(in thousands of dollars, except per share amounts)
The MD&A and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide the reader
financial statements with a narrative from our management’s perspective. Our management report is divided into the following sections:
•Overview •Recent Developments •Results of Operations
• Summary of real estate investments
• Cash and capital resources
Please read this discussion along with our MD&A and audited financial statements as of and for the year endedDecember 31, 2021 and Notes thereto, included in our 2021 Annual Report on Form 10-K, and our Condensed Consolidated Financial Statements and related Notes as of and for the quarterly period endedMarch 31, 2022 and 2021. Basis of Presentation The Condensed Consolidated Financial Statements included in this Form 10-Q present the financial position ofVector Group Ltd. , aDelaware corporation, as ofMarch 31, 2022 andDecember 31, 2021 and the results of our operations for the three months endedMarch 31, 2022 and 2021 giving effect to the distribution of Douglas Elliman Inc. (the "Distribution") with the historical financial results of Douglas Elliman reflected as discontinued operations. The cash flows and comprehensive income related to Douglas Elliman have not been segregated and are included in the Condensed Consolidated Statements of Cash Flows and Condensed Consolidated Statements of Comprehensive Income, respectively, for all periods presented. Unless otherwise indicated, the information in the Notes to the Condensed Consolidated Financial Statements refer only toVector Group's continuing operations and do not include discussion of balances or activity of Douglas Elliman. Overview
We are a holding company and are primarily engaged in two business areas:
• Tobacco: the manufacture and sale of cigarettes at reduced prices in
through our
•Real Estate: the real estate investment business through our subsidiary,New Valley LLC , which (i) has interests in numerous real estate projects acrossthe United States and (ii) is seeking to acquire or invest in additional real estate properties or projects.
Cigarettes from our tobacco subsidiaries are produced in 100 length, style and wrapper combinations. Liggett’s current brand portfolio includes:
•Eagle 20's •Montego •Pyramid
• Grand Prix, Liggett Select,
The discount segment is a challenging marketplace, with consumers having less brand loyalty and placing greater emphasis on price. Liggett's competition is divided into two segments. The first segment consists of the three largest manufacturers of cigarettes inthe United States :Philip Morris USA Inc. , which is owned by Altria Group, Inc.,RJ Reynolds Tobacco Company , which is owned by British American Tobacco Plc, andITG Brands LLC , which is owned by Imperial Brands Plc. These three manufacturers, while primarily premium cigarette-based companies, also produce and sell discount cigarettes. The second segment of competition is comprised of a group of smaller manufacturers and importers, most of which sell deep discount cigarettes. 35 --------------------------------------------------------------------------------
Douglas Elliman’s financial results up to the date of distribution are presented as results from discontinued operations, net of income taxes in our condensed consolidated statements of earnings and are not included in our results from continuing operations described herein. -below. See Note 4.
RECENT DEVELOPMENTS
Montego. FromAugust 2020 toFebruary 2022 , Liggett has expanded the distribution of its Montego deep discount brand nationally. Montego was Liggett's second-largest brand for the three months endedMarch 31, 2022 . Prior toAugust 2020 , Montego was sold in select targeted markets in four states. Montego's unit volume represented approximately 38% for the three months endedMarch 31, 2022 compared to approximately 10% of total unit volume sales for the three months endedMarch 31, 2021 . Menthol and Flavorings. OnMay 4, 2022 , FDA published a proposed rule to prohibit menthol as a characterizing flavor in cigarettes. For the twelve months endedMarch 31, 2022 , approximately 19% of our cigarette unit sales were menthol flavored. We cannot predict how a tobacco product standard or a restriction on the sale and distribution of tobacco products with menthol, if ultimately issued by FDA, will impact product sales, whether it will have a material adverse effect on Liggett or Vector Tobacco, or whether it will impact Liggett and Vector Tobacco to a greater degree than other companies in the industry.
