Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
 
 
 
 
FORM 10-Q
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2019
Commission File Number 1-9750
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12874144&doc=12
(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
New York, New York
 
10021
(Address of principal executive offices)
 
(Zip Code)
Registrant's telephone number, including area code: (212) 606-7000

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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of the 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 such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
Emerging growth company
¨
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
As of April 30, 2019, there were 46,612,127 outstanding shares of common stock, par value $0.01 per share, of the registrant.
______________________________________________________________________________________________________




TABLE OF CONTENTS
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2



PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

SOTHEBY’S
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)
Three Months Ended March 31,
 
2019
 
2018
 
 
 
 
 
Revenues:
 
 

 
 

Agency commissions and fees
 
$
147,667

 
$
165,526

Inventory sales
 
8,766

 
16,236

Finance
 
13,266

 
9,881

Other
 
3,766

 
4,153

Total revenues
 
173,465

 
195,796

Expenses:
 
 

 
 

Agency direct costs
 
31,803

 
35,273

Cost of inventory sales
 
7,166

 
15,995

Cost of finance revenues
 

 
2,263

Marketing
 
5,908

 
5,722

Salaries and related
 
76,645

 
78,719

General and administrative
 
47,842

 
43,813

Depreciation and amortization
 
7,691

 
7,100

Restructuring charges, net
 
(19
)
 

Total expenses
 
177,036

 
188,885

Operating (loss) income
 
(3,571
)
 
6,911

Interest income
 
285

 
365

Interest expense
 
(13,151
)
 
(9,313
)
Extinguishment of debt
 

 
(10,855
)
Non-operating income
 
1,848

 
1,424

Loss before taxes
 
(14,589
)
 
(11,468
)
Income tax benefit
 
(5,986
)
 
(4,136
)
Equity in earnings of investees
 
1,528

 
806

Net loss
 
(7,075
)
 
(6,526
)
Less: Net loss attributable to noncontrolling interest

(4
)
 
(4
)
Net loss attributable to Sotheby's
 
$
(7,071
)
 
$
(6,522
)
Basic and diluted loss per share - Sotheby’s common shareholders
 
$
(0.15
)
 
$
(0.12
)
Weighted average basic and diluted shares outstanding
 
46,422

 
52,464


See accompanying Notes to Condensed Consolidated Financial Statements

3



SOTHEBY’S
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
(In thousands)
Three Months Ended March 31,
 
2019
 
2018
 
 
 
 
 
Net loss
 
$
(7,075
)
 
$
(6,526
)
Other comprehensive (loss) income:
 
 
 
 
Currency translation adjustments
 
1,247

 
7,200

Cash flow hedges
 
(213
)
 
1,170

Net investment hedges
 
(46
)
 
(1,610
)
Defined benefit pension plan
 
(13
)
 
82

Total other comprehensive income
 
975

 
6,842

Comprehensive (loss) income
 
(6,100
)
 
316

Less: Comprehensive loss attributable to noncontrolling interests
 
(4
)
 
(4
)
Comprehensive (loss) income attributable to Sotheby's
 
$
(6,096
)
 
$
320


See accompanying Notes to Condensed Consolidated Financial Statements



4




SOTHEBY’S
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
 
 
March 31,
2019
 
December 31, 2018
 
March 31,
2018
 
 
 
 
A S S E T S
 
 

 
 
 
 

Current assets:
 
 

 
 
 
 

Cash and cash equivalents
 
$
124,332

 
$
178,579

 
$
335,728

Restricted cash (see Notes 9 and 12)
 
11,739

 
4,836

 
15,682

Accounts receivable, net of allowance for doubtful accounts of $9,311, $9,125, and $10,190
 
764,059

 
978,140

 
724,432

Notes receivable, net of allowance for credit losses of $1,146, $1,075, and $1,209
 
81,641

 
103,834

 
64,019

Inventory
 
43,137

 
43,635

 
65,308

Income tax receivables
 
22,781

 
3,353

 
18,805

Prepaid expenses and other current assets (see Note 11)
 
47,923

 
38,631

 
40,605

Total current assets
 
1,095,612

 
1,351,008

 
1,264,579

Notes receivable, net of allowance for credit losses of $1,525, $1,525, and $1,525
 
664,703

 
602,389

 
453,997

Fixed assets, net of accumulated depreciation and amortization of $244,730, $237,211, and $238,669
 
400,150

 
386,736

 
354,526

Operating lease right-of-use assets (see Note 6)
 
75,064

 

 

Goodwill
 
55,581

 
55,573

 
55,831

Intangible assets, net
 
12,174

 
12,993

 
15,318

Income tax receivables
 
17,529

 
16,694

 
337

Deferred income taxes
 
30,835

 
37,035

 
34,306

Other long-term assets (see Note 11)
 
231,673

 
226,660

 
237,016

Total assets
 
$
2,583,321

 
$
2,689,088

 
$
2,415,910

L I A B I L I T I E S  A N D  S H A R E H O L D E R S’  E Q U I T Y
 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

Client payables
 
$
726,594

 
$
997,168

 
$
820,374

Accounts payable and accrued liabilities
 
107,930

 
101,366

 
106,558

Accrued salaries and related costs
 
38,107

 
92,219

 
44,051

Current portion of long-term debt, net
 
13,653

 
13,604

 
12,381

Operating lease liabilities (see Note 6)
 
16,960

 

 

Accrued income taxes
 
32,189

 
31,169

 
8,160

Other current liabilities
 
12,056

 
13,263

 
17,780

Total current liabilities
 
947,489

 
1,248,789

 
1,009,304

Credit facility borrowings
 
430,000

 
280,000

 
65,000

Long-term debt, net
 
637,008

 
638,786

 
650,988

Operating lease liabilities (see Note 6)
 
59,478

 

 

Accrued income taxes
 
21,611

 
19,933

 
38,305

Deferred income taxes
 
14,940

 
14,569

 
15,753

Other long-term liabilities (see Note 11)
 
40,944

 
45,517

 
45,552

Total liabilities
 
2,151,470

 
2,247,594

 
1,824,902

Commitments and contingencies (see Note 15)
 


 


 


Shareholders’ equity:
 
 

 
 

 
 

Common stock, $0.01 par value
 
716

 
711

 
711

Authorized shares — 200,000,000
 
 

 
 
 
 

Issued shares —71,640,116; 71,188,120; and 71,160,981
 
 

 
 
 
 

Outstanding shares —46,612,127; 46,346,863; and 52,303,947
 
 
 
 
 
 
Additional paid-in capital
 
470,463

 
463,623

 
452,441

Treasury stock shares, at cost — 25,027,989; 24,841,257; and 18,857,034
 
(849,784
)
 
(839,284
)
 
(579,891
)
Retained earnings
 
881,368

 
888,333

 
773,177

Accumulated other comprehensive loss
 
(71,069
)
 
(72,044
)
 
(55,624
)
Total shareholders’ equity
 
431,694

 
441,339

 
590,814

Noncontrolling interest
 
157

 
155

 
194

Total equity
 
431,851

 
441,494

 
591,008

Total liabilities and shareholders’ equity
 
$
2,583,321

 
$
2,689,088

 
$
2,415,910

See accompanying Notes to Condensed Consolidated Financial Statements

5




SOTHEBY’S
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)

 
 
Three Months Ended
 
 
March 31,
2019
 
March 31,
2018
Operating Activities:
 
 

 
 

Net loss attributable to Sotheby's
 
$
(7,071
)
 
$
(6,522
)
Adjustments to reconcile net loss attributable to Sotheby's to net cash used by operating activities:
 
 
 
 
Extinguishment of debt
 

 
10,855

Depreciation and amortization
 
7,691

 
7,100

Deferred income tax expense
 
6,370

 
97

Share-based payments
 
7,598

 
8,377

Net pension benefit
 
(675
)
 
(822
)
Inventory writedowns and bad debt provisions
 
1,387

 
3,141

Amortization of debt issuance costs
 
372

 
451

Equity in earnings of investees
 
(1,528
)
 
(806
)
Other
 
589

 
260

Changes in assets and liabilities:
 
 

 
 

Accounts receivable
 
201,642

 
79,743

Client payables
 
(272,607
)
 
(188,676
)
Inventory
 
(684
)
 
7,003

Changes in other operating assets and liabilities (see Note 12)
 
(80,716
)
 
(75,804
)
Net cash used by operating activities
 
(137,632
)
 
(155,603
)
Investing Activities:
 
 

 
 

Funding of notes receivable
 
(102,013
)
 
(17,730
)
Collections of notes receivable
 
75,320

 
96,919

Capital expenditures
 
(21,308
)
 
(9,143
)
Acquisitions, net of cash acquired
 
(759
)
 
(5,702
)
Funding of investments
 
(150
)
 

Distributions from investees
 
2,050

 
1,684

Other
 

 
(64
)
Net cash (used) provided by investing activities
 
(46,860
)
 
65,964

Financing Activities:
 
 

 
 

Proceeds from credit facility borrowings
 
260,000

 
45,000

Repayments of credit facility borrowings
 
(110,000
)
 
(176,500
)
Repayments of York Property Mortgage
 
(2,101
)
 
(2,015
)
Settlement of 2022 Senior Notes, including call premium
 

 
(307,875
)
Debt issuance and other borrowing costs
 
(71
)
 
(88
)
Repurchases of common stock (see Note 13)
 
(10,500
)
 
(21,001
)
Settlement of forward contract indexed to Sotheby's common stock (see Note 13)
 
