NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1
.
Basis of Presentation
Company Overview
—Since 1744, Sotheby’s 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.
As successor to a business that began in 1744, Sotheby's is the oldest company listed on the New York Stock Exchange ("NYSE") (symbol: BID) and is the only publicly traded investment opportunity in the art market. Sotheby's is incorporated in Delaware. On June 16, 2019, Sotheby's entered into an Agreement and Plan of Merger with Bidfair USA LLC and BidFair MergeRight Inc. If the pending Merger (as defined in Note 22) is consummated, Sotheby’s will cease to be a publicly traded company. (See Note 22 for information regarding the pending Merger of Sotheby's with Bidfair USA LLC and BidFair MergeRight Inc.)
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 Income Statements 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 Income Statements, 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 Income Statements 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 Sales
1
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.
________________________________________________________________
1
Represents the total hammer (sale) price of property sold at auction.
3
.
Segment Reporting
Our operations are 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.
Thomas S. Smith, Jr., Sotheby's CEO, is our chief operating decision maker. Mr. Smith 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 income before taxes, which excludes the unallocated items highlighted in the reconciliation below.
The following table presents our segment information for the
three and six months ended June 30, 2019 and 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Agency
|
|
SFS
|
|
All Other
|
|
Reconciling items
|
|
Total
|
|
Revenues
|
|
$
|
338,139
|
|
|
$
|
18,359
|
|
|
$
|
7,791
|
|
|
$
|
(2,511
|
)
|
(a)
|
$
|
361,778
|
|
|
Segment income before taxes (b)
|
|
$
|
77,290
|
|
|
$
|
9,584
|
|
|
$
|
1,335
|
|
|
$
|
(5,253
|
)
|
(c)
|
$
|
82,956
|
|
|
Three Months Ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
327,445
|
|
|
$
|
11,823
|
|
|
$
|
8,550
|
|
|
$
|
(2,182
|
)
|
(a)
|
$
|
345,636
|
|
|
Segment income before taxes (b)
|
|
$
|
70,192
|
|
|
$
|
6,380
|
|
|
$
|
1,051
|
|
|
$
|
(3,742
|
)
|
(c)
|
$
|
73,881
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
492,441
|
|
|
$
|
34,426
|
|
|
$
|
13,688
|
|
|
$
|
(5,312
|
)
|
(a)
|
$
|
535,243
|
|
|
Segment income before taxes (b)
|
|
$
|
53,144
|
|
|
$
|
17,561
|
|
|
$
|
3,413
|
|
|
$
|
(5,751
|
)
|
(c)
|
$
|
68,367
|
|
|
Six Months Ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
507,178
|
|
|
$
|
24,239
|
|
|
$
|
14,732
|
|
|
$
|
(4,717
|
)
|
(a)
|
$
|
541,432
|
|
|
Segment income before taxes (b)
|
|
$
|
61,169
|
|
|
$
|
13,131
|
|
|
$
|
2,439
|
|
|
$
|
(14,326
|
)
|
(c)
|
$
|
62,413
|
|
|
|
|
|
(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 Income Statements. 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 Income Statements.
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 income before taxes are detailed in the table below.
|
The table below presents a reconciliation of total segment income before taxes to consolidated income before taxes for the
three and six months ended June 30, 2019 and 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Agency
|
|
$
|
77,290
|
|
|
$
|
70,192
|
|
|
$
|
53,144
|
|
|
$
|
61,169
|
|
|
SFS
|
|
9,584
|
|
|
6,380
|
|
|
17,561
|
|
|
13,131
|
|
|
All Other
|
|
1,335
|
|
|
1,051
|
|
|
3,413
|
|
|
2,439
|
|
|
Segment income before taxes
|
|
88,209
|
|
|
77,623
|
|
|
74,118
|
|
|
76,739
|
|
|
Unallocated amounts and reconciling items:
|
|
|
|
|
|
|
|
|
|
Revolving credit facility costs (a)
|
|
(5,164
|
)
|
|
(6,473
|
)
|
|
(9,983
|
)
|
|
(9,419
|
)
|
|
SFS corporate finance charge
|
|
6,474
|
|
|
3,965
|
|
|
12,323
|
|
|
7,988
|
|
|
Merger-related expenses
|
|
(5,710
|
)
|
|
—
|
|
|
(5,710
|
)
|
|
—
|
|
|
Extinguishment of debt
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,855
|
)
|
|
Equity in earnings of investees (b)
|
|
(853
|
)
|
|
(1,234
|
)
|
|
(2,381
|
)
|
|
(2,040
|
)
|
|
Income before taxes
|
|
$
|
82,956
|
|
|
$
|
73,881
|
|
|
$
|
68,367
|
|
|
$
|
62,413
|
|
|
|
|
|
(a)
|
For the three and six months ended June 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 income before taxes. However, such earnings are reported separately below income before taxes in our Condensed Consolidated Income Statements.
|
The table below presents segment assets, as well as a reconciliation of segment assets to consolidated assets as of
June 30, 2019
,
December 31, 2018
, and
June 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
June 30, 2018
|
|
Agency
|
|
$
|
1,884,330
|
|
|
$
|
1,886,986
|
|
|
$
|
2,227,296
|
|
|
SFS
|
|
759,623
|
|
|
705,779
|
|
|
494,420
|
|
|
All Other
|
|
37,448
|
|
|
39,241
|
|
|
43,625
|
|
|
Total segment assets
|
|
2,681,401
|
|
|
2,632,006
|
|
|
2,765,341
|
|
|
Unallocated amounts and reconciling items:
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and income tax receivable
|
|
69,187
|
|
|
57,082
|
|
|
46,326
|
|
|
Consolidated assets
|
|
$
|
2,750,588
|
|
|
$
|
2,689,088
|
|
|
$
|
2,811,667
|
|
Substantially all of our capital expenditures for the
six months ended
June 30, 2019
, the year ended
December 31, 2018
, and the
six months ended
June 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 six months ended June 30, 2019 and 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Three Months Ended June 30, 2018
|
|
|
|
Agency
|
|
SFS
|
|
All Other
|
|
Total
|
|
Agency
|
|
SFS
|
|
All Other
|
|
Total
|
|
Revenue from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency commissions and fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction commissions
|
|
$
|
275,851
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
275,851
|
|
|
$
|
257,799
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
257,799
|
|
|
Auction related fees, net (a)
|
|
19,086
|
|
|
—
|
|
|
—
|
|
|
19,086
|
|
|
6,081
|
|
|
—
|
|
|
—
|
|
|
6,081
|
|
|
Private sale commissions
|
|
24,780
|
|
|
—
|
|
|
114
|
|
|
24,894
|
|
|
24,016
|
|
|
—
|
|
|
500
|
|
|
24,516
|
|
|
Other Agency commissions and fees
|
|
2,302
|
|
|
—
|
|
|
11
|
|
|
2,313
|
|
|
2,359
|
|
|
—
|
|
|
124
|
|
|
2,483
|
|
|
Total Agency commissions and fees
|
|
322,019
|
|
|
—
|
|
|
125
|
|
|
322,144
|
|
|
290,255
|
|
|
—
|
|
|
624
|
|
|
290,879
|
|
|
Inventory sales
|
|
16,120
|
|
|
—
|
|
|
2,139
|
|
|
18,259
|
|
|
37,190
|
|
|
—
|
|
|
2,916
|
|
|
40,106
|
|
|
Advisory revenues
|
|
—
|
|
|
—
|
|
|
1,315
|
|
|
1,315
|
|
|
—
|
|
|
—
|
|
|
1,156
|
|
|
1,156
|
|
|
License fee and other revenues
|
|
—
|
|
|
—
|
|
|
4,212
|
|
|
4,212
|
|
|
—
|
|
|
—
|
|
|
3,854
|
|
|
3,854
|
|
|
Total revenue from contracts with customers
|
|
338,139
|
|
|
—
|
|
|
7,791
|
|
|
345,930
|
|
|
327,445
|
|
|
—
|
|
|
8,550
|
|
|
335,995
|
|
|
Finance revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and related fees
|
|
—
|
|
|
15,848
|
|
|
—
|
|
|
15,848
|
|
|
—
|
|
|
9,641
|
|
|
—
|
|
|
9,641
|
|
|
Total revenues
|
|
$
|
338,139
|
|
|
$
|
15,848
|
|
|
$
|
7,791
|
|
|
$
|
361,778
|
|
|
$
|
327,445
|
|
|
$
|
9,641
|
|
|
$
|
8,550
|
|
|
$
|
345,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
Six Months Ended June 30, 2018
|
|
|
|
Agency
|
|
SFS
|
|
All Other
|
|
Total
|
|
Agency
|
|
SFS
|
|
All Other
|
|
Total
|
|
Revenue from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency commissions and fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction commissions
|
|
$
|
392,889
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
392,889
|
|
|
$
|
389,929
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
389,929
|
|
|
Auction related fees, net (a)
|
|
28,514
|
|
|
—
|
|
|
—
|
|
|
28,514
|
|
|
17,824
|
|
|
—
|
|
|
—
|
|
|
17,824
|
|
|
Private sale commissions
|
|
43,019
|
|
|
—
|
|
|
114
|
|
|
43,133
|
|
|
43,501
|
|
|
—
|
|
|
500
|
|
|
44,001
|
|
|
Other Agency commissions and fees
|
|
5,220
|
|
|
—
|
|
|
55
|
|
|
5,275
|
|
|
4,351
|
|
|
—
|
|
|
300
|
|
|
4,651
|
|
|
Total Agency commissions and fees
|
|
469,642
|
|
|
—
|
|
|
169
|
|
|
469,811
|
|
|
455,605
|
|
|
—
|
|
|
800
|
|
|
456,405
|
|
|
Inventory sales
|
|
22,799
|
|
|
—
|
|
|
4,226
|
|
|
27,025
|
|
|
51,573
|
|
|
—
|
|
|
4,769
|
|
|
56,342
|
|
|
Advisory revenues
|
|
—
|
|
|
—
|
|
|
2,722
|
|
|
2,722
|
|
|
—
|
|
|
—
|
|
|
2,406
|
|
|
2,406
|
|
|
License fee and other revenues
|
|
—
|
|
|
—
|
|
|
6,571
|
|
|
6,571
|
|
|
—
|
|
|
—
|
|
|
6,757
|
|
|
6,757
|
|
|
Total revenue from contracts with customers
|
|
492,441
|
|
|
—
|
|
|
13,688
|
|
|
506,129
|
|
|
507,178
|
|
|
—
|
|
|
14,732
|
|
|
521,910
|
|
|
Finance revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and related fees
|
|
—
|
|
|
29,114
|
|
|
—
|
|
|
29,114
|
|
|
—
|
|
|
19,522
|
|
|
—
|
|
|
19,522
|
|
|
Total revenues
|
|
$
|
492,441
|
|
|
$
|
29,114
|
|
|
$
|
13,688
|
|
|
$
|
535,243
|
|
|
$
|
507,178
|
|
|
$
|
19,522
|
|
|
$
|
14,732
|
|
|
$
|
541,432
|
|
|
|
|
|
(a)
|
Auction Related Fees, net, includes the net overage or shortfall attributable to auction guarantees, consignor expense recoveries, and shipping fees charged to buyers.
