's. For the
three months ended
March 31, 2016
and
2015
, All Other includes
$0.1 million
and
$0.4 million
, respectively, of equity earnings related to Acquavella Modern Art.
|
The table below presents Sotheby's assets by segment, as well as a reconciliation of segment assets to consolidated assets as of
March 31, 2016
,
December 31, 2015
, and
March 31, 2015
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
March 31, 2015
|
Agency
|
|
$
|
1,721,815
|
|
|
$
|
2,499,441
|
|
|
$
|
1,687,248
|
|
SFS
|
|
627,330
|
|
|
721,781
|
|
|
711,862
|
|
All Other
|
|
27,174
|
|
|
25,178
|
|
|
27,887
|
|
Total segment assets
|
|
2,376,319
|
|
|
3,246,400
|
|
|
2,426,997
|
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
Deferred tax assets and income tax receivable
|
|
37,678
|
|
|
16,913
|
|
|
65,157
|
|
Consolidated assets
|
|
$
|
2,413,997
|
|
|
$
|
3,263,313
|
|
|
$
|
2,492,154
|
|
In April 2015, the FASB issued ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs
, and in August 2015 issued ASU 2015-15,
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.
These standards require unamortized debt issuance costs to be included as a direct deduction from the related debt liability on the balance sheet, but permit companies to continue to record unamortized debt issuance costs related to revolving credit facility arrangements as assets. Under previous guidance, all unamortized debt issuance costs were reported as assets on the balance sheet. Sotheby's adopted and applied ASU 2015-03 on a retrospective basis on its January 1, 2016 effective date. As permitted by ASU 2015-15, Sotheby's will continue to present debt issuance costs related to revolving credit facility arrangements as an asset on its balance sheet, regardless of whether there are any outstanding borrowings under the arrangement. Prior period balances of Agency segment assets presented in the table above, which previously included unamortized debt issuance costs related to long-term debt, have been adjusted to conform to the current period presentation. See Note 1 for additional information on the effects of the retrospective adoption of ASU 2015-03.
5.
Receivables
Accounts Receivable (Net)
—Through its Agency segment, Sotheby's accepts property on consignment and matches sellers, also known as consignors, to buyers through the auction or private sale process. Following an auction or private sale, Sotheby's invoices the buyer for the purchase price of the property (including any commissions owed by the buyer), collects payment from the buyer, and remits to the consignor the net sale proceeds after deducting its commissions, expenses and applicable taxes and royalties.
Under Sotheby’s standard auction payment terms, payments from buyers are due no more than
30
days from the sale date and payments to consignors are due
35
days from the sale date. For private sales, payment from the buyer is typically due on the sale date, with the net sale proceeds being due to the consignor shortly thereafter. Extended payment terms are sometimes provided to an auction or private sale buyer. For auctions, the extent to which extended payment terms are provided to buyers can vary considerably from selling season to selling season. Extended payment terms typically extend the payment due date to a date that is no longer than one year from the sale date. In limited circumstances, the payment due date may be extended to a date that is beyond one year from the sale date. When providing extended payment terms, Sotheby’s attempts to match the timing of cash receipt from the buyer with the timing of payment to the consignor, but is not always successful in doing so. All extended payment term arrangements are approved by management under Sotheby's internal corporate governance policy.
In the limited circumstances when the payment due date is extended to a date that is beyond one year from the sale date, if the consignor does not provide Sotheby's matched payment terms (i.e., Sotheby's pays the consignor prior to receiving payment from the buyer), the receivable balance is reclassified from Accounts Receivable to Notes Receivable in the Condensed Consolidated Balance Sheets. As of
March 31, 2016
,
December 31, 2015
, and
March 31, 2015
, Notes Receivable within the Agency segment included
$23.9 million
,
$24.3 million
, and
$22.9 million
respectively, of such balances that have been reclassified from Accounts Receivable.
Under the standard terms and conditions of its auction and private sales, Sotheby’s is not obligated to pay the consignor for property that has not been paid for by the buyer. If a buyer defaults on payment, the sale may be cancelled, and the property will be returned to the consignor. Alternatively, the consignor may reoffer the property at a future Sotheby's auction or negotiate a private sale with Sotheby's acting as its agent. In certain instances and subject to management approval under Sotheby’s internal corporate governance policy, the consignor may be paid the net sale proceeds before payment is collected from the buyer and/or the buyer may be allowed to take possession of the property before making payment. In situations when the buyer takes possession of the property before making payment, Sotheby’s is liable to the seller for the net sales proceeds whether or not the buyer makes payment. As of
March 31, 2016
,
December 31, 2015
, and
March 31, 2015
, Accounts Receivable (net) included
$141.1 million
,
$165.2 million
, and
$134.2 million
, respectively, related to situations when Sotheby's paid the consignor all or a portion of the net sales proceeds before payment was collected from the buyer. As of
March 31, 2016
,
December 31, 2015
, and
March 31, 2015
, Accounts Receivable (net) also included
$38.8 million
,
$93.1 million
, and
$48.7 million
, respectively, related to situations when the buyer was allowed to take possession of the property before making payment to Sotheby’s.
Notes Receivable (Sotheby's Financial Services)
—SFS provides certain collectors and art dealers with financing secured by works of art that Sotheby's either has in its possession or permits borrowers to possess. SFS generally makes
two
types of secured loans: (1) advances secured by consigned property where the borrowers are contractually committed, in the near term, to sell the property through Sotheby's Agency segment (a "consignor advance") and (2) general purpose term loans secured by property not presently intended for sale (a "term loan").
Consignor advances allow sellers to receive funds upon consignment for an auction or private sale that will typically occur up to
one
year in the future and normally have short-term maturities. Term loans allow Sotheby's to establish or enhance mutually beneficial relationships with borrowers and may generate future auction or private sale consignments and/or purchases. In certain situations, term loans are also made to reference accounts receivable generated by clients' auction and private sale purchases. Term loans normally have initial maturities of up to
two
years and typically carry a variable market rate of interest.
The lending activities of SFS are predominantly funded with borrowings drawn from a dedicated revolving credit facility. Cash balances are also used to fund a portion of the SFS loan portfolio. See Note 8 for information related to the SFS Credit Facility.
As of
March 31, 2016
,
December 31, 2015
, and
March 31, 2015
, Notes Receivable (net) related to SFS consisted of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
|
March 31,
2015
|
Consignor advances
|
|
$
|
23,149
|
|
|
$
|
30,180
|
|
|
$
|
38,190
|
|
Term loans
|
|
587,509
|
|
|
652,078
|
|
|
661,657
|
|
Total
|
|
$
|
610,658
|
|
|
$
|
682,258
|
|
|
$
|
699,847
|
|
As of
March 31, 2016
,
December 31, 2015
, and
March 31, 2015
, the table above includes
$110.2 million
,
$108.8 million
, and
$112 million
, respectively of term loans made by SFS to refinance clients' auction and private sale purchases. For the
three
months ended
March 31, 2016
and
March 31, 2015
, SFS made
$6.1 million
and
$32.3 million
, respectively, of such loans. These loans are accounted for as non-cash transfers between Accounts Receivable (net) and Notes Receivable (net) and are, therefore, not reflected as the funding of Notes Receivable within Investing Activities in the Condensed Consolidated Statements of Cash Flows. Upon repayment, the cash received in settlement of such loans is classified within Operating Activities in the Condensed Consolidated Statements of Cash Flows. For the three months ended
March 31, 2016
and
March 31, 2015
, such repayments totaled
$4.7 million
and
$10.7 million
, respectively.
The collection of secured loans can be adversely impacted by a decline in the art market in general or in the value of the collateral, which is concentrated within certain collecting categories. In addition, in situations when there are competing claims on the collateral and/or when a borrower becomes subject to bankruptcy or insolvency laws, Sotheby’s ability to realize on its collateral may be limited or delayed.
Management aims to mitigate the risks associated with potential collateral devaluation by targeting a
50%
loan to value ("LTV") ratio (i.e., the principal loan amount divided by the low auction estimate of the collateral). Loans may also be made with LTV ratios between
51%
and
60%
as the SFS Credit Facility permits borrowings on loans with an LTV of up to
60%
. In rare circumstances, loans are also made at an initial LTV ratio higher than
60%
. In addition, the LTV ratio of certain loans may increase above the
50%
target due to decreases in the low auction estimates of the collateral. The revaluation of loan collateral is performed by Sotheby’s specialists on a semi-annual basis or more frequently if there is a material change in circumstances related to the loan, the value of the collateral, the disposal plans for the collateral, or if an event of default occurs. Management believes that the LTV ratio is a critical credit quality indicator for the secured loans made by SFS.
The table below provides the aggregate LTV ratio for the SFS loan portfolio as of
March 31, 2016
,
December 31, 2015
, and
March 31, 2015
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
|
March 31,
2015
|
Secured loans
|
|
$
|
610,658
|
|
|
$
|
682,258
|
|
|
$
|
699,847
|
|
Low auction estimate of collateral
|
|
$
|
1,327,493
|
|
|
$
|
1,380,022
|
|
|
$
|
1,444,468
|
|
Aggregate LTV ratio
|
|
46
|
%
|
|
49
|
%
|
|
48
|
%
|
The table below provides the aggregate LTV ratio for secured loans made by SFS with an LTV ratio above
50%
as of
March 31, 2016
,
December 31, 2015
, and
March 31, 2015
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
|
March 31,
2015
|
Secured loans with an LTV ratio above 50%
|
|
$
|
268,348
|
|
|
$
|
354,049
|
|
|
$
|
432,967
|
|
Low auction estimate of collateral related to secured loans with an LTV ratio above 50%
|
|
$
|
490,103
|
|
|
$
|
626,829
|
|
|
$
|
781,387
|
|
Aggregate LTV ratio of secured loans with an LTV ratio above 50%
|
|
55
|
%
|
|
56
|
%
|
|
55
|
%
|
The table below provides other credit quality information regarding secured loans made by SFS as of
March 31, 2016
,
December 31, 2015
, and
March 31, 2015
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
|
March 31,
2015
|
Total secured loans
|
|
$
|
610,658
|
|
|
$
|
682,258
|
|
|
$
|
699,847
|
|
Loans past due
|
|
$
|
5,310
|
|
|
$
|
11,819
|
|
|
$
|
16,269
|
|
Loans more than 90 days past due
|
|
$
|
1,328
|
|
|
$
|
7,828
|
|
|
$
|
10,000
|
|
Non-accrual loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
Allowance for credit losses for impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Allowance for credit losses based on historical data
|
|
1,445
|
|
|
1,458
|
|
|
1,252
|
|
Total allowance for credit losses - secured loans
|
|
$
|
1,445
|
|
|
$
|
1,458
|
|
|
$
|
1,252
|
|
Management considers a loan to be past due when principal payments are not paid in accordance with the stated terms of the loan. As of
March 31, 2016
,
$5.3 million
of the Notes Receivable (net) balance was considered to be past due, of which
$1.3 million
was more than 90 days past due. The collateral securing these loans has low auction estimates of approximately
$22.7 million
and
$7.5 million
, respectively, resulting in an LTV ratio of approximately
23%
and
18%
, respectively. Sotheby's is continuing to accrue interest on these past due loans. In consideration of payments received to-date in the second quarter of 2016, the collateral value related to these loans, current collateral disposal plans, and negotiations with the borrowers, management believes that the principal and interest amounts due for these loans will be collected.