10,500

 

Funding of employee tax obligations upon the vesting of share-based payments
 
(11,272
)
 
(9,163
)
Net cash provided (used) by financing activities
 
136,556

 
(471,642
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
 
922

 
7,427

Decrease in cash, cash equivalents, and restricted cash
 
(47,014
)
 
(553,854
)
Cash, cash equivalents, and restricted cash at beginning of period
 
200,234

 
923,926

Cash, cash equivalents, and restricted cash at end of period
 
$
153,220

 
$
370,072

Supplemental information on non-cash investing and financing activities:
See Note 5 for information regarding non-cash transfers between Accounts Receivable (net) and Notes Receivable (net).
See Notes 1 and 6 for information regarding non-cash investing and financing activities related to leases.
See Note 10 for information regarding derivative financial instruments designated as net investment hedges.
See accompanying Notes to Condensed Consolidated Financial Statements

6



SOTHEBY'S
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(In thousands)
 
Common
Stock
 
Additional
Paid-In
Capital
 
Treasury Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Balance at January 1, 2019
$
711

 
$
463,623

 
$
(839,284
)
 
$
888,333

 
$
(72,044
)
 
$
441,339

Net loss attributable to Sotheby's
 
 
 
 
 
 
(7,071
)
 
 
 
(7,071
)
Other comprehensive income
 
 
 
 
 
 
 
 
975

 
975

Common stock shares withheld to satisfy employee tax obligations
 
 
(11,597
)
 
 
 
 
 
 
 
(11,597
)
Restricted stock units vested, net
5

 
(5
)
 
 
 
 
 
 
 

Amortization of share-based payment expense
 
 
7,598

 
 
 
 
 
 
 
7,598

Shares and deferred stock units issued to directors
 
 
344

 
 
 
 
 
 
 
344

Forward contract indexed to Sotheby's common stock
 
 
10,500

 
(10,500
)
 
 
 
 
 

Other
 
 
 
 
 
 
106

 
 
 
106

Balance at March 31, 2019
$
716

 
$
470,463

 
$
(849,784
)
 
$
881,368

 
$
(71,069
)
 
$
431,694

 
Common
Stock
 
Additional
Paid-In
Capital
 
Treasury Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Balance at January 1, 2018
$
709

 
$
453,364

 
$
(554,551
)
 
$
779,699

 
$
(62,466
)
 
$
616,755

Net loss attributable to Sotheby's
 
 
 
 
 
 
(6,522
)
 
 
 
(6,522
)
Other comprehensive income
 
 
 
 
 
 
 
 
6,842

 
6,842

Common stock shares withheld to satisfy employee tax obligations
 
 
(9,548
)
 
 
 
 
 
 
 
(9,548
)
Restricted stock units vested, net
2

 
(2
)
 
 
 
 
 
 
 

Amortization of share-based payment expense
 
 
8,377

 
 
 
 
 
 
 
8,377

Shares and deferred stock units issued to directors
 
 
250

 
 
 
 
 
 
 
250

Repurchases of common stock
 
 
 
 
(25,340
)
 
 
 
 
 
(25,340
)
Balance at March 31, 2018
$
711

 
$
452,441

 
$
(579,891
)
 
$
773,177

 
$
(55,624
)
 
$
590,814




7



SOTHEBY’S
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Basis of Presentation
Company Overview—Since 1744, Sotheby’s has been uniting collectors with world-class works of art, which in these financial statements is meant to include authenticated fine art, decorative art, jewelry, wine, and collectibles, and may also be referred to as "art," "artwork," or "property." Today, Sotheby's offers property from more than 70 collecting categories to clients from 130 countries and presents auctions in ten different salesrooms, including New York, London, Hong Kong, and Paris, and Sotheby’s BidNow program allows clients to view all auctions live online and place bids from anywhere in the world. Sotheby's also offers collectors a variety of innovative art-related services, including the brokerage of private art sales, private jewelry sales through Sotheby's Diamonds, exclusive private selling exhibitions, art-related financing, and art advisory services, as well as retail wine locations in New York and Hong Kong.
Accounting Principles—The unaudited Condensed Consolidated Financial Statements included herein have been prepared by the management of Sotheby’s in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. In our opinion, the unaudited Condensed Consolidated Financial Statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. The interim results presented in our Condensed Consolidated Statements of Operations are not necessarily indicative of results for a full year. See Note 2 for information about the seasonality of our business. We urge you to read these unaudited Condensed Consolidated Financial Statements in conjunction with the information included in our 2018 Form 10-K filed with the SEC on February 28, 2019.
Principles of Consolidation—The unaudited Condensed Consolidated Financial Statements include the accounts of our wholly-owned subsidiaries and Sotheby's (Beijing) Auction Co., Ltd. ("Sotheby's Beijing"), a joint venture in which we have a controlling 80% ownership interest. The net loss attributable to the minority owner of Sotheby's Beijing is reported as "Net Loss Attributable to Noncontrolling Interest" in our Condensed Consolidated Statements of Operations, and the non-controlling 20% ownership interest is reported as "Noncontrolling Interest" within the Equity section of our Condensed Consolidated Balance Sheets. Intercompany transactions and balances among our subsidiaries are eliminated in consolidation.
Equity investments through which we may significantly influence, but not control, the investee, are accounted for using the equity method. Under the equity method, our share of investee earnings or losses is recorded in our Condensed Consolidated Statements of Operations within Equity in Earnings of Investees. Our interest in the net assets of these investees is recorded on our Condensed Consolidated Balance Sheets within Other Long-Term Assets. Our equity method investees include: (i) Acquavella Modern Art ("AMA"), a partnership through which a collection of fine art is being sold, (ii) RM Sotheby's, an auction house for investment-quality automobiles, and (iii) a partnership through which artworks are being purchased and sold.
Estimates and Assumptions—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Leases—In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases, which requires long-term lease arrangements to be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease liability are recorded for all long-term leases, whether classified as an operating lease or a finance lease. On July 30, 2018, the FASB issued ASU 2018-11, which made targeted improvements to ASU 2016-02 (together, the "New Lease Standard").
We adopted the New Lease Standard on January 1, 2019 using the modified retrospective method and elected not to recast comparative prior year periods. We have also elected the package of practical expedients available under the transition provisions of the New Lease Standard, including (i) not reassessing whether expired or existing contracts contain leases, (ii) not reassessing previous lease classification, and (iii) not revaluing initial direct costs for existing leases. In addition, for all leases, we have elected the practical expedient that allows the aggregation of non-lease components, such as maintenance, utilities, and management services, with the related lease components when evaluating accounting treatment.


8



As a result of our adoption of the New Lease Standard, we recorded a right-of-use asset of $78.4 million and a corresponding operating lease liability of $79.4 million on the January 1, 2019 effective date. The operating lease liability recorded upon adoption was measured using our approximate incremental borrowing rate as of that date. The New Lease Standard did not impact our results of operations, cash flows, or our compliance with existing debt covenants. (See Note 6 for additional information on our leases.)
2. Seasonality of Business
The global art auction market has two principal selling seasons, which generally occur in the second and fourth quarters of the year. In the aggregate, second and fourth quarter Net Auction Sales1 represented 76% and 80% of our total annual Net Auction Sales in 2018 and 2017, respectively, with auction commission revenues comprising approximately 74% and 66%, of our total revenues, respectively. Accordingly, our financial results are seasonal, with peak revenues and operating income generally occurring in the second and fourth quarters. Consequently, first and third quarter results have historically reflected lower revenues when compared to the second and fourth quarters and, typically, a net loss due to the fixed nature of many of our operating expenses.





















___________________________________________________________________
1 Represents the total hammer (sale) price of property sold at auction.


9



3. Segment Reporting
Our operations are organized under two segments—the Agency segment and the Finance segment, which does business, and is referred to in this report, as Sotheby's Financial Services (or "SFS").
Through our Agency segment, we accept works of art on consignment and match sellers (also known as consignors) to buyers through the auction or private sale process. In both auction and private sale transactions, we act as exclusive agent for the seller. Prior to offering a work of art for sale, we perform due diligence activities to authenticate and determine the ownership history and condition of the consigned artwork. To a much lesser extent, Agency segment activities also include the sale of artworks that are principally acquired as a consequence of the auction process, and RM Sotheby's, an equity investee that operates as an auction house for investment-quality automobiles. The Agency segment is an aggregation of operating segments which include the auction, private sale, and other related activities that are conducted within various collecting categories, all of which have similar economic characteristics and are similar in their services, customers, and the manner in which their services are provided.
SFS is an art financing company that operates as a niche lender with the ability to tailor attractive financing packages for clients who wish to obtain immediate access to liquidity from their art assets. SFS leverages the art expertise of the Agency segment, skill in international law and finance, and access to capital to provide art collectors and dealers with financing secured by their works of art, allowing them to unlock the value in their collections.
Art Agency, Partners (“AAP”), through which we offer art advisory services, provides art collectors with strategic guidance on collection identity and development, acquisitions, short and long-term planning, and provides advice to artists and artists' estates. In addition, from time-to-time, AAP brokers private art sales for its advisory clients. Our advisory services are classified within All Other for segment reporting purposes, along with our retail wine business, brand licensing activities, and the results from other certain equity method investments.
Thomas S. Smith, Jr., Sotheby's CEO, is our chief operating decision maker. Mr. Smith regularly evaluates financial information about each of our segments in deciding how to allocate resources and assess performance. The performance of each segment is measured based on segment income before taxes, which excludes the unallocated items highlighted in the reconciliation below.
The following table presents our segment information for the three months ended March 31, 2019 and 2018 (in thousands):
Three Months Ended March 31, 2019
 
