10-K 1 bid-12312014x10k.htm 10-K BID-12.31.2014-10K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
 
 
 
FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014.
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM          TO
COMMISSION FILE NUMBER 1-9750
___________________________________________________________________
(Exact name of registrant as specified in its charter)
__________________________________________________________________
Delaware
38-2478409
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1334 York Avenue
10021
New York, New York
(Zip Code)
(Address of principal executive offices)
 
 
 
 
 
(212) 606-7000
 
 
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 
 
 
 
 
 
Title of each class
 
 
Name of each exchange
on which registered
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock,
 
 
New York Stock Exchange
 
 
$0.01 Par Value
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None
 
 
 
 
 
 
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer þ Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes o No þ
As of June 30, 2014, the aggregate market value of the 61,655,954 shares of Common Stock held by non-affiliates of the registrant was $2,588,933,508 based upon the closing price ($41.99) on the New York Stock Exchange composite tape on such date for the Common Stock.
As of February 17, 2015, there were outstanding 68,992,620 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement for the 2015 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.
 




TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I

ITEM 1: DESCRIPTION OF BUSINESS
Overview
Sotheby’s (or, "the Company") is a global art business whose operations are organized under three segments: Agency, Principal, and Finance. The Agency segment earns commissions by matching buyers and sellers of authenticated fine art, decorative art, and jewelry (collectively, “art” or “works of art” or “artwork” or "property") through the auction or private sale process. The Principal segment earns revenues from the sale of artworks that have been purchased opportunistically by Sotheby’s. The Finance segment earns interest income through art-related financing activities by making loans to certain collectors and dealers that are secured by works of art.
Sotheby’s was initially incorporated in Michigan in August 1983. In October 1983, the Company acquired Sotheby Parke Bernet Group Limited, which was then a publicly held company listed on the International Stock Exchange of the United Kingdom and which, through its predecessors, had been engaged in the auction business since 1744. In 1988, Sotheby’s issued shares of common stock to the public. In June 2006, Sotheby’s reincorporated in the State of Delaware. Sotheby's common stock ("Common Stock") is listed on the New York Stock Exchange (the “NYSE”) and trades under the symbol “BID”. As successor to the business that began in 1744, Sotheby’s is the oldest company listed on the NYSE and is the only publicly traded investment opportunity in the art market.
Agency Segment
Description of Business
Through its Agency segment, Sotheby's accepts property on consignment, stimulates buyer interest through professional marketing techniques, and matches sellers (also known as consignors) to buyers through the auction or private sale process. Prior to offering a work of art for sale, Sotheby’s specialists perform significant due diligence activities to authenticate and determine the ownership history of the property being sold.
Following an auction or private sale, Sotheby's invoices the buyer for the purchase price of the property (including any commission owed by the buyer), collects payment from the buyer, and remits to the consignor the net sale proceeds after deducting its commissions, expenses and applicable taxes and royalties. Sotheby's auction commissions include those paid by the buyer ("buyer's premium") and those paid by the seller ("seller's commission") (collectively, "auction commission revenue"), both of which are calculated as a percentage of the hammer price of the property sold at auction. Sotheby's private sale commissions are stipulated in a legally binding agreement between Sotheby’s and the seller, which outlines the terms of the arrangement including the desired sale price and the amount or rate of commission to be earned. In certain situations, Sotheby’s may also execute a legally binding agreement with the buyer stipulating the terms of the private sale transaction. In 2014, 2013, and 2012, auction commission revenues accounted for approximately 81% of Sotheby's consolidated revenues. In 2014, 2013, and 2012, private sale commission revenues accounted for approximately 6%, 10%, and 10%, respectively, of Sotheby’s consolidated revenues.
Under Sotheby’s standard auction payment terms, payments from buyers are due no more than 30 days from the sale date and payments to consignors are due 35 days from the sale date. For private sales, payment from the buyer is typically due on the sale date, with the net sale proceeds being due to the consignor shortly thereafter. Extended payment terms are sometimes provided to a buyer and, for auctions, can vary considerably from selling season to selling season. Such 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. Any changes from the standard auction and private sale payment terms are subject to management approval under Sotheby's policy. When providing extended payment terms, Sotheby’s attempts to match the timing of cash receipt from the buyer with the timing of payment to the consignor, but is not always successful in doing so.
Under the standard terms and conditions of its auction and private sales, Sotheby’s is not obligated to pay the consignor for property that has not been paid for by the buyer. If a buyer defaults on payment, the sale may be cancelled, and the property will be returned to the consignor. Alternatively, the consignor may reoffer the property at a future Sotheby's auction or negotiate a private sale with Sotheby's acting as its agent. In certain instances and subject to management approval under Sotheby’s policy, the consignor may be paid the net sale proceeds before payment is collected from the buyer and/or the buyer may be allowed to take possession of the property before making payment. In situations when the buyer takes possession of the property before making payment, Sotheby’s is liable to the seller for the net sale proceeds whether or not the buyer makes payment.

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From time-to-time in the ordinary course of its business, Sotheby’s will guarantee to a consignor a minimum sale price in connection with the sale of property at auction (an “auction guarantee”). Sotheby’s is generally entitled to a share of the excess proceeds (the “overage”) if the property under the auction guarantee sells above the guaranteed price. In the event that the property sells for less than the guaranteed price, Sotheby’s must perform under the auction guarantee by funding the difference between the sale price at auction and the amount of the auction guarantee. If the property does not sell, the amount of the auction guarantee must be paid, but Sotheby’s has the right to recover such amount through the future sale of the property. In these situations, the property is recorded on Sotheby's balance sheet as inventory at the lower of cost (i.e., the amount paid under the auction guarantee) or management’s estimate of the property's net realizable value (i.e., the expected sale price upon disposition). The sale proceeds ultimately realized by Sotheby’s in these situations may equal, exceed or be less than the amount recorded as inventory.
Sotheby’s may reduce its financial exposure under auction guarantees through contractual risk and reward sharing arrangements. Such auction guarantee risk and reward sharing arrangements include irrevocable bids and partner sharing arrangements. An irrevocable bid is an arrangement under which a counterparty commits to bid a predetermined price on the guaranteed property. If the irrevocable bid is the winning bid, the counterparty purchases the property at the predetermined price plus the applicable buyer’s premium, which is the same amount that any other successful bidder would pay at that price. If the irrevocable bid is not the winning bid, the counterparty is generally entitled to receive a share of the auction commission earned on the sale and/or a share of any overage. In a partner sharing arrangement, a counterparty commits to fund: (i) a share of the difference between the sale price at auction and the amount of the auction guarantee if the property sells for less than the minimum guaranteed price or (ii) a share of the minimum guaranteed price if the property does not sell, while taking ownership of a proportionate share of the unsold property. In exchange for accepting a share of the financial exposure under the auction guarantee, the counterparty in a partner sharing arrangement is generally entitled to receive a share of the auction commission earned if the property sells and/or a share of any overage.
The counterparties to Sotheby's auction guarantee risk and reward sharing arrangements are typically major international art dealers or major art collectors. Sotheby’s could be exposed to losses in the event any of these counterparties do not perform according to the terms of these contractual arrangements.
Although irrevocable bid and partner sharing arrangements may be used to reduce the risk associated with auction guarantees, Sotheby's may also enter into auction guarantees without securing such arrangements. In these circumstances, Sotheby's could be exposed to auction guarantee losses and/or deterioration in auction commission margins if the underlying property fails to sell at the minimum guaranteed price. Furthermore, in such situations, Sotheby's liquidity could be reduced.
(See "Auction Commission Margin" under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for a complete discussion of the factors impacting auction commission margin. See Note 5 of Notes to Consolidated Financial Statements for additional information about auction and private sale receivables. See Note 18 of Notes to Consolidated Financial Statements for additional information about auction guarantees.)
The Art Market and Competition
The global art market is influenced over time by the overall strength and stability of the global economy, the financial markets of various countries, geopolitical conditions and world events, all of which may impact the willingness of potential buyers and sellers to purchase and sell art. In addition, the amount and quality of art consigned for sale is influenced by other factors not within Sotheby’s control, and many consignments often become available as a result of the death or financial or marital difficulties of the owner. These factors cause the supply and demand for works of art to be unpredictable and may lead to significant variability in Sotheby's revenues from period to period.
The sale of works of art in the global art market is primarily effected through the major auction houses, numerous art dealers, smaller auction houses, and also directly between collectors. Competition in the global art market is intense and a fundamental challenge facing any auctioneer or art dealer is to obtain high quality and valuable property for sale either as agent or as principal. Sotheby's primary competitor in the global art market is Christie’s International, PLC ("Christie's"), a privately held, French-owned, auction house. To a much lesser extent, Sotheby’s also faces competition from smaller auction houses such as Bonhams and Phillips, as well as regional auction houses and a variety of art dealers across all collecting categories. In the Chinese art market, Sotheby's also competes with Beijing Poly International Auction Co. Ltd., China Guardian Auctions Co. Ltd. and Beijing Hanhai Auction Co. Ltd.

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In 2014, 2013, and 2012, Sotheby’s and Christie's together totaled approximately $12.9 billion, $11.0 billion, and $9.7 billion, respectively, of Aggregate Auction Sales1, of which Sotheby's accounted for $6.1 billion (47%), $5.1 billion (47%), and $4.5 billion (46%), respectively.
It is not possible to measure with any particular accuracy the entire global art market or to reach any conclusions regarding overall competition because privately owned art dealers and auction houses frequently do not publicly report annual totals for auction sales, revenues, or profits, and the amounts reported may not be verifiable. However, Sotheby’s believes that art dealers account for the majority of the volume of transactions in the global art market.
The owner of a work of art wishing to sell has four principal options: (i) sale or consignment to an art dealer; (ii) sale or consignment to an auction house; (iii) private sale to a collector or museum without the use of an intermediary; or (iv) for certain categories of property (in particular, collectibles), consignment to an internet-based service. The more valuable the property, the more likely it is that the owner will consider more than one option and will solicit proposals from more than one potential purchaser or agent, particularly if the seller is a fiduciary representing an estate or trust.
A complex array of factors may influence the seller’s decision. These factors, which are not ranked in any particular order, include: (i) the level and breadth of expertise of the art dealer or auction house with respect to the property, (ii) the extent of the prior relationship, if any, between the art dealer or auction house and its staff and the seller, (iii) the reputation and historic level of achievement by the art dealer or auction house in attaining high sale prices in the property’s specialized category, (iv) the client’s desire for privacy, (v) the amount of cash offered by an art dealer, auction house or other purchaser to purchase the property outright, which is greatly influenced by the amount and cost of capital resources available to such parties, (vi) the availability and terms of financial inducements offered by auction houses including auction guarantees, short-term financing, and auction commission sharing arrangements, (vii) the level of pre-sale estimates, (viii) the desirability of a public auction in order to achieve the maximum possible price, a particular concern for a seller that is a fiduciary representing an estate or trust, (ix) the amount of commission charged by art dealers or auction houses to sell a work on consignment, (x) the cost, style, and extent of pre-sale marketing and promotion to be undertaken by an art dealer or auction house, (xi) the reputation of the art dealer or auction house and recommendations by third parties consulted by the seller, (xii) the desire of clients to conduct business with a publicly traded company, and (xiii) the availability and extent of related services, such as tax or insurance appraisals.
While financial inducements such as auction commission sharing arrangements and auction guarantees may lead to a higher level of auction consignments, they put pressure on auction commission margins, and auction guarantees introduce the possibility of incurring a loss on the transaction and reduced liquidity if the underlying property fails to sell at the minimum guaranteed price. To mitigate the pressure on auction commission margins, from time-to-time Sotheby’s adjusts its commission rate structures. In addition, as discussed above, Sotheby’s may reduce its financial exposure under auction guarantees through contractual risk and reward sharing arrangements.
Seasonality
The worldwide art auction market has two principal selling seasons, which generally occur in the second and fourth quarters of the year. In the aggregate, second and fourth quarter Net Auction Sales2 represented 79%, 83%, and 84% of total Net Auction Sales2 in 2014, 2013, and 2012, respectively, with auction commission revenues comprising approximately 81% of Sotheby's total revenues in these years. Accordingly, Sotheby's financial results are seasonal, with peak revenues and operating income generally occurring in the second and fourth quarters. Consequently, first and third quarter results have historically reflected lower revenues when compared to the second and fourth quarters and, typically, a net loss due to the fixed nature of many of Sotheby's operating expenses. Management believes that investors should focus on results for six and twelve month periods, which better reflect the business cycle of the art auction market (See Note 25 of Notes to Consolidated Financial Statements for Sotheby's quarterly results for the years ended December 31, 2014 and 2013.)




_______________________________________________________________________________
1 Aggregate Auction Sales represents the hammer of property sold at auction plus buyer's premium.
2 Net Auction Sales represents the hammer or sale price of property sold at auction.

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Regulation of the Art Market
Regulation of the art market varies from jurisdiction to jurisdiction. In many jurisdictions, Sotheby’s is subject to laws and regulations that are not directed solely toward the art market, including, but not limited to, import and export regulations, cultural property ownership laws, data protection and privacy laws, anti-money laundering laws, antitrust laws, copyright and resale royalty laws, laws and regulations involving sales, use, value-added and other indirect taxes, and regulations related to the use of real estate. In addition, Sotheby's is subject to local auction regulations, such as New York City Auction Regulations Subchapter M of Title 6 §§ 2-121-2-125, et. seq. Such regulations currently do not impose a material impediment to the worldwide business of Sotheby's, but do affect the art market generally. A material adverse change in such regulations, such as the American Royalties Too Act of 2014 introduced in the U.S. Congress, which would impose a 5% resale royalty (with a cap of $35,000) on sales of art through larger auction houses, could affect Sotheby's business. Additionally, export and import laws and cultural property ownership laws could affect the availability of certain kinds of property for sale at Sotheby's principal auction locations, increase the cost of moving property to such locations, or expose Sotheby's to legal claims or government inquiries. Sotheby’s has a Compliance Department which, amongst other activities, develops and updates compliance policies and audits, monitors, and provides training to its employees on compliance with many of these laws and regulations.
Principal Segment
Description of Business
The activities of the Principal segment include the sale of artworks that have been purchased opportunistically by Sotheby's, including property acquired for sale at auction in the near term in lieu of the Agency segment providing an auction guarantee to a potential consignor. To a lesser extent, the activities of the Principal segment also include retail wine sales and the activities of Acquavella Modern Art ("AMA"), an equity investee. Also, under certain circumstances, the Principal segment provides secured loans to certain art dealers to finance the purchase of works of art. In these situations, Sotheby's acquires a partial ownership interest in the purchased property in addition to providing the loan. Upon its eventual sale, the loan is repaid and any profit or loss is shared by Sotheby's and the art dealer according to their respective ownership interests.
The Principal segment also holds the remaining inventory of Noortman Master Paintings (or "NMP"), an art dealer that was owned and operated by Sotheby's from its acquisition in June 2006 until its closure in December 2013. As of December 31, 2014, the carrying value of NMP's remaining inventory was $6.1 million, representing a $5 million (45%) decrease when compared to December 31, 2013 principally as a result of sales completed during the period. Management is continuing to execute its plans for further sales of NMP’s remaining inventory.
(See Note 5 of Notes to Consolidated Financial Statements for information about Principal segment lending activities. See Note 6 of Notes to Consolidated Financial Statements for information about Principal segment inventory. See Note 7 of Notes to Consolidated Financial Statements for information about AMA.)
Principal Segment Market and Competition
The activities of the Principal segment are conducted in the same markets as the Agency segment and are impacted to varying degrees by many of the same competitive factors (as discussed above under “The Art Market and Competition”). The most prominent competitive factors impacting the Principal segment, which are not ranked in any particular order, include: (i)the ability to locate and purchase quality works of art for resale; (ii) the amount and cost of capital resources required to finance purchases of art; (iii) the level and breadth of expertise with respect to the works of art being purchased and sold; and (iv) the strength of relationships with various art market participants, which include art dealers and major art collectors.
Finance Segment
Description of Business
The Finance segment provides certain collectors and art dealers with financing secured by works of art that Sotheby's either has in its possession or permits borrowers to possess. The Finance segment generally makes two types of secured loans: (1) advances secured by consigned property where the borrowers are contractually committed, in the near term, to sell the property through the Agency segment of Sotheby's (a “consignor advance”); and (2) general purpose term loans secured by property not presently intended for sale (a “term loan”). (See Note 5 of Notes to Consolidated Financial Statements for additional information related to Finance segment loans.)
 

