NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
—Summary of Significant Accounting Policies
Basis of Presentation
—The Consolidated Financial Statements included herein have been prepared 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"). In the Consolidated Financial Statements, unless otherwise stated, the terms "art" or "works of art" or "artwork" or "property" refer to authenticated fine art, decorative art, jewelry, wine, and collectibles.
Principles of Consolidation
—The Consolidated Financial Statements include the accounts of our wholly-owned subsidiaries and Sotheby's (Beijing) Auction Co., Ltd. ("Sotheby's Beijing"), a joint venture formed in September 2012 in which we have a controlling
80%
ownership interest. The net income attributable to the minority owner of Sotheby's Beijing is reported as "Net (Loss) Income Attributable to Noncontrolling Interest" in our Consolidated Income Statements and the non-controlling
20%
ownership interest is reported as "Noncontrolling Interest" within the Equity section of our Consolidated Balance Sheets. Intercompany transactions and balances among our subsidiaries are eliminated in consolidation.
Equity investments through which we exercise significant influence over the investee, but do not control, are accounted for using the equity method. Under the equity method, our share of investee earnings or losses is recorded within Equity in Earnings of Investees in our Consolidated Income Statements. Our interest in the net assets of these investees is recorded within Equity Method Investments on our Consolidated Balance Sheets. Our equity method investees include Acquavella Modern Art, a partnership through which a collection of fine art is being sold, and RM Sotheby's (formerly RM Auctions), an auction house for investment-quality automobiles. See
Note 5
for information related to our equity method investments.
Foreign Currency Translation
—Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenues, expenses, gains, and losses recorded in foreign currencies are translated using the monthly average exchange rates prevailing during the period in which they are recognized. Translation adjustments resulting from this process are recorded to Other Comprehensive (Loss) Income and reported on our Consolidated Balance Sheets within Accumulated Other Comprehensive Loss until the subsidiary is sold or liquidated.
Adjustments to Prior Period Presentation
—In April 2015, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("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. We adopted and applied ASU 2015-03 on a retrospective basis on its January 1, 2016 effective date. As permitted by ASU 2015-15, we are continuing to present debt issuance costs related to revolving credit facility arrangements as an asset on our 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 our previously issued financial statements (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
Consolidated Balance Sheets:
|
|
As Previously Reported
|
|
ASU 2015-03 Adjustments
|
|
As Adjusted
|
Other long-term assets (see Note 12)
|
|
$
|
135,115
|
|
|
$
|
(10,816
|
)
|
|
$
|
124,299
|
|
York Property Mortgage, current
|
|
$
|
7,302
|
|
|
$
|
(1,010
|
)
|
|
$
|
6,292
|
|
Long-term debt, net
|
|
$
|
614,767
|
|
|
$
|
(9,806
|
)
|
|
$
|
604,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
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 provided by operating activities:
|
|
|
|
|
|
|
Amortization of debt discount and issuance costs
|
|
$
|
1,782
|
|
|
$
|
1,290
|
|
|
$
|
3,072
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
Other operating assets and liabilities (see Note 13)
|
|
$
|
(26,342
|
)
|
|
$
|
(1,290
|
)
|
|
$
|
(27,632
|
)
|
Net cash provided by operating activities
|
|
$
|
155,058
|
|
|
$
|
—
|
|
|
$
|
155,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014
|
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 provided by operating activities:
|
|
|
|
|
|
|
Amortization of debt discount and issuance costs
|
|
$
|
3,564
|
|
|
$
|
1,042
|
|
|
$
|
4,606
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
Other operating assets and liabilities (see Note 13)
|
|
$
|
14,448
|
|
|
$
|
(1,042
|
)
|
|
$
|
13,406
|
|
Net cash provided by operating activities
|
|
$
|
44,265
|
|
|
$
|
—
|
|
|
$
|
44,265
|
|
Restricted Cash
—As of December 31, 2016 and 2015, Restricted Cash primarily includes amounts held in certain foreign jurisdictions where there is a legal requirement for auction houses to maintain consignor funds in segregated accounts (
$38.5 million
and
$28.9 million
, respectively). As of December 31, 2016, Restricted Cash also includes funds held in escrow pending the final settlement of a sale (
$15.3 million
), as well as funds held in a cash management account established under the control of the lender for potential monthly debt service, insurance, and tax payments related to the mortgage on our headquarters building in New York (
$4.6 million
). See Note 9 for information related to the mortgage on our headquarters building in New York.
Valuation of Inventory and Loan Collateral
—The art market is not a highly liquid trading market. As a result, the valuation of art is inherently subjective and the realizable value of art often fluctuates over time. In estimating the realizable value of art held in inventory and art pledged as collateral for SFS loans, we consider the following complex array of factors: (i) whether the property is expected to be offered at auction or sold privately, and the timing of any such sale; (ii) the supply and demand for the property, taking into account current art market conditions, as well as changing trends as to which collecting categories and artists are most sought after; (iii) recent sale prices achieved for comparable items within a particular collecting category and/or by a particular artist; (iv) the state of the global economy and financial markets; and (v) our intent and ability to hold the property in order to maximize its realizable value. Due to the inherent subjectivity involved in estimating the realizable value of art held in inventory and art pledged as collateral for SFS loans, our estimates of realizable value may prove, with the benefit of hindsight, to be different than the amount ultimately realized upon sale. See below for a detailed discussion of our accounting policies with respect to Notes Receivable and Inventory.
Accounts Receivable and Allowance for Doubtful Accounts
—Accounts Receivable principally includes amounts due from buyers as a result of auction and private sale transactions. The recorded amount reflects the purchase price of the property, including our commission. The Allowance for Doubtful Accounts principally includes estimated losses associated with situations when we have paid the net sale proceeds to the seller and it is probable that payment will not be collected from the buyer. The Allowance for Doubtful Accounts also includes an estimate of probable losses inherent in the remainder of the Accounts Receivable balance. The amount of the required allowance is based on the facts available to management, including the value of any property held as collateral, and is reevaluated and adjusted as additional facts become known. Based on all available information, we believe that the Allowance for Doubtful Accounts is adequate as of
December 31, 2016
; however, actual losses may ultimately exceed the recorded allowance. As of
December 31, 2016
and
2015
, the Allowance for Doubtful Accounts was
$7.7 million
and
$8.6 million
, respectively. See
Note 4
for information related to Accounts Receivable.
Notes Receivable and Allowance for Credit Losses
—Notes Receivable includes loans made to clients that are secured by artworks. The classification of a loan as current or non-current on our Consolidated Balance Sheets takes into account the contractual maturity date of the loan, as well as the likelihood of renewing the loan on or before its contractual maturity. The determination of whether a specific loan is impaired and the amount of any required allowance is based on the facts available to management and is reevaluated and adjusted as additional facts become known. A loan is considered to be impaired when we determine 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. An allowance is also established for probable losses inherent in the remainder of the loan portfolio based on historical data related to loan losses. See
Note 4
for information related to Notes Receivable.
Inventory
—Inventory consists of artworks that we own and includes the following general categories: (i) items that have been obtained as a result of the failure of guaranteed property to sell at auction (see
Note 19
), (ii) items that have been purchased opportunistically, including property acquired for sale at auction, and (iii) other objects obtained incidental to the auction process (e.g., as a result of buyer default).
Inventory is valued on a specific identification basis at the lower of cost or our estimate of realizable value (i.e., the expected sale price upon disposition). If there is evidence that the estimated realizable value of a specific item held in Inventory is less than its carrying value, a writedown is recorded to reflect our revised estimate of realizable value. For the years ended December 31, 2016, 2015, and 2014, inventory writedowns totaled
$22.3 million
,
$20.1 million
, and
$10 million
, respectively.
Although all of the items held in Inventory are available for immediate sale, the timing of eventual sale is difficult to predict due to the high value and unique nature of each item, as well as the cyclical nature of the global art market. We expect that the items held in Inventory will be sold in the ordinary course of our business during the normal operating cycle for such items.
Fixed Assets
—Fixed Assets are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful life of the asset. Buildings are depreciated over a useful life of up to
50 years
. Building improvements are depreciated over a useful life of up to
20 years
. Furniture and fixtures are depreciated over a useful life of up to
seven
years. Leasehold improvements are amortized using the straight-line method over the lesser of the term of the related lease or the estimated useful life of the improvement. Computer software purchased or developed for internal use consists of the cost of purchased software, as well as direct external and internal software development costs. These costs are amortized on a straight-line basis over the estimated useful life of the software, which is typically between
seven
to
ten
years for enterprise systems and
three
years for other types of software. See
Note 6
for information related to Fixed Assets.
Goodwill
—Goodwill represents the excess of the purchase price paid over the fair value of net assets acquired in a business combination. Goodwill is not amortized, but is tested annually for impairment at the reporting unit level as of October 31 and between annual tests if indicators of potential impairment exist. These indicators could include a decline in our stock price and market capitalization, a significant change in the outlook for the reporting unit's business, lower than expected operating results, increased competition, legal factors, or the sale or disposition of a significant portion of a reporting unit. An impairment loss is recognized for any amount by which the carrying value of a reporting unit's goodwill exceeds its fair value. The fair value of the reporting units in our Agency segment is determined in reference to a blend of the income and market approaches and the fair value of our art advisory reporting unit is determined using a discounted cash flow methodology. See Note 7 for information related to Goodwill.
The significant assumptions used in the income approach and discounted cash flow approach include (i) forecasted growth rates and (ii) forecasted profitability, both of which are estimated based on consideration of our historical performance and projections of our future performance, and (iii) discount rates that are used to calculate the value of future projected cash flows, which rates are derived based on our estimated weighted average cost of capital. The significant assumptions used in the market approach include the selected multiples applied to certain operating metrics. Considerable judgment is necessary to evaluate the impact of operating changes and business initiatives in order to estimate future growth rates and profitability in order to estimate future cash flows and multiples. This is particularly true in a cyclical business, like ours. Future business results could significantly impact the evaluation of our goodwill which could have a material impact on the determination of whether a potential impairment exists and the size of any such impairment.
Intangible Assets
—Intangible assets are amortized over their estimated useful lives unless the useful life of a particular intangible asset is deemed to be indefinite. If indicators of potential impairment exist, intangible assets with defined useful lives are tested for impairment based on our estimates of undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values. See Note 7 for information related to Intangible Assets.
Impairment of Long-Lived Assets
—Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. In such situations, long-lived assets are considered impaired when estimated future cash flows (undiscounted and without interest charges) resulting from the use of the asset and its eventual disposition are less than the asset's carrying amount. In such situations, the asset is written down to the present value of the estimated future cash flows. Factors that are considered when evaluating long-lived assets for impairment include a current expectation that it is more likely than not that the long-lived asset will be sold significantly before the end of its useful life, a significant decrease in the market price of the long-lived asset, and a significant change in the extent or manner in which the long-lived asset is being used.
Valuation of Deferred Tax Assets
—A valuation allowance is recorded to reduce our deferred tax assets to the amount that is more likely than not to be realized. In assessing the need for the valuation allowance, management considers, among other things, projections of future taxable income and ongoing prudent and feasible tax planning strategies. If we determine that sufficient negative evidence exists (for example, if we experience cumulative three-year losses in a certain jurisdiction), then we will consider recording a valuation allowance against a portion or all of the deferred tax assets in that jurisdiction. If, after recording a valuation allowance, our projections of future taxable income and other positive evidence considered in evaluating the need for a valuation allowance prove, with the benefit of hindsight, to be inaccurate, it could prove to be more difficult to support the realization of our deferred tax assets. As a result, an additional valuation allowance could be required, which would have an adverse impact on our effective income tax rate and results. Conversely, if, after recording a valuation allowance, we determine that sufficient positive evidence exists in the jurisdiction in which the valuation allowance was recorded (for example, if we are no longer in a three-year cumulative loss position in the jurisdiction, and we expect to have future taxable income in that jurisdiction based upon our forecasts and the expected timing of deferred tax asset reversals), we may reverse a portion or all of the valuation allowance in that jurisdiction. In such situations, the adjustment made to the deferred tax asset would have a favorable impact on our effective income tax rate and results in the period such determination was made. See
Note 16
for information related to income taxes, including the recorded balances of our valuation allowance related to deferred tax assets.
Auction Guarantees
—From time-to-time in the ordinary course of our business, we will guarantee to a consignor a minimum sale price in connection with the sale of property at auction. If the property offered under the auction guarantee sells above the minimum guaranteed price, we are generally entitled to a share of the excess proceeds. In the event that the property sells for less than the minimum guaranteed price, we must perform under the auction guarantee by funding the difference between the sale price at auction and the amount of the auction guarantee. If any item of property offered under the auction guarantee does not sell, the amount of the auction guarantee must be paid, but we take ownership of the unsold property and may recover the amount paid through its future sale. In situations when an item of guaranteed property does not sell and we take ownership of the property, it is recorded as Inventory on our Consolidated Balance Sheets at the lower of its cost (i.e., the amount paid under the auction guarantee) or our estimate of the property's net realizable value (i.e., the expected sale price upon its eventual disposition).
The estimated fair value of our obligation to perform under our auction guarantees is recorded on our Consolidated Balance Sheets within Accounts Payable and Accrued Liabilities. This estimated fair value is based on an analysis of historical loss experience related to auction guarantees and does not include the impact of risk-sharing arrangements that may have mitigated all or a portion of any historical losses.
See
Note 19
for information related to auction guarantees and any associated risk-sharing arrangements.
Financial Instruments
—Our material financial instruments include: (i) Cash and Cash Equivalents; (ii) Restricted Cash; (iii) Notes Receivable; (iv) credit facility borrowings; (v) long-term debt, including the mortgage on our headquarters building in New York; and (vi) various derivative financial instruments. The carrying amounts of Cash and Cash Equivalents, Restricted Cash, Notes Receivable, the mortgage on our headquarters building in New York, and credit facility borrowings do not materially differ from their estimated fair values due to their nature and the variable interest rates associated with each of these financial instruments. See Notes 9 for fair value information related to other long-term debt and Note 10 for fair value information related to derivative financial instruments.
Revenue Recognition (Agency Commissions and Fees)
—Through our Agency segment, we accept property on consignment, stimulate buyer interest through professional marketing techniques, and match sellers (also known as consignors) to buyers through the auction or private sale process. Prior to offering a work of art for sale, we perform due diligence activities to authenticate and determine the ownership history of the property being sold. The revenue recognition policy for each of the principal components of Agency Commissions and Fees is described below.
(1) Auction Commission Revenues
—In our role as auctioneer, we accept property on consignment and match sellers to buyers through the auction process. As compensation for our auction services, we earn a commission from both the buyer ("buyer's premium") and, to a lesser extent, the seller ("seller's commission") (collectively, "auction commission revenue"), both of which are calculated as a percentage of the hammer price of the property sold at auction.
On the fall of the auctioneer's hammer, the highest bidder becomes legally obligated to pay the full purchase price, which includes the hammer price of the property purchased plus the buyer's premium, and the seller is legally obligated to relinquish the property in exchange for the hammer price less any seller's commissions. Auction commission revenue is recognized on the date of the auction sale upon the fall of the auctioneer's hammer, which is the point in time when we have substantially accomplished what we must do to be entitled to the benefits represented by the auction commission revenue. Subsequent to the date of the auction sale, our remaining obligations for our auction services relate only to the collection of the purchase price from the buyer and the remittance of the net sale proceeds to the seller. These remaining service obligations are not an essential part of our auction services.
Under the standard terms and conditions of our auction sales, we are 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. We continually evaluate the collectability of amounts due from individual buyers and only recognize auction commission revenue when the collection of the amount due from the buyer is reasonably assured. If we determine that it is probable that the buyer will default, a cancelled sale is recorded in the period in which that determination is made and the associated Accounts Receivable balance, including our auction commission, is reversed. Our judgments regarding the collectability of Accounts Receivable are based on an assessment of the buyer's payment history, discussions with the buyer, and the value of any property held as security against the buyer's payment obligation. Our judgments with respect to the collectability of amounts due from buyers for auction purchases may prove, with the benefit of hindsight, to be incorrect. Historically, cancelled sales have not been material in relation to the aggregate hammer price of property sold at auction.
Auction commission revenues are recorded net of commissions owed to third parties, which are principally the result of situations when the buyer's premium is shared with the consignor or with the counterparty in an auction guarantee risk and reward sharing arrangement (see
Note 19
). Additionally, in certain situations, auction commissions are shared with third parties who introduce us to auction consignors or otherwise facilitate the sale of property at auction.
(2) Private Sale Commission Revenues
—Private sale commission revenues are earned through the direct brokering of purchases and sales of art. Similar to auction sales, the primary service that we provide in a private sale transaction is the matching of the seller to a buyer in a legally binding transaction. Private sales are initiated either by a client wishing to sell property with Sotheby's acting as its exclusive agent in the transaction or a prospective buyer who is interested in purchasing a certain work of art privately. Such arrangements are evidenced by a legally binding agreement between Sotheby's and the seller (a "Seller Agreement"), which outlines the terms of the arrangement, including the desired sale price and the amount or rate of commission to be earned. In certain situations, we may also execute a legally binding agreement with the buyer stipulating the terms of the transaction (a "Buyer Agreement").
The timing of revenue recognition for private sale commissions is evaluated on a case-by-case basis, and in large part, is dependent upon whether a Buyer Agreement has been executed. Additionally, a careful analysis of the individual facts and circumstances is performed for each transaction to fully understand our obligations and performance requirements related to the transaction.
In transactions with a Buyer Agreement, our services are performed on the date that the Buyer Agreement is executed. At this point, any remaining service obligations are considered to be inconsequential and perfunctory. Such remaining service obligations normally relate only to the collection of the purchase price from the buyer and the remittance of the net sale proceeds to the seller. These remaining service obligations are not an essential part of the services that we provide in a private sale transaction. In the absence of an executed Buyer Agreement, revenue recognition is deferred until we have performed our substantive service obligations in the transaction and the buyer has paid the full purchase price thereby evidencing the terms of the arrangement.