A non-accrual loan is a loan for which future Finance revenue is not recorded due to management’s determination that it is probable that future interest on the loan is not collectible. Any cash receipts subsequently received on non-accrual loans are first applied to reduce the recorded principal balance of the loan, with any proceeds in excess of the principal balance then applied to interest owed by the borrower. The recognition of Finance revenue may resume on a non-accrual loan if sufficient additional collateral is provided by the borrower or if management becomes aware of other circumstances that indicate that it is probable that the borrower will make future interest payments on the loan. As of
March 31, 2016
,
December 31, 2015
, and
March 31, 2015
, there were
no
non-accrual loans outstanding.
A loan is considered to be impaired when management determines that it is probable that a portion of the principal and interest owed by the borrower will not be recovered after taking into account the estimated realizable value of the collateral securing the loan, as well as the ability of the borrower to repay any shortfall between the value of the collateral and the amount of the loan. If a loan is considered to be impaired, Finance revenue is no longer recognized and bad debt expense is recorded for any principal or accrued interest that is deemed uncollectible. As of
March 31, 2016
,
December 31, 2015
, and
March 31, 2015
, there were
no
impaired loans outstanding.
During the period January 1, 2016 to
March 31, 2016
, activity related to the Allowance for Credit Losses was as follows (in thousands of dollars):
|
|
|
|
|
Allowance for credit losses as of January 1, 2016
|
$
|
1,458
|
|
Change in loan loss provision
|
(13
|
)
|
Allowance for credit losses as of March 31, 2016
|
$
|
1,445
|
|
As of
March 31, 2016
, unfunded commitments to extend additional credit through SFS were approximately
$10 million
.
Notes Receivable (Agency Segment)
—Sotheby’s is obligated under the terms of certain auction guarantees to advance a portion of the guaranteed amount prior to the auction. In addition, in certain limited situations, the Agency segment will also provide advances to consignors that are secured by property scheduled to be offered at auction in the near term. Such auction guarantee and Agency segment consignor advances are recorded on the Condensed Consolidated Balance Sheets within Notes Receivable (net). As of
March 31, 2016
and
March 31, 2015
, auction guarantee advances outstanding totaled
$2 million
and
$25 million
, respectively. There were
no
auction guarantee advances outstanding as of December 31, 2015. There were
no
Agency segment consignor advances outstanding for any of the reporting periods. See Note 11 for additional information related to auction guarantees.
In the limited circumstances when the payment due date for an auction or private sale receivable is extended to a date that is beyond one year from the sale date, if the consignor does not provide Sotheby's matched payment terms, the receivable balance is reclassified from Accounts Receivable (net) to Notes Receivable (net) in the Condensed Consolidated Balance Sheets. As of
March 31, 2016
, and
December 31, 2015
, Notes Receivable (net) within the Agency segment included
$23.9 million
and
$24.3 million
, respectively, of such amounts reclassified from Accounts Receivable (net), against which Sotheby's holds approximately
$7 million
of collateral. As of
March 31, 2015
, Notes Receivable (net) within the Agency segment included
$22.9 million
, against which Sotheby's held
$3.7 million
of collateral. These Notes Receivable are accounted for as non-cash transfers between Accounts Receivable (net) and Notes Receivable (net) and are, therefore, not reflected within Investing Activities in the Condensed Consolidated Statements of Cash Flows. Upon repayment, the cash received in settlement of such Notes Receivable is classified within Operating Activities in the Condensed Consolidated Statements of Cash Flows.
Under certain circumstances, Sotheby's provides loans to art dealers to finance the purchase of works of art. In these situations, Sotheby's acquires a partial ownership interest or a security interest in the purchased property in addition to providing the loan. Upon the eventual sale of the property acquired, the loan is repaid. As of
March 31, 2016
,
December 31, 2015
, and
March 31, 2015
, such loans totaled
$4.2 million
,
$4.2 million
, and
$4.7 million
, respectively. Sotheby's is no longer accruing interest with respect to one of these loans with a balance of
$2.1 million
, but management believes that this balance is collectible.
Notes Receivable (Other)
—In the second quarter of 2013, Sotheby's sold its interest in an equity method investee for
$4.3 million
. The sale price was funded by an upfront cash payment to Sotheby's of
$0.8 million
and the issuance of a
$3.5 million
unsecured loan. This loan matures in December 2018, has a variable market rate of interest, and requires monthly payments during the loan term. As of
March 31, 2016
,
December 31, 2015
, and
March 31, 2015
, the carrying value of this loan was approximately
$2.4 million
,
$2.4 million
, and
$2.7 million
, respectively.
6.
Acquisition of Art Agency, Partners
On January 11, 2016, Sotheby's acquired certain entities comprising the business of Art Agency, Partners ("AAP"), a firm that provides a range of art-related services to art collectors, for initial cash consideration of
$50 million
. This initial cash payment is subject to customary adjustment pursuant to the terms of the underlying purchase agreement. Through this acquisition, Sotheby's aims to grow its auction and private sale revenues by enhancing its relationships with art collectors and improving its position in the fine art market, particularly in Impressionist, Modern and Contemporary Art. Also, as a result of this acquisition, Sotheby's will add a new revenue stream by integrating AAP's existing art advisory business, providing a new avenue for growth.
Sotheby's has agreed to make earn-out payments to the former owners of AAP not to exceed
$35 million
in the aggregate over the next
four
to
five years
, contingent on the achievement of a minimum level of financial performance in the Agency segment within the Impressionist, Modern and Contemporary Art collecting categories, as well as from AAP's existing art advisory business. For accounting purposes, the earn-out payments are recorded as compensation expense within Salaries and Related Costs and are being expensed on a pro-rata basis over the periods during which the financial performance targets are expected to be met. For the three months ended March 31, 2016, Sotheby's recognized
$2.2 million
of compensation expense related to this earn-out arrangement.
In connection with this acquisition, each of the former owners of AAP entered into a
five
-year employment agreement with Sotheby’s. Each employment agreement includes non-competition and non-solicitation covenants that will continue in effect for
twelve
months following the end of the period of employment.
In the first quarter of 2016, Sotheby's substantially completed the purchase price allocation related to the acquisition of AAP and will finalize the attribution of the resulting goodwill between the Agency segment and the acquired art advisory business in the second quarter of 2016 (see Note 7). The goodwill is tax deductible over a period of 15 years.
The table below summarizes the allocation of the total purchase price paid to the assets acquired and liabilities assumed as of March 31, 2016 (in thousands of dollars):
|
|
|
|
|
|
Purchase price:
|
|
|
Initial cash consideration
|
|
$
|
50,000
|
|
Working capital adjustment
|
|
1,066
|
|
Total purchase price
|
|
$
|
51,066
|
|
Allocation of purchase price:
|
|
|
Net working capital acquired
|
|
$
|
1,572
|
|
Fixed assets and other long-term assets
|
|
173
|
|
Goodwill
|
|
34,225
|
|
Intangible assets - Customer relationships (see Note 7)
|
|
11,000
|
|
Intangible assets - Non-compete agreements (see Note 7)
|
|
3,100
|
|
Deferred tax assets
|
|
996
|
|
Total purchase price
|
|
$
|
51,066
|
|
Sotheby's incurred
$0.8 million
of transaction costs in connection with the acquisition of AAP, which were recognized within General and Administrative Expenses in the fourth quarter of 2015 (
$0.6 million
) and the first quarter of 2016 (
$0.2 million
).
Revenue and earnings attributable to the acquired art advisory business during the period since the acquisition date are not material. It is impracticable to compute the amount of revenues and earnings contributed to the Agency segment as a result of the acquisition because the related activities have been integrated into the segment. Disclosure of proforma revenues and earnings attributable to the acquisition is also excluded because it is impracticable to determine since AAP was a closely-held private entity and its historical financial records are not available in U.S. GAAP.
7.
Goodwill and Intangible Assets
Goodwill
—As of March 31, 2015, all goodwill was attributable to the Agency segment. On January 11, 2016, Sotheby's acquired certain entities comprising the business of AAP, a firm that provides a range of art-related services to art collectors. In the first quarter of 2016, Sotheby's substantially completed the purchase price allocation related to the acquisition of AAP and will finalize the attribution of the resulting goodwill between the Agency segment and the acquired art advisory business in the second quarter of 2016. As of March 31, 2016, the goodwill associated with the acquisition of AAP was provisionally attributed to the Agency segment.
For the three months ended March 31, 2016 and 2015, changes in the carrying value of Goodwill were as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
Balance as of January 1
|
|
$
|
13,621
|
|
|
$
|
14,017
|
|
Goodwill acquired (see Note 6)
|
|
34,225
|
|
|
—
|
|
Foreign currency exchange rate changes
|
|
2
|
|
|
(436
|
)
|
Balance as of March 31
|
|
$
|
47,848
|
|
|
$
|
13,581
|
|
Intangible Assets
—As of March 31, 2016, December 31, 2015, and March 31, 2015, intangible assets consisted of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization Period
|
|
March 31,
2016
|
|
December 31,
2015
|
|
March 31,
2015
|
Indefinite lived intangible assets:
|
|
|
|
|
|
|
|
|
License (a)
|
|
N/A
|
|
$
|
324
|
|
|
$
|
324
|
|
|
$
|
324
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
Customer relationships - AAP (see Note 6)
|
|
8 years
|
|
11,000
|
|
|
—
|
|
|
—
|
|
Non-compete agreements - AAP (see Note 6)
|
|
6 years
|
|
3,100
|
|
|
—
|
|
|
—
|
|
Total intangible assets subject to amortization
|
|
|
|
14,100
|
|
|
—
|
|
|
—
|
|
Accumulated amortization
|
|
|
|
(472
|
)
|
|
—
|
|
|
—
|
|
Total amortizable intangible assets (net)
|
|
|
|
13,628
|
|
|
—
|
|
|
—
|
|
Total intangible assets (net)
|
|
|
|
$
|
13,952
|
|
|
$
|
324
|
|
|
$
|
324
|
|
(a) Relates to a license obtained in conjunction with the purchase of a retail wine business in 2008.