Agency
 
SFS
 
All Other
 
Reconciling items
 
Total
Revenues
 
$
154,302

 
$
16,067

 
$
5,897

 
$
(2,801
)
(a)
$
173,465

Segment (loss) income before taxes (b)
 
$
(24,146
)
 
$
7,977

 
$
2,078

 
$
(498
)
(c)
$
(14,589
)
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
179,733

 
$
12,416

 
$
6,182

 
$
(2,535
)
(a)
$
195,796

Segment (loss) income before taxes (b)
 
$
(9,023
)
 
$
6,751

 
$
1,388

 
$
(10,584
)
(c)
$
(11,468
)
(a)
The reconciling items related to revenues consist principally of amounts charged by SFS to the Agency segment, including interest and facility fees related to certain loans made to Agency segment clients, as well as fees charged for term loan collateral sold at auction or privately through the Agency segment.
(b)
Our previous credit agreements provided for dedicated asset-based revolving credit facilities for the Agency segment and SFS (see Note 9). The SFS Credit Facility was used to fund a significant portion of client loans. Accordingly, any borrowing costs associated with the SFS Credit Facility were recorded within Cost of Finance Revenues in our Condensed Consolidated Statements of Operations. In September 2017, we modified our cash management strategy in order to reduce borrowing costs by applying excess cash balances against revolver credit facility borrowings. On June 26, 2018, we refinanced our previous credit agreements. The new credit agreement that was entered into in connection with this refinancing combined the Agency Credit Facility and the SFS Credit Facility into one asset-based revolving credit facility. Subsequent to the refinancing and resulting elimination of the SFS Credit Facility, the SFS loan portfolio is no longer directly funded with revolving credit facility borrowings. Accordingly, beginning in the third quarter of 2018, all borrowing costs associated with our revolving credit facility are recorded as interest expense in our Condensed Consolidated Statements of Operations.
    

10



As a result of this refinancing and the concurrent elimination of the separate segment-based revolving credit facilities, beginning in the third quarter of 2018, when measuring segment profitability: (i) revolving credit facility costs are no longer allocated to our segments and (ii) SFS receives a corporate finance charge that is calculated assuming that 85% of their loan portfolio is funded with debt. Prior period segment results have been recast to reflect these changes in the measurement of segment profitability.
(c)
The unallocated amounts and reconciling items related to segment (loss) income before taxes are detailed in the table below.
The table below presents a reconciliation of total segment loss before taxes to consolidated loss before taxes for the three months ended March 31, 2019 and 2018 (in thousands):
Three Months Ended March 31,
 
2019
 
2018
Agency
 
$
(24,146
)
 
$
(9,023
)
SFS
 
7,977

 
6,751

All Other
 
2,078

 
1,388

Segment loss before taxes
 
(14,091
)
 
(884
)
Unallocated amounts and reconciling items:
 
 
 
 
Extinguishment of debt
 

 
(10,855
)
Revolving credit facility costs
 
(4,819
)
 
(2,946
)
SFS corporate finance charge
 
5,849

 
4,023

Equity in earnings of investees (a)
 
(1,528
)
 
(806
)
Loss before taxes
 
$
(14,589
)
 
$
(11,468
)
(a)
For segment reporting purposes, our share of earnings related to equity investees is included as part of loss before taxes. However, such earnings are reported separately below loss before taxes in our Condensed Consolidated Statements of Operations.
The table below presents segment assets, as well as a reconciliation of segment assets to consolidated assets as of March 31, 2019, December 31, 2018, and March 31, 2018 (in thousands):
 
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
Agency
 
$
1,737,022

 
$
1,886,986

 
$
1,774,543

SFS
 
739,356

 
705,779

 
546,044

All Other
 
35,798

 
39,241

 
41,875

Total segment assets
 
2,512,176

 
2,632,006

 
2,362,462

Unallocated amounts and reconciling items:
 
 

 
 

 
 
Deferred tax assets and income tax receivable
 
71,145

 
57,082

 
53,448

Consolidated assets
 
$
2,583,321

 
$
2,689,088

 
$
2,415,910

Substantially all of our capital expenditures for the three months ended March 31, 2019, the year ended December 31, 2018, and the three months ended March 31, 2018 were attributable to the Agency segment.


11



4. Revenues
The Agency segment, which is our predominant source of revenue, earns commissions and fees by acting as agent for clients wishing to sell their artworks through the auction or private sale process. To a much lesser extent, the Agency segment also earns revenues from the sale of artworks that are owned by Sotheby's. Outside of the Agency segment, we earn revenues from art advisory services, retail wine sales, and brand licensing activities, which are aggregated and classified within All Other for segment reporting purposes, as well as from the art-related financing activities conducted by SFS. The revenues earned by the Agency and All Other segments are accounted for in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers ("ASC 606"). The revenues earned by SFS are not within the scope of ASC 606.
The following table summarizes our revenues by segment and type for the three months ended March 31, 2019 and 2018 (in thousands):
 
 
Three Months Ended March 31, 2019
 
Three Months Ended March 31, 2018

 
Agency
 
SFS
 
All Other
 
Total
 
Agency
 
SFS
 
All Other
 
Total
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency commissions and fees:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auction commissions
 
$
117,038

 
$

 
$

 
$
117,038

 
$
132,130

 
$

 
$

 
$
132,130

Auction related fees, net (a)
 
9,428

 

 

 
9,428

 
11,743

 

 

 
11,743

Private sale commissions
 
18,239

 

 

 
18,239

 
19,485

 

 

 
19,485

Other Agency commissions and fees
 
2,918

 

 
44

 
2,962

 
1,992

 

 
176

 
2,168

Total Agency commissions and fees
 
147,623

 

 
44

 
147,667

 
165,350

 

 
176

 
165,526

Inventory sales
 
6,679

 

 
2,087

 
8,766

 
14,383

 

 
1,853

 
16,236

Advisory revenues
 

 

 
1,407

 
1,407

 

 

 
1,250

 
1,250

License fee and other revenues
 

 

 
2,359

 
2,359

 

 

 
2,903

 
2,903

Total revenue from contracts with customers
 
154,302

 

 
5,897

 
160,199

 
179,733

 

 
6,182

 
185,915

Finance revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest and related fees
 

 
13,266

 

 
13,266

 

 
9,881

 

 
9,881

Total revenues
 
$
154,302

 
$
13,266

 
$
5,897

 
$
173,465

 
$
179,733

 
$
9,881

 
$
6,182

 
$
195,796

(a)
Auction Related Fees, net, includes the net overage or shortfall attributable to auction guarantees, consignor expense recoveries, and shipping fees charged to buyers.
Contract Balances—We are predominantly an agency business that collects and remits cash on behalf of our clients. Following the completion of an auction or private sale, we invoice the buyer for the aggregate purchase price of the property, which includes our buyer's premium or private sale commission, as well as any applicable taxes and royalties. The amount owed by the buyer is recorded within Accounts Receivable, and the amount of net sale proceeds due to the seller is recorded within Client Payables. Upon collection from the buyer, we are obligated to remit the net proceeds to the seller after deducting our commissions and related fees, as well as any applicable taxes and royalties, which are ultimately paid to the appropriate taxing authority or royalty association.
Under our standard auction payment terms, the purchase price is due from the buyer no more than 30 days after the sale date, with the net proceeds due to the consignor 35 days after the sale date. For private sales, payment from the buyer is typically due on the sale date, with the net sale proceeds due to the consignor shortly thereafter. We also sometimes provide extended payment terms to an auction or private sale buyer. For auctions, the extent to which extended payment terms are provided can vary considerably from selling season to selling season. Extended payment terms typically extend the payment due date to a date that is no longer than one year from the sale date. In limited circumstances, the payment due date may be extended to a date that is beyond one year from the sale date.

12



When providing extended payment terms, we attempt to match the timing of cash receipt from the buyer with the timing of our payment to the consignor, but are not always successful in doing so. Accordingly, in these situations, the net sale proceeds are paid to the consignor before payment is collected from the buyer. Under our standard auction terms, we retain possession of the property until payment is received from the buyer, though, in certain limited situations, we may allow the buyer to take possession of the property before making payment. In these situations, we are liable to the seller for the net sales proceeds whether or not the buyer makes payment. All extended payment term and property release arrangements are approved by management under our internal corporate governance policy.
In the limited circumstances when the buyer's payment due date is extended to a date that is beyond one year from the sale date, if the seller does not provide matched payment terms, the receivable balance is reclassified from Accounts Receivable to Notes Receivable on our Condensed Consolidated Balance Sheets. (See Note 5 for information on Agency segment Notes Receivable.)
When the buyer's due date is extended to a date that is one year or less from the sale date, as a practical expedient, we do not record a discount to our commission to account for the effects of the financing component. However, in the limited circumstances when the buyer's due date is extended to a date that is beyond one year from the sale date, we record a discount to our commission revenue to reflect the financing component, if material.
The table below presents the Accounts Receivable balances related to our contracts with customers and associated Client Payables as of March 31, 2019, December 31, 2018, and March 31, 2018. The net receivable (payable) balance reported at each balance sheet date is dependent on the timing of auction and private sale settlements, as well as the extent of extended payment terms granted to buyers, particularly if not matched by the consignor.
(in thousands)
 