|
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 June 30, 2019, December 31, 2018, and June 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)
|
|
June 30,
2019
|
|
December 31,
2018
|
|
June 30,
2018
|
|
Accounts receivable
|
|
$
|
890,330
|
|
|
$
|
967,817
|
|
|
$
|
1,076,152
|
|
|
Client payables
|
|
901,779
|
|
|
997,168
|
|
|
1,191,581
|
|
|
Net payable
|
|
$
|
(11,449
|
)
|
|
$
|
(29,351
|
)
|
|
$
|
(115,429
|
)
|
As of June 30, 2019, the net payable balance was
($11.4) million
, as compared to net payable balances of
($29.4) million
as of December 31, 2018 and
($115.4) million
as of June 30, 2018. As of June 30, 2019, Accounts Receivable includes
$91.1 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
$75.3 million
as of June 30, 2018. As of
June 30, 2019
,
December 31, 2018
, and
June 30, 2018
, Accounts Receivable (net) also included
$39.3 million
,
$39.6 million
, and
$26.9 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 Income Statements. As of
June 30, 2019
,
December 31, 2018
, and
June 30, 2018
, the contract cost balances recorded within Prepaid Expenses and Other Current Assets were
$11 million
,
$10.8 million
, and
$6.8 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
June 30, 2019
,
December 31, 2018
, and
June 30, 2018
, the net Notes Receivable balance of SFS was
$747.3 million
,
$694 million
, and
$480 million
, respectively. As of
June 30, 2019
,
December 31, 2018
, and
June 30, 2018
,
$39.9 million
,
$99.7 million
, and
$91.8 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
June 30, 2019
,
December 31, 2018
, and
June 30, 2018
, the total net Notes Receivable balance of SFS included
$188.5 million
,
$126.2 million
, and
$28.4 million
, respectively, of term loans issued by SFS to refinance client auction and private sale purchases. For the
six months ended June 30, 2019 and 2018
, SFS issued
$68.6 million
and
$15.1 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
six months ended June 30, 2019 and 2018
, such repayments totaled
$6.3 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
June 30, 2019
,
December 31, 2018
, and
June 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
June 30,
2018
|
|
Secured loans
|
|
$
|
747,312
|
|
|
$
|
693,977
|
|
|
$
|
479,972
|
|
|
Low auction estimate of collateral
|
|
$
|
1,633,504
|
|
|
$
|
1,629,270
|
|
|
$
|
1,159,693
|
|
|
Aggregate LTV ratio
|
|
46
|
%
|
|
43
|
%
|
|
41
|
%
|
The table below provides the aggregate LTV ratio for secured loans made by SFS with an LTV ratio above
50%
as of
June 30, 2019
,
December 31, 2018
, and
June 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
June 30,
2018
|
|
Secured loans with an LTV ratio above 50%
|
|
$
|
266,931
|
|
|
$
|
264,916
|
|
|
$
|
105,744
|
|
|
Low auction estimate of collateral related to secured loans with an LTV ratio above 50%
|
|
$
|
479,638
|
|
|
$
|
476,157
|
|
|
$
|
182,398
|
|
|
Aggregate LTV ratio of secured loans with an LTV ratio above 50%
|
|
56
|
%
|
|
56
|
%
|
|
58
|
%
|
The table below provides other credit quality information regarding secured loans made by SFS as of
June 30, 2019
,
December 31, 2018
, and
June 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
June 30,
2018
|
|
Total secured loans
|
|
$
|
747,312
|
|
|
$
|
693,977
|
|
|
$
|
479,972
|
|
|
Loans past due
|
|
$
|
42,424
|
|
|
$
|
14,405
|
|
|
$
|
62,310
|
|
|
Loans more than 90 days past due
|
|
$
|
14,561
|
|
|
$
|
8,911
|
|
|
$
|
41,819
|
|
|
Non-accrual loans
|
|
$
|
—
|
|
|
$
|
3,854
|
|
|
$
|
15,402
|
|
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses for impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Allowance for credit losses based on historical data
|
|
1,271
|
|
|
1,075
|
|
|
1,132
|
|
|
Total allowance for credit losses - secured loans
|
|
$
|
1,271
|
|
|
$
|
1,075
|
|
|
$
|
1,132
|
|
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
June 30, 2019
,
$42.4 million
of the net Notes Receivable balance was past due, of which
$14.6 million
was more than
90
days past due. We are continuing to accrue interest on all past due loans and, as of
June 30, 2019
, the collateral securing such loans had a low auction estimate of approximately
$83.6 million
, resulting in a weighted average LTV ratio of approximately
51%
. In consideration of expected loan renewals, 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
June 30, 2019
,
December 31, 2018
, and
June 30, 2018
, there were
no
impaired loans outstanding.
As of
June 30, 2019
, unfunded commitments to extend additional credit through SFS were approximately
$65.8 million
.
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
June 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. As of
June 30, 2019
,
December 31, 2018
and June 30, 2018 loans of this type had a balance of
$2.1 million
,
$3.1 million
, and
$2.1 million
respectively.
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
$3.2 million
as of
December 31, 2018
. There were
no
Agency segment consignor advances outstanding as of
June 30, 2019
and
June 30, 2018
.
Allowance for Credit Losses
—During the period January 1,
2019
to
June 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
|
196
|
|
|
—
|
|
|
196
|
|
|
Balance as of June 30, 2019
|
$
|
1,271
|
|
|
$
|
1,525
|
|
|
$
|
2,796
|
|
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 Income Statements 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 Income Statements 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 Income Statements within General and Administrative Expenses for the three and six months ended
June 30, 2019
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
2019
|
|
Operating lease cost
|
|
$
|
4,869
|
|
|
$
|
9,730
|
|
|
Variable lease cost
|
|
671
|
|
|
1,428
|
|
|
Sublease income
|
|
(377
|
)
|
|
(856
|
)
|
|
Total lease cost
|
|
$
|
5,163
|
|
|
$
|
10,302
|
|
The following table summarizes information about the amount and timing of our future operating lease commitments as of
June 30, 2019
(in thousands):
|
|
|
|
|
|
|
|
|
2019 (remaining)
|
|
$
|
9,978
|
|
|
2020
|
|
18,638
|
|
|
2021
|
|
14,622
|
|
|
2022
|
|
12,027
|
|
|
2023
|
|
8,899
|
|
|
Thereafter
|
|
31,720
|
|
|
Total undiscounted operating lease payments
|
|
$
|
95,884
|
|
|
Less: Imputed interest
|
|
(16,740
|
)
|
|
Present value of operating lease liabilities
|
|
$
|
79,144
|
|
As of
June 30, 2019
, the weighted-average remaining lease term for our operating leases is
7.43
years, and the weighted average discount rate used to measure our operating lease liabilities is
4.70%
.