For the three months ended
March 31, 2016
, amortization expense related to intangible assets was approximately
$0.5 million
.
No
such amortization expense was recorded in the prior year period.
The estimated aggregate amortization expense for the remaining useful lives of intangible assets subject to amortization during the five-year period succeeding the
March 31, 2016
balance sheet date are as follows (in thousands of dollars):
|
|
|
|
|
|
Period
|
|
Amount
|
April 2016 to March 2017
|
|
$
|
1,892
|
|
April 2017 to March 2018
|
|
$
|
1,892
|
|
April 2018 to March 2019
|
|
$
|
1,892
|
|
April 2019 to March 2020
|
|
$
|
1,892
|
|
April 2020 to March 2021
|
|
$
|
1,892
|
|
8.
Debt
Revolving Credit Facilities
—Sotheby's and certain of its wholly-owned subsidiaries are parties to a credit agreement with an international syndicate of lenders which provides for separate dedicated revolving credit facilities for the Agency segment (the "Agency Credit Facility") and SFS (the "SFS Credit Facility") (the "Credit Agreement"). On June 15, 2015, the Credit Agreement was amended to increase the commitments under the SFS Credit Facility in order to support the lending activities of SFS and to extend the maturity date of the Credit Agreement by one year to August 22, 2020.
The Agency Credit Facility is an asset-based revolving credit facility of which the proceeds may be used primarily for the working capital and other general corporate needs of the Agency segment. The SFS Credit Facility is an asset-based revolving credit facility of which the proceeds may be used primarily for the working capital and other general corporate needs of SFS, including the funding of client loans. The Credit Agreement allows Sotheby's to transfer the proceeds of borrowings under each of the revolving credit facilities between the Agency segment and SFS.
The maximum aggregate borrowing capacity of the Credit Agreement, which is subject to a borrowing base, is approximately
$1.335 billion
, with
$300 million
committed to the Agency segment and
$1.035 billion
committed to SFS, including a
$485 million
increase that was secured for SFS in conjunction with the June 2015 amendment. The borrowing capacity of the Agency Credit Facility includes a
$50 million
incremental revolving credit facility with higher advance rates against certain assets and higher commitment and borrowing costs (the "Incremental Facility"). The Incremental Facility has a maturity date of August 22, 2016, which may be extended for an additional
365
days on an annual basis with the consent of the lenders who agree to extend their commitments under the Incremental Facility.
The Credit Agreement has a sub-limit of
$400 million
for borrowings in the U.K. and Hong Kong, with up to
$50 million
available for foreign borrowings under the Agency Credit Facility and up to
$350 million
available for foreign borrowings under the SFS Credit Facility. The Credit Agreement also includes an accordion feature, which allows Sotheby’s to seek an increase to the combined borrowing capacity of the Credit Agreement until February 23, 2020 by an amount not to exceed
$150 million
in the aggregate. Though new commitments would need to be obtained, the uncommitted accordion feature permits Sotheby’s to seek an increase to the aggregate commitments of either or both of the Agency and SFS credit facilities under an expedited arrangement process.
The borrowing base under the Agency Credit Facility is determined by a calculation that is primarily based upon a percentage of the carrying values of certain auction guarantee advances (see Note 5), a percentage of the carrying value of certain inventory, a percentage of the carrying value of certain extended payment term receivables arising from auction or private sale transactions (see Note 5), and the fair value of certain of Sotheby's trademarks. The borrowing base of the Incremental Facility is determined by a calculation that is based on a percentage of the carrying value of certain inventory and the fair value of certain of Sotheby's trademarks. The borrowing base under the SFS Credit Facility is determined by a calculation that is primarily based upon a percentage of the carrying values of certain loans in the SFS loan portfolio and the fair value of certain of Sotheby's trademarks.
The obligations under the Credit Agreements are cross-guaranteed and cross-collateralized. Domestic borrowers are jointly and severally liable for all obligations under the Credit Agreement and, subject to certain limitations, borrowers in the U.K. and Sotheby's Hong Kong Limited, are jointly and severally liable for all obligations of the foreign borrowers under the Credit Agreement. In addition, the obligations of the borrowers under the Credit Agreement are guaranteed by certain of their subsidiaries. Sotheby's obligations under the Credit Agreement are secured by liens on all or substantially all of the personal property of the entities that are borrowers and guarantors under the Credit Agreement.
The Credit Agreement contains certain customary affirmative and negative covenants including, but not limited to, limitations on capital expenditures, a
$600 million
limitation on net outstanding auction guarantees (i.e., auction guarantees less the impact of related risk and reward sharing arrangements), and limitations on the use of proceeds from borrowings under the Credit Agreement.
The Credit Agreement does not limit dividend payments and Common Stock repurchases provided that, both before and after giving effect thereto: (i) there are no events of default, (ii) the aggregate available borrowing capacity equals or exceeds
$100 million
, and (iii) the Liquidity Amount, as defined in the Credit Agreement, equals or exceeds
$200 million
. The Credit Agreement also contains certain financial covenants, which are only applicable during certain defined compliance periods. These financial covenants were not applicable for the twelve month period ended
March 31, 2016
.
Since August 2009, Sotheby’s has incurred aggregate fees of approximately
$21.4 million
in conjunction with the establishment of and subsequent amendments to the Credit Agreement. These fees are being amortized on a straight-line basis through the
August 22, 2020
maturity date of the Credit Agreement.
The following tables summarize information relevant to the Credit Agreement as of and for the periods ended
March 31, 2016
, December 31, 2015, and
March 31, 2015
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the three months ended March 31, 2016
|
|
Agency Credit Facility
|
|
SFS Credit Facility
|
|
Total
|
Maximum borrowing capacity (a)
|
|
$
|
300,000
|
|
|
$
|
1,035,000
|
|
|
$
|
1,335,000
|
|
Borrowing base
|
|
$
|
225,378
|
|
|
$
|
529,920
|
|
|
$
|
755,298
|
|
Borrowings outstanding
|
|
$
|
—
|
|
|
$
|
521,000
|
|
|
$
|
521,000
|
|
Available borrowing capacity (b)
|
|
$
|
225,378
|
|
|
$
|
8,920
|
|
|
$
|
234,298
|
|
Average borrowings outstanding
|
|
$
|
—
|
|
|
$
|
539,714
|
|
|
$
|
539,714
|
|
Borrowing costs - interest
|
|
$
|
—
|
|
(c)
|
$
|
3,673
|
|
(d)
|
$
|
3,673
|
|
Borrowing costs - fee amortization
|
|
$
|
673
|
|
(c)
|
$
|
721
|
|
(d)
|
$
|
1,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31, 2015
|
|
Agency Credit Facility
|
|
SFS Credit Facility
|
|
Total
|
Maximum borrowing capacity (a)
|
|
$
|
300,000
|
|
|
$
|
1,035,000
|
|
|
$
|
1,335,000
|
|
Borrowing base
|
|
$
|
225,642
|
|
|
$
|
547,586
|
|
|
$
|
773,228
|
|
Borrowings outstanding
|
|
$
|
—
|
|
|
$
|
541,500
|
|
|
$
|
541,500
|
|
Available borrowing capacity (b)
|
|
$
|
225,642
|
|
|
$
|
6,086
|
|
|
$
|
231,728
|
|
Average borrowings outstanding
|
|
$
|
—
|
|
|
$
|
541,004
|
|
|
$
|
541,004
|
|
Borrowing costs - interest
|
|
$
|
—
|
|
(c)
|
$
|
14,060
|
|
(d)
|
$
|
14,060
|
|
Borrowing costs - fee amortization
|
|
$
|
2,752
|
|
(c)
|
$
|
1,720
|
|
(d)
|
$
|
4,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the three months ended March 31, 2015
|
|
Agency Credit Facility
|
|
SFS Credit Facility
|
|
Total
|
Maximum borrowing capacity (a)
|
|
$
|
300,000
|
|
|
$
|
550,000
|
|
|
$
|
850,000
|
|
Borrowing base
|
|
$
|
280,107
|
|
|
$
|
550,000
|
|
|
$
|
830,107
|
|
Borrowings outstanding
|
|
$
|
—
|
|
|
$
|
501,500
|
|
|
$
|
501,500
|
|
Available borrowing capacity (b)
|
|
$
|
280,107
|
|
|
$
|
48,500
|
|
|
$
|
328,607
|
|
Average borrowings outstanding
|
|
$
|
—
|
|
|
$
|
472,872
|
|
|
$
|
472,872
|
|
Borrowing costs - interest
|
|
$
|
—
|
|
(c)
|
$
|
3,167
|
|
(d)
|
$
|
3,167
|
|
Borrowing costs - fee amortization
|
|
$
|
706
|
|
(c)
|
$
|
221
|
|
(d)
|
$
|
927
|
|
Legend:
(a) In June 2015, the Credit Agreements were amended to, among other things, increase their maximum aggregate borrowing capacity from
$850 million
to approximately
$1.335 billion
.
(b) The available borrowing capacity is calculated as the borrowing base less borrowings outstanding.
(c) Borrowing costs related to the Agency Credit Facility, which include interest and fee amortization, are reflected in the Condensed Consolidated Statements of Operations as Interest Expense. See the table below for additional information related to Interest Expense associated with the Agency Credit Facility.
(d) Borrowing costs related to the SFS Credit Facility are reflected in the Condensed Consolidated Statements of Operations within Cost of Finance Revenues. For the three months ended March 31, 2016, the year ended December 31, 2015, and the three months ended March 31, 2015, the weighted average cost of borrowings related to the SFS Credit Facility was approximately
3.3%
,
2.9%
, and
2.9%
, respectively.
Long-Term Debt
—As of
March 31, 2016
,
December 31, 2015
, and
March 31, 2015
, Long-Term Debt consisted of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
|
March 31,
2015
|
York Property Mortgage, net of unamortized debt discount and issuance costs of $6,313, $6,565, and $979
|
|
$
|
313,942
|
|
|
$
|
315,504
|
|
|
$
|
218,554
|
|
2022 Senior Notes, net of unamortized debt issuance costs of $4,124, $4,251, and $4,676
|
|
295,876
|
|
|
295,749
|
|
|
295,324
|
|
Less current portion:
|
|
|
|
|
|
|
York Property Mortgage, net of unamortized discount and debt issuance costs of $1,010, $1,010, and $979
|
|
(6,409
|
)
|
|
(6,292
|
)
|
|
(218,554
|
)
|
Total Long-Term Debt, net
|
|
$
|
603,409
|
|
|
$
|
604,961
|
|
|
$
|
295,324
|
|
On January 1, 2016, Sotheby's retrospectively adopted ASU 2015-03, which requires unamortized debt issuance costs to be included as a direct deduction from the related debt liability on the balance sheet. Under previous guidance, all unamortized debt issuance costs were reported as assets on the balance sheet. See Note 1 for information on the impact of the retrospective adoption of ASU 2015-03.