Private sale commission revenues are recorded net of commissions owed to third parties. In certain situations, commissions are shared with third parties who introduce us to consignors who sell property through a private sale transaction.
(3) Other Agency Commissions and Fees (Net)
—Included in Other Agency Commissions and Fees is our share of overage or shortfall related to guaranteed property offered or sold at auction. The overage or shortfall related to guaranteed property is generally recognized in the period in which the property is offered at auction. However, a shortfall is recognized prior to the date of the auction if we determine that a loss related to an auction guarantee is probable. In such situations, we estimate the amount of the loss based on the difference between the amount of the auction guarantee and the expected selling price of the property, including buyer's premium.
Also included in Other Agency Commissions and Fees (Net) are commissions and fees earned on sales of art brokered by third parties, fees charged to consignors for property withdrawn prior to auction, and catalogue subscription and advertising revenues. These revenues are recognized in our Consolidated Income Statements when the underlying event occurs or over the period during which we provide the service to our customer.
Revenue Recognition (Inventory Sales)
—Inventory sales are recognized in the period in which the sale is completed, title to the property passes to the purchaser, and we have fulfilled any other obligations that may be relevant to the transaction, including, but not limited to, delivery of the property. In instances when Inventory is sold at auction, the associated buyer's premium is recorded within Inventory Sales. The carrying value of Inventory sold during a period is recorded within Cost of Inventory Sales.
Revenue Recognition (Finance Revenues)
—Finance revenues consist principally of interest income earned on Notes Receivable. Such interest income is recognized when earned, based on the amount of the outstanding loan, the applicable interest rate on the loan, and the length of time the loan is outstanding during the period. A non-accrual loan is a loan for which future Finance revenue is not recorded due to our 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 we become aware of other circumstances that indicate that it is probable that the borrower will make future interest payments on the loan. See
Note 4
for information related to Notes Receivable.
Revenue Recognition (Advisory Revenues)
—Advisory revenues consist of fees earned from providing art-related advice to certain clients, including strategic guidance on collection identity and development, acquisitions, and short and long-term planning. These arrangements are typically evidenced by a legally binding written agreement between us and the client, which outlines the nature of the services to be provided and the amount of fees to be earned. Our advisory services are also sometimes provided on the basis of a verbal agreement with the client. For arrangements with written agreements, advisory revenues are recognized ratably on a straight-line basis over the term of the agreement, provided collectability is reasonably assured. Advisory service arrangements are typically one year in duration. In the absence of a written advisory agreement, revenue recognition is deferred until we have performed our substantive service obligations and the client has made payment for those services thereby evidencing the terms of the arrangement. Advisory revenues are reflected within Other Revenues in our Consolidated Income Statements.
Sales, Use and Value-Added Taxes
—Sales, use and value-added taxes assessed by governmental authorities that are both imposed on and concurrent with revenue-producing transactions between us and our clients are reported on a net basis within revenues.
Agency Direct Costs
—A large portion of Agency Direct Costs relate to sale marketing expenses such as catalogue production and distribution, advertising and promotion costs, and traveling exhibition costs. Such costs are deferred and recorded on our Consolidated Balance Sheets within Prepaid Expenses and Other Current Assets until the date of the sale when they are recognized in our Consolidated Income Statements.
Cost of Finance Revenues
—The Cost of Finance Revenues includes costs related to revolving credit facility borrowings that are used to fund client loans, including interest expense, commitment fees, and the amortization of amendment and arrangement fees. See Note 9 for information related to our revolving credit facility.
Share-Based Payments
—We grant share-based payment awards as compensation to certain employees. The amount of compensation expense recognized for share-based payments is based, in part, on our estimate of the number of shares ultimately expected to vest as a result of employee service. For share-based payment awards that vest annually over a multi-year period of service, compensation expense is amortized over the requisite service period according to a graded vesting schedule. For share-based payment awards that vest at the end of a service period, compensation expense is amortized on a straight-line basis over the requisite service period.
A substantial portion of the share-based payment awards vest only if we achieve established profitability targets (for awards granted prior to 2016) or certain return on invested capital targets (for awards granted beginning in 2016). The amount of compensation expense recognized for such performance-based awards is dependent upon our quarterly assessment of the likelihood of achieving these targets. Accordingly, if our projections of future performance against these targets prove, with the benefit of hindsight, to be inaccurate, the amount of life-to-date and future compensation expense related to share-based payments could significantly increase or decrease.
In 2015, we granted a share-based payment award to Thomas S. Smith, Jr., our President and CEO, with a single vesting opportunity after a
five
-year service period contingent upon the achievement of pre-determined levels of appreciation related to our common stock. The compensation expense recognized for this share-based payment is based on our estimate of the grant date fair value of the award. In developing this estimate, we considered then-current market conditions, historical data, and any other relevant data.
Dividend equivalents related to share-based payments to employees are charged to Retained Earnings.
See
Note 21
for information related to share-based payments.
Use of Estimates
—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.
Note 2
—Segment Reporting
Sotheby's is a global art business, offering our clients opportunities to connect with and transact in the world's most extraordinary objects. Auctioneers since 1744, today we offer a variety of innovative art-related services, including the brokerage of private art sales, private jewelry sales through Sotheby's Diamonds, exclusive private selling exhibitions at our S|2 galleries, art-related financing, and art advisory services, as well as retail wine locations in New York and Hong Kong.
Our 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").
Through our Agency segment, we accept property on consignment, stimulate buyer interest through professional marketing techniques, and match sellers (also known as consignors) to buyers through the auction or private sale process. Prior to offering a work of art for sale, we perform due diligence activities to authenticate and determine the ownership history of the property being sold. 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 (see
Note 5
). The Agency segment is an aggregation of the auction, private sale, and other related activities conducted by our operating segments in the Americas, Europe, and Asia, which have similar economic characteristics and are similar in their services, customers, and the manner in which their services are provided.
SFS is an art financing company that is uniquely positioned as a niche lender with the ability to tailor attractive financing packages for clients who wish to obtain immediate access to liquidity from their art assets. SFS deploys a unique combination of art expertise, skill in international law and finance, and access to capital to provide art collectors and dealers with financing secured by their works of art, allowing them to unlock the value in their collections. (See
Note 4
).
Art Agency Partners (“AAP”), through which we offer art advisory services, provides clients strategic guidance on collection identity and development, acquisitions, and short and long-term planning. AAP was acquired on January 11, 2016 (see Note 3). Our advisory services are classified within All Other for segment reporting purposes, along with our retail wine business, brand licensing activities, the activities of Acquavella Modern Art ("AMA"), an equity investee (see
Note 5
), and sales of the remaining inventory of Noortman Master Paintings, an art dealer that was owned and operated by us from its acquisition in 2006 until its closure in December 2013.
The accounting policies of our segments are the same as those described in
Note 1
. For auction commissions, revenues are attributed to geographic areas based on the location of the auction. For private sale commissions, revenues are attributed to geographic areas based on the location of the entities which significantly contributed to the completion of the sale. For inventory activities, revenues are attributed to geographic areas based on the location of the entity that holds legal title to the property sold. SFS revenues are attributed to geographic areas based on the location of the entity that originated the loan. Revenues attributable to our advisory business are earned entirely in the U.S.
The following table presents our segment information for the years ended December 31,
2016
,
2015
, and
2014
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
Agency
|
|
SFS
|
|
All Other
|
|
Reconciling items
|
|
Total
|
Revenues
|
|
$
|
726,662
|
|
|
$
|
61,234
|
|
|
$
|
25,999
|
|
|
$
|
(8,518
|
)
|
(a)
|
$
|
805,377
|
|
Interest income
|
|
$
|
1,294
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,294
|
|
Interest expense
|
|
$
|
30,310
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,310
|
|
Depreciation and amortization
|
|
$
|
21,081
|
|
|
$
|
119
|
|
|
$
|
617
|
|
|
$
|
—
|
|
|
$
|
21,817
|
|
Segment income (loss) before taxes
|
|
$
|
64,571
|
|
(c)
|
$
|
35,907
|
|
|
$
|
(482
|
)
|
(c)
|
$
|
(3,262
|
)
|
(b)
|
$
|
96,734
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
892,030
|
|
|
$
|
65,248
|
|
|
$
|
18,975
|
|
|
$
|
(14,759
|
)
|
(a)
|
$
|
961,494
|
|
Interest income
|
|
$
|
1,773
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,776
|
|
Interest expense
|
|
$
|
32,745
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
32,745
|
|
Depreciation and amortization
|
|
$
|
19,233
|
|
|
$
|
124
|
|
|
$
|
124
|
|
|
$
|
—
|
|
|
$
|
19,481
|
|
Segment income before taxes
|
|
$
|
139,942
|
|
|
$
|
41,303
|
|
|
$
|
10,864
|
|
|
$
|
(22,810
|
)
|
(b)
|
$
|
169,299
|
|
Year ended December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
885,293
|
|
|
$
|
47,290
|
|
|
$
|
19,747
|
|
|
$
|
(14,277
|
)
|
(a)
|
$
|
938,053
|
|
Interest income
|
|
$
|
1,857
|
|
|
$
|
18
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
1,883
|
|
Interest expense
|
|
$
|
35,189
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
35,189
|
|
Depreciation and amortization
|
|
$
|
20,110
|
|
|
$
|
130
|
|
|
$
|
335
|
|
|
$
|
—
|
|
|
$
|
20,575
|
|
Segment income before taxes
|
|
$
|
182,763
|
|
|
$
|
31,763
|
|
(b)
|
$
|
7,424
|
|
|
$
|
(28,929
|
)
|
(b)
|
$
|
193,021
|
|
(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 income before taxes are detailed in the table below.
|
|
|
(c)
|
Agency segment income before taxes for the year ended December 31, 2016 includes
$23.9 million
of compensation expense related to an earn-out arrangement with the former principals of AAP. All Other (loss) income before taxes for the year ended December 31, 2016 includes
$11.1 million
of compensation expense related to this earn-out arrangement. See
Note 3
.
|
The table below details the unallocated amounts and reconciling items related to segment income (loss) before taxes and provides a reconciliation of segment income (loss) before taxes to consolidated income before taxes for the years ended December 31,
2016
,
2015
, and
2014
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Agency
|
$
|
64,571
|
|
|
$
|
139,942
|
|
|
$
|
182,763
|
|
SFS
|
35,907
|
|
|
41,303
|
|
|
31,763
|
|
All Other
|
(482
|
)
|
|
10,864
|
|
|
7,424
|
|
Segment income before taxes
|
99,996
|
|
|
192,109
|
|
|
221,950
|
|
Unallocated amounts and reconciling items:
|
|
|
|
|
|
|
|
|
Leadership transition severance costs (a)
|
—
|
|
|
(13,251
|
)
|
|
—
|
|
CEO separation and transition costs (see Note 23)
|
—
|
|
|
(4,232
|
)
|
|
(7,591
|
)
|
Special charges (net) (see Note 25)
|
—
|
|
|
—
|
|
|
(20,008
|
)
|
Equity in earnings of investees (b):
|
|
|
|
|
|
RM Sotheby's
|
(1,967
|
)
|
|
(2,519
|
)
|
|
—
|
|
Acquavella Modern Art
|
(1,295
|
)
|
|
(2,808
|
)
|
|
(1,330
|
)
|
Total equity in earnings of investees
|
(3,262
|
)
|
|
(5,327
|
)
|
|
(1,330
|
)
|
Income before taxes
|
$
|
96,734
|
|
|
$
|
169,299
|
|
|
$
|
193,021
|
|
(a) In 2015, in conjunction with our leadership transition, we incurred severance costs of
$13.3 million
associated with the termination of certain executive officers, including our former Chief Financial Officer and former Chief Operating Officer.
(b) For segment reporting purposes, our share of earnings related to equity investees is included as part of income before taxes. However, such earnings are reported separately below income before taxes in our Consolidated Income Statements. For the periods presented, Agency segment results include equity earnings related to RM Sotheby's and All Other includes equity earnings related to Acquavella Modern Art. See
Note 5
for information related to our equity method investments.
The table below presents geographic information about our revenues for the years ended December 31,
2016
,
2015
, and
2014
for all countries which exceeded
5%
of total revenues (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
United States
|
$
|
367,200
|
|
|
$
|
463,129
|
|
|
$
|
402,385
|
|
United Kingdom
|
193,721
|
|
|
257,336
|
|
|
271,505
|
|
Hong Kong and China
|
145,885
|
|
|
146,262
|
|
|
165,066
|
|
Switzerland
|
50,003
|
|
|
50,134
|
|
|
46,226
|
|
France
|
42,980
|
|
|
41,803
|
|
|
48,032
|
|
Other countries
|
14,106
|
|
|
17,589
|
|
|
19,116
|
|
Reconciling item:
|
|
|
|
|
|
|
|
|
Intercompany revenue
|
(8,518
|
)
|
|
(14,759
|
)
|
|
(14,277
|
)
|
Total
|
$
|
805,377
|
|
|
$
|
961,494
|
|
|
$
|
938,053
|
|
The table below presents segment assets, as well as a reconciliation of segment assets to consolidated assets as of
December 31, 2016
,
2015
, and 2014 (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
2014
|
Agency
|
|
$
|
1,759,670
|
|
|
$
|
2,499,441
|
|
|
$
|
2,386,739
|
|
SFS
|
|
687,649
|
|
|
721,781
|
|
|
658,710
|
|
All Other
|
|
42,246
|
|
|
25,178
|
|
|
29,067
|
|
Total segment assets
|
|
2,489,565
|
|
|
3,246,400
|
|
|
3,074,516
|
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
Deferred tax assets and income tax receivable
|
|
14,861
|
|
|
16,913
|
|
|
55,280
|
|
Consolidated assets
|
|
$
|
2,504,426
|
|
|
$
|
3,263,313
|
|
|
$
|
3,129,796
|
|
Substantially all of our capital expenditures for the years ended December 31,
2016
,
2015
, and
2014
were attributable to the Agency segment. See Note 1 for information regarding the retrospective adoption of an accounting standard in 2016 that requires unamortized debt issuance costs to be included as a direct deduction from the related debt liability on the balance sheet. Prior period balances in this table have been adjusted to conform to this new presentation.
Note 3
—Acquisition of Art Agency, Partners
On January 11, 2016, we acquired Art Agency, Partners, a firm that provides a range of art-related services, in exchange for initial cash consideration of
$50 million
and potential future earn-out payments of up to
$35 million
, as discussed in more detail below. The purpose of this acquisition is to grow auction and private sale revenues by enhancing our relationships with art collectors and by improving our position in the fine art market, particularly in Impressionist, Modern and Contemporary Art. Also, as a result of this acquisition, we have added a new revenue stream by integrating AAP's existing art advisory business, providing a new avenue for growth.
The purchase agreement governing the acquisition of AAP includes non-competition and non-solicitation covenants that continue in effect until January 2021. In connection with this acquisition, each of the former principals of AAP also entered into a
five
-year employment agreement that extends through January 2021. Each employment agreement also includes non-competition and non-solicitation covenants that continue in effect for
12 months
following the end of employment.
As indicated above, in connection with the acquisition of AAP, we agreed to make future earn-out payments to the former principals of AAP not to exceed
$35 million
in the aggregate, contingent on the achievement of a level of cumulative financial performance within the Impressionist, Modern and Contemporary Art collecting categories, as well as from AAP's art advisory business. Progress against the cumulative financial target (the "Target") is measured at the end of each calendar year during the
four
-year performance period following the acquisition, after adjusting the Target to reflect the annual growth or contraction of the auction market for Impressionist, Modern and Contemporary Art, when compared to the year ended December 31, 2015. Payments made pursuant to the earn-out arrangement are deemed to be compensation for accounting purposes and are expensed to Salaries and Related Costs in our Consolidated Income Statements on a pro-rata basis over the periods during which the Target is met.
For the year ended December 31, 2016, we recognized
$35 million
of compensation expense associated with the AAP earn-out arrangement based on our assessment of performance against the Target during the initial annual period. This amount includes charges of
$17.2 million
and
$13.4 million
recorded in the third and fourth quarters of 2016, respectively, following our reassessments of progress against the Target based on forecasted and actual results for the autumn sales season. The achievement of the entire
$35 million
earn-out reflects our improved market share in the Contemporary Art collecting category, as well as an improvement in auction commission margins. The
$35 million
owed under the earn-out arrangement will be paid in
four
annual increments of
$8.75 million
in the first quarter of each year beginning in 2017 and through 2020. The portion of the accrued liability due in the first quarter of 2017 (
$8.75 million
) is recorded within Accrued Salaries and Related Costs on our Consolidated Balance Sheets. The remaining liability (
$26.25 million
) is recorded within Other Long-Term Liabilities. See Note 12.
The table below summarizes the allocation of the total purchase price paid for AAP to the assets acquired and liabilities assumed (in thousands of dollars):
|
|
|
|
|
|
Purchase price:
|
|
|
Initial cash consideration
|
|
$
|
50,000
|
|
Working capital adjustment
|
|
1,189
|
|
Total purchase price
|
|
$
|
51,189
|
|
Allocation of purchase price:
|
|
|
Net working capital acquired
|
|
$
|
1,572
|
|
Fixed assets and other long-term assets
|
|
173
|
|
Goodwill
|
|
34,490
|
|
Intangible assets - customer relationships (see Note 7)
|
|
10,800
|
|
Intangible assets - non-compete agreements (see Note 7)
|
|
3,060
|
|
Deferred tax assets
|
|
1,094
|
|
Total purchase price
|
|
$
|
51,189
|
|
Upon completion of the purchase price allocation,
$28.3 million
of the resulting goodwill was allocated to the Agency segment and
$6.2 million
was allocated to the acquired art advisory business, which is reported within All Other for segment reporting purposes. The goodwill is tax deductible over a period of
15
years. See Note 7 for additional information related to goodwill and intangible assets.