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A consignor advance allows a seller to receive funds upon consignment for an auction or private sale that will typically occur up to one year in the future. Consignor advances normally have short-term maturities. Term loans allow Sotheby's to establish or enhance mutually beneficial relationships with borrowers and may generate future auction or private sale consignments and/or purchases. In certain situations, term loans are also made to refinance accounts receivable generated by clients' auction and private sale purchases. Term loans normally have initial maturities of up to two years and typically carry a variable market rate of interest.
Prior to 2014, the lending activities of the Finance segment were funded primarily by the operating cash flows of the Agency segment, with the ability to supplement those cash flows with revolving credit facility borrowings. In January 2014, in order to reduce the Finance segment's cost of capital and enhance returns, Sotheby's established a separate capital structure for the Finance segment through which client loans are predominantly funded with borrowings drawn from a dedicated revolving credit facility. The establishment of the Finance segment's dedicated revolving credit facility in February 2014 has allowed management to debt fund a substantial portion of pre-existing loans and fund further growth of the loan portfolio. Cash balances are also used to fund a portion of the Finance segment loan portfolio, as appropriate.
The collection of secured loans can be adversely impacted by a decline in the art market in general or in the value of the particular collateral. In addition, in situations when there are competing claims on the collateral and/or when a borrower becomes subject to bankruptcy or insolvency laws, Sotheby’s ability to realize on its collateral may be limited or delayed.
Sotheby’s target loan-to-value (“LTV”) ratio, which is defined as the principal loan amount divided by the low auction estimate of the collateral, is 50% or lower. However, loans are also made at an initial LTV ratio higher than 50%. In addition, as a result of the periodic revaluation of loan collateral, the LTV ratio of certain loans may increase above the 50% target due to decreases in the low auction estimates of the collateral. The revaluation of loan collateral is performed by Sotheby’s specialists on an annual basis or more frequently if there is a material change in circumstances related to the loan, the value of the collateral, or the disposal plans for the collateral.
(See "Finance Segment," "Capital Allocation and Financial Policy Review," and “Liquidity and Capital Resources” under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for information on the financial performance and capital structure of the Finance segment. See Note 5 of Notes to Consolidated Financial Statements for information about Finance segment loans. See Note 9 of Notes to Consolidated Financial Statements for information about the Finance segment's dedicated revolving credit facility.)
Finance Segment Market and Competition
Sotheby’s Finance segment is uniquely positioned as a niche lender with the ability to tailor attractive financing packages for clients who wish to obtain immediate access to liquidity from their art assets. Through its Finance segment, Sotheby’s deploys its unique combination of art expertise, skills in international law and finance, and access to capital.
A considerable number of traditional lending sources offer conventional loans at a lower cost to borrowers than the average cost of loans offered by the Finance segment. Additionally, many traditional lenders offer borrowers a variety of integrated financial services such as wealth management, which are not offered by Sotheby’s. Few lenders, however, are willing to accept works of art as sole collateral as they do not possess the ability to both appraise and sell works of art within a vertically integrated organization. Sotheby’s believes that through a combination of its art expertise and skills in international law and finance, it has the ability to tailor attractive financing packages for clients who wish to obtain immediate access to liquidity from their art assets.
Brand Licensing Activities
Prior to 2004, Sotheby’s engaged in the marketing and brokerage of luxury residential real estate sales through Sotheby’s International Realty (“SIR”). In 2004, Sotheby’s sold SIR to a subsidiary of Realogy Corporation (“Realogy”), formerly Cendant Corporation. In conjunction with the sale, Sotheby’s entered into an agreement with Realogy to license the SIR trademark and certain related trademarks for an initial 50-year term with a 50-year renewal option (the “Realogy License Agreement”). The Realogy License Agreement is applicable worldwide.
The Realogy License Agreement provides for an ongoing license fee during its term based on the volume of commerce transacted under the licensed trademarks. In 2014, 2013, and 2012, Sotheby’s earned $7.2 million, $6 million, and $5 million, respectively, in license fee revenue related to the Realogy License Agreement.
The Sotheby’s name is also licensed for use in connection with the art auction business in Australia, art education services in the United States (the "U.S.") and the United Kingdom (the “U.K.”), and print management services. Management will consider additional opportunities to license the Sotheby’s brand in businesses where appropriate.


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Financial and Geographical Information about Segments
See Note 4 of Notes to Consolidated Financial Statements for financial and geographical information about Sotheby’s segments.
Employees
As of December 31, 2014, Sotheby’s had 1,550 employees, with 606 located in North America and South America, 502 in the U.K., 230 in Continental Europe, and 212 in Asia. Sotheby’s regards its relations with its employees as good. The table below provides a breakdown of Sotheby’s employees by segment as of December 31, 2014 and 2013.
December 31
 
2014
 
2013
Agency
 
1,341

 
1,371

Principal
 

 
3

Finance
 
8

 
7

All Other
 
201

 
196

Total
 
1,550

 
1,577

The three employees in the Principal segment as of December 31, 2013 relate to NMP and left employment on January 1, 2014 as a result of the closure of NMP's remaining office. Following the closure of NMP, the activities of the Principal segment are conducted solely by employees of the Agency segment. Employees classified within “All Other” principally relate to Sotheby’s central corporate and information technology departments.
Website Address
Sotheby’s makes available free of charge its annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K through a hyperlink from its website, http://investor.shareholder.com/bid/index.cfm, a website maintained by an unaffiliated third-party service. Such reports are made available on the same day that they are electronically filed with or furnished to the Securities and Exchange Commission (the "SEC"). Information available on the website is not incorporated by reference and is not deemed to be part of this Form 10-K.
ITEM 1A: RISK FACTORS
Sotheby's operating results and liquidity are significantly influenced by a number of risk factors, many of which are not within its control. These factors, which are not ranked in any particular order, are discussed below.
The global economy and the financial markets and political conditions of various countries may negatively affect Sotheby's business and clients, as well as the supply of and demand for works of art.
The international art market is influenced over time by the overall strength and stability of the global economy and the financial markets of various countries, although this correlation may not be immediately evident. In addition, global political conditions and world events may affect Sotheby's business through their effect on the economies of various countries, as well as on the willingness of potential buyers and sellers to purchase and sell art in the wake of economic uncertainty. Sotheby's business can be particularly influenced by the economies, financial markets and political conditions of the U.S., the U.K., China, and the other major countries or territories of Europe and Asia (including the Middle East). Accordingly, weakness in those economies and financial markets can adversely affect the supply of and demand for works of art and Sotheby's business. Furthermore, global political conditions may also influence the enactment of legislation that could adversely impact Sotheby's business.

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Government laws and regulations may restrict or limit Sotheby's business or impact the value of its real estate assets.
Many of Sotheby's activities are subject to laws and regulations including, but not limited to, import and export regulations, cultural property ownership laws, data protection and privacy laws, anti-money laundering laws, antitrust laws, copyright and resale royalty laws, laws and regulations involving sales, use, value-added and other indirect taxes, and regulations related to the use of real estate. In addition, Sotheby's is subject to local auction regulations, such as New York City Auction Regulations Subchapter M of Title 6 §§ 2-121-2-125, et. seq. Such regulations currently do not impose a material impediment to the worldwide business of Sotheby's, but do affect the art market generally. A material adverse change in such regulations, such as the American Royalties Too Act of 2014 introduced in the U.S. Congress, which would impose a 5% resale royalty (with a cap of $35,000) on sales of art through large auction houses, could affect Sotheby's business. Additionally, export and import laws and cultural property ownership laws could affect the availability of certain kinds of property for sale at Sotheby's principal auction locations, increase the cost of moving property to such locations, or expose Sotheby's to legal claims or government inquiries.
Foreign currency exchange rate movements can significantly impact Sotheby's results of operations and financial condition.
Sotheby's has operations throughout the world. Approximately 59% of Sotheby's total revenues were earned outside of the U.S. in 2014, including 29% of its total revenues earned in the U.K. Additionally, Sotheby's has significant assets and liabilities denominated in the Pound Sterling, the Euro, and the Swiss Franc. Revenues, expenses, gains, and losses recorded in foreign currencies are translated using the monthly average exchange rates prevailing during the period in which they are recognized. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Accordingly, fluctuations in foreign currency exchange rates, particularly for the Pound Sterling, the Euro, and the Swiss Franc can significantly impact Sotheby's results of operations and financial condition.
Competition in the international art market is intense and may adversely impact Sotheby's results of operations.
Sotheby's competes with other auctioneers and art dealers to obtain valuable consignments to offer for sale either at auction or through private sale. The level of competition is intense and can adversely impact Sotheby's ability to obtain valuable consignments for sale, as well as the commission margins achieved on such consignments.
Sotheby's cannot be assured of the amount and quality of property consigned for sale, which may cause significant variability in its financial results.
The amount and quality of property consigned for sale is influenced by a number of factors not within Sotheby's control. Many major consignments, and specifically single-owner sale consignments, often become available as a result of the death or financial or marital difficulties of the owner, all of which are unpredictable and may cause significant variability in Sotheby's financial results from period to period.
The demand for art is unpredictable, which may cause significant variability in Sotheby's results of operations.
The demand for art is influenced not only by overall economic conditions, but also by changing trends in the art market as to which collecting categories and artists are most sought after and by the collecting preferences of individual collectors, all of which are difficult to predict and which may adversely impact the ability of Sotheby's to obtain and sell consigned property, potentially causing significant variability in Sotheby's results from period to period.
The loss of key personnel could adversely impact Sotheby's ability to compete.
Sotheby's is largely a service business in which the ability of its employees to develop and maintain relationships with potential sellers and buyers of works of art is essential to its success. Moreover, Sotheby's business is unique, making it important to retain key specialists and members of management. Accordingly, Sotheby's business is highly dependent upon its success in attracting and retaining qualified personnel. Sotheby's is currently in a transition process involving certain key positions, including the Chief Executive Officer ("CEO").
The business plans and initiatives being implemented by Sotheby's may not succeed.
Sotheby's future operating results are dependent, in part, on management's success in implementing its business plans and initiatives, including the strategic partnership with eBay and the investment in RM Auctions, both as discussed below within Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." The inability of Sotheby's to successfully implement its business plans and initiatives could result in, among other things, the loss of clients, the impairment of assets, and inefficiencies from operating in new and emerging markets. Also, Sotheby's short-term operating results and liquidity could be unfavorably impacted by the implementation of its business plans and initiatives.

9



Sotheby's joint venture and wholly-owned subsidiary in China are foreign-invested enterprises under Chinese law. As such, enforcement of certain of Sotheby's rights within these entities are subject to approval from the Chinese government, which could limit the ability of the entities to operate and succeed.
Sotheby's operates an equity joint venture with Beijing GeHua Art Company in China and, in 2014, established a wholly-owned subsidiary in China after obtaining the license required to operate as a Foreign-Invested Commercial Enterprise. Because these entities are foreign-invested enterprises under Chinese law, enforcement of certain of Sotheby's rights within these entities is subject to approval from the Chinese government. For example, all changes in shareholding and constitution of the joint venture will be subject to approval by the Chinese government, including in the event Sotheby's is seeking to terminate the joint venture agreement, exercise its put option, or wind-up the joint venture. Accordingly, Sotheby's ability to successfully operate its businesses in China could be constrained by the Chinese government and other unforeseen circumstances.
Sotheby's capital allocation and financial policies may impact its liquidity, financial condition, market capitalization and business, and Sotheby's ongoing ability to return capital to its shareholders (and the size and timing of such return) is subject to ongoing business variables.
The actions taken by management based on its review of Sotheby's capital allocation and financial policies may impact its current and future liquidity, financial condition, market capitalization, and business. In addition, the amount and timing of any potential return of capital to shareholders depends on various factors, including the amount of excess cash generated by the business in the future, the ability to continue to debt finance the Finance segment loan portfolio, the business initiatives contemplated and implemented by management, and the amount of capital that may be required to support Sotheby’s future liquidity needs, among other factors. (See "Capital Allocation and Financial Policy Review" and “Liquidity and Capital Resources" within Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations.")
A breach of the security measures protecting Sotheby's global network of information systems and those of certain third-party service providers utilized by Sotheby's may occur.
Sotheby's is dependent on a global network of information systems to conduct its business and is committed to maintaining a strong infrastructure to secure these systems. As part of its information systems infrastructure, Sotheby's relies, to a certain extent, upon third-party service providers to perform services related to its live auction bidding platform BIDnowTM, retail wine e-commerce, video broadcasting, website content distribution, and SAP hosting. While these third-party service providers offer unique and specialized information security measures, certain elements of Sotheby's global information system security are outside management's direct control due to the use of these service providers. These third-party service providers are contractually obligated to host and maintain the service in a professional manner, in accordance with the rules and standards generally accepted within the industry. This includes conventional security measures such as firewall, password and encryption protection, breach notification requirements, and PCI practices for credit card processing services. A breach of the security measures protecting Sotheby's information systems could adversely impact its operations, reputation, and brand.
Sotheby's business continuity plans may not be effective in addressing the impact of unexpected events that could impact its business.
Sotheby's inability to successfully implement its business continuity plans in the wake of an unexpected event, such as an act of God or a terrorist attack occurring near one of its major selling and/or sourcing offices and/or any other unexpected event, could disrupt its ability to operate and adversely impact its operations.
Sotheby's relies on a small number of clients who make a significant contribution to its revenues, profitability, and operating cash flows.
Sotheby's relies on a small number of clients who make a significant contribution to its revenues, profitability, and operating cash flows. Accordingly, Sotheby's revenues, profitability, and operating cash flows are highly dependent upon its ability to develop and maintain relationships with this small group of clients, as well as the financial strength of these clients.