Recent Developments in Tobacco Litigation
The cigarette industry continues to be challenged on numerous fronts. New cases continue to be commenced against Liggett and other cigarette manufacturers. Liggett could be subjected to substantial liabilities and bonding requirements from litigation relating to cigarette products. Adverse litigation outcomes could have a negative impact on our ability to operate due to their impact on cash flows. It is possible that there could be adverse developments in pending cases including the certification of additional class actions. An unfavorable outcome or settlement of pending tobacco-related litigation could encourage the commencement of additional litigation. In addition, an unfavorable outcome in any tobacco-related litigation could have a material adverse effect on our consolidated financial position, results of operations or cash flows. Liggett could face difficulties in obtaining a bond to stay execution of a judgment pending appeal. Mississippi Litigation. InJanuary 2016 , the Attorney General forMississippi filed a motion inChancery Court inJackson County, Mississippi to enforce theMarch 1996 settlement agreement among Liggett,Mississippi and other states (the "1996 Agreement") alleging that Liggett owesMississippi at least$27,000 in compensatory damages and interest. InApril 2017 , theChancery Court ruled, over Liggett's objections, that the 1996 Agreement should be enforced asMississippi claims and referred the matter first to arbitration and then to a Special Master for further proceedings to determine the amount of damages, if any, to be awarded. InApril 2021 , following confirmation of the final arbitration award, the parties stipulated that the unpaid principal (exclusive of interest) purportedly due from Liggett toMississippi pursuant to the 1996 Agreement was approximately$16,700 , subject to Liggett's right to litigate and/or appeal the enforceability of the 1996 Agreement (and all issues other than the calculation of the principal amount allegedly due). InSeptember 2019 , the Special Master held a hearing regardingMississippi's claim for pre- and post-judgment interest. InAugust 2021 , the Special Master issued a final report with proposed findings and recommendations that pre-judgment interest, in the amount of approximately$18,800 , is due from Liggett fromApril 2005 -August 3, 2021 . InApril 2022 , theMississippi Chancery Court affirmed the Special Master's findings. Additional interest amounts will accrue if the judgment is not overturned on appeal. Liggett continues to assert that theApril 2017 Chancery Court order is in error because the most favored nations provision in the 1996 Agreement eliminated all of Liggett's payment obligations toMississippi , and has reserved all rights to appeal this and other issues at the conclusion of the case. In the event Liggett appeals an adverse judgment, the posting of a bond will likely be required. Liggett may be required to make additional payments to eitherMississippi orTexas which could have a material adverse effect on our consolidated financial position, results of operations and cash flows.
See “Laws and Regulations” in Section 2 of the MD&A for further information on litigation.
36 --------------------------------------------------------------------------------
Operating results
The following discussion provides an assessment of our results of operations, capital resources and liquidity and should be read in conjunction with our condensed consolidated financial statements included elsewhere in this report. The condensed consolidated financial statements include the accounts of Liggett, Vector Tobacco,Liggett Vector Brands , New Valley and other less significant subsidiaries. For purposes of this discussion and other consolidated financial reporting, our business segments for the three months endedMarch 31, 2022 and 2021 were Tobacco and Real Estate. The Tobacco segment consisted of the manufacture and sale of cigarettes.The Real Estate segment included our investment inNew Valley , which includes Escena and investments in real estate ventures. Three Months Ended March 31, 2022 2021 Revenues: Tobacco$ 309,048 $ 268,463 Real estate 2,994 2,525 Total revenues$ 312,042 $ 270,988 Operating income (loss): Tobacco$ 77,639 (1)$ 81,599 (2) Real estate 975 1,032 Corporate and Other (3,488) (6,656) Total operating income$ 75,126 $ 75,975
(1) Operating income includes
settlement of disputes and costs of judgment.
(2) Operating income includes
litigation and judgment costs.
