Segment Reporting

Sotheby’s operations are organized under three segments: Agency, Principal, and Finance. Sotheby’s chief operating decision making group, which consists of its Chief Executive Officer ("CEO"), Chief Financial Officer, and Chief Operating Officer, regularly evaluates financial information about each operating segment in deciding how to allocate resources and assess performance. The performance of each segment is measured based on its pre-tax income (loss), excluding the unallocated items highlighted below.

The Agency segment 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. The Agency segment is an aggregation of Sotheby's auction and private sale activities conducted by its operating segments in the Americas, Europe, and Asia, which have similar economic characteristics and are similar in their services, customers, and the manner in which their services are provided.

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 (see Note 7). 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.

The Finance segment conducts art-related financing activities by providing certain collectors and dealers with loans secured by works of art (see Note 5).

All Other primarily includes the results of Sotheby’s brand licensing activities and other ancillary businesses, which are not material to Sotheby’s consolidated financial statements.

The accounting policies of Sotheby’s segments are the same as those described in the summary of significant accounting policies (see Note 2). For auction commissions, Agency segment revenues are attributed to geographic areas based on the location of the auction. For private sale commissions, Agency segment revenues are attributed to geographic areas based on the location of the entities which significantly contributed to the completion of the sale. Principal segment revenues are attributed to geographic areas based on the location of the entity that holds legal title to the property sold. Finance segment revenues are attributed to geographic areas based on the location of the entity that originated the loan.

The following table presents Sotheby’s segment information for 2014, 2013, and 2012 (in thousands of dollars):



Year ended December 31, 2014	Agency		Principal			Finance			All Other		Reconciling items				Total
Revenues	$	825,126	$	69,958		$	42,018		$	9,956	$	(9,005	)		$	938,053
Interest income	$	1,857	$	—		$	18		$	8	$	—			$	1,883
Interest expense (a)	$	35,189	$	—		$	—		$	—	$	—			$	35,189
Depreciation and amortization	$	20,110	$	298		$	130		$	37	$	—			$	20,575
Segment income before taxes	$	188,045	$	71		$	26,491	(b)	$	7,343	$	(28,929	)		$	193,021
Year ended December 31, 2013
Revenues	$	794,179	$	30,638		$	31,228		$	8,124	$	(10,491	)		$	853,678
Interest income	$	3,860	$	—		$	—		$	31	$	(1,090	)	(c)	$	2,801
Interest expense (a)	$	42,636	$	—		$	67		$	9	$	—			$	42,712
Depreciation and amortization	$	19,072	$	202		$	125		$	36	$	—			$	19,435
Segment income (loss) before taxes	$	164,499	$	(4,827	)	$	21,445	(b)	$	5,975	$	(1,399	)		$	185,693
Year ended December 31, 2012
Revenues	$	717,231	$	26,180		$	25,486		$	7,374	$	(7,779	)		$	768,492
Interest income	$	2,465	$	6		$	—		$	—	$	(921	)	(c)	$	1,550
Interest expense (a)	$	44,425	$	4		$	—		$	—	$	—			$	44,429
Depreciation and amortization	$	17,325	$	463		$	120		$	34	$	—			$	17,942
Segment income (loss) before taxes	$	152,240	$	(1,423	)	$	18,595	(b)	$	5,338	$	(15,314	)		$	159,436

(a) Borrowing costs related to the Finance Credit Agreement, which include interest and the amortization of fees, are reflected in the Consolidated Income Statements as the Cost of Finance Revenues (See Note 9).

(b)

In 2014, 2013, and 2012, Finance segment income before taxes includes $2.1 million, $2.7 million, and $1.7 million, respectively, of intercompany charges from Sotheby's global treasury function. As the Finance segment continues to debt finance its loan portfolio, it is expected that these intercompany charges will decrease in the future. (See Notes 5 and 9 for information on the capital structure of the Finance segment and the debt financing of client loans.)

(c)

In 2013 and 2012, the reconciling item related to Interest Income relates to charges from the Agency segment to the Finance segment for intercompany borrowing costs. Beginning in 2014, these charges are no longer applicable due to the debt financing of the Finance segment's loan portfolio. (See Notes 5 and 9 for information on the capital structure of the Finance segment and the debt financing of client loans.)