We incurred
$0.8 million
of transaction costs in connection with the acquisition of AAP, which were recognized within General and Administrative Expenses in our Consolidated Income Statements in the fourth quarter of 2015 (
$0.6 million
) and the first quarter of 2016 (
$0.2 million
).
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 pro-forma 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.
Note 4
—Receivables
Accounts Receivable (Net)
—Through our Agency segment, we accept property on consignment and match sellers, also known as consignors, to buyers through the auction or private sale process. Following an auction or private sale, we invoice the buyer for the purchase price of the property (including any commissions owed by the buyer), collect payment from the buyer, and remit to the consignor the net sale proceeds after deducting our commissions, expenses and applicable taxes and royalties.
Under our standard auction payment terms, the purchase price is due from the buyer no more than
30 days
after the sale date, with the net proceeds due to the consignor
35 days
after the sale date. For private sales, payment from the buyer is typically due on the sale date, with the net sale proceeds due to the consignor shortly thereafter. We also sometimes provide extended payment terms to an auction or private sale buyer. For auctions, the extent to which extended payment terms are provided 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, we attempt to match the timing of cash receipt from the buyer with the timing of our payment to the consignor, but are not always successful in doing so. All extended payment term arrangements are approved by management under our internal corporate governance policy.
In the limited circumstances when the buyer's payment due date is extended to a date that is beyond one year from the sale date, if the consignor does not provide matched payment terms (i.e., we pay the consignor before receiving payment from the buyer), the receivable balance is reclassified from Accounts Receivable to Notes Receivable on our Consolidated Balance Sheets. As of
December 31, 2016
and
2015
, Notes Receivable within the Agency segment included
$7.5 million
and
$24.3 million
, respectively, of such balances that have been reclassified from Accounts Receivable. See discussion of Agency segment Notes Receivable below.
Under the standard terms and conditions of our auction and private sales, we are 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 one of our future auctions or negotiate a private sale with us acting as their agent. In certain instances, and subject to management approval under our internal corporate governance policy, we may pay the net sale proceeds to the consignor before payment is collected from the buyer and/or we may allow the buyer to take possession of the property before making payment. In situations when the buyer takes possession of the property before making payment, we are liable to the seller for the net sales proceeds whether or not the buyer makes payment. As of
December 31, 2016
and
2015
, Accounts Receivable (net) included
$90.1 million
and
$165.2 million
, respectively, related to situations when we paid the consignor all or a portion of the net sales proceeds before payment was collected from the buyer. As of
December 31, 2016
and
2015
, Accounts Receivable (net) also included
$76.3 million
and
$93.1 million
, respectively, related to situations when we allowed the buyer to take possession of the property before making payment.
Notes Receivable (Sotheby's Financial Services)
—SFS makes term loans secured by artworks that are not presently intended for sale, allowing us to establish or enhance mutually beneficial relationships with art collectors. Term loans may also generate future auction or private sale consignments and/or purchases. In certain situations, term loans are made to refinance receivables generated by the auction and private sale purchases of our clients. Term loans normally have initial maturities of up to two years and typically carry a variable market rate of interest. To a much lesser extent, SFS also makes consignor advances secured by artworks that are contractually committed, in the near term, to be offered for sale through our Agency segment. Consignor advances allow sellers to receive funds upon consignment for an auction or private sale that will occur up to one year in the future and normally have short-term maturities.
The lending activities of SFS are predominantly funded with borrowings drawn from a dedicated revolving credit facility. To a lesser extent, cash balances are also used to fund a portion of the loans made by SFS, as appropriate. See
Note 9
for information related to the dedicated revolving credit facility for SFS.
As of
December 31, 2016
and
2015
, the net Notes Receivable balance of SFS includes
$88.7 million
and
$108.8 million
, respectively, of term loans issued by SFS to refinance client auction and private sale purchases. For the years ended
December 31, 2016
and
2015
, SFS issued
$13.3 million
and
$50.2 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 our Consolidated Statements of Cash Flows. Upon repayment, the cash received in settlement of such Notes Receivable is classified within Operating Activities in our Consolidated Statements of Cash Flows. For the years ended December 31,
2016
and
2015
, such repayments totaled
$33.4 million
and
$31.8 million
, respectively.
The repayment 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, our ability to realize on our collateral may be limited or delayed.
We aim to mitigate the risk associated with a potential devaluation in our collateral by targeting a
50%
loan-to-value ("LTV") ratio (i.e., the principal loan amount divided by the low auction estimate of the collateral). However, loans may also be made with LTV ratios between
51%
and
60%
, and in rare circumstances, loans may be made at an initial LTV ratio higher than
60%
. The SFS Credit Facility permits borrowings up to
85%
of the portion of any loan that does not exceed a
60%
LTV ratio.
The LTV ratio of certain loans may increase above our
50%
target due to a decrease in the low auction estimate of the collateral. The revaluation of term loan collateral is performed by our specialists on an annual basis or more frequently if there is a material change in the circumstances related to the loan, the value of the collateral, the disposal plans for the collateral, or if an event of default occurs. We believe that the LTV ratio is the 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
December 31, 2016
and
2015
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Secured loans
|
|
$
|
675,109
|
|
|
$
|
682,258
|
|
Low auction estimate of collateral
|
|
$
|
1,405,856
|
|
|
$
|
1,380,022
|
|
Aggregate LTV ratio
|
|
48
|
%
|
|
49
|
%
|
The table below provides the aggregate LTV ratio for secured loans made by SFS with an LTV above
50%
as of
December 31, 2016
and
2015
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Secured loans with an LTV ratio above 50%
|
|
$
|
270,111
|
|
|
$
|
354,049
|
|
Low auction estimate of collateral related to secured loans with an LTV above 50%
|
|
$
|
486,973
|
|
|
$
|
626,829
|
|
Aggregate LTV ratio of secured loans with an LTV above 50%
|
|
55
|
%
|
|
56
|
%
|
The table below provides other credit quality information regarding secured loans made by SFS as of
December 31, 2016
and
2015
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Total secured loans
|
|
$
|
675,109
|
|
|
$
|
682,258
|
|
Loans past due
|
|
$
|
90,508
|
|
|
$
|
11,819
|
|
Loans more than 90 days past due
|
|
$
|
158
|
|
|
$
|
7,828
|
|
Non-accrual loans
|
|
$
|
158
|
|
|
$
|
—
|
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
Allowance for credit losses for impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
Allowance for credit losses based on historical data
|
|
1,270
|
|
|
1,458
|
|
Total allowance for credit losses - secured loans
|
|
$
|
1,270
|
|
|
$
|
1,458
|
|
We consider a loan to be past due when principal payments are not paid in accordance with the stated terms of the loan. As of
December 31, 2016
,
$90.5 million
of the Notes Receivable (net) balance was past due, of which
$0.2 million
was more than 90 days past due. The collateral securing these loans has a low auction estimate of approximately
$161 million
resulting in an LTV ratio of approximately
56%
. We are continuing to accrue interest on virtually all past due loans. In consideration of payments received to-date in the first quarter of
2017
, the collateral value related to these loans, and current collateral disposal plans, we believe 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 our 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 we become aware of other circumstances that indicate that it is probable that the borrower will make future interest payments on the loan. As of
December 31, 2016
there were
$0.2 million
of non-accrual loans outstanding. As of December 31,
2015
, there were
no
non-accrual loans outstanding.
A loan is considered to be impaired when we determine 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
December 31, 2016
and
2015
, there were
no
impaired loans outstanding.
For the years ended
December 31, 2016
and 2015, activity related to the Allowance for Credit Losses was as follows (in thousands of dollars):
|
|
|
|
|
Balance as of January 1, 2015
|
$
|
1,166
|
|
Change in loan loss provision
|
292
|
|
Balance as of December 31, 2015
|
1,458
|
|
Change in loan loss provision
|
(188
|
)
|
Balance as of December 31, 2016
|
$
|
1,270
|
|
As of
December 31, 2016
, unfunded commitments to extend additional credit through SFS were approximately
$14.7 million
.
Notes Receivable (Agency Segment)
—We are obligated under the terms of certain auction guarantees to advance a portion of the guaranteed amount prior to the auction. Such auction guarantee advances are recorded on our Consolidated Balance Sheets within Notes Receivable (net). As of December 31, 2016, there were
$1 million
in auction guarantee advances outstanding. As of December 31, 2015, there were
no
auction guarantee advances outstanding. See
Note 19
for information related to auction guarantees.
As discussed above, 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 matched payment terms, the receivable balance is reclassified from Accounts Receivable (net) to Notes Receivable (net) on our Consolidated Balance Sheets. As of
December 31, 2016
, Notes Receivable (net) within the Agency segment included
$7.5 million
of such amounts reclassified from Accounts Receivable (net), against which we hold
$3.1 million
of collateral. As of
December 31, 2015
, Notes Receivable within the Agency segment included
$24.3 million
of such loans, against which we held
$7.2 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 as the funding of Notes Receivable within Investing Activities in our Consolidated Statements of Cash Flows. Upon repayment, the cash received in settlement of such Notes Receivable is classified within Operating Activities in our Consolidated Statements of Cash Flows. For the year ended December 31, 2016, such repayments totaled
$16.3 million
.
Under certain circumstances, we provide loans to certain art dealers to finance the purchase of works of art. In these situations, we acquire 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
December 31, 2016
and
2015
, such unsecured loans totaled
$3.8 million
and
$4.2 million
, respectively. We are 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, we sold our interest in an equity method investee for
$4.3 million
. The sale price was funded by an upfront cash payment 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
December 31, 2016
and
2015
, the carrying value of this loan was
$2.1 million
and
$2.4 million
, respectively.
Note 5
—Equity Method Investments
Acquavella Modern Art—
On May 23, 1990, we purchased the common stock of the Pierre Matisse Gallery Corporation ("Matisse") for approximately
$153 million
. The assets of Matisse consisted of a collection of fine art (the "Matisse Inventory"). Upon consummation of the purchase, we entered into an agreement with Acquavella Contemporary Art, Inc. ("ACA") to form AMA, a partnership through which the Matisse Inventory would be sold. We contributed the Matisse Inventory to AMA in exchange for a
50%
interest in the partnership. Although the original term of the AMA partnership agreement was for
ten years
and was due to expire in 2000, it has been renewed on an annual basis since then.
Pursuant to the AMA partnership agreement, upon the death of the majority shareholder of ACA, the successors-in-interest to ACA have the right, but not the obligation, to require us to purchase their interest in AMA at a price equal to the fair market value of such interest. The fair market value shall be determined pursuant to a process and a formula set forth in the partnership agreement that includes an appraisal of the works of art held by AMA at such time. Upon dissolution of AMA, if we and ACA elect not to liquidate the property and assets of AMA, any assets remaining after the payment of expenses and any other liabilities of AMA will be distributed to us and AMA as tenants-in-common or in some other reasonable manner. The net assets of AMA consist almost entirely of the Matisse Inventory. As of
December 31, 2016
and
2015
, the carrying value of the Matisse Inventory was
$39 million
and
$41.4 million
, respectively. As of
December 31, 2016
and
2015
, the carrying value of our investment in AMA was
$7.9 million
and
$8.5 million
, respectively. For the years ended December 31, 2016, 2015, and 2014, our results include
$1.3 million
,
$2.8 million
, and
$0.7 million
, respectively, of equity earnings related to AMA. From time-to-time, we transact with the principal shareholder of ACA in the normal course of our business.
RM Sotheby's—
On February 18, 2015, we acquired a
25%
ownership interest in RM Auctions, an auction house for investment-quality automobiles, for
$30.7 million
. Following our investment, RM Auctions is now known as RM Sotheby's. In addition to the initial
25%
ownership interest, we have governance participation and a comprehensive partnership agreement to work together to drive growth in the business. Over time, we will have opportunities to increase our ownership stake as the partnership evolves and grows. As of
December 31, 2016
and
2015
, the carrying value of our investment in RM Sotheby's was
$35.3 million
and
$33.2 million
, respectively. For the years ended December 31, 2016 and 2015, our results include
$2 million
and
$2.5 million
, respectively, of equity earnings related to RM Sotheby's.
Note 6
—Fixed Assets
As of
December 31, 2016
and
2015
, Fixed Assets consisted of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Land
|
|
$
|
92,155
|
|
|
$
|
93,078
|
|
Buildings and building improvements
|
|
230,803
|
|
|
226,530
|
|
Leasehold improvements
|
|
72,969
|
|
|
82,011
|
|
Computer hardware and software
|
|
74,744
|
|
|
73,728
|
|
Furniture, fixtures and equipment
|
|
76,829
|
|
|
78,529
|
|
Construction in progress
|
|
3,621
|
|
|
2,090
|
|
Other
|
|
5,257
|
|
|
2,015
|
|
Sub-total
|
|
556,378
|
|
|
557,981
|
|
Less: Accumulated depreciation and amortization
|
|
(209,196
|
)
|
|
(203,487
|
)
|
Total Fixed Assets, net
|
|
$
|
347,182
|
|
|
$
|
354,494
|
|
For the years ended
December 31, 2016
,
2015
, and
2014
, Depreciation and Amortization related to Fixed Assets was
$19.9 million
,
$19.5 million
, and
$20.6 million
, respectively.
Note 7
—Goodwill and Intangible Assets
Goodwill
—As of January 1, 2015, all goodwill was attributable to the Agency segment. As discussed in Note 3, on January 11, 2016, we acquired AAP, a firm that provides a range of art-related services. Upon completion of the related purchase price allocation,
$28.3 million
of the resulting goodwill was allocated to the Agency segment and
$6.2 million
was allocated to the acquired art advisory business, which is reported within All Other for segment reporting purposes.
For the years ended
December 31, 2016
and 2015, changes in the carrying value of Goodwill were as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
Year ended December 31, 2015
|
|
|
Agency
|
|
All Other
|
|
Total
|
|
Agency
|
|
All Other
|
|
Total
|
Beginning balance
|
|
$
|
13,621
|
|
|
$
|
—
|
|
|
$
|
13,621
|
|
|
$
|
14,017
|
|
|
$
|
—
|
|
|
$
|
14,017
|
|
Goodwill acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
AAP (see Note 3)
|
|
28,339
|
|
|
6,151
|
|
|
34,490
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Orion Analytical (a)
|
|
2,445
|
|
|
—
|
|
|
2,445
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency exchange rate changes
|
|
(527
|
)
|
|
—
|
|
|
(527
|
)
|
|
(396
|
)
|
|
—
|
|
|
(396
|
)
|
Ending balance
|
|
$
|
43,878
|
|
|
$
|
6,151
|
|
|
$
|
50,029
|
|
|
$
|
13,621
|
|
|
$
|
—
|
|
|
$
|
13,621
|
|
|
|
|
(a)
|
On November 30, 2016, we acquired Orion Analytical, a materials analysis and consulting firm that utilizes state-of-the-art technical and scientific methods in the examination of art, cultural property, wine and other objects. With this acquisition, we have established a scientific research department that complements our existing world-class expertise and provenance research capabilities.
|
|
Intangible Assets
—As of
December 31, 2016
and 2015, intangible assets consisted of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization Period
|
|
December 31, 2016
|
|
December 31, 2015
|
Indefinite lived intangible assets:
|
|
|
|
|
|
|
License (a)
|
|
N/A
|
|
$
|
324
|
|
|
$
|
324
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
Customer relationships - AAP (see Note 3)
|
|
8 years
|
|
10,800
|
|
|
—
|
|
Non-compete agreements - AAP (see Note 3)
|
|
6 years
|
|
3,060
|
|
|
—
|
|
Artworks database (b)
|
|
10 years
|
|
1,125
|
|
|
—
|
|
Total intangible assets subject to amortization
|
|
|
|
14,985
|
|
|
—
|
|
Accumulated amortization
|
|
|
|
(1,916
|
)
|
|
—
|
|
Total amortizable intangible assets (net)
|
|
|
|
13,069
|
|
|
—
|
|
Total intangible assets (net)
|
|
|
|
$
|
13,393
|
|
|
$
|
324
|
|
(a) Relates to a license obtained in conjunction with the purchase of a retail wine business in 2008.
(b) Relates to a database containing historic information concerning repeat sales of works of art. This database was acquired in the third quarter of 2016.
For the
year ended December 31, 2016
, amortization expense related to intangible assets was approximately
$1.9 million
.
No
such amortization expense was recorded in 2015 and 2014.
The estimated aggregate amortization expense for the remaining useful lives of intangible assets subject to amortization during the
five
-year period succeeding the
December 31, 2016
balance sheet date are as follows (in thousands of dollars):
|
|
|
|
|
|
Period
|
|
Amount
|
2017
|
|
$
|
1,972
|
|
2018
|
|
$
|
1,972
|
|
2019
|
|
$
|
1,972
|
|
2020
|
|
$
|
1,972
|
|
2021
|
|
$
|
1,972
|
|
Note 8
—Pension Arrangements
Retirement Savings Plan
—We sponsor a qualified defined contribution plan for our employees in the U.S. (the "Retirement Savings Plan"). Participants in the Retirement Savings Plan may elect to contribute between
2%
and
50%
of their eligible compensation, on a pre-tax or after-tax Roth basis. We may match participant savings with a contribution of up to
3%
of eligible compensation. We may also contribute an annual discretionary amount to the Retirement Savings Plan, which varies as a percentage of each participant's eligible compensation depending on our profitability. For the years ended December 31,
2016
,
2015
, and
2014
, we accrued discretionary contributions of
$1.2 million
,
$1.3 million
, and
$1.3 million
, respectively, related to the Retirement Savings Plan, which is equal to
2%
of eligible compensation paid during those years. For the years ended December 31,
2016
,
2015
, and
2014
, total pension expense related to matching and discretionary contributions to the Retirement Savings Plan, net of forfeitures, was
$2.5 million
,
$2.4 million
, and
$2.4 million
, respectively. Both participant and Company contributions to the Retirement Savings Plan are subject to limitations under Internal Revenue Service ("IRS") regulations.