Three months completed
Revenues. Total revenues were$312,042 for the three months endedMarch 31, 2022 compared to$270,988 for the three months endedMarch 31, 2021 . The$41,054 (15.1%) increase in revenues was primarily due to a$40,585 increase in Tobacco revenues related to increased unit volume and a$469 increase in Real Estate revenues. Cost of sales. Total cost of sales was$212,815 for the three months endedMarch 31, 2022 compared to$164,907 for the three months endedMarch 31, 2021 . The$47,908 (29.1%) increase in cost of sales was primarily due to a$47,506 increase in Tobacco cost of sales primarily related to increased sales volume, and a$402 increase in Real Estate cost of sales. Expenses. Operating expenses were$24,101 for the three months endedMarch 31, 2022 compared to$30,106 for the same period last year. The$6,005 (19.9%) decline was due to a$3,168 decline in Corporate and Other expense and a$2,961 decline in Tobacco expenses. This was offset by a$124 increase in Real Estate expenses for the three months endedMarch 31, 2022 . Operating income. Operating income was$75,126 for the three months endedMarch 31, 2022 compared to operating income of$75,975 for the same period last year. Tobacco operating income declined by$3,960 due primarily to declines in net pricing and higher per unit MSA expense, while Real Estate operating income declined$57 . This was offset by a decline in Corporate and Other operating loss of$3,168 . Other expenses. Other expenses were$30,362 for the three months endedMarch 31, 2022 compared to other expenses of$45,211 for the three months endedMarch 31, 2021 . For the three months endedMarch 31, 2022 , other expenses primarily consisted of interest expense of$25,098 , equity in losses from investments of$2,242 , equity in losses from real estate ventures of$1,877 and other expenses of$1,145 . For the three months endedMarch 31, 2021 , other expenses primarily consisted of interest expense of$28,721 and loss on extinguishment of debt of$21,362 . This was offset by other income of$2,706 , equity in earnings from real estate ventures$1,589 and equity in earnings from investments of$577 . 37 --------------------------------------------------------------------------------
Earnings before provision for income taxes. Earnings before income taxes were
and
Income tax expense. Income tax expense was$12,222 for the three months endedMarch 31, 2022 compared to income tax expense of$9,214 for the three months endedMarch 31, 2021 . Our provision for income taxes in interim periods is based on expected income, statutory rates, nontaxable differences, valuation allowances against deferred tax assets, and any tax planning opportunities available to us. For interim financial reporting, we estimate the annual effective income tax rate based on full year projections and apply the annual effective income tax rate against year-to-date pretax income to record income tax expense, adjusted for discrete items, if any. We refine annual estimates as new information becomes available.
The tobacco.
Tobacco revenues. Liggett increased the list price of Eagle 20's, Pyramid, Liggett Select, Eve andGrand Prix by$0.16 per pack onApril 29, 2022 ,$0.15 per pack inJanuary 2022 ,$0.15 per pack inSeptember 2021 ,$0.14 per pack inJune 2021 , and$0.14 per pack inJanuary 2021 . EffectiveMay 1, 2022 , Liggett reduced its Montego promotional spending of$0.10 per pack. All of our Tobacco sales were in the discount category in 2022 and 2021. For the three months endedMarch 31, 2022 , Tobacco revenues were$309,048 compared to$268,463 for the three months endedMarch 31, 2021 . Revenues increased by$40,585 (15.1%) due primarily to an 18.7% (362 million units) increase in unit sales volume, partially offset by a decline in the average selling price of our brands. The average selling price of our brands declined due to a shift in volume from our higher priced Eagle 20's and Pyramid brands to Montego. Eagle 20's remains Liggett's primary discount cigarette brand and its percentage of Liggett's total unit sales declined from 61% in the three months endedMarch 31, 2021 to 41% for the three months endedMarch 31, 2022 . Montego is now Liggett's second largest brand and its unit volume increased from 10% of total unit sales in the three months endedMarch 31, 2021 to 38% for the three months endedMarch 31, 2022 . Pyramid, Liggett's third largest brand, declined from 21% of total unit volume sales in the three months endedMarch 31, 2021 to 16% for the three months endedMarch 31, 2022 . Tobacco cost of sales. The major components of our Tobacco cost of sales were as follows: Three Months EndedMarch 31, 2022 2021