March 31,
2019
 
December 31,
2018
 
March 31,
2018
Accounts receivable
 
$
751,553

 
$
967,817

 
$
716,330

Client payables
 
726,594

 
997,168

 
820,374

Net receivable (payable)
 
$
24,959

 
$
(29,351
)
 
$
(104,044
)
As of March 31, 2019, the net receivable balance was $25 million, as compared to net payable balances of ($29.4) million as of December 31, 2018 and ($104) million as of March 31, 2018. The net receivable balance as of March 31, 2019 is significantly influenced by payments made to consignors prior to collecting payment from buyers. As of March 31, 2019, Accounts Receivable included $153.9 million related to situations when we paid the consignor prior to collecting from the buyer, as compared to $118.7 million as of December 31, 2018 and $39.4 million as of March 31, 2018. Based on buyer payments collected to-date, our collection history with the buyers, and anticipated upcoming buyer settlements, we believe that the Accounts Receivable balance outstanding as of March 31, 2019 is collectible.
As of March 31, 2019, December 31, 2018, and March 31, 2018, Accounts Receivable (net) also included $34.6 million, $39.6 million, and $23.8 million, respectively, related to situations when we allowed the buyer to take possession of the property before making payment.
Deferred revenue balances are generally not material.
Contract Costs—We incur various direct costs in the fulfillment of our auction services. These costs principally relate to the transport of consigned artworks to the location of the auction sale, various sale marketing activities including catalogue production and distribution, and the exhibition of consigned artworks. A large portion of these costs are funded prior to the auction and are recorded on our Condensed Consolidated Balance Sheets within Prepaid Expenses and Other Current Assets until the date of the auction sale when they are expensed to Direct Costs of Services in the Condensed Consolidated Statements of Operations. As of March 31, 2019, December 31, 2018, and March 31, 2018, the contract cost balances recorded within Prepaid Expenses and Other Current Assets were $13.5 million, $10.8 million, and $9.7 million, respectively.


13



5. Notes Receivable
Sotheby's Financial Services—SFS makes term loans secured by artworks that are not presently intended for sale, allowing us to establish or enhance mutually beneficial relationships with art collectors. Term loans may also generate future auction or private sale consignments through the sale of the collateral at the conclusion of the loan and/or through future purchases of new property by the borrower. In certain situations, term loans are made to refinance the accounts receivable balances generated by the auction and private sale purchases of our clients. Term loans normally have an initial maturity of one year with an option to renew for an additional year, and typically carry a variable market rate of interest. To a much lesser extent, SFS also makes consignor advances secured by artworks that are contractually committed, in the near term, to be offered for sale through the Agency segment. Consignor advances allow sellers to receive funds upon consignment for an auction or private sale that will occur up to one year in the future and normally have short-term maturities.
As of March 31, 2019, December 31, 2018, and March 31, 2018, the net Notes Receivable balance of SFS was $727.8 million, $694 million, and $513.5 million, respectively. As of March 31, 2019, December 31, 2018, and March 31, 2018, $70.6 million, $99.7 million, and $59.8 million, respectively, of the net Notes Receivable balance of SFS was classified within current assets on our Condensed Consolidated Balance Sheets, with the remainder classified within non-current assets. The classification of a loan as current or non-current takes into account the contractual maturity date of the loan, as well as the likelihood of renewing the loan on or before its contractual maturity date.
As of March 31, 2019, December 31, 2018, and March 31, 2018, the total net Notes Receivable balance of SFS included $135.5 million, $126.2 million, and $47.2 million, respectively, of term loans issued by SFS to refinance client auction and private sale purchases. For the three months ended March 31, 2019 and 2018, SFS issued $13.4 million and $7.8 million, respectively, of such loans. These loans are accounted for as non-cash transfers between Accounts Receivable (net) and Notes Receivable (net) and are, therefore, not reflected as the funding of Notes Receivable (net) within Investing Activities in our Condensed Consolidated Statements of Cash Flows. Upon repayment, the cash received in settlement of such Notes Receivable is classified within Operating Activities in our Condensed Consolidated Statements of Cash Flows. For the three months ended March 31, 2019 and 2018, such repayments totaled $4.1 million and $15 million, respectively.
The repayment of secured loans can be adversely impacted by a decline in the art market in general or in the value of the collateral, which is concentrated within certain collecting categories. In addition, in situations when there are competing claims on the collateral and/or when a borrower becomes subject to bankruptcy or insolvency laws, our ability to realize on our collateral may be limited or delayed.
We aim to mitigate the risk associated with a potential devaluation in our collateral by targeting a 50% loan-to-value ("LTV") ratio (i.e., the principal loan amount divided by the low auction estimate of the collateral). However, loans may also be made with LTV ratios between 51% and 60%, and, in rare circumstances, loans may be made at an initial LTV ratio higher than 60%
The LTV ratio of certain loans may increase above the 50% target due to a decrease in the low auction estimates of the collateral. The revaluation of term loan collateral is performed by our specialists on an annual basis, or more frequently, if there is a material change in the circumstances related to the loan, the value of the collateral, the disposal plans for the collateral, or if an event of default occurs. We believe that the LTV ratio is the critical credit quality indicator for the secured loans made by SFS.
The table below provides the aggregate LTV ratio for the SFS loan portfolio as of March 31, 2019, December 31, 2018, and March 31, 2018 (in thousands):
 
 
March 31,
2019
 
December 31,
2018
 
March 31,
2018
Secured loans
 
$
727,783

 
$
693,977

 
$
513,482

Low auction estimate of collateral
 
$
1,651,561

 
$
1,629,270

 
$
1,295,353

Aggregate LTV ratio
 
44
%
 
43
%
 
40
%
 

14



The table below provides the aggregate LTV ratio for secured loans made by SFS with an LTV ratio above 50% as of March 31, 2019, December 31, 2018, and March 31, 2018 (in thousands):
 
 
March 31,
2019
 
December 31,
2018
 
March 31,
2018
Secured loans with an LTV ratio above 50%
 
$
331,740

 
$
264,916

 
$
121,599

Low auction estimate of collateral related to secured loans with an LTV ratio above 50%
 
$
594,871

 
$
476,157

 
$
209,933

Aggregate LTV ratio of secured loans with an LTV ratio above 50%
 
56
%
 
56
%
 
58
%
The table below provides other credit quality information regarding secured loans made by SFS as of March 31, 2019, December 31, 2018, and March 31, 2018 (in thousands):
 
 
March 31,
2019
 
December 31,
2018
 
March 31,
2018
Total secured loans
 
$
727,783

 
$
693,977

 
$
513,482

Loans past due
 
$
25,590

 
$
14,405

 
$
65,436

Loans more than 90 days past due
 
$
5,657

 
$
8,911

 
$
36,341

Non-accrual loans
 
$

 
$
3,854

 
$
23,658

Impaired loans
 
$

 
$

 
$

Allowance for credit losses:
 
 
 
 

 
 

Allowance for credit losses for impaired loans
 
$

 
$

 
$

Allowance for credit losses based on historical data
 
1,146

 
1,075

 
1,209

Total allowance for credit losses - secured loans
 
$
1,146

 
$
1,075

 
$
1,209

We consider a loan to be past due when principal payments are not paid by the contractual maturity date. Typically, a loan becomes past due only for a short period of time during which either the loan is renewed or collateral is sold to satisfy the borrower's obligations. As of March 31, 2019, $25.6 million of the net Notes Receivable balance was past due, of which $5.7 million was more than 90 days past due. We are continuing to accrue interest on all past due loans and, as of March 31, 2019, the collateral securing such loans had a low auction estimate of approximately $145.8 million, resulting in a weighted average LTV ratio of approximately 39%. In consideration of expected loan renewals, collateral sales to date for which the proceeds have not yet been collected from the buyer, as well as the value of the remaining collateral and our current collateral disposal plans, we believe that the principal and interest amounts owed for these past due loans will be collected.
A non-accrual loan is a loan for which future Finance Revenue is not recorded due to our determination that it is probable that future interest on the loan will not be collectible. Any cash receipts subsequently received on non-accrual loans are first applied to reduce the recorded principal balance of the loan, with any proceeds in excess of the principal balance then applied to interest owed by the borrower. The recognition of Finance Revenue may resume on a non-accrual loan if sufficient additional collateral is provided by the borrower or if we become aware of other circumstances that indicate that it is probable that the borrower will make future interest payments on the loan. As of December 31, 2018, we had one non-accrual loan with a recorded investment of $5.6 million, consisting of the $3.9 million principal balance and $1.8 million in accrued interest. As of March 31, 2018, this loan had a recorded investment of $25.5 million, consisting of the $23.7 million principal balance and $1.8 million in accrued interest. The investment in this loan was significantly reduced in 2018 and then fully repaid in January 2019 through the collection of collateral sale proceeds.
A loan is considered to be impaired when we determine that it is probable that a portion of the principal and interest owed by the borrower will not be recovered after taking into account the estimated realizable value of the collateral securing the loan, as well as the ability of the borrower to repay any shortfall between the value of the collateral and the amount of the loan. The determination of whether a specific loan is impaired and the amount of any required allowance is based on the facts available to management and is reevaluated and adjusted as additional facts become known. If a loan is considered to be impaired, Finance Revenue is no longer recognized and bad debt expense is recorded for any principal or accrued interest that is deemed uncollectible. As of March 31, 2019, December 31, 2018, and March 31, 2018, there were no impaired loans outstanding.

