NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
Company Overview—Since 1744, Sotheby’s (the "Company") has been uniting collectors with world-class works of art, which in these financial statements is meant to include authenticated fine art, decorative art, jewelry, wine, and collectibles, and may also be referred to as "art," "artwork," or "property." Today, Sotheby's offers property from more than 70 collecting categories to clients from 130 countries and presents auctions in ten different salesrooms, including New York, London, Hong Kong, and Paris, and Sotheby’s BidNow program allows clients to view all auctions live online and place bids from anywhere in the world. Sotheby's also offers collectors 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, art-related financing, and art advisory services, as well as retail wine locations in New York and Hong Kong.
Accounting Principles—The unaudited Condensed Consolidated Financial Statements included herein have been prepared by the management of Sotheby’s in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. In our opinion, the unaudited Condensed Consolidated Financial Statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. The interim results presented in our Condensed Consolidated Statements of Operations are not necessarily indicative of results for a full year. See Note 2 for information about the seasonality of our business. We urge you to read these unaudited Condensed Consolidated Financial Statements in conjunction with the information included in our 2018 Form 10-K filed with the SEC on February 28, 2019.
Principles of Consolidation—The unaudited Condensed Consolidated Financial Statements include the accounts of our wholly-owned subsidiaries and Sotheby's (Beijing) Auction Co., Ltd. ("Sotheby's Beijing"), a joint venture in which we have a controlling 80% ownership interest. The net loss attributable to the minority owner of Sotheby's Beijing is reported as "Net Loss Attributable to Noncontrolling Interest" in our Condensed Consolidated Statements of Operations, and the non-controlling 20% ownership interest is reported as "Noncontrolling Interest" within the Equity section of our Condensed Consolidated Balance Sheets. Intercompany transactions and balances among our subsidiaries are eliminated in consolidation.
Equity investments through which we may significantly influence, but not control, the investee, are accounted for using the equity method. Under the equity method, our share of investee earnings or losses is recorded in our Condensed Consolidated Statements of Operations within Equity in Earnings of Investees. Our interest in the net assets of these investees is recorded on our Condensed Consolidated Balance Sheets within Other Long-Term Assets. Our equity method investees include: (i) Acquavella Modern Art ("AMA"), a partnership through which a collection of fine art is being sold, (ii) RM Sotheby's, an auction house for investment-quality automobiles, and (iii) a partnership through which artworks are being purchased and sold.
Estimates and Assumptions—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Leases—In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases, which requires long-term lease arrangements to be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease liability are recorded for all long-term leases, whether classified as an operating lease or a finance lease. On July 30, 2018, the FASB issued ASU 2018-11, which made targeted improvements to ASU 2016-02 (together, the "New Lease Standard").
We adopted the New Lease Standard on January 1, 2019 using the modified retrospective method and elected not to recast comparative prior year periods. We have also elected the package of practical expedients available under the transition provisions of the New Lease Standard, including (i) not reassessing whether expired or existing contracts contain leases, (ii) not reassessing previous lease classification, and (iii) not revaluing initial direct costs for existing leases. In addition, for all leases, we have elected the practical expedient that allows the aggregation of non-lease components, such as maintenance, utilities, and management services, with the related lease components when evaluating accounting treatment.
As a result of our adoption of the New Lease Standard, we recorded a right-of-use asset of $78.4 million and a corresponding operating lease liability of $79.4 million on the January 1, 2019 effective date. The operating lease liability recorded upon adoption was measured using our approximate incremental borrowing rate as of that date. The New Lease Standard did not impact our results of operations, cash flows, or our compliance with existing debt covenants. (See Note 6 for additional information on our leases.)
2. Seasonality of Business
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 Sales1 represented 76% and 80% of our total annual Net Auction Sales in 2018 and 2017, respectively, with auction commission revenues comprising approximately 74% and 66%, of our total revenues, respectively. Accordingly, our financial results are seasonal, with peak revenues and operating income generally occurring in the second and fourth quarters. Consequently, first and third quarter results have historically reflected lower revenues when compared to the second and fourth quarters and, typically, a net loss due to the fixed nature of many of our operating expenses.
3. Segment Reporting
As of September 30, 2019, our operations were organized under two segments—the Agency segment and the Finance segment, which does business, and is referred to in this report, as Sotheby's Financial Services (or "SFS"). Through our Agency segment, we accept works of art on consignment and match sellers (also known as consignors) to buyers through the auction or private sale process. In both auction and private sale transactions, we act as exclusive agent for the seller. Prior to offering a work of art for sale, we perform due diligence activities to authenticate and determine the ownership history and condition of the consigned artwork. 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, and RM Sotheby's, an equity investee that operates as an auction house for investment-quality automobiles. The Agency segment is an aggregation of operating segments which include the auction, private sale, and other related activities that are conducted within various collecting categories, all of 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 operates 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 leverages the art expertise of the Agency segment, 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.
Art Agency, Partners (“AAP”), through which we offer art advisory services, provides art collectors with strategic guidance on collection identity and development, acquisitions, short and long-term planning, and provides advice to artists and artists' estates. In addition, from time-to-time, AAP brokers private art sales for its advisory clients. Our advisory services are classified within All Other for segment reporting purposes, along with our retail wine business, brand licensing activities, and the results from other certain equity method investments.
The Chief Executive Officer of the Company is our chief operating decision maker. The Chief Executive Officer regularly evaluates financial information about each of our segments in deciding how to allocate resources and assess performance. The performance of each segment is measured based on segment (loss) income before taxes, which excludes the unallocated items highlighted in the reconciliation below.
On October 3, 2019, we completed our merger with BidFair MergeRight Inc. See Note 22 for more information related to our merger with BidFair MergeRight Inc., as well as the concurrent transfers of Sotheby's Financial Services, Inc. to BidFair USA Inc. and 1334 York LLC (the owner of our headquarters building at 1334 York Avenue in New York, the "York Property") to BidFair Property Holdings Inc., a subsidiary of BidFair USA Inc. Upon completion of those transfers, the Company no longer owned SFS, Inc. and 1334 York LLC.
________________________________________________________________
1 Represents the total hammer (sale) price of property sold at auction.
The following table presents our segment information for the three and nine months ended September 30, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Agency
|
|
SFS
|
|
All Other
|
|
Reconciling items
|
|
Total
|
|
Revenues
|
|
$
|
70,948
|
|
|
$
|
17,884
|
|
|
$
|
6,329
|
|
|
$
|
(2,227
|
)
|
(a)
|
$
|
92,934
|
|
|
Segment (loss) income before taxes (b)
|
|
$
|
(83,210
|
)
|
|
$
|
10,149
|
|
|
$
|
1,402
|
|
|
$
|
(3,378
|
)
|
(c)
|
$
|
(75,037
|
)
|
|
Three Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
98,314
|
|
|
$
|
12,822
|
|
|
$
|
9,424
|
|
|
$
|
(1,399
|
)
|
(a)
|
$
|
119,161
|
|
|
Segment (loss) income before taxes (b)
|
|
$
|
(46,803
|
)
|
|
$
|
7,152
|
|
|
$
|
2,093
|
|
|
$
|
481
|
|
(c)
|
$
|
(37,077
|
)
|
|
Nine Months Ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
563,389
|
|
|
$
|
52,310
|
|
|
$
|
20,017
|
|
|
$
|
(7,539
|
)
|
(a)
|
$
|
628,177
|
|
|
Segment (loss) income before taxes (b)
|
|
$
|
(30,066
|
)
|
|
$
|
27,710
|
|
|
$
|
4,815
|
|
|
$
|
(9,129
|
)
|
(c)
|
$
|
(6,670
|
)
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
605,492
|
|
|
$
|
37,061
|
|
|
$
|
24,156
|
|
|
$
|
(6,116
|
)
|
(a)
|
$
|
660,593
|
|
|
Segment income before taxes (b)
|
|
$
|
15,175
|
|
|
$
|
20,283
|
|
|
$
|
4,532
|
|
|
$
|
(14,654
|
)
|
(c)
|
$
|
25,336
|
|
|
|
|
|
(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)
|
Our previous credit agreements provided for dedicated asset-based revolving credit facilities for the Agency segment and SFS (see Note 9). The SFS Credit Facility was used to fund a significant portion of client loans. Accordingly, any borrowing costs associated with the SFS Credit Facility were recorded within Cost of Finance Revenues in our Condensed Consolidated Statements of Operations. In September 2017, we modified our cash management strategy in order to reduce borrowing costs by applying excess cash balances against revolver credit facility borrowings. On June 26, 2018, we refinanced our previous credit agreements. The new credit agreement that was entered into in connection with this refinancing combined the Agency Credit Facility and the SFS Credit Facility into one asset-based revolving credit facility. Subsequent to the refinancing and resulting elimination of the SFS Credit Facility, the SFS loan portfolio is no longer directly funded with revolving credit facility borrowings. Accordingly, beginning in the third quarter of 2018, all borrowing costs associated with our revolving credit facility are recorded as interest expense in our Condensed Consolidated Statements of Operations.
|
As a result of this refinancing and the concurrent elimination of the separate segment-based revolving credit facilities, beginning in the third quarter of 2018, when measuring segment profitability: (i) revolving credit facility costs are no longer allocated to our segments and (ii) SFS receives a corporate finance charge that is calculated assuming that 85% of their loan portfolio is funded with debt. Prior period segment results have been recast to reflect these changes in the measurement of segment profitability.
|
|
|
|
(c)
|
The unallocated amounts and reconciling items related to segment (loss) income before taxes are detailed in the table below.
|
The table below presents a reconciliation of total segment (loss) income before taxes to consolidated (loss) income before taxes for the three and nine months ended September 30, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Agency
|
|
$
|
(83,210
|
)
|
|
$
|
(46,803
|
)
|
|
$
|
(30,066
|
)
|
|
$
|
15,175
|
|
|
SFS
|
|
10,149
|
|
|
7,152
|
|
|
27,710
|
|
|
20,283
|
|
|
All Other
|
|
1,402
|
|
|
2,093
|
|
|
4,815
|
|
|
4,532
|
|
|
Segment (loss) income before taxes
|
|
(71,659
|
)
|
|
(37,558
|
)
|
|
2,459
|
|
|
39,990
|
|
|
Unallocated amounts and reconciling items:
|
|
|
|
|
|
|
|
|
|
Revolving credit facility costs (a)
|
|
(4,458
|
)
|
|
(1,921
|
)
|
|
(14,441
|
)
|
|
(12,149
|
)
|
|
SFS corporate finance charge
|
|
6,346
|
|
|
3,878
|
|
|
18,669
|
|
|
11,866
|
|
|
Merger-related expenses
|
|
(4,735
|
)
|
|
—
|
|
|
(10,445
|
)
|
|
—
|
|
|
Extinguishment of debt
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,855
|
)
|
|
Equity in earnings of investees (b)
|
|
(531
|
)
|
|
(1,476
|
)
|
|
(2,912
|
)
|
|
(3,516
|
)
|
|
(Loss) income before taxes
|
|
$
|
(75,037
|
)
|
|
$
|
(37,077
|
)
|
|
$
|
(6,670
|
)
|
|
$
|
25,336
|
|
|
|
|
|
(a)
|
For the nine months ended September 30, 2018, revolving credit facility costs in the table above includes approximately $4 million of unamortized fees related to our previous credit agreements that were written off in the second quarter of 2018. (See Note 9.)
|
|
|
|
|
(b)
|
For segment reporting purposes, our share of earnings related to equity investees is included as part of (loss) income before taxes. However, such earnings are reported separately below (loss) income before taxes in our Condensed Consolidated Statements Operations.
|
The table below presents segment assets, as well as a reconciliation of segment assets to consolidated assets as of September 30, 2019, December 31, 2018, and September 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
September 30, 2018
|
|
Agency
|
|
$
|
1,333,377
|
|
|
$
|
1,886,986
|
|
|
$
|
1,516,644
|
|
|
SFS
|
|
860,284
|
|
|
705,779
|
|
|
616,092
|
|
|
All Other
|
|
35,481
|
|
|
39,241
|
|
|
36,835
|
|
|
Total segment assets
|
|
2,229,142
|
|
|
2,632,006
|
|
|
2,169,571
|
|
|
Unallocated amounts and reconciling items:
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and income tax receivable
|
|
82,139
|
|
|
57,082
|
|
|
65,900
|
|
|
Consolidated assets
|
|
$
|
2,311,281
|
|
|
$
|
2,689,088
|
|
|
$
|
2,235,471
|
|
Substantially all of our capital expenditures for the nine months ended September 30, 2019, the year ended December 31, 2018, and the nine months ended September 30, 2018 were attributable to the Agency segment.
4. Revenues
The Agency segment, which is our predominant source of revenue, earns commissions and fees by acting as agent for clients wishing to sell their artworks through the auction or private sale process. To a much lesser extent, the Agency segment also earns revenues from the sale of artworks that are owned by Sotheby's. Outside of the Agency segment, we earn revenues from art advisory services, retail wine sales, and brand licensing activities, which are aggregated and classified within All Other for segment reporting purposes, as well as from the art-related financing activities conducted by SFS. The revenues earned by the Agency and All Other segments are accounted for in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers ("ASC 606"). The revenues earned by SFS are not within the scope of ASC 606.