See the captioned sections below for information related to the York Property Mortgage and the 2022 Senior Notes.
York Property Mortgage
—On February 6, 2009, Sotheby's purchased the land and building located at 1334 York Avenue, New York, New York (the "York Property") from RFR Holding Corp. ("RFR") for a purchase price of
$370 million
. The York Property is home to Sotheby's sole North American auction salesroom and principal North American exhibition space, including S|2, Sotheby's private sale exhibition gallery. The York Property is also home to the U.S. operations of SFS, as well as Sotheby's corporate offices.
Sotheby's financed the
$370 million
purchase price through an initial
$50 million
cash payment made in conjunction with the signing of the related purchase and sale agreement on January 11, 2008, an
$85 million
cash payment made when the purchase was consummated on February 6, 2009, and the assumption of a
$235 million
mortgage that carried an initial annual rate of interest of approximately
5.6%
(the "Original York Property Mortgage"). The Original York Property Mortgage was due to mature on July 1, 2035, but had an optional pre-payment date of July 1, 2015, after which the annual rate of interest was scheduled to increase to
10.6%
.
On July 1, 2015, Sotheby's entered into a
seven
-year,
$325 million
mortgage loan (the "York Property Mortgage") to refinance the Original York Property Mortgage. After the repayment of the Original York Property Mortgage and the funding of all closing costs, reserves, and expenses, Sotheby's received net cash proceeds of approximately
$98 million
. The York Property Mortgage bears interest based on the
one
-month LIBOR rate (the "LIBOR rate") plus a spread of
2.25%
and is being amortized based on a
25
-year mortgage-style amortization schedule over the seven-year term of the mortgage, with the remaining principal balance of
$268.2 million
due to be paid on the July 1, 2022 maturity date.
In connection with the York Property Mortgage, Sotheby's entered into interest rate protection agreements secured by the York Property, consisting of a
two
-year interest rate swap effective as of July 1, 2015 and a
five
-year interest rate collar effective as of July 1, 2017. Both instruments have a notional amount equal to the applicable principal balance of the York Property Mortgage and have an identical amortization schedule to that of the mortgage. These interest rate protection agreements effectively hedge the LIBOR rate on the entire outstanding principal balance of the York Property Mortgage at an annual rate equal to
0.877%
for the first two years, and then at an annual rate of no less than
1.917%
, but no more than
3.75%
, for the remainder of the
seven
-year term. After taking into account the interest rate protection agreements, the annual interest rate for the first two years of the York Property Mortgage will be approximately
3.127%
and then will be between a floor of
4.167%
and a cap of
6%
for the remainder of the seven-year term. See Note 17 for additional information related to the interest rate protection agreements.
The York Property, the York Property Mortgage, and the related interest rate protection agreements are held by 1334 York, LLC (the "LLC"), a separate legal entity of Sotheby's that maintains its own books and records and whose results are ultimately consolidated into Sotheby's financial statements. The LLC is the sole owner and lessor of the York Property. The LLC presently leases the York Property to Sotheby's, Inc., which is also controlled by Sotheby's. The assets of the LLC are not available to satisfy the obligations of other Sotheby's affiliates or any other entity.
The loan agreement governing the York Property Mortgage contains the following financial covenants, which are subject to additional terms and conditions as provided in the underlying loan agreement:
|
|
•
|
As of July 1, 2020, the loan to value ("LTV") ratio (i.e., the principal balance of the York Property Mortgage divided by the appraised value of the York Property) may not exceed
65%
(the "Maximum LTV") based on the then-outstanding principal balance of the York Property Mortgage. If the LTV ratio exceeds the Maximum LTV, the LLC may, at its option, post cash or a letter of credit or pay down the York Property Mortgage without any prepayment penalty or premium, in an amount that will cause the LTV ratio not to exceed the Maximum LTV.
|
|
|
•
|
At all times during the term of the York Property Mortgage, the Debt Yield will not be less than
8.5%
(the "Minimum Debt Yield"). The Debt Yield is calculated by dividing the annual net operating income of the LLC, which primarily consists of lease income from Sotheby's, Inc. (calculated on a cash basis), by the outstanding principal balance of the York Property Mortgage. If the Debt Yield falls below the Minimum Debt Yield, the LLC has the option to post cash or a letter of credit or prepay the York Property Mortgage without any prepayment penalty or premium, in an amount that will cause the Debt Yield to exceed the Minimum Debt Yield.
|
|
|
•
|
If Sotheby’s corporate credit rating from Standard & Poor’s Rating Services is downgraded to "BB-", the lender may require that the LLC establish cash management accounts (the "Cash Management Accounts") under the lender's control for the monthly debt service, insurance, and tax payments. If the rating is downgraded to "B+" or "B", the lender may require the LLC to deposit a certain amount of debt service into the Cash Management Accounts (approximately
6
and
12
months of debt service, respectively). If the rating is downgraded to lower than "B", the LLC must make principal payments on the mortgage such that the LTV ratio does not exceed
65%
. On February 9, 2016, Sotheby's corporate credit rating from S&P was downgraded to "BB-" from "BB". As a result, a Cash Management Account was established under the control of the lender for monthly debt service, insurance, and tax payments. The lender will retain any excess cash after debt service, insurance, and taxes as security (estimated to be
$6 million
annually). As of March 31, 2016, the Cash Management Account had a balance of
$0.6 million
, which is reflected within Restricted Cash on the Condensed Consolidated Balance Sheets.
|
|
|
•
|
At all times during the term of the York Property Mortgage, Sotheby’s is required to maintain a net worth of at least
$425 million
, subject to a cure period.
|
As of
March 31, 2016
, the fair value of the York Property Mortgage approximates its book value due to the variable interest rate associated with the mortgage. The fair value measurement is considered to be a Level 2 fair value measurement in the fair value hierarchy as per Accounting Standards Codification 820,
Fair Value Measurements
("ASC 820").
2022 Senior Notes
—On September 27, 2012, Sotheby's issued
$300 million
aggregate principal amount of
5.25%
Senior Notes, due
October 1, 2022
(the "2022 Senior Notes"). The 2022 Senior Notes were offered only to qualified institutional buyers in accordance with Rule 144A and to non-U.S. Persons under Regulation S under the Securities Act of 1933, as amended (the "Securities Act"). Holders of the 2022 Senior Notes do not have registration rights, and the 2022 Senior Notes have not been and will not be registered under the Securities Act.
The net proceeds from the issuance of the 2022 Senior Notes were approximately
$300 million
, after deducting fees paid to the initial purchasers, and were principally used to retire
$80 million
of unsecured debt that was due in June 2015 and
$182 million
of convertible debt that was due in June 2013.
The 2022 Senior Notes are guaranteed, jointly and severally, on a senior unsecured basis by certain of Sotheby's existing and future domestic subsidiaries to the extent and on the same basis that such subsidiaries guarantee borrowings under the New Credit Agreement. Interest on the 2022 Senior Notes is payable semi-annually in cash on April 1 and October 1 of each year.
The 2022 Senior Notes are redeemable by Sotheby's, in whole or in part, on or after October 1, 2017, at specified redemption prices set forth in the underlying indenture, plus accrued and unpaid interest to, but excluding, the redemption date. Prior to October 1, 2017, the 2022 Senior Notes are redeemable, in whole or in part, at a redemption price equal to
100%
of the principal amount to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date, plus a premium equal to the greater of
1%
of the principal amount of the 2022 Senior Notes and a make-whole premium (as defined in the underlying indenture). The 2022 Senior Notes are not callable by holders unless Sotheby's is in default under the terms of the underlying indenture.
As of
March 31, 2016
, the
$300 million
principal amount of the 2022 Senior Notes had a fair value of approximately
$269.3 million
based on a broker quoted price derived via a pricing model using observable and unobservable inputs. As such, this fair value measurement is considered to be a Level 3 fair value measurement in the fair value hierarchy as per ASC 820.
Future Principal and Interest Payments
—The aggregate future principal and interest payments due under the York Property Mortgage, the 2022 Senior Notes, and Sotheby's credit revolving facility during the five-year period after the
March 31, 2016
balance sheet date are as follows (in thousands of dollars):
|
|
|
|
|
|
Period
|
|
Amount
|
April 2016 to March 2017
|
|
$
|
33,218
|
|
April 2017 to March 2018
|
|
$
|
35,747
|
|
April 2018 to March 2019
|
|
$
|
36,590
|
|
April 2019 to March 2020
|
|
$
|
36,600
|
|
April 2020 to March 2021
|
|
$
|
557,612
|
|
In consideration of the interest rate protection agreements relating to the York Property Mortgage, the table above assumes that the annual interest rate for the first two years of the mortgage will be approximately
3.127%
, and then will be at the interest rate collar's floor rate of
4.167%
for the remainder of the seven-year term.
Interest Expense
—For the three months ended
March 31, 2016
and
2015
, Interest Expense consisted of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2016
|
|
2015
|
Agency Credit Facility:
|
|
|
|
|
Amendment and arrangement fees
|
|
$
|
278
|
|
|
$
|
315
|
|
Commitment fees
|
|
395
|
|
|
391
|
|
Sub-total
|
|
673
|
|
|
706
|
|
York Property Mortgage
|
|
2,788
|
|
|
4,011
|
|
2022 Senior Notes
|
|
4,098
|
|
|
4,098
|
|
Other interest expense
|
|
(13
|
)
|
|
(154
|
)
|
Total Interest Expense
|
|
$
|
7,546
|
|
|
$
|
8,661
|
|
In the table above, Interest Expense related to the York Property Mortgage and the 2022 Senior Notes includes the amortization of debt issuance costs and, when applicable, the amortization of discount. Borrowing costs related to the SFS Credit Facility are reflected within Cost of Finance Revenues in the Condensed Consolidated Statements of Operations.
9.
Defined Benefit Pension Plan
Sotheby’s sponsors a defined benefit pension plan in the U.K. (the "U.K. Pension Plan"). Effective April 1, 2004, participation in the U.K. Pension Plan was closed to new employees and a defined contribution plan (the “U.K. Defined Contribution Plan”) was made available on that date. On April 30, 2016, after the completion of a statutory consultation process, the U.K. Pension Plan was closed to accrual of future service costs for active participants, who will transition to become participants in the U.K. Defined Contribution Plan.