Deferred Compensation Plan
—We sponsor a non-qualified Deferred Compensation Plan (the "DCP"), which is available to certain U.S. officers for whom contributions to the Retirement Savings Plan are limited by IRS regulations. The DCP provides participants with a menu of investment crediting options that track a portfolio of various deemed investment funds. We credit participant accounts on the same basis as matching and discretionary contributions to the Retirement Savings Plan, as discussed above. For the years ended December 31,
2016
,
2015
, and
2014
, we recorded discretionary accruals of
$0.3 million
,
$0.3 million
, and
$0.4 million
, respectively, related to the DCP, which is equal to
2%
of eligible compensation paid during those years. For the years ended December 31,
2016
,
2015
, and
2014
, total pension expense related to our matching and discretionary DCP accruals was
$0.6 million
,
$0.8 million
, and
$0.9 million
, respectively.
Employee deferrals and our accrued contributions to the DCP are informally funded into a rabbi trust which provides benefit security by sheltering assets in the event of a change-in-control of Sotheby's and certain other situations. DCP liabilities are financed through the trust almost entirely by using company-owned variable life insurance ("COLI"), and, to a much lesser extent, investments in money market mutual funds. As of
December 31, 2016
and
2015
, the DCP liability was
$25.9 million
and
$39 million
, respectively, and the assets held in the rabbi trust consisted of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Company-owned variable life insurance
|
|
$
|
25,114
|
|
|
$
|
37,155
|
|
Money market mutual fund investments
|
|
1,599
|
|
|
688
|
|
Total
|
|
$
|
26,713
|
|
|
$
|
37,843
|
|
The decrease in the DCP assets and liabilities between the two year-end reporting periods is largely due to distributions made to employees who separated from service.
The COLI and money market mutual fund investments are aggregated and recorded on our Consolidated Balance Sheets within Trust Assets Related to Deferred Compensation Liability. The COLI is reflected at its cash surrender value. The money market mutual fund investments are classified as trading securities and reflected at their fair value.
Changes in the fair value of the DCP liability, which result from gains and losses in deemed participant investments, are recognized in our Consolidated Income Statements within Salaries and Related Costs in the period in which they occur. Gains in deemed participant investments increase the DCP liability, as well as Salaries and Related Costs. Losses in deemed participant investments decrease the DCP liability, as well as Salaries and Related Costs. For the years ended December 31,
2016
,
2015
, and
2014
, net gains (losses) in deemed participant investments totaled
$1.6 million
,
($0.5) million
, and
$1.9 million
, respectively.
Gains and losses resulting from changes in the cash surrender value of the COLI and the fair value of the money market mutual fund investments, as well as related COLI expenses (primarily for insurance), are recognized in our Consolidated Income Statements below Operating Income within Other Income (Expense) in the period in which they occur. For the years ended December 31,
2016
,
2015
, and
2014
, net gains (losses) related to the COLI and the money market mutual fund investments were
$0.4 million
,
($2.7) million
, and
$0.3 million
, respectively. In 2015, Other Income (Expense) also includes a
$1.6 million
death benefit recognized in the fourth quarter of 2015 under the COLI policy.
U.K. Defined Contribution Plan
—Beginning on April 1, 2004, a defined contribution plan was made available to employees in the U.K. (the "U.K. Defined Contribution Plan"). Beginning in 2015, we may also contribute an annual discretionary amount to the U.K. Defined Contribution Plan, which varies as a percentage of each participant's eligible compensation depending on our profitability. For the years ended December 31,
2016
and 2015, we accrued discretionary contributions of
$0.8 million
and
$0.7 million
, respectively, related to the U.K. Defined Contribution Plan, both of which are equal to
2%
of eligible compensation paid during those years. For the years ended December 31,
2016
,
2015
, and
2014
, pension expense related to the U.K. Defined Contribution Plan was
$4.3 million
,
$3.1 million
, and
$2.2 million
, respectively. The increase in pension expense in 2016 is primarily attributable to additional contributions made on behalf of previously active participants in our U.K. defined benefit pension plan, who transferred into the U.K. Defined Contribution Plan after the defined benefit pension plan was closed to accrual of future service costs on April 30, 2016. See "U.K Defined Benefit Pension Plan" below.
U.K. Defined Benefit Pension Plan
—We sponsor 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. 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 became participants in the U.K. Defined Contribution Plan. The tables below present detailed information related to the U.K. Pension Plan, including the recognition of a
$17.9 million
curtailment gain in 2015 that resulted from this plan closure.
Benefit Obligation, Plan Assets, and Funded Status
The table below details the changes in the projected benefit obligation, plan assets, and funded status of the U.K. Pension Plan, as well as the net pension asset recognized on our Consolidated Balance Sheets, as of
December 31, 2016
and
2015
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Reconciliation of benefit obligation
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
326,243
|
|
|
$
|
381,935
|
|
Service cost
|
|
1,086
|
|
|
4,497
|
|
Interest cost
|
|
9,817
|
|
|
12,923
|
|
Contributions by plan participants
|
|
232
|
|
|
877
|
|
Actuarial loss (gain)
|
|
64,104
|
|
|
(27,885
|
)
|
Curtailment gain
|
|
—
|
|
|
(17,895
|
)
|
Benefits paid
|
|
(12,176
|
)
|
|
(10,745
|
)
|
Foreign currency exchange rate changes
|
|
(61,687
|
)
|
|
(17,464
|
)
|
Projected benefit obligation at end of year
|
|
327,619
|
|
|
326,243
|
|
Reconciliation of plan assets
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
393,102
|
|
|
410,928
|
|
Actual return on plan assets
|
|
73,806
|
|
|
9,996
|
|
Employer contributions
|
|
24,748
|
|
|
2,163
|
|
Contributions by plan participants
|
|
232
|
|
|
877
|
|
Benefits paid
|
|
(12,176
|
)
|
|
(10,745
|
)
|
Foreign currency exchange rate changes
|
|
(73,517
|
)
|
|
(20,117
|
)
|
Fair value of plan assets at end of year
|
|
406,195
|
|
|
393,102
|
|
Funded Status
|
|
|
|
|
|
|
Net pension asset
|
|
$
|
78,576
|
|
|
$
|
66,859
|
|
As of December 31, 2016 and 2015, the net pension asset of
$78.6 million
and
$66.9 million
, respectively, was recorded within Other Long-Term Assets on our Consolidated Balance Sheets (see Note 12). For the year ended December 31,
2016
, we contributed
$24.7 million
to the U.K. Pension Plan, including
$24.2 million
contributed in December 2016 in respect of the recently completed statutory triennial funding valuation of the plan. This contribution satisfied the resulting statutory funding deficit in-full. As discussed above, the U.K. Pension Plan is now closed to accrual of future service costs. Accordingly, we do not expect to pay regular contributions to the U.K. Pension Plan in 2017.
As of
December 31, 2016
and
2015
, the accumulated benefit obligation for the U.K. Pension Plan was
$327.6 million
and
$325.8 million
, respectively.
Components of Net Pension (Benefit) Cost
For the years ended December 31,
2016
,
2015
, and
2014
, the components of the net pension (benefit) cost related to the U.K. Pension Plan are as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Service cost
|
|
$
|
1,086
|
|
|
$
|
4,497
|
|
|
$
|
4,499
|
|
Interest cost
|
|
9,817
|
|
|
12,923
|
|
|
15,633
|
|
Expected return on plan assets
|
|
(17,798
|
)
|
|
(20,174
|
)
|
|
(23,166
|
)
|
Amortization of actuarial loss
|
|
—
|
|
|
3,967
|
|
|
2,346
|
|
Amortization of prior service cost
|
|
—
|
|
|
364
|
|
|
—
|
|
Net pension (benefit) cost
|
|
$
|
(6,895
|
)
|
|
$
|
1,577
|
|
|
$
|
(688
|
)
|
Net (Loss) Gain Recognized in Other Comprehensive (Loss) Income
The net (loss) gain related to the U.K. Pension Plan, which is recognized net of tax in Other Comprehensive (Loss) Income, is generally the result of: (i) actual results differing from previous actuarial assumptions (for example, the expected return on plan assets), (ii) changes in actuarial assumptions between balance sheet dates (for example, the discount rate), and/or (iii) curtailment gains. For the years ended December 31,
2016
,
2015
, and 2014, the net (loss) gain related to the U.K. Pension Plan was
($6.5) million
,
$29.4 million
, and
($9.8) million
, respectively.
Net Loss Included in Accumulated Other Comprehensive Loss
Net gains and (losses) related to the U.K. Pension Plan recognized in Other Comprehensive (Loss) Income are recorded net of tax in the Shareholders' Equity section of our Consolidated Balance Sheets within Accumulated Other Comprehensive Loss. As of
December 31, 2016
and
2015
, the net loss related to the U.K. Pension Plan recorded in Accumulated Other Comprehensive Loss was
($14.2) million
and
($10) million
, respectively.
If the amount recorded in Accumulated Other Comprehensive Loss exceeds
10%
of the greater of (i) the market-related value of plan assets or (ii) the benefit obligation, that excess amount is amortized as a component of future net pension cost or benefit over the average expected future life of plan participants, which is approximately
30.8
years. The market-related value of plan assets adjusts the market value of plan assets by recognizing changes in fair value over a period of
five
years. It is expected that approximately
$0.9 million
(
$1.1 million
, pre-tax) of the
($14.2) million
after-tax net loss related to the U.K. Pension Plan will be recognized as a reduction of the net pension benefit anticipated for the year ended December 31, 2017.
Assumptions
As of and for the years ended December 31,
2016
,
2015
, and
2014
, the following assumptions were used in determining the benefit obligation and net pension (benefit) cost related to the U.K. Pension Plan:
|
|
|
|
|
|
Benefit Obligation
|
|
2016
|
|
2015
|
Weighted average discount rate
|
|
2.7%
|
|
3.7%
|
Weighted average rate of compensation increase
|
|
—%
|
|
—%
|
|
|
|
|
|
|
|
|
Net Pension (Benefit) Cost
|
|
2016
|
|
2015
|
|
2014
|
Weighted average discount rate
|
|
N/A
|
|
3.5%
|
|
4.4%
|
Weighted average discount rate - service cost
|
|
3.8%
|
|
3.5%
|
|
4.4%
|
Weighted average discount rate - interest cost
|
|
3.4%
|
|
3.5%
|
|
4.4%
|
Weighted average rate of compensation increase
|
|
4.1%
|
|
4.1%
|
|
4.6%
|
Weighted average expected long-term rate of return on plan assets
|
|
5.2%
|
|
5.4%
|
|
6.1%
|
The discount rate represents the approximate weighted average rate at which the obligations of the U.K. Pension Plan could be effectively settled and is based on a yield curve for a selection of high-quality corporate bonds with maturity dates approximating the length of time remaining until individual benefit payment dates. Prior to 2016, the same discount rate was used for the service and interest cost components of the net pension (benefit) cost. In 2016, we elected to use separate discount rates for each of these components. The discount rate used for each component in 2016 contemplates a full yield curve in respect to the expected timing of the cash flows related to these components.
The measurement of the benefit obligation as of December 31, 2016 and 2015 does not include an assumption for future annual compensation increases due to the closure of the U.K. Pension Plan to the accrual of future service costs, as discussed above.
The expected long-term rate of return is weighted according to the composition of invested assets and is based on expected future appreciation, as well as dividend and interest yields currently available in the equity and bond markets. In particular, the expected rate of return for growth assets represents our estimate of median annualized returns by asset class. The expected rate of return on debt securities is based on interest yields currently available on long-dated U.K. government bonds and highly-rated corporate bonds. No allowance is made in the expected rate of return for potential market out-performance by fund managers.
Plan Assets
The investment policy for the U.K. Pension Plan is established by its Trustees in consultation with our management. The Trustees' investment objective is to maximize the return on assets while controlling the level of risk so as to ensure that sufficient assets are available to pay participants' benefits as and when they arise. In order to avoid an undue concentration of risk, a diverse spread of assets is held within the portfolio. The diversification is both within and across asset categories. Professional investment managers are provided target allocation percentages for different categories within each asset class; actual allocation percentages are permitted to fall within a reasonable range of these targets. In setting specific asset allocation targets, the Trustees take advice as required from professional investment advisors and require that the majority of the assets be realizable at short notice.
In 2014, the Trustees altered the asset allocation so that approximately
60%
was allocated to growth assets and approximately
40%
was allocated to debt securities and cash. As a result of the closure of the U.K. Pension Plan to the accrual of future service costs in April 2016 and our
$24.2 million
contribution to the plan in December 2016 (both as discussed above), there has been an improvement in the funded status of the plan. Accordingly, a further change in asset allocation was implemented in February 2017, which is intended to reduce investment risk and which has resulted in an approximate allocation of
40%
to growth assets and
60%
to debt securities and cash. A small holding in real estate is retained and is not subject to this allocation methodology.
The investment managers for the U.K. Pension Plan have full discretion in making investment decisions, subject to broad guidelines established by the Trustees. It is the Trustees' policy not to invest in the common stock of Sotheby's or any of its subsidiaries. The performance of the investment managers is benchmarked against suitable indices.
The table below presents the fair value of U.K. Pension Plan assets, by investment category, as of
December 31, 2016
and
2015
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
% of Total
|
|
2015
|
|
% of Total
|
Growth assets
|
|
$
|
217,730
|
|
|
53.6
|
%
|
|
$
|
240,214
|
|
|
61.1
|
%
|
Debt securities
:
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
35,973
|
|
|
8.9
|
%
|
|
36,772
|
|
|
9.4
|
%
|
Index-linked
|
|
134,972
|
|
|
33.2
|
%
|
|
112,049
|
|
|
28.5
|
%
|
Total debt securities
|
|
170,945
|
|
|
42.1
|
%
|
|
148,821
|
|
|
37.9
|
%
|
Real estate mutual funds
|
|
2,667
|
|
|
0.6
|
%
|
|
3,148
|
|
|
0.8
|
%
|
Cash and cash equivalents
|
|
14,853
|
|
|
3.7
|
%
|
|
919
|
|
|
0.2
|
%
|
Total fair value of plan assets
|
|
$
|
406,195
|
|
|
|
|
|
$
|
393,102
|
|
|
|
|
The assets of the U.K. Pension Plan, which are measured at fair value, are classified and disclosed according to one of the following categories:
|
|
•
|
Level 1—Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Level 1 inputs generally provide the most reliable evidence of fair value.
|
|
|
•
|
Level 2—Pricing inputs are 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.
|
|
|
•
|
Level 3—Pricing inputs are unobservable for the asset or liability and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgment or estimation.
|
The table below provides fair value measurement information for the U.K. Pension Plan assets as of December 31,
2016
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
Total Fair
Value
|
|
Quoted Prices
in Active
Markets (Level 1)
|
|
Significant Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Growth assets
|
$
|
217,730
|
|
|
$
|
171,286
|
|
|
$
|
46,444
|
|
|
$
|
—
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
35,973
|
|
|
—
|
|
|
35,973
|
|
|
—
|
|
Index-linked
|
134,972
|
|
|
134,972
|
|
|
|
|
|
—
|
|
Total debt securities
|
170,945
|
|
|
134,972
|
|
|
35,973
|
|
|
—
|
|
Real estate mutual funds
|
2,667
|
|
|
—
|
|
|
2,667
|
|
|
—
|
|
Cash and cash equivalents
|
14,853
|
|
|
14,853
|
|
|
—
|
|
|
—
|
|
Total fair value of plan assets
|
$
|
406,195
|
|
|
$
|
321,111
|
|
|
$
|
85,084
|
|
|
$
|
—
|
|
As of December 31,
2016
, the following U.K. Pension Plan assets are classified as Level 1 fair value measurements:
Growth Assets
—Includes investments in publicly-traded mutual funds and other publicly-traded stocks, the fair values of which are based on exchange quoted prices in active markets.
Debt Securities
—Includes investments in publicly-traded bond mutual funds and other publicly-traded bonds, the fair values of which are based on exchange quoted prices in active markets.
Cash and Cash Equivalents
—Includes investments in cash and money market instruments that are highly liquid and for which book value approximates fair value.
As of December 31,
2016
, the following U.K. Pension Plan assets are classified as Level 2 fair value measurements:
Growth Assets
—Includes investments in pooled funds which do not have directly observable quoted market prices, but for which the underlying value is determined by publicly-traded stocks that have directly observable exchange quoted prices in active markets.
Debt Securities
—Includes investments in pooled funds which do not have directly observable quoted market prices, but for which the underlying value is determined by publicly-traded bonds that have directly observable exchange quoted prices in active markets.
Real Estate Mutual Funds
—Includes investments in real estate mutual funds, the fair value of which are based on directly and indirectly observable real estate prices, including comparable prices.
Estimated Future Benefit Payments
Estimated future benefit payments related to the U.K. Pension Plan are as follows (in thousands of dollars):
|
|
|
|
|
|
Year
|
|
Benefit
Payments
|
2017
|
|
$
|
8,149
|
|
2018
|
|
$
|
8,494
|
|
2019
|
|
$
|
8,015
|
|
2020
|
|
$
|
8,863
|
|
2021
|
|
$
|
10,945
|
|
2022 to 2026
|
|
$
|
57,567
|
|
Note 9
—Debt
Revolving Credit Facility
—We are party 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 the SFS business and to extend the maturity date of the Credit Agreement by one year to August 22, 2020.