The following tables summarize our revenues by segment and type for the three and nine months ended September 30, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Three Months Ended September 30, 2018
|
|
|
|
Agency
|
|
SFS
|
|
All Other
|
|
Total
|
|
Agency
|
|
SFS
|
|
All Other
|
|
Total
|
|
Revenue from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency commissions and fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction commissions
|
|
$
|
48,088
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
48,088
|
|
|
$
|
72,734
|
|
|
$
|
—
|
|
|
$
|
(156
|
)
|
|
$
|
72,578
|
|
|
Auction related fees, net (a)
|
|
5,786
|
|
|
—
|
|
|
—
|
|
|
5,786
|
|
|
7,685
|
|
|
—
|
|
|
(15
|
)
|
|
7,670
|
|
|
Private sale commissions
|
|
10,118
|
|
|
—
|
|
|
107
|
|
|
10,225
|
|
|
12,759
|
|
|
—
|
|
|
—
|
|
|
12,759
|
|
|
Other Agency commissions and fees
|
|
1,719
|
|
|
—
|
|
|
32
|
|
|
1,751
|
|
|
3,556
|
|
|
—
|
|
|
158
|
|
|
3,714
|
|
|
Total Agency commissions and fees
|
|
65,711
|
|
|
—
|
|
|
139
|
|
|
65,850
|
|
|
96,734
|
|
|
—
|
|
|
(13
|
)
|
|
96,721
|
|
|
Inventory sales
|
|
5,237
|
|
|
—
|
|
|
1,716
|
|
|
6,953
|
|
|
1,580
|
|
|
—
|
|
|
4,918
|
|
|
6,498
|
|
|
Advisory revenues
|
|
—
|
|
|
—
|
|
|
1,203
|
|
|
1,203
|
|
|
—
|
|
|
—
|
|
|
1,169
|
|
|
1,169
|
|
|
License fee and other revenues
|
|
—
|
|
|
—
|
|
|
3,271
|
|
|
3,271
|
|
|
—
|
|
|
—
|
|
|
3,350
|
|
|
3,350
|
|
|
Total revenue from contracts with customers
|
|
70,948
|
|
|
—
|
|
|
6,329
|
|
|
77,277
|
|
|
98,314
|
|
|
—
|
|
|
9,424
|
|
|
107,738
|
|
|
Finance revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and related fees
|
|
—
|
|
|
15,657
|
|
|
—
|
|
|
15,657
|
|
|
—
|
|
|
11,423
|
|
|
—
|
|
|
11,423
|
|
|
Total revenues
|
|
$
|
70,948
|
|
|
$
|
15,657
|
|
|
$
|
6,329
|
|
|
$
|
92,934
|
|
|
$
|
98,314
|
|
|
$
|
11,423
|
|
|
$
|
9,424
|
|
|
$
|
119,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
Nine Months Ended September 30, 2018
|
|
|
|
Agency
|
|
SFS
|
|
All Other
|
|
Total
|
|
Agency
|
|
SFS
|
|
All Other
|
|
Total
|
|
Revenue from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency commissions and fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction commissions
|
|
$
|
440,977
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
440,977
|
|
|
$
|
462,663
|
|
|
$
|
—
|
|
|
$
|
(156
|
)
|
|
$
|
462,507
|
|
|
Auction related fees, net (a)
|
|
34,300
|
|
|
—
|
|
|
—
|
|
|
34,300
|
|
|
25,509
|
|
|
—
|
|
|
(15
|
)
|
|
25,494
|
|
|
Private sale commissions
|
|
53,137
|
|
|
—
|
|
|
221
|
|
|
53,358
|
|
|
56,260
|
|
|
—
|
|
|
500
|
|
|
56,760
|
|
|
Other Agency commissions and fees
|
|
6,939
|
|
|
—
|
|
|
87
|
|
|
7,026
|
|
|
7,907
|
|
|
—
|
|
|
458
|
|
|
8,365
|
|
|
Total Agency commissions and fees
|
|
535,353
|
|
|
—
|
|
|
308
|
|
|
535,661
|
|
|
552,339
|
|
|
—
|
|
|
787
|
|
|
553,126
|
|
|
Inventory sales
|
|
28,036
|
|
|
—
|
|
|
5,942
|
|
|
33,978
|
|
|
53,153
|
|
|
—
|
|
|
9,687
|
|
|
62,840
|
|
|
Advisory revenues
|
|
—
|
|
|
—
|
|
|
3,925
|
|
|
3,925
|
|
|
—
|
|
|
—
|
|
|
3,575
|
|
|
3,575
|
|
|
License fee and other revenues
|
|
—
|
|
|
—
|
|
|
9,842
|
|
|
9,842
|
|
|
—
|
|
|
—
|
|
|
10,107
|
|
|
10,107
|
|
|
Total revenue from contracts with customers
|
|
563,389
|
|
|
—
|
|
|
20,017
|
|
|
583,406
|
|
|
605,492
|
|
|
—
|
|
|
24,156
|
|
|
629,648
|
|
|
Finance revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and related fees
|
|
—
|
|
|
44,771
|
|
|
—
|
|
|
44,771
|
|
|
—
|
|
|
30,945
|
|
|
—
|
|
|
30,945
|
|
|
Total revenues
|
|
$
|
563,389
|
|
|
$
|
44,771
|
|
|
$
|
20,017
|
|
|
$
|
628,177
|
|
|
$
|
605,492
|
|
|
$
|
30,945
|
|
|
$
|
24,156
|
|
|
$
|
660,593
|
|
|
|
|
|
(a)
|
Auction Related Fees, net, includes the net overage or shortfall attributable to auction guarantees, consignor expense recoveries, and shipping fees charged to buyers.
|
(See Note 22 for information related to our merger with BidFair MergeRight Inc., as well as the concurrent transfer of Sotheby's Financial Services, Inc. to BidFair USA, Inc. Upon completion of this transfer, the Company no longer owned Sotheby's Financial Services, Inc.)
Contract Balances—We are predominantly an agency business that collects and remits cash on behalf of our clients. Following the completion of an auction or private sale, we invoice the buyer for the aggregate purchase price of the property, which includes our buyer's premium or private sale commission, as well as any applicable taxes and royalties. The amount owed by the buyer is recorded within Accounts Receivable, and the amount of net sale proceeds due to the seller is recorded within Client Payables. Upon collection from the buyer, we are obligated to remit the net proceeds to the seller after deducting our commissions and related fees, as well as any applicable taxes and royalties, which are ultimately paid to the appropriate taxing authority or royalty association.
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. Accordingly, in these situations, the net sale proceeds are paid to the consignor before payment is collected from the buyer. Under our standard auction terms, we retain possession of the property until payment is received from the buyer, though, in certain limited situations, we may allow the buyer to take possession of the property before making payment. In these situations, we are liable to the seller for the net sales proceeds whether or not the buyer makes payment. All extended payment term and property release 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 seller does not provide matched payment terms, the receivable balance is reclassified from Accounts Receivable to Notes Receivable on our Condensed Consolidated Balance Sheets. (See Note 5 for information on Agency segment Notes Receivable.)
When the buyer's due date is extended to a date that is one year or less from the sale date, as a practical expedient, we do not record a discount to our commission to account for the effects of the financing component. However, in the limited circumstances when the buyer's due date is extended to a date that is beyond one year from the sale date, we record a discount to our commission revenue to reflect the financing component, if material.
The table below presents the Accounts Receivable balances related to our contracts with customers and associated Client Payables as of September 30, 2019, December 31, 2018, and September 30, 2018. The net receivable (payable) balance reported at each balance sheet date is dependent on the timing of auction and private sale settlements, as well as the extent of extended payment terms granted to buyers, particularly if not matched by the consignor.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
September 30,
2019
|
|
December 31,
2018
|
|
September 30,
2018
|
|
Accounts receivable
|
|
$
|
410,147
|
|
|
$
|
967,817
|
|
|
$
|
599,681
|
|
|
Client payables
|
|
405,144
|
|
|
997,168
|
|
|
627,466
|
|
|
Net receivable (payable)
|
|
$
|
5,003
|
|
|
$
|
(29,351
|
)
|
|
$
|
(27,785
|
)
|
As of September 30, 2019, the net receivable balance was $5 million, as compared to net payable balances of ($29.4) million as of December 31, 2018 and ($27.8) million as of September 30, 2018. As of September 30, 2019, Accounts Receivable includes $68.2 million related to situations when we paid the consignor prior to collecting from the buyer, as compared to $118.7 million as of December 31, 2018 and $47.2 million as of September 30, 2018. As of September 30, 2019, December 31, 2018, and September 30, 2018, Accounts Receivable (net) also included $14.6 million, $39.6 million, and $12 million, respectively, related to situations when we allowed the buyer to take possession of the property before making payment.
Deferred revenue balances are generally not material.
Contract Costs—We incur various direct costs in the fulfillment of our auction services. These costs principally relate to the transport of consigned artworks to the location of the auction sale, various sale marketing activities including catalogue production and distribution, and the exhibition of consigned artworks. A large portion of these costs are funded prior to the auction and are recorded on our Condensed Consolidated Balance Sheets within Prepaid Expenses and Other Current Assets until the date of the auction sale when they are expensed to Direct Costs of Services in the Condensed Consolidated Statements of Operations. As of September 30, 2019, December 31, 2018, and September 30, 2018, the contract cost balances recorded within Prepaid Expenses and Other Current Assets were $10.3 million, $10.8 million, and $10.4 million, respectively.
5. 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 through the sale of the collateral at the conclusion of the loan and/or through future purchases of new property by the borrower. In certain situations, term loans are made to refinance the accounts receivable balances generated by the auction and private sale purchases of our clients. Term loans normally have an initial maturity of one year with an option to renew for an additional year, 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 the 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.
As of September 30, 2019, December 31, 2018, and September 30, 2018, the net Notes Receivable balance of SFS was $851.1 million, $694 million, and $593 million, respectively. As of September 30, 2019, December 31, 2018, and September 30, 2018, $45.6 million, $99.7 million, and $129.1 million, respectively, of the net Notes Receivable balance of SFS was classified within current assets on our Condensed Consolidated Balance Sheets, with the remainder classified within non-current assets. The classification of a loan as current or non-current 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 date.
As of September 30, 2019, December 31, 2018, and September 30, 2018, the total net Notes Receivable balance of SFS included $193.9 million, $126.2 million, and $132.5 million, respectively, of term loans issued by SFS to refinance client auction and private sale purchases. For the nine months ended September 30, 2019 and 2018, SFS issued $79.2 million and $119.2 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 (net) within Investing Activities in our Condensed Consolidated Statements of Cash Flows. Upon repayment, the cash received in settlement of such Notes Receivable is classified within Operating Activities in our Condensed Consolidated Statements of Cash Flows. For the nine months ended September 30, 2019 and 2018, such repayments totaled $11.5 million and $41.1 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 LTV ratio of certain loans may increase above the 50% target due to a decrease in the low auction estimates of the collateral. The revaluation of term loan collateral is performed by our specialists on a semi-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 September 30, 2019, December 31, 2018, and September 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
September 30,
2018
|
|
Secured loans
|
|
$
|
851,108
|
|
|
$
|
693,977
|
|
|
$
|
592,962
|
|
|
Low auction estimate of collateral
|
|
$
|
1,770,870
|
|
|
$
|
1,629,270
|
|
|
$
|
1,425,960
|
|
|
Aggregate LTV ratio
|
|
48
|
%
|
|
43
|
%
|
|
42
|
%
|
The table below provides the aggregate LTV ratio for secured loans made by SFS with an LTV ratio above 50% as of September 30, 2019, December 31, 2018, and September 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
September 30,
2018
|
|
Secured loans with an LTV ratio above 50%
|
|
$
|
388,247
|
|
|
$
|
264,916
|
|
|
$
|
225,491
|
|
|
Low auction estimate of collateral related to secured loans with an LTV ratio above 50%
|
|
$
|
667,461
|
|
|
$
|
476,157
|
|
|
$
|
382,997
|
|
|
Aggregate LTV ratio of secured loans with an LTV ratio above 50%
|
|
58
|
%
|
|
56
|
%
|
|
59
|
%
|
The table below provides other credit quality information regarding secured loans made by SFS as of September 30, 2019, December 31, 2018, and September 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
September 30,
2018
|
|
Total secured loans
|
|
$
|
851,108
|
|
|
$
|
693,977
|
|
|
$
|
592,962
|
|
|
Loans past due
|
|
$
|
103,322
|
|
|
$
|
14,405
|
|
|
$
|
77,751
|
|
|
Loans more than 90 days past due
|
|
$
|
19,388
|
|
|
$
|
8,911
|
|
|
$
|
27,315
|
|
|
Non-accrual loans
|
|
$
|
—
|
|
|
$
|
3,854
|
|
|
$
|
6,330
|
|
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses for impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Allowance for credit losses based on historical data
|
|
$
|
1,410
|
|
|
$
|
1,075
|
|
|
$
|
1,067
|
|
|
Total allowance for credit losses - secured loans
|
|
$
|
1,410
|
|
|
$
|
1,075
|
|
|
$
|
1,067
|
|
We consider a loan to be past due when principal payments are not paid by the contractual maturity date. Typically, a loan becomes past due only for a short period of time during which either the loan is renewed or collateral is sold to satisfy the borrower's obligations. As of September 30, 2019, $103.3 million of the net Notes Receivable balance was past due, of which $19.4 million was more than 90 days past due. We are continuing to accrue interest on all past due loans and, as of September 30, 2019, the collateral securing such loans had a low auction estimate of approximately $215 million, resulting in a weighted average LTV ratio of approximately 51%. In consideration of expected loan renewals, collateral sales to date for which the proceeds have not yet been collected from the buyer, as well as the value of the remaining collateral, we believe that the principal and interest amounts owed for these past due 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 will not be 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.
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. 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. 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 September 30, 2019, December 31, 2018, and September 30, 2018, there were no impaired loans outstanding.
As of September 30, 2019, unfunded commitments to extend additional credit through SFS were approximately $39.1 million.
(See Note 22 for information related to our merger with BidFair MergeRight Inc., as well as the concurrent transfer of Sotheby's Financial Services, Inc. to BidFair USA, Inc. Upon completion of this transfer, the Company no longer owned Sotheby's Financial Services, Inc.)
Agency Segment—As discussed in Note 4, 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 Condensed Consolidated Balance Sheets. 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 Condensed Consolidated Statements of Cash Flows. Upon repayment, the cash received in settlement of such Notes Receivable is classified within Operating Activities in our Condensed Consolidated Statements of Cash Flows. As of September 30, 2018, Notes Receivable (net) within the Agency segment included $1.2 million of such amounts reclassified from Accounts Receivable (net), respectively.
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. In the third quarter of 2019, one such loan became uncollectible and, as a result, we recorded a loss of $2.1 million associated with the write-off of this loan. As of December 31, 2018 and September 30, 2018, loans of this type had a balance of $3.1 million.
In certain limited situations, the Agency segment will also provide advances to consignors that are secured by property scheduled to be offered at auction in the near term. Such Agency segment consignor advances are recorded on our Condensed Consolidated Balance Sheets within Notes Receivable (net) and totaled $2 million, $3.2 million, and $3.4 million as of September 30, 2019, December 31, 2018 and September 30, 2018, respectively.
Allowance for Credit Losses—During the period January 1, 2019 to September 30, 2019, activity related to the Allowance for Credit Losses by segment was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFS
|
|
Agency
|
|
Total
|
|
Balance as of January 1, 2019
|
$
|
1,075
|
|
|
$
|
1,525
|
|
|
$
|
2,600
|
|
|
Change in loan loss provision based on historical data
|
335
|
|
|
—
|
|
|
335
|
|
|
Change in loan loss provision for impaired loans
|
—
|
|
|
—
|
|
|
—
|
|
|
Balance as of September 30, 2019
|
$
|
1,410
|
|
|
$
|
1,525
|
|
|
$
|
2,935
|
|
6. Leases
We conduct business in leased premises, which are primarily used to conduct Agency segment operations, including space used for auction salesrooms, gallery and exhibition space, administrative offices, and warehouse facilities. A substantial portion of our leased premises are located in London, England; Hong Kong, China; Paris, France; Geneva, Switzerland; and Zurich, Switzerland.
Our determination of whether a contract is or contains a lease and whether that lease should be classified as a finance or operating lease is performed at lease inception, which is the date on which we sign the lease agreement. Lease components, which represent our right to use specified assets, and non-lease components such as maintenance, utilities, and management services contained within a lease are accounted for as a single lease component.