10



Subject to management approval under Sotheby's policy, Sotheby's may pay a consignor the net sale proceeds from an auction or private sale before payment is collected from the buyer and/or may allow the buyer to take possession of purchased property before payment is received. In these situations, Sotheby's is exposed to losses in the event the buyer does not make payment.
Under the standard terms and conditions of its auction and private sales, Sotheby's is not obligated to pay the consignor for property that has not been paid for by the buyer. However, in certain instances and subject to management approval under Sotheby's policy, the consignor may be paid the net sale proceeds before payment is collected from the buyer while Sotheby's retains possession of the property. In such situations, if the buyer does not make payment, Sotheby's will take title to the property, but could be exposed to losses if the value of the property declines. In certain other situations and subject to management approval under Sotheby's policy, the buyer is allowed to take possession of purchased property before making payment. In these situations, Sotheby's is liable to the seller for the net sale proceeds whether or not the buyer makes payment and would incur losses in the event of buyer default. (See Note 5 of Notes to Consolidated Financial Statements for information about auction and private sale receivables.)
Sotheby's ability to collect auction receivables may be adversely impacted by buyers from emerging markets, as well as by the banking and foreign currency laws and regulations, and judicial systems of the countries in which it operates and in which its clients reside.
Sotheby's operates in 40 countries and has a worldwide client base that has grown in recent years due in part to a dramatic increase in the activity of buyers from emerging markets, and in particular, China. The collection of auction receivables related to buyers from emerging markets may be adversely impacted by the buyer's lack of familiarity with the auction process and the buyer's financial condition. Sotheby's ability to collect auction receivables may also be adversely impacted by the banking and foreign currency laws and regulations regarding the movement of funds out of certain countries, as well as by Sotheby's ability to enforce its rights as a creditor in jurisdictions where the applicable laws and regulations may be less defined, particularly in emerging markets.
Demand for art-related financing is unpredictable, which may cause variability in Sotheby's results of operations.
Sotheby's business is, in part, dependent on the demand for art-related financing, which can be significantly influenced by overall economic conditions and by the often unpredictable financial requirements of owners of major art collections. Accordingly, the results of Sotheby's Finance segment are subject to variability from period to period.
The ability of Sotheby's to realize proceeds from the sale of collateral for Finance segment loans may be delayed or limited.
In situations when there are competing claims on the collateral for Finance segment loans and/or when a borrower becomes subject to bankruptcy or insolvency laws, Sotheby's ability to realize proceeds from the sale of its collateral may be limited or delayed.
The value of the property held in inventory and the property pledged as collateral for Finance segment loans is subjective and often fluctuates, exposing Sotheby's to losses and significant variability in its results.
The market for fine art, decorative art, and jewelry is not a highly liquid trading market. As a result, the valuation of these items is inherently subjective and their realizable value often fluctuates over time. Accordingly, Sotheby's is at risk both as to the realizable value of the property held in inventory and as to the realizable value of the property pledged as collateral for Finance segment loans. In estimating the realizable value of the property held in inventory and the property pledged as collateral for Finance segment loans, management relies on the opinions of Sotheby's specialists, who consider the following complex array of factors when valuing these items: (i) whether the property is expected to be offered at auction or sold privately, and the timing of any such sale, (ii) the supply and demand for the property, taking into account economic conditions and, when relevant, changing trends in the art market as to which collecting categories and artists are most sought after; and (iii) recent sale prices achieved for comparable items within a particular collecting category and/or by a particular artist. If there is evidence that the estimated realizable value of a specific item held in inventory is less than its carrying value, a loss is recorded to reflect management's revised estimate of realizable value. In addition, if the estimated realizable value of the property pledged as collateral for a Finance segment loan is less than the corresponding loan balance, management assesses whether it is necessary to record a loss to reduce the carrying value of the loan, after taking into account the ability of the borrower to repay any shortfall between the value of the collateral and the amount of the loan. These factors may cause significant variability in Sotheby's results from period to period.

11



The low rate of historic losses on the Finance segment loan portfolio may not be indicative of future loan loss experience.
Sotheby's has historically incurred minimal losses on the Finance segment loan portfolio. However, despite management's stringent loan underwriting standards, Sotheby's previous loan loss experience may not be indicative of the future performance of the loan portfolio.
The collateral supporting the Finance segment loan portfolio is concentrated within certain collecting categories. A material decline in these markets could impair Sotheby’s ability to collect the principal and interest owed on certain loans and could require repayments of borrowings on such affected loans under Sotheby's revolving credit facility.
The collateral supporting the Finance segment loan portfolio is concentrated within certain collecting categories. Although management believes the Finance segment loan portfolio is sufficiently collateralized due to its current aggregate loan-to-value ratio of 48%, a material decline in these markets could impair Sotheby’s ability to collect the principal and interest owed on certain loans. Additionally, the eligibility of individual Finance segment loans included in the borrowing base of Sotheby's revolving credit facility requires a minimum loan-to-value ratio of 60%. A material decline in the value of Finance segment loan collateral could result in an increase in the loan-to-value ratio above 60% for individual loans and could require repayment of a portion of the borrowings associated with such loans.
Sotheby's could be exposed to losses and/or reputational harm as a result of various claims and lawsuits incidental to the ordinary course of its business.
Sotheby's becomes involved in various legal proceedings, lawsuits, and other claims incidental to the ordinary course of its business. Management is required to assess the likelihood of any adverse judgments or outcomes in these matters, as well as potential ranges of probable or reasonably possible losses. A determination of the amount of losses, if any, to be recorded or disclosed as a result of these contingencies is based on a careful analysis of each individual exposure with, in some cases, the assistance of outside legal counsel. The amount of losses recorded or disclosed for such contingencies may change in the future due to new developments in each matter or a change in settlement strategy.
Sotheby's could be exposed to reputational harm as a result of wrongful actions by certain third parties.
Sotheby's is involved in various business arrangements and ventures with unaffiliated third parties. Wrongful actions by such parties could harm Sotheby's brand and reputation.
Sotheby's could be exposed to losses in the event of title or authenticity claims.
The assessment of property offered for auction or private sale can involve potential claims regarding title and authenticity. Items sold by Sotheby's may be subject to statutory warranties as to title and to a limited guarantee as to authenticity under the Conditions of Sale and Terms of Guarantee that are published in Sotheby's auction sale catalogues and the terms stated in, and the laws applicable to, agreements governing private sale transactions. The authentication of the items offered by Sotheby's is based on scholarship and research, but necessarily requires a degree of judgment from Sotheby's specialists. In the event of a title or authenticity claim against Sotheby's, Sotheby's may have recourse against the seller of the property and may have the benefit of insurance, but a claim could nevertheless expose Sotheby's to losses and to reputational risk.
Auction guarantees create the risk of loss resulting from the potential inaccurate valuation of art.
As discussed above, the market for fine art, decorative art, and jewelry is not a highly liquid trading market and, as a result, the valuation of these items is inherently subjective. Accordingly, Sotheby's is at risk with respect to management's ability to estimate the likely selling prices of property offered with auction guarantees. If management's judgments about the likely selling prices of property offered with auction guarantees prove to be inaccurate, there could be a significant adverse impact on Sotheby's results, financial condition, and liquidity. (See Note 18 of Notes to Consolidated Financial Statements for information related to auction guarantees.)
Sotheby's could be exposed to losses in the event of nonperformance by its counterparties in auction guarantee risk and reward sharing arrangements.
In certain situations, Sotheby's reduces its financial exposure under auction guarantees through risk and reward sharing arrangements. Sotheby's counterparties to these risk and reward sharing arrangements are typically major international art dealers or major art collectors. Sotheby's could be exposed to losses in the event any of these counterparties do not perform according to the terms of these contractual arrangements. (See Note 18 of Notes to Consolidated Financial Statements for information related to auction guarantees.)

12



Future costs and obligations related to Sotheby's U.K. Pension Plan are dependent on unpredictable factors, which may cause significant variability in employee benefit costs.
Future costs and obligations related to Sotheby's defined benefit pension plan in the U.K. are heavily influenced by changes in interest rates, investment performance in the debt and equity markets, changes in statutory requirements in the U.K., and actuarial assumptions, each of which is unpredictable and may cause significant variability in Sotheby's employee benefit costs. (See "Critical Accounting Estimates" within Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 17 of Notes to Consolidated Financial Statements for information related to the U.K. Pension Plan.)
Tax matters may cause significant variability in Sotheby's financial results.
Sotheby's operates in many tax jurisdictions throughout the world and the provision for income taxes involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which Sotheby's operates. Sotheby's effective income tax rate can vary significantly between periods due to a number of complex factors including, but not limited to: (i) future changes in applicable laws; (ii) projected levels of taxable income; (iii) changes in the jurisdictional mix of forecasted and/or actual pre-tax income; (iv) increases or decreases to valuation allowances recorded against deferred tax assets; (v) tax audits conducted by various tax authorities; (vi) adjustments to income taxes upon the finalization of income tax returns; (vii) the ability to claim foreign tax credits; (viii) the repatriation of foreign earnings for which Sotheby's has not previously provided income taxes; and (ix) tax planning strategies.
Sotheby's clients reside in various tax jurisdictions throughout the world. To the extent that there are changes to tax laws or tax reporting obligations in any of these jurisdictions, such changes could adversely impact the ability and/or willingness of clients to purchase or sell works of art through Sotheby's. Additionally, Sotheby's is 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 Sotheby's and its clients. The application of these laws and regulations to Sotheby's unique business and global client base, and the estimation of any related liabilities, is complex and requires a significant amount of judgment. These indirect tax liabilities are generally not those of Sotheby’s unless it fails 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 Sotheby's to claims from tax authorities.
Insurance coverage for artwork may become more difficult to obtain, exposing Sotheby's to losses for artwork in Sotheby's possession.
Sotheby's maintains insurance coverage for the works of art it owns, works of art consigned by clients, and all other property that may be in Sotheby's custody, which are exhibited and stored at Sotheby's facilities around the world. An inability to adequately insure such works of art due to limited capacity of the global art insurance market could, in the future, have a material adverse impact on Sotheby's business.
Due to the nature of its business, valuable works of art are exhibited and stored at Sotheby's facilities around the world. Such works of art could be subject to damage or theft, which could have a material adverse effect on Sotheby's business and reputation.
Valuable works of art are exhibited and stored at Sotheby's facilities around the world. Although Sotheby's maintains state of the art security measures at its premises, valuable artworks may be subject to damage or theft. The damage or theft of valuable property despite Sotheby's security measures could have a material adverse impact on Sotheby's business and reputation. Sotheby's maintains insurance coverage for the works of art that are exhibited and stored at its facilities, which could significantly mitigate any potential losses resulting from the damage or theft of such works of art.
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.

13



ITEM 2: PROPERTIES
Sotheby’s is headquartered at 1334 York Avenue, New York, New York (the “York Property”). The York Property includes land and approximately 489,000 square feet of building area. The York Property is home to Sotheby’s sole North American auction salesroom and principal North American exhibition space, including S|2, a private sale exhibition gallery. The York Property is also home to the U.S. operations of Sotheby's Finance segment and its corporate offices. The York Property was purchased by Sotheby's on February 6, 2009 for $370 million and, as of December 31, 2014, had a net book value of $268.1 million. Prior to this purchase, Sotheby’s occupied the York Property subject to a 20-year lease which was entered into in conjunction with a sale-leaseback transaction in February 2003.
The York Property is owned subject to a $235 million mortgage, which matures on July 1, 2035, but has an optional pre-payment date of July 1, 2015 and bears an annual rate of interest of approximately 5.6%, which increases to 10.6% subsequent to July 1, 2015 unless the mortgage is repaid by that date. Management is currently exploring its options with respect to a long-term refinancing of the York Property Mortgage, with the intent of completing such a refinancing no later than June 30, 2015. (See Note 9 of Notes to Consolidated Financial Statements for additional information on the York Property Mortgage. Also, see statement on Forward Looking Statements.)
Sotheby’s U.K. operations are centered at New Bond Street, London, where the main salesrooms, exhibition spaces and administrative offices are located. As part of an ongoing multi-year refurbishment initiative, Sotheby's has invested approximately $8 million to enhance the New Bond Street exhibition space and construct an S|2 private sales gallery. Management expects to invest an additional $4 million in 2015 to complete the final phase of this refurbishment project (see statement on Forward Looking Statements). Almost the entire New Bond Street complex is either owned or held under various long-term lease, freehold, and virtual freehold arrangements. (Freeholds are occupancy arrangements in which the property is owned outright by Sotheby’s. Virtual freeholds are occupancy arrangements in which there is a 2,000-year lease with nominal yearly rent payments that cannot be escalated during the term of the lease.) Sotheby's also leases 52,000 square feet for a warehouse facility in Greenford, West London under a lease that expires in 2030.
Below is a table summarizing Sotheby’s ownership, freehold, and lease arrangements related to its London properties as of December 31, 2014 (in thousands of dollars, except for square footage):
 
Square
Footage
 
Net Book Value of Land
 
Net Book Value of Buildings and Building Improvements
 
Net Book Value of Leasehold Improvements
 
Total Net Book Value of London Premises
Freeholds and virtual freeholds
96,503

 
$
5,654

 
$
2,163

 
$
27,284

 
$
35,101

Leases with a remaining term greater than 10 years
108,089

 

 

 
10,520

 
10,520

All other leases
30,309

 

 

 
3,355

 
3,355

Total
234,901

 
$
5,654

 
$
2,163

 
$
41,159

 
$
48,976

Sotheby’s also leases space primarily for Agency segment operations in various locations throughout North America, South America, Continental Europe and Asia, including sales centers in Geneva and Zurich, Switzerland; Milan, Italy, Paris, France, and Hong Kong and Beijing, China.
Management believes Sotheby's worldwide premises are adequate for the current conduct of its business, but has performed a review of its real estate holdings, including the York Property and the New Bond Street premises. As the Board of Directors is currently searching for a new CEO, the results of this review will be further evaluated by the Board in consultation with the new CEO after taking into account the strategic and operating requirements for these locations.
ITEM 3: LEGAL PROCEEDINGS
See Note 16 of Notes to Consolidated Financial Statements for information related to Legal Proceedings.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.