For the six months ended
June 30, 2019
, operating lease liabilities arising from obtaining right-of-use assets totaled
$8.7 million
. For the six months ended
June 30, 2019
, cash payments made in respect of our lease liabilities totaled
$9.4 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 June 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2018 to June 2019
|
|
July 2019 to June 2020
|
|
July 2020 to June 2021
|
|
July 2021 to June 2022
|
|
July 2022 to June 2023
|
|
Thereafter
|
|
Total (a)
|
|
$
|
19,311
|
|
|
$
|
16,802
|
|
|
$
|
14,384
|
|
|
$
|
11,522
|
|
|
$
|
9,652
|
|
|
$
|
30,121
|
|
|
$
|
101,792
|
|
|
|
|
|
(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.
|
7
.
Goodwill and Intangible Assets
Goodwill
—For the
six months ended June 30, 2019 and 2018
, changes in the carrying value of Goodwill were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 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
|
|
(33
|
)
|
|
—
|
|
|
(33
|
)
|
|
(136
|
)
|
|
—
|
|
|
(136
|
)
|
|
Ending balance as of June 30
|
|
$
|
49,389
|
|
|
$
|
6,151
|
|
|
$
|
55,540
|
|
|
$
|
49,519
|
|
|
$
|
6,151
|
|
|
$
|
55,670
|
|
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
June 30, 2019
,
December 31, 2018
, and
June 30, 2018
, intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization Period
|
|
June 30,
2019
|
|
December 31, 2018
|
|
June 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
|
|
|
1,200
|
|
|
Technology
|
|
4 years
|
|
4,461
|
|
|
4,461
|
|
|
4,461
|
|
|
Total intangible assets subject to amortization
|
|
|
|
19,596
|
|
|
19,596
|
|
|
19,521
|
|
|
Accumulated amortization
|
|
|
|
(8,566
|
)
|
|
(6,927
|
)
|
|
(5,232
|
)
|
|
Total amortizable intangible assets (net)
|
|
|
|
11,030
|
|
|
12,669
|
|
|
14,289
|
|
|
Total intangible assets (net)
|
|
|
|
$
|
11,354
|
|
|
$
|
12,993
|
|
|
$
|
14,613
|
|
|
|
|
|
(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 six months ended June 30, 2019, amortization expense related to intangible assets was approximately
$0.8 million
and
$1.6 million
, respectively. For the three and six months ended June 30, 2018, amortization expense related to intangible assets was approximately
$0.7 million
and
$1.3 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
June 30, 2019
balance sheet date are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Period
|
|
Amount
|
|
July 2019 to June 2020
|
|
$
|
3,186
|
|
|
July 2020 to June 2021
|
|
$
|
3,062
|
|
|
July 2021 to June 2022
|
|
$
|
2,302
|
|
|
July 2022 to June 2023
|
|
$
|
1,480
|
|
|
July 2023 to June 2024
|
|
$
|
805
|
|
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 six months ended June 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 Income Statements were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Interest cost
|
|
$
|
1,990
|
|
|
$
|
1,939
|
|
|
$
|
4,006
|
|
|
$
|
3,920
|
|
|
Expected return on plan assets
|
|
(2,640
|
)
|
|
(2,839
|
)
|
|
(5,315
|
)
|
|
(5,741
|
)
|
|
Amortization of actuarial loss
|
|
—
|
|
|
122
|
|
|
—
|
|
|
247
|
|
|
Amortization of prior service cost
|
|
(16
|
)
|
|
(26
|
)
|
|
(32
|
)
|
|
(52
|
)
|
|
Net pension credit
|
|
$
|
(666
|
)
|
|
$
|
(804
|
)
|
|
$
|
(1,341
|
)
|
|
$
|
(1,626
|
)
|
9
.
Debt
Revolving Credit Faciliti
es
—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"). The Previous Credit Agreements were scheduled to mature on August 22, 2020.
On June 26, 2018, we refinanced the Previous Credit Agreements and entered into a new credit agreement with an international syndicate of lenders led by JPMorgan Chase Bank, N.A. (the “New Credit Agreement”). The proceeds under the New Credit Agreement may be used for our working capital needs and other general corporate purposes, and borrowings thereunder are available in U.S. Dollars, Pounds Sterling, Euros, Swiss Francs, and Hong Kong Dollars. The New Credit Agreement reduced the interest rate margins for borrowings when compared to those under the Previous Credit Agreements by
25 basis points
. Such interest rate margins are determined by reference to a pricing grid that is based on the level of borrowings outstanding under the New Credit Agreement. The New Credit Agreement is scheduled to mature on June 26, 2023.
The New 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
, which is subject to an enhanced borrowing base. The New Credit Agreement has a sub-limit of
$350 million
for foreign currency borrowings, as well as an accordion feature, which allows us to seek an increase to the borrowing capacity of the New Credit Agreement by an amount not to exceed
$300 million
in the aggregate. Though new commitments would need to be obtained, the uncommitted accordion feature permits us to seek an increase to the aggregate borrowing capacity under the New Credit Agreement pursuant to an expedited documentation process.
The borrowing base under the New Credit Agreement is determined by a calculation that is based upon, among other things, a percentage of: (i) eligible cash; (ii) the carrying value of certain auction guarantee advances; (iii) the carrying value of certain art inventory; (iv) the carrying value of certain extended payment term receivables arising from auction or private sale transactions; (v) the carrying value of certain loans in the SFS loan portfolio; (vi) the fair market value of certain eligible real property located in the U.K., subject to a cap; and (vii) the net orderly liquidation value of certain of our trademarks, subject to a cap.
Domestic borrowers are jointly and severally liable for all obligations under the New Credit Agreement and, subject to certain limitations, borrowers in the U.K. and Sotheby's Hong Kong Limited, are jointly and severally liable for all obligations of the foreign borrowers under the New Credit Agreement. In addition, the obligations of the borrowers under the New Credit Agreement are guaranteed by certain of their subsidiaries. Our obligations under the New Credit Agreement are secured by liens on all or substantially all of the personal property of the entities that are borrowers and guarantors under the New Credit Agreement.
The New Credit Agreement contains certain customary affirmative and negative covenants including, but not limited to, limitations on indebtedness, liens, investments, restricted payments, and the use of proceeds from borrowings thereunder. The New Credit Agreement also contains a limitation on net outstanding auction guarantees (i.e., auction guarantees less the impact of related risk sharing arrangements).
Subject to maintaining a minimum level of available borrowing capacity, the New Credit Agreement permits dividend payments, common stock repurchases, investments, and certain debt prepayments, so long as no event of default exists. The New Credit Agreement also contains certain financial covenants, which are only applicable during certain defined compliance periods. These financial covenants were not applicable for the twelve month period ended
June 30, 2019
.
(See Note 22 for information regarding the pending Merger of Sotheby's with Bidfair USA LLC and BidFair MergeRight Inc., as well as the potential impact of the pending Merger on the
New Credit Agreement
.)
We have incurred aggregate fees of approximately
$4.4 million
related to the New Credit Agreement, which are being amortized on a straight-line basis through its
June 26, 2023
maturity date.
The following tables summarize information related to our revolving credit facilities as of and for the periods ended
June 30, 2019
,
December 31, 2018
, and
June 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the periods ended
|
|
June 30, 2019
|
|
December 31, 2018
|
|
June 30, 2018
|
|
Maximum borrowing capacity
|
|
$
|
1,100,000
|
|
|
$
|
1,100,000
|
|
|
$
|
1,100,000
|
|
|
Borrowing base
|
|
$
|
907,133
|
|
|
$
|
857,773
|
|
|
$
|
655,198
|
|
|
Borrowings outstanding
|
|
$
|
320,000
|
|
|
$
|
280,000
|
|
|
$
|
63,000
|
|
|
Available borrowing capacity (a)
|
|
$
|
587,133
|
|
|
$
|
577,773
|
|
|
$
|
592,198
|
|
|
Average Borrowings Outstanding:
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
$
|
325,055
|
|
|
N/A
|
|
|
$
|
63,637
|
|
|
Six months ended June 30,
|
|
$
|
338,857
|
|
|
N/A
|
|
|
$
|
105,823
|
|
|
Year ended December 31,
|
|
N/A
|
|
|
$
|
106,181
|
|
|
N/A
|
|
|
|
|
|
(a)
|
The available borrowing capacity is calculated as the borrowing base less borrowings outstanding.
|
Borrowing costs under the Previous Credit Agreements related to the Agency segment are reflected in our Condensed Consolidated Income Statements as Interest Expense. Borrowing costs under the Previous Credit Agreements related to SFS are reflected in our Condensed Consolidated Income Statements within Cost of Finance Revenues as any borrowings thereunder were used to directly fund client loans. Subsequent to the change in our cash management strategy (as discussed in
Note 3
), the refinancing of the Previous Credit Agreements, and the resulting elimination of the SFS Credit Facility on June 26, 2018, the SFS loan portfolio is no longer being directly funded with revolving credit facility borrowings. Accordingly, all borrowing costs associated with the New Credit Agreement are recorded as Interest Expense in our Condensed Consolidated Income Statements.