Lease right-of-use assets and lease liabilities are measured and recognized on our Condensed Consolidated Balance Sheets on the lease commencement date, which is the date on which the lessor makes the underlying asset available to use. The measurement of lease right-of-use assets and lease liabilities is based on the present value of lease payments not yet made, discounted using our incremental borrowing rate ("IBR") as of the commencement date of the lease. In determining our IBR, a number of factors are considered, including the term of the lease, the effects of collateral, the economic environment of the lessee, and the creditworthiness of the lessee. Short-term operating leases, which have an initial term of twelve months or less, are not recognized on our Condensed Consolidated Balance Sheets.
Operating lease cost is calculated so that the aggregate amount of fixed minimum lease payments for each lease is recognized in our Condensed Consolidated Statements of Operations on a straight-line basis over the term of the lease. Variable lease payments are not included in the lease liability recorded on our Condensed Consolidated Balance Sheets, but are recognized in our Condensed Consolidated Statements of Operations during the period in which the obligation for those payments is incurred. Our variable lease payments principally relate to lease obligations which are periodically adjusted for changes in an index or rate, including fair market rental rate adjustments that typically occur according to a scheduled rent review period. For leases with such provisions, the operating right-of-use asset and lease liability are measured using the index or fair market rental rate in effect at the lease commencement date. Under the terms of most leases, we are required to pay various service fees, real estate taxes, and insurance costs which are variable in nature and, therefore not included in the measurement of our lease liabilities.
Certain of our leases provide us the option to extend or terminate the lease term. Such options are factored into the measurement of our lease right-of-use assets and lease liabilities when we determine it is reasonably certain that the option will be exercised.
The following table summarizes the components of the operating lease cost reflected in our Condensed Consolidated Statements of Operations within General and Administrative Expenses for the three and nine months ended September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
2019
|
|
Operating lease cost
|
|
$
|
5,252
|
|
|
$
|
14,982
|
|
|
Variable lease cost
|
|
513
|
|
|
1,941
|
|
|
Sublease income
|
|
(275
|
)
|
|
(1,131
|
)
|
|
Total lease cost
|
|
$
|
5,490
|
|
|
$
|
15,792
|
|
The following table summarizes information about the amount and timing of our future operating lease commitments as of September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
2019 (remaining)
|
|
$
|
4,825
|
|
|
2020
|
|
18,171
|
|
|
2021
|
|
14,315
|
|
|
2022
|
|
11,802
|
|
|
2023
|
|
8,736
|
|
|
Thereafter
|
|
30,834
|
|
|
Total undiscounted operating lease payments
|
|
$
|
88,683
|
|
|
Less: Imputed interest
|
|
(15,036
|
)
|
|
Present value of operating lease liabilities
|
|
$
|
73,647
|
|
As of September 30, 2019, the weighted-average remaining lease term for our operating leases is 7.36 years, and the weighted average discount rate used to measure our operating lease liabilities is 4.74%.
For the nine months ended September 30, 2019, operating lease liabilities arising from obtaining right-of-use assets totaled $8.7 million. For the nine months ended September 30, 2019, cash payments made in respect of our lease liabilities totaled $14.3 million and are classified within operating activities in our Condensed Consolidated Statements of Cash Flows.
The following table summarizes the future minimum lease payments due under non-cancellable operating leases in effect at December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2019 to December 2019
|
|
January 2020 to December 2020
|
|
January 2021 to December 2021
|
|
January 2022 to December 2022
|
|
January 2023 to December 2023
|
|
Thereafter
|
|
Total (a)
|
|
$
|
20,039
|
|
|
$
|
17,771
|
|
|
$
|
14,033
|
|
|
$
|
11,750
|
|
|
$
|
9,449
|
|
|
$
|
32,318
|
|
|
$
|
105,360
|
|
The following table summarizes the future minimum lease payments due under non-cancellable operating leases in effect at September 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2018 to September 2019
|
|
October 2019 to September 2020
|
|
October 2020 to September 2021
|
|
October 2021 to September 2022
|
|
October 2022 to September 2023
|
|
Thereafter
|
|
Total (a)
|
|
$
|
19,233
|
|
|
$
|
16,779
|
|
|
$
|
13,598
|
|
|
$
|
11,112
|
|
|
$
|
9,453
|
|
|
$
|
29,579
|
|
|
$
|
99,754
|
|
|
|
|
|
(a)
|
These amounts represent our undiscounted non-cancellable future minimum operating lease commitments, including any contractual market-based or indexed rent adjustments that are currently in effect. The lease commitments reflected in the table also include any future fixed minimum payments for common area maintenance, insurance, or tax payments for which we are also obligated under the terms of certain leases.
|
(See Note 22 for information related to our merger with BidFair MergeRight Inc., as well as the concurrent related transfer of 1334 York LLC (the owner of the York Property) and the intended transfer of the real estate holdings that collectively house our main salesrooms, exhibition spaces, and administrative offices in London to BidFair Property Holdings Inc., a subsidiary of BidFair USA Inc. Following the completion of these transfers, the Company will no longer own any of the underlying real estate assets and will no longer be party to any of the associated lease agreements that are currently in place. Instead, the Company will enter into long-term, arms-length lease agreements with BidFair Property Holdings Inc. in respect of these real estate assets.)
7. Goodwill and Intangible Assets
Goodwill—For the nine months ended September 30, 2019 and 2018, changes in the carrying value of Goodwill were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
|
|
|
Agency
|
|
All Other
|
|
Total
|
|
Agency
|
|
All Other
|
|
Total
|
|
Beginning balance as of January 1
|
|
$
|
49,422
|
|
|
$
|
6,151
|
|
|
$
|
55,573
|
|
|
$
|
44,396
|
|
|
$
|
6,151
|
|
|
$
|
50,547
|
|
|
Goodwill acquired
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,259
|
|
|
—
|
|
|
5,259
|
|
|
Foreign currency exchange rate changes
|
|
(193
|
)
|
|
—
|
|
|
(193
|
)
|
|
(148
|
)
|
|
—
|
|
|
(148
|
)
|
|
Ending balance as of September 30
|
|
$
|
49,229
|
|
|
$
|
6,151
|
|
|
$
|
55,380
|
|
|
$
|
49,507
|
|
|
$
|
6,151
|
|
|
$
|
55,658
|
|
On February 2, 2018, we acquired Viyet, an online marketplace for interior design specializing in vintage and antique furniture, decorative objects, and accessories. This acquisition complements and enhances our online sales program, and provides an additional sale format to offer clients. In October 2018, Viyet was rebranded as Sotheby's Home.
Intangible Assets—As of September 30, 2019, December 31, 2018, and September 30, 2018, intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization Period
|
|
September 30,
2019
|
|
December 31, 2018
|
|
September 30,
2018
|
|
Indefinite lived intangible assets:
|
|
|
|
|
|
|
|
|
|
License (a)
|
|
N/A
|
|
$
|
324
|
|
|
$
|
324
|
|
|
$
|
324
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
Customer relationships - Art Advisory Partners
|
|
8 years
|
|
10,800
|
|
|
10,800
|
|
|
10,800
|
|
|
Non-compete agreements - Art Advisory Partners
|
|
5-6 years
|
|
3,060
|
|
|
3,060
|
|
|
3,060
|
|
|
Artworks database (b)
|
|
10 years
|
|
1,275
|
|
|
1,275
|
|
|
1,275
|
|
|
Technology
|
|
4 years
|
|
4,461
|
|
|
4,461
|
|
|
4,461
|
|
|
Total intangible assets subject to amortization
|
|
|
|
19,596
|
|
|
19,596
|
|
|
19,596
|
|
|
Accumulated amortization
|
|
|
|
(9,386
|
)
|
|
(6,927
|
)
|
|
(5,939
|
)
|
|
Total amortizable intangible assets (net)
|
|
|
|
10,210
|
|
|
12,669
|
|
|
13,657
|
|
|
Total intangible assets (net)
|
|
|
|
$
|
10,534
|
|
|
$
|
12,993
|
|
|
$
|
13,981
|
|
|
|
|
|
(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 along with the associated business in exchange for an initial cash payment made in the third quarter of 2016 and subsequent cash payments made in the third quarters of 2017 and 2018.
|
For the three and nine months ended September 30, 2019, amortization expense related to intangible assets was approximately $0.8 million and $2.5 million, respectively. For the three and nine months ended September 30, 2018, amortization expense related to intangible assets was approximately $0.7 million and $2 million, respectively.
The estimated aggregate amortization expense for the remaining useful lives of intangible assets subject to amortization during the five-year period succeeding the September 30, 2019 balance sheet date are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Period
|
|
Amount
|
|
October 2019 to September 2020
|
|
$
|
3,186
|
|
|
October 2020 to September 2021
|
|
$
|
2,999
|
|
|
October 2021 to September 2022
|
|
$
|
1,937
|
|
|
October 2022 to September 2023
|
|
$
|
1,480
|
|
|
October 2023 to September 2024
|
|
$
|
468
|
|
8. Defined Benefit Pension Plan
We sponsor a defined benefit pension plan in the U.K. (the "U.K. Pension Plan"), which was closed to future service cost accruals on April 30, 2016. For the three and nine months ended September 30, 2019 and 2018, the components of the net pension credit related to the U.K. Pension Plan recorded within Non-Operating Income in our Condensed Consolidated Statements of Operations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Interest cost
|
|
$
|
1,897
|
|
|
$
|
1,855
|
|
|
$
|
5,903
|
|
|
$
|
5,775
|
|
|
Expected return on plan assets
|
|
(2,520
|
)
|
|
(2,717
|
)
|
|
(7,835
|
)
|
|
(8,458
|
)
|
|
Amortization of actuarial loss
|
|
—
|
|
|
117
|
|
|
—
|
|
|
364
|
|
|
Amortization of prior service cost
|
|
(15
|
)
|
|
(24
|
)
|
|
(47
|
)
|
|
(76
|
)
|
|
Net pension credit
|
|
$
|
(638
|
)
|
|
$
|
(769
|
)
|
|
$
|
(1,979
|
)
|
|
$
|
(2,395
|
)
|
9. Debt
Revolving Credit Facilities—Prior to June 26, 2018, we were party to credit agreements with an international syndicate of lenders that, among other things, provided for dedicated asset-based revolving credit facilities for the Agency segment (the "Agency Credit Facility") and SFS (the "SFS Credit Facility") (collectively, the "Previous Credit Agreements"). On June 26, 2018, we refinanced the Previous Credit Agreements and entered into a credit agreement with an international syndicate of lenders led by JPMorgan Chase Bank, N.A. (the “JPMorgan Chase Credit Agreement”). As a result of this refinancing, $4 million of unamortized fees related to the Previous Credit Agreements were written off in the second quarter of 2018.
The JPMorgan Chase Credit Agreement combined the Agency Credit Facility and SFS Credit Facility into one asset-based revolving credit facility with an aggregate borrowing capacity of $1.1 billion, subject to a borrowing base. Borrowings under the JPMorgan Chase Credit Agreement were available to fund our working capital needs and for other general corporate purposes. Our obligations under the JPMorgan Chase Credit Agreement were secured by liens on all or substantially all of the personal property of the entities that were borrowers and guarantors under the JPMorgan Chase Credit Agreement.
The JPMorgan Chase Credit Agreement was scheduled to mature on June 26, 2023, but it was terminated on October 3, 2019 in connection with our merger with BidFair MergeRight Inc., and all remaining outstanding borrowings were repaid. As a result of the termination of the JPMorgan Chase Credit Agreement, $3.3 million of related unamortized debt issuance costs will be written-off in the fourth quarter of 2019. (See Note 22 for information related to our merger with BidFair MergeRight Inc.)
The following table summarizes our revolving credit facility borrowings as of and for the periods ended September 30, 2019, December 31, 2018, and September 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the periods ended
|
|
September 30, 2019
|
|
December 31, 2018
|
|
September 30, 2018
|
|
Borrowings outstanding
|
|
$
|
470,000
|
|
|
$
|
280,000
|
|
|
$
|
215,000
|
|
|
Average Borrowings Outstanding:
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
$
|
403,750
|
|
|
N/A
|
|
|
$
|
71,902
|
|
|
Nine months ended September 30,
|
|
$
|
360,726
|
|
|
N/A
|
|
|
$
|
94,399
|
|
|
Year ended December 31,
|
|
N/A
|
|
|
$
|
106,181
|
|
|
N/A
|
|
For the period through June 26, 2018, borrowing costs under the Previous Credit Agreements related to SFS are reflected in our Condensed Consolidated Statements of Operations within Cost of Finance Revenues as any borrowings thereunder were used to directly fund client loans. Subsequent to a change in our cash management strategy (see Note 3) and the elimination of the SFS Credit Facility on June 26, 2018, the SFS loan portfolio is no longer directly funded with revolving credit facility borrowings. Accordingly, all borrowing costs associated with the JPMorgan Chase Credit Agreement are recorded as Interest Expense in our Condensed Consolidated Statements of Operations.
Long-Term Debt—As of September 30, 2019, December 31, 2018, and September 30, 2018, Long-Term Debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
September 30,
2018
|
|
York Property Mortgage, net of unamortized debt issuance costs of $2,797, $3,559, and $3,787
|
|
$
|
249,902
|
|
|
$
|
257,284
|
|
|
$
|
259,099
|
|
|
2025 Notes, net of unamortized debt issuance costs of $4,363, $4,894, and $5,070
|
|
395,637
|
|
|
395,106
|
|
|
394,930
|
|
|
Less current portion:
|
|
|
|
|
|
|
|
York Property Mortgage, net of unamortized debt issuance costs of $1,017, $1,010, and $1,010
|
|
(9,590
|
)
|
|
(13,604
|
)
|
|
(13,514
|
)
|
|
Total Long-Term Debt, net
|
|
$
|
635,949
|
|
|
$
|
638,786
|
|
|
$
|
640,515
|
|
(See the captioned sections below for information related to the York Property Mortgage and the 2025 Notes. )
York Property Mortgage—As of September 30, 2019, the York Property, our headquarters building located at 1334 York Avenue in New York, was subject to a seven-year, $325 million mortgage loan (the "York Property Mortgage") that was scheduled to mature on July 1, 2022. As of September 30, 2019, the York Property Mortgage had an outstanding principal balance of $252.7 million and its fair value approximated its book value due to the variable interest rate associated with the mortgage. The fair value measurement of the York Property Mortgage is considered to be a Level 2 fair value measurement in the hierarchy provided by ASC 820, Fair Value Measurements. The York Property Mortgage was repaid on October 3, 2019 in connection with the completion of our merger with BidFair MergeRight Inc. As a result of the repayment of the York Property Mortgage, $2.8 million of unamortized debt issuance costs will be written-off in the fourth quarter of 2019.
The York Property Mortgage was charged interest based on the one-month LIBOR rate plus a spread of 2.25% and was being amortized based on a 25-year mortgage-style amortization schedule over its originally scheduled seven-year term. On June 21, 2017, the York Property Mortgage was amended (the "First Amendment") to reduce the minimum net worth that Sotheby's was required to maintain from $425 million to $325 million in order to provide flexibility in carrying out its common stock repurchase program. On October 18, 2018, the York Property Mortgage was further amended (the "Second Amendment") to modify the definition of net worth to provide further flexibility in carrying out the common stock repurchase program.