14



PART II

ITEM 5: MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information
Quarterly Stock Prices—The principal market for Sotheby’s Common Stock is the NYSE (symbol: BID). As of February 13, 2015, there were 911 holders of record of Sotheby’s Common Stock. The quarterly price ranges on the NYSE of Sotheby’s Common Stock during 2014 and 2013 were as follows:
 
 
2014
 
2013
 
 
High
 
Low
 
High
 
Low
Quarter Ended
 
 
 
 
 
 
 
 
March 31
 
$
53.74

 
$
42.41

 
$
40.49

 
$
33.26

June 30
 
$
44.86

 
$
37.89

 
$
39.60

 
$
32.95

September 30
 
$
44.95

 
$
35.00

 
$
49.60

 
$
37.95

December 31
 
$
44.01

 
$
34.74

 
$
54.00

 
$
48.52

Cash Dividends—The following table summarizes cash dividends declared and paid to shareholders in each of the quarterly periods in 2014 and 2013 (in thousands of dollars, except per share amounts):
 
 
2014
 
2013
 
 
Per Share
 
Amount
 
Per Share
 
Amount
Quarterly Dividends
 
 
 
 
 
 
 
 
1st quarter
 
$
0.10

 
$
6,944

 
$

 
$

2nd quarter
 
0.10

 
6,894

 

 

3rd quarter
 
0.10

 
6,899

 
0.10

 
6,841

4th quarter
 
0.10

 
6,899

 
0.10

 
6,913

Total
 
0.40

 
27,636

 
0.20

 
13,754

Special Dividends
 
 
 
 
 
 
 
 
1st quarter
 
4.34

 
300,118

 

 

Total dividends
 
$
4.74

 
$
327,754

 
$
0.20

 
$
13,754

In December 2012, the Board of Directors declared and Sotheby's paid accelerated first and second quarter of 2013 dividends totaling $0.20 per share (approximately $13.6 million). This accelerated dividend was intended to be in lieu of dividends that would have otherwise been declared and paid in the first and second quarters of 2013.
On February 26, 2015, the Board of Directors declared a quarterly dividend of $0.10 per share (approximately $6.9 million), payable on March 16, 2015 to shareholders of record as of March 9, 2015. It is the intention of Sotheby’s to continue to pay regular quarterly dividends at a rate of $0.10 per share, subject to approval by the Board of Directors and depending on economic, financial, market, legal, and other conditions at the time. (See statement on Forward Looking Statements.)
Sotheby's has a credit agreement with an international syndicate of lenders led by General Electric Capital Corporation under which there are no limitations on dividend payments and Common Stock repurchases provided that, both before and after giving effect thereto: (i) there are no Events of Default, as defined in the credit agreement, (ii) the Aggregate Borrowing Availability, as defined in the credit agreement, equals or exceeds $100 million, and (iii) the Liquidity Amount, as defined in the credit agreement, equals or exceeds $200 million. (See "Liquidity and Capital Resources" under Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 9 of Notes to Consolidated Financial Statements for additional information related to Sotheby's credit agreement.)

15



Special Dividend and Common Stock Repurchase Program—In January 2014, management and the Board of Directors completed a review of Sotheby's capital allocation and financial policies and as a result: (i) established separate capital structures and financial policies for its Agency and Finance segments, (ii) declared a special dividend of $300 million ($4.34 per share) payable to shareholders of record as of February 12, 2014, and (iii) authorized a 5-year, $150 million Common Stock repurchase program principally to offset the annual vesting of employee share-based payments.
The $300 million special dividend was paid on March 17, 2014 and was funded principally by the repatriation of $250 million of cash from Sotheby’s foreign subsidiaries, with the remaining $50 million funded by existing domestic cash balances. In conjunction with this special dividend, dividend equivalents of approximately $11 million were accrued on share-based payments to Sotheby's employees and charged against retained earnings, of which approximately $3.8 million was paid in March 2014. (See Note 14 of Notes to Consolidated Financial Statements for information related to Sotheby's share-based payment programs.)
In conjunction with the Common Stock repurchase program, Sotheby's repurchased 558,171 shares of its Common Stock for an aggregate purchase price of $25 million ($44.79 per share) pursuant to an accelerated stock buyback agreement that was concluded in March 2014.
In February 2015, the Board of Directors decided it is in Sotheby's best interest to preserve financial flexibility as it searches for a new CEO. The Board of Directors looks forward to working with the new CEO to develop a robust strategic vision to drive long-term growth and believes capital allocation decisions should be considered in conjunction with these plans. Accordingly, Sotheby's Board of Directors concluded that there will currently be no return of capital to shareholders, with the exception of normal quarterly dividends.
Equity Compensation Plans
The following table provides information as of December 31, 2014 related to shares of Sotheby’s Common Stock that may be issued under its existing equity compensation plans, including the Sotheby’s 1997 Stock Option Plan (the “Stock Option Plan”), the Sotheby’s Restricted Stock Unit Plan (the “Restricted Stock Unit Plan”), and the Sotheby’s Amended and Restated Stock Compensation Plan for Non-Employee Directors (the “Directors Stock Plan”):
 
 
(A)
 
(B)
 
(C)
Plan Category (1)
 
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights (2)
 
Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights (3)
 
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans (4)
 
 
(In thousands, except per share data)
Equity compensation plans approved by shareholders
 
1,856

 
$
22.11

 
3,679

Equity compensation plans not approved by shareholders
 

 

 

Total
 
1,856

 
$
22.11

 
3,679

_____________________________________________________________
(1)
See Note 14 of Notes to Consolidated Financial Statements for a description of the material features of Sotheby’s equity compensation plans.
(2)
Includes 1,805,958 shares awarded under the Restricted Stock Unit Plan for which vesting is contingent upon future employee service and/or Sotheby’s achievement of certain profitability targets and 50,000 stock options for which vesting is contingent upon future employee service.
(3)
The weighted-average exercise price includes the exercise price of stock options, but does not take into account 1,805,958 shares awarded under the Restricted Stock Unit Plan, which have no exercise price.
(4)
Includes 3,573,376 shares available for future issuance under the Restricted Stock Unit Plan, 104,100 shares available for issuance under the Stock Option Plan, and 2,482 shares available for issuance under the Directors Stock Plan.

16



Performance Graph
The following graph compares the cumulative total shareholder return on Sotheby’s Common Stock for the five-year period from December 31, 2009 to December 31, 2014 with the cumulative return of the Standard & Poor’s Global Luxury Index (the "S&P Global Luxury Index"), which is a line-of-business index largely composed of companies whose products and services appeal to a segment of the population consistent with Sotheby's clients and the Standard & Poor's MidCap 400 Stock Index (the “S&P MidCap 400”).
The graph reflects an investment of $100 in Sotheby’s Common Stock, the S&P Global Luxury Index, and the S&P MidCap 400 on December 31, 2009, and a reinvestment of dividends at the average of the closing stock prices at the beginning and end of each quarter.
 
 
12/31/09
 
12/31/10
 
12/31/11
 
12/31/12
 
12/31/13
 
12/31/14
Sotheby's
 
$
100.00

 
$
201.51

 
$
128.56

 
$
153.88

 
$
244.54

 
$
218.31

S&P Global Luxury Index
 
$
100.00

 
$
144.70

 
$
142.14

 
$
179.70

 
$
243.65

 
$
232.55

S&P MidCap 400
 
$
100.00

 
$
126.65

 
$
124.47

 
$
146.71

 
$
195.89

 
$
215.01


17



ITEM 6: SELECTED FINANCIAL DATA
Year ended December 31
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
(Thousands of dollars, except per share data)
Income Statement Data:
 
 

 
 

 
 

 
 

 
 

Revenues:
 
 
 
 
 
 
 
 
 
 
Agency
 
$
825,126

 
$
793,639

 
$
717,231

 
$
791,738

 
$
731,021

Principal
 
69,958

 
30,638

 
26,180

 
21,790

 
29,092

Finance
 
33,013

 
21,277

 
17,707

 
12,038

 
9,685

License fees
 
8,484

 
6,902

 
6,124

 
5,228

 
3,682

Other
 
1,472

 
1,222

 
1,250

 
1,042

 
829

Total revenues
 
$
938,053

 
$
853,678

 
$
768,492

 
$
831,836

 
$
774,309

Net interest expense (a)
 
$
(33,306
)
 
$
(39,911
)
 
$
(42,879
)
 
$
(37,496
)
 
$
(45,080
)
Net income attributable to Sotheby's
 
$
117,795

 
$
130,006

 
$
108,292

 
$
171,416

 
$
160,950

Basic earnings per share
 
$
1.69

 
$
1.90

 
$
1.59

 
$
2.52

 
$
2.37

Diluted earnings per share
 
$
1.68

 
$
1.88

 
$
1.57

 
$
2.46

 
$
2.34

Cash dividends declared per share
 
$
4.74

 
$
0.20

 
$
0.52

 
$
0.23

 
$
0.20

Statistical Metrics:
 
 
 
 
 
 
 
 
 
 
Net Auction Sales (b)
 
$
5,151,419

 
$
4,338,948

 
$
3,809,656

 
$
4,240,573

 
$
3,644,764

Auction Commission Margin (c)
 
14.7
%
 
15.9
%
 
16.3
%
 
16.6
%
 
18.3
%
Private Sales (d)
 
$
624,511

 
$
1,179,038

 
$
906,510

 
$
814,581

 
$
494,505

EBITDA (e)
 
$
256,776

 
$
245,066

 
$
220,640

 
$
286,596

 
$
288,323

Adjusted EBITDA (e)
 
$
298,613

 
$
246,438

 
$
235,658

 
$
292,955

 
$
294,560

Balance Sheet Data:
 
 

 
 

 
 

 
 

 
 

Working capital (f)
 
$
610,315

 
$
829,784

 
$
706,244

 
$
728,984

 
$
573,020

Average Loan Portfolio (g)
 
$
583,304

 
$
433,619

 
$
335,898

 
$
219,785

 
$
181,585

Total assets
 
$
3,134,820

 
$
2,893,546

 
$
2,575,095

 
$
2,399,414

 
$
2,178,628

Credit facility borrowings
 
$
445,000

 
$


$

 
$

 
$

Long-term debt, net (f)
 
$
300,000

 
$
515,148

 
$
515,197

 
$
464,552

 
$
472,862

Total equity
 
$
878,238

 
$
1,139,665

 
$
992,826

 
$
903,667

 
$
771,508

Legend:
(a)
Represents interest expense less interest income.
(b)
Represents the total hammer price of property sold at auction.
(c)
Represents total auction commission revenues as a percentage of Net Auction Sales.

(d)
Represents the total purchase price of property sold in private sales brokered by Sotheby's, including its commissions.

(e)
See "Non-GAAP Financial Measures" below under Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," for a description of this non-GAAP financial measure and a reconciliation to the most comparable GAAP measure.
(f)
The York Property Mortgage matures on July 1, 2035, but has an optional pre-payment date of July 1, 2015 and bears an annual rate of interest of approximately 5.6%, which increases to 10.6% subsequent to July 1, 2015 unless the mortgage is repaid by that date. Accordingly, the $218.7 million carrying value of the York Property Mortgage is classified as a current liability on Sotheby's Consolidated Balance Sheet as of December 31, 2014 and included in the calculation of working capital as of that date. As of December 31, 2013, 2012, 2011, and 2010, the carrying value of the York Property Mortgage included in long-term debt, net was approximately $215 million. Management is currently exploring its options with respect to a long-term refinancing of the York Property Mortgage, with the intent of completing such a refinancing no later than June 30, 2015.
(g)
Represents the average Finance segment loan portfolio outstanding during the period.



18




ITEM 7:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Sotheby's Business
Sotheby’s is a global art business whose operations are organized under three segments: Agency, Principal, and Finance. The Agency segment earns commissions by matching buyers and sellers of authenticated fine art, decorative art, and jewelry (collectively, “art” or “works of art” or “artwork” or "property") through the auction or private sale process. The Principal segment earns revenues from the sale of artworks that have been purchased opportunistically by Sotheby’s. The Finance segment earns interest income through art-related financing activities by making loans to certain collectors and dealers that are secured by works of art.
The global art market is influenced over time by the overall strength and stability of the global economy, the financial markets of various countries, geopolitical conditions and world events, all of which may impact the willingness of potential buyers and sellers to purchase and sell art. In addition, the amount and quality of art consigned for sale is influenced by other factors not within Sotheby’s control, and many consignments often become available as a result of the death or financial or marital difficulties of the owner. These factors cause the supply and demand for works of art to be unpredictable and may lead to significant variability in Sotheby's revenues from period to period.
Competition in the international art market is intense. A fundamental challenge facing any auctioneer or art dealer is to obtain high quality and valuable property for sale either as agent or as principal. Sotheby's primary global competitor is Christie’s, a privately held, French-owned, auction house. In response to the competitive environment, Sotheby’s may offer consignors a variety of financial inducements such as auction commission sharing arrangements and auction guarantees as a means to secure high-value consignments. Although these inducements may lead to a higher level of auction consignments, they put pressure on auction commission margins, and auction guarantees introduce the possibility of incurring a loss on the transaction and reduced liquidity if the underlying property fails to sell at the minimum guaranteed price. To mitigate the pressure on auction commission margins, from time-to-time Sotheby’s adjusts its commission rate structures. In addition, Sotheby’s may reduce its financial exposure under auction guarantees through contractual risk and reward sharing arrangements such as irrevocable bids under which a counterparty commits to bid a predetermined price on the guaranteed property.
Sotheby's is a service business in which the ability of its employees to source high-value works of art and develop and maintain relationships with potential sellers and buyers of works of art is essential to its success. Sotheby's business is highly dependent upon attracting and retaining qualified personnel and employee compensation is its most substantial operating expense. Sotheby’s also incurs significant costs to promote, conduct, and complete its auctions, as well as general and administrative expenses to support its global operations. While a large portion of Sotheby’s expenses are fixed, certain categories of expense are variable, with sale marketing costs dependent upon the volume of auction activity and certain elements of employee compensation a function of Sotheby’s profitability.
Industry Trends
In late 2009, the global art market began a period of expansion that has resulted in some of the most profitable years in Sotheby’s history, and the art market has remained strong to date. A significant driver of the expansion of the global art market and Sotheby’s profitability during this period has been the growth of the Contemporary and Asian art markets, as well as increased demand for art from clients in China and other emerging markets across several collecting categories.
As the global art market has grown, the value of the property sold by Sotheby's has increased and the competitive environment between Sotheby’s and Christie’s has intensified. These factors have resulted in a decline in auction commission margins over the past few years, with the competitive environment for high-value consignments causing an increase in the use of auction commission sharing arrangements and an increase in the use of auction guarantees, sometimes without the protection of irrevocable bids.
To help mitigate the recent decline in auction commission margins, in March 2013 and again in February 2015, management enacted increases in Sotheby’s buyer’s premium rate structure. (See "Auction Commission Margin" within the discussion of Agency segment results below.)