Long-Term Debt
—As of
June 30, 2019
,
December 31, 2018
, and
June 30, 2018
, Long-Term Debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
June 30,
2018
|
|
York Property Mortgage, net of unamortized debt issuance costs of $3,051, $3,559, and $4,039
|
|
$
|
253,638
|
|
|
$
|
257,284
|
|
|
$
|
267,082
|
|
|
2025 Senior Notes, net of unamortized debt issuance costs of $4,540, $4,894, and $5,248
|
|
395,460
|
|
|
395,106
|
|
|
394,752
|
|
|
Less current portion:
|
|
|
|
|
|
|
|
York Property Mortgage, net of unamortized debt issuance costs of $1,017, $1,010, and $1,010
|
|
(9,409
|
)
|
|
(13,604
|
)
|
|
(13,423
|
)
|
|
Total Long-Term Debt, net
|
|
$
|
639,689
|
|
|
$
|
638,786
|
|
|
$
|
648,411
|
|
See the captioned sections below for information related to the York Property Mortgage and the 2025 Senior Notes.
York Property Mortgage
—The York Property, our headquarters building located at 1334 York Avenue in New York, is subject to a
seven
-year,
$325 million
mortgage loan (the "York Property Mortgage") that matures on July 1, 2022. As of
June 30, 2019
, the York Property Mortgage had an outstanding principal balance of
$256.7 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 bears interest based on the
one
-month LIBOR rate plus a spread of
2.25%
and is being amortized based on a
25
-year mortgage-style amortization schedule over its
seven
-year term. On June 21, 2017, the York Property Mortgage was amended (the "First Amendment") to reduce the minimum net worth that Sotheby's is required to maintain f
rom
$425 million
to
$325 million
in order to provide continued flexibility regarding potential future common stock repurchases. On October 18, 2018, the York Property Mortgage was further amended (the "Second Amendment") to modify the definition of net worth whereby the balance recorded within Treasury Stock Shares on our Condensed Consolidated Balance Sheets is added back to Total Equity for the purposes of calculating net worth. Although the minimum net worth required by the York Property Mortgage remains at
$325 million
, the change to the definition of net worth provides continued flexibility regarding potential future common stock repurchases. Sotheby’s net worth as of
June 30, 2019
, as calculated under the Second Amendment, is approximately
$1.3 billion
.
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. On July 2, 2018, a
$6.25 million
principal payment funded primarily from the restricted cash management account was made in accordance with the First Amendment. On July 1, 2019, a
$1.9 million
principal payment funded from the restricted cash management account was made in accordance with the First Amendment. (See
Note 10
for information related to the interest protection agreements that were entered into in connection with the York Property Mortgage.)
The York Property, the York Property Mortgage, and the related interest rate protection agreements are held by 1334 York, LLC (the "LLC"), a separate legal entity of Sotheby's that maintains its own books and records and whose results are ultimately consolidated into our Condensed Consolidated Financial Statements. The LLC is the sole owner and lessor of the York Property. The LLC presently leases the York Property to Sotheby's, Inc., which is also controlled by Sotheby's. The assets of the LLC are not available to satisfy the obligations of our other affiliates or any other entity.
The loan agreement governing the York Property Mortgage contains the following financial covenants, which are subject to additional terms and conditions as provided in the underlying loan agreement:
|
|
|
|
•
|
As measured on July 1, 2020, the LTV ratio (i.e., the principal balance of the York Property Mortgage divided by the appraised value of the York Property) may not exceed
65%
(the "Maximum LTV") based on the then-outstanding principal balance of the York Property Mortgage. If the LTV ratio exceeds the Maximum LTV, the LLC may, at its option, post cash or a letter of credit or pay down the York Property Mortgage without any prepayment penalty or premium, in an amount that will cause the LTV ratio not to exceed the Maximum LTV.
|
|
|
|
|
•
|
At all times during the term of the York Property Mortgage, the Debt Yield will not be less than
8.5%
(the "Minimum Debt Yield"). The Debt Yield is calculated by dividing the annual net operating income of the LLC, which primarily consists of lease income from Sotheby's, Inc. (calculated on a cash basis), by the outstanding principal balance of the York Property Mortgage. If the Debt Yield falls below the Minimum Debt Yield, the LLC has the option to post cash or a letter of credit or prepay the York Property Mortgage without any prepayment penalty or premium, in an amount that will cause the Debt Yield to exceed the Minimum Debt Yield.
|
|
|
|
|
•
|
If Sotheby's corporate credit rating from Standard & Poor’s Rating Services ("S&P") is downgraded to "BB-", the lender may require that the LLC establish cash management accounts (the "Cash Management Accounts") under the lender's control for potential monthly debt service, insurance, and tax payments. If the rating is downgraded to "B+" or "B", the lender may require the LLC to deposit a certain amount of debt service into the Cash Management Accounts (approximately
6
and
12
months of debt service, respectively). If the rating is downgraded to lower than "B", the LLC must make principal payments on the mortgage such that the LTV ratio does not exceed
65%
. On February 9, 2016, Sotheby's corporate credit rating from S&P was downgraded to "BB-" from "BB". As a result, a Cash Management Account was established under the control of the lender. The lender will retain any excess cash after monthly debt service, insurance, and taxes as security. As of
June 30, 2019
,
December 31, 2018
, and
June 30, 2018
, the Cash Management Account had a balance of
$1.6 million
,
$0.7 million
, and
$5.3 million
, respectively, which is reflected within Restricted Cash on our Condensed Consolidated Balance Sheets.
|
|
|
|
|
•
|
At all times during the term of the York Property Mortgage, we are required to maintain a minimum net worth as discussed above, subject to a cure period.
|
(See Note 22 for information regarding the pending Merger of Sotheby's with Bidfair USA LLC and BidFair MergeRight Inc., as well as the potential impact of the pending Merger on the York Property Mortgage.)
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 Senior Notes").
On December 12, 2017, we issued
$400 million
aggregate principal amount of
4.875%
Senior Notes due December 15, 2025 (the “2025 Senior Notes”). The net proceeds from the sale of the 2025 Senior 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 Senior Notes, which were redeemed using these funds on January 11, 2018. The
$312.3 million
r
edemption 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 Senior 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 Senior Notes is payable in cash semi-annually in arrears on June 15 and December 15 of each year, beginning June 15, 2018. The 2025 Senior Notes were offered only to qualified institutional buyers in accordance with Rule 144A and to non-U.S. Persons under Regulation S under the Securities Act of 1933, as amended (the "Securities Act"). Holders of the 2025 Senior Notes do not have registration rights, and the 2025 Senior Notes have not been and will not be registered under the Securities Act. The 2025 Senior Notes are guaranteed, jointly and severally, on a senior unsecured basis by certain of our existing and future domestic subsidiaries to the extent and on the same basis that such subsidiaries guarantee borrowings under the Credit Agreement.
The 2025 Senior 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 Senior Notes are redeemable, in whole or in part, at a redemption price equal to
100%
of the principal amount of the 2025 Senior 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). In addition, at any time prior to December 15, 2020, we may redeem up to
40%
of the aggregate principal amount of the 2025 Senior Notes with the net cash proceeds of certain equity offerings at the redemption price of
104.875%
plus accrued and unpaid interest.
If Sotheby's experiences a Change of Control (as defined in the underlying indenture), we must offer to repurchase all of the 2025 Senior Notes then outstanding at
101%
of the aggregate principal amount of the 2025 Senior Notes, plus accrued and unpaid interest. (See Note 22 for information regarding the pending Merger of Sotheby's with Bidfair USA LLC and BidFair MergeRight Inc., as well as the potential impact of the pending Merger on the 2025 Senior Notes.)
The underlying indenture for the 2025 Senior 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
June 30, 2019
, the
$400 million
principal amount of the 2025 Senior Notes had a fair value of approximately
$405.5 million
, reflecting a redemption price of
101.375%
, 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.