The table below summarizes the components of the net pension (benefit) cost related to the U.K. Pension Plan for the
three
months ended
March 31, 2016
and
2015
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
Service cost
|
|
$
|
864
|
|
|
$
|
1,115
|
|
Interest cost
|
|
2,604
|
|
|
3,205
|
|
Expected return on plan assets
|
|
(4,721
|
)
|
|
(5,004
|
)
|
Amortization of actuarial loss
|
|
—
|
|
|
984
|
|
Amortization of prior service cost
|
|
—
|
|
|
90
|
|
Net pension (benefit) cost
|
|
$
|
(1,253
|
)
|
|
$
|
390
|
|
For the
three
months ended
March 31, 2016
, Sotheby's contributed
$0.4 million
to the U.K. Pension Plan, and total contributions for the year ending December 31, 2016 are expected to be approximately
$1.9 million
.
10.
Commitments and Contingencies
Compensation Arrangements
—As of March 31, 2016, Sotheby’s had compensation arrangements with certain senior employees, which expire at various points between
March 31, 2017
and
March 31, 2020
. Such arrangements may provide, among other benefits, for minimum salary levels and for compensation under Sotheby's incentive compensation programs that is payable only if specified Company and individual goals are attained. Additionally, under certain circumstances, certain of these arrangements provide annual share-based payments, severance payments, and other cash compensation. The aggregate remaining commitment for salaries and other cash compensation related to these compensation arrangements, excluding any participation in Sotheby’s incentive compensation programs, was approximately
$11.9 million
as of
March 31, 2016
.
Legal Actions
—Sotheby’s becomes involved in various claims and lawsuits incidental to the ordinary course of its business, including the matters described below. Management is required to assess the likelihood of any adverse judgments or outcomes in these matters, as well as potential ranges of probable or reasonably possible losses. A determination of the amount of losses, if any, to be recorded or disclosed as a result of these contingencies is based on a careful analysis of each individual exposure with, in some cases, the assistance of outside legal counsel. The amount of losses recorded or disclosed for such contingencies may change in the future due to new developments in each matter or a change in settlement strategy. While the impact of any one or more legal claims or proceedings could be material to Sotheby's operating results in any period, management does not believe that the outcome of any of these pending claims or proceedings, individually or in the aggregate, will have a material adverse effect on Sotheby’s consolidated financial condition.
Estate of Robert Graham, et al. v. Sotheby's, Inc.
is a purported class action commenced in the U.S. District Court for the Central District of California in October 2011 on behalf of U.S. artists (and their estates) whose artworks were sold by Sotheby's in the State of California or at auction by California sellers and for which a royalty was allegedly due under the California Resale Royalties Act (the "Resale Royalties Act"). Plaintiffs seek unspecified damages, punitive damages and injunctive relief for alleged violations of the Resale Royalties Act and the California Unfair Competition Law. In January 2012, Sotheby’s filed a motion to dismiss the action on the grounds, among others, that the Resale Royalties Act violates the U.S. Constitution and is preempted by the U.S. Copyright Act of 1976. In February 2012, the plaintiffs filed their response to Sotheby's motion to dismiss. The court heard oral arguments on the motion to dismiss on March 12, 2012. On May 17, 2012, the court issued an order dismissing the action on the ground that the Resale Royalties Act violated the Commerce Clause of the U.S. Constitution. The plaintiffs appealed this ruling. On May 5, 2015, an en banc panel of the U.S. Court of Appeals for the Ninth Circuit issued a decision affirming the lower court decision that the Resale Royalties Act was unconstitutional insofar as it sought to apply to sales outside of the state of California. The plaintiffs filed a motion for certiorari to the U.S. Supreme Court, which was denied on January 11, 2016. On April 12, 2016, the district court granted Sotheby's motion to dismiss the remaining claims in the action, which relate to sales that occurred in California. The plaintiffs have indicated that they will appeal this decision.
See Note 5 for information related to unfunded commitments to extend additional credit through SFS. See Note 6 for information related to the contingent consideration arrangement related to the AAP acquisition. See Note 8 for information related to debt commitments. See Note 11 for information related to Sotheby's auction guarantees. See Note 20 for information related to income tax contingencies.
11.
Auction Guarantees
From time-to-time in the ordinary course of its business, Sotheby’s will guarantee to a consignor a minimum sale price in connection with the sale of property at auction (an "auction guarantee"). Sotheby’s is generally entitled to a share of the excess proceeds (the "overage") if the property under the auction guarantee sells above the guaranteed price. In the event that the property sells for less than the guaranteed price, Sotheby’s must perform under the auction guarantee by funding the difference between the sale price at auction and the amount of the auction guarantee. The amount of any such shortfall recorded in Sotheby's financial statements is reduced by any auction commissions earned on property sold under the auction guarantee. If the property does not sell, the amount of the auction guarantee must be paid, but Sotheby’s takes ownership of the unsold property and may recover the amount paid through its future sale. Depending on the mix of items subject to a guarantee, in advance of peak selling seasons, a small number of guaranteed items may represent a substantial portion of the aggregate amount of outstanding auction guarantees.
In situations when the guaranteed property does not sell, the property is recorded as Inventory on the Condensed Consolidated Balance Sheets at the lower of cost (i.e., the amount paid under the auction guarantee) or management’s estimate of the property's net realizable value (i.e., the expected sale price upon its eventual disposition). The proceeds ultimately realized by Sotheby’s on the sale of previously guaranteed property may equal, exceed, or be less than the estimated net realizable value recorded as Inventory on the Condensed Consolidated Balance Sheets.
Sotheby’s may reduce its financial exposure under auction guarantees through contractual risk and reward sharing arrangements. Such auction guarantee risk and reward sharing arrangements include irrevocable bids and partner sharing arrangements. An irrevocable bid is an arrangement under which a counterparty commits to bid a predetermined price on the guaranteed property. If the irrevocable bid is not the winning bid, the counterparty is generally entitled to receive a share of the auction commission earned on the sale and/or a share of any overage. If the irrevocable bid is the winning bid, the counterparty may receive a fixed fee as compensation for providing the irrevocable bid. This fee may be netted against the counterparty's obligation to pay the full purchase price (i.e., hammer price plus the applicable buyer's premium). In a partner sharing arrangement, a counterparty commits to fund: (i) a share of the difference between the sale price at auction and the amount of the auction guarantee if the property sells for less than the minimum guaranteed price or (ii) a share of the minimum guaranteed price if the property does not sell while taking ownership of a proportionate share of the unsold property. In exchange for accepting a share of the financial exposure under the auction guarantee, the counterparty in a partner sharing arrangement is generally entitled to receive a share of the auction commission earned if the property sells and/or a share of any overage.
The counterparties to Sotheby's auction guarantee risk and reward sharing arrangements are typically major international art dealers or major art collectors. Sotheby’s could be exposed to losses in the event any of these counterparties do not perform according to the terms of these contractual arrangements.
Although irrevocable bid and partner sharing arrangements may be used to reduce the risk associated with auction guarantees, Sotheby's may also enter into auction guarantees without securing such arrangements. In these circumstances, Sotheby's could be exposed to auction guarantee losses and/or deterioration in auction commission margins if the underlying property fails to sell at the minimum guaranteed price. Furthermore, in such situations, Sotheby's liquidity could be reduced.
Sotheby's credit agreement has a covenant that imposes a
$600 million
limitation on net outstanding auction guarantees (i.e., the aggregate financial exposure under outstanding auction guarantees less the impact of related risk and reward sharing arrangements). In addition to compliance with this covenant, significant auction guarantees and related risk and reward sharing arrangements are subject to approval by Sotheby's Board of Directors.
As of
March 31, 2016
, Sotheby’s had outstanding auction guarantees totaling
$74.5 million
. Sotheby's financial exposure under these auction guarantees is reduced by irrevocable bids totaling
$2.8 million
. Each of the outstanding auction guarantees has a minimum guaranteed price that is within or below the range of the pre-sale auction estimates for the underlying property. Substantially all of property related to these auction guarantees is being offered at auctions in the second quarter of 2016. Sotheby's is obligated under the terms of certain auction guarantees to advance all or a portion of the guaranteed amount prior to auction. As of
March 31, 2016
,
$2 million
of the guaranteed amount was advanced by Sotheby's and is recorded within Notes Receivable (net) on the Condensed Consolidated Balance Sheets. As of
March 31, 2016
, December 31, 2015, and March 31, 2015, the carrying value of the liability representing the estimated fair value of Sotheby’s obligation to perform under its outstanding auction guarantees totaled
$0.7 million
,
$1 million
, and
$7.3 million
, respectively, and is recorded within Accounts Payable and Accrued Liabilities on the Condensed Consolidated Balance Sheets.
On September 2, 2015, Sotheby's entered into an arrangement with the Estate of A. Alfred Taubman (the "Estate") under which Sotheby's is selling works of art from the collection of A. Alfred Taubman (the "Taubman Collection"). Robert S. Taubman, a trustee and beneficiary of the Estate, was a director of Sotheby's at the time Sotheby's entered into the arrangement. In connection with this arrangement, Sotheby's provided an auction guarantee of
$509 million
, after taking into account items withdrawn by the Estate prior to sale. As of
March 31, 2016
, the remaining outstanding auction guarantee related to the Taubman Collection totaled
$1.3 million
and relates to property scheduled to be offered at auction in 2016. See Note 21
for additional information related to this related party auction guarantee.
As of May 5, 2016, Sotheby's had outstanding auction guarantees totaling
$86.2 million
and, as of that date, Sotheby's financial exposure was reduced by risk and reward sharing arrangements totaling
$14.2 million
. Each of the auction guarantees outstanding as of May 5, 2016 had a minimum guaranteed price that was within or below the range of the pre-sale auction estimates for the underlying property. The property related to these auction guarantees is being offered at auctions in the second quarter of 2016. As of May 5, 2016,
$2 million
of the guaranteed amount had been advanced by Sotheby's.
12.
Shareholders' Equity and Dividends
Common Stock Repurchase Program
—In January 2014, the Board of Directors authorized a
five
-year,
$150 million
Common Stock repurchase program. In March 2014, Sotheby's repurchased
558,171
shares of its Common Stock for an aggregate purchase price of
$25 million
(
$44.79
per share) pursuant to an accelerated share repurchase ("ASR") agreement.