19



To further leverage the growth of the global art market witnessed in recent years, Sotheby’s has developed its presence in emerging markets and implemented initiatives to grow private sales. In the emerging markets, Sotheby’s has deepened its relationships with Chinese art collectors by implementing regional marketing initiatives, investing in new staff with requisite skills to service Asian clients, and expanding its facilities in Hong Kong. Elsewhere, Sotheby’s has pursued opportunities in emerging markets such as Russia, the Middle East, and South America. In the private sales arena, over the past several years, Sotheby’s has committed additional management and specialist talent and opened dedicated private sale exhibition galleries in New York, London and Hong Kong, branded as S|2 and focused on selling Contemporary Art.
Along with the recent growth in the global art market and Sotheby’s revenues, operating expenses also increased. In response, in late 2013, management completed a review of its cost structure and identified opportunities for cost savings in 2014 across various categories of expense including auction direct costs, marketing expenses, professional fees and other categories of general and administrative expense. In addition, throughout 2014, management took other actions resulting in incremental cost savings within these categories of expense. Furthermore, in July 2014, Sotheby's announced a restructuring plan, which has resulted in staff reductions, the majority of savings from which are being reinvested through the addition of new staff in collecting categories and activities with the highest growth opportunity in the future. Management estimates that the reinvestment in various growth initiatives in 2015, along with expected increases in the cost of doing business, will result in a net increase in expenses when compared to 2014. (See "Management's Cost Control Programs" below and statement on Forward Looking Statements.)
Seasonality
The worldwide art auction market has two principal selling seasons, which generally occur in the second and fourth quarters of the year. In the aggregate, second and fourth quarter Net Auction Sales represented 79% and 83% of total Net Auction Sales in 2014 and 2013, respectively, with auction commission revenues comprising approximately 81% of Sotheby's total revenues in these years. Accordingly, Sotheby's financial results are seasonal, with peak revenues and operating income generally occurring in the second and fourth quarters. Consequently, first and third quarter results have historically reflected lower revenues when compared to the second and fourth quarters and, typically, a net loss due to the fixed nature of many of Sotheby's operating expenses. Management believes that investors should focus on results for six and twelve month periods, which better reflect the business cycle of the art auction market. (See Note 25 of Notes to Consolidated Financial Statements for Sotheby's quarterly results for the years ended December 31, 2014 and 2013.)
Critical Accounting Estimates
The preparation of financial statements and related disclosures in accordance with GAAP requires management to make judgments, assumptions, and estimates that affect the amounts reported in Sotheby's Consolidated Financial Statements and accompanying notes. Actual results may ultimately differ from management’s original estimates as future events and circumstances sometimes do not develop as expected. Note 2 of Notes to Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of Sotheby's Consolidated Financial Statements. In addition, management believes that the following are its most critical accounting estimates, which are not ranked in any particular order, that may affect Sotheby’s reported financial condition and/or results of operations.
(1)
Valuation of Inventory and Loan Collateral—The market for fine art, decorative art, and jewelry is not a highly liquid trading market. As a result, the valuation of these items is inherently subjective and their realizable value often fluctuates over time.
If there is evidence that the estimated realizable value of a specific item held in inventory is less than its carrying value, a loss is recorded to reflect management's revised estimate of realizable value. (See Note 6 of Notes to Consolidated Financial Statements for information related to Sotheby's inventory.)
If the estimated realizable value of the property pledged as collateral for a Finance segment loan is less than the corresponding loan balance, management assesses whether it is necessary to record a loss to reduce the carrying value of the loan, after taking into account the ability of the borrower to repay any shortfall between the value of the collateral and the amount of the loan. (See Note 5 of Notes to Consolidated Financial Statements for information related to Finance segment loans.)
In estimating the realizable value of the property held in inventory and the property pledged as collateral for Finance segment loans, management relies on the opinions of Sotheby's specialists, who consider the following complex array of factors when valuing these items: (i) whether the property is expected to be offered at auction or sold privately, and the timing of any such sale; (ii) the supply and demand for the property, taking into account economic conditions and, where relevant, changing trends in the art market as to which collecting categories and artists are most sought after; and (iii) recent sale prices achieved for comparable items within a particular collecting category and/or by a particular artist.

20



Due to the inherent subjectivity involved in estimating the realizable value of the property held in inventory and the property pledged as collateral for Finance segment loans, management's estimates of realizable value may prove, with the benefit of hindsight, to be different than the amount ultimately realized upon sale.
(2) Accounts Receivable—Accounts receivable principally includes amounts due from buyers as a result of auction and private sale transactions. The recorded amount reflects the purchase price of the property, including Sotheby's commission. Under the standard terms and conditions of its auction and private sales, Sotheby’s is not obligated to pay the consignor for property that has not been paid for by the buyer, provided that the property has not been released to the buyer. If a buyer defaults on payment, the sale may be cancelled and the property will be returned to the consignor. Management continually evaluates the collectability of amounts due from individual buyers and, if management determines that it is probable that a buyer will default, a cancelled sale is recorded in the period in which that determination is made and the associated accounts receivable balance, including Sotheby's auction commission, is reversed. Management's judgments regarding the collectability of accounts receivable are based on an assessment of the buyer's payment history, discussions with the buyer, and the value of any property held as security against the buyer's payment obligation. Management's judgments with respect to the collectability of amounts due from buyers for auction and private sale purchases may prove, with the benefit of hindsight, to be incorrect. Historically, cancelled sales have not been material in relation to the aggregate hammer price of property sold at auction. (See Note 5 of Notes to Consolidated Financial Statements for information related to accounts receivable.)
(3) Pension Obligations—The pension obligations related to Sotheby's U.K. defined benefit pension plan (the “U.K. Pension Plan”) are based on an actuarial valuation. Inherent in this valuation are key assumptions and estimates, including those related to the discount rate, the expected long-term rate of return on plan assets, future inflation, future annual compensation increases, and mortality, which are reviewed and updated, as appropriate, on at least an annual basis. In developing these assumptions and estimates, management considers current market conditions, market indices, and other relevant data.
The discount rate represents the approximate weighted average rate at which the obligations of the U.K. Pension Plan could be effectively settled and is based on a yield curve for a selection of high-quality corporate bonds with maturity dates approximating the length of time remaining until individual benefit payment dates. The discount rate as of December 31, 2013 that was used to calculate the $0.7 million net pension benefit recorded in 2014 was 4.4%. A hypothetical increase or decrease of 0.1% in this assumption would result in a decrease or increase in net annual pension cost of approximately $0.6 million. As of December 31, 2014, the discount rate used to calculate the $381.9 million benefit obligation was 3.5%. A hypothetical increase or decrease of 0.1% in this assumption would result in a decrease or increase in the benefit obligation of approximately $7.4 million.
The expected long-term rate of return is weighted according to the composition of invested assets and is based on expected future appreciation, as well as dividend and interest yields currently available in the equity and bond markets. In particular, the expected rate of return for growth assets represents management's best estimate of annualized long-term returns by asset class. The expected rate of return on debt securities is based on interest yields currently available on long-dated U.K. government bonds and highly-rated corporate bonds. Where funds are actively managed, no allowance is made in the expected rate of return for potential market out-performance by fund managers. The expected long-term rate of return on plan assets used to calculate the $0.7 million net pension benefit recorded in 2014 was 6.1%. A hypothetical increase or decrease of 0.25% in this assumption would result in a decrease or increase in net annual pension cost of approximately $1 million.
The assumption for future annual compensation increases is determined after considering historical salary data for Sotheby's U.K. employees and management's expectations for future salary growth, as well as current economic data for inflation. The assumption for future annual compensation increases used to calculate the $0.7 million net pension benefit recorded in 2014 was 4.6%. A hypothetical increase or decrease of 0.25% in this assumption would result in an increase or decrease in net annual pension cost of approximately $0.4 million. As of December 31, 2014, the assumption for future annual compensation increases used to calculate the $381.9 million benefit obligation was 4.1%. A hypothetical increase or decrease of 0.25% in this assumption would result in an increase or decrease in the benefit obligation of approximately $2.1 million.
Assumed mortality rates are based upon standardized data tables used by actuaries in the U.K., taking into account the demographics of U.K. Pension Plan members and allowances for longer future life expectancies. A hypothetical 5% increase or decrease in life expectancies would result in an increase or decrease in net pension cost of approximately $0.6 million. Additionally, a hypothetical 5% increase or decrease in life expectancies would result in an increase or decrease in the benefit obligation of approximately $4.5 million.

21



As of December 31, 2014 and 2013, the accumulated after-tax net loss related to the U.K. Pension Plan that has not yet been recognized in Sotheby's Consolidated Income Statements was approximately ($44) million and ($38.6) million, respectively, and is reflected in the Shareholders' Equity section of Sotheby' Consolidated Balance Sheets within accumulated other comprehensive loss. Unrecognized pension losses are generally the result of: (i) actual results being different from previous actuarial assumptions and/or (ii) changes in actuarial assumptions between balance sheet dates. The ($9.8) million after-tax net loss incurred in 2014 is the result of a decrease in the discount rate from 4.4% to 3.5%, partially offset by a better than expected return on plan assets and a decrease in the assumption for expected future inflation.
In periods when the unrecognized pre-tax loss reflected in Shareholders' Equity exceeds 10% of the greater of: (i) the market-related value of plan assets or (ii) the benefit obligation, the excess amount is amortized as a component of future net pension cost over the average expected remaining service period of active plan participants, which is approximately 11.7 years. It is expected that approximately $3.2 million ($4 million, pre-tax) of the ($44) million after-tax net loss related to the U.K. Pension Plan will be recognized as a component of the net pension expense for the year ended December 31, 2015. (See statement on Forward Looking Statements.)
(See Note 17 of Notes to Consolidated Financial Statements for additional information related to the U.K. Pension Plan.)
(4)
Income Taxes—The provision for income taxes involves a significant amount of management judgment regarding the interpretation of the relevant facts and laws in the many jurisdictions in which Sotheby's operates. Future changes in applicable laws, projected levels of taxable income, estimates of U.S. and foreign cash, working capital and investment needs, and tax planning could change Sotheby's effective tax rate and recorded tax balances.
As of December 31, 2014, Sotheby's had net deferred tax assets of $47.4 million, primarily resulting from deductible temporary differences which will reduce taxable income in future periods over a number of years. Included in this net deferred tax asset is a valuation allowance of $2.2 million to reduce Sotheby's deferred tax assets to the amount that is more likely than not to be realized. In assessing the need for the valuation allowance, management considers, among other things, projections of future taxable income and ongoing prudent and feasible tax planning strategies. If management's projections of future taxable income and other positive evidence considered in evaluating the need for a valuation allowance prove, with the benefit of hindsight, to be inaccurate, it could prove more difficult to support the realization of these deferred tax assets. As a result, an additional valuation allowance could be required, which would have an adverse impact on Sotheby's effective income tax rate and results. Conversely, should management determine that Sotheby's will be able to realize its deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would have a favorable impact on Sotheby's effective income tax rate and results in the period such determination was made.
Accounting for income taxes requires that incremental income taxes on the undistributed earnings of foreign subsidiaries be accounted for as a deferred tax liability unless management can assert that those earnings are indefinitely reinvested outside of the U.S. Beginning in 2014, the current earnings of Sotheby's foreign subsidiaries are not considered by management to be indefinitely reinvested outside of the U.S., and a deferred tax liability for incremental income taxes has been recorded on those earnings. However, Sotheby’s has not recognized a deferred tax liability for incremental income taxes on the undistributed foreign earnings generated prior to 2014 which management has determined to be indefinitely reinvested outside the U.S. The determination that foreign earnings are indefinitely reinvested is based on estimates and judgments of projected cash flow needs, as well as the working capital and investment requirements of Sotheby’s foreign and domestic subsidiaries. Material changes in Sotheby’s estimates of cash, working capital, and investment needs in the various jurisdictions in which it operates could require repatriation of foreign earnings previously considered to be indefinitely reinvested, which would be subject to incremental income taxes and applicable non-U.S. income and withholding taxes.

22



Due to the global complexity of tax regulation, Sotheby's records liabilities to address potential exposures involving uncertain tax positions that management has taken, or expects to take, on income tax returns that could be challenged by taxing authorities. These potential exposures result from the varying applications and interpretations of income tax related statutes, rules, and regulations. As of December 31, 2014, Sotheby’s liability for unrecognized tax benefits, excluding interest and penalties, was $22.8 million. Management believes that Sotheby's recorded tax liabilities are adequate to cover all open years based on an assessment of the relevant facts and circumstances. This assessment involves assumptions and significant judgments about future events and potential actions by taxing authorities, as well as an evaluation of past experiences. The cost of the ultimate resolution of these matters may be greater or less than the liability that Sotheby's has recorded. To the extent that management's opinion as to the outcome of these matters changes, income tax expense will be adjusted accordingly in the period in which such a determination is made. Sotheby's recognizes interest and penalties related to income taxes as income tax expense.
(See discussion of “Income Tax Expense” below, as well as Notes 10 and 11 of Notes to Consolidated Financial Statements.)
(5)
Share-Based Payments—Sotheby's grants share-based payment awards as compensation to certain employees. The amount of compensation expense recognized for share-based payments is based on management’s estimate of the number of shares ultimately expected to vest as a result of employee service. A substantial portion of the share-based payment awards vest only if Sotheby's achieves established profitability targets. The amount and timing of compensation expense recognized for such performance-based awards is dependent upon management's quarterly assessment of the likelihood and timing of achieving these future profitability targets. Accordingly, if management's projections of future profitability prove, with the benefit of hindsight, to be inaccurate, the amount of life-to-date and future compensation expense related to share-based payments could significantly increase or decrease. (See Note 14 of Notes to Consolidated Financial Statements for information related to Sotheby's share-based payment programs.)
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
This discussion should be read in conjunction with Note 4 of Notes to Consolidated Financial Statements, which provides financial information about Sotheby's segments.
Overview
In 2014, Sotheby’s reported operating income of $226 million, which represents a $3.5 million (2%) increase when compared to 2013, as current year results include $41.8 million in charges associated with shareholder activism, restructuring, and CEO transition. Excluding these items, Sotheby's reported Adjusted Operating Income* of $267.9 million, representing a $43.9 million (20%) improvement over the prior year. The improvement in Adjusted Operating Income* reflects the continuing strength of the global art market, with Agency segment revenues improving $31.5 million (4%). Also favorably impacting the comparison to the prior year are a number of cost reduction initiatives implemented by management throughout 2014. These initiatives resulted in a lower ratio of auction direct costs as a percentage of Net Auction Sales, savings in general and administrative and marketing expenses, and also helped contain full-time salary costs.
In 2014, Sotheby’s reported net income of $117.8 million, which represents a $12.2 million (9%) decrease when compared to 2013, as current year results include the impact of the charges noted in the previous paragraph. Excluding these items, Sotheby's reported Adjusted Net Income* of $142.4 million, representing an $11.6 million (9%) improvement over the prior year. As discussed in more detail below under "Income Tax Expense," the comparison of Sotheby's after-tax results to the prior year is significantly influenced by the effective income tax rate for the period, which increased from 30% to approximately 39%.
See the discussion below for greater detail on the significant factors impacting Sotheby’s 2014 results and the comparison to 2013.
Outlook
The global art market continues to reflect strong demand and high prices. In this strong market, the competitive environment for high-value consignments is robust and auction commission margins remain under pressure.
______________________
*
See "Non-GAAP Financial Measures" below for a description of this non-GAAP financial measure and a reconciliation to the most comparable GAAP measure.