Future Payments Due Under Outstanding Debt
—The aggregate future principal and interest payments due under the New Credit Agreement, the York Property Mortgage, and the 2025 Senior Notes during the five-year period after
June 30, 2019
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Period
|
|
Amount
|
|
July 2019 to June 2020
|
|
$
|
41,350
|
|
|
July 2020 to June 2021
|
|
$
|
41,198
|
|
|
July 2021 to June 2022
|
|
$
|
41,098
|
|
|
July 2022 to June 2023
|
|
$
|
563,514
|
|
|
July 2023 to June 2024
|
|
$
|
19,500
|
|
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 the mortgage 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.
The table above does not reflect the required potential redemption of the 2025 Senior Notes, the potential required repayment of outstanding revolving credit facility borrowings under the New Credit Agreement, or the potential required repayment of the York Property Mortgage upon the change of control that would occur if the pending Merger discussed in Note 22 is consummated.
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
June 30, 2019
,
December 31, 2018
, and
June 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Liabilities
|
|
June 30, 2019
|
|
Balance Sheet Classification
|
|
Fair Value
|
|
Balance Sheet Classification
|
|
Fair Value
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate collar
|
|
N/A
|
|
$
|
—
|
|
|
Other Current Liabilities
|
|
$
|
629
|
|
|
Interest rate collar
|
|
N/A
|
|
—
|
|
|
Other Long-Term Liabilities
|
|
2,778
|
|
|
Total cash flow hedges
|
|
|
|
—
|
|
|
|
|
3,407
|
|
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Prepaid Expenses and Other Current Assets
|
|
1,235
|
|
|
N/A
|
|
—
|
|
|
Total
|
|
|
|
$
|
1,235
|
|
|
|
|
$
|
3,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
June 30, 2018
|
|
Balance Sheet Classification
|
|
Fair Value
|
|
Balance Sheet Classification
|
|
Fair Value
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
Prepaid Expenses and Other Current Assets
|
|
$
|
274
|
|
|
N/A
|
|
$
|
—
|
|
|
Interest rate collar
|
|
N/A
|
|
—
|
|
|
Other Current Liabilities
|
|
25
|
|
|
Interest rate collar
|
|
N/A
|
|
—
|
|
|
Other Long-Term Liabilities
|
|
207
|
|
|
Total cash flow hedges
|
|
|
|
274
|
|
|
|
|
232
|
|
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Prepaid Expenses and Other Current Assets
|
|
4,444
|
|
|
N/A
|
|
—
|
|
|
Total
|
|
|
|
$
|
4,718
|
|
|
|
|
$
|
232
|
|
During the six months ended June 30, 2019, we settled derivative financial instruments designated as net investment hedges with an aggregate notional value of
$22.9 million
and realized an aggregate gain of
$0.5 million
. During the six months ended June 30, 2018, we settled derivative financial instruments designated as net investment hedges with an aggregate notional value of
$97.9 million
and realized a net loss of
($5.9)
million.
The following table summarizes the effect of the derivative financial instruments designated as hedging instruments on our Condensed Consolidated Income Statements and Condensed Consolidated Statements of Comprehensive Income for the
three and six months ended June 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 Income
|
|
Amount Reclassified from Accumulated Other Comprehensive Loss into Net Income - Effective Portion
|
|
Three Months Ended June 30,
|
|
2019
|
|
2018
|
|
|
|
2019
|
|
2018
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
—
|
|
|
$
|
15
|
|
|
Interest Expense
|
|
$
|
—
|
|
|
$
|
(93
|
)
|
|
Interest rate collar
|
|
(1,428
|
)
|
|
207
|
|
|
Interest Expense
|
|
—
|
|
|
7
|
|
|
Total cash flow hedges
|
|
(1,428
|
)
|
|
222
|
|
|
|
|
—
|
|
|
(86
|
)
|
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
1,041
|
|
|
3,350
|
|
|
N/A
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
(387
|
)
|
|
$
|
3,572
|
|
|
|
|
$
|
—
|
|
|
$
|
(86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Gain Recognized in Other Comprehensive Loss - Effective Portion
|
|
Classification of (Loss) Gain Reclassified from Accumulated Other Comprehensive Loss into Net Income
|
|
Amount Reclassified from Accumulated Other Comprehensive Loss into Net Income - Effective Portion
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
|
|
2019
|
|
2018
|
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
—
|
|
|
$
|
95
|
|
|
Interest Expense
|
|
$
|
—
|
|
|
$
|
(145
|
)
|
|
Interest rate collar
|
|
(1,641
|
)
|
|
1,187
|
|
|
Interest Expense
|
|
—
|
|
|
169
|
|
|
Total cash flow hedges
|
|
(1,641
|
)
|
|
1,282
|
|
|
|
|
—
|
|
|
24
|
|
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
995
|
|
|
1,740
|
|
|
N/A
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
(646
|
)
|
|
$
|
3,022
|
|
|
|
|
$
|
—
|
|
|
$
|
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
—In connection with 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
. 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 fixes 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 will be between a floor of
4.167%
and a cap of
6%
for the remainder of its term. Beginning on the effective date of the Mortgage Collar through
June 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 relates to previously forecasted interest payments that are no longer probable of occurring following the June 2017 amendment to the York Property Mortgage.
As of
June 30, 2019
, the notional value of the Mortgage Collar was
$256.7 million
, which is equal to the principal balance of the York Property Mortgage on that date. For the remainder of its term, the Mortgage Collar will have a notional value that is no greater than the applicable forecasted principal balance of the York Property Mortgage.
The York Property, the York Property Mortgage, and the related interest rate protection agreement(s) are held by 1334 York, LLC, a separate legal entity of Sotheby's that maintains its own books and records and whose results are ultimately consolidated into our financial statements.
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 remains outstanding and is effective, any unrealized gains and losses related to changes in their fair value are recorded to Accumulated Other Comprehensive Loss on our Condensed Consolidated Balance Sheets and then to the extent that there are any hedge settlements, the after-tax amount of any such settlement is reclassified to Interest Expense in our Condensed Consolidated Income Statements in the same period that interest expense related to the underlying debt instruments is recorded. Any hedge ineffectiveness is immediately recognized in Net Income. In addition, if any of the forecasted transactions associated with the Cash Flow Hedges are no longer probable of occurring, any related amounts previously recorded in Accumulated Other Comprehensive Loss on our Condensed Consolidated Balance Sheets would be immediately reclassified into Net Income.
Management performs a quarterly assessment to determine whether the Mortgage Collar, as amended, continues to be highly effective in hedging the risk associated with the variability in expected cash outflows related to the one-month LIBOR-indexed interest payments on the York Property Mortgage. As of
June 30, 2019
, the Mortgage Collar, as amended, is 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
June 30, 2019
, the aggregate notional value of our outstanding net investment hedge contracts was
$36.7 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 Income Statements 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 June 30, 2019, December 31, 2018, and June 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
June 30, 2018
|
|
Fair value of forward exchange contracts recorded within Prepaid Expenses and Other Current Assets
|
|
$
|
77
|
|
|
$
|
351
|
|
|
$
|
3,712
|
|
|
Fair value of forward exchange contracts recorded within Accounts Payable and Accrued Liabilities
|
|
$
|
115
|
|
|
$
|
125
|
|
|
$
|
2
|
|
As of
June 30, 2019
, the notional value of outstanding forward exchange contracts not designated as hedging instruments was
$324 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
June 30, 2019
,
December 31, 2018
, and
June 30, 2018
, Prepaid Expenses and Other Current Assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
June 30,
2018
|
|
Prepaid expenses
|
|
$
|
25,440
|
|
|
$
|
25,672
|
|
|
$
|
25,586
|
|
|
Derivative financial instruments (see Note 10)
|
|
1,235
|
|
|
462
|
|
|
274
|
|
|
Insurance recoveries
|
|
4,147
|
|
|
4,353
|
|
|
2,335
|
|
|
Other
|
|
10,457
|
|
|
8,144
|
|
|
15,067
|
|
|
Total Prepaid Expenses and Other Current Assets
|
|
$
|
41,279
|
|
|
$
|
38,631
|
|
|
$
|
43,262
|
|
As of
June 30, 2019
,
December 31, 2018
, and
June 30, 2018
, Other Long-Term Assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
June 30,
2018
|
|
Defined benefit pension plan asset
|
|
$
|
103,931
|
|
|
$
|
103,539
|
|
|
$
|
107,647
|
|
|
Equity method investments (a)
|
|
47,897
|
|
|
47,507
|
|
|
46,789
|
|
|
Trust assets related to deferred compensation liability
|
|
33,457
|
|
|
28,517
|
|
|
30,017
|
|
|
Restricted cash (see Note 12)
|
|
16,654
|
|
|
16,819
|
|
|
17,442
|
|
|
Insurance recoveries
|
|
13,205
|
|
|
13,882
|
|
|
12,782
|
|
|
Other
|
|
17,265
|
|
|
16,396
|
|
|
15,136
|
|
|
Total Other Long-Term Assets
|
|
$
|
232,409
|
|
|
$
|
226,660
|
|
|
$
|
229,813
|
|
|
|
|
|
(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
June 30, 2019
,
December 31, 2018
, and
June 30, 2018
, Other Long-Term Liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
June 30,
2018
|
|
Deferred compensation liability
|
|
$
|
32,894
|
|
|
$
|
28,255
|
|
|
$
|
29,605
|
|
|
Acquisition earn-out consideration
|
|
—
|
|
|
8,750
|
|
|
8,750
|
|
|
Interest rate collar liability (see Note 10)
|
|
2,778
|
|
|
1,185
|
|
|
207
|
|
|
Other
|
|
4,117
|
|
|
7,327
|
|
|
7,609
|
|
|
Total Other Long-Term Liabilities
|
|
$
|
39,789
|
|
|
$
|
45,517
|
|
|
$
|
46,171
|
|
12
.