The Agency Credit Facility and the SFS Credit Facility are asset-based revolving credit facilities which may be used primarily for the working capital and other general corporate needs of each segment, including for the funding of SFS loans. The Credit Agreement allows the proceeds from borrowings under each of the revolving credit facilities to be transferred 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"). In July 2016, the Credit Agreement was amended to extend the maturity date of the Incremental Facility by one year to August 22, 2017. This maturity date 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 foreign currency borrowings, with up to
$50 million
available for foreign currency borrowings under the Agency Credit Facility and up to
$350 million
available for foreign currency borrowings under the SFS Credit Facility. The Credit Agreement also includes an accordion feature, which allows us to seek an increase to the 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 us to seek an increase to the aggregate commitments of the Credit Agreement 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 4
), 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 4
), and the fair value of certain of our trademarks. The borrowing base under the Incremental Facility is determined by a calculation that is based on a percentage of the carrying values of certain inventory and the fair value of certain of our trademarks. The borrowing base under the SFS Credit Facility is determined by a calculation that is primarily based on a percentage of the carrying value of certain SFS loans and the fair value of certain our 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. Our 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
December 31, 2016
.
Since August 2009, we have incurred aggregate fees of approximately
$21.7 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. As of December 31, 2016,
$7.7 million
of such unamortized fees are included within Other Long-Term Assets on our Consolidated Balance Sheets.
The following tables summarize information related to the Credit Agreement as of and for the years ended
December 31, 2016
,
2015
, and 2014 (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31, 2016
|
|
Agency Credit Facility
|
|
SFS Credit Facility
|
|
Total
|
Maximum borrowing capacity
|
|
$
|
300,000
|
|
|
$
|
1,035,000
|
|
|
$
|
1,335,000
|
|
Borrowing base
|
|
$
|
165,443
|
|
|
$
|
569,021
|
|
|
$
|
734,464
|
|
Borrowings outstanding
|
|
$
|
—
|
|
|
$
|
565,000
|
|
|
$
|
565,000
|
|
Available borrowing capacity (a)
|
|
$
|
165,443
|
|
|
$
|
4,021
|
|
|
$
|
169,464
|
|
Average borrowings outstanding
|
|
$
|
—
|
|
|
$
|
534,433
|
|
|
$
|
534,433
|
|
Borrowing Costs:
|
|
|
|
|
|
|
Interest
|
|
$
|
—
|
|
(b)
|
$
|
14,819
|
|
(c)
|
$
|
14,819
|
|
Fees
|
|
2,712
|
|
(b)
|
2,919
|
|
(c)
|
5,631
|
|
Total
|
|
$
|
2,712
|
|
|
$
|
17,738
|
|
|
$
|
20,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31, 2015
|
|
Agency Credit Facility
|
|
SFS Credit Facility
|
|
Total
|
Maximum borrowing capacity
|
|
$
|
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 (a)
|
|
$
|
225,642
|
|
|
$
|
6,086
|
|
|
$
|
231,728
|
|
Average borrowings outstanding
|
|
$
|
—
|
|
|
$
|
541,004
|
|
|
$
|
541,004
|
|
Borrowing Costs:
|
|
|
|
|
|
|
Interest
|
|
$
|
—
|
|
(b)
|
$
|
14,060
|
|
(c)
|
$
|
14,060
|
|
Fees
|
|
2,752
|
|
(b)
|
1,720
|
|
(c)
|
4,472
|
|
Total
|
|
$
|
2,752
|
|
|
$
|
15,780
|
|
|
$
|
18,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31, 2014
|
|
Agency Credit Facility
|
|
SFS Credit Facility
|
|
Total
|
Maximum borrowing capacity
|
|
$
|
300,000
|
|
|
$
|
550,000
|
|
|
$
|
850,000
|
|
Borrowing base
|
|
$
|
237,830
|
|
|
$
|
519,255
|
|
|
$
|
757,085
|
|
Borrowings outstanding
|
|
$
|
—
|
|
|
$
|
445,000
|
|
|
$
|
445,000
|
|
Available borrowing capacity (a)
|
|
$
|
237,830
|
|
|
$
|
74,255
|
|
|
$
|
312,085
|
|
Average borrowings outstanding
|
|
$
|
—
|
|
|
$
|
306,448
|
|
|
$
|
306,448
|
|
Borrowing Costs:
|
|
|
|
|
|
|
Interest
|
|
$
|
—
|
|
(b)
|
$
|
7,751
|
|
(c)
|
$
|
7,751
|
|
Fees
|
|
2,240
|
|
(b)
|
989
|
|
(c)
|
3,229
|
|
Total
|
|
$
|
2,240
|
|
|
$
|
8,740
|
|
|
$
|
10,980
|
|
Legend:
(a) The available borrowing capacity is calculated as the borrowing base less borrowings outstanding.
(b) Borrowing costs related to the Agency Credit Facility, which include interest and fees, are reflected in our Consolidated Income Statements as Interest Expense. See the table below for additional information related to Interest Expense associated with the Agency Credit Facility.
(c) Borrowing costs related to the SFS Credit Facility are reflected in our Consolidated Income Statements within Cost of Finance Revenues. For the years ended
December 31, 2016
,
2015
, and 2014, 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
December 31, 2016
and
2015
, Long-Term Debt consisted of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
York Property Mortgage, net of unamortized debt issuance costs of $5,555 and $6,565
|
|
$
|
309,212
|
|
|
$
|
315,504
|
|
2022 Senior Notes, net of unamortized debt issuance costs of $3,642 and $4,251
|
|
296,358
|
|
|
295,749
|
|
Less current portion:
|
|
|
|
|
York Property Mortgage, net of unamortized debt issuance costs of $1,010 and $1,010
|
|
(6,629
|
)
|
|
(6,292
|
)
|
Total Long-Term Debt, net
|
|
$
|
598,941
|
|
|
$
|
604,961
|
|
On January 1, 2016, we 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, we 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 our sole North American auction salesroom and principal North American exhibition space, including S|2, our private sale exhibition gallery. The York Property is also home to the U.S. operations of SFS, as well as our corporate offices.
We 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, we 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, we 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 its
seven
-year term, with the then-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, we 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. See
Note 10
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 our Consolidated 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 our other 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 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 our corporate credit rating from Standard & Poor's Rating Services ("S&P") 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 potential 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, our 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 December 31, 2016, the Cash Management Account had a balance of
$4.6 million
, which is reflected within Restricted Cash on our Consolidated Balance Sheets.
|
|
|
•
|
At all times during the term of the York Property Mortgage, we are required to maintain a net worth of at least
$425 million
, subject to a cure period.
|
As of
December 31, 2016
, the fair value of the York Property Mortgage approximates its book value due to the variable interest rate associated with the mortgage. This 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, we 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
$294.6 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 our existing and future domestic subsidiaries to the extent and on the same basis that such subsidiaries guarantee borrowings under the Credit Agreement. Interest on the 2022 Senior Notes is payable semi-annually in cash on April 1 and October 1 of each year.
We may redeem the 2022 Senior Notes, 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, we may redeem the 2022 Senior Notes, 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 we are in default under the terms of the underlying indenture.
As of
December 31, 2016
, the
$300 million
principal amount of 2022 Senior Notes had a fair value of approximately
$297.8 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 Credit Agreement, the York Property Mortgage, and the 2022 Senior Notes during the five year period after
December 31, 2016
are as follows (in thousands of dollars):
|
|
|
|
|
|
Year
|
|
Amount
|
2017
|
|
$
|
34,650
|
|
2018
|
|
$
|
36,586
|
|
2019
|
|
$
|
36,597
|
|
2020
|
|
$
|
601,607
|
|
2021
|
|
$
|
36,620
|
|
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 years ended December 31,
2016
,
2015
, and
2014
, Interest Expense consisted of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
2014
|
Agency Credit Facility:
|
|
|
|
|
|
|
|
|
|
Amendment and arrangement fees
|
|
$
|
1,123
|
|
|
$
|
1,167
|
|
|
$
|
1,096
|
|
Commitment fees
|
|
1,589
|
|
|
1,585
|
|
|
1,144
|
|
Sub-total
|
|
2,712
|
|
|
2,752
|
|
|
2,240
|
|
York Property Mortgage
|
|
11,121
|
|
|
13,537
|
|
|
16,335
|
|
2022 Senior Notes
|
|
16,402
|
|
|
16,394
|
|
|
16,394
|
|
Other interest expense
|
|
75
|
|
|
62
|
|
|
220
|
|
Total Interest Expense
|
|
$
|
30,310
|
|
|
$
|
32,745
|
|
|
$
|
35,189
|
|
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 our Consolidated Income Statements.
Interest Paid
—In
2016
,
2015
, and
2014
, interest paid totaled
$44.5 million
,
$53.5 million
, and
$42.4 million
, respectively. Interest paid in 2016, 2015, and 2014 includes
$27.8 million
,
$36 million
, and
$31.2 million
respectively, attributable to the Agency segment, which primarily relates to the York Property Mortgage (including
$7.1 million
of amounts paid to refinance the previous mortgage in July 2015), our long-term debt securities, and revolving credit facility fees. Interest paid in
2016
,
2015
, and
2014
includes
$16.7 million
,
$17.5 million
and
$11.2 million
, respectively, attributable to the SFS Credit Facility, which relates to revolving credit facility borrowings and fees.
Note 10
—Derivative Financial Instruments
Derivative Financial Instruments Designated as Hedging Instruments
—The following tables summarize fair value information related to the derivative financial instruments designated as hedging instruments and recorded on our Consolidated Balance Sheets as of
December 31, 2016
and 2015 (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Liabilities
|
December 31, 2016
|
|
Balance Sheet Classification
|
|
Fair Value
|
|
Balance Sheet Classification
|
|
Fair Value
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Other Current Assets
|
|
$
|
82
|
|
|
Other Current Liabilities
|
|
$
|
163
|
|
Interest rate collar
|
|
N/A
|
|
—
|
|
|
Other Long-Term Liabilities
|
|
5,952
|
|
Total cash flow hedges
|
|
|
|
82
|
|
|
|
—
|
|
6,115
|
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Other Current Assets
|
|
30,258
|
|
|
N/A
|
|
—
|
|
Total
|
|
|
|
$
|
30,340
|
|
|
|
|
$
|
6,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Liabilities
|
December 31, 2015
|
|
Balance Sheet Classification
|
|
Fair Value
|
|
Balance Sheet Classification
|
|
Fair Value
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
N/A
|
|
$
|
—
|
|
|
Other Current Liabilities
|
|
$
|
360
|
|
Interest rate collar
|
|
N/A
|
|
—
|
|
|
Other Long-Term Liabilities
|
|
6,816
|
|
Total cash flow hedges
|
|
|
|
—
|
|
|
|
|
7,176
|
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
N/A
|
|
—
|
|
|
N/A
|
|
—
|
|
Total
|
|
|
|
$
|
—
|
|
|
|
|
$
|
7,176
|
|
The following tables summarize the effect of the derivative financial instruments designated as hedging instruments on our Consolidated Income Statements and Consolidated Statements of Comprehensive Income for the years ended
December 31, 2016
and 2015 (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Other Comprehensive (Loss) Income - Effective Portion
|
|
Classification of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Net Income
|
|
Amount Reclassified from Accumulated Other Comprehensive Loss into Net Income - Effective Portion
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
|
|
2016
|
|
2015
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(704
|
)
|
|
$
|
(802
|
)
|
|
Interest Expense
|
|
$
|
813
|
|
|
$
|
688
|
|
Interest rate collar
|
|
533
|
|
|
(4,192
|
)
|
|
Interest Expense
|
|
—
|
|
|
—
|
|
Total cash flow hedges
|
|
(171
|
)
|
|
(4,994
|
)
|
|
|
|
813
|
|
|
688
|
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
16,618
|
|
|
—
|
|
|
Other Income/(Expense)
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
16,447
|
|
|
$
|
(4,994
|
)
|
|
|
|
$
|
813
|
|
|
$
|
688
|
|
See the captioned sections below for information related to derivative financial instruments designated as cash flow hedges and derivative financial instruments designated as net investment hedges.
Derivative Financial Instruments Designated as Cash Flow Hedges
—On July 1, 2015, we entered into a
seven
-year,
$325 million
mortgage loan to refinance the 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 its
seven
-year term. In connection with the York Property Mortgage, we entered into interest rate protection agreements secured by the York Property, consisting of a
two
-year interest rate swap (the "Mortgage Swap"), effective as of
July 1, 2015
, and a
five
-year interest rate collar (the "Mortgage Collar"), effective as of
July 1, 2017
. The Mortgage Swap and the Mortgage Collar each 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. As of
December 31, 2016
, the notional value of the Mortgage Swap was
$314.8 million
and the notional value of the Collar was
$310.3 million
. 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 our financial statements. See Note 9 for additional information related to the York Property Mortgage.
On November 21, 2016, we entered into a two-year interest rate swap agreement (the “SFS Swap”) to eliminate the variability in expected cash outflows associated with the one-month LIBOR indexed interest payments owed on
$63 million
of SFS Credit Facility borrowings. As of
December 31, 2016
, the notional value of the SFS Swap was
$63 million
. See Note 9 for additional information related to the SFS Credit Facility.
At their inception, the Mortgage Swap, the Mortgage Collar, and the SFS Swap (collectively, the "Cash Flow Hedges")were each individually designated as cash flow hedges of the risk associated with the variability in expected cash outflows related to the one-month LIBOR-indexed interest payments owed on their respective debt instruments. Accordingly, to the extent that each of the Cash Flow Hedges are effective, any unrealized gains and losses related to changes in their fair value are recorded to Accumulated Other Comprehensive Loss on our Consolidated Balance Sheets and then reclassified to Interest Expense in our Consolidated Income Statements as interest expense related to the underlying debt instruments is recorded. Any hedge ineffectiveness is immediately recognized in Interest Expense. There was no hedge ineffectiveness related to the Cash Flow Hedges during the years ended
December 31, 2016
and 2015. Management performs a quarterly assessment to determine whether each of the Cash Flow Hedges continues to be highly effective in hedging the risk associated with the variability in expected cash outflows related to the one-month LIBOR-indexed interest payments owed on their respective debt instruments.
The assets and liabilities associated with the Cash Flow Hedges 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. Level 2 fair value measurements may be determined through the use of models or other valuation methodologies. The fair value of the Mortgage 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 timing of the interest payments related to the York Property Mortgage. The fair value of the Mortgage 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. The fair value of the SFS 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 timing of the interest payments related to the SFS Credit Facility.
Derivative Financial Instruments Designated as Net Investment Hedges
—In the fourth quarter of 2015, in consideration of the expansion of our common stock repurchase program, as well as the need for cash in the U.S. to fund other corporate strategic initiatives, management assessed its U.S. and foreign cash needs and concluded that approximately
$600 million
of accumulated foreign earnings would be repatriated to the U.S. in the foreseeable future. As of
December 31, 2016
, approximately
$330 million
of these foreign earnings had been repatriated and used, in part, to fund common stock repurchases. We expect that additional repatriations will be made, though the specific timing of any further repatriation of foreign earnings is currently uncertain and is being evaluated. These accumulated foreign earnings represented, at that time, almost the entire value of our net investments in the subsidiaries from which the earnings are being repatriated. As a result, we are exposed to variability in the U.S. Dollar equivalent of these net investments and, by extension, the U.S. Dollar equivalent of any foreign earnings repatriated to the U.S. due to potential changes in foreign currency exchange rates. In 2016, we entered into foreign currency forward exchange contracts with a aggregate notional value
$309.1 million
, which hedge the net investment in certain of our foreign subsidiaries. As of
December 31, 2016
, the aggregate notional value of the net investment hedge contracts that remained outstanding was
$213.8 million
.
We use the forward rate method to assess the effectiveness of our net investment hedges. Under the forward rate method, if both the notional amount of the derivative designated as a hedge of a net investment in a foreign subsidiary equals the portion of the net investment designated as being hedged and the derivative relates solely to the foreign exchange rate between the functional currency of the hedged net investment and the investor’s functional currency, then all changes in fair value of the derivative are reported in the cumulative translation adjustment accounts within Accumulated Other Comprehensive Loss on our Consolidated Balance Sheets.
The foreign currency forward exchange contracts designated as net investment hedges are considered 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 these foreign currency forward exchange contracts is based on the estimated amount to settle the contracts using applicable market exchange rates as of the balance sheet date.
Derivative Financial Instruments Not Designated as Hedging Instruments
—We also utilize forward contracts to hedge cash flow exposures related to foreign currency exchange rate movements arising 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. 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 our Consolidated Income Statements in Other Income (Expense).
As of
December 31, 2016
, the notional value of outstanding forward exchange contracts not designated as hedging instruments was
$258.8 million
. Notional values do not quantify risk or represent our assets or liabilities, but are used to calculate cash settlements under outstanding forward exchange contracts. We are exposed to credit-related risks in the event of nonperformance by the two counterparties to our outstanding forward exchange contracts. We do not expect any of these counterparties to fail to meet their obligations, given their high short-term (A1/P1) credit ratings. As of
December 31, 2016
, the aggregate fair value of these contracts represented a liability of
$3.6 million
, which was recorded on our Consolidated Balance Sheets within Accounts Payable and Accrued Liabilities. As of
December 31, 2015
the aggregate fair value of these contracts was not material to our Consolidated Financial Statements.
Note 11
—Other Current Liabilities
In the second quarter of 2016, we sold an undivided legal and beneficial
50%
ownership interest in a Fancy Vivid Pink Diamond (the "Pink Diamond"), weighing 59.60 carats, for
$34.2 million
in cash. The entire value of the Pink Diamond will continue to be reported within Inventory on our Consolidated Balance Sheets pending the future sale of a
100%
interest in the property. Until such time, the
$34.2 million
we received will be recorded within Other Current Liabilities on our Consolidated Balance Sheets. Upon completion of the future sale of a
100%
interest in the Pink Diamond, the revenue associated with the final sale will include the
$34.2 million
already collected and will be recorded within Inventory Sales on our Consolidated Income Statements with the corresponding acquisition cost recorded as Cost of Inventory Sales.