23



Results of Operations for the Years Ended December 31, 2014 and 2013
The table below presents a summary of Sotheby’s consolidated results of operations for 2014 and 2013, as well as a comparison between the two years (in thousands of dollars):
 
 
 
 
 
Favorable/(Unfavorable)
 
2014
 
2013
 
$ / % Change
 
% Change
Revenues:
 

 
 

 
 

 
 

Agency
$
825,126

 
$
793,639

 
$
31,487

 
4
%
Principal
69,958

 
30,638

 
39,320

 
*

Finance
33,013

 
21,277

 
11,736

 
55
%
License fees
8,484

 
6,902

 
1,582

 
23
%
Other
1,472

 
1,222

 
250

 
20
%
Total revenues
938,053

 
853,678

 
84,375

 
10
%
Expenses:
 
 
 
 
 
 
 
Agency direct costs
86,524

 
84,594

 
(1,930
)
 
(2
%)
Cost of Principal revenues
68,037

 
30,307

 
(37,730
)
 
*

Cost of Finance revenues
8,740

 

 
(8,740
)
 
N/A

Marketing
16,566

 
22,487

 
5,921

 
26
%
Salaries and related
310,934

 
297,450

 
(13,484
)
 
(5
%)
General and administrative (a)
158,796

 
175,458

 
16,662

 
9
%
Depreciation and amortization
20,575

 
19,435

 
(1,140
)
 
(6
%)
Special charges, net (b)
20,008

 
1,372

 
(18,636
)
 
*

Restructuring charges, net (c)
14,238

 

 
(14,238
)
 
N/A

CEO separation costs (d)
7,591

 

 
(7,591
)
 
N/A

Total expenses
712,009

 
631,103

 
(80,906
)
 
(13
%)
Operating income
226,044

 
222,575

 
3,469

 
2
%
Net interest expense (e)
(33,306
)
 
(39,911
)
 
6,605

 
17
%
Other income
283

 
3,029

 
(2,746
)
 
(91
%)
Income before taxes
193,021

 
185,693

 
7,328

 
4
%
Equity in earnings of investees, net of tax
732

 
15

 
717

 
*

Income tax expense
75,761

 
55,702

 
(20,059
)
 
(36
%)
Net income
117,992

 
130,006

 
(12,014
)
 
(9
%)
Less: Net income attributable to noncontrolling interest
197

 

 
197

 
N/A

Net income attributable to Sotheby's
$
117,795

 
$
130,006

 
$
(12,211
)
 
(9
%)
Diluted earnings per share - Sotheby's common shareholders
$
1.68

 
$
1.88

 
$
(0.20
)
 
(11
%)
Statistical Metrics:
 

 
 

 
 

 


Aggregate Auction Sales (f)
$
6,075,345

 
$
5,127,155

 
$
948,190

 
18
%
Net Auction Sales (g)
$
5,151,419

 
$
4,338,948

 
$
812,471

 
19
%
Private Sales (h)
$
624,511

 
$
1,179,038

 
$
(554,527
)
 
(47
%)
Consolidated Sales (i)
$
6,740,114

 
$
6,336,831

 
$
403,283

 
6
%
Adjusted Expenses (j)
$
602,135

 
$
599,424

 
$
(2,711
)
 
%
Adjusted Operating Income (j)
$
267,881

 
$
223,947

 
$
43,934

 
20
%
Adjusted Net Income (j)
$
142,398

 
$
130,761

 
$
11,637

 
9
%
Adjusted Diluted Earnings Per Share (j)
$
2.03

 
$
1.89

 
$
0.14

 
7
%
EBITDA (j)
$
256,776

 
$
245,066

 
$
11,710

 
5
%
Adjusted EBITDA (j)
$
298,613

 
$
246,438

 
$
52,175

 
21
%
EBITDA Margin (j)
27.4
%
 
28.7
%
 
(1.3
%)
 
N/A

Adjusted EBITDA Margin (j)
31.8
%
 
28.9
%
 
2.9
%
 
N/A

Effective income tax rate
39.2
%
 
30.0
%
 
(9.2
%)
 
N/A


24



Legend:
 *
Represents a change in excess of 100%.
(a)
In Sotheby's 2013 Form 10-K, professional fees included $1.4 million of third party advisory, legal, and other professional service fees directly associated with issues related to shareholder activism. These costs became material in 2014 and, as a result, were reported separately within special charges. The costs incurred in 2013 related to these issues have been reclassified to special charges in this Form 10-K to ensure comparability.

(b)
Consists of expenses directly associated with issues related to shareholder activism and the resulting proxy contest with Third Point LLC ("Third Point"), as well as the related shareholder litigation, net of a $4.6 million insurance recovery recognized in 2014.
(c)
Consists of employee termination benefits and lease exit costs associated with the restructuring plan approved by Sotheby's Board of Directors in July 2014.
(d)
Consists of compensation-related costs associated with the resignation of William F. Ruprecht as Sotheby's CEO.
(e)
Represents interest expense less interest income.
(f)
Represents the total hammer price of property sold at auction plus buyer’s premium.
(g)
Represents the total hammer price of property sold at auction.
(h)
Represents the total purchase price of property sold in private sales brokered by Sotheby’s, including its commissions.
(i)
Represents the sum of Aggregate Auction Sales, Private Sales, and Principal revenues. For the purposes of this calculation, the amount of Aggregate Auction Sales related to the sale of Principal segment inventory at Sotheby's auctions is eliminated. In 2014, such sales totaled $29.7 million.
(j)
See "Non-GAAP Financial Measures" below for a description of this non-GAAP financial measure and a reconciliation to the most comparable GAAP measure.


25



Agency Segment
The Agency segment earns commissions by matching buyers and sellers (also known as consignors) of authenticated fine art, decorative art, and jewelry (collectively, “art” or “works of art” or “artwork” or "property") through the auction or private sale process. The tables below present a summary of Agency segment gross profit and related statistical metrics for 2014 and 2013 (in thousands of dollars):
 
 
 
 
 
 
Favorable / (Unfavorable)
 
 
2014
 
2013
 
$ / % Change
 
% Change
Agency revenues:
 
 

 
 

 
 

 
 

Auction commissions
 
$
758,213

 
$
687,853

 
$
70,360

 
10
%
Private sale commissions
 
60,183

 
88,171

 
(27,988
)
 
(32
%)
Auction guarantee and inventory activities
 
(15,462
)
 
(2,186
)
 
(13,276
)
 
*

Other Agency revenues
 
22,192

 
19,801

 
2,391

 
12
%
Total Agency revenues
 
825,126

 
793,639

 
31,487

 
4
%
Agency direct costs:
 
 
 
 
 


 


Auction direct costs
 
79,677

 
77,078

 
(2,599
)
 
(3
%)
Private sale expenses
 
6,847

 
7,516

 
669

 
9
%
Total Agency direct costs
 
86,524



84,594

 
(1,930
)
 
(2
%)
Intersegment costs (a)
 
9,005

 
9,951

 
946

 
10
%
Agency segment gross profit (b)
 
$
729,597

 
$
699,094

 
$
30,503

 
4
%
Statistical Metrics:
 
 
 
 
 
 
 
 
Aggregate Auction Sales (c)
 
$
6,075,345

 
$
5,127,155

 
$
948,190

 
18
%
Net Auction Sales (d)
 
$
5,151,419

 
$
4,338,948

 
$
812,471

 
19
%
Items sold at auction with a hammer price greater than $1 million
 
743

620

620

 
123

 
20
%
Total hammer price of items sold at auction with a hammer price greater than $1 million
 
$
3,188,811

 
$
2,623,378

 
$
565,433

 
22
%
Items sold at auction with a hammer price greater than $2 million
 
408


307

 
101

 
33
%
Total hammer price of items sold at auction with a hammer price greater than $2 million
 
$
2,720,525


$
2,182,127

 
$
538,398

 
25
%
Auction Commission Margin (e)
 
14.7
%
 
15.9
%
 
(1.2
%)
 
N/A

Auction direct costs as a percentage of Net Auction Sales
 
1.55
%
 
1.78
%
 
0.23
%
 
N/A

Private Sales (f)
 
$
624,511

 
$
1,179,038

 
$
(554,527
)
 
(47
%)
Legend:
*
Represents a change in excess of 100%.
(a)
Represents interest charged by the Finance segment for secured loans issued with an interest rate below the Finance segment's target rate, as well as facility fees charged by the Finance segment for secured loans where no facility fee is collected from the borrower.
(b)
The calculation of Agency segment gross profit does not include the impact of salaries and related costs, general and administrative expenses, and depreciation and amortization expense. However, these items are deducted in the determination of segment income before taxes as reported in Note 4 of Notes to Consolidated Financial Statements.
(c)
Represents the total hammer price of property sold at auction plus buyer's premium.
(d)
Represents the total hammer price of property sold at auction.
(e)
Represents total auction commission revenues as a percentage of Net Auction Sales.
(f)
Represents the total purchase price of property sold in private sales brokered by Sotheby's, including its commissions.



26



Overview—In 2014, Agency segment gross profit improved by $30.5 million (4%) due to a 10% increase in auction commission revenues, which was the result of a 19% increase in Net Auction Sales, partially offset by a decline in Auction Commission Margin from 15.9% to 14.7%. The comparison of Agency segment gross profit between the current and prior year also benefits from a significant reduction in auction direct costs as a percentage of Net Auction Sales from 1.78% to 1.55%. Despite the overall improvement in Agency segment gross profit, in 2014, there was a $28 million (32%) decrease in private sale commissions when compared to the prior year. See the discussion below for an explanation of the significant factors impacting the comparison between the two years.
Auction Commission Revenues—In its role as auctioneer, Sotheby’s accepts property on consignment and matches sellers to buyers through the auction process. Sotheby’s invoices the buyer for the purchase price of the property (including the commission owed by the buyer), collects payment from the buyer, and remits to the seller the net sale proceeds after deducting its commissions, expenses and applicable taxes and royalties. Sotheby’s auction commissions include those paid by the buyer (“buyer’s premium”) and those paid by the seller (“seller’s commission”) (collectively, “auction commission revenue”), both of which are calculated as a percentage of Net Auction Sales.
In 2014, auction commission revenues improved $70.4 million (10%) due to an $812.5 million (19%) increase in Net Auction Sales, partially offset by a decline in Auction Commission Margin from 15.9% to 14.7%. In 2014, auction commission revenues were also favorably impacted by changes in foreign currency exchange rates, which contributed $11.7 million to the overall increase versus the prior year. Excluding the impact of foreign currency exchange rate changes, auction commission revenues increased $58.7 million (9%) in 2014. See "Net Auction Sales" and "Auction Commission Margin" below for a more detailed discussion of these statistical metrics.
Net Auction Sales—In 2014, Net Auction Sales increased $812.5 million (19%) as a result of the performance in the following collecting categories (in millions of dollars):
 
 
$ Increase
 
% Increase
Impressionist and Modern Art
 
$
286.3

 
30
%
Contemporary Art
 
261.3

 
22
%
Old Master and British Paintings and Drawings
 
80.2

 
35
%
Jewelry
 
46.0

 
10
%
Other fine art, decorative art and collectibles
 
138.7

 
9
%
Total
 
$
812.5

 
19
%
The increase in Net Auction Sales is aided by a 66% increase in sales attributable to single-owner collections. Most notably, Property from the Collection of Mrs. Paul Mellon was sold at various auctions during the fourth quarter of 2014 and contributed $188.8 million in Net Auction Sales across the collecting categories in the table above.
Auction Commission Margin—Auction Commission Margin represents total auction commission revenues as a percentage of Net Auction Sales. Typically, Auction Commission Margin is higher for lower value works of art or collections, while higher valued property earns a lower Auction Commission Margin. Accordingly, Auction Commission Margin may be adversely impacted by the mix of property sold in a period. Auction Commission Margin may also be adversely impacted by arrangements whereby Sotheby's shares its buyer's premium with a consignor in order to secure a high-value consignment, as well as by Sotheby's use of auction guarantees. For example, when issuing an auction guarantee, Sotheby's may enter into a risk and reward sharing arrangement with a counterparty whereby Sotheby's financial exposure under the auction guarantee is reduced in exchange for sharing its buyer's premium. Also, in situations when guaranteed property sells for less than the guaranteed price, Sotheby's buyer's premium from that sale is used to reduce the loss on the transaction. (See Note 18 of Notes to Consolidated Financial Statements for information related to Sotheby's use of auction guarantees.)
In 2014, Auction Commission Margin decreased from 15.9% to 14.7% due to the competitive environment for high-value consignments, which resulted in the increased use of auction guarantees that in certain situations resulted in guaranteed property selling for less than the guaranteed price, necessitating the use of all or a portion of Sotheby's buyer's premium to reduce the losses on the transactions. In addition, in 2014, sales mix adversely impacted Auction Commission Margin, as there was a shift in the proportion of property sold to the higher price bands of Sotheby's buyer's premium rate structure. The competitive environment also resulted in a higher level of buyer's premium shared with consignors.

27



In order to enhance revenue and strengthen auction commission margins, Sotheby’s enacted a new buyer's premium rate structure that became effective February 1, 2015 that is generally 25% on the first $200,000 of hammer (sale) price; 20% on the portion of hammer (sale) price above $200,000 up to and including $3 million; and 12% on any remaining amount above $3 million. The hammer (sale) price thresholds in other currencies have been adjusted in a commensurate manner. The previous buyer’s premium rate structure, which was in effect since March 15, 2013, was 25% on the first $100,000 of hammer (sale) price; 20% on the portion of hammer (sale) price above $100,000 up to and including $2 million; and 12% on any remaining amount above $2 million.
Private Sale Commission Revenues—Private sale commission revenues are earned through the direct brokering of purchases and sales of art. Private sales are initiated either by a client wishing to sell property with Sotheby’s acting as its exclusive agent in the transaction, or by a prospective buyer who is interested in purchasing a certain work of art privately. Because private sales are individually negotiated non-recurring transactions, the volume and value of transactions completed can vary from period to period, with associated variability in revenues. In 2014, despite a 43% increase in the number of transactions, private sale commission revenues decreased $28 million (32%) as prior year results included a significant number of non-recurring high-value transactions.
Auction Guarantee and Inventory Activities— Auction guarantee and inventory activities consists mainly of gains and losses related to auction guarantees, including: (i) Sotheby's share of overage or shortfall related to guaranteed property offered or sold at auction; (ii) writedowns to the carrying value of previously guaranteed property that initially failed to sell at auction, and (iii) recoveries and losses on the eventual sale of previously guaranteed property that initially failed to sell at auction.
In 2014, the net loss from Sotheby's auction guarantee and inventory activities increased by $13.3 million principally due to losses incurred on certain guaranteed property offered at auction during the current year. When evaluating the performance of Sotheby's portfolio of auction guarantees, management takes into consideration the total net revenue earned on guaranteed property offered at auction, which includes any auction commission revenues earned, as well as any guarantee overage or shortfall. On this basis, in 2014, Sotheby's portfolio of auction guarantees was profitable.
Other Agency Revenues—Other Agency revenues principally includes commissions and other fees earned by Sotheby's on sales brokered by third parties, fees charged to consignors for property withdrawn prior to auction, fees charged to clients for catalogue production and insurance, catalogue subscription revenues and advertising revenues. In 2014, Other Agency revenues increased $2.4 million (12%) due in part to a $1.7 million fee earned in the first quarter on a sale brokered by a third party for which there was no comparable amount earned in the prior year.
Agency Direct Costs—In 2014 and 2013, Agency direct costs consisted of the following (in thousands of dollars):
 
 
 
 
 
 
Favorable / (Unfavorable)
 
 
2014
 
2013
 
$ / % Change
 
% Change
Auction direct costs:
 
 
 
 
 
 
 
 
Sale marketing
 
$
34,979

 
$
34,669

 
$
(310
)
 
(1
%)
Shipping
 
13,208

 
12,912

 
(296
)
 
(2
%)
Sale venue
 
14,522

 
14,532

 
10

 
%
Other
 
16,968

 
14,965

 
(2,003
)
 
(13
%)
Total auction direct costs
 
79,677

 
77,078

 
(2,599
)
 
(3
%)
Private sale expenses
 
6,847


7,516

 
669

 
9
%
Total Agency direct costs
 
$
86,524

 
$
84,594

 
$
(1,930
)
 
(2
%)
Statistical Metric:
 
 
 
 
 
 
 
 
Auction direct costs as a % of Net Auction Sales
 
1.55%
 
1.78%
 
0.23
%
 
N/A


Auction Direct Costs—A large portion of auction direct costs relate to sale marketing expenses such as catalogue production and distribution, advertising and promotion costs, and traveling exhibition costs. Auction direct costs also include the cost of shipping property, sale venue costs, and other direct costs such as debit and credit card processing fees. The level of auction direct costs incurred in a period is generally dependent upon the volume and composition of Sotheby's auction sale offerings. For example, direct costs attributable to auctions of single-owner or other high-value collections are typically higher than those associated with standard various-owner auctions, mainly due to higher promotional costs for catalogues, special events, and traveling exhibitions, as well as higher shipping expenses.