Supplemental Condensed Consolidated Cash Flow Information
Cash, Cash Equivalents, and Restricted Cash
—As of
June 30, 2019
,
December 31, 2018
, and
June 30, 2018
, cash, cash equivalents, and restricted cash consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
June 30,
2018
|
|
Cash and cash equivalents
|
|
$
|
132,137
|
|
|
$
|
178,579
|
|
|
$
|
432,357
|
|
|
Restricted cash, recorded within current assets:
|
|
|
|
|
|
|
|
Consignor funds held in legally segregated accounts
|
|
36,187
|
|
|
3,938
|
|
|
23,528
|
|
|
Cash Management Account related to the York Property Mortgage (see Note 9)
|
|
1,648
|
|
|
716
|
|
|
5,264
|
|
|
Other
|
|
181
|
|
|
182
|
|
|
187
|
|
|
Restricted cash, recorded within current assets
|
|
38,016
|
|
|
4,836
|
|
|
28,979
|
|
|
Restricted cash, recorded within other long-term assets (a)
|
|
16,654
|
|
|
16,819
|
|
|
17,442
|
|
|
Total restricted cash
|
|
54,670
|
|
|
21,655
|
|
|
46,421
|
|
|
Cash, cash equivalents, and restricted cash
|
|
$
|
186,807
|
|
|
$
|
200,234
|
|
|
$
|
478,778
|
|
|
|
|
|
(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
six months ended June 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
Increase in:
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
$
|
(3,435
|
)
|
|
$
|
(8,233
|
)
|
|
Other long-term assets
|
|
(4,839
|
)
|
|
(3,611
|
)
|
|
Income tax receivables and deferred income tax assets
|
|
(17,022
|
)
|
|
(9,782
|
)
|
|
(Decrease)/increase in:
|
|
|
|
|
|
Accounts payable and accrued liabilities and other liabilities
|
|
(33,110
|
)
|
|
(23,870
|
)
|
|
Accrued income taxes and deferred income tax liabilities
|
|
21,306
|
|
|
4,126
|
|
|
Total changes in other operating assets and liabilities
|
|
$
|
(37,100
|
)
|
|
$
|
(41,370
|
)
|
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 six months of 2018, we repurchased
1,192,604
shares of our common stock for an aggregate purchase price of
$62.5 million
, resulting in an average price of
$52.40
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 six months ended June 30, 2019 and 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Currency Translation Adjustments
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(82,722
|
)
|
|
$
|
(67,280
|
)
|
|
$
|
(84,051
|
)
|
|
$
|
(74,505
|
)
|
|
Other comprehensive loss before reclassifications, net of tax of $0, $0, $0, and $400
|
|
(1,972
|
)
|
|
(14,238
|
)
|
|
(643
|
)
|
|
(7,013
|
)
|
|
Other comprehensive loss
|
|
(1,972
|
)
|
|
(14,238
|
)
|
|
(643
|
)
|
|
(7,013
|
)
|
|
Balance at end of period
|
|
(84,694
|
)
|
|
(81,518
|
)
|
|
(84,694
|
)
|
|
(81,518
|
)
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
(843
|
)
|
|
141
|
|
|
(630
|
)
|
|
(1,029
|
)
|
|
Other comprehensive (loss) income before reclassifications, net of tax of ($471), $73, ($541), and $423
|
|
(1,428
|
)
|
|
222
|
|
|
(1,641
|
)
|
|
1,282
|
|
|
Reclassifications from accumulated other comprehensive loss, net of tax of $0, ($28), $0, and $8
|
|
—
|
|
|
(86
|
)
|
|
—
|
|
|
24
|
|
|
Other comprehensive (loss) income
|
|
(1,428
|
)
|
|
136
|
|
|
(1,641
|
)
|
|
1,306
|
|
|
Balance at end of period
|
|
(2,271
|
)
|
|
277
|
|
|
(2,271
|
)
|
|
277
|
|
|
Net Investment Hedges
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
15,281
|
|
|
11,949
|
|
|
15,327
|
|
|
13,559
|
|
|
Other comprehensive income before reclassifications, net of tax of $341, $1,094, $329, and $569
|
|
1,041
|
|
|
3,350
|
|
|
995
|
|
|
1,740
|
|
|
Other comprehensive income
|
|
1,041
|
|
|
3,350
|
|
|
995
|
|
|
1,740
|
|
|
Balance at end of period
|
|
16,322
|
|
|
15,299
|
|
|
16,322
|
|
|
15,299
|
|
|
Defined Benefit Pension Plan
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
(2,785
|
)
|
|
(434
|
)
|
|
(2,690
|
)
|
|
(491
|
)
|
|
Currency translation adjustments
|
|
106
|
|
|
32
|
|
|
24
|
|
|
7
|
|
|
Other comprehensive income before reclassifications
|
|
106
|
|
|
32
|
|
|
24
|
|
|
7
|
|
|
Prior service cost amortization, net of tax of ($3), ($4), ($6), and ($8)
|
|
(13
|
)
|
|
(21
|
)
|
|
(26
|
)
|
|
(43
|
)
|
|
Actuarial loss amortization, net of tax of $0, $19, $0, and $40
|
|
—
|
|
|
102
|
|
|
—
|
|
|
206
|
|
|
Reclassifications from accumulated other comprehensive loss, net of tax
|
|
(13
|
)
|
|
81
|
|
|
(26
|
)
|
|
163
|
|
|
Other comprehensive income (loss)
|
|
93
|
|
|
113
|
|
|
(2
|
)
|
|
170
|
|
|
Balance at end of period
|
|
(2,692
|
)
|
|
(321
|
)
|
|
(2,692
|
)
|
|
(321
|
)
|
|
Total other comprehensive loss attributable to Sotheby's
|
|
(2,266
|
)
|
|
(10,639
|
)
|
|
(1,291
|
)
|
|
(3,797
|
)
|
|
Accumulated other comprehensive loss as of June 30
|
|
$
|
(73,335
|
)
|
|
$
|
(66,263
|
)
|
|
$
|
(73,335
|
)
|
|
$
|
(66,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
Settlements
|
|
$
|
—
|
|
|
$
|
(114
|
)
|
|
$
|
—
|
|
|
$
|
32
|
|
|
Tax effect
|
|
—
|
|
|
28
|
|
|
—
|
|
|
(8
|
)
|
|
Reclassification adjustments, net of tax
|
|
—
|
|
|
(86
|
)
|
|
—
|
|
|
24
|
|
|
Defined Benefit Pension Plan
|
|
|
|
|
|
|
|
|
|
Prior service cost amortization
|
|
(16
|
)
|
|
(26
|
)
|
|
(32
|
)
|
|
(52
|
)
|
|
Actuarial loss amortization
|
|
—
|
|
|
122
|
|
|
—
|
|
|
247
|
|
|
Pre-tax total
|
|
(16
|
)
|
|
96
|
|
|
(32
|
)
|
|
195
|
|
|
Tax effect
|
|
3
|
|
|
(15
|
)
|
|
6
|
|
|
(32
|
)
|
|
Reclassification adjustments, net of tax
|
|
(13
|
)
|
|
81
|
|
|
(26
|
)
|
|
163
|
|
|
Total reclassification adjustments, net of tax
|
|
$
|
(13
|
)
|
|
$
|
(5
|
)
|
|
$
|
(26
|
)
|
|
$
|
187
|
|
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
$18.7 million
as of
June 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.