In 2014, 2013, and 2012 Agency segment revenues consisted of the following (in thousands of dollars):



	2014			2013			2012
Auction commissions	$	758,213		$	687,853		$	622,391
Private sale commissions	60,183			88,711			74,632
Auction guarantee and inventory activities	(15,462		)	(2,186		)	(1,623		)
Other Agency revenues (a)	22,192			19,801			21,831
Total Agency segment revenues	825,126			794,179			717,231
Reconciling item (b)	—			(540		)	—
Total Agency revenues	$	825,126		$	793,639		$	717,231

(a) Includes commissions and other fees earned by Sotheby's on sales brokered by third parties, fees charged to clients for catalogue production and insurance, catalogue subscription revenues, and advertising revenues.

(b) In 2013, the reconciling item relates to the elimination of private sale commission revenues earned by the Agency segment for acting as agent in the sale of certain Principal segment inventory.

The table below provides a reconciliation of segment revenues to consolidated revenues for 2014, 2013, and 2012 (in thousands of dollars):



	2014			2013			2012
Agency	$	825,126		$	794,179		$	717,231
Principal	69,958			30,638			26,180
Finance	42,018			31,228			25,486
All Other	9,956			8,124			7,374
Segment revenues	947,058			864,169			776,271
Reconciling items:
Intercompany charges from Finance to Agency (a)	(9,005		)	(9,951		)	(7,779		)
Intercompany private sale commission revenues charged by Agency to Principal	—			(540		)	—
Total revenues	$	938,053		$	853,678		$	768,492

(a) Represents interest charged for secured loans issued with an interest rate below the Finance segment's target rate, as well as facility fees charged for secured loans where no facility fee is collected from the borrower.

The table below details the unallocated amounts and reconciling items related to segment income before taxes and provides a reconciliation of segment income before taxes to consolidated income before taxes for 2014, 2013, and 2012 (in thousands of dollars):



	2014			2013			2012
Agency	$	188,045		$	164,499		$	152,240
Principal	71			(4,827		)	(1,423		)
Finance	26,491			21,445			18,595
All Other	7,343			5,975			5,338
Segment income before taxes	221,950			187,092			174,750
Unallocated amounts and reconciling items:
Special charges, net (see Note 21)	(20,008		)	(1,372		)	—
CEO separation costs (see Note 23)	(7,591		)	—			—
Extinguishment of debt (see Note 10)	—			—			(15,020		)
Equity in earnings of investees	(1,330		)	(27		)	(294		)
Income before taxes	$	193,021		$	185,693		$	159,436

In the table above, Sotheby's pre-tax share of earnings related to its equity investees are included as part of the Principal segment income (loss), but are presented net of tax in the Consolidated Income Statement.

The table below presents geographic information about revenues in 2014, 2013, and 2012 for all countries which exceeded 5% of total revenues (in thousands of dollars):



	2014			2013			2012
United States	$	397,113		$	352,450		$	338,162
United Kingdom (the "U.K.")	271,505			230,304			221,716
China	165,066			153,909			108,399
France	48,032			46,891			40,972
Switzerland	46,226			41,150			41,061
Other countries	19,116			39,465			25,961
Reconciling item:
Intercompany revenue	(9,005		)	(10,491		)	(7,779		)
Total	$	938,053		$	853,678		$	768,492

The table below presents assets for Sotheby’s segments, as well as a reconciliation of segment assets to consolidated assets as of December 31, 2014, 2013 and 2012 (in thousands of dollars):



December 31	2014		2013		2012
Agency	$	2,325,855	$	2,261,482	$	1,977,620
Principal	93,275		82,560		85,748
Finance	658,710		480,103		427,871
All Other	1,700		1,496		1,224
Total segment assets	3,079,540		2,825,641		2,492,463
Unallocated amounts:
Deferred tax assets and income tax receivable	55,280		67,905		82,632
Consolidated assets	$	3,134,820	$	2,893,546	$	2,575,095

Substantially all of Sotheby's capital expenditures in 2014, 2013, and 2012 were attributable to the Agency segment.