15



As of March 31, 2019, unfunded commitments to extend additional credit through SFS were approximately $57.9 million.
Agency Segment—As discussed in Note 4, in the limited circumstances when the payment due date for an auction or private sale receivable is extended to a date that is beyond one year from the sale date, if the consignor does not provide matched payment terms, the receivable balance is reclassified from Accounts Receivable (net) to Notes Receivable (net) on our Condensed Consolidated Balance Sheets. These Notes Receivable are accounted for as non-cash transfers between Accounts Receivable (net) and Notes Receivable (net) and are, therefore, not reflected as the funding of Notes Receivable within Investing Activities in our Condensed Consolidated Statements of Cash Flows. Upon repayment, the cash received in settlement of such Notes Receivable is classified within Operating Activities in our Condensed Consolidated Statements of Cash Flows. As of March 31, 2019 and March 31, 2018, Notes Receivable (net) within the Agency segment included $1.2 million and $2.4 million of such amounts reclassified from Accounts Receivable (net), respectively.
Under certain circumstances, we provide loans to certain art dealers to finance the purchase of works of art. In these situations, we acquire a partial ownership interest or a security interest in the purchased property in addition to providing the loan. Upon the eventual sale of the property acquired, the loan is repaid. As of March 31, 2019, December 31, 2018, and March 31, 2018 loans of this type had a balance of $3.1 million, $3.1 million, and $2.1 million respectively.
In certain limited situations, the Agency segment will also provide advances to consignors that are secured by property scheduled to be offered at auction in the near term. Such Agency segment consignor advances are recorded on our Condensed Consolidated Balance Sheets within Notes Receivable (net) and totaled $1.3 million and $3.2 million as of March 31, 2019 and December 31, 2018, respectively. There were no Agency segment consignor advances outstanding as of March 31, 2018.
Allowance for Credit Losses—During the period January 1, 2019 to March 31, 2019, activity related to the Allowance for Credit Losses by segment was as follows (in thousands):
 
SFS
 
Agency
 
Total
Balance as of January 1, 2019
$
1,075

 
$
1,525

 
$
2,600

Change in loan loss provision based on historical data
71

 

 
71

Balance as of March 31, 2019
$
1,146

 
$
1,525

 
$
2,671

6. Leases
We conduct business in leased premises, which are primarily used to conduct Agency segment operations, including space used for auction salesrooms, gallery and exhibition space, administrative offices, and warehouse facilities. A substantial portion of our leased premises are located in London, England; Hong Kong, China; Paris, France; Geneva, Switzerland; and Zurich, Switzerland.
Our determination of whether a contract is or contains a lease and whether that lease should be classified as a finance or operating lease is performed at lease inception, which is the date on which we sign the lease agreement. Lease components, which represent our right to use specified assets, and non-lease components such as maintenance, utilities, and management services contained within a lease are accounted for as a single lease component.
Lease right-of-use assets and lease liabilities are measured and recognized on our Condensed Consolidated Balance Sheets on the lease commencement date, which is the date on which the lessor makes the underlying asset available to use. The measurement of lease right-of-use assets and lease liabilities is based on the present value of lease payments not yet made, discounted using our incremental borrowing rate ("IBR") as of the commencement date of the lease. In determining our IBR, a number factors are considered, including the term of the lease, the effects of collateral, the economic environment of the lessee, and the creditworthiness of the lessee. Short-term operating leases, which have an initial term of twelve months or less, are not recognized on our Condensed Consolidated Balance Sheets.

16



Operating lease cost is calculated so that the aggregate amount of fixed minimum lease payments for each lease is recognized in our Condensed Consolidated Statements of Operations on a straight-line basis over the term of the lease. Variable lease payments are not included in the lease liability recorded on our Condensed Consolidated Balance Sheets, but are recognized in our Condensed Consolidated Statements of Operations during the period in which the obligation for those payments is incurred. Our variable lease payments principally relate to lease obligations which are periodically adjusted for changes in an index or rate, including fair market rental rate adjustments that typically occur according to a scheduled rent review period. For leases with such provisions, the operating right-of-use asset and lease liability are measured using the index or fair market rental rate in effect at the lease commencement date. Under the terms of most leases, we are required to pay various service fees, real estate taxes, and insurance costs which are variable in nature and, therefore not included in the measurement of our lease liabilities.
Certain of our leases provide us the option to extend or terminate the lease term. Such options are factored into the measurement of our lease right-of-use assets and lease liabilities when we determine it is reasonably certain that the option will be exercised.
The following table summarizes the components of the operating lease cost reflected in our Condensed Consolidated Statements of Operations within General and Administrative Expenses for the three months ended March 31, 2019 (in thousands):
Three Months Ended March 31,
 
2019
Operating lease cost
 
$
4,861

Variable lease cost
 
757

Sublease income
 
(479
)
Total lease cost
 
$
5,139

The following table summarizes information about the amount and timing of our future operating lease commitments as of March 31, 2019 (in thousands):
2019 (remaining)
 
$
14,473

2020
 
17,657

2021
 
13,469

2022
 
11,064

2023
 
7,991

Thereafter
 
28,353

Total undiscounted operating lease payments
 
$
93,007

Less: Imputed interest
 
(16,569
)
Present value of operating lease liabilities
 
$
76,438

As of March 31, 2019, we have entered into an operating lease with an undiscounted non-cancellable future minimum lease commitment of $7.6 million. This lease commitment is not included in our operating lease liabilities as of March 31, 2019 because the premises are not yet available for use. This lease is expected to commence in the second quarter of 2019 and has a term of nine years.
As of March 31, 2019, the weighted-average remaining lease term for our operating leases is 7.6 years and the weighted average discount rate used to measure our operating lease liabilities is 4.77%.
For the three months ended March 31, 2019, operating lease liabilities arising from obtaining right-of-use assets totaled $1.5 million. For the three months ended March 31, 2019, cash payments made in respect of our lease liabilities totaled $4.7 million and are classified within operating activities in our Condensed Consolidated Statements of Cash Flows.

17



The following table summarizes the future minimum lease payments due under non-cancellable operating leases in effect at December 31, 2018 (in thousands)
January 2019 to December 2019
 
January 2020 to December 2020
 
January 2021 to December 2021
 
January 2022 to December 2022
 
January 2023 to December 2023
 
Thereafter
 
Total (a)
$
20,039

 
$
17,771

 
$
14,033

 
$
11,750

 
$
9,449

 
$
32,318

 
$
105,360

The following table summarizes the future minimum lease payments due under non-cancellable operating leases in effect at March 31, 2018 (in thousands):
April 2018 to March 2019
 
April 2019 to March 2020
 
April 2020 to March 2021
 
April 2021 to March 2022
 
April 2022 to March 2023
 
Thereafter
 
Total (a)
$
20,073

 
$
17,606

 
$
15,963

 
$
12,937

 
$
10,393

 
$
34,839

 
$
111,811


(a)
These amounts represent our undiscounted non-cancellable future minimum operating lease commitments, including any contractual market-based or indexed rent adjustments that are currently in effect. The lease commitments reflected in the table also include any future fixed minimum payments for common area maintenance, insurance, or tax payments for which we are also obligated under the terms of certain leases.

18



7. Goodwill and Intangible Assets
Goodwill—For the three months ended March 31, 2019 and 2018, changes in the carrying value of Goodwill were as follows (in thousands):
Three Months Ended March 31,
 
2019
 
2018
 
 
Agency
 
All Other
 
Total
 
Agency
 
All Other
 
Total
Beginning balance as of January 1
 
$
49,422

 
$
6,151

 
$
55,573

 
$
44,396

 
$
6,151

 
$
50,547

Goodwill acquired
 

 

 

 
5,109

 

 
5,109

Foreign currency exchange rate changes
 
8

 

 
8

 
175

 

 
175

Ending balance as of March 31
 
$
49,430

 
$
6,151

 
$
55,581

 
$
49,680

 
$
6,151

 
$
55,831

On February 2, 2018, we acquired Viyet, an online marketplace for interior design specializing in vintage and antique furniture, decorative objects, and accessories. This acquisition complements and enhances our online sales program, and provides an additional sale format to offer clients. In October 2018, Viyet was rebranded as Sotheby's Home.
Intangible Assets—As of March 31, 2019, December 31, 2018, and March 31, 2018, intangible assets consisted of the following (in thousands):
 
 
Amortization Period
 
March 31, 2019
 
December 31, 2018
 
March 31,
2018
Indefinite lived intangible assets:
 
 
 
 
 
 
 
 
License (a)
 
N/A
 
$
324

 
$
324

 
$
324

Intangible assets subject to amortization:
 
 
 
 
 
 
 
 
Customer relationships - Art Advisory Partners
 
8 years
 
10,800

 
10,800

 
10,800

Non-compete agreements - Art Advisory Partners
 
5-6 years
 
3,060

 
3,060

 
3,060

Artworks database (b)
 
10 years
 
1,275

 
1,275

 
1,200

Technology
 
4 years
 
4,461

 
4,461

 
4,461

Total intangible assets subject to amortization
 
 
 
19,596

 
19,596

 
19,521

Accumulated amortization
 
 
 
(7,746
)
 
(6,927
)
 
(4,527
)
Total amortizable intangible assets (net)
 
 
 
11,850

 
12,669

 
14,994

Total intangible assets (net)
 
 
 