On August 6, 2015, the Board of Directors approved an increase of
$125 million
to Sotheby's share repurchase authorization, which resulted in a total share repurchase authorization of
$250 million
as of that date. On August 13, 2015, Sotheby's entered into an ASR agreement (the "August 2015 ASR Agreement") pursuant to which it received an initial delivery of
2,667,378
shares of its Common Stock for an initial purchase price of
$125 million
. The initial shares received by Sotheby's on August 13, 2015 had a value of
$100 million
, or
$37.49
per share. In November 2015, the counterparty to the August 2015 ASR Agreement elected to conclude the agreement, and Sotheby's received an additional
1,038,280
shares of its Common Stock. Accordingly, the August 2015 ASR Agreement resulted in the total repurchase of
3,705,658
shares of Sotheby's Common Stock for an average price of
$33.73
per share.
On January 21, 2016, in conjunction with management's capital allocation analysis, the Board of Directors approved a
$200 million
increase to Sotheby's remaining
$125 million
share repurchase authorization, resulting in an updated total share repurchase authorization of
$325 million
. In the first quarter of 2016, Sotheby's repurchased
6,525,419
shares of its Common Stock for
$154.5 million
at an average price of
$23.68
per share under this increased authorization through open market purchases and purchases made pursuant to a Rule 10b5-1 plan. The
$154.5 million
in Common Stock repurchases includes
$6.9 million
recorded within Accounts Payable and Accrued Liabilities as of March 31, 2016 for transactions that settled in early-April 2016. Subsequent to March 31, 2016 and through May 5, 2016, Sotheby's repurchased an additional
1,365,119
shares of its Common Stock for
$36.5 million
(
$26.73
per share) pursuant to a Rule 10b5-1 plan. As of May 5, 2016,
$134 million
remained under the current share repurchase authorization. Management expects to continue to repurchase shares of Common Stock via open market purchases, purchases made pursuant to a Rule 10b5-1 plan, and/or accelerated share repurchase agreements, subject to the factors described in the following paragraph.
The timing of share repurchases and the actual amount purchased will depend on a variety of factors, including the market price of Sotheby's Common Stock, general market and economic conditions, and other corporate considerations. Repurchases may continue to be made pursuant to plans intended to comply with Rule 10b5-1 under the Exchange Act, which allows Sotheby's to purchase its shares during periods when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. The repurchase authorization does not require the purchase of a specific number of shares and is subject to suspension or termination by the Board of Directors at any time.
Quarterly Cash Dividends
—On February 26, 2015, Sotheby's Board of Directors declared a quarterly dividend of
$0.10
per share (approximately
$6.9 million
) that was paid on March 16, 2015 to shareholders of record as of March 9, 2015.
On January 21, 2016, in conjunction with management's recent capital allocation analysis, the Board of Directors decided to eliminate Sotheby's
$0.10
per share quarterly cash dividend and allocate the capital instead to repurchase shares of Common Stock, as discussed above.
Special Dividend
—In January 2014, the Board of Directors declared a special dividend of
$300 million
(
$4.34
per share) that was paid on March 17, 2014. The special dividend was funded principally by the repatriation of
$250 million
of cash from Sotheby’s foreign subsidiaries, with the remaining
$50 million
funded by then existing domestic cash balances. In conjunction with this special dividend, Sotheby's accrued approximately
$11 million
for dividend equivalents owed on share-based payments to employees and charged to retained earnings. Through March 31, 2016, approximately
$7.2 million
of such dividend equivalents has been paid to employees, with
$1.4 million
,
$2 million
, and
$3.8 million
paid in March 2016, March 2015, and March 2014, respectively. See Note 13 for information related to Sotheby's share-based payment programs.
13.
Share-Based Payments
Share-Based Payments
—Share-based payments to employees include performance-based stock unit awards, market-based stock unit awards, restricted stock units, and restricted stock shares. A description of each of these share-based payments is provided below.
For the
three months ended March 31, 2016
and
2015
, compensation expense related to share-based payments is reflected in the following accounts in the Condensed Consolidated Statements of Operations (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
Salaries and related costs
|
|
$
|
5,837
|
|
|
$
|
5,653
|
|
Voluntary separation incentive programs (see Note 14)
|
|
(306
|
)
|
|
—
|
|
CEO separation and transition costs (see Note 15)
|
|
—
|
|
|
2,000
|
|
Total share-based payment expense (pre-tax)
|
|
$
|
5,531
|
|
|
$
|
7,653
|
|
Total share-based payment expense (after-tax)
|
|
$
|
3,801
|
|
|
$
|
4,831
|
|
For the three months ended March 31, 2016, Sotheby's recognized a
$0.3 million
credit related to share-based payments associated with the voluntary separation programs enacted in the fourth quarter of 2015. This credit is the result of a change in management's estimate of the number of performance-based stock units held by program participants that are expected to vest.
For the
three months ended
March 31, 2016
, Sotheby's recognized a
($1.3) million
tax shortfall related to share-based payment arrangements. This tax shortfall represents the amount by which the tax deduction resulting from the vesting of share-based payments in the period was less than the tax benefit initially recognized in Sotheby's financial statements upon the amortization of compensation expense. The
($1.3) million
tax shortfall in the period is accounted for as a reduction to previously recorded excess tax benefits related to share-based payments recorded within Additional Paid-in Capital on the Condensed Consolidated Balance Sheets.
For the
three months ended
March 31, 2015, Sotheby's realized
$1.1 million
of excess tax benefits related to share-based payment arrangements. These tax benefits represent the amount by which the tax deduction resulting from the vesting of share-based payments in the period exceeded the tax benefit initially recognized in Sotheby's financial statements upon the amortization of compensation expense. Excess tax benefits are recognized on the Condensed Consolidated Balance Sheets as an increase to Additional Paid-in Capital and are classified within Financing Activities in the Condensed Consolidated Statements of Cash Flows.
As of
March 31, 2016
, unrecognized compensation expense related to the unvested portion of share-based payments was
$40.1 million
. This compensation expense is expected to be amortized over a weighted-average period of approximately
2.7
years. Sotheby’s does not capitalize any compensation expense related to share-based payments to employees.
Sotheby's Restricted Stock Unit Plan
—Sotheby's Third Amended and Restated Restricted Stock Unit Plan (the "Restricted Stock Unit Plan") provides for the issuance of Restricted Stock Units ("RSU's") and restricted stock shares to employees, subject to the approval of the Compensation Committee of the Board of Directors (the "Compensation Committee"). In making awards under the Restricted Stock Unit Plan, the Compensation Committee takes into account the nature of the services rendered by employees, their present and potential future contributions to Sotheby's success, and such other factors as the Compensation Committee in its discretion deems relevant.
RSU's and restricted stock shares issued under the Restricted Stock Unit Plan generally vest evenly over a
three
-year service period. Prior to vesting, holders of RSU's and restricted stock shares are entitled to receive non-forfeitable dividend equivalents and dividends, respectively, if, when, and at the same rate as dividends are paid on Sotheby's Common Stock. Prior to vesting, holders of RSU's do not have voting rights, while holders of restricted stock shares have voting rights. RSU's and restricted stock shares may not be sold, assigned, transferred, pledged or otherwise encumbered until they vest.
Performance Share Units (or "PSU's") are RSU's that generally vest over
three
or
four
years, subject to the achievement of certain profitability targets (for awards granted prior to 2016) or certain return on invested capital ("ROIC") targets (for awards granted in 2016). Prior to vesting, holders of PSU's do not have voting rights and are not entitled to receive dividends or dividend equivalents. Dividend equivalents are generally credited to holders of PSU's if, when, and at the same rate as dividends are paid on Sotheby's Common Stock, but are only paid for PSU's that vest and become shares of Common Stock. PSU's may not be sold, assigned, transferred, pledged or otherwise encumbered until they vest.
In the first quarter of 2016, the Compensation Committee granted share-based payment awards with a total grant date fair value of
$23.7 million
, as follows:
|
|
•
|
607,606
PSU's with a grant date fair value of
$14.4 million
and a single vesting opportunity after a three-year service period. These PSU awards provide recipients with an opportunity to vest in incremental PSU's of up to
200%
of the initial units awarded subject to the achievement of certain ROIC targets. The maximum number of shares of Common Stock that may be issued with respect to these awards is
1,215,212
.
|
|
|
•
|
394,371
RSU's with annual vesting over a
three
-year service period and a grant date fair value of
$9.3 million
.
|
Summary of Outstanding Share-Based Payment Awards
—For the
three months ended
March 31, 2016
, changes to the number of outstanding RSU’s, PSU’s, and Restricted Stock shares were as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
Restricted Stock Shares, RSU's and PSU's
|
|
Weighted
Average
Grant Date
Fair Value
|
Outstanding at January 1, 2016
|
2,019
|
|
|
$
|
43.61
|
|
Granted
|
1,002
|
|
|
$
|
23.66
|
|
Vested
|
(530
|
)
|
|
$
|
39.60
|
|
Canceled
|
(163
|
)
|
|
$
|
38.25
|
|
Outstanding at March 31, 2016
|
2,328
|
|
|
$
|
36.31
|
|
As of
March 31, 2016
,
2.6 million
shares were available for future awards pursuant to the Restricted Stock Unit Plan. The aggregate fair value of RSU’s and PSU's that vested during the
three months ended
March 31, 2016
and
2015
was
$13.7 million
and
$22.9 million
, respectively, based on the closing stock price on the dates the shares vested.
Stock Options
—Stock options issued pursuant to the Sotheby's 1997 Stock Option Plan are exercisable into authorized, but unissued shares of Sotheby's Common Stock. Stock options vest evenly over
four
years and expire
ten
years after the date of grant. As of
March 31, 2016
,
104,100
shares of Common Stock were available for the issuance of stock options under the Stock Option Plan. As of
March 31, 2016
,
50,000
stock options were outstanding and exercisable with a weighted average exercise price of
$22.11
per share, a weighted average remaining contractual term of
3.9
years, and an aggregate intrinsic value of
$0.2 million
.
No
stock options were exercised or granted during the
three months ended March 31, 2016
and 2015.
14.
Voluntary Separation Incentive Programs (Net)
On November 13, 2015, Sotheby's announced a series of regional voluntary separation incentive programs (the "Programs") aimed at reducing headcount and associated compensation costs. The Programs were offered to Sotheby's employees in jurisdictions where it was practical to do so. Employees who elected to participate in the Programs were accepted only upon approval by Sotheby's management.
In the fourth quarter of 2015, Sotheby's recognized a charge of
$36.9 million
as a result of the Programs, consisting of
$33.8 million
in cash severance benefits and
$3.1 million
in accelerated equity compensation expense related to awards that will continue to vest after termination of employment, subject to Sotheby's achievement of the underlying profitability targets, when applicable. The liability related to the
$33.8 million
in cash severance benefits is recorded within Accounts Payable and Accrued Liabilities on the December 31, 2015 Condensed Consolidated Balance Sheet and includes
$4.7 million
related to 2015 incentive compensation that would have been paid to participants had they not participated in the Programs.