Manufacturing overhead, raw materials and labor
Customer Shipping and Handling
1,993 1,416 Federal excise taxes, net 116,079 97,714 FDA expense 6,624 6,072 MSA expense, net of market share exemption 54,076 (1) 31,568 (2) Total cost of sales$ 211,537 $ 164,031
(1) Includes
(2) Includes
The Tobacco segment's MSA expense is the most volume-sensitive component (on a per-unit basis) of our cost of sales because, under the terms of the MSA, we have no payment obligations except to the extent that our tobacco subsidiaries' market share of theU.S. cigarette market exceeds 1.92%. We estimate MSA expense based on total domestic taxable cigarette shipments inthe United States , our taxable shipments and inflation. Based on assumptions discussed below, we estimated our MSA expense increased to$0.47 per pack for the three months endedMarch 31, 2022 from our estimate of$0.33 per pack from the three months endedMarch 31, 2021 . (We estimated our MSA expense was$0.40 per pack for the year endedDecember 31, 2021 .) Our MSA expense is impacted by total domestic taxable cigarette shipments inthe United States . As ofMarch 31, 2022 , we estimate taxable shipments in theU.S. will decline by 7.0% in 2022 compared to our estimate as ofMarch 31, 2021 of a decline of 6.0% in 2021. (The actual change in 2021 taxable shipments was a decline of 6.2%.) We estimate our 2022 projected annual MSA expense changes by approximately$1,800 for each 1% change from 2021 shipment volumes in the U.S. market. 38 -------------------------------------------------------------------------------- Inflationary pressures also impact Liggett's MSA expense, which is subject to an annual inflation adjustment. The inflation adjustment is the greater of theU.S. CPI rate or 3%. For the three months endedMarch 31, 2022 , Liggett's management assumed an inflation adjustment to MSA expense of 7% compared to an assumption of 4% for the three months endedMarch 31, 2021 . (The actual inflation adjustment to the MSA in 2021 was 7%.) Our annual MSA expense increases by approximately$2,300 for each 1% increase in inflation over 3%. In addition to the MSA expense, we could experience inflationary impacts from manufacturing costs. The largest component of Liggett's manufacturing costs is leaf tobacco and other raw materials. In recent years, due to declining prices of leaf tobacco as well as efficiencies gained from technological innovation in Liggett's factory, Liggett's raw material costs have been relatively flat and, therefore, prior to 2021, Liggett had not been impacted by inflation. During the three months endedMarch 31, 2022 , Liggett experienced a 4.1% increase in leaf tobacco and raw materials (on a per unit basis) compared to no change in prices during the three months endedMarch 31, 2021 . Further, when including labor costs, manufacturing overhead and shipping costs with leaf tobacco and raw materials, Liggett experienced a 2.1% increase in production costs (on a per unit basis) during the three months endedMarch 31, 2022 , compared to a decline in total production costs of 2.8% during the three months endedMarch 31, 2021 . Tobacco gross profit was$97,511 for the three months endedMarch 31, 2022 compared to$104,432 for the three months endedMarch 31, 2021 , a decline of$6,921 (6.6%). This decline in gross profit for the three months endedMarch 31, 2022 was primarily attributable to lower net pricing caused by a shift in volume to Liggett's lower priced Montego brand. As a percentage of revenue (excluding Federal Excise Taxes), Tobacco gross profit margin declined from 61.2% in the 2021 period to 50.5% in the 2022 period. Tobacco expenses. Tobacco operating, selling, general and administrative expenses, excluding settlements and judgments, were$19,800 for the three months endedMarch 31, 2022 compared to$22,828 for the three months endedMarch 31, 2021 . The decline of$3,028 was mainly due to lower professional fees and expenses. Tobacco product liability legal expenses, including settlements and judgments, were$1,645 and$1,525 for the three months endedMarch 31, 2022 and 2021, respectively. Tobacco operating income. Tobacco operating income was$77,639 for the three months endedMarch 31, 2022 compared to$81,599 for the three months endedMarch 31, 2021 . The decline of$3,960 (4.9%) was attributable to lower gross profit partially offset by lower operating, selling, general and administrative expenses. Real Estate. Real Estate revenues. Real Estate revenues were$2,994 and$2,525 for the three months endedMarch 31, 2022 and 2021, respectively. Real Estate revenues increased by$469 , which was primarily related to sales on facilities from Escena. InApril 2022 , New Valley sold Escena and received approximately$15,300 in net cash proceeds. We will account for the transaction in our condensed consolidated statement of operations for the three months endedJune 30, 2022 . 39 --------------------------------------------------------------------------------