$
12,174

 
$
12,993

 
$
15,318

(a)
Relates to a license obtained in conjunction with the purchase of a retail wine business in 2008.
(b)
Relates to a database containing historic information concerning repeat sales of works of art. This database was acquired along with the associated business in exchange for an initial cash payment made in the third quarter of 2016 and subsequent cash payments made in the third quarters of 2017 and 2018.
For the three months ended March 31, 2019 and 2018, amortization expense related to intangible assets was approximately $0.8 million and $0.6 million, respectively.
The estimated aggregate amortization expense for the remaining useful lives of intangible assets subject to amortization during the five-year period succeeding the March 31, 2019 balance sheet date are as follows (in thousands):
Period
 
Amount
April 2019 to March 2020
 
$
3,186

April 2020 to March 2021
 
$
3,124

April 2021 to March 2022
 
$
2,666

April 2022 to March 2023
 
$
1,480

April 2023 to March 2024
 
$
1,143


19



8. Defined Benefit Pension Plan
We sponsor a defined benefit pension plan in the U.K. (the "U.K. Pension Plan"), which was closed to future service cost accruals on April 30, 2016. For the three months ended March 31, 2019 and 2018, the components of the net pension credit related to the U.K. Pension Plan recorded within Non-Operating Income in our Condensed Consolidated Statements of Operations were as follows (in thousands):
Three Months Ended March 31,
 
2019
 
2018
Interest cost
 
$
2,016

 
$
1,981

Expected return on plan assets
 
(2,675
)
 
(2,902
)
Amortization of actuarial loss
 

 
125

Amortization of prior service cost
 
(16
)
 
(26
)
Net pension credit
 
$
(675
)
 
$
(822
)
9. Debt 
Revolving Credit Facilities—Prior to June 26, 2018, we were party to credit agreements with an international syndicate of lenders that, among other things, provided for dedicated asset-based revolving credit facilities for the Agency segment (the "Agency Credit Facility") and SFS (the "SFS Credit Facility") (collectively, the "Previous Credit Agreements"). The Previous Credit Agreements were scheduled to mature on August 22, 2020.
On June 26, 2018, we refinanced the Previous Credit Agreements and entered into a new credit agreement with an international syndicate of lenders led by JPMorgan Chase Bank, N.A. (the “New Credit Agreement”). The proceeds under the New Credit Agreement may be used for our working capital needs and other general corporate purposes, and borrowings thereunder are available in U.S. Dollars, Pounds Sterling, Euros, Swiss Francs, and Hong Kong Dollars. The New Credit Agreement reduced the interest rate margins for borrowings when compared to those under the Previous Credit Agreements by 25 basis points. Such interest rate margins are determined by reference to a pricing grid that is based on the level of borrowings outstanding under the New Credit Agreement. The New Credit Agreement is scheduled to mature on June 26, 2023.
The New Credit Agreement combined the Agency Credit Facility and SFS Credit Facility into one asset-based revolving credit facility with an aggregate borrowing capacity of $1.1 billion, which is subject to an enhanced borrowing base. The New Credit Agreement has a sub-limit of $350 million for foreign currency borrowings, as well as an accordion feature, which allows us to seek an increase to the borrowing capacity of the New Credit Agreement by an amount not to exceed $300 million in the aggregate. Though new commitments would need to be obtained, the uncommitted accordion feature permits us to seek an increase to the aggregate borrowing capacity under the New Credit Agreement pursuant to an expedited documentation process.
The borrowing base under the New Credit Agreement is determined by a calculation that is based upon, among other things, a percentage of: (i) eligible cash; (ii) the carrying value of certain auction guarantee advances; (iii) the carrying value of certain art inventory; (iv) the carrying value of certain extended payment term receivables arising from auction or private sale transactions; (v) the carrying value of certain loans in the SFS loan portfolio; (vi) the fair market value of certain eligible real property located in the U.K., subject to a cap; and (vii) the net orderly liquidation value of certain of our trademarks, subject to a cap.
Domestic borrowers are jointly and severally liable for all obligations under the New Credit Agreement and, subject to certain limitations, borrowers in the U.K. and Sotheby's Hong Kong Limited, are jointly and severally liable for all obligations of the foreign borrowers under the New Credit Agreement. In addition, the obligations of the borrowers under the New Credit Agreement are guaranteed by certain of their subsidiaries. Our obligations under the New Credit Agreement are secured by liens on all or substantially all of the personal property of the entities that are borrowers and guarantors under the New Credit Agreement.
The New Credit Agreement contains certain customary affirmative and negative covenants including, but not limited to, limitations on indebtedness, liens, investments, restricted payments, and the use of proceeds from borrowings thereunder. The New Credit Agreement also contains a limitation on net outstanding auction guarantees (i.e., auction guarantees less the impact of related risk sharing arrangements).

20



Subject to maintaining a minimum level of available borrowing capacity, the New Credit Agreement permits dividend payments, common stock repurchases, investments, and certain debt prepayments, so long as no event of default exists. The New Credit Agreement also contains certain financial covenants, which are only applicable during certain defined compliance periods. These financial covenants were not applicable for the twelve month period ended March 31, 2019.
We have incurred aggregate fees of approximately $4.4 million related to the New Credit Agreement, which are being amortized on a straight-line basis through its June 26, 2023 maturity date.
The following tables summarize information related to our revolving credit facilities as of and for the periods ended March 31, 2019, December 31, 2018, and March 31, 2018 (in thousands):
As of and for the periods ended
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
Maximum borrowing capacity
 
$
1,100,000

 
$
1,100,000

 
$
1,100,000

Borrowing base
 
$
904,072

 
$
857,773

 
$
549,983

Borrowings outstanding
 
$
430,000

 
$
280,000

 
$
65,000

Available borrowing capacity (a)
 
$
474,072

 
$
577,773

 
$
484,983

Average Borrowings Outstanding:
 
 
 
 
 
 
Three months ended
 
$
352,833

 
N/A

 
$
148,478

Year ended
 
N/A

 
$
106,181

 
N/A

(a)
The available borrowing capacity is calculated as the borrowing base less borrowings outstanding.
Borrowing costs under the Previous Credit Agreements related to the Agency segment are reflected in our Condensed Consolidated Statements of Operations as Interest Expense. Borrowing costs under the Previous Credit Agreements related to SFS are reflected in our Condensed Consolidated Statements of Operations within Cost of Finance Revenues as any borrowings thereunder were used to directly fund client loans. Subsequent to the change in our cash management strategy (as discussed in Note 3), the refinancing of the Previous Credit Agreements, and the resulting elimination of the SFS Credit Facility on June 26, 2018, the SFS loan portfolio is no longer being directly funded with revolving credit facility borrowings. Accordingly, all borrowing costs associated with the New Credit Agreement are recorded as Interest Expense in our Condensed Consolidated Statements of Operations.
Long-Term Debt—As of March 31, 2019, December 31, 2018, and March 31, 2018, Long-Term Debt consisted of the following (in thousands):
 
 
March 31,
2019
 
December 31,
2018
 
March 31,
2018
York Property Mortgage, net of unamortized debt issuance costs of $3,305, $3,559, and $4,292
 
$
255,437

 
$
257,284

 
$
268,794

2025 Senior Notes, net of unamortized debt issuance costs of $4,776, $4,894, and $5,425
 
395,224

 
395,106

 
394,575

Less current portion:
 
 
 
 
 
 
York Property Mortgage, net of unamortized debt issuance costs of $1,017, $1,010, and $1,010
 
(13,653
)
 
(13,604
)
 
(12,381
)
Total Long-Term Debt, net
 
$
637,008

 
$
638,786

 
$
650,988

See the captioned sections below for information related to the York Property Mortgage and the 2025 Senior Notes.

21



York Property Mortgage—The York Property, our headquarters building located at 1334 York Avenue in New York, is subject to a seven-year, $325 million mortgage loan (the "York Property Mortgage") that matures on July 1, 2022. As of March 31, 2019, the York Property Mortgage had an outstanding principal balance of $258.7 million and its fair value approximated its book value due to the variable interest rate associated with the mortgage. The fair value measurement of the York Property Mortgage is considered to be a Level 2 fair value measurement in the hierarchy provided by ASC 820, Fair Value Measurements.
The York Property Mortgage bears interest based on the one-month LIBOR rate plus a spread of 2.25% and is being amortized based on a 25-year mortgage-style amortization schedule over its seven-year term. On June 21, 2017, the York Property Mortgage was amended (the "First Amendment") to reduce the minimum net worth that Sotheby's is required to maintain from $425 million to $325 million in order to provide continued flexibility regarding potential future common stock repurchases. On October 18, 2018, the York Property Mortgage was further amended (the "Second Amendment") to modify the definition of net worth whereby the balance recorded within Treasury Stock Shares on our Condensed Consolidated Balance Sheets is added back to Total Equity for the purposes of calculating net worth. Although the minimum net worth required by the York Property Mortgage remains at $325 million, the change to the definition of net worth provides continued flexibility regarding potential future common stock repurchases. Sotheby’s net worth as of March 31, 2019, as calculated under the Second Amendment, is approximately $1.3 billion.
In conjunction with the First Amendment, on July 3, 2017, we made a prepayment of $32 million to reduce the outstanding principal balance of the York Property Mortgage, and agreed to make annual prepayments funded primarily with cash accumulated in a restricted cash management account, as discussed below, beginning in July 2018 and continuing through July 2021 that are not to exceed $25 million in the aggregate during that period. The $32 million principal payment made on July 3, 2017 was funded with $25 million from existing cash balances and $7 million from a restricted cash management account associated with the York Property Mortgage. On July 2, 2018, a $6.25 million principal payment funded primarily from the restricted cash management account was made in accordance with the First Amendment. (See Note 10 for information related to the interest protection agreements that were entered into in connection with the York Property Mortgage.)
The York Property, the York Property Mortgage, and the related interest rate protection agreements are held by 1334 York, LLC (the "LLC"), a separate legal entity of Sotheby's that maintains its own books and records and whose results are ultimately consolidated into our Condensed Consolidated Financial Statements. The LLC is the sole owner and lessor of the York Property. The LLC presently leases the York Property to Sotheby's, Inc., which is also controlled by Sotheby's. The assets of the LLC are not available to satisfy the obligations of our other affiliates or any other entity.
The loan agreement governing the York Property Mortgage contains the following financial covenants, which are subject to additional terms and conditions as provided in the underlying loan agreement:
As measured on July 1, 2020, the LTV ratio (i.e., the principal balance of the York Property Mortgage divided by the appraised value of the York Property) may not exceed 65% (the "Maximum LTV") based on the then-outstanding principal balance of the York Property Mortgage. If the LTV ratio exceeds the Maximum LTV, the LLC may, at its option, post cash or a letter of credit or pay down the York Property Mortgage without any prepayment penalty or premium, in an amount that will cause the LTV ratio not to exceed the Maximum LTV.
At all times during the term of the York Property Mortgage, the Debt Yield will not be less than 8.5% (the "Minimum Debt Yield"). The Debt Yield is calculated by dividing the annual net operating income of the LLC, which primarily consists of lease income from Sotheby's, Inc. (calculated on a cash basis), by the outstanding principal balance of the York Property Mortgage. If the Debt Yield falls below the Minimum Debt Yield, the LLC has the option to post cash or a letter of credit or prepay the York Property Mortgage without any prepayment penalty or premium, in an amount that will cause the Debt Yield to exceed the Minimum Debt Yield.