Note 12
—Supplemental Consolidated Balance Sheet Information
As of December 31, 2016 and 2015, Prepaid Expenses and Other Current Assets consisted of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Prepaid expenses
|
|
$
|
20,436
|
|
|
$
|
19,422
|
|
Derivative financial instruments (see Note 10)
|
|
30,340
|
|
|
—
|
|
Other (a)
|
|
25,831
|
|
|
14,507
|
|
Total Prepaid and Other Current Assets
|
|
$
|
76,607
|
|
|
$
|
33,929
|
|
(a) Other includes insurance recoveries and other miscellaneous short-term assets.
As of December 31, 2016 and 2015, Other Long-Term Assets consisted of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Defined benefit pension plan asset (see Note 8)
|
|
$
|
78,576
|
|
|
$
|
66,859
|
|
Equity method investments (see Note 5)
|
|
43,143
|
|
|
41,744
|
|
Other
|
|
16,992
|
|
|
15,696
|
|
Total Other Long-Term Assets
|
|
$
|
138,711
|
|
|
$
|
124,299
|
|
As of December 31, 2016 and 2015, Other Long-Term Liabilities consisted of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Acquisition earn-out consideration (see Note 3)
|
|
$
|
26,250
|
|
|
$
|
—
|
|
Interest rate collar liability (see Note 10)
|
|
5,952
|
|
|
6,816
|
|
Other
|
|
6,964
|
|
|
8,793
|
|
Total Other Long-Term Liabilities
|
|
$
|
39,166
|
|
|
$
|
15,609
|
|
Note 13
—Supplemental Consolidated Cash Flow Information
For the years ended December 31, 2016, 2015 and 2014, changes in other operating assets and liabilities as reported in the Consolidated Statements of Cash Flows included the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
2014
|
Decrease (increase) in:
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
$
|
(14,510
|
)
|
|
$
|
(6,562
|
)
|
|
$
|
(9,559
|
)
|
Other long-term assets
|
|
(10,006
|
)
|
|
13,641
|
|
|
4,330
|
|
Income tax receivables and deferred income tax assets
|
|
2,395
|
|
|
22,144
|
|
|
7,168
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
Accrued income taxes and deferred income tax liabilities
|
|
14,879
|
|
|
(27,325
|
)
|
|
(9,309
|
)
|
Accounts payable and accrued liabilities and other liabilities
|
|
17,297
|
|
|
(29,530
|
)
|
|
20,776
|
|
Total changes in other operating assets and liabilities
|
|
$
|
10,055
|
|
|
$
|
(27,632
|
)
|
|
$
|
13,406
|
|
Note 14
—Shareholders' Equity and Dividends
Common Stock
—Our common stock is traded on the New York Stock Exchange (the "NYSE") under the symbol BID. Each share of our common stock has a par value of
$0.01
per share and is entitled to one vote. As of
December 31, 2016
and
2015
, there were
52,971,232
and
65,791,119
shares of common stock outstanding, respectively.
Preferred Stock
—We have the authority to issue
50 million
shares of no par value preferred stock.
No
shares of preferred stock were outstanding as of
December 31, 2016
and
2015
.
Common Stock Repurchase Program
—The following table provides information regarding our common stock repurchase program as of and for the years ended December 31, 2016, 2015, and 2014 (in thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Three-Year Total
|
Shares repurchased
|
13,144
|
|
|
3,706
|
|
|
558
|
|
|
17,408
|
|
Aggregate purchase price
|
$
|
359,885
|
|
|
$
|
125,000
|
|
|
$
|
25,000
|
|
|
$
|
509,885
|
|
Average price per share
|
$
|
27.38
|
|
|
$
|
33.73
|
|
|
$
|
44.79
|
|
|
$
|
29.29
|
|
Repurchase authorization outstanding
|
$
|
40,226
|
|
|
$
|
125,000
|
|
|
$
|
125,000
|
|
|
$
|
40,226
|
|
On January 29, 2014, our Board of Directors authorized a
five
-year,
$150 million
common stock repurchase program. In March 2014, we repurchased
558,171
shares of common stock under this authorization for an aggregate purchase price of
$25 million
(
$44.79
per share) pursuant to an accelerated stock repurchase ("ASR") agreement.
On August 6, 2015, our Board of Directors approved an increase of
$125 million
to the share repurchase authorization, which resulted in an updated authorization of
$250 million
as of that date. On August 13, 2015, we entered into an ASR agreement (the "August 2015 ASR Agreement") pursuant to which we received an initial delivery of
2,667,378
shares of our common stock for an initial purchase price of
$125 million
. The initial shares received 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 we received an additional
1,038,280
shares of our common stock. Accordingly, the August 2015 ASR Agreement resulted in the total repurchase of
3,705,658
shares of our common stock for an average price of
$33.73
per share.
On January 21, 2016, our Board of Directors approved a
$200 million
increase to the share repurchase authorization, which resulted in an updated authorization of
$325 million
as of that date, and on September 30, 2016, approved an additional share repurchase authorization of
$75 million
. The share repurchases made in 2016 include open market purchases, purchases made pursuant to a Rule 10b5-1 plan, and purchases made pursuant to an agreement with funds managed by Marcato Capital Management LP ("Marcato") in which we agreed to acquire
2,050,000
shares of our common stock from Marcato for an aggregate purchase price of
$73.8 million
, or
$36.00
per share. At the time of this agreement, Marcato owned
8.5%
of our outstanding common stock.
The timing of further share repurchases and the actual amount purchased will depend on a variety of factors including the market price of our common stock, general market and economic conditions, securities law requirements, 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 us to purchase our shares during periods when we 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 our Board of Directors at any time.
Quarterly Cash Dividends
—The following table summarizes cash dividends declared and paid in each of the quarterly periods in the years ended December 31,
2016
,
2015
, and 2014 (in thousands of dollars, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
Per Share
|
|
Amount
|
|
Per Share
|
|
Amount
|
|
Per Share
|
|
Amount
|
|
Quarter Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.10
|
|
|
$
|
6,944
|
|
|
$
|
0.10
|
|
|
$
|
6,944
|
|
|
June 30
|
|
—
|
|
|
—
|
|
|
0.10
|
|
|
6,933
|
|
|
0.10
|
|
|
6,894
|
|
|
September 30
|
|
—
|
|
|
—
|
|
|
0.10
|
|
|
6,667
|
|
|
0.10
|
|
|
6,899
|
|
|
December 31
|
|
—
|
|
|
—
|
|
|
0.10
|
|
|
6,563
|
|
|
0.10
|
|
|
6,899
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.40
|
|
|
$
|
27,107
|
|
|
$
|
0.40
|
|
|
$
|
27,636
|
|
|
On January 21, 2016, our Board of Directors decided to eliminate the
$0.10
per share quarterly cash dividend and, instead, allocate the capital to repurchase shares of common stock.
Special Dividend
—On January 29, 2014, our 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 our foreign subsidiaries, with the remaining
$50 million
funded by then existing domestic cash balances. In conjunction with this special dividend, we accrued approximately
$11 million
for dividend equivalents related to unvested share-based payments to employees. These accrued dividend equivalents were charged to Retained Earnings. Through December 31, 2016, approximately
$7.2 million
of such dividends have been paid to employees upon the vesting of the share-based payments, including
$1.4 million
,
$2 million
, and
$3.8 million
paid in each of March 2016, 2015, and 2014, respectively.
Note 15
—Accumulated Other Comprehensive Loss
The following is a summary of the changes in Accumulated Other Comprehensive Loss and the details regarding any reclassification adjustments made during the period January 1, 2014 to
December 31, 2016
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Currency Translation Adjustments
|
|
|
|
|
|
|
Balance at January 1
|
|
$
|
(52,279
|
)
|
|
$
|
(33,223
|
)
|
|
$
|
(1,352
|
)
|
Other comprehensive loss before reclassifications, net of tax of ($13,113), ($6,345), and ($2,376)
|
|
(37,199
|
)
|
|
(18,951
|
)
|
|
(33,929
|
)
|
Reclassifications from other comprehensive (loss) income
|
|
—
|
|
|
(105
|
)
|
|
2,058
|
|
Other comprehensive loss
|
|
(37,199
|
)
|
|
(19,056
|
)
|
|
(31,871
|
)
|
Balance at December 31
|
|
(89,478
|
)
|
|
(52,279
|
)
|
|
(33,223
|
)
|
Cash Flow Hedges
|
|
|
|
|
|
|
Balance at January 1
|
|
(4,306
|
)
|
|
—
|
|
|
—
|
|
Other comprehensive loss before reclassifications, net of tax of ($106), ($3,126), and $0
|
|
(171
|
)
|
|
(4,994
|
)
|
|
—
|
|
Reclassifications from other comprehensive (loss) income, net of tax of $502, $430, and $0
|
|
813
|
|
|
688
|
|
|
—
|
|
Other comprehensive income (loss)
|
|
642
|
|
|
(4,306
|
)
|
|
—
|
|
Balance at December 31
|
|
(3,664
|
)
|
|
(4,306
|
)
|
|
—
|
|
Net Investment Hedges
|
|
|
|
|
|
|
Balance at January 1
|
|
—
|
|
|
—
|
|
|
—
|
|
Other comprehensive income before reclassifications, net of tax of $10,354, $0, and $0
|
|
16,618
|
|
|
—
|
|
|
—
|
|
Other comprehensive income
|
|
16,618
|
|
|
—
|
|
|
—
|
|
Balance at December 31
|
|
16,618
|
|
|
—
|
|
|
—
|
|
Defined Benefit Pension Plan
|
|
|
|
|
|
|
Balance at January 1
|
|
(9,619
|
)
|
|
(43,543
|
)
|
|
(38,101
|
)
|
Currency translation adjustments
|
|
2,300
|
|
|
1,097
|
|
|
2,468
|
|
Net actuarial (loss) gain, net of tax of ($1,427), $6,445, and ($2,447)
|
|
(6,515
|
)
|
|
29,363
|
|
|
(9,787
|
)
|
Prior service cost amortization, net of tax of $0, $73, and $0
|
|
—
|
|
|
291
|
|
|
—
|
|
Actuarial loss amortization, net of tax of $0, $794, and $469
|
|
—
|
|
|
3,173
|
|
|
1,877
|
|
Other comprehensive (loss) income
|
|
(4,215
|
)
|
|
33,924
|
|
|
(5,442
|
)
|
Balance at December 31
|
|
(13,834
|
)
|
|
(9,619
|
)
|
|
(43,543
|
)
|
Total other comprehensive (loss) income attributable to Sotheby's
|
|
(24,154
|
)
|
|
10,562
|
|
|
(37,313
|
)
|
Accumulated comprehensive loss as of December 31
|
|
$
|
(90,358
|
)
|
|
$
|
(66,204
|
)
|
|
$
|
(76,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Cumulative Translation Adjustments
|
|
|
|
|
|
|
(Gain) loss upon liquidation of foreign subsidiary
|
|
$
|
—
|
|
|
$
|
(105
|
)
|
|
$
|
2,058
|
|
Tax effect
|
|
—
|
|
|
—
|
|
|
—
|
|
Reclassification adjustment, net of tax
|
|
—
|
|
|
(105
|
)
|
|
2,058
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
Settlement of interest rate swaps
|
|
1,315
|
|
|
1,118
|
|
|
—
|
|
Tax effect
|
|
(502
|
)
|
|
(430
|
)
|
|
—
|
|
Reclassification adjustment, net of tax
|
|
813
|
|
|
688
|
|
|
—
|
|
Defined Benefit Pension Plan
|
|
|
|
|
|
|
Prior service cost amortization
|
|
—
|
|
|
364
|
|
|
—
|
|
Actuarial loss amortization
|
|
—
|
|
|
3,967
|
|
|
2,346
|
|
Pre-tax total
|
|
—
|
|
|
4,331
|
|
|
2,346
|
|
Tax effect
|
|
—
|
|
|
(867
|
)
|
|
(469
|
)
|
Reclassification adjustments, net of tax
|
|
—
|
|
|
3,464
|
|
|
1,877
|
|
Total reclassification adjustments, net of tax
|
|
$
|
813
|
|
|
$
|
4,047
|
|
|
$
|
3,935
|
|
Note 16
—Income Taxes
For the years ended December 31,
2016
,
2015
, and
2014
, the significant components of income tax expense consisted of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Income before taxes:
|
|
|
|
|
|
|
|
|
Domestic
|
$
|
(38,567
|
)
|
|
$
|
11,414
|
|
|
$
|
21,976
|
|
Foreign
|
135,301
|
|
|
157,885
|
|
|
171,045
|
|
Total
|
$
|
96,734
|
|
|
$
|
169,299
|
|
|
$
|
193,021
|
|
Income tax expense—current:
|
|
|
|
|
|
|
|
|
Domestic
|
$
|
18,443
|
|
|
$
|
10,455
|
|
|
$
|
22,220
|
|
State and local
|
1,766
|
|
|
5,958
|
|
|
6,946
|
|
Foreign
|
29,904
|
|
|
33,043
|
|
|
37,762
|
|
Sub-total
|
50,113
|
|
|
49,456
|
|
|
66,928
|
|
Income tax (benefit) expense—deferred:
|
|
|
|
|
|
|
|
|
Domestic
|
(19,114
|
)
|
|
69,835
|
|
|
5,406
|
|
State and local
|
(1,034
|
)
|
|
6,378
|
|
|
6,314
|
|
Foreign
|
(4,008
|
)
|
|
5,476
|
|
|
(2,887
|
)
|
Sub-total
|
(24,156
|
)
|
|
81,689
|
|
|
8,833
|
|
Total
|
$
|
25,957
|
|
|
$
|
131,145
|
|
|
$
|
75,761
|
|
As of
December 31, 2016
and
2015
, the components of Deferred Tax Assets and Deferred Tax Liabilities consisted of the following (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
|
Asset provisions and liabilities
|
|
$
|
11,512
|
|
|
$
|
13,720
|
|
Inventory writedowns
|
|
10,874
|
|
|
10,621
|
|
Tax loss and credit carryforwards
|
|
3,708
|
|
|
2,887
|
|
Difference between book and tax basis of depreciable and amortizable assets
|
|
30,855
|
|
|
17,857
|
|
Share-based payments and deferred compensation
|
|
26,267
|
|
|
34,165
|
|
Sub-total
|
|
83,216
|
|
|
79,250
|
|
Valuation allowance
|
|
(2,819
|
)
|
|
(2,437
|
)
|
Total deferred tax assets
|
|
80,397
|
|
|
76,813
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Difference between book and tax basis of other assets and liabilities
|
|
1,612
|
|
|
2,361
|
|
Pension obligations
|
|
9,689
|
|
|
11,231
|
|
Basis differences in equity method investments
|
|
3,423
|
|
|
3,805
|
|
Undistributed earnings of foreign subsidiaries
|
|
68,201
|
|
|
91,924
|
|
Total deferred tax liabilities
|
|
82,925
|
|
|
109,321
|
|
Total net deferred tax liabilities
|
|
$
|
(2,528
|
)
|
|
$
|
(32,508
|
)
|
As of December 31, 2016, we had deferred tax assets related to various foreign and state loss and tax credit carryforwards totaling
$3.7 million
that begin to expire in 2020.
As of
December 31, 2016
and 2015, we provided valuation allowances of
$2.8 million
and
$2.4 million
, respectively, relating to net operating loss carryforwards. The increase in the valuation allowance in 2016 is due to an increase in the net operating loss related to certain jurisdictions.
For the years ended December 31,
2016
,
2015
, and
2014
, our effective income tax rate varied from the statutory tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Statutory federal income tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State and local taxes, net of federal tax benefit
|
0.5
|
%
|
|
2.3
|
%
|
|
2.5
|
%
|
Foreign taxes at rates different from U.S. rates
|
(25.0
|
%)
|
|
(14.9
|
%)
|
|
(13.5
|
%)
|
U.S. taxes on foreign earnings
|
9.9
|
%
|
|
50.5
|
%
|
|
12.6
|
%
|
Valuation allowance
|
0.5
|
%
|
|
0.3
|
%
|
|
(0.2
|
%)
|
Effect of enacted tax legislation
|
(0.1
|
%)
|
|
2.5
|
%
|
|
2.0
|
%
|
Changes in tax reserves
|
1.6
|
%
|
|
0.0
|
%
|
|
0.4
|
%
|
Other
|
4.4
|
%
|
|
1.8
|
%
|
|
0.4
|
%
|
Effective income tax rate
|
26.8
|
%
|
|
77.5
|
%
|
|
39.2
|
%
|
The presentation of certain prior year amounts in the table above has been updated to conform to the current year presentation.
The comparison of our effective income tax rate between periods is significantly influenced by the level and mix of earnings and losses by taxing jurisdiction, foreign tax rate differentials, the relative impact of permanent book to tax differences (e.g., non-deductible expenses) on pre-tax results by taxing jurisdiction, new tax legislation, and changes in valuation allowances and tax reserves.
Our effective income tax rate is
26.8%
for the year ended December 31,
2016
, compared to
77.5%
in the prior year. The decrease in our effective income tax rate is primarily due to income tax expense of
$65.7 million
recorded in the fourth quarter of 2015 to recognize a deferred tax liability for incremental taxes associated with accumulated foreign earnings related to years prior to 2014 that were no longer deemed to be indefinitely reinvested outside of the U.S. The decrease in our effective tax rate is also due to a change in assertion regarding earnings from our foreign subsidiaries. In the first quarter of 2016, we determined that our foreign earnings related to 2016 (except those in the U.K.) would be indefinitely reinvested outside of the U.S. Conversely, in 2015, we recorded incremental deferred income taxes on substantially all of our foreign earnings for that year on the basis that such earnings would not be indefinitely reinvested overseas. As a result, the mix of pre-tax income among our various jurisdictions did not have a material effect on our effective income tax rate in 2015. However, the effective income tax rate for 2016 is influenced by changes in the mix of pre-tax income among the various jurisdictions where we operate, resulting in a decrease in our effective income tax rate. (See “Repatriation of Foreign Earnings” below.)