Litigation Related to Pending Merger
—Following the announcement on June 17, 2019 of the pending Merger (see Note 22), Sotheby's and members of its Board of Directors have been named in
three
putative class action complaints, Shiva Stein vs. Sotheby's, et al. and Eli D. Goffmna vs. Sotheby's, et al. filed in the U.S. District Court for the Southern District of New York, and a third putative class action complaint, Michael Kent vs. Sotheby's, et al. filed in the U.S. District Court for the District of Delaware, by alleged stockholders of Sotheby’s. The plaintiffs allege, among other things, that the preliminary proxy statement filed with the SEC by Sotheby's on July 12, 2019 in connection with the pending Merger misstates or omits material information regarding Sotheby's financial projections, the analyses performed by Sotheby's financial advisors, and the process leading up to the pending Merger, in violation of the federal securities laws.
Litigation such as this is routine in the United States following the announcement of a pending acquisition, and additional, duplicative actions may be filed in the future. We believe that any claim that the preliminary proxy statement is inaccurate or misleading in any way is without merit, and we will vigorously defend against any assertions in these or in any similar actions that may be filed against Sotheby's. Therefore, at this time, we do not believe the ultimate resolution of these lawsuits will have a material adverse effect on Sotheby's.
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 (“SAB 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 June 30, 2019, December 31, 2018, and June 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
$20.2 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.
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
June 30, 2019
, we had outstanding auction guarantees totaling
$68.7 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 third and fourth quarters of
2019
. Our financial exposure under these auction guarantees is reduced by
$59.1 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
June 30, 2019
, our net financial exposure related to the auction guarantees was
$9.6 million
.
We are obligated under the terms of certain auction guarantees to advance all or a portion of the guaranteed amount prior to auction. There were
no
auction guarantee advances outstanding as of June 30, 2019,
December 31, 2018
, and
June 30, 2018
. As of
June 30, 2019
,
December 31, 2018
, and
June 30, 2018
, the estimated fair value of our obligation to perform under our outstanding auction guarantees totaled
$1.9 million
,
$2.9 million
, and
$0.9 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.
As of
July 26, 2019
, we had outstanding auction guarantees totaling
$44.2 million
and, as of that date, our financial exposure was reduced by risk-sharing arrangements totaling
$32.9 million
. After taking into account these risk-sharing arrangements, as of
July 26, 2019
, our net financial exposure related to auction guarantees was
$11.4 million
. Each of the auction guarantees outstanding as of
July 26, 2019
has a minimum guaranteed price that is within or below the range of the pre-sale auction estimates for the underlying property. The majority of property related to these auction guarantees is being offered at auctions during the fourth quarter of 2019. As of
July 26, 2019
, we have
no
auction guarantee advances outstanding.
18
.
Share-Based Payments
Share-based payments made to employees include performance-based stock unit awards, market-based stock unit awards, restricted stock units, and restricted shares. Share-based payments are 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.
For the
three and six months ended June 30, 2019 and 2018
, compensation expense related to share-based payments was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Amortization of share-based payments
|
|
$
|
7,269
|
|
|
$
|
6,312
|
|
|
$
|
14,867
|
|
|
$
|
14,689
|
|
|
Accelerated expense attributable to contractual severance agreement
|
|
1,050
|
|
—
|
|
|
1,050
|
|
|
—
|
|
|
Total share-based payment expense (pre-tax)
|
|
$
|
8,319
|
|
|
$
|
6,312
|
|
|
$
|
15,917
|
|
|
$
|
14,689
|
|
|
Total share-based payment expense (after-tax)
|
|
$
|
6,386
|
|
|
$
|
5,087
|
|
|
$
|
12,214
|
|
|
$
|
11,726
|
|
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 will 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 anticipation of the pending Merger (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 six months ended June 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 six months ended June 30, 2019 and 2018, we recog
nized
$1.5 million
and
$1.2 million
, respectively, in excess tax benefits related to share-based payments in our Condensed Consolidated Income Statements. 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
June 30, 2019
, unrecognized compensation expense related to the unvested portion of share-based payments to employees was
$37.6 million
. This compensation expense is expected to be amortized over a weighted-average period of approximately
2.2
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 by our Board of Directors 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 permits 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 will be granted under the Prior Plans after May 3, 2018. However, the terms and conditions of the Prior Plans and related award agreements will continue to apply to all awards granted prior to May 3, 2018 under the Prior Plans.
The Equity Plan is a fungible share plan. Each option or SAR granted under the Equity Plan will count 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, will count 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 are entitled to receive non-forfeitable dividend equivalents and dividends, respectively, at the same rate as dividends are paid on our common stock (if and when such dividends are paid). Prior to vesting, holders of RSU's issued under the Restricted Stock Unit Plan do not have voting rights, while holders of restricted shares have voting rights. RSU's and restricted shares may not be sold, assigned, transferred, pledged or otherwise encumbered until they vest.
For RSU's and restricted shares issued after May 3, 2018 under the new Equity Plan, dividend equivalents will 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 will only be paid for RSU's and restricted shares that vest.
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 do not have voting rights and are not entitled to receive dividends or dividend equivalents. Dividend equivalents are generally credited to holders of PSU's at the same rate as dividends are paid on our common stock (if and when such dividends are paid), but are only paid for PSU's that vest and become shares of our common stock. PSU's may not be sold, assigned, transferred, pledged or otherwise encumbered until they vest.
For the
six months ended June 30, 2019
, the Compensation Committee 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
six months ended June 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
|
(744
|
)
|
|
$
|
30.35
|
|
|
Canceled
|
(200
|
)
|
|
$
|
32.38
|
|
|
Outstanding at June 30, 2019
|
1,688
|
|
|
$
|
44.56
|
|
As of
June 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
six months ended June 30, 2019 and 2018
was
$29.7 million
and
$26.8 million
, respectively, based on the closing stock price on the dates the shares vested.
Directors Stock Plan
—Common stock is issued quarterly under the Sotheby’s Stock Compensation Plan for Non-Employee Directors (as amended and restated, the “Directors Stock Plan”). Directors may elect to receive this compensation in the form of deferred stock units, which are credited in an amount that is equal to the number of shares of common stock the director otherwise would have received. The number of shares of common stock awarded is calculated using the closing price of the common stock on the New York Stock Exchange on the business day immediately prior to the quarterly grant date. Deferred stock units are held until a director’s termination of service, at which time the units are settled on a one-for-one basis in shares of our common stock on the first day of the calendar month following the date of termination. For the
three months ended June 30, 2019 and 2018
, we recognized
$0.4 million
and
$0.3 million
, respectively, within General and Administrative Expenses in our Condensed Consolidated Income Statements related to common stock shares awarded under the Directors Stock Plan. For the six months ended June 30, 2019 and 2018, such expense was
$0.7 million
and
$0.6 million
, respectively. As of
June 30, 2019
,
203,149
deferred stock units were outstanding under the Directors Stock Plan and
70,248
units were available for future issuance.
19
.
Earnings Per Share
Basic earnings per share
—Basic earnings per share attributable to Sotheby's common shareholders is computed under the two-class method using the weighted average number of common shares outstanding during the period. The two-class method requires that the amount of net income attributable to participating securities be deducted from consolidated net income in the computation of basic earnings per share. In periods with a net loss, the net loss attributable to participating securities is not deducted from consolidated net loss in the computation of basic loss per share as the impact would be anti-dilutive. Our participating securities include unvested restricted stock units and unvested restricted 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 earnings per share
—Diluted 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 Board of Directors. (See
Note 18
for information on our share-based payment programs.)