22




If Sotheby's corporate credit rating from Standard & Poor’s Rating Services ("S&P") is downgraded to "BB-", the lender may require that the LLC establish cash management accounts (the "Cash Management Accounts") under the lender's control for potential monthly debt service, insurance, and tax payments. If the rating is downgraded to "B+" or "B", the lender may require the LLC to deposit a certain amount of debt service into the Cash Management Accounts (approximately 6 and 12 months of debt service, respectively). If the rating is downgraded to lower than "B", the LLC must make principal payments on the mortgage such that the LTV ratio does not exceed 65%. On February 9, 2016, Sotheby's corporate credit rating from S&P was downgraded to "BB-" from "BB". As a result, a Cash Management Account was established under the control of the lender. The lender will retain any excess cash after monthly debt service, insurance, and taxes as security. As of March 31, 2019, December 31, 2018, and March 31, 2018, the Cash Management Account had a balance of $1 million, $0.7 million, and $4.3 million, respectively, which is reflected within Restricted Cash on our Condensed Consolidated Balance Sheets.
At all times during the term of the York Property Mortgage, we are required to maintain a minimum net worth as discussed above, subject to a cure period.
Senior Unsecured Debt—On September 27, 2012, we issued $300 million aggregate principal amount of 5.25% Senior Notes, due October 1, 2022 (the "2022 Senior Notes"). On December 12, 2017, we issued $400 million aggregate principal amount of 4.875% Senior Notes due December 15, 2025 (the “2025 Senior Notes”). The net proceeds from the sale of the 2025 Senior Notes were approximately $395.5 million, after deducting fees paid to the initial purchasers, of which $312.3 million was irrevocably deposited with a trustee for the benefit of the holders of the 2022 Senior Notes, which were redeemed using these funds on January 11, 2018. The $312.3 million redemption price that was deposited with the trustee, consisting of the $300 million principal amount plus $4.4 million of accrued interest and a call premium of $7.9 million, was classified within Restricted Cash on our Condensed Consolidated Balance Sheets as of December 31, 2017. As a result of the redemption of the 2022 Senior Notes, we wrote-off $3 million of related unamortized debt issuance costs, which, when combined with the $7.9 million call premium, resulted in a total loss on the extinguishment of $10.9 million recognized in the first quarter of 2018.
Interest on the 2025 Senior Notes is payable in cash semi-annually in arrears on June 15 and December 15 of each year, beginning June 15, 2018. The 2025 Senior Notes were offered only to qualified institutional buyers in accordance with Rule 144A and to non-U.S. Persons under Regulation S under the Securities Act of 1933, as amended (the "Securities Act"). Holders of the 2025 Senior Notes do not have registration rights, and the 2025 Senior Notes have not been and will not be registered under the Securities Act. The 2025 Senior Notes are guaranteed, jointly and severally, on a senior unsecured basis by certain of our existing and future domestic subsidiaries to the extent and on the same basis that such subsidiaries guarantee borrowings under the Credit Agreement. The 2025 Senior Notes will be redeemable, in whole or in part, on or after December 15, 2020, at specified redemption prices set forth in the underlying indenture, plus accrued and unpaid interest to, but excluding, the redemption date. Prior to December 15, 2020, the 2025 Senior Notes are redeemable, in whole or in part, at a redemption price equal to 100% of the principal amount of the 2025 Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date, plus a make-whole premium (as defined in the underlying indenture). In addition, at any time prior to December 15, 2020, we may redeem up to 40% of the aggregate principal amount of the 2025 Senior Notes with the net cash proceeds of certain equity offerings at the redemption price of 104.875% plus accrued and unpaid interest. If Sotheby's experiences a Change of Control (as defined in the underlying indenture), we must offer to repurchase all of the 2025 Senior Notes then outstanding at 101% of the aggregate principal amount of the 2025 Senior Notes repurchased, plus accrued and unpaid interest. The underlying indenture for the 2025 Senior Notes also contains customary covenants that limit, among other things, our ability to grant liens on our assets; enter into sale and leaseback transactions; and merge, consolidate or transfer or dispose of substantially all of our assets. The above covenants are subject to a number of exceptions and qualifications set forth in the underlying indenture.
As of March 31, 2019, the $400 million principal amount of the 2025 Senior Notes had a fair value of approximately $388.5 million based on a broker quoted price derived via a pricing model using observable and unobservable inputs. As such, this fair value measurement is considered to be a Level 3 fair value measurement in the hierarchy provided by ASC 820.


23



Future Payments Due Under Outstanding Debt—The aggregate future principal and interest payments due under the New Credit Agreement, the York Property Mortgage, and the 2025 Senior Notes during the five-year period after March 31, 2019 are as follows (in thousands):
Period
 
Amount
April 2019 to March 2020
 
$
47,300

April 2020 to March 2021
 
$
47,162

April 2021 to March 2022
 
$
46,741

April 2022 to March 2023
 
$
665,618

April 2023 to March 2024
 
$
19,500

The table above assumes that the annual interest rate for the York Property Mortgage will be within the ceiling and floor rates of the associated interest rate collar for the remainder of the mortgage term based on available forecasts of LIBOR rates for the future periods through maturity (see Note 10). The table above also assumes York Property Mortgage principal payments consistent with the related mortgage amortization schedule, as well as annual principal prepayments of $6.25 million each July through 2021, as discussed above.

24



10. Derivative Financial Instruments
Derivative Financial Instruments Designated as Hedging Instruments—The following tables present fair value information related to the derivative financial instruments designated as hedging instruments as of March 31, 2019, December 31, 2018, and March 31, 2018 (in thousands):
 
 
Assets
 
Liabilities
March 31, 2019
 
Balance Sheet Classification
 
Fair Value
 
Balance Sheet Classification
 
Fair Value
Cash Flow Hedges:
 
 
 
 

 
 
 
 

Interest rate collar
 
N/A
 
$

 
Other Current Liabilities
 
$
49

Interest rate collar
 
N/A
 

 
Other Long-Term Liabilities
 
1,459

Total cash flow hedges
 
 
 

 
 

1,508

Net Investment Hedges:
 
 
 
 
 

 
 
Foreign exchange contracts
 
Prepaid Expenses and Other Current Assets
 
415

 
N/A
 

Total
 
 
 
$
415

 

 
$
1,508

 
 
Assets
 
Liabilities
December 31, 2018
 
Balance Sheet Classification
 
Fair Value
 
Balance Sheet Classification
 
Fair Value
Cash Flow Hedges:
 
 
 
 

 
 
 
 

Interest rate collar
 
N/A
 

 
Other Current Liabilities
 
40

Interest rate collar
 
N/A
 

 
Other Long-Term Liabilities
 
1,185

Total cash flow hedges
 
 
 

 
 
 
1,225

Net Investment Hedges:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
N/A
 
462

 
N/A
 

Total
 
 
 
$
462

 
 
 
$
1,225

 
 
Assets
 
Liabilities
March 31, 2018
 
Balance Sheet Classification
 
Fair Value
 
Balance Sheet Classification
 
Fair Value
Cash Flow Hedges:
 
 
 
 

 
 
 
 

Interest rate swap
 
Prepaid Expenses and Other Current Assets
 
$
377

 
N/A
 
$

Interest rate collar
 
N/A
 

 
Other Current Liabilities
 
177

Interest rate collar
 
N/A
 

 
Other Long-Term Liabilities
 
399

Total cash flow hedges
 
 
 
377

 
 
 
576

Net Investment Hedges:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
N/A
 

 
Other Current Liabilities
 
5,891

Total
 
 
 
$
377

 
 
 
$
6,467



25



The following table summarizes the effect of the derivative financial instruments designated as hedging instruments on our Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive (Loss) Income for the three months ended March 31, 2019 and 2018 (in thousands):
 