In conjunction with the First Amendment, on July 3, 2017, we made a prepayment of $32 million to reduce the outstanding principal balance of the York Property Mortgage, and agreed to make annual prepayments funded primarily with cash accumulated in a restricted cash management account, as discussed below, beginning in July 2018 and continuing through July 2021 that are not to exceed $25 million in the aggregate during that period. The $32 million principal payment made on July 3, 2017 was funded with $25 million from existing cash balances and $7 million from a restricted cash management account associated with the York Property Mortgage. Subsequent principal payments were made on July 2, 2018 ($6.25 million) and July 1, 2019 ($1.9 million) funded primarily from the restricted cash management account in accordance with the First Amendment.
On February 9, 2016, Sotheby's corporate credit rating from Standard & Poor’s Rating Services was downgraded to "BB-" from "BB". As a result, due to a financial covenant under the York Property Mortgage, a Cash Management Account was established under the control of the lender. The lender was entitled to retain any excess cash after monthly debt service, insurance, and taxes as security. As of September 30, 2019, December 31, 2018, and September 30, 2018, the Cash Management Account had a balance of $0.6 million, $0.7 million, and $0.5 million, respectively, which is reflected within Restricted Cash on our Condensed Consolidated Balance Sheets.
The York Property, the York Property Mortgage, and the related interest rate protection agreements are/were held by 1334 York, LLC (the "LLC"), a separate legal entity of Sotheby's that maintains its own books and records and whose results through October 3, 2019 were ultimately consolidated into our 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.
(See Note 10 for information related to the interest protection agreements that were entered into in connection with the York Property Mortgage. See Note 22 for information related to our merger with BidFair MergeRight Inc., as well as the related transfer of the LLC to BidFair Property Holdings Inc., a subsidiary of BidFair USA Inc. Upon completion of this transfer, the Company no longer owned the LLC.)
Senior Unsecured Debt—On September 27, 2012, we issued $300 million aggregate principal amount of 5.25% Senior Notes, due October 1, 2022 (the "2022 Notes"). On December 12, 2017, we issued $400 million aggregate principal amount of 4.875% Senior Notes due December 15, 2025 (the “2025 Notes”). The net proceeds from the sale of the 2025 Notes were approximately $395.5 million, after deducting fees paid to the initial purchasers, of which $312.3 million was irrevocably deposited with a trustee for the benefit of the holders of the 2022 Notes, which were redeemed using these funds on January 11, 2018. The $312.3 million redemption price that was deposited with the trustee, consisting of the $300 million principal amount plus $4.4 million of accrued interest and a call premium of $7.9 million, was classified within Restricted Cash on our Condensed Consolidated Balance Sheets as of December 31, 2017. As a result of the redemption of the 2022 Notes, we wrote-off $3 million of related unamortized debt issuance costs, which, when combined with the $7.9 million call premium, resulted in a total loss on the extinguishment of $10.9 million recognized in the first quarter of 2018.
Interest on the 2025 Notes is payable in cash semi-annually in arrears on June 15 and December 15 of each year, beginning June 15, 2018. The 2025 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 2025 Notes do not have registration rights, and the 2025 Notes have not been and will not be registered under the Securities Act. The 2025 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 JPMorgan Chase Credit Agreement.
The 2025 Notes will be redeemable, in whole or in part, on or after December 15, 2020, at specified redemption prices set forth in the underlying indenture, plus accrued and unpaid interest to, but excluding, the redemption date. Prior to December 15, 2020, the 2025 Notes are redeemable, in whole or in part, at a redemption price equal to 100% of the principal amount of the 2025 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date, plus a make-whole premium (as defined in the underlying indenture). The underlying indenture for the 2025 Notes also contains customary covenants that limit, among other things, our ability to grant liens on our assets; enter into sale and leaseback transactions; and merge, consolidate or transfer or dispose of substantially all of our assets. The above covenants are subject to a number of exceptions and qualifications set forth in the underlying indenture.
As of September 30, 2019, the $400 million principal amount of the 2025 Notes had a fair value of approximately $407.5 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 hierarchy provided by ASC 820.
On September 10, 2019, BidFair MergeRight Inc. made an offer to purchase (the “Change of Control Tender Offer”) any and all of the outstanding 2025 Notes in connection with and conditioned on the consummation of our merger with BidFair MergeRight Inc. The Change of Control Tender Offer offered to repurchase the $400 million 2025 Notes outstanding at 101% of the aggregate principal amount, plus accrued and unpaid interest. On October 15, 2019, as a result of the Change of Control Tender Offer, the Company repurchased $342.3 million of the 2025 Notes at a redemption price of $351.3 million, which included $5.6 million of accrued interest and a call premium of $3.4 million. As a result of the partial redemption of the 2025 Notes, we will write-off $3.7 million of unamortized debt issuance costs, which, when combined with the $3.4 million call premium, will result in a total loss on the extinguishment of $7.1 million to be recognized in the fourth quarter of 2019. As of November 9, 2019, $57.7 million of the 2025 Notes remain outstanding. (See Note 22 for information related to our merger with BidFair MergeRight Inc.)
Future Payments Due Under Outstanding Debt—As of September 30, 2019, the aggregate future principal and interest payments due under the JPMorgan Chase Credit Agreement, the York Property Mortgage, and the 2025 Notes during the subsequent five-year period are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Period
|
|
Amount
|
|
October 2019 to September 2020
|
|
$
|
41,302
|
|
|
October 2020 to September 2021
|
|
$
|
41,173
|
|
|
October 2021 to September 2022
|
|
$
|
258,209
|
|
|
October 2022 to September 2023
|
|
$
|
489,500
|
|
|
October 2023 to September 2024
|
|
$
|
19,500
|
|
The table above does not reflect the partial redemption of the 2025 Notes, the repayment of outstanding revolving credit facility borrowings under the JPMorgan Chase Credit Agreement, or the repayment of the York Property Mortgage in connection with the completion of our merger with BidFair MergeRight, Inc. on October 3, 2019 (see Note 22).
The table above assumes that the annual interest rate for the York Property Mortgage will be within the ceiling and floor rates of the associated interest rate collar for the remainder of its contractual term based on available forecasts of LIBOR rates for the future periods through maturity (see Note 10). The table above also assumes York Property Mortgage principal payments consistent with the related mortgage amortization schedule, as well as currently anticipated annual principal prepayments of approximately $2 million each July through 2021.
10. Derivative Financial Instruments
Derivative Financial Instruments Designated as Hedging Instruments—The following tables present fair value information related to the derivative financial instruments designated as hedging instruments as of September 30, 2019, December 31, 2018, and September 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Liabilities
|
|
September 30, 2019
|
|
Balance Sheet Classification
|
|
Fair Value
|
|
Balance Sheet Classification
|
|
Fair Value
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate collar
|
|
N/A
|
|
$
|
—
|
|
|
Other Current Liabilities
|
|
$
|
683
|
|
|
Interest rate collar
|
|
N/A
|
|
—
|
|
|
Other Long-Term Liabilities
|
|
3,017
|
|
|
Total cash flow hedges
|
|
|
|
—
|
|
|
|
|
3,700
|
|
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Prepaid Expenses and Other Current Assets
|
|
661
|
|
|
N/A
|
|
—
|
|
|
Total
|
|
|
|
$
|
661
|
|
|
|
|
$
|
3,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Liabilities
|
|
December 31, 2018
|
|
Balance Sheet Classification
|
|
Fair Value
|
|
Balance Sheet Classification
|
|
Fair Value
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate collar
|
|
N/A
|
|
$
|
—
|
|
|
Other Current Liabilities
|
|
$
|
40
|
|
|
Interest rate collar
|
|
N/A
|
|
—
|
|
|
Other Long-Term Liabilities
|
|
1,185
|
|
|
Total cash flow hedges
|
|
|
|
—
|
|
|
|
|
1,225
|
|
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Prepaid Expenses and Other Current Assets
|
|
462
|
|
|
N/A
|
|
—
|
|
|
Total
|
|
|
|
$
|
462
|
|
|
|
|
$
|
1,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Liabilities
|
|
September 30, 2018
|
|
Balance Sheet Classification
|
|
Fair Value
|
|
Balance Sheet Classification
|
|
Fair Value
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate collar
|
|
Prepaid Expenses and Other Current Assets
|
|
$
|
12
|
|
|
N/A
|
|
—
|
|
|
Interest rate collar
|
|
Other Long-Term Assets
|
|
98
|
|
|
N/A
|
|
—
|
|
|
Total cash flow hedges
|
|
|
|
110
|
|
|
|
|
—
|
|
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Prepaid Expenses and Other Current Assets
|
|
81
|
|
|
N/A
|
|
—
|
|
|
Total
|
|
|
|
$
|
191
|
|
|
|
|
$
|
—
|
|
During the nine months ended September 30, 2019, we settled derivative financial instruments designated as net investment hedges with an aggregate notional value of $59.7 million and realized an aggregate gain of $2.3 million. During the nine months ended September 30, 2018, we settled derivative financial instruments designated as net investment hedges with an aggregate notional value of $202 million and realized a net loss of ($1.9) million.
The following table summarizes the effect of the derivative financial instruments designated as hedging instruments on our Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Gain Recognized in Other Comprehensive Loss - Effective Portion
|
|
Classification of (Loss) Gain Reclassified from Accumulated Other Comprehensive Loss into Net Loss
|
|
Amount Reclassified from Accumulated Other Comprehensive Loss into Net Loss - Effective Portion
|
|
Three Months Ended September 30,
|
|
2019
|
|
2018
|
|
|
|
2019
|
|
2018
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate collar
|
|
$
|
(220
|
)
|
|
$
|
256
|
|
|
Interest Expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Total cash flow hedges
|
|
(220
|
)
|
|
256
|
|
|
|
|
—
|
|
|
—
|
|
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
868
|
|
|
(238
|
)
|
|
N/A
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
648
|
|
|
$
|
18
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Gain Recognized in Other Comprehensive Loss - Effective Portion
|
|
Classification of (Loss) Gain Reclassified from Accumulated Other Comprehensive Loss into Net (Loss) Income
|
|
Amount Reclassified from Accumulated Other Comprehensive Loss into Net (Loss) Income - Effective Portion
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
|
|
|
2019
|
|
2018
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
—
|
|
|
$
|
95
|
|
|
Interest Expense
|
|
$
|
—
|
|
|
$
|
(145
|
)
|
|
Interest rate collar
|
|
(1,861
|
)
|
|
1,443
|
|
|
Interest Expense
|
|
—
|
|
|
169
|
|
|
Total cash flow hedges
|
|
(1,861
|
)
|
|
1,538
|
|
|
|
|
—
|
|
|
24
|
|
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
1,863
|
|
|
1,502
|
|
|
N/A
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
2
|
|
|
$
|
3,040
|
|
|
|
|
$
|
—
|
|
|
$
|
24
|
|
See the captioned sections below for information related to the derivative financial instruments designated as cash flow hedges or net investment hedges.
Derivative Financial Instruments Designated as Cash Flow Hedges—Upon entry into the York Property Mortgage (see Note 9), we entered into interest rate protection agreements secured by the York Property, consisting of a 2-year interest rate swap (the "Mortgage Swap"), effective as of July 1, 2015, and a 5-year interest rate collar (the "Mortgage Collar"), effective as of July 1, 2017. As of September 30, 2019, the notional value of the Mortgage Collar was $249 million, which was slightly lower than the principal balance of the York Property Mortgage on that date. The York Property Mortgage was repaid on October 3, 2019 in connection with the completion of our merger with BidFair MergeRight Inc. (see Note 22). As a result, as of that date, the previously forecasted interest payments associated with the York Property Mortgage are no longer probable of occurring. Accordingly, in the fourth quarter of 2019, the remaining amount associated with the Mortgage Collar recorded in Accumulated Other Comprehensive Loss on our Condensed Consolidated Balance Sheets will be reclassified into Net Income.
The Mortgage Swap fixed the LIBOR rate on the York Property Mortgage at an annual rate equal to 0.877% through its July 1, 2017 expiration date. The Mortgage Collar effectively fixed the LIBOR rate on the York Property Mortgage at an annual rate of no less than 1.917%, but no more than 3.75%, for the remainder of the mortgage's 7-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 was approximately 3.127% and then was between a floor of 4.167% and a cap of 6%. Beginning on the effective date of the Mortgage Collar through September 30, 2019, the average interest rate for the York Property Mortgage was 4.4%.
In conjunction and concurrent with the First Amendment to the York Property Mortgage in June 2017 (see Note 9), the notional value of the Mortgage Collar was reduced by $57 million to reflect: (i) the $32 million principal prepayment made on the York Property Mortgage on July 3, 2017 and (ii) potential annual prepayments of $6.25 million each, beginning in July 2018 and continuing through July 2021. The reduction in the notional value of the Mortgage Collar related to previously forecasted interest payments that were no longer probable of occurring following the June 2017 amendment to the York Property Mortgage.
As of September 30, 2019 and prior to the Merger, the Mortgage Collar was assumed to have a notional value that was no greater than the applicable forecasted principal balance of the York Property Mortgage. Upon the closing of the Merger on October 3, 2019, 1334 York LLC repaid all of its outstanding indebtedness under the York Property Mortgage.
The York Property, the York Property Mortgage, and the related interest rate protection agreement(s) are/were held by 1334 York, LLC, a separate legal entity of Sotheby's that maintains its own books and records and whose results through October 3, 2019 were ultimately consolidated into our financial statements.
On November 21, 2016, we entered into a two-year interest rate swap agreement to eliminate the variability in expected cash outflows associated with the one-month LIBOR-indexed interest payments owed on $63 million of revolving credit facility borrowings (the "Revolving Credit Facility Swap"). In the third quarter of 2018, these revolving credit facility borrowings were repaid, and the Revolving Credit Facility Swap was terminated, resulting in a $0.2 million (net of tax) reclassification from Accumulated Other Comprehensive Loss into Net Loss in that period.
At their inception, the Mortgage Collar and the Revolving Credit Facility 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 remained outstanding and was effective, any unrealized gains and losses related to changes in their fair value were recorded to Accumulated Other Comprehensive Loss on our Condensed Consolidated Balance Sheets and then to the extent that there are any hedge settlements, the amount of any such settlement is reclassified to Interest Expense in our Condensed Consolidated Statements of Operations in the same period that interest expense related to the underlying debt instruments was recorded. Any hedge ineffectiveness was immediately recognized in Net Income. In addition, if any of the forecasted transactions associated with the Cash Flow Hedges were no longer probable of occurring, any related amounts previously recorded in Accumulated Other Comprehensive Loss on our Condensed Consolidated Balance Sheets were reclassified into Net (Loss) Income.
Management performed a quarterly assessment to determine whether the Mortgage Collar, as amended, continued 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 on the York Property Mortgage. As of September 30, 2019, because our merger with BidFair MergeRight Inc. was not yet completed (see Note 22), the Mortgage Collar, as amended, was expected to continue 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 on the York Property Mortgage.