The table below summarizes the computation of basic and diluted earnings per share for the
three and six months ended June 30, 2019 and 2018
(in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
Basic
:
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Sotheby’s
|
|
$
|
57,006
|
|
|
$
|
57,282
|
|
|
$
|
49,935
|
|
|
$
|
50,760
|
|
|
|
Less: Net income attributable to participating securities
|
|
412
|
|
|
844
|
|
|
495
|
|
|
763
|
|
|
|
Net income attributable to Sotheby’s common shareholders
|
|
$
|
56,594
|
|
|
$
|
56,438
|
|
|
$
|
49,440
|
|
|
$
|
49,997
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
46,614
|
|
|
51,780
|
|
|
46,518
|
|
|
52,122
|
|
|
|
Basic earnings per share - Sotheby’s common shareholders
|
|
$
|
1.21
|
|
|
$
|
1.09
|
|
|
$
|
1.06
|
|
|
$
|
0.96
|
|
|
|
Diluted
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Sotheby’s
|
|
$
|
57,006
|
|
|
$
|
57,282
|
|
|
49,935
|
|
|
$
|
50,760
|
|
|
|
Less: Net income attributable to participating securities
|
|
412
|
|
|
844
|
|
|
495
|
|
|
763
|
|
|
|
Net income attributable to Sotheby’s common shareholders
|
|
$
|
56,594
|
|
|
$
|
56,438
|
|
|
$
|
49,440
|
|
|
$
|
49,997
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
46,614
|
|
|
51,780
|
|
|
46,518
|
|
|
52,122
|
|
|
|
Weighted average effect of dilutive potential common shares:
|
|
|
|
|
|
|
|
|
|
|
Performance share units
|
|
198
|
|
|
259
|
|
|
290
|
|
|
197
|
|
|
|
Deferred stock units
|
|
203
|
|
|
171
|
|
|
199
|
|
|
172
|
|
|
|
Restricted stock units
|
|
109
|
|
|
—
|
|
|
70
|
|
|
—
|
|
|
|
Weighted average dilutive potential common shares outstanding
|
|
510
|
|
|
430
|
|
|
559
|
|
|
369
|
|
|
|
Weighted average diluted shares outstanding
|
|
47,124
|
|
|
52,210
|
|
|
47,077
|
|
|
52,491
|
|
|
|
Diluted earnings per share - Sotheby’s common shareholders
|
|
$
|
1.20
|
|
|
$
|
1.08
|
|
|
$
|
1.05
|
|
|
$
|
0.95
|
|
For the three and six months ended June 30, 2019, approximately
0.6 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. For the three and six months ended June 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 and resulted in
$10.8 million
of Restructuring Charges in 2018, of which
$2.1 million
were recorded in the second quarter of 2018. The remaining restructuring liability of
$1.1 million
as of June 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 throughout 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 six months ended June 30, 2019, our Condensed Consolidated Income Statements include Agency Commissions and Fees of
$1.5 million
, respectively, attributable to transactions with related parties. For
the three and six months ended June 30, 2018, our Condensed Consolidated Income Statements include Agency Commissions and Fees of
$3.2 million
and
$3.4 million
, respectively, attributable to transactions with related parties.
For the six months ended June 30, 2018, our Condensed Consolidated Income Statements include Inventory Sales (and related cost of sales) of
$5.3 million
attributable to transactions with related parties.
As of June 30, 2018, Accounts Receivable included amounts due from related party purchasers of
$3.6 million
. As of December 31, 2018 and June 30, 2018, Client Payables included amounts owed to related party consignors totaling
$4.3 million
and
$0.4 million
, respectively. As of June 30, 2019,
no
such amounts were due from or owed to related parties.
22
.
Pending Merger
On June 16, 2019, Sotheby's entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among Sotheby's, Bidfair USA LLC, a Delaware limited liability company (“Parent”) and BidFair MergeRight Inc., a Delaware corporation and wholly-owned subsidiary of Parent (“Merger Sub”). Parent and Merger Sub are ultimately controlled by Patrick Drahi. Pursuant to the Merger Agreement, Merger Sub will be merged with and into Sotheby's (the “Merger”), with Sotheby's continuing as the surviving company in the Merger.
Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger, each share of common stock,
$0.01
par value, of Sotheby's issued and outstanding immediately prior to the effective time of the Merger (other than shares of common stock held in the treasury of Sotheby's or owned by any subsidiary of Sotheby's, Parent, Merger Sub, or any other subsidiary or affiliate of Parent and shares of common stock owned by stockholders of Sotheby's
who have neither voted in favor of the Merger nor consented thereto in writing and
properly exercised and perfected and not withdrawn a demand for appraisal rights under Delaware law) will be converted into the right to receive
$57.00
in cash, without interest (the "Merger Consideration").
The Merger Agreement contains customary “no-shop” restrictions on Sotheby's ability to solicit alternative transaction proposals from third parties and to provide non-public information to and engage in discussions or negotiations with third parties regarding alternative transaction proposals. Notwithstanding the limitations applicable under the “no-shop” restrictions, after the date of the Merger Agreement, and prior to obtaining the approval of the Merger Agreement by holders of a majority of Sotheby's outstanding common stock, Sotheby's may under certain circumstances provide non-public information to and participate in discussions or negotiations with third parties with respect to an unsolicited alternative transaction proposal that Sotheby's Board of Directors has determined would reasonably be expected to lead to a Superior Proposal (as defined in the Merger Agreement).
The consummation of the Merger is subject to various conditions, including, among others, customary conditions relating to (i) the adoption of the Merger Agreement by holders of a majority of Sotheby's outstanding common stock, (ii) certain non-U.S. regulatory approvals relating to competition matters, (iii) written determination from the Committee on Foreign Investment in the United States that there are no unresolved national security concerns with respect to the transactions contemplated by the Merger Agreement, (iv) the absence of a legal restraint or injunction that prohibits or enjoins the consummation of the Merger or any other transactions contemplated under the Merger Agreement, and (v) the absence of a Company Material Adverse Effect (as defined in the Merger Agreement). The obligation of each party to consummate the Merger is also conditioned on the accuracy of the other party’s representations and warranties (subject to certain materiality exceptions) and the other party’s compliance, in all material respects, with its covenants and agreements under the Merger Agreement. On July 10, 2019, the Federal Trade Commission (the “FTC”) granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act (“HSR Act”).
Parent and Merger Sub have secured committed financing, consisting of a combination of equity financing to be provided by NEXT ALT S.à r.l., an affiliate of Parent, and debt financing from BNP Paribas Securities Corp. and BNP Paribas, the aggregate proceeds of which Parent and Merger Sub have represented will be sufficient for Parent and Merger Sub to pay the aggregate Merger Consideration and other fees and expenses under the Merger Agreement. Parent and Merger Sub have agreed to use their respective commercially reasonable efforts to obtain the financing on the terms and conditions described in the debt commitment letter and the equity commitment letter, each entered into on June 16, 2019. In addition, an affiliate of Parent has provided Sotheby's with a guaranty in favor of Sotheby's, which guarantees the payment obligations of Parent’s affiliate under the equity commitment letter and certain payment obligations of Parent and Merger Sub under the Merger Agreement. The equity commitment letter provides that Sotheby's has the right to rely on and enforce certain terms of the agreement. The Merger Agreement does not contain a financing condition.
The Merger Agreement provides for certain customary termination rights of Sotheby's and Parent, including the right of either party to terminate the Merger Agreement if the Merger is not completed on or before December 13, 2019 (the “Outside Date”), provided that the Outside Date may, under certain circumstances, be extended up to an additional
90 days
by either party. Sotheby's may terminate the Merger Agreement, in certain circumstances, including to accept a Superior Proposal pursuant to terms set forth in the Merger Agreement. The Merger Agreement also provides that (1) Sotheby's will be required to pay Parent a termination fee of
$110.9 million
and/or reimburse Parent for up to
$4 million
of expenses in certain circumstances, including if Sotheby's terminates the Merger Agreement to accept a Superior Proposal and (2) Parent will be required to pay Sotheby's a termination fee of
$221.7 million
in certain other circumstances due to Parent’s inability to obtain the debt financing.
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 Preliminary Proxy Statement filed with the SEC on July 12, 2019.
Assuming timely receipt of required regulatory approvals and timely satisfaction of other closing conditions, including the approval by our shareholders of the merger proposal, we currently expect the closing of the Merger to occur during the fourth quarter of 2019.
If the Merger is consummated, within 30 days of the resulting change of control, we must commence and consummate an offer to purchase all of the outstanding 2025 Senior Notes at a purchase price equal to
101%
of their principal amount, plus any accrued interest. However, we shall not be required to make such an offer to purchase all of the outstanding 2025 Senior Notes if (i) a third party makes the offer to purchase the 2025 Senior Notes in the manner, at the times and otherwise in compliance with the requirements set forth in the indenture, and purchases all of the 2025 Senior Notes properly tendered and not withdrawn under the offer to purchase, or (ii) a notice of redemption has been given pursuant to the indenture and until there is a default in payment of the applicable redemption price. We or a third party may make such an offer to purchase the 2025 Senior Notes in advance of a change of control if a definitive agreement to effect the change of control is in place at the time such offer to purchase is made, and the offer to purchase is effected upon the consummation of the change of control, and such offer to purchase may be conditional on the change of control.
If consummated, the Merger will also be considered an event of default under the Change of Control provisions of the New Credit Agreement, upon which the respective lenders may accelerate the repayment of any outstanding borrowings and the New Credit Agreement commitments may be terminated. If such an acceleration of outstanding borrowings under the New Credit Agreement occurred, it would also be considered an event of default under the York Property Mortgage, upon which the lenders can accelerate the repayment of any outstanding borrowings. (See Note 9 for a discussion of our outstanding debt obligations.)
For the three and six months ended June 30, 2019, we incurred
$5.7 million
in financial advisory and legal fees related to the pending Merger, which are reflected in our Condensed Consolidated Income Statements within Merger-Related Expenses.
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 potential impact of adopting ASU 2016-13 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 potential impact of adopting ASU 2018-17 on our financial statements.