The comparison of our effective income tax rate between the two periods is also influenced by a
$4 million
charge recorded in 2015 to write-down certain deferred tax assets. This writedown was a result of New York City tax legislation enacted in that year, which resulted in a reduction of income apportioned to New York City in 2016 and accordingly resulted in a decrease to our state and local effective income tax rate in the current year.
For the year ended December 31, 2015, our effective income tax rate increased when compared to 2014 primarily due to the
$65.7 million
charge recorded in the fourth quarter of 2015, as discussed above.
The comparison of our effective income tax rate between 2015 and 2014 was also influenced by the
$4 million
charge recorded in 2015 to write-down certain deferred tax assets as a result of New York City tax legislation, as discussed above, and income tax expense of approximately
$3.9 million
recorded in 2014 related to the writedown of certain deferred tax assets as a result of New York State legislation that was enacted in 2014.
Repatriation of Foreign Earnings
—Prior to the fourth quarter of 2015, based on our projections and planned uses of U.S. and foreign earnings, we 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, we did not initially record deferred income taxes on these earnings in our Consolidated Financial Statements. In the fourth quarter of 2015, however, in consideration of the expansion of our common stock repurchase program (see Note 14), as well as the need for cash in the U.S. to fund other corporate strategic initiatives, we reassessed our 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, we recognized a liability for the deferred income taxes on these foreign earnings. In addition, we had accrued incremental taxes during 2014 and 2015 on approximately
$200 million
of foreign earnings for those years. As of December 31, 2015, we 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 December 31, 2016, approximately
$330 million
of the foreign earnings discussed above have been repatriated and used, in part, to fund common stock repurchases. We expect that additional repatriations will be made, though the specific timing of any further repatriation of foreign earnings and the cash payment of the associated taxes is currently uncertain and is being evaluated.
Based on our current projections and planned uses of U.S. and foreign cash, we believe that our 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 recorded, will be sufficient to satisfy our current cash needs in the U.S. Accordingly, we plan to indefinitely reinvest the prospective earnings of our foreign subsidiaries, except those in the U.K., outside of the U.S. As a result, income tax expense related to the deferred tax liabilities for incremental taxes associated with our foreign earnings decreased from approximately
$14.2 million
in 2015 and
$18.6 million
in 2014 to approximately
$8.5 million
in 2016.
As of December 31, 2016, income taxes have not been provided on approximately
$108 million
of our foreign earnings which are intended to be indefinitely reinvested outside of the U.S. A determination of the amount of unrecognized deferred income tax liabilities on these earnings is subject to many variables, such as the amount of foreign tax credits, if any, that may be available and is dependent on circumstances existing if and when remittance occurs. The unrecognized deferred income tax liability related to these earnings is impracticable to compute. If these earnings were not indefinitely reinvested outside of the U.S., and assuming that the distribution would be fully taxable in the U.S. with no use of foreign tax credits, a deferred tax liability of approximately
$38 million
would be recognized for U.S. federal income taxes.
Total net income tax payments during
2016
,
2015
, and
2014
were
$32.4 million
,
$53.9 million
, and
$60.3 million
, respectively.
Note 17
—Uncertain Tax Positions
As of
December 31, 2016
,
2015
, and
2014
, the liability for unrecognized tax benefits, excluding interest and penalties, was
$19.5 million
,
$22 million
, and
$22.8 million
, respectively, and is recorded within long-term Accrued Income Taxes on our Consolidated Balance Sheets.
As of
December 31, 2016
and
2015
, the total amount of unrecognized tax benefits that, if recognized, would favorably affect our effective income tax rate was
$9.3 million
and
$12.8 million
, respectively.
The table below presents a reconciliation of the beginning and ending balances of the liability for unrecognized tax benefits, excluding interest and penalties, for the years ended
December 31, 2016
,
2015
, and
2014
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Balance at January 1
|
$
|
22,042
|
|
|
$
|
22,798
|
|
|
$
|
25,423
|
|
Increases in unrecognized tax benefits related to the current year
|
1,700
|
|
|
2,917
|
|
|
2,229
|
|
Increases in unrecognized tax benefits related to prior years
|
29
|
|
|
2,276
|
|
|
167
|
|
Decreases in unrecognized tax benefits related to prior years
|
—
|
|
|
(1,973
|
)
|
|
(134
|
)
|
Decreases in unrecognized tax benefits related to settlements
|
—
|
|
|
(437
|
)
|
|
(590
|
)
|
Decreases in unrecognized tax benefits due to the lapse of the applicable statute of limitations
|
(4,293
|
)
|
|
(3,539
|
)
|
|
(4,297
|
)
|
Balance at December 31
|
$
|
19,478
|
|
|
$
|
22,042
|
|
|
$
|
22,798
|
|
The net decrease to the liability for unrecognized tax benefits in 2016 is primarily due to the expiration of the statute of limitations for certain tax years, partially offset by the accrual of tax reserves related to transfer pricing and other U.S. federal and state and non-U.S. matters.
In 2015 and 2014, the net decreases to the liability for unrecognized tax benefits were primarily attributable to the expiration of the statutes of limitations for certain tax years, the closing of tax audits in 2015 and the settlement of an audit in 2014, partially offset by the accrual of tax reserves related to transfer pricing and other U.S. federal and state and non-U.S. matters.
We recognize interest expense and penalties related to unrecognized tax benefits as a component of Income Tax Expense in our Consolidated Income Statements. During
2016
,
2015
, and
2014
, we recognized a net expense of
$0.3 million
, a net benefit of
$0.04 million
, and a net expense of
$0.2 million
, respectively, for interest expense and penalties related to unrecognized tax benefits. As of
December 31, 2016
,
2015
, and
2014
, the liability for tax-related interest and penalties included in our Consolidated Balance Sheets was
$2.1 million
,
$1.8 million
, and
$1.8 million
, respectively. The net increase in 2016 is due to the accrual of additional interest, partially offset by the reversal of interest accrued on unrecognized tax benefits that were recognized during the year. The net decrease in 2015 is primarily attributable to the closing of certain tax audits, partially offset by the accrual of tax reserves related to transfer pricing.
We are subject to taxation in the U.S. and various state and foreign jurisdictions and, as a result, may be subject to tax audits in these jurisdictions. We are currently under examination by various U.S. state and foreign taxing authorities. The earliest open tax year for the major jurisdictions in which we do business, which includes the U.S. (including various state and local jurisdictions), the U.K., and Hong Kong, is 2009.
We believe it is reasonably possible that a decrease of
$9.3 million
in the balance of unrecognized tax benefits can occur within 12 months of the
December 31, 2016
balance sheet date primarily as a result of the expiration of statutes of limitation and the expected settlements of ongoing tax audits.
Note 18
—Commitments and Contingencies
Compensation Arrangements
—As of
December 31, 2016
, we had compensation arrangements with certain senior employees, which expire at various points between February 28, 2017 and March 31, 2020. Such arrangements may provide, among other benefits, for minimum salary levels and for compensation under our 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 our incentive compensation programs, was approximately
$10.3 million
as of
December 31, 2016
.
Guarantees of Collection
—A guarantee of collection is a guarantee to a consignor that, under certain conditions, we will pay the consignor for property that has sold at auction, but has not yet been paid for by the purchaser. It is not a guarantee that the property will be sold at a certain minimum price.
As of December 31, 2016, we had outstanding guarantees of collection totaling
$4 million
related to property sold at auctions in the fourth quarter of 2016. In the event that any purchaser does not pay for purchased property by the settlement date, we will be required to pay the consignor the net sale proceeds, but would then take title to the property and have the right to pursue the defaulting buyer and/or reoffer the property at a future sale. As of February 15, 2017, all amounts due to us for property sold under this guarantee of collection have been remitted by the purchasers.
Tax Contingencies
—We are subject to laws and regulations in many countries involving sales, use, value-added and other indirect taxes which are assessed by various governmental authorities and imposed on certain revenue-producing transactions between us and our clients. The application of these laws and regulations to our unique business and global client base, and the estimation of any related liabilities, is complex and requires a significant amount of judgment. We are generally not responsible for these indirect tax liabilities unless we fail to collect the correct amount of sales, use, value-added, or other indirect taxes. Failure to collect the correct amount of indirect tax on a transaction may expose us to claims from tax authorities and could require us to record a liability and corresponding charge to General and Administrative Expenses.
Legal Contingencies
—We become involved in various claims and lawsuits incidental to the ordinary course of our business. We are required to assess the likelihood of any adverse judgments or outcomes related to these legal contingencies, as well as potential ranges of probable or reasonably possible losses. The determination of the amount of any losses 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 our operating results in any period, we do not believe that the outcome of any of these pending claims or proceedings, individually and in the aggregate, will have a material adverse effect on our consolidated financial condition.
See Note 3 for information related to our commitment to make earn-out payments to the former principals of AAP. See
Note 4
for information related to unfunded commitments to extend additional credit through SFS. See
Note 9
for information related to debt commitments. See Note 17 for information related to income tax contingencies. See
Note 19
for information related to auction guarantees. See
Note 20
for information related to lease commitments.
Note 19
—Auction Guarantees
From time-to-time in the ordinary course of our business, we will guarantee to a consignor a minimum sale price in connection with the sale of property at auction (an "auction guarantee"). If the property offered under the auction guarantee sells above the minimum guaranteed price, we are generally entitled to a share of the excess proceeds (the "overage"). In the event that the property sells for less than the minimum guaranteed price, we must perform under the auction guarantee by funding the difference between the sale price at auction and the amount of the auction guarantee (the "shortfall"). The amount of any shortfall recorded in our Consolidated Income Statements is reduced by any auction commissions earned on property sold under the auction guarantee. If any item of property offered under the auction guarantee does not sell, the amount of the auction guarantee must be paid, but we take ownership of the unsold property and may recover the amount paid through its future sale. Depending on the mix of items subject to an auction 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 an item of guaranteed property does not sell and we take ownership of the property, it is recorded as Inventory on our Consolidated Balance Sheets at the lower of its cost (i.e., the amount paid under the auction guarantee) or our estimate of the property's net realizable value (i.e., the expected sale price upon its eventual disposition). The market for fine art, decorative art, and jewelry is not a highly liquid trading market. As a result, the valuation of property acquired as a result of failed auction guarantees is inherently subjective and its realizable value often fluctuates over time. Accordingly, the proceeds ultimately realized on the sale of previously guaranteed property may equal, exceed, or be less than the estimated net realizable value recorded as Inventory on our Consolidated Balance Sheets.
We may reduce our 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., the 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 our auction guarantee risk and reward sharing arrangements are typically major international art dealers or major art collectors. We 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, we may also enter into auction guarantees without securing such arrangements. In these circumstances, we could be exposed to deterioration in auction commission margins and/or auction guarantee losses if one or more of the guaranteed items fails to sell at its minimum guaranteed price. Furthermore, in such situations, our liquidity could be reduced.
Our 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 our Board of Directors.
As of
December 31, 2016
, we had outstanding auction guarantees totaling
$18.3 million
. Our financial exposure under these auction guarantees is reduced by irrevocable bids totaling
$12.8 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. The property related to these auction guarantees is being offered at auctions during the first and second quarters of 2017.
We are obligated under the terms of certain auction guarantees to advance all or a portion of the guaranteed amount prior to auction. As of December 31, 2016, there were
$1 million
in auction guarantee advances outstanding.
As of
December 31, 2016
and 2015, the estimated fair value of our obligation to perform under our outstanding auction guarantees totaled
$0.6 million
and
$1 million
, respectively, and is recorded within Accounts Payable and Accrued Liabilities on our Consolidated Balance Sheets.
As of February 23, 2017, we had outstanding auction guarantees totaling
$147.7 million
and, as of that date, our financial exposure was reduced by irrevocable bids totaling
$89.4 million
. Each of the auction guarantees outstanding as of February 23, 2017, 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 first and second quarters of 2017. As of February 23, 2017, we have advanced
$11.5 million
of the total guaranteed amount.
Note 20
—Lease Commitments
We conduct business on premises leased in various locations under long-term operating leases expiring at various dates through 2060. For the years ended December 31,
2016
,
2015
, and
2014
, net rental expense under our operating leases was
$18.4 million
,
$17.5 million
, and
$18.2 million
, respectively, which was recorded in General and Administrative Expenses in our Consolidated Income Statements. Future minimum lease payments due under non-cancellable operating leases in effect at
December 31, 2016
were as follows (in thousands of dollars):
|
|
|
|
|
2017
|
$
|
15,036
|
|
2018
|
7,339
|
|
2019
|
6,448
|
|
2020
|
5,781
|
|
2021
|
5,291
|
|
Thereafter
|
28,176
|
|
Total future minimum lease payments
|
$
|
68,071
|
|
The future minimum lease payments in the table above exclude future minimum sublease rental receipts of
$1 million
owed to us under noncancellable subleases. In addition to the operating lease payments in the table above, under the terms of certain leases, we are required to pay real estate taxes and utility costs and may be subject to escalations in the amount of future minimum lease payments based on certain contractual provisions.
Note 21
—Share-Based Payments
Share-Based Payments
—Share-based payments made to employees include performance-based stock unit awards, market-based stock unit awards, restricted stock units, restricted stock shares, and stock options. Share-based payments are also made to members of our Board of Directors through the issuance of deferred stock units. A description of each of these share-based payments is provided below.
For the years ended December 31,
2016
,
2015
, and
2014
, compensation expense for share-based payments made to employees was reflected in the following accounts in our Consolidated Income Statements (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Salaries and related costs
|
$
|
15,935
|
|
|
$
|
28,632
|
|
|
$
|
23,470
|
|
Voluntary separation incentive programs (see Note 22)
|
(719
|
)
|
|
3,068
|
|
|
—
|
|
CEO separation and transition costs (see Note 23)
|
—
|
|
|
2,000
|
|
|
3,591
|
|
Total share-based payment expense (pre-tax)
|
$
|
15,216
|
|
|
$
|
33,700
|
|
|
$
|
27,061
|
|
Total share-based payment expense (after-tax)
|
$
|
10,810
|
|
|
$
|
22,992
|
|
|
$
|
17,683
|
|
For the year ended December 31, 2016, our Consolidated Income Statements include a credit of
$0.7 million
related to share-based payments associated with the voluntary separation programs enacted in the fourth quarter of 2015. This credit is the result of changes in our estimate of the number of performance-based stock units held by program participants that are expected to vest.
In 2016, we 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 our Consolidated Financial Statements. Such tax shortfalls are accounted for on our Consolidated Balance Sheets as a reduction to amounts recorded in Additional Paid-in Capital for previously recognized excess tax benefits related to share-based payments.
In
2015
and
2014
, we recognized
$1.1 million
and
$3.6 million
, respectively, 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 our Consolidated Financial Statements. Such excess tax benefits are recognized on our Consolidated Balance Sheets as an increase to Additional Paid-in Capital and are classified within Financing Activities in our Consolidated Statements of Cash Flows.
As of
December 31, 2016
, unrecognized compensation expense related to the unvested portion of share-based payments to employees was
$17.5 million
. This compensation expense is expected to be amortized over a weighted-average period of approximately
2.2
years. We do not capitalize compensation expense related to share-based payments to employees.
Restricted Stock Unit Plan
—The Sotheby's Restricted Stock Unit Plan (as amended and restated, the "Restricted Stock Unit Plan") provides for the issuance of restricted stock units ("RSU's") and restricted stock shares to employees. Awards made under the Restricted Stock Unit Plan are subject to the approval of the Compensation Committee of our 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 our 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, at the same rate as dividends are paid on our common stock (if and when such dividends are paid). 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
year service periods, 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 beginning 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 at the same rate as dividends are paid on our common stock (if and when such dividends are paid), but are only paid for PSU's that vest and become shares of our common stock. PSU's may not be sold, assigned, transferred, pledged, or otherwise encumbered until they vest.