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 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 Revolving Credit Facility Swap was based on a discounted cash flow methodology using the contractual terms of the instrument and observable LIBOR-curve rates that were consistent with the timing of the interest payments related to our revolving credit facility.
Derivative Financial Instruments Designated as Net Investment Hedges—We are exposed to variability in the U.S. Dollar equivalent of the net investments in our foreign subsidiaries 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. As a result, we regularly enter into foreign currency forward exchange contracts to hedge the net investments in our foreign subsidiaries from which we expect to repatriate earnings to the U.S. As of September 30, 2019, the aggregate notional value of our outstanding net investment hedge contracts was $35.1 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 value 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 Condensed 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. These instruments are not designated as hedging instruments for accounting purposes. Accordingly, changes in the fair value of these instruments are recognized in our Condensed Consolidated Statements of Operations in Non-Operating Income.
The following table presents the fair values of forward exchange contract assets and liabilities recorded on our Condensed Consolidated Balance Sheets as of September 30, 2019, December 31, 2018, and September 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
September 30, 2018
|
|
Fair value of forward exchange contracts recorded within Prepaid Expenses and Other Current Assets
|
|
$
|
169
|
|
|
$
|
351
|
|
|
$
|
578
|
|
|
Fair value of forward exchange contracts recorded within Accounts Payable and Accrued Liabilities
|
|
$
|
—
|
|
|
$
|
125
|
|
|
$
|
343
|
|
As of September 30, 2019, the notional value of outstanding forward exchange contracts not designated as hedging instruments was $203 million. Notional values do not quantify risk or represent 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 counterparties to our outstanding forward exchange contracts that are not designated as hedging instruments. We do not expect any of these counterparties to fail to meet their obligations, given their investment grade short-term credit ratings.
11. Supplemental Condensed Consolidated Balance Sheet Information
As of September 30, 2019, December 31, 2018, and September 30, 2018, Prepaid Expenses and Other Current Assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
September 30,
2018
|
|
Prepaid expenses
|
|
$
|
33,691
|
|
|
$
|
25,672
|
|
|
$
|
39,832
|
|
|
Derivative financial instruments (see Note 10)
|
|
661
|
|
|
462
|
|
|
670
|
|
|
Insurance recoveries
|
|
4,022
|
|
|
4,353
|
|
|
2,189
|
|
|
Other
|
|
12,113
|
|
|
8,144
|
|
|
14,462
|
|
|
Total Prepaid Expenses and Other Current Assets
|
|
$
|
50,487
|
|
|
$
|
38,631
|
|
|
$
|
57,153
|
|
As of September 30, 2019, December 31, 2018, and September 30, 2018, Other Long-Term Assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
September 30,
2018
|
|
Defined benefit pension plan asset
|
|
$
|
101,601
|
|
|
$
|
103,539
|
|
|
$
|
108,036
|
|
|
Equity method investments (a)
|
|
48,469
|
|
|
47,507
|
|
|
47,527
|
|
|
Trust assets related to deferred compensation liability
|
|
32,997
|
|
|
28,517
|
|
|
30,870
|
|
|
Restricted cash (see Note 12)
|
|
16,196
|
|
|
16,819
|
|
|
17,137
|
|
|
Insurance recoveries
|
|
6,870
|
|
|
13,882
|
|
|
15,357
|
|
|
Derivative financial instruments (see Note 10)
|
|
—
|
|
|
—
|
|
|
98
|
|
|
Other
|
|
24,252
|
|
|
16,396
|
|
|
15,424
|
|
|
Total Other Long-Term Assets
|
|
$
|
230,385
|
|
|
$
|
226,660
|
|
|
$
|
234,449
|
|
|
|
|
|
(a)
|
Includes our equity method investments in RM Sotheby's and AMA, as well as a partnership through which artworks are being purchased and sold.
|
As of September 30, 2019, December 31, 2018, and September 30, 2018, Other Long-Term Liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
September 30,
2018
|
|
Deferred compensation liability
|
|
$
|
32,387
|
|
|
$
|
28,255
|
|
|
$
|
30,491
|
|
|
Acquisition earn-out consideration
|
|
—
|
|
|
8,750
|
|
|
8,750
|
|
|
Interest rate collar liability (see Note 10)
|
|
3,017
|
|
|
1,185
|
|
|
—
|
|
|
Other
|
|
4,022
|
|
|
7,327
|
|
|
7,328
|
|
|
Total Other Long-Term Liabilities
|
|
$
|
39,426
|
|
|
$
|
45,517
|
|
|
$
|
46,569
|
|
12. Supplemental Condensed Consolidated Cash Flow Information
Cash, Cash Equivalents, and Restricted Cash—As of September 30, 2019, December 31, 2018, and September 30, 2018, cash, cash equivalents, and restricted cash consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
September 30,
2018
|
|
Cash and cash equivalents
|
|
$
|
81,695
|
|
|
$
|
178,579
|
|
|
$
|
156,272
|
|
|
Restricted cash, recorded within current assets:
|
|
|
|
|
|
|
|
Consignor funds held in legally segregated accounts
|
|
1,976
|
|
|
3,938
|
|
|
1,179
|
|
|
Cash Management Account related to the York Property Mortgage (see Note 9)
|
|
595
|
|
|
716
|
|
|
460
|
|
|
Other
|
|
835
|
|
|
182
|
|
|
185
|
|
|
Restricted cash, recorded within current assets
|
|
3,406
|
|
|
4,836
|
|
|
1,824
|
|
|
Restricted cash, recorded within other long-term assets (a)
|
|
16,196
|
|
|
16,819
|
|
|
17,137
|
|
|
Total restricted cash
|
|
19,602
|
|
|
21,655
|
|
|
18,961
|
|
|
Cash, cash equivalents, and restricted cash
|
|
$
|
101,297
|
|
|
$
|
200,234
|
|
|
$
|
175,233
|
|
|
|
|
|
(a)
|
Principally relates to funds held in escrow pending the payment of sale proceeds to a consignor.
|
Changes in Other Operating Assets and Liabilities—For the nine months ended September 30, 2019 and 2018, changes in other operating assets and liabilities as reported in the Condensed Consolidated Statements of Cash Flows include the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
|
Increase in:
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
$
|
(9,375
|
)
|
|
$
|
(16,384
|
)
|
|
Other long-term assets
|
|
(3,110
|
)
|
|
(6,590
|
)
|
|
Income tax receivables and deferred income tax assets
|
|
(30,573
|
)
|
|
(26,305
|
)
|
|
(Decrease)/increase in:
|
|
|
|
|
|
Accounts payable and accrued liabilities and other liabilities
|
|
(58,415
|
)
|
|
(39,436
|
)
|
|
Accrued income taxes and deferred income tax liabilities
|
|
8,339
|
|
|
5,392
|
|
|
Total changes in other operating assets and liabilities
|
|
$
|
(93,134
|
)
|
|
$
|
(83,323
|
)
|
13. Common Stock Repurchase Program
On December 13, 2018, we paid $70 million upon entry into an Accelerated Share Repurchase ("ASR") agreement (the "December 2018 ASR Agreement"). Pursuant to the December 2018 ASR Agreement, on December 14, 2018, we received an initial delivery of 1,605,938 shares of our common stock with a value of $59.5 million, or $37.05 per share. In conjunction with our entry into the December 2018 ASR Agreement, we recorded $59.5 million to Treasury Stock to reduce Shareholders’ Equity for the value of the initial shares received and $10.5 million to Additional Paid-In Capital to reduce Shareholders’ Equity for the unsettled portion of the December 2018 ASR Agreement, which represented a forward contract indexed to our common stock. On March 1, 2019, the December 2018 ASR Agreement expired, and we received an additional 186,732 shares of our common stock. Upon conclusion of the December 2018 ASR Agreement, the $10.5 million initially recorded to Additional Paid-In Capital was reclassified to Treasury Stock on our Condensed Consolidated Statements of Shareholders' Equity. In total, the December 2018 ASR Agreement resulted in the repurchase of 1,792,670 shares of our common stock for an average price of $39.05 per share. The amount paid to enter into the December 2018 ASR Agreement effectively utilized the remaining share repurchase authorization from our Board of Directors.
During the first nine months of 2018, we repurchased 3,789,608 shares of our common stock for an aggregate purchase price of $186.2 million, resulting in an average price of $49.14 per share. These share repurchases were made through open market purchases and purchases made pursuant to an SEC Rule 10b5-1 plan codified at 17 C.F.R. 240.10b5-1.
14. 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 for the three and nine months ended September 30, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Currency Translation Adjustments
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(84,694
|
)
|
|
$
|
(81,518
|
)
|
|
$
|
(84,051
|
)
|
|
$
|
(74,505
|
)
|
|
Other comprehensive loss before reclassifications, net of tax of $0, $0, $0, and $400
|
|
(5,707
|
)
|
|
(155
|
)
|
|
(6,350
|
)
|
|
(7,168
|
)
|
|
Other comprehensive loss
|
|
(5,707
|
)
|
|
(155
|
)
|
|
(6,350
|
)
|
|
(7,168
|
)
|
|
Balance at end of period
|
|
(90,401
|
)
|
|
(81,673
|
)
|
|
(90,401
|
)
|
|
(81,673
|
)
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
(2,271
|
)
|
|
277
|
|
|
(630
|
)
|
|
(1,029
|
)
|
|
Other comprehensive (loss) income before reclassifications, net of tax of ($73), $85, ($614), and $508
|
|
(220
|
)
|
|
256
|
|
|
(1,861
|
)
|
|
1,538
|
|
|
Reclassifications from accumulated other comprehensive loss, net of tax of $0, ($114), $0, and ($106)
|
|
—
|
|
|
(160
|
)
|
|
—
|
|
|
(136
|
)
|
|
Other comprehensive (loss) income
|
|
(220
|
)
|
|
96
|
|
|
(1,861
|
)
|
|
1,402
|
|
|
Balance at end of period
|
|
(2,491
|
)
|
|
373
|
|
|
(2,491
|
)
|
|
373
|
|
|
Net Investment Hedges
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
16,322
|
|
|
15,299
|
|
|
15,327
|
|
|
13,559
|
|
|
Other comprehensive income (loss) before reclassifications, net of tax of $284, ($78), $613, and $491
|
|
868
|
|
|
(238
|
)
|
|
1,863
|
|
|
1,502
|
|
|
Other comprehensive income (loss)
|
|
868
|
|
|
(238
|
)
|
|
1,863
|
|
|
1,502
|
|
|
Balance at end of period
|
|
17,190
|
|
|
15,061
|
|
|
17,190
|
|
|
15,061
|
|
|
Defined Benefit Pension Plan
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
(2,692
|
)
|
|
(321
|
)
|
|
(2,690
|
)
|
|
(491
|
)
|
|
Currency translation adjustments
|
|
72
|
|
|
4
|
|
|
96
|
|
|
11
|
|
|
Other comprehensive income before reclassifications
|
|
72
|
|
|
4
|
|
|
96
|
|
|
11
|
|
|
Prior service cost amortization, net of tax of ($3), ($4), ($9), and ($12)
|
|
(12
|
)
|
|
(21
|
)
|
|
(38
|
)
|
|
(64
|
)
|
|
Actuarial loss amortization, net of tax of $0, $20, $0, and $60
|
|
—
|
|
|
97
|
|
|
—
|
|
|
303
|
|
|
Reclassifications from accumulated other comprehensive loss, net of tax
|
|
(12
|
)
|
|
76
|
|
|
(38
|
)
|
|
239
|
|
|
Other comprehensive income
|
|
60
|
|
|
80
|
|
|
58
|
|
|
250
|
|
|
Balance at end of period
|
|
(2,632
|
)
|
|
(241
|
)
|
|
(2,632
|
)
|
|
(241
|
)
|
|
Total other comprehensive loss attributable to Sotheby's
|
|
(4,999
|
)
|
|
(217
|
)
|
|
(6,290
|
)
|
|
(4,014
|
)
|
|
Accumulated other comprehensive loss as of September 30
|
|
$
|
(78,334
|
)
|
|
$
|
(66,480
|
)
|
|
$
|
(78,334
|
)
|
|
$
|
(66,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
Settlements
|
|
$
|
—
|
|
|
$
|
(274
|
)
|
|
$
|
—
|
|
|
$
|
(242
|
)
|
|
Tax effect
|
|
—
|
|
|
114
|
|
|
—
|
|
|
106
|
|
|
Reclassification adjustments, net of tax
|
|
—
|
|
|
(160
|
)
|
|
—
|
|
|
(136
|
)
|
|
Defined Benefit Pension Plan
|
|
|
|
|
|
|
|
|
|
Prior service cost amortization
|
|
(15
|
)
|
|
(25
|
)
|
|
(47
|
)
|
|
(77
|
)
|
|
Actuarial loss amortization
|
|
—
|
|
|
117
|
|
|
—
|
|
|
364
|
|
|
Pre-tax total
|
|
(15
|
)
|
|
92
|
|
|
(47
|
)
|
|
287
|
|
|
Tax effect
|
|
3
|
|
|
(16
|
)
|
|
9
|
|
|
(48
|
)
|
|
Reclassification adjustments, net of tax
|
|
(12
|
)
|
|
76
|
|
|
(38
|
)
|
|
239
|
|
|
Total reclassification adjustments, net of tax
|
|
$
|
(12
|
)
|
|
$
|
(84
|
)
|
|
$
|
(38
|
)
|
|
$
|
103
|
|
15. Commitments and Contingencies
Compensation Arrangements—We are party to compensation arrangements with certain senior employees, which expire at various points between March 31, 2020 and December 31, 2022. 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 $16.9 million as of September 30, 2019.
Indirect 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 our income statement.
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 (including the matter discussed below), individually or in the aggregate, will have a material adverse effect on our consolidated financial condition.
Rybolovlev Litigation—On November 17, 2017, Sotheby’s, together with its London, Geneva and Vienna subsidiaries, and one of its employees (collectively, “the Sotheby’s Parties”), initiated a declaratory judgment action (requête en conciliation) in Switzerland (the “Swiss Action”), at the Tribunal de Première Instance de la République et Canton de Genève, against Dmitry Rybolovlev and various persons and entities affiliated with him. The Sotheby’s Parties’ action seeks a declaration that the Sotheby’s Parties owe no liability or debt to Mr. Rybolovlev and his affiliates in connection with sales of art and related services to entities affiliated with Mr. Yves Bouvier, as discussed in more detail below. Sotheby’s filed its detailed Statement of Claim on July 11, 2017.