28



In 2014, auction direct costs as a percentage of Net Auction Sales decreased from 1.78% to 1.55% when compared to the prior year as management leveraged the efficiencies and spending controls that were implemented throughout the year, particularly in catalogue production. These efforts limited the year-over-year increase in auction direct costs in 2014 to 3% on a 19% increase in Net Auction Sales, with the overall increase in auction direct costs resulting from higher sale advertising and promotion costs, unfavorable changes in foreign currency exchange rates, and unfavorable property loss and damage experience.
(See "Management's Cost Control Programs" below for forward looking information with respect to the level of auction direct costs anticipated for 2015.)
Private Sale Expenses—Private sale expenses consist largely of exhibition and sale marketing costs. In 2014, the $0.7 million (9%) decrease in private sale expenses is reflective of the reduced aggregate value of private sales in the period.
Principal Segment
The activities of the Principal segment include the sale of artworks that have been purchased opportunistically by Sotheby's, including property acquired for sale at auction in the near term in lieu of the Agency segment providing an auction guarantee to a potential consignor. To a lesser extent, the activities of the Principal segment also include retail wine sales and the activities of Acquavella Modern Art, an equity investee. Also, under certain circumstances, the Principal segment provides secured loans to certain art dealers to finance the purchase of works of art. In these situations, Sotheby's acquires a partial ownership interest in the purchased property in addition to providing the loan. Upon its eventual sale, the loan is repaid and any profit or loss is shared by Sotheby's and the art dealer according to their respective ownership interests.
The Principal segment also holds the remaining inventory of Noortman Master Paintings, an art dealer that was owned and operated by Sotheby's from its acquisition in June 2006 until its closure in December 2013. As of December 31, 2014, the carrying value of NMP's remaining inventory was $6.1 million, representing a $5 million (45%) decrease when compared to December 31, 2013 principally as a result of sales completed during the period. Management is continuing to execute its plans for further sales of NMP’s remaining inventory.
The table below summarizes Principal segment gross profit for 2014 and 2013 (in thousands of dollars):
    
 
 
 
 
 
Favorable / (Unfavorable)
 
2014
 
2013
 
$ Change
 
% Change
Principal revenues
$
69,958

 
$
30,638

 
$
39,320

 
*
Cost of Principal revenues
(68,037
)
 
(30,307
)
 
(37,730
)
 
*
Principal gross profit (a)
$
1,921

 
$
331

 
$
1,590

 
*
Legend:
*
Represents a change in excess of 100%.
(a)
The calculation of Principal segment gross profit does not include the impact of salaries and related costs, general and administrative expenses, and depreciation and amortization expense. However, these items are deducted in the determination of segment income (loss) before taxes as reported in Note 4 of Notes to Consolidated Financial Statements.
The increase in Principal revenues and cost of Principal revenues in 2014 is largely due to sales of property acquired from a potential consignor in lieu of the Agency segment providing an auction guarantee. The improvement in Principal segment gross profit is primarily due to a $0.8 million decrease in inventory writedowns when compared to the prior year and an increase in the number of profitable sales of items purchased for investment purposes.


29



Finance Segment
The Finance segment provides certain collectors and art dealers with financing secured by works of art that Sotheby's either has in its possession or permits borrowers to possess. The Finance segment generally makes two types of secured loans: (1) advances secured by consigned property where the borrowers are contractually committed, in the near term, to sell the property through the Agency segment of Sotheby's (a “consignor advance”); and (2) general purpose term loans secured by property not presently intended for sale (a “term loan”). (See Note 5 of Notes to Consolidated Financial Statements for additional information related to Finance segment loans.) Prior to 2014, the lending activities of the Finance segment were funded primarily by the operating cash flows of the Agency segment, with the ability to supplement those cash flows with revolving credit facility borrowings. In January 2014, in order to reduce the Finance segment's cost of capital and enhance returns, Sotheby's established a separate capital structure for the Finance segment through which client loans are predominantly funded with borrowings drawn from a dedicated revolving credit facility. The establishment of the Finance segment's dedicated revolving credit facility in February 2014 has allowed management to debt fund a substantial portion of pre-existing loans and fund further growth of the loan portfolio. Cash balances are also used to fund a portion of the Finance segment loan portfolio, as appropriate.
As of December 31, 2014, outstanding borrowings under the Finance segment's dedicated revolving credit facility totaled $445 million and the loan portfolio balance was $644 million, yielding a leverage ratio of 69%. The shortfall versus management's originally targeted leverage ratio of 85% is due to certain loans that do not qualify for debt financing under the Finance segment's dedicated revolving credit facility and funding inefficiencies related to foreign loans resulting from the level of Sotheby's foreign cash balances. In February 2015, management reduced its targeted return on equity for the Finance segment from 20% to 15% to allow for additional investment to drive growth.
(See "Capital Allocation and Financial Policy Review" and "Liquidity and Capital Resources" below. Also, see statement on Forward Looking Statements.)
The table below presents a summary of Finance segment gross profit and related statistical metrics for 2014 and 2013, as well as a comparison between the two years (in thousands of dollars):
 
 
 
 
 
 
Favorable / (Unfavorable)
 
 
2014
 
2013
 
$ / % Change
 
% Change
Finance revenues:
 
 
 
 
 
 
 
 
Client Paid:
 
 
 
 
 
 
 
 
Interest
 
$
29,477

 
$
19,767

 
$
9,710

 
49
%
Facility fees
 
3,536

 
1,510

 
2,026

 
*

Total client paid revenues
 
33,013

 
21,277

 
11,736

 
55
%
Intersegment revenues:
 
 
 
 
 
 
 
 
Interest (a)
 
6,796

 
7,959

 
(1,163
)
 
(15
%)
Facility fees (b)
 
2,209

 
1,992

 
217

 
11
%
Total intersegment revenues
 
9,005

 
9,951

 
(946
)
 
(10
%)
Total Finance revenues
 
42,018

 
31,228

 
10,790

 
35
%
Cost of Finance revenues (c)
 
8,740

 
1,090

 
(7,650
)
 
N/A

Finance segment gross profit (d)
 
$
33,278

 
$
30,138

 
$
3,140

 
10
%
Loan Portfolio Metrics:
 
 
 
 
 
 
 
 
Loan Portfolio Balance (e)
 
$
644,441

 
$
474,433

 
$
170,008

 
36
%
Average Loan Portfolio (f)
 
$
583,304

 
$
433,619

 
$
149,685

 
35
%
Credit Facility Borrowings Outstanding (g)
 
$
445,000

 
$

 
$
445,000

 
N/A

Average Credit Facility Borrowings (h)
 
$
306,448

 
$

 
$
306,448

 
N/A

Finance Revenue Margin (i)
 
7.2%
 
7.2%
 
—%
 
N/A

Finance Segment Leverage Ratio (j)
 
69.1%
 
—%
 
69.1%
 
N/A


30



Legend:
 
 
 
*
Represents a change in excess of 100%.
(a)
Represents interest earned from the Agency segment for secured loans issued with an interest rate below the Finance segment's target rate.
(b)
Represents facility fees earned from the Agency segment for secured loans where no facility fee is collected from the borrower.
(c)
In 2014, the cost of Finance revenues includes borrowing costs related to the Finance segment's revolving credit facility, including interest expense, commitment fees, and the amortization of amendment and arrangement fees. In 2013, the cost of Finance revenues includes intersegment borrowing costs related to the funding of the loan portfolio.
(d)
The calculation of Finance segment gross profit does not include the impact of salaries and related costs, general and administrative expenses, depreciation and amortization expense, and intercompany charges from Sotheby's global treasury function. However, these items are deducted in the determination of segment income before taxes as reported in Note 4 of Notes to Consolidated Financial Statements.
(e)
Represents the period ending loan portfolio balance.
(f)
Represents the average loan portfolio outstanding during the period.
(g)
Represents the period ending balance of borrowings outstanding under the Finance segment's revolving credit facility.
(h)
Represents average borrowings outstanding during the period under the Finance segment's revolving credit facility.
(i)
Represents the annualized rate of return of Finance revenues in relation to the Average Loan Portfolio.
(j)
Calculated as Credit Facility Borrowings Outstanding divided by the Loan Portfolio Balance.
The improvement in Finance segment gross profit in 2014 reflects the continued growth of the client loan portfolio, which is a result of a number of factors, including an increase in the demand for art-related financing, the increased ability to fund loans through revolving credit facility borrowings, the relatively low nominal interest rate environment, and the improved global reach of Sotheby's art-financing business. The overall improvement in Finance segment gross profit is partially offset by the cost of revolving credit facility borrowings as management began the process of debt-financing the loan portfolio after establishing the Finance segment's dedicated revolving credit facility in February 2014.
Marketing Expenses
Marketing expenses are costs related to the promotion of the Sotheby’s brand, consisting of corporate marketing activities and client service initiatives, as well as strategic sponsorships of and charitable donations to cultural institutions. In 2014, marketing expenses decreased $5.9 million (26%), reflecting increased efficiencies, enhanced spending controls, and a more targeted approach to spending on strategic sponsorships of and charitable donations to museums and other cultural institutions. To a lesser extent, the comparison to the prior year is favorably impacted by one-time promotional costs of $0.8 million incurred in the prior year related to Sotheby's 40th Anniversary in Hong Kong.
(See "Management's Cost Control Programs" below for forward looking information with respect to the level of marketing expenses anticipated for 2015.)

31



Salaries and Related Costs
In 2014 and 2013, salaries and related costs consisted of the following (in thousands of dollars):
 
 
 
 
 
Favorable / (Unfavorable)
 
2014
 
2013
 
$ / % Change
 
% Change
Full-time salaries
$
150,110

 
$
142,503

 
$
(7,607
)
 
(5
%)
Incentive compensation expense
63,672

 
58,573

 
(5,099
)
 
(9
%)
Share-based payment expense
23,470

 
22,350

 
(1,120
)
 
(5
%)
Payroll taxes
23,631

 
21,992

 
(1,639
)
 
(7
%)
Employee benefits
29,651

 
32,415

 
2,764

 
9
%
Other compensation expense
20,400

 
19,617

 
(783
)
 
(4
%)
Total salaries and related costs
$
310,934

 
$
297,450

 
$
(13,484
)
 
(5
%)
Statistical Metric:
 

 
 

 
 

 
 

Salaries and related costs as a % of revenues
33.1
%
 
34.8
%
 
1.7
%
 
N/A

In 2014, changes in foreign currency exchange rates increased salaries and related costs by $2.9 million when compared to the prior year. Excluding the impact of foreign currency exchange rate changes, salaries and related costs increased $10.6 million (4%) in 2014.
See the discussion below for a detailed explanation of the significant factors impacting the comparison of the various elements of salaries and related costs between 2014 and 2013.
Full-Time Salaries—In 2014, full-time salaries increased by approximately 5% when compared to the prior year partially due to the impact of mid-year strategic headcount and salary increases in 2013 which were implemented in part to support Sotheby's growth in Asia. In addition, targeted salary and headcount increases taking effect in 2014 contributed to the growth of full-time salaries versus the prior year. These increases were marginally offset by headcount reductions carried out in the second half of 2014 as a result of the 2014 Restructuring Plan (see "Restructuring Charges, Net" below).
Also contributing to the higher level of full-time salaries in 2014 are changes in foreign currency exchange rates, which contributed $2.1 million to the year-over-year increase. Excluding the impact of foreign currency exchange rate changes, full-time salaries increased by approximately 4% in 2014 when compared to the prior year.
(See "Management's Cost Control Programs" below for forward looking information with respect to the level of full-time salaries anticipated for 2015.)
Incentive Compensation—Incentive compensation principally includes the expense associated with cash payments made under Sotheby's incentive compensation program. The amount of incentive compensation paid under this program is awarded based upon the recommendation of the Compensation Committee to the Board of Directors after assessing Sotheby's annual earnings, as measured by Adjusted EBITDA*. In addition, incentive compensation includes amounts awarded to employees for brokering certain eligible private sale transactions under a formula established by the Compensation Committee.
In 2014, the increase in incentive compensation expense is principally due to the higher level of Adjusted EBITDA* relative to the prior year, partially offset by lower private sale incentive costs resulting from a decline in private sale commission revenues.






________________________
* See "Non-GAAP Financial Measures" below for a description of this non-GAAP financial measure.

32



Share-Based Payment Expense—Share-based payment expense relates to the amortization of equity compensation awards such as performance share units, restricted stock units, and stock options. Equity compensation awards are granted annually in the first quarter of the year, primarily under Sotheby's incentive compensation program, with the annual award value generally dependent upon the level of Sotheby’s financial results for the prior year. The amount of compensation expense recognized for share-based payments is based on management’s estimate of the number of units ultimately expected to vest as a result of employee service. In addition, for performance share units, the amount and timing of expense recognition is significantly impacted by management’s quarterly assessment of the likelihood and timing of achieving certain profitability targets.
In 2014, share-based payment expense increased by $1.1 million (5%) reflecting management's assessment of the number of performance-based equity compensation units expected to vest. (See Note 14 of Notes to Consolidated Financial Statements for more detailed information related to Sotheby’s share-based compensation programs.)
Employee Benefits—Employee benefits include the cost of Sotheby’s retirement plans and health and welfare programs, as well as certain employee severance costs. Sotheby’s material retirement plans include defined benefit and defined contribution pension plans for its employees in the U.K. and defined contribution and deferred compensation plans for its U.S. employees.
Generally, the amount of employee benefit costs recognized in a period is dependent upon headcount and overall compensation levels, as well as Sotheby’s financial performance. Additionally, the level of expense related to Sotheby’s defined benefit pension plan in the U.K. is significantly influenced by interest rates, investment performance in the debt and equity markets, and actuarial assumptions. Also, the amount recorded in a period for Sotheby’s Deferred Compensation Plan (the “DCP”) is dependent upon changes in the fair value of the DCP liability resulting from gains and losses in deemed participant investments. On a consolidated basis, cost increases (decreases) related to the DCP liability are largely offset by market gains (losses) in the trust assets related to the DCP liability, which are reflected in the Consolidated Income Statements within other income.
In 2014, employee benefit costs decreased $2.8 million (9%) as lower non-restructuring related severance costs and a decline in DCP investment performance are partially offset by the impact of the headcount, salary and incentive compensation increases discussed above, as well as a higher level of claims under Sotheby's U.S. health insurance plans and higher pension costs in the U.K. (For information regarding other non-restructuring related severance costs incurred in 2014, see "CEO Separation Costs" below.)
For the year ending December 31, 2015, the net cost associated with the U.K. defined benefit plan is expected to increase $2.3 million primarily due to an increase in the required amortization of prior year actuarial losses. (See statement on Forward Looking Statements.)
Other Compensation Expense—Other compensation expense typically includes expense related to certain retention-based, new-hire and other employment arrangements, as well as the cost of temporary labor and overtime. Other compensation expense increased $0.8 million (4%) in 2014 primarily as a result of a higher level of expense associated with such employment arrangements.