For the three months ended March 31, 2016, Sotheby's recognized a
($0.3) million
net credit to the previously recorded charge as a result of management’s quarterly assessment of the likelihood that performance-based stock units held by program participants will vest. Through March 31, 2016, Sotheby's made cash payments of approximately
$27.4 million
related to the Programs. Accordingly, the remaining accrued liability related to the Programs recorded within Accounts Payable and Accrued Liabilities on the March 31, 2016 Condensed Consolidated Balance Sheet was
$6.4 million
. The remaining liability is expected to be settled through cash payments made principally in the second quarter of 2016.
Employee transitions under the Programs commenced on December 31, 2015 and will occur throughout 2016. The Programs will result in a net reduction of approximately
5%
of Sotheby's global headcount of approximately
1,600
employees prior to their implementation.
15.
CEO Separation and Transition Costs
In the first quarter of 2015, Sotheby's recognized
$4.2 million
in costs associated with the hiring of Thomas S. Smith, Jr. as its President and Chief Executive Officer. These costs principally relate to compensation of
$3.1 million
owed to Mr. Smith to replace incentive compensation that he expected to receive from his previous employer, consisting of a fully-vested restricted stock unit award with a fair value of
$2 million
granted on March 31, 2015 and a
$1.1 million
cash payment that was paid in September 2015. There was no required service period associated with this compensation. The CEO Separation and Transition Costs recognized in the first quarter of 2015 also include approximately
$1.1 million
in recruitment and other professional fees associated with the CEO hiring process.
16.
Restructuring Charges (Net)
On July 16, 2014, the Board of Directors approved a restructuring plan (the "2014 Restructuring Plan") principally impacting Sotheby's operations in the United States ("U.S.") and the U.K. The 2014 Restructuring Plan resulted in Restructuring Charges (net) of
$14.2 million
recognized in 2014, consisting of
$13.9 million
in employee termination benefits and approximately
$0.3 million
in lease exit costs. For the three months ended March 31, 2015, Sotheby's recognized a credit of approximately
$0.4 million
in Restructuring Charges (net) as a result of adjustments to the initial accrual for employee termination benefits. The headcount reductions resulting from the 2014 Restructuring Plan were completed in the third quarter of 2015 and the associated liability has been fully settled.
17.
Derivative Financial Instruments
Derivatives Financial Instruments Designated as Cash Flow Hedges
—On July 1, 2015, Sotheby's entered into a
seven
-year,
$325 million
mortgage loan to refinance its previous mortgage on the York Property. The York Property Mortgage bears interest based on the
one
-month LIBOR rate plus a spread of
2.25%
and is being amortized based on a
25
-year mortgage-style amortization schedule over the
seven
-year term of the mortgage. In connection with the York Property Mortgage, Sotheby's entered into interest rate protection agreements secured by the York Property, consisting of a
two
-year interest rate swap (the "Swap"), effective as of
July 1, 2015
, and a
five
-year interest rate collar (the "Collar"), effective as of
July 1, 2017
. Both of these instruments have a notional amount equal to the applicable principal balance of the York Property Mortgage and have an identical amortization schedule to that of the mortgage. The York Property, the York Property Mortgage, and the related interest rate protection agreements are held by 1334 York, LLC, a separate legal entity of Sotheby's that maintains its own books and records and whose results are ultimately consolidated into Sotheby's financial statements. See Note 8 for information related to the York Property Mortgage.
As of
March 31, 2016
, the notional value of the Swap was equal to the
$320.3 million
principal balance of the York Property Mortgage on that date, and the notional value of the Collar was
$310.3 million
, which is equal to the forecasted principal balance of the York Property Mortgage as of the Collar's effective date. These interest rate protection agreements effectively hedge the LIBOR rate on the entire outstanding principal balance of the York Property Mortgage at an annual rate equal to
0.877%
for the first two years, and then at an annual rate of no less than
1.917%
, but no more than
3.75%
, for the remainder of the
seven
-year term. After taking into account the interest rate protection agreements, the annual interest rate for the first two years of the York Property Mortgage will be approximately
3.127%
and then will be between a floor of
4.167%
and a cap of
6%
for the remainder of the
seven
-year term.
At their inception, the Swap and the Collar were each individually designated as cash flow hedges of the risk associated with the variability in expected cash outflows related to the monthly one-month LIBOR-indexed interest payments on the York Property Mortgage. Accordingly, to the extent that the Swap and the Collar are effective, any unrealized gains and losses related to changes in their fair value are recorded to Accumulated Other Comprehensive Loss on the Condensed Consolidated Balance Sheets and then reclassified to Interest Expense in the Condensed Consolidated Statements of Operations as interest expense related to the mortgage is recorded. Any hedge ineffectiveness is immediately recognized in Interest Expense. There was no hedge ineffectiveness related to the Swap or the Collar during the three months ended March 31, 2016. Management performs a quarterly assessment to determine whether the Swap and the Collar continue to be highly effective in hedging the risk associated with the variability in expected cash outflows related to the monthly one-month LIBOR-indexed interest payments on the York Property Mortgage.
As of
March 31, 2016
, the fair value of the Swap recorded in Other Current Liabilities on the Condensed Consolidated Balance Sheets was
$1.2 million
. For the three months ended
March 31, 2016
, the loss in fair value associated with the Swap recognized in Other Comprehensive Loss was
$0.8 million
(net of tax) and the amount reclassified to Interest Expense during the period was
$0.2 million
(net of tax).
As of
March 31, 2016
, the fair value of the Collar recorded in Other Long-Term Liabilities on the Condensed Consolidated Balance Sheets was
$13.2 million
. For the three months ended
March 31, 2016
, the loss in fair value associated with the Collar recognized in Other Comprehensive Loss was
$3.9 million
(net of tax).
The Swap and the Collar liabilities have been designated as Level 2 fair value measurements within the fair value hierarchy provided by ASC 820. Level 2 fair value measurements have pricing inputs other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value may be determined through the use of models or other valuation methodologies. The fair value of the Swap is based on a discounted cash flow methodology using the contractual terms of the instrument and observable LIBOR-curve rates that are consistent with the frequency of the interest cash flows of the York Property Mortgage. The fair value of the Collar is based on an option pricing model using observable LIBOR-curve rates for each forecasted monthly settlement, with the projected cash flows discounted using the contractual terms of the instrument, which are consistent with the frequency of the interest cash flows of the York Property Mortgage.
Derivative Financial Instruments Not Designated as Hedging Instruments
—Sotheby’s utilizes forward exchange contracts to hedge cash flow exposures related to foreign currency exchange rate movements, which primarily arise from short-term foreign currency denominated intercompany balances and, to a much lesser extent, foreign currency denominated client payable balances, as well as foreign currency denominated auction guarantee obligations. Such forward exchange contracts are typically short-term with settlement dates less than six months from their inception. Additionally, on rare occasions, Sotheby’s may purchase foreign currency option contracts to hedge risks associated with foreign currency denominated client payable balances. All instruments used to offset cash flow exposures related to foreign currency exchange rate movements are not designated as hedging instruments for accounting purposes. Accordingly, changes in the fair value of these instruments are recognized in the Condensed Consolidated Statements of Operations in Other Income (Expense).
As of
March 31, 2016
, the notional value of outstanding forward exchange contracts was
$254.2 million
. Notional values do not quantify risk or represent assets or liabilities of Sotheby’s, but are used to calculate cash settlements under outstanding forward exchange contracts. Sotheby’s is exposed to credit-related risks in the event of nonperformance by the three
counterparties to its outstanding forward exchange contracts. Sotheby’s does not expect any of these counterparties to fail to meet their obligations, given their high short-term (A1/P1) credit ratings. As of
March 31, 2016
,
December 31, 2015
, and
March 31, 2015
, the fair values of these contracts were not material to Sotheby's consolidated financial statements.
18.
Accumulated Other Comprehensive Loss
The following is a summary of the changes in Accumulated Other Comprehensive Loss, for the
three months ended March 31, 2016
and
2015
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
Foreign Currency Items
|
|
Defined Benefit Pension Items
|
|
Derivative Financial Instruments
|
|
Total
|
Balance at January 1, 2016
|
|
$
|
(52,279
|
)
|
|
$
|
(9,619
|
)
|
|
$
|
(4,306
|
)
|
|
$
|
(66,204
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
(2,963
|
)
|
|
418
|
|
|
(4,712
|
)
|
|
(7,257
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
—
|
|
|
—
|
|
|
223
|
|
|
223
|
|
Net other comprehensive (loss) income
|
|
(2,963
|
)
|
|
418
|
|
|
(4,489
|
)
|
|
(7,034
|
)
|
Balance at March 31, 2016
|
|
$
|
(55,242
|
)
|
|
$
|
(9,201
|
)
|
|
$
|
(8,795
|
)
|
|
$
|
(73,238
|
)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
|
Foreign Currency Items
|
|
Defined Benefit Pension Items
|
|
Derivative Financial Instruments
|
|
Total
|
Balance at January 1, 2015
|
|
$
|
(33,223
|
)
|
|
$
|
(43,543
|
)
|
|
$
|
—
|
|
|
$
|
(76,766
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
(21,458
|
)
|
|
2,189
|
|
|
—
|
|
|
(19,269
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
—
|
|
|
858
|
|
|
—
|
|
|
858
|
|
Net other comprehensive (loss) income
|
|
(21,458
|
)
|
|
3,047
|
|
|
—
|
|
|
(18,411
|
)
|
Balance at March 31, 2015
|
|
$
|
(54,681
|
)
|
|
$
|
(40,496
|
)
|
|
$
|
—
|
|
|
$
|
(95,177
|
)
|
For the three months ended March 31, 2016 and 2015, included in Other Comprehensive (Loss) Income before reclassifications are
$0.4 million
(net of tax) and
$2.2 million
(net of tax), respectively, related to changes in the foreign currency translation adjustment account associated with accumulated unrealized losses related to the U.K. Pension Plan.
For the three months ended March 31, 2016,
$0.2 million
(net of tax) was reclassified from Accumulated Other Comprehensive Loss and recognized on a pre-tax basis within Interest Expense in the Condensed Consolidated Statements of Operations as a result of monthly interest accruals related to the Swap associated with the York Property Mortgage (see Note 17).
For the three months ended March 31, 2015,
$0.9 million
(net of tax) was reclassified from Accumulated Other Comprehensive Loss and recognized on a pre-tax basis within Salaries and Related Costs in the Condensed Consolidated Statements of Operations as a result of the amortization of actuarial losses and prior service costs related to the U.K. Pension Plan.