The Sotheby’s Parties filed the Swiss Action in response to the stated intent of Mr. Rybolovlev’s counsel to initiate litigation in the U.K. against several of the Sotheby’s Parties. Specifically, on October 27, 2017, counsel for entities affiliated with Mr. Rybolovlev filed papers with the U.S. District Court for the Southern District of New York requesting authority to use documents previously obtained from Sotheby’s pursuant to 28 U.S.C. § 1782. This statute allows parties to conduct discovery in the U.S. for use in foreign legal proceedings. Mr. Rybolovlev sought discovery to support a contemplated U.K. proceeding alleging that Sotheby’s and its agents aided and abetted an alleged fraud that Mr. Bouvier allegedly perpetrated against Mr. Rybolovlev and affiliated entities. On December 22, 2017, the District Court in New York approved Mr. Rybolovlev’s request to use Sotheby’s previously disclosed documents both in the contemplated U.K. proceedings, and in the Sotheby’s Parties’ Swiss declaratory judgment proceeding against Mr. Rybolovlev and his affiliates. To date, we are not aware of Mr. Rybolovlev actually filing the threatened U.K. litigation against Sotheby’s, and believe that Geneva is the correct venue for the dispute, that the Lugano Convention effectively precludes Mr. Rybolovlev from sustaining an action in the U.K., and that the Sotheby’s Parties will prevail in the Swiss Action.
On October 2, 2018, two entities controlled by Mr. Rybolovlev commenced proceedings against Sotheby’s and Sotheby’s, Inc. in the U.S. District Court for the Southern District of New York. In their complaint, these entities allege that Sotheby’s and Sotheby's Inc. and their agents, aided and abetted an alleged fraud that Mr. Bouvier allegedly perpetrated against Mr. Rybolovlev and affiliated entities and are claiming a minimum of $380 million in damages. The plaintiffs also allege that the Sotheby's Parties, in commencing the Swiss Action, violated a tolling agreement that the parties had entered into and seek an injunction prohibiting the Sotheby's Parties from prosecuting the Swiss Action. On January 18, 2019, the Sotheby's and Sotheby's Inc. filed a motion to dismiss this complaint, which they believe to be meritless, on numerous grounds.
On June 25, 2019, the District Court in New York granted in part and denied in part Sotheby's and Sotheby's Inc.'s motion to dismiss this case on forum non conveniens and international comity grounds and to dismiss the plaintiffs’ breach of contract claim for failure to state a claim, pursuant to Rule 12(b) of the Federal Rules of Civil Procedure. The District Court in New York granted Sotheby's and Sotheby's Inc.'s motion insofar as it sought to dismiss the plaintiffs’ claim for an injunction prohibiting the Sotheby's Parties from prosecuting the Swiss Action. The District Court in New York otherwise denied the Sotheby's and Sotheby's Inc.'s motion to dismiss. In the same June 25 ruling, the District Court in New York granted in part and denied in part Sotheby's and Sotheby's Inc.'s motion to seal certain publicly filed documents in the case.
On July 23, 2019, Sotheby's and Sotheby's Inc. filed their answer with the District Court in New York. The case will now proceed to discovery. In addition, on September 20, 2019, the plaintiffs filed a motion for partial summary judgment with respect to their claim that Sotheby’s violated the tolling agreement. On October 20, 2019, Sotheby’s filed its opposition to that motion, to which plaintiffs responded on October 25, 2019.
Litigation Related to Merger—On July 17, July 19, July 23, and August 1, 2019, four substantially similar litigations were filed against the Company and the members of its Board of Directors in the United States District Court for the Southern District of New York and in the United States District Court for the District of Delaware by purported stockholders of the Company, captioned Stein v. Sotheby’s, et al., Case No. 1:19-cv-06669 (S.D.N.Y.), Goffmna v. Sotheby’s, et al., Case No. 1:19-cv-06733 (S.D.N.Y.), Kent v. Sotheby’s, et al., Case No. 1:19-cv-01374-UNA (D. Del.) and Stevens v. Sotheby’s, et al., Case No. 1:19-cv-7198 (S.D.N.Y), respectively. The complaints allege that a preliminary version of the proxy statement filed by the Company with the SEC in connection with its proposed merger was materially inaccurate or incomplete in certain respects, thereby allegedly violating Section 14(a) and 20(a) of the Exchange Act, 15 U.S.C. §§ 78n(a), 78t(a), and SEC Rule 14a-9, 17 C.F.R. 240.14a-9 and 17 C.F.R. § 244.100 promulgated thereunder. The complaints purport to seek injunctive relief and money damages. Following the filing of the Company’s final proxy statement, the plaintiffs in each of the actions indicated that they intended to dismiss the actions as moot, while reserving the right to seek attorneys’ fees from the Company. The Company believes the allegations in these actions are without merit.
16. Income Taxes
The U.S. Tax Cuts and Jobs Act (“the Act”) was enacted on December 22, 2017. Upon enactment, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, which allowed companies to record the income tax effects of the Act as a provisional amount based on reasonable estimates for those tax effects and provided a one-year measurement period for companies to finalize the accounting of the income tax effects of the Act. Our accounting for the effects of the Act was complete as of December 31, 2018; however, there may be some elements of the Act that remain subject to further clarification by the issuance of future regulations or notices by the U.S. Treasury Department or IRS which could result in future adjustments to previously recorded amounts.
Final regulations related to the computation of the one-time transition tax on certain unremitted and untaxed earnings of our foreign subsidiaries were issued on January 15, 2019. These regulations did not have a material impact on the related liability that was recorded.
On June 21, 2019, the Internal Revenue Service issued final regulations relating to the global intangible low-taxed income and foreign tax credit provisions of the U.S. tax law changes included in the Act. We do not believe these regulations will have a material impact on our financial statements.
As of September 30, 2019, December 31, 2018, and September 30, 2018, our Condensed Consolidated Balance Sheets reflect long-term accrued income taxes (net of foreign tax credits) of $15.3 million, $15.3 million, and $14.5 million, respectively, for the remaining balance of the one-time transition tax, which we elected to pay in installments over eight years, as allowed by the Act. Under the Act, certain acceleration events may cause the remaining unpaid portion of the installments to become due immediately. The Merger is one such acceleration event. We have filed a transfer agreement with the Internal Revenue Service (“IRS”) that would allow us to maintain the deferral. If the IRS does not accept the transfer agreement, the remaining balance of the liability would be due immediately. (See Note 22 for information relating to the Merger.)
17. Auction Guarantees
From time-to-time, in the ordinary course of business, we will provide a guarantee to the consignor that their consigned artwork will achieve a specified minimum sale price at auction. This type of arrangement is known as an auction guarantee. If the property offered under an auction guarantee sells above the minimum guaranteed price, we are generally entitled to a share of 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 shortfall between the sale price at auction and the amount of the auction guarantee. If the property offered under the auction guarantee does not sell, we must pay the amount of the auction guarantee to the consignor and then take ownership of the unsold property and may recover the amount paid through its future sale. In certain limited situations, if the guaranteed property fails to sell at auction or if the purchaser defaults, the consignor has the right to cancel the auction guarantee and retain the property.
In situations when an item of guaranteed property does not sell and we take ownership of the property, it is taken into Inventory and recorded on our Condensed 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 Condensed Consolidated Balance Sheets.
We may reduce our financial exposure under auction guarantees through contractual risk sharing arrangements. Such auction guarantee risk sharing arrangements include irrevocable bid arrangements and, from time-to-time, partner sharing arrangements. An irrevocable bid is an arrangement under which a counterparty irrevocably 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, as their fee, a share of the buyer's premium earned on the sale and/or a share of any auction guarantee overage. If the irrevocable bid is the winning bid, the counterparty may sometimes receive a fee as compensation for providing the irrevocable bid. This fee is netted against the counterparty's obligation to pay the aggregate purchase price (i.e., the hammer price plus 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, if the property sells, the counterparty in a partner sharing arrangement is generally entitled to receive, as their fee, a share of the buyer's premium earned on the sale and/or a share of any auction guarantee overage.
The counterparties to these auction guarantee risk 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. Additionally, although risk 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.
As of September 30, 2019, we had outstanding auction guarantees totaling $195.6 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. All of the property related to these auction guarantees is being offered at auctions during the fourth quarter of 2019. Our financial exposure under these auction guarantees is reduced by $130.1 million as a result of our use of contractual risk sharing arrangements with third parties. After taking into account these risk-sharing arrangements, as of September 30, 2019, our net financial exposure related to the auction guarantees was $65.5 million.
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 September 30, 2019 and 2018, there were $3.8 million and $21.5 million of auction guarantee advances outstanding, respectively. As of September 30, 2019, December 31, 2018, and September 30, 2018, the estimated fair value of our obligation to perform under our outstanding auction guarantees totaled $5.5 million, $2.9 million, and $11.4 million, respectively, and is recorded within Accounts Payable and Accrued Liabilities on our Condensed Consolidated Balance Sheets. 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.
18. Share-Based Payments
Prior to our merger with BidFair MergeRight Inc. on October 3, 2019, share-based payments made to employees included performance-based stock unit awards, market-based stock unit awards, restricted stock units, and restricted shares. Share-based payments were also made to members of our Board of Directors through the issuance of common stock and deferred stock units. A description of each of these share-based payments is provided below. (See Note 22 for information related to our merger with BidFair MergeRight Inc., as well as the impact of the merger on outstanding share-based payments awards.)
For the three and nine months ended September 30, 2019 and 2018, compensation expense related to share-based payments was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Amortization of share-based payments
|
|
$
|
7,212
|
|
|
$
|
6,736
|
|
|
$
|
22,079
|
|
|
$
|
21,425
|
|
|
Accelerated expense attributable to contractual severance agreement
|
|
—
|
|
|
—
|
|
|
1,050
|
|
|
—
|
|
|
Total share-based payment expense (pre-tax)
|
|
$
|
7,212
|
|
|
$
|
6,736
|
|
|
$
|
23,129
|
|
|
$
|
21,425
|
|
|
Total share-based payment expense (after-tax)
|
|
$
|
5,560
|
|
|
$
|
4,754
|
|
|
$
|
17,774
|
|
|
$
|
16,480
|
|
In the second quarter of 2019, we entered into a contractual severance agreement with a named executive officer (the "NEO”) pursuant to which, among other things, the NEO is no longer be required to provide service in order for his share-based payment awards to vest. In addition, in conjunction with this contractual severance agreement and in conjunction with our merger with BidFair MergeRight Inc. (see Note 22), the NEO’s stock units were immediately canceled and converted into a right to receive an amount in cash equal in value to the product of: (i) the number of shares of Sotheby’s common stock underlying such awards and (ii) $57.00. As a result of the contractual severance agreement with the NEO, for the three and nine months ended September 30, 2019, we recognized accelerated share-based payment expense of $1.1 million related to the removal of the NEO's service requirement and an additional $0.7 million related to the revaluing of the NEO's share-based payment awards to $57.00 per share from their grant date fair value. Also in conjunction with the modification of the NEO's share-based payment awards, in the second quarter of 2019, $2 million was reclassified from Additional Paid-in Capital to Accrued Salaries and Related Costs in our Condensed Consolidated Balance Sheets to reflect the required cash settlement of those awards.
For the nine months ended September 30, 2019 and 2018, we recognized $1.5 million and $1.2 million, respectively, in excess tax benefits related to share-based payments in our Condensed Consolidated Statements of Operations. 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 Condensed Consolidated Financial Statements.
As of September 30, 2019, unrecognized compensation expense related to the unvested portion of share-based payments to employees was approximately $30.4 million, which was expected to be amortized over a weighted-average period of approximately 2 years. We do not capitalize any compensation expense related to share-based payments to employees.
2018 Equity Incentive Plan—The Sotheby’s 2018 Equity Incentive Plan (the “Equity Plan”) was adopted on February 28, 2018 and approved by our stockholders on May 3, 2018. The Equity Plan replaced the Sotheby’s Restricted Stock Unit Plan (as amended and restated, the "Restricted Stock Unit Plan") and the Sotheby’s 1997 Stock Option Plan (collectively, the “Prior Plans”), which are discussed in more detail below. The Equity Plan permitted the issuance of restricted stock, restricted stock units, performance shares, performance share units, stock options, stock appreciation rights (or, "SAR's"), and other equity-related awards. No further awards were granted under the Prior Plans after May 3, 2018. However, the terms and conditions of the Prior Plans and related award agreements continued to apply to all awards granted prior to May 3, 2018 under the Prior Plans.
The Equity Plan was a fungible share plan. Each option or SAR granted under the Equity Plan counted as one share from the available share pool. Each full-value award granted under the Equity Plan, including restricted stock units and performance share units, counted as 2.14 shares from the available pool.
Restricted Stock Unit Plan—Prior to May 3, 2018, the Restricted Stock Unit Plan provided for the issuance of restricted stock units ("RSU's") and restricted shares to employees. Awards made under the Restricted Stock Unit Plan were subject to the approval of the Compensation Committee of our Board of Directors.
RSU's and restricted 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 shares issued under the Restricted Stock Unit Plan were entitled to receive non-forfeitable dividend equivalents and dividends, respectively, at the same rate as dividends were paid on our common stock (if and when such dividends were paid). Prior to vesting, holders of RSU's issued under the Restricted Stock Unit Plan did not have voting rights, while holders of restricted shares had voting rights. RSU's and restricted shares were not able to be sold, assigned, transferred, pledged or otherwise encumbered until they vested.
For RSU's and restricted shares issued after May 3, 2018 under the new Equity Plan, dividend equivalents would have been generally be credited to holders of RSU's at the same rate as dividends are paid on our common stock (if and when such dividends are paid), but would have only been paid for RSU's and restricted shares that vested.
Performance Share Units (or "PSU's") are RSU's that generally vest over three-year service periods, subject to the achievement of certain profitability targets (for awards granted prior to 2016) or certain ROIC targets (for awards granted beginning in 2016). Prior to vesting, holders of PSU's did not have voting rights and were not entitled to receive dividends or dividend equivalents. Dividend equivalents were 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 were only paid for PSU's that vest and become shares of our common stock. PSU's were not able to be sold, assigned, transferred, pledged or otherwise encumbered until they vested.
For the nine months ended September 30, 2019, the Compensation Committee of the Board of Directors approved share-based payment awards with a total grant date fair value of $31.4 million, as follows:
|
|
|
|
•
|
325,027 PSU's with a grant date fair value of $13.1 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 units awarded 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 650,054.
|
|
|
|
|
•
|
454,519 RSU's with a grant date fair value of $18.3 million and annual vesting opportunities over a three-year service period.
|
Summary of Outstanding Share-Based Payment Awards—For the nine months ended September 30, 2019, changes to the number of outstanding RSU’s, PSU’s, and restricted shares were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Shares, RSU's and PSU's
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Outstanding at January 1, 2019
|
1,852
|
|
|
$
|
39.12
|
|
|
Granted
|
780
|
|
|
$
|
40.20
|
|
|
Vested
|
(748
|
)
|
|
$
|
30.45
|
|
|
Canceled
|
(201
|
)
|
|
$
|
32.31
|
|
|
Outstanding at September 30, 2019
|
1,683
|
|
|
$
|
44.55
|
|
As of September 30, 2019, 5.9 million shares were available for future awards issued pursuant to the new Equity Plan. The aggregate fair value of RSU’s and PSU's that vested during the nine months ended September 30, 2019 and 2018 was $29.9 million and $26.9 million, respectively, based on the closing stock price on the dates the shares vested.