In 2016, the Compensation Committee approved 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's provide the recipient with an opportunity to vest in incremental PSU's of up to
100%
of the initial award subject to the achievement of certain ROIC targets, for a total maximum vesting opportunity of
200%
of the initial award. The maximum number of shares of common stock that may be payable with respect to these awards is
1,215,212
.
|
|
|
•
|
394,371
RSU's with a grant date fair value of
$9.3 million
and annual vesting opportunities over a
three
-year service period.
|
CEO Share-Based Payment Awards
—In the first quarter of 2015, share-based payment awards with a grant date fair value of
$16.5 million
were granted to Thomas S. Smith, Jr. upon the commencement of his employment as our President and CEO on March 31, 2015. These awards consist of the following:
|
|
•
|
An inducement award of
158,638
shares of restricted stock with a grant date fair value of
$6.5 million
, with periodic vesting opportunities between March 4, 2016 and September 1, 2017, which substantially correspond to the times when forfeited opportunities at Mr. Smith's previous employer would otherwise have become eligible to vest. These restricted stock shares were not issued pursuant to the Restricted Stock Unit Plan and have not been registered with the SEC. These shares have voting rights and a non-forfeitable right to dividends.
|
|
|
•
|
An inducement award of
47,070
fully-vested RSU's with a grant date fair value of
$2 million
awarded to Mr. Smith to compensate him for a portion of the annual bonus that he would have received from his previous employer. The common stock shares associated with this award will be distributed in three approximately equal installments on the third, fourth, and fifth anniversaries of the grant date. These RSU's were not issued pursuant to the Restricted Stock Unit Plan and have not been registered with the SEC. These RSU's will be credited with dividend equivalents in the form of additional RSU's if, when, and at the same rate as dividends are paid on our common stock.
|
|
|
•
|
An award of
94,140
PSU's under the Restricted Stock Unit Plan with a grant date fair value of
$8 million
and with a single vesting opportunity after a
five
-year service period contingent upon the achievement of pre-determined levels of price appreciation in our stock. This award provides opportunities to vest in incremental PSU's up to
350%
of the initial award, such that the maximum number of shares that may be payable with respect to this award is
329,490
shares. These PSU's do not have a right to earn dividend equivalents.
|
Subsequent Event: 2017 Share-Based Payment Awards
—In 2017, prior to the date of this filing, the Compensation Committee approved share-based payment awards with a total grant date fair value of
$28.9 million
as follows:
|
|
•
|
367,745
PSU's with a grant date fair value of
$14.5 million
and a single vesting opportunity after a
three
-year service period. These PSU's provide the recipient with an opportunity to vest in incremental PSU's of up to
100%
of the initial awards subject to the achievement of certain ROIC targets, for a total maximum vesting opportunity of
200%
of the initial award. The maximum number of shares of common stock that may be payable with respect to these awards is
735,490
.
|
|
|
•
|
363,664
RSU's with a grant date fair value of
$14.4 million
and annual vesting opportunities over a
three
-year service period.
|
Summary of Outstanding Share-Based Payment Awards to Employees
—For the year ended December 31,
2016
, changes to the number of outstanding RSU's, PSU's, and Restricted Stock shares were as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
RSU's, PSU's, and Restricted
Stock Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Outstanding at January 1, 2016
|
2,019
|
|
|
$
|
43.61
|
|
Granted
|
1,002
|
|
|
$
|
23.66
|
|
Vested
|
(569
|
)
|
|
$
|
39.60
|
|
Canceled
|
(217
|
)
|
|
$
|
36.28
|
|
Outstanding at December 31, 2016
|
2,235
|
|
|
$
|
36.40
|
|
As of
December 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
2016
,
2015
, and
2014
was
$15.2 million
,
$22.9 million
, and
$28.1 million
, respectively, based on the closing stock price on the dates the shares vested.
Stock Options
—Stock options issued pursuant to the 1997 Stock Option Plan are exercisable into authorized, but unissued shares of our common stock. Stock options vest evenly over
four
years and expire
10
years after the date of grant. As of
December 31, 2016
,
104,100
shares of common stock were available for the issuance of stock options under the Stock Option Plan. As of
December 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
3.1 years
, and an aggregate intrinsic value of
$0.9 million
.
No
stock options were granted or exercised in 2016 and 2015. The aggregate intrinsic value of options exercised during
2014
was
$1.2 million
. Cash received from stock options that were exercised during
2014
totaled
$1 million
. In
2014
, the related excess tax benefit realized from the exercise of stock options was
$0.3 million
.
Directors Stock Plan
—Common stock is issued quarterly under the Sotheby’s Stock Compensation Plan for Non-Employee Directors (as amended and restated, the “Directors Stock Plan”). Directors may elect to receive this compensation in the form of deferred stock units, which are credited in an amount that is equal to the number of shares of common stock the director otherwise would have received. The number of shares of common stock awarded is calculated using the closing price of the common stock on the NYSE on the business day immediately prior to the quarterly grant date. Deferred stock units are held until a director’s termination of service, at which time the units are settled on a one-for one basis in shares of our common stock on the first day of the calendar month following the date of termination. As of December 31, 2016,
149,004
deferred stock units were outstanding under the Directors Stock Plan and
136,645
units were available for future issuance.
Note 22
—Voluntary Separation Incentive Programs
On November 13, 2015, we announced a series of regional voluntary separation incentive programs (the "Programs") aimed at reducing headcount and associated compensation costs. The Programs were offered to our employees in jurisdictions where it was practical to do so. Employees who elected to participate in the Programs were accepted only upon approval by management.
In the fourth quarter of 2015, we 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 our achievement of the underlying profitability targets, when applicable. The liability related to the
$33.8 million
in cash severance benefits was recorded on our Consolidated Balance Sheets within Accounts Payable and Accrued Liabilities and included
$4.7 million
related to 2015 incentive compensation that would have been paid to participants had they not participated in the Programs.
In 2016, we recognized a net credit of
$0.6 million
to the originally recorded charge primarily as a result of our quarterly assessment of the likelihood that the performance-based stock units held by participants in the Programs will vest.
Employee transitions and cash severance payments under the Programs are substantially complete.
Note 23
—CEO Separation and Transition Costs
In 2014, CEO Separation and Transition Costs consisted of compensation-related charges of
$7.6 million
recognized in the fourth quarter of 2014, related to the resignation of William F. Ruprecht as our President and CEO, and charges of
$4.2 million
recognized in the first quarter of 2015, associated with the subsequent hiring of Thomas S. Smith, Jr. as his replacement. The charges recognized in the fourth quarter of 2014 consisted of the accrual of a
$4 million
cash severance benefit and
$3.6 million
in accelerated equity compensation expense triggered by the terms of Mr. Ruprecht's employment agreement. The charges recognized in the first quarter of 2015 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 made 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.
Note 24
—Restructuring Charges (Net)
On July 16, 2014, our Board of Directors approved a restructuring plan (the "2014 Restructuring Plan") principally impacting our operations in the 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. In 2015, we recognized a credit of approximately
$1 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.
Note 25
—Special Charges (Net)
In 2014, we recognized Special Charges (net) of
$20 million
related to third party advisory, legal, and other professional service fees directly associated with issues related to shareholder activism, the resulting proxy contest with Third Point LLC ("Third Point"), and the litigation concerning our former shareholder rights plan and the change in control provision in our credit agreement. This amount is net of a
$4.6 million
insurance recovery pertaining to certain professional services fees incurred in defense of the litigation concerning our former shareholder rights plan and the change in control provision in our credit agreement.
Included in Special Charges (net) in 2014 is a
$10 million
charge related to our reimbursement of Third Point's documented, out-of-pocket expenses incurred in connection with the proxy contest and the litigation concerning our former shareholder rights plan. This reimbursement is part of a support agreement that we entered into with Third Point, Daniel S. Loeb, Olivier Reza, Harry J. Wilson and other entities affiliated with Third Point (together with Third Point, the "Third Point Entities") on May 4, 2014 pursuant to which we settled the previously pending proxy contest for the election of directors (the "Support Agreement"). Pursuant to the Support Agreement, on May 4, 2014, Mr. Loeb, Mr. Reza, and Mr. Wilson (the "Third Point Nominees") were appointed to our Board of Directors. The Support Agreement also contains various other terms and provisions, including with respect to standstill and voting commitments entered into by Third Point, Third Point's withdrawal of the litigation concerning our former shareholder rights plan, and the accelerated expiration of our former shareholder rights plan.
Note 26
—Earnings Per Share
Basic earnings per share
—Basic 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. Our 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 21
for information on our share-based payment programs.
Diluted earnings per share
—Diluted earnings per share attributable to Sotheby's common shareholders is computed in a similar manner to basic 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. Our 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 our Board of Directors. See
Note 21
for information on our share-based payment programs.
For the years ended December 31,
2016
,
2015
, and
2014
,
1 million
,
0.9 million
, and
1.1 million
potential common shares, respectively, related to share-based payment awards 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 respective balance sheet dates.
The table below summarizes the computation of basic and diluted earnings per share for the years ended December 31,
2016
,
2015
, and
2014
(in thousands of dollars, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Basic:
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income attributable to Sotheby's
|
$
|
74,112
|
|
|
$
|
43,727
|
|
|
$
|
117,795
|
|
Less: Net income attributable to participating securities
|
1,001
|
|
|
354
|
|
|
1,047
|
|
Net income attributable to Sotheby's common shareholders
|
$
|
73,111
|
|
|
$
|
43,373
|
|
|
$
|
116,748
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
57,024
|
|
|
68,121
|
|
|
69,016
|
|
Basic earnings per share - Sotheby's common shareholders
|
$
|
1.28
|
|
|
$
|
0.64
|
|
|
$
|
1.69
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income attributable to Sotheby's
|
$
|
74,112
|
|
|
$
|
43,727
|
|
|
$
|
117,795
|
|
Less: Net income attributable to participating securities
|
1,001
|
|
|
354
|
|
|
1,047
|
|
Net income attributable to Sotheby's common shareholders
|
$
|
73,111
|
|
|
$
|
43,373
|
|
|
$
|
116,748
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
57,024
|
|
|
68,121
|
|
|
69,016
|
|
Weighted average effect of dilutive potential common shares:
|
|
|
|
|
|
Performance share units
|
465
|
|
|
438
|
|
|
407
|
|
Deferred stock units
|
149
|
|
|
167
|
|
|
162
|
|
Stock options
|
15
|
|
|
18
|
|
|
21
|
|
Weighted average dilutive potential common shares outstanding
|
629
|
|
|
623
|
|
|
590
|
|
Weighted average diluted shares outstanding
|
57,653
|
|
|
68,744
|
|
|
69,606
|
|
Diluted earnings per share - Sotheby's common shareholders
|
$
|
1.27
|
|
|
$
|
0.63
|
|
|
$
|
1.68
|
|
The decrease in weighted average basic and diluted shares outstanding over the three reporting periods is due to common stock repurchases. See
Note 14
for additional information on our share repurchase program.
Note 27
—Related Party Transactions
From time-to-time, in the ordinary course of business, related parties, such as members of our Board of Directors and employees, buy and sell property at our auctions or through private sales brokered by Sotheby's. For the years ended
December 31, 2016
,
2015
, and
2014
, we recognized Agency Commissions and Fees of
$4.1 million
,
$2.7 million
, and
$3.1 million
, respectively, related to property sold or purchased by related parties. As of December 31, 2016, Accounts Receivable (net) included
$1.8 million
associated with an auction purchase made by a related party and Client Payables included
$3.6 million
owed to related party consignors.
On September 2, 2015, we entered into an arrangement with the Estate of A. Alfred Taubman under which we offered works of art from the Taubman Collection. Robert S. Taubman, a trustee and beneficiary of the Estate, was a member of our Board of Directors at the time the arrangement was consummated. In connection with this arrangement, we provided an auction guarantee of
$509 million
, after taking into account items withdrawn by the Estate prior to sale. Total aggregate proceeds (i.e., the hammer price plus buyer's premium) from sales of Taubman Collection property were
$473.5 million
. The results of these sales, combined with the initially 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 December 31, 2015, we owed
$285.4 million
to the Estate in connection with this auction guarantee. This liability was settled by cash payments made to the Estate throughout 2016.
On October 3, 2016, we entered into an agreement with funds managed by Marcato Capital Management LP, pursuant to which we purchased
2,050,000
shares of our common stock from Marcato for an aggregate purchase price of
$73.8 million
, or
$36.00
per share. At the time of this agreement, Marcato owned
8.5%
of our outstanding common stock. (See Note 14.)
Note 28
—Recently Issued Accounting Standards
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. We are continuing to assess the impact of ASU 2014-09 on our Consolidated Financial Statements. Based on our progress to date, we do not expect the adoption of ASU 2014-09 to have a material impact on the timing of our revenue recognition.
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 in the accompanying notes to the financial statements. ASU 2016-01 will be effective for us 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. We are currently assessing the potential impact of adopting this new accounting standard on our Consolidated 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 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 us 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. We are currently assessing the potential impact of adopting this new accounting standard on our Consolidated 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. We will adopt ASU 2016-05 on its effective date of January 1, 2017. The adoption of ASU 2016-05 will not have a material effect on our Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-06,
Derivatives and Hedging - 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. We will adopt ASU 2016-06 on its effective date of January 1, 2017. The adoption of ASU 2016-06 will not have a material effect on our Consolidated 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 tax consequences and certain classifications within the statement of cash flows. This standard requires companies to record all excess tax benefits and deficiencies resulting from the vesting of share-based payments to the income statement, whereas current guidance generally permits such items to be recorded to the equity section of the balance sheet provided that an adequate level of previously recorded excess tax benefits exists. We will adopt ASU 2016-09 on its effective date of January 1, 2017. We expect that the adoption of ASU 2016-09 could potentially result in increased variability in our effective income tax rate as a result of the requirement to record all excess tax benefits and deficiencies resulting from the vesting of share-based payments to our Consolidated Income Statements. We do not expect that the other provisions of ASU 2016-09 will have a material effect on our Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13,
Measurement of Credit Losses on Financial Instruments
, which amends previously issued guidance regarding the impairment of financial instruments by creating an impairment model that is based on
expected losses rather than incurred losses. ASU 2016-13 is effective for us beginning on January 1, 2020. Early adoption is permitted. We are currently assessing the potential impact of adopting this new accounting standard on our Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows
, which updates guidance as to how certain cash receipts and cash payments should be presented and classified within the statement of cash flows. ASU 2016-15 is intended to reduce the existing diversity in practice and is effective for us beginning on January 1, 2018. Early adoption is permitted. We are currently assessing the potential impact of adopting this new accounting standard on our Consolidated Financial Statements.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows
, which amends ASC 230 to add or clarify guidance on the classification and presentation of restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for us beginning on January 1, 2018. Early adoption is permitted. We are currently assessing the potential impact of adopting this new accounting standard on our Consolidated Financial Statements.
Note 29
—Quarterly Results (Unaudited)
The global art auction market has
two
principal selling seasons, which generally occur in the second and fourth quarters of the year. In the aggregate, second and fourth quarter Net Auction Sales
1
represented
82%
and
78%
of our total annual Net Auction Sales in
2016
and
2015
, respectively, with auction commission revenues comprising approximately
75%
of our total revenues in each of these years. Accordingly, our financial results are seasonal, with peak revenues and operating income generally occurring in the second and fourth quarters. Consequently, first and third quarter results have historically reflected lower revenues when compared to the second and fourth quarters and, typically, a net loss due to the fixed nature of many of our operating expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
(In thousands, except per share data)
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Net Auction Sales
|
$
|
491,176
|
|
|
$
|
1,567,495
|
|
|
$
|
160,208
|
|
|
$
|
1,337,211
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Agency commissions and fees
|
$
|
81,065
|
|
|
$
|
273,764
|
|
|
$
|
51,285
|
|
|
$
|
265,719
|
|
Inventory sales
|
6,794
|
|
|
5,281
|
|
|
24,359
|
|
|
26,429
|
|
Finance
|
14,755
|
|
|
14,750
|
|
|
11,138
|
|
|
12,073
|
|
Other
|
3,917
|
|
|
4,870
|
|
|
4,710
|
|
|
4,468
|
|
Total revenues
|
$
|
106,531
|
|
|
$
|
298,665
|
|
|
$
|
91,492
|
|
|
$
|
308,689
|
|
Operating (loss) income
|
$
|
(31,989
|
)
|
|
$
|
130,083
|
|
|
$
|
(66,874
|
)
|
|
$
|
91,396
|
|
Net (loss) income attributable to Sotheby's
|
$
|
(25,884
|
)
|
|
$
|
88,964
|
|
|
$
|
(54,470
|
)
|
|
$
|
65,502
|
|
Per Share Amounts:
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share - Sotheby's common shareholders
|
$
|
(0.41
|
)
|
|
$
|
1.54
|
|
|
$
|
(0.99
|
)
|
|
$
|
1.22
|
|
Diluted (loss) earnings per share - Sotheby's common shareholders
|
$
|
(0.41
|
)
|
|
$
|
1.52
|
|
|
$
|
(0.99
|
)
|
|
$
|
1.20
|
|
Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
63,022
|
|
|
57,104
|
|
|
55,013
|
|
|
52,956
|
|
Diluted
|
63,022
|
|
|
57,712
|
|
|
55,013
|
|
|
53,685
|
|
Year Ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Net Auction Sales
|
$
|
755,817
|
|
|
$
|
1,856,643
|
|
|
$
|
370,928
|
|
|
$
|
2,033,350
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Agency commissions and fees
|
$
|
127,882
|
|
|
$
|
310,377
|
|
|
$
|
69,222
|
|
|
$
|
284,439
|
|
Inventory sales
|
12,983
|
|
|
7,005
|
|
|
53,226
|
|
|
35,485
|
|
Finance
|
12,687
|
|
|
11,970
|
|
|
12,933
|
|
|
12,899
|
|
Other
|
2,123
|
|
|
2,654
|
|
|
2,611
|
|
|
2,998
|
|
Total revenues
|
$
|
155,675
|
|
|
$
|
332,006
|
|
|
$
|
137,992
|
|
|
$
|
335,821
|
|
Operating income (loss)
|
$
|
18,404
|
|
|
$
|
116,458
|
|
|
$
|
(21,707
|
)
|
|
$
|
88,566
|
|
Net income (loss) attributable to Sotheby's
|
$
|
5,202
|
|
|
$
|
67,572
|
|
|
$
|
(17,894
|
)
|
|
$
|
(11,153
|
)
|
Per Share Amounts:
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share - Sotheby's common shareholders
|
$
|
0.07
|
|
|
$
|
0.97
|
|
|
$
|
(0.26
|
)
|
|
$
|
(0.17
|
)
|
Diluted earnings (loss) per share - Sotheby's common shareholders
|
$
|
0.07
|
|
|
$
|
0.96
|
|
|
$
|
(0.26
|
)
|
|
$
|
(0.17
|
)
|
Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
69,090
|
|
|
69,332
|
|
|
67,946
|
|
|
66,118
|
|
Diluted
|
69,705
|
|
|
69,884
|
|
|
67,946
|
|
|
66,118
|
|
__________________________________________________________________
1
Net Auction Sales represents the hammer or sale price of property sold at auction.