19.
Income Taxes
The quarterly income tax provision is calculated using an estimated annual effective income tax rate based on actual historical information and forward looking estimates. The estimated annual effective income tax rate may fluctuate due to changes in forecasted annual pre-tax income, changes in the jurisdictional mix of forecasted pre-tax income and changes to actual or forecasted permanent book to tax differences (e.g., non-deductible expenses). Furthermore, the effective income tax rate may fluctuate as the result of changes to the valuation allowance for net deferred tax assets, the impact of future tax settlements with federal, state or foreign tax authorities, or the impact of tax law changes. Management identifies items which are unusual and non-recurring in nature and treats these as discrete events. The tax effect of these discrete events is booked entirely in the quarter in which they occur.
Prior to the fourth quarter of 2015, based on Sotheby’s projections and planned uses of U.S. and foreign earnings, management had intended that approximately
$400 million
of accumulated foreign earnings relating to years prior to 2014 would be indefinitely reinvested outside of the U.S. As a result, Sotheby’s did not initially record deferred income taxes on these earnings in its financial statements. In the fourth quarter of 2015, however, in consideration of the expansion of Sotheby's Common Stock repurchase program (see Note 12), as well as the need for cash in the U.S. to fund other corporate strategic initiatives, Sotheby's reassessed its U.S. and foreign cash needs and concluded that these foreign earnings would instead be repatriated to the U.S. in the foreseeable future. Consequently, in the fourth quarter of 2015, Sotheby's recognized a liability for the deferred income taxes on these foreign earnings. In addition, Sotheby’s had accrued incremental taxes during 2014 and 2015 on approximately
$200 million
of foreign earnings for those years. As a result, as of December 31, 2015, Sotheby’s had recognized total net deferred tax liabilities of approximately
$92 million
for foreign earnings deemed not to be indefinitely reinvested outside of the U.S.
As of March 31, 2016,
$146 million
of the foreign earnings discussed above have been repatriated and used to fund Common Stock repurchases in the first quarter of 2016. Management expects that additional repatriations will be made later in 2016, though the specific timing of any further repatriation of foreign earnings and the cash payment of the associated taxes is currently being evaluated.
Based on current projections and planned uses of U.S. and foreign cash, management believes that its cash balances and earnings in the U.S., as well as the amount of unremitted foreign earnings for which a deferred tax liability has been provided will satisfy its current cash needs in the U.S. Accordingly, management plans to indefinitely reinvest a portion of its prospective foreign earnings (those related to Sotheby’s non-U.K. foreign subsidiaries) outside of the U.S. As a result, management expects that Sotheby’s effective income tax rate, excluding discrete items, will decrease in 2016 and future years, when compared to 2015.
As of March 31, 2016, Sotheby’s estimates that its annual effective income tax rate, excluding discrete items, will be approximately
31%
as compared to its estimate of approximately
36%
as of March 31, 2015. The decrease in the estimated annual effective income tax rate is primarily due to management’s assertion regarding the indefinite reinvestment of Sotheby’s 2016 foreign earnings (except those related to Sotheby’s subsidiaries in the U.K.), as described above, as well as a decrease in Sotheby’s state and local effective income tax rate due to legislation enacted subsequent to the first quarter of 2015 and, to a lesser extent, to a change in the jurisdictional mix of pre-tax earnings.
For the three months ended March 31, 2016, Sotheby’s effective income tax rate is approximately
33%
compared to an effective income tax rate of approximately
50%
for the three months ended March 31, 2015. The decrease in the effective income tax rate as compared to the prior year is due to the decrease in the estimated annual effective income tax rate, as discussed above, as well as discrete tax expense of
$1 million
recorded in the first quarter of 2015 as a result of concluding income tax audits, which increased the effective income tax rate by approximately
13%
.
20.
Uncertain Tax Positions
As of March 31, 2016, Sotheby’s liability for unrecognized tax benefits, excluding interest and penalties, was
$19 million
, representing a decrease of
$3 million
when compared to a liability of
$22 million
as of December 31, 2015. This net decrease is primarily the result of the expiration of a statute of limitations for certain tax years. As of March 31, 2015, Sotheby’s liability for unrecognized tax benefits, excluding interest and penalties, was
$20.6 million
. As of
March 31, 2016
,
December 31, 2015
, and
March 31, 2015
, the total amount of unrecognized tax benefits that, if recognized, would favorably affect Sotheby’s effective tax rate was
$12.4 million
,
$12.8 million
, and
$12.7 million
, respectively. Sotheby's believes it is reasonably possible that a decrease of
$2.8 million
in the balance of unrecognized tax benefits can occur within 12 months of the March 31, 2016 balance sheet date as a result of the expiration of statutes of limitations.
Sotheby’s is subject to taxation in the U.S. and various U.S. state and foreign jurisdictions and, as a result, is subject to tax audits in these jurisdictions. Sotheby’s is currently under examination by various U.S. state and foreign taxing authorities. The earliest open tax year for the major jurisdictions in which Sotheby's does business, which include the U.S. (including various state and local jurisdictions), the U.K., and Hong Kong, is 2009.
Sotheby’s recognizes interest expense and penalties related to unrecognized tax benefits as a component of Income Tax (Benefit) Expense. The accrual for such interest and penalties decreased by
$0.3 million
for the three months ended March 31, 2016.
Sotheby’s policy is to record interest expense related to sales, value added and other non-income based taxes as Interest Expense in its Condensed Consolidated Statements of Operations. Penalties related to such taxes are recorded as General and Administrative Expenses in its Condensed Consolidated Statements of Operations. Interest expense and penalties related to income taxes are recorded as a component of Income Tax (Benefit) Expense in Sotheby’s Condensed Consolidated Statements of Operations.
21.
Related Party Transactions
From time-to-time, in the ordinary course of business, related parties such as members of the Board of Directors and employees, transact with Sotheby's to buy and sell property at auction and through private sales. For the
three months ended March 31, 2016
and 2015, Sotheby’s recognized Agency Commissions and Fees of
$0.5 million
and
$0.7 million
, respectively, for property consigned or purchased by related parties.
On September 2, 2015, Sotheby's entered into an arrangement with the Estate of A. Alfred Taubman under which it is selling works of art from the collection of A. Alfred Taubman. Robert S. Taubman, a trustee and beneficiary of the Estate, was a director of Sotheby's at the time Sotheby's entered into the arrangement. In connection with this arrangement, Sotheby's provided an auction guarantee of
$509 million
, after taking into account items withdrawn by the Estate prior to sale. Through March 31, 2016, total aggregate proceeds (i.e., the hammer price plus buyer's premium) from sales of Taubman Collection property were
$473 million
. The results of these sales, combined with the estimated value of items which were taken into inventory after failing to sell at auction (
$33 million
) resulted in a loss on the auction guarantee of approximately
$3 million
, which was recognized in the fourth quarter of 2015. As of March 31, 2016 and December 31, 2015, Sotheby's owed
$52.8 million
and
$285.4 million
, respectively, to the Estate. Subsequent to March 31, 2016, an additional
$42.5 million
was paid to the Estate in settlement of the outstanding liability. As of
March 31, 2016
, the remaining outstanding auction guarantee related to the Taubman Collection totaled
$1.3 million
and relates to property scheduled to be offered at auction in 2016.
As of March 31, 2015, Accounts Receivable (net) included
$0.3 million
associated with auction or private sale purchases made by related parties. As of March 31, 2016, Due to Related Party Consignors included
$54.7 million
associated with amounts owed to related party consignors, including the
$52.8 million
owed to the Estate discussed above.
22.
Recent Accounting Standards Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which introduces a new five-step framework for revenue recognition. The core principal of the standard is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This ASU also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity's contracts with customers. This standard can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. On August 12, 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers - Deferral of Effective Date
, which defers the effective date of ASU 2014-09 to January 1, 2018 with early adoption beginning January 1, 2017. Management is currently assessing the potential impact of adopting this new accounting standard on Sotheby’s financial statements.
In March 2016, the FASB issued ASU 2016-08
, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
. ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations and includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. ASU 2016-08 is effective January 1, 2018 to be in alignment with the effective date of ASU 2014-09, as discussed above. Management is currently assessing the potential impact of adopting this new accounting standard on Sotheby’s financial statements.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.
ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments including requirements to measure most equity investments at fair value with changes in fair value recognized in net income, to perform a qualitative assessment of equity investments without readily determinable fair values, and to separately present financial assets and liabilities by measurement category and by type of financial asset on the balance sheet or the accompanying notes to the financial statements. ASU 2016-01 will be effective for Sotheby's beginning on January 1, 2018, and will be applied by means of a cumulative effect adjustment to the balance sheet, except for effects related to equity securities without readily determinable values, which will be applied prospectively. Management is currently assessing the potential impact of adopting this new accounting standard on Sotheby’s financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which requires an entity to recognize long-term lease arrangements as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all long-term leases, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The amendments also require certain new quantitative and qualitative disclosures regarding leasing arrangements. ASU 2016-02 will be effective for Sotheby's beginning on January 1, 2019. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. Management is currently assessing the potential impact of adopting this new accounting standard on Sotheby’s financial statements.
In March 2016, the FASB issued ASU 2016-05,
Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships
, which clarifies that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument would not, in and of itself, be considered a termination of the derivative instrument, provided that all other hedge accounting criteria continue to be met. ASU 2016-05 is effective for Sotheby's beginning on January 1, 2017. Early adoption is permitted, including in an interim period. Management is currently assessing the potential impact of adopting this new accounting standard on Sotheby’s financial statements.
In March 2016, the FASB issued ASU 2016-06,
Derivatives and Hedging (Topic 815) - Contingent Put and Call Options in Debt Instruments
, which aims to reduce the diversity of practice in identifying embedded derivatives in debt instruments. ASU 2016-06 clarifies that the nature of an exercise contingency is not subject to the “clearly and closely” criteria for purposes of assessing whether the call or put option must be separated from the debt instrument and accounted for separately as a derivative. ASU 2016-06 will be effective for Sotheby's beginning on January 1, 2017. Management is currently assessing the potential impact of adopting this new accounting standard on Sotheby’s financial statements.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting.
ASU 2016-09 simplifies several aspects of the accounting and presentation of share-based payment transactions, including the accounting for related income taxes consequences and certain classifications within the statement of cash flows. ASU 2016-09 is effective for Sotheby's beginning on January 1, 2017. Management is currently assessing the potential impact of adopting this new accounting standard on Sotheby’s financial statements.