Directors Stock Plan—Common stock was issued quarterly under the Sotheby’s Stock Compensation Plan for Non-Employee Directors (as amended and restated, the “Directors Stock Plan”). Directors were able to elect to receive this compensation in the form of deferred stock units ("DSU's"), which was 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 was calculated using the closing price of the common stock on the New York Stock Exchange on the business day immediately prior to the quarterly grant date. Deferred stock units were held until a director’s termination of service, at which time the units were 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. For the three months ended September 30, 2019 and 2018, we recognized $0.4 million and $0.3 million, respectively, within General and Administrative Expenses in our Condensed Consolidated Statements of Operations related to common stock shares awarded under the Directors Stock Plan. For the nine months ended September 30, 2019 and 2018, such expense was $1.1 million and $0.9 million, respectively. As of September 30, 2019, 209,046 deferred stock units were outstanding under the Directors Stock Plan and 64,900 units were available for future issuance. (See Note 22 for information related to our merger with BidFair MergeRight Inc., as well as the impact of the merger on outstanding DSU's.)
19. (Loss) Earnings Per Share
Basic (loss) earnings per share—Basic (loss) earnings per share attributable to Sotheby's common shareholders is computed under the two-class method using the weighted average number of common shares outstanding during the period. The two-class method requires that the amount of net income attributable to participating securities be deducted from consolidated net income in the computation of basic earnings per share. In periods with a net loss, the net loss attributable to participating securities is not deducted from consolidated net loss in the computation of basic loss per share as the impact would be anti-dilutive. Our participating securities include unvested restricted stock units and unvested restricted shares held by employees, both of which have non-forfeitable rights to dividends. (See Note 18 for information on our share-based payment programs.)
Diluted (loss) earnings per share—Diluted (loss) earnings per share attributable to Sotheby's common shareholders is computed in a similar manner to basic loss 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 principally include unvested performance share units held by employees, unvested restricted stock units that do not have non-forfeitable rights to dividends, and deferred stock units held by members of our previous Board of Directors. (See Note 18 for information on our share-based payment programs.)
The table below summarizes the computation of basic and diluted (loss) earnings per share for the three and nine months ended September 30, 2019 and 2018 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Sotheby’s
|
|
$
|
(53,359
|
)
|
|
$
|
(27,838
|
)
|
|
$
|
(3,424
|
)
|
|
$
|
22,922
|
|
|
|
Less: Net income attributable to participating securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
344
|
|
|
|
Net (loss) income attributable to Sotheby’s common shareholders
|
|
$
|
(53,359
|
)
|
|
$
|
(27,838
|
)
|
|
$
|
(3,424
|
)
|
|
$
|
22,578
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
46,616
|
|
|
50,927
|
|
|
46,551
|
|
|
51,724
|
|
|
|
Basic (loss) earnings per share - Sotheby’s common shareholders
|
|
$
|
(1.14
|
)
|
|
$
|
(0.55
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
0.44
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Sotheby’s
|
|
$
|
(53,359
|
)
|
|
$
|
(27,838
|
)
|
|
(3,424
|
)
|
|
$
|
22,922
|
|
|
|
Less: Net income attributable to participating securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
344
|
|
|
|
Net (loss) income attributable to Sotheby’s common shareholders
|
|
$
|
(53,359
|
)
|
|
$
|
(27,838
|
)
|
|
$
|
(3,424
|
)
|
|
$
|
22,578
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
46,616
|
|
|
50,927
|
|
|
46,551
|
|
|
51,724
|
|
|
|
Weighted average effect of dilutive potential common shares:
|
|
|
|
|
|
|
|
|
|
|
Performance share units
|
|
—
|
|
|
—
|
|
|
—
|
|
|
138
|
|
|
|
Deferred stock units
|
|
—
|
|
|
—
|
|
|
—
|
|
|
174
|
|
|
|
Weighted average dilutive potential common shares outstanding
|
|
—
|
|
|
—
|
|
|
—
|
|
|
312
|
|
|
|
Weighted average diluted shares outstanding
|
|
46,616
|
|
|
50,927
|
|
|
46,551
|
|
|
52,036
|
|
|
|
Diluted (loss) earnings per share - Sotheby’s common shareholders
|
|
$
|
(1.14
|
)
|
|
$
|
(0.55
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
0.43
|
|
For the three and nine months ended ended September 30, 2019 and the three months ended September 30, 2018, approximately 2 million potential common shares related to share-based payments were excluded from the computation of diluted loss per share because their inclusion in the computation would be anti-dilutive in a loss period. For the nine months ended September 30, 2018, approximately 1 million potential common shares related to share-based payments were excluded from the computation of diluted loss per share because the financial performance or stock price targets inherent in such awards were not achieved as of their respective balance sheet dates.
20. Restructuring Charges
Beginning in the second quarter of 2018, we implemented a restructuring plan with the principal goal of reducing headcount through the elimination of certain Agency segment and corporate level positions (the "2018 Restructuring Plan"). The 2018 Restructuring Plan was completed in the fourth quarter of 2018. For the three and nine months ended September 30, 2018, we recognized $3.8 million and $5.9 million, respectively, of restructuring charges associated with the 2018 Restructuring Plan, which are almost entirely attributable to severance-related costs. The remaining restructuring liability of $0.8 million as of September 30, 2019 is recorded on our Condensed Consolidated Balance Sheets within Accounts Payable and Accrued Liabilities. This liability is expected to be substantially settled through cash payments to be made in the fourth quarter of 2019.
21. Related Party Transactions
From time-to-time, in the ordinary course of business, related parties, such as members of the Board of Directors and management, buy and sell property at our auctions or through private sales.
For the three and nine months ended September 30, 2019, our Condensed Consolidated Statements of Operations include Agency Commissions and Fees of $0.2 million and $1.7 million, respectively, attributable to transactions with related parties. For the three and nine months ended September 30, 2018, our Condensed Consolidated Statements of Operations include Agency Commissions and Fees of $0.1 million and $3.4 million, respectively, attributable to transactions with related parties. For the nine months ended September 30, 2018, our Condensed Consolidated Statements of Operations include Inventory Sales (and related cost of sales) of $5.3 million attributable to transactions with related parties.
As of September 30, 2019 and 2018, Accounts Receivable included amounts due from related party purchasers of $0.1 million. As of September 30, 2019, December 31, 2018, and September 30, 2018, Client Payables included amounts owed to related party consignors totaling $0.4 million, $4.3 million, and $0.5 million, respectively.
22. Merger
Overview—On June 16, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with BidFair USA Inc. (formerly a limited liability company known as BidFair USA LLC) (“Parent”) and BidFair MergeRight Inc., a Delaware corporation and a wholly owned indirect subsidiary of Parent (“Merger Sub”). On October 3, 2019 (the “Effective Time”), the Company completed the transactions contemplated by the Merger Agreement, and Merger Sub merged with and into the Company, with the Company continuing as the surviving corporation and as a wholly-owned indirect subsidiary of Parent (the “Merger”). Parent and Merger Sub are entities that are controlled by Patrick Drahi.
At the Effective Time, each share of common stock, $0.01 par value, of the Company (“Company Common Stock”) issued and outstanding immediately prior to the Effective Time (other than shares of Common Stock owned by the Company, Parent, Merger Sub, or any of their respective direct or indirect wholly-owned subsidiaries or any other affiliate of Parent, was converted into the right to receive $57.00 in cash, without interest (the “Merger Consideration”). The aggregate cash consideration paid to Company stockholders upon the closing of the Merger was approximately $2.6 billion. As of November 8, 2019, 488,926 shares of Company Common Stock that were subject to a now withdrawn demand for appraisal rights under Delaware law remained outstanding. The holders of these shares will be paid $27.9 million in respect of the Merger Consideration in the fourth quarter of 2019.
At the Effective Time, each outstanding deferred stock unit of the Company (a “Company DSU”) under the Company’s Stock Compensation Plan for Non-Employee Directors was canceled and converted into the right to receive (without interest and subject to any applicable withholding tax), an amount in cash equal to the number of shares of Company Common Stock underlying such Company DSU multiplied by the Merger Consideration. The amount owed in relation to Company DSUs totaled $11.9 million and was paid to the respective holders on October 11, 2019.
At the Effective Time, each outstanding performance share unit (a “Company PSU”) that is subject to performance conditions based on the price of a share of Company Common Stock (a “Company Share Price PSU”) under the Company’s incentive plans was canceled and converted into the right to receive an amount in cash (without interest and subject to any applicable withholding tax) equal to the number of shares of Company Common Stock earned in accordance with the terms and conditions set forth in the award agreement as reasonably determined by the Compensation Committee multiplied by the Merger Consideration. The amount owed in relation to Company Share Price PSUs totaled $2.9 million and was paid to the holder on October 15, 2019.
At the Effective Time, each outstanding performance cash unit (a “Company PCU”) under the Company’s incentive plans was canceled, extinguished and converted into an award (each, a “Converted PCU”) representing the right to receive an amount in cash (without interest and subject to any applicable withholding tax) equal in value to the number of shares of Company Common Stock represented by Company PCUs deemed earned as of immediately prior to the Effective Time (125% of target for Company PCUs with a performance period ending on December 31, 2019, 100% of target for Company PCUs with a performance period ending on December 31, 2020 and 100% of target for Company PCUs with a performance period ending on December 31, 2021) multiplied by the Merger Consideration. The amount owed by the Company in relation to Converted PCUs is approximately $1 million.
At the Effective Time, each outstanding Company PSU (other than a Company Share Price PSU) under the Company’s incentive plans was canceled, extinguished and converted into an award (each, a “Converted PSU”) representing the right to receive an amount in cash (without interest and subject to any applicable withholding tax) equal in value to the number of Company PSUs deemed earned as of immediately prior to the Effective Time (125% of target for Company PSUs with a performance period ending on December 31, 2019, 100% of target for Company PSUs with a performance period ending on December 31, 2020 and 100% of target for Company PSUs with a performance period ending on December 31, 2021) multiplied by the Merger Consideration. The amount owed by the Company in relation to Converted PSUs is approximately $51 million.
At the Effective Time, each outstanding restricted cash unit subject only to service-based vesting conditions (a “Company RCU”) under the Company’s incentive plans was canceled, extinguished and converted into an award (each, a “Converted RCU”) representing the right to receive an amount in cash (without interest and subject to any applicable withholding tax) equal to the number of shares of Company Common Stock represented by such Company RCU as of immediately prior to the Effective Time multiplied by the Merger Consideration. The amount owed by the Company in relation to Converted RCUs is approximately $3 million.
At the Effective Time, each outstanding restricted stock unit subject only to service-based vesting conditions (a “Company RSU”) under the Company’s incentive plans was canceled, extinguished and converted into an award (each, a “Converted RSU”) representing the right to receive an amount in cash (without interest and subject to any applicable withholding tax) equal to the number of shares of Company Common Stock underlying such Company RSU as of immediately prior to the Effective Time multiplied by the Merger Consideration. The amount owed by the Company in relation to Converted RSUs is approximately $45 million.
Each Converted PCU, Converted PSU (other than each Company Share PSU), Converted RCU and Converted RSU will (A) vest and settle on terms (including acceleration events but excluding any performance-based vesting conditions, if applicable) as were applicable to the corresponding Company equity award immediately prior to the Effective Time and (B) vest in full to the extent the holder of a converted award is subject to a qualifying termination of employment during the twenty-four (24) month period following the closing, with such converted award settled in cash as soon as practicable, but in no event later than ten (10) business days, following such qualifying termination, or such later time as required to comply with Section 409A of the Internal Revenue Code of 1986. The Company Share PSUs have already vested and were paid out as set forth above. (See Note 18 for a summary of the terms and conditions of the Company's share-based payment arrangements.)
In connection with the Merger, Merger Sub (i) issued $600 million principal amount of 7.375% senior secured notes due 2027 (the “2027 Notes”) in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended, and (ii) entered into a credit agreement dated as of October 2, 2019, between Merger Sub, inter alios, certain lenders party thereto and BNP Paribas, as administrative agent, and Deutsche Bank Trust Company Americas, as the collateral agent (the “Agent”), (the “New Credit Facilities Agreement”). The 2027 Notes were issued pursuant to an indenture dated as of October 2, 2019, between Merger Sub and Deutsche Bank Trust Company Americas, as trustee, paying agent, transfer agent, registrar, and notes collateral agent (the “Indenture”). The proceeds from the issuance of the 2027 Notes were used to fund a portion of the Merger Consideration ($345 million) and to repay a portion of the outstanding revolving credit facility borrowings under the JPMorgan Chase Credit Agreement ($255 million) (see Note 9).
As of the Effective Time, the 2027 Notes and the New Credit Facilities (as defined below) became obligations of the Company, and the Company entered into a supplemental indenture to the Indenture (the “Target Supplemental Indenture”). Each existing material wholly-owned direct or indirect subsidiary of the Company that is organized in the U.S. (the “Initial U.S. Guarantors”) is a guarantor under the Indenture and the New Credit Facilities Agreement and, each existing material wholly-owned direct or indirect subsidiary of the Company that is organized in England and Wales, Luxembourg or Hong Kong (the “Initial Non-U.S. Guarantors”) will become a guarantor under the Indenture and the New Credit Facilities Agreement within 90 days after the Effective Time.
Also in connection with the Merger, the Company entered into transactions to transfer Sotheby's Financial Services, Inc. and its wholly-owned subsidiaries to its parent, BidFair USA Inc. (the “SFS Business Transfer”). Following the SFS Business Transfer, the receivables related to the SFS loan portfolio (including those held by indirect wholly-owned subsidiaries of the Company) were transferred to a bankruptcy remote subsidiary (the "SFS Subsidiary") formed by Sotheby’s Financial Services, Inc. (the “SFS Portfolio Transfer”) and Sotheby’s Financial Services, Inc. was engaged to continue to service the portfolio of loans. The SFS Portfolio Transfer is being financed with a loan of up to $1 billion (the "SFS Loan") extended to the SFS Subsidiary pursuant to a loan agreement between the SFS Subsidiary and BNP Paribas, as administrative agent for the lenders party to such loan agreement (the "SFS Loan Agreement"). Approximately $834 million of the SFS loan was drawn on October 2, 2019 and was used to fund a portion of the Merger Consideration. The SFS Loan Agreement permits additional draws on the SFS Loan through January 31, 2020 to provide financing for the purchase of additional loan receivables by the SFS Subsidiary, and we expect to receive commitments for additional funding for loans made subsequent to January 31, 2020. The SFS Loan has a maturity date of the later of December 31, 2020 or the final maturity date of the last loan included in the SFS Portfolio Transfer. The obligations of the SFS Subsidiary under the SFS Loan are secured by the receivables and associated rights acquired in conjunction with the SFS Portfolio Transfer. The Company has provided a guarantee of the SFS Subsidiary's obligations under the SFS Loan of up to $150 million that is supported by standby letters of credit under the New Credit Facilities.