 
Gain (Loss) Recognized in Other Comprehensive Income - Effective Portion
 
Classification of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Net Loss
 
Amount Reclassified from Accumulated Other Comprehensive Loss into Net Loss - Effective Portion
Three Months Ended March 31,
 
2019
 
2018
 
 
 
2019
 
2018
Cash Flow Hedges:
 
 

 
 
 
 
 
 

 
 
Interest rate swap
 
$

 
$
80

 
Interest Expense
 
$

 
$
(52
)
Interest rate collar
 
(213
)
 
980

 
Interest Expense
 

 
162

Total cash flow hedges
 
(213
)
 
1,060

 
 
 

 
110

Net Investment Hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
(46
)
 
(1,610
)
 
N/A
 

 

Total
 
$
(259
)
 
$
(550
)
 
 
 
$

 
$
110

See the captioned sections below for information related to the derivative financial instruments designated as cash flow hedges or net investment hedges.
Derivative Financial Instruments Designated as Cash Flow Hedges—In connection with the York Property Mortgage (see Note 9), we entered into interest rate protection agreements secured by the York Property, consisting of a 2-year interest rate swap (the "Mortgage Swap"), effective as of July 1, 2015, and a 5-year interest rate collar (the "Mortgage Collar"), effective as of July 1, 2017. The Mortgage Swap fixed the LIBOR rate on the York Property Mortgage at an annual rate equal to 0.877% through its July 1, 2017 expiration date. The Mortgage Collar effectively fixes the LIBOR rate on the York Property Mortgage at an annual rate of no less than 1.917%, but no more than 3.75%, for the remainder of the mortgage's 7-year term. After taking into account the interest rate protection agreements, the annual interest rate for the first two years of the York Property Mortgage was approximately 3.127% and then will be between a floor of 4.167% and a cap of 6% for the remainder of its term. Beginning on the effective date of the Mortgage Collar through March 31, 2019, the weighted average interest rate for the York Property Mortgage was 4.35%.
In conjunction and concurrent with the First Amendment to the York Property Mortgage in June 2017 (see Note 9), the notional value of the Mortgage Collar was reduced by $57 million to reflect: (i) the $32 million principal prepayment made on the York Property Mortgage on July 3, 2017 and (ii) potential annual prepayments of $6.25 million each, beginning in July 2018 and continuing through July 2021. The reduction in the notional value of the Mortgage Collar relates to previously forecasted interest payments that are no longer probable of occurring following the June 2017 amendment to the York Property Mortgage. 
As of March 31, 2019, the notional value of the Mortgage Collar was $258.7 million, which is equal to the principal balance of the York Property Mortgage on that date. For the remainder of its term, the Mortgage Collar will have a notional value that is no greater than the applicable forecasted principal balance of the York Property Mortgage.
The York Property, the York Property Mortgage, and the related interest rate protection agreement(s) are held by 1334 York, LLC, a separate legal entity of Sotheby's that maintains its own books and records and whose results are ultimately consolidated into our financial statements.
On November 21, 2016, we entered into a two-year interest rate swap agreement to eliminate the variability in expected cash outflows associated with the one-month LIBOR-indexed interest payments owed on $63 million of revolving credit facility borrowings (the "Revolving Credit Facility Swap"). In the third quarter of 2018, these revolving credit facility borrowings were repaid, and the Revolving Credit Facility Swap was terminated, resulting in a $0.2 million (net of tax) reclassification from Accumulated Other Comprehensive Loss into Net Loss in that period.

26



At their inception, the Mortgage Collar and the Revolving Credit Facility Swap (collectively, the "Cash Flow Hedges") were each individually designated as cash flow hedges of the risk associated with the variability in expected cash outflows related to the one-month LIBOR-indexed interest payments owed on their respective debt instruments. Accordingly, to the extent that each of the Cash Flow Hedges remains outstanding and is effective, any unrealized gains and losses related to changes in their fair value are recorded to Accumulated Other Comprehensive Loss on our Condensed Consolidated Balance Sheets and then reclassified to Interest Expense in our Condensed Consolidated Statements of Operations in the same period that interest expense related to the underlying debt instruments is recorded. Any hedge ineffectiveness is immediately recognized in Net Income (Loss). In addition, if any of the forecasted transactions associated with the Cash Flow Hedges are no longer probable of occurring, any related amounts previously recorded in Accumulated Other Comprehensive Loss on our Condensed Consolidated Balance Sheets would be immediately reclassified into Net Income (Loss).
Management performs a quarterly assessment to determine whether the Mortgage Collar, as amended, continues to be highly effective in hedging the risk associated with the variability in expected cash outflows related to the one-month LIBOR-indexed interest payments on the York Property Mortgage. As of March 31, 2019, the Mortgage Collar, as amended, is expected to continue to be highly effective in hedging the risk associated with the variability in expected cash outflows related to the one-month LIBOR-indexed interest payments on the York Property Mortgage.
The assets and liabilities associated with the Cash Flow Hedges have been designated as Level 2 fair value measurements within the fair value hierarchy provided by ASC 820. Level 2 fair value measurements have pricing inputs other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date. Level 2 fair value measurements may be determined through the use of models or other valuation methodologies. The fair value of the Mortgage Collar is based on an option pricing model using observable LIBOR-curve rates for each forecasted monthly settlement, with the projected cash flows discounted using the contractual terms of the instrument. The fair value of the Revolving Credit Facility Swap was based on a discounted cash flow methodology using the contractual terms of the instrument and observable LIBOR-curve rates that were consistent with the timing of the interest payments related to our revolving credit facility.
Derivative Financial Instruments Designated as Net Investment Hedges—We are exposed to variability in the U.S. Dollar equivalent of the net investments in our foreign subsidiaries and, by extension, the U.S. Dollar equivalent of any foreign earnings repatriated to the U.S. due to potential changes in foreign currency exchange rates. As a result, we regularly enter into foreign currency forward exchange contracts to hedge the net investments in our foreign subsidiaries from which we expect to repatriate earnings to the U.S. As of March 31, 2019, the aggregate notional value of our outstanding net investment hedge contracts was $59.7 million.
We use the forward rate method to assess the effectiveness of our net investment hedges. Under the forward rate method, if both the notional value of the derivative designated as a hedge of a net investment in a foreign subsidiary equals the portion of the net investment designated as being hedged and the derivative relates solely to the foreign exchange rate between the functional currency of the hedged net investment and the investor’s functional currency, then all changes in fair value of the derivative are reported in the cumulative translation adjustment accounts within Accumulated Other Comprehensive Loss on our Condensed Consolidated Balance Sheets.
The foreign currency forward exchange contracts designated as net investment hedges are considered Level 2 fair value measurements within the fair value hierarchy provided by ASC 820. Level 2 fair value measurements have pricing inputs other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value may be determined through the use of models or other valuation methodologies. The fair value of these foreign currency forward exchange contracts is based on the estimated amount to settle the contracts using applicable market exchange rates as of the balance sheet date.
Derivative Financial Instruments Not Designated as Hedging Instruments—We also utilize forward contracts to hedge cash flow exposures related to foreign currency exchange rate movements arising from short-term foreign currency denominated intercompany balances and, to a much lesser extent, foreign currency denominated client payable balances, as well as foreign currency denominated auction guarantee obligations. Such forward exchange contracts are typically short-term with settlement dates less than six months from their inception. These instruments are not designated as hedging instruments for accounting purposes. Accordingly, changes in the fair value of these instruments are recognized in our Condensed Consolidated Statements of Operations in Non-Operating Income.

27



As of March 31, 2019, the notional value of outstanding forward exchange contracts not designated as hedging instruments was $184.8 million. Notional values do not quantify risk or represent assets or liabilities, but are used to calculate cash settlements under outstanding forward exchange contracts. We are exposed to credit-related risks in the event of nonperformance by the counterparties to our outstanding forward exchange contracts that are not designated as hedging instruments. We do not expect any of these counterparties to fail to meet their obligations, given their investment grade short-term credit ratings. As of March 31, 2019, our Condensed Consolidated Balance Sheets include an asset of $0.3 million within Prepaid Expenses and Other Current Assets and a liability of $0.3 million within Accounts Payable and Accrued Liabilities, representing the fair values of these contracts on that date. As of December 31, 2018, our Condensed Consolidated Balance Sheets include an asset of $1.7 million within Prepaid Expenses and Other Current Assets and a liability of $1.5 million within Accounts Payable and Accrued Liabilities, representing the fair values of these contracts on that date. As of March 31, 2018, our Condensed Consolidated Balance Sheets include a liability of $2.1 million recorded within Accounts Payable and Accrued Liabilities, representing the fair value of these contracts on that date.
11. Supplemental Condensed Consolidated Balance Sheet Information
As of March 31, 2019, December 31, 2018, and March 31, 2018, Prepaid Expenses and Other Current Assets consisted of the following (in thousands):
 
 
March 31,
2019

December 31,
2018

March 31,
2018
Prepaid expenses
 
$
32,793

 
$
25,672

 
$
32,444

Derivative financial instruments (see Note 10)
 
415

 
462

 
377

Insurance recoveries
 
5,558

 
4,353

 

Other
 
9,157

 
8,144

 
7,784

Total Prepaid Expenses and Other Current Assets
 
$
47,923

 
$
38,631

 
$
40,605

As of March 31, 2019, December 31, 2018, and March 31, 2018, Other Long-Term Assets consisted of the following (in thousands):
 
 
March 31,
2019
 
December 31,
2018