33



General and Administrative Expenses
In 2014 and 2013, general and administrative expenses consisted of the following (in thousands of dollars):
 
 
 
 
 
 
Favorable / (Unfavorable)
 
 
2014
 
2013
 
$ Change
 
% Change
Professional fees (a)
 
$
54,285

 
$
61,624

 
$
7,339

 
12
%
Facilities-related expenses
 
44,590

 
46,920

 
2,330

 
5
%
Travel and entertainment
 
27,633

 
30,788

 
3,155

 
10
%
Telecommunication and technology
 
9,077

 
9,057

 
(20
)
 
%
Insurance
 
6,190

 
6,252

 
62

 
1
%
Other indirect expenses
 
17,021

 
20,817

 
3,796

 
18
%
Total general and administrative expenses
 
$
158,796

 
$
175,458

 
$
16,662

 
9
%
Legend:
(a)
In Sotheby's 2013 Form 10-K, professional fees included $1.4 million of third party advisory, legal, and other professional service fees directly associated with issues related to shareholder activism. These costs became material in 2014 and, as a result, were reported separately within special charges. The costs incurred in 2013 related to these issues have been reclassified to special charges in this Form 10-K to ensure comparability.

See the discussion below for an explanation of the significant factors impacting the comparison of the various elements of general and administrative expenses between 2014 and 2013.
Professional fees—Professional fees principally include the costs associated with certain outsourced functions, legal, audit and other compliance-related fees, and Board of Director fees, as well as business consulting costs. In 2014, professional fees decreased $7.3 million (12%) principally due to a lower level of business consulting costs, as well as lower website development consulting costs and lower tax, legal, audit and accounting fees.
(See "Management's Cost Control Programs" below for forward looking information with respect to the level of professional fees and other areas of general and administrative expense anticipated for 2015.)
Facilities-related expenses—Facilities-related expenses principally include rent expense, real estate taxes and other costs related to the operation, security and maintenance of Sotheby's worldwide premises. In 2014, facilities-related expenses decreased $2.3 million (5%) principally due to lower maintenance costs primarily at Sotheby's York Avenue headquarters in New York, where several significant repairs were necessary in the prior year, and lower commercial rent taxes.
Travel and entertainment—Travel and entertainment includes costs related to business travel by Sotheby's staff and client entertainment. In 2014, travel and entertainment expenses decreased $3.2 million (10%) primarily due to management's cost control initiatives in this area.
Other indirect expenses—Other indirect expenses include costs related to client goodwill gestures and claims, uncollectible accounts and other miscellaneous indirect costs. In 2014, other indirect expenses decreased $3.8 million (18%) primarily due to a $2.5 million reduction in client goodwill gestures and legal claims, as prior year results were unfavorably impacted by a $1.7 million accommodation made to an irrevocable bid counterparty in the first quarter of 2013. To a lesser extent, the comparison to the prior year is also favorably impacted by a net decrease in bad debt expense resulting from a $0.6 million reduction to the Finance segment's allowance for credit losses as a result of better than anticipated loan loss rates. (See Note 5 of Notes to Consolidated Financial Statements.)
Special Charges, Net
In 2014 and 2013, Sotheby's recognized special charges of $20 million and $1.4 million, respectively, related to third party advisory, legal, and other professional service fees directly associated with issues related to shareholder activism, the resulting proxy contest with Third Point, and the litigation concerning Sotheby's former shareholder rights plan and the change in control provision in its credit agreement. The amount recognized in 2014 is net of a $4.6 million insurance recovery pertaining to certain professional services fees incurred in defense of the litigation concerning Sotheby's former shareholder rights plan and the change in control provision in its credit agreement.


34



Included in special charges in 2014 is a $10 million charge related to the reimbursement by Sotheby's of Third Point's documented, out-of-pocket expenses incurred in connection with the proxy contest and the litigation concerning Sotheby's former shareholder rights plan. This reimbursement is part of a support agreement Sotheby's entered into with Third Point, Daniel S. Loeb, Olivier Reza, Harry J. Wilson and other entities affiliated with Third Point (together with Third Point, the “Third Point Entities”) on May 4, 2014 pursuant to which Sotheby's and Third Point settled the previously pending proxy contest for the election of directors (the "Support Agreement"). Pursuant to the Support Agreement, on May 4, 2014, Sotheby's Board of Directors expanded the size of the Board to 15 directors and appointed Mr. Loeb, Mr. Reza, and Mr. Wilson (the “Third Point Nominees”) to fill the resulting vacancies. The Support Agreement also contains various other terms and provisions, including with respect to standstill and voting commitments entered into by Third Point, Third Point's withdrawal of the litigation concerning Sotheby's former shareholder rights plan, and the accelerated expiration of Sotheby's former shareholder rights plan.
(See Note 13 of Notes to Consolidated Financial Statements for information related to Sotheby's former shareholder rights plan. See Note 16 of Notes to Consolidated Financial Statements for information related to the litigation concerning Sotheby's former shareholder rights plan and the change in control provision in its credit agreement.)
Restructuring Charges, Net
On July 16, 2014, Sotheby's Board of Directors approved a restructuring plan (the "2014 Restructuring Plan") principally impacting Sotheby's operations in the U.S. and the U.K. The 2014 Restructuring Plan has resulted in restructuring charges (net) of approximately $14.2 million recognized in 2014, consisting of $13.9 million in employee termination benefits recognized in the second half of 2014 and approximately $0.3 million in lease exit costs. A large majority of the headcount reductions resulting from the 2014 Restructuring Plan have been completed and the remainder will occur by June 30, 2015. The 2014 Restructuring Plan will result in annualized cost savings of approximately $13 million, of which $11 million is being reinvested through the addition of new staff in support of collecting categories and activities with the highest growth opportunity in the future. (See "Management's Cost Control Programs" below for information on other cost control initiatives implemented in 2014 and Note 22 of Notes to Consolidated Financial Statements. Also, see statement on Forward Looking Statements.)
CEO Separation Costs
In the fourth quarter of 2014, Sotheby's recognized $7.6 million of compensation-related costs associated with the resignation agreement with William F. Ruprecht as CEO, the details of which are summarized in a Form 8-K filed with the SEC on November 25, 2014. The $7.6 million charge consists of a $4 million severance accrual and $3.6 million for accelerated recognition of share-based payment expense triggered by the terms of his employment agreement.
Net Interest Expense
Net interest expense decreased $6.6 million (17%) in 2014 primarily as a result of the repayment of Sotheby's 3.125% Convertible Notes upon their maturity in June 2013.
Other Income
In 2014, other income decreased $2.7 million (91%) primarily due to significantly lower gains on DCP trust assets when compared to 2013 and recognition of a $2.1 million loss recorded in 2014 related to the cumulative translation adjustment that was recognized upon the liquidation of a foreign subsidiary. The impact of these factors was partially offset by gains realized on certain other foreign currency denominated transactions in 2014.
Income Tax Expense
Sotheby's effective income tax rate was 39.2% in 2014, compared to 30% in 2013. The increase in the 2014 effective income tax rate over the prior year was caused by two income tax benefits that were recognized in 2013 for which there were no comparable benefits in 2014. In the fourth quarter of 2013, a $10 million income tax benefit was recorded related to the reversal of a valuation allowance recorded against foreign tax credits which management determined were more likely than not to be realized as a result of a repatriation of earnings from Sotheby’s foreign subsidiaries, as discussed in the following paragraph. In the second quarter of 2013, a $6.8 million income tax benefit was recorded, net of a related liability recognized for uncertain tax benefits, for a worthless stock deduction Sotheby’s claimed on its 2013 U.S. federal income tax return related to the tax basis of a foreign subsidiary. Also adversely impacting the comparison to the prior year is $3.9 million of income tax expense that was recognized in 2014 to reduce the value of certain deferred tax assets to an amount that will be recognized in the future as a result of the enactment of the New York State 2014-2015 Budget Act, as discussed below.

35


In both 2014 and 2013, Sotheby’s effective income tax rate was increased as the result of deferred tax liabilities recorded for incremental income taxes on the undistributed earnings of foreign subsidiaries. Beginning in 2014, based on its projections and planned uses of foreign cash balances, management determined that the current earnings of Sotheby's foreign subsidiaries would not be indefinitely reinvested outside of the U.S., and a net deferred tax liability of $16.4 million has been recorded on those earnings. The $16.4 million net liability consists of $18.6 million of income tax expense that was charged against net income and a $2.2 million income tax benefit recorded in other comprehensive income. In 2013, net income tax expense of $8.7 million was recorded as a result of management’s decision to repatriate $250 million of accumulated earnings from certain of Sotheby’s foreign subsidiaries to help fund a $300 million special dividend that was paid to shareholders in March 2014. This decision was based on the conclusions reached in January 2014 as a result of the Capital Allocation and Financial Policy Review. The income tax expense that was recognized in the fourth quarter of 2013 as a result of this planned repatriation of foreign earnings was recorded net of the reversal of a valuation allowance against certain foreign tax credits, which management determined were more likely than not to be realized as a result of the planned repatriation.
(See “Capital Allocation and Financial Policy Review” and “Liquidity and Capital Resources” below, and Notes 10 and 11 of Notes to Consolidated Financial Statements.)
The New York State 2014-2015 Budget Act (“N.Y. Budget Act”)—The N.Y. Budget Act was signed into law on March 31, 2014. The N.Y. Budget Act substantially modified and reformed various aspects of New York State tax law. Sotheby’s anticipates that the legislation will reduce the amount of taxable income apportioned to New York State, thereby reducing its state effective income tax rate beginning in 2015. Management does not expect the N.Y. Budget Act to have a material impact on Sotheby’s worldwide effective tax rate. Sotheby’s recorded $3.9 million of income tax expense to reduce the value of certain deferred tax assets to the amount that will be recognized in the future as a result of the anticipated reduction of the New York State effective income tax rate (including $1.3 million of income tax expense related to temporary differences originating in the current year that are expected to reverse in a future year at a lower effective tax rate). (See statement on Forward Looking Statements.)
Impact of Changes in Foreign Currency Exchange Rates
For the year ended December 31, 2014, foreign currency exchange rates had a net favorable impact of approximately $7 million on Sotheby's operating income when compared to 2013, with revenues favorably impacted by $14.2 million and expenses unfavorably impacted by $7.2 million.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
This discussion should be read in conjunction with Note 4 of Notes to Consolidated Financial Statements, which provides financial information about Sotheby's segments.
Overview
In 2013, Sotheby’s reported net income of $130 million, a $21.7 million (20%) increase when compared to 2012. This improvement was made possible by a $24.7 million increase in fourth quarter net income as Net Auction Sales for the period increased 28%, reflecting the strength of the global art market as Sotheby’s autumn sales of Asian Art in Hong Kong and Impressionist Art in New York significantly exceeded 2012 results.
The improvement in 2013 net income is primarily attributable to a $529.3 million (14%) increase in Net Auction Sales and a $272.5 million (30%) increase in Private Sales. However, these increases generated a smaller 11% growth in Agency segment revenues as the competitive environment for high value auction consignments was robust and resulted in a decrease in Auction Commission Margin from 16.3% in 2012 to 15.9% in 2013. In addition, the improvement in revenues is partially offset by a higher level of operating expenses due to the cost of strategic investments, as well as inflationary pressures across most expense categories.
In addition to the operating factors discussed above, the comparison of Sotheby's 2013 results to the prior year is also favorably impacted by a non-operating bond redemption loss of $15 million ($8.3 million, after taxes) incurred in the fourth quarter of 2012.
See the discussion below for greater detail on the significant factors impacting Sotheby’s 2013 results and the comparison to 2012.





36




Results of Operations for the Years Ended December 31, 2013 and 2012
The table below presents a summary of Sotheby’s results of operations for 2013 and 2012, as well as a comparison between the two years (in thousands of dollars):
 
 
 
 
 
Favorable/(Unfavorable)
 
2013
 
2012
 
$ / % Change
 
% Change
Revenues:
 

 
 

 
 

 
 

Agency
$
793,639

 
$
717,231

 
$
76,408

 
11
%
Principal
30,638

 
26,180

 
4,458

 
17
%
Finance
21,277

 
17,707

 
3,570

 
20
%
License fees
6,902

 
6,124

 
778

 
13
%
Other
1,222

 
1,250

 
(28
)
 
(2
%)
Total revenues
853,678

 
768,492

 
85,186

 
11
%
Expenses:
 
 
 
 
 
 
 
Agency direct costs
84,594

 
65,665

 
(18,929
)
 
(29
%)
Cost of Principal revenues
30,307

 
21,118

 
(9,189
)
 
(44
%)
Marketing
22,487

 
17,857

 
(4,630
)
 
(26
%)
Salaries and related
297,450

 
273,273

 
(24,177
)
 
(9
%)
General and administrative (a)
175,458

 
158,220

 
(17,238
)
 
(11
%)
Depreciation and amortization
19,435

 
17,942

 
(1,493
)
 
(8
%)
Special charges, net (a)
1,372

 

 
(1,372
)
 
N/A

Restructuring charges, net

 
(2
)
 
(2
)
 
100
%
Total expenses
631,103

 
554,073

 
(77,030
)
 
(14
%)
Operating income
222,575

 
214,419

 
8,156

 
4
%
Net interest expense (b)
(39,911
)
 
(42,879
)
 
2,968

 
7
%
Extinguishment of debt

 
(15,020
)
 
15,020

 
N/A

Other income
3,029

 
2,916

 
113

 
4
%
Income before taxes
185,693

 
159,436

 
26,257

 
16
%
Equity in earnings of investees, net of tax
15

 
251

 
(236
)
 
(94
%)
Income tax expense
55,702

 
51,395

 
(4,307
)
 
(8
%)
Net income
130,006

 
108,292

 
21,714

 
20
%
Less: Net income attributable to non-controlling interest

 

 

 
N/A

Net income attributable to Sotheby's
$
130,006

 
$
108,292

 
$
21,714

 
20
%
Diluted earnings per share - Sotheby's common shareholders
$
1.88

 
$
1.57

 
$
0.31

 
20
%
Statistical Metrics:
 

 
 

 
 

 
 
Aggregate Auction Sales (c)
$
5,127,155

 
$
4,473,625

 
$
653,530

 
15
%
Net Auction Sales (d)
$
4,338,948

 
$
3,809,656

 
$
529,292

 
14
%
Private Sales (e)
$
1,179,038

 
$
906,510

 
$
272,528

 
30
%
Consolidated Sales (f)
$
6,336,831

 
$
5,406,315

 
$
930,516

 
17
%
Adjusted Expenses (g)
$
599,424

 
$
532,957

 
$
(66,467
)
 
(12
%)
Adjusted Operating Income (g)
$
223,947

 
$
214,417

 
$
9,530

 
4
%
Adjusted Net Income (g)
$
130,761

 
$
116,553

 
$
14,208

 
12
%
Adjusted Diluted Earnings Per Share (g)
$
1.89

 
$
1.69

 
$
0.20

 
12
%
EBITDA (g)
$
245,066

 
$
220,640

 
$
24,426

 
11
%
Adjusted EBITDA (g)
$
246,438

 
$
235,658

 
$
10,780

 
5
%
EBITDA Margin (g)
28.7
%