Further in connection with the Merger, the Company entered into a transaction to transfer 1334 York, LLC (the owner of the York Property) to BidFair Property Holdings Inc., a Delaware corporation and a subsidiary of BidFair USA Inc. (the “York Property Transfer”). In conjunction with the York Property Transfer, 1334 York, LLC and BidFair Property Holdings Inc. entered into a $450 million asset bridge loan (the "Asset Sale Bridge Facility"), the proceeds of which were used to repay the York Property Mortgage ($249 million) and to repay a portion of the outstanding revolving credit facility borrowings under the JPMorgan Chase Credit Agreement ($201 million). The Asset Sale Bridge Facility will terminate one year following the Effective Time, subject to the right of the borrowers to extend the maturity date by six months solely conditioned upon payment of an extension fee without any further consent of the lender. The Asset Sale Bridge Facility is expected to be refinanced or extended at its maturity. In addition, as soon as commercially practical after the completion of the Merger, the Company also intends to transfer to BidFair Property Holdings Inc. the real estate holdings that collectively house its London main salesrooms, exhibition spaces, and administrative offices (the "London Properties") (the "London Properties Transfer"). Upon the completion of the York Property Transfer and the London Properties Transfer, the Company will enter into long-term, arms-length lease agreements with BidFair Property Holdings Inc. in respect of the York Property and the London Properties. (See Note 9 for information related to the York Property Mortgage and the JPMorgan Chase Credit Agreement.)
The foregoing description of the Merger Agreement and the Merger is not complete and is subject to and entirely qualified by reference to the full text of the Merger Agreement, which was filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 17, 2019.
(See the captioned sections below for information related to the 2027 Notes and the New Credit Facilities Agreement.)
2027 Notes—As discussed above, in connection with the Merger, Merger Sub issued $600 million principal amount of senior secured notes due 2027 in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. As of the Effective Time, the 2027 Notes became obligations of the Company. The 2027 Notes bear interest at a rate of 7.375% per annum and mature on October 15, 2027. Interest on the 2027 Notes will be payable semi-annually in arrears on June 1 and December 1 of each year, starting in June 2020.
The 2027 Notes rank equally in right of payment with any existing or future indebtedness of the Company that is not subordinated in right of payment to the 2027 Notes, including the Company’s obligations under the New Credit Facilities. The Notes rank senior in right of payment to all of the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the 2027 Notes. The 2027 Notes are effectively subordinated to any of the Company’s existing and future indebtedness that is secured by property or assets that do not secure the 2027 Notes, to the extent of the value of such property and assets securing such indebtedness. In addition, the 2027 Notes are structurally subordinated to the existing and future liabilities of the Company’s subsidiaries that do not guarantee the 2027 Notes. The 2027 Notes are guaranteed on a senior secured basis (the “Guarantees”) jointly and severally by BidFair Holdings Inc., a Delaware corporation and wholly owned subsidiary of Parent (“BidFair”), and each of Company’s existing and future material wholly-owned restricted subsidiaries organized in the U.S., and within 90 days following the Effective Time, will be guaranteed by wholly-owned subsidiaries organized in England and Wales, Luxembourg and Hong Kong that guarantee the New Credit Facilities or that guarantee certain of its other indebtedness or certain indebtedness of a guarantor (subject to certain exceptions) (collectively, the “Subsidiary Guarantors”, and together with BidFair, the “Guarantors”). The Guarantees will rank equally in right of payment to the existing and future senior indebtedness of the Guarantors, including the 2025 Notes and the New Credit Facilities, and rank senior in right of payment to any existing and future subordinated obligations of the Guarantors.
The Company may redeem some or all of the 2027 Notes at any time on or after October 15, 2022, at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. The Company may also redeem up to 40% of the 2027 Notes using the proceeds of certain equity offerings before October 15, 2022, at a redemption price equal to 107.375%, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time prior to October 15, 2022, the Company may redeem some or all of the 2027 Notes, at a price equal to 100% of the principal amount thereof, plus a “make whole” premium specified in the Indenture plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.
The Indenture contains certain covenants and agreements, including limitations on the ability of the Company and its restricted subsidiaries to (i) incur or guarantee additional indebtedness, (ii) make investments or other restricted payments, (iii) create liens, (iv) sell assets and subsidiary stock, (v) pay dividends or make other distributions or repurchase or redeem its capital stock or subordinated debt, (vi) engage in certain transactions with affiliates, (vii) enter into agreements that restrict the payment of dividends by subsidiaries or the repayment of intercompany loans and advances, and (viii) engage in mergers or consolidations, in each case subject to certain exceptions. The Indenture also contains certain customary events of default. If an event of default occurs, the obligations under the 2027 Notes and the Indenture may be accelerated.
New Credit Facilities—The New Credit Facilities Agreement provides (i) U.S. dollar-denominated term loans in an aggregate principal amount of up to $500 million available in up to two drawings (the “New Term Loan Facility”); and (ii) U.S. dollar-denominated revolving loan commitments in an aggregate principal amount of $400 million (the “New Revolving Credit Facility,” and together with the New Term Loan Facility, the “New Credit Facilities”). The New Term Loan Facility will mature in January 2027, and the New Revolving Credit Facility will mature in October 2024. Capitalized terms used under this heading and not otherwise defined herein shall have the meanings given to them in the New Credit Facilities Agreement.
The New Credit Facilities Agreement also permits the Company to request revolving loans, swing line loans or letters of credit from the revolving lenders thereunder, from time to time from and after the initial funding date under the New Credit Facilities (the “New Term Loan Facility Funding Date”) and prior to the date that is five years from the Effective Time.
Loans comprising each Eurodollar Borrowing or ABR Borrowing, as applicable, shall bear interest at a rate per annum equal to the Adjusted LIBO Rate or the Alternate Base Rate ("ABR"), as applicable, plus an Applicable Margin, where the Applicable Margin means (i) in respect of term loans (x) with respect to any ABR Loan, 4.5% per annum and (y) with respect to any Eurodollar Loan, 5.5% per annum, and (ii) in respect of revolving credit loans (x) with respect to any ABR Loan, 2.75% per annum and (y) with respect to any Eurodollar Loan, 3.75% per annum.
The New Credit Facilities Agreement requires the Company to prepay outstanding term loans under the New Term Loan Facility, subject to certain exceptions and deductions, with (i) 100% of the net cash proceeds of certain asset sales, subject to reinvestment rights and certain other exceptions; and (ii) commencing with the fiscal year ending 2020, a pari ratable share (based on the outstanding principal amount of the term loans under the New Credit Facilities divided by the outstanding principal amount of all pari passu indebtedness (including the term loans under the New Credit Facilities)) of 50% of the Company’s annual excess cash flow, which will be reduced to (x) 25% if the Consolidated Net Leverage Ratio is less than or equal to 4.50 to 1.00 and greater than 3.75 to 1.00, and (y) 0% if the Consolidated Net Leverage Ratio is less than or equal to 3.75 to 1.00 and subject to other customary deductions.
Voluntary prepayments of the loans under the New Term Loan Facility are permitted; however, any prepayments on or prior to the 12-month anniversary of the New Term Loan Facility Funding Date which are either (x) in connection with a Repricing Transaction or (y) effect any amendment of the New Credit Facility resulting in a Repricing Transaction, are subject to a call premium payable to the administrative agent on behalf of the lenders of, in the case of (x) 1.00% of the principal amount of the New Term Loan Facility so repaid and in the case of (y) a payment equal to 1.00% of the aggregate amount of the New Term Loan Facility subject to such Repricing Transaction.
Beginning on January 15, 2020, the Company is required to make scheduled quarterly payments each equal to 0.25% of the original principal amount of the term loans borrowed under the New Term Loan Facility, with the balance expected to be due on the January 2027 maturity date. As of November 9, 2019, the aggregate principal amount outstanding under the New Term Loan facility was $467 million, consisting of (i) $96 million drawn to repay a portion of the outstanding revolving credit facility borrowings under the JPMorgan Chase Credit Agreement ($14 million) and to fund a portion of the transaction costs associated with the Merger, including debt issuance costs associated with the 2027 Notes, and (ii) $370 million drawn to fund the Change of Control Tender Offer and a portion of the transaction costs associated with the Merger. As of November 8, 2019, outstanding borrowings under the New Revolving Credit Facility were $145 million and the available borrowing capacity was $105 million.
.
The obligations of the Company under the New Credit Facilities (i) are guaranteed, on a senior basis, by the Initial U.S. Guarantors; and (ii) will be guaranteed, on a senior basis, within 90 business days following the Effective Time, by the Initial Non-U.S. Guarantors (or, in each case, such later date as may be reasonably agreed by the Company and the Agent and pursuant to arrangements to be mutually agreed by the Company and the Agent). In addition, the New Credit Facilities will be guaranteed by each future material wholly-owned restricted subsidiary of the Company that is organized in the U.S., England and Wales, Luxembourg and Hong Kong, subject to certain limitations set forth in the New Credit Facilities documentation.
The obligations of the Company under the New Credit Facilities are secured by (a) first-priority security interests in substantially all of the collateral of the Subsidiary Guarantors (other than any Subsidiary Guarantor incorporated in Luxembourg (“Luxembourg Guarantor”)) and the Company (other than any real estate, SFS-related notes receivable, and subject to certain other exceptions) which secured the Company's obligations under the JPMorgan Chase Credit Agreement (see Note 9), (b) without limiting clause (a) above, all of the equity interests (i) of the Company held by BidFair and (ii) of any Subsidiary Guarantor incorporated in the U.S., England and Wales, Luxembourg and Hong Kong held by any Luxembourg Guarantor and (c) without limiting clause (a) above, any intercompany loans (i) from BidFair to the Company and (ii) from any Luxembourg Guarantor to any other Restricted Subsidiary (together, the “Senior Credit Facilities Collateral”), provided that such Senior Credit Facilities Collateral shall be required to be delivered or provided in the case of any Initial Non-U.S. Guarantor or in the case of any Initial U.S. Guarantor with respect to assets located outside the U.S. (if any) that are required to be pledged by such Initial U.S. Guarantor, subject to certain agreed security principles, within 90 days after the Effective Time (or, in each case, such later date as may be reasonably agreed by the Company and the Agent and pursuant to arrangements to be mutually agreed by the Company and the Agent).
The New Credit Facilities Agreement includes negative covenants that substantially reflect the covenants contained in the Indenture governing the 2027 Notes and, subject to certain significant exceptions and qualifications, will limit the Company’s ability and the ability of its restricted subsidiaries to: (i) incur or guarantee additional Indebtedness, (ii) make investments or other restricted payments, (iii) create liens, (iv) sell assets and subsidiary stock, (v) pay dividends or make other distributions or repurchase or redeem the Company’s capital stock or subordinated debt, (vi) engage in certain transactions with affiliates, (vii) enter into agreements that restrict the payment of dividends by subsidiaries or the repayment of intercompany loans and advances; and (viii) engage in mergers or consolidations. The New Revolving Credit Facility will include a financial maintenance covenant solely for the benefit of the lenders under the New Revolving Credit Facility consisting of a maximum consolidated net senior secured leverage ratio of the Company and its restricted subsidiaries of 6.50 to 1.0. The financial covenant will be tested on the last day of any fiscal quarter (commencing on March 31, 2020) but solely for the purpose of the New Revolving Credit Facility only if on such day the outstanding borrowings under the New Revolving Credit Facility (other than cash collateralized or undrawn letters of credit) exceed 40% of the total commitments under the New Revolving Credit Facility.
The New Credit Facilities Agreement also contains certain customary representations and warranties, affirmative covenants and events of default (including, among others, an event of default upon a change of control). If an event of default occurs, the lenders under the New Credit Facilities will be entitled to take various actions, including the acceleration of amounts due under the New Credit Facilities and all actions permitted to be taken by a secured creditor, subject to the Intercreditor Agreement.
The foregoing description of the Merger Agreement is qualified in its entirety by the full text of the Merger Agreement, which is attached as Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on June 17, 2019. For additional information regarding the Merger, please also refer to our Definitive Proxy Statement filed with the SEC on August 7, 2019. as well as our Current Report on Form 8-K filed with the SEC on October 3, 2019, announcing the consummation of the Merger.
The foregoing description of the 2027 Notes is qualified in its entirety by the full text of the Indenture, which is attached as Exhibit 10.2 to this Form 10-Q. The foregoing description of the New Revolving Credit Facility and New Term Loan Facility is qualified in its entirety by the full text of the agreement for these debt arrangements, which is attached as Exhibit 10.1 to this Form 10-Q. For additional information regarding the 2027 Notes, the New Revolving Credit Facility, and the New Term Loan Facility, see our Current Report on Form 8-K filed with the SEC on October 3, 2019, announcing the consummation of the Merger.
Management Changes—In connection with the consummation of the Merger, all of the members of the Board of Directors of the Company immediately prior to the Effective Time ceased to be directors of the Company at the Effective Time, and Jean-Luc Berrebi became the sole director of the Company. In addition, as of the Effective Time and in connection with the Merger, Michael Goss left his position as Chief Financial Officer of the Company, and Jean-Luc Berrebi was appointed as Chief Financial Officer and Chief Operating Officer of the Company as of the Effective Date. Mr. Goss' departure qualifies as a termination other than for “cause” in connection with a change-in-control for purposes of the Company's Executive Severance Plan, and he has received severance in accordance therewith, with his outstanding equity awards treated in accordance with the Merger Agreement, in each case, as described in the definitive merger proxy statement filed by the Company on August 7, 2019.
On October 28, 2019, the Company announced that, effective immediately, Thomas S. Smith, Jr. stepped down from his position as President and Chief Executive Officer of the Company. Mr. Smith’s departure qualifies as a termination other than for “cause” in connection with a change-in-control for purposes of his Employment Agreement, dated March 13, 2015, with the Company. and he will receive severance in accordance therewith, with his outstanding equity awards treated in accordance with the Merger Agreement, in each case, as described in the definitive merger proxy statement filed by the Company on August 7, 2019.
In connection with the departure of Mr. Smith, the Company announced that effective immediately, Charles F. Stewart became Chief Executive Officer of the Company.
Merger-Related Expenses—For the three and nine months ended September 30, 2019, the Company incurred $4.7 million and $10.4 million, respectively, in financial advisory and legal fees related to the Merger, which are reflected in its Condensed Consolidated Statements of Operations within Merger-Related Expenses. Upon completion of the Merger, on October 3, 2019, the Company incurred approximately $38 million in success-based financial advisory fees, which will be recognized in the fourth quarter of 2019.
23. Accounting Standards Not Yet Adopted
Credit Losses—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. For public business entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019. For all other entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2020. We are currently assessing the adoption of ASU 2016-13 and its potential impact on our financial statements.
Consolidation—In October 2018, the FASB issued ASU 2018-17, Targeted Improvements to Related Party Guidance for VIE's, which, among other things, addresses fees paid to decision makers and related party service providers. For public business entities, ASU 2018-17 is effective for fiscal years beginning after December 15, 2019. For all other entities, ASU 2018-17 is effective for fiscal years beginning after December 15, 2020. We are currently assessing the adoption of ASU 2018-17 and its potential impact on our financial statements.