Revenues, cost of sales, expenses and real estate operating income for the three months ended
Three Months Ended March 31, 2022 2021 Real Estate Revenues: Sales on facilities from Escena$ 2,969 $ 1,625 Revenues from investments in real estate 25 900 Total real estate revenues$ 2,994 $ 2,525
Cost of real estate sales:
Cost of sales on facilities from Escena$ 1,278 $ 2,361 Total real estate cost of sales$ 1,278 $ 2,361 Operating, selling, administrative and general expenses$ 741 $ 617 Operating income$ 975 1032000$ 1,032 Corporate and Other. Corporate and Other loss. The operating loss at the Corporate and Other segment was$3,488 for the three months endedMarch 31, 2022 compared to$6,656 for the same period in 2021. 40 --------------------------------------------------------------------------------
Summary of real estate investments
We own and seek to acquire interests in various domestic and international real estate projects through debt and equity investments. Our real estate investments mainly include the following projects in
(Dollars in Thousands. Area and Unit Information in Ones) Future Capital Commit- Projected Number ofNet Cash Cumulative Carrying Value ments from Residential Lots, Actual/Projected Percentage Owned Invested Earnings as ofMarch 31 , New Valley Units and/or Hotel Construction Start Projected Location Date ofInitial Investment (1) (Returned) (Losses) 2022 (2) Projected Residential and/orHotel Area Projected Commercial Space Rooms Date Construction End Date Master planned community, golf course, and club house in Palm 667 R Lots Escena, net (liquidatedApril 2022 ) Springs, CAMarch 2008 100 %$ (1,894) $ 10,933 $ 9,039 $ - 450 Acres 450 H N/A N/A Investments in real estate, net$ (1,894) $ 10,933
Investments in real estate ventures:111 Murray Street TriBeCa ,Manhattan, NY May 2013 9.5 %$ 7,166 $ (4,414) $ 2,752 $ - 330,000 SF 1,700 SF 157 RSeptember 2014 Completed 87 Park (8701 Collins Avenue )Miami Beach, FL December 2013 23.1 % (6,485) 6,485 - - 160,000 SF TBD 70 ROctober 2015 Completed Financial District, Manhattan,125 Greenwich Street NYAugust 2014 13.4 % 7,992 (7,992) - - 306,000 SF 16,000 SF 273 RMarch 2015 TBD West Hollywood Edition (9040 Sunset 20 R Boulevard)West Hollywood, CA October 2014 48.5 % 17,188 (17,188) - - 210,000 SF - 190 HMay 2015 CompletedMonad Terrace (1300 West Ave )Miami Beach, FL May 2015 19.6 % 7,635 (7,635) - - 160,000 SF - 59 RMay 2016 Completed Takanasee (805 Ocean Ave )Long Branch, NJ December 2015 22.8 % 5,588 (5,588) - - 63,000 SF - 13 RJune 2017 TBD Brookland (15 East 19th St )Brooklyn, NY April 2017 9.8 % 57 (57) - - 24,000 SF - 33 RAugust 2017 Completed Dime (209 Havemeyer St )Brooklyn, NY November 2017 16.5 % 9,145 (4,817) 4,328 - 100,000 SF 150,000 SF 177 RMay 2017 Completed352 6th Avenue Brooklyn, NY February 2019 37.0 % (394) 394 - - 5,200 SF - 4 RSeptember 2019 Completed Meatpacking District,Meatpacking Plaza (44 Ninth Ave )Manhattan, NY April 2019 16.9 % 10,692 (2,906) 7,786 - 8,741 SF 76,919 SF 15 RJuly 2021 August 2023 Five Park (500 Alton Road )Miami Beach, FL September 2019 38.9 % 18,098 2,177 20,275 - 472,000 SF 15,000 SF 291 RApril 2020 September 2024 9 DeKalb Avenue Brooklyn, NY April 2019 4.2 % 5,000 1,400 6,400 - 450,000 SF 120,000 SF 540 RMarch 2019 February 2023 Natura Miami, FL December 2019 77.8 % 7,354 5,450 12,804 - 460,000 SF - 460 RDecember 2019 November 2022 Ritz-Carlton Villas (4701 Meridian Avenue)Miami Beach, FL December 2020 50.0 % 4,109 (149) 3,960 - 58,000 SF - 15 ROctober 2020 December 2022 2000 N. Atlantic Ave. Daytona Beach, FL November 2021 50.0 % 1,882 156 2,038 - TBD TBD TBD SocietyNashville (915 Division St)Nashville, TN November 2021 89.1 % 19,500 1,782 21,282 - 320,000 SF 8,000 SF 472 RJuly 2022 September 2024 3621 Collins Ave (3)Miami Beach, FL March 2022 2.5 % 1,000 - 1,000 TBD TBD TBD Condominium and Mixed Use Development$ 115,527 $ (32,902) $ 82,625 $ -Riverchase Landing Hoover, AL October 2021 50.0 %$ 11,700 $ (309) $ 11,391 $ - 746,000 SF N/A 468 R N/A N/A Apartment Buildings$ 11,700 $ (309) $ 11,391 $ - Park Lane Hotel (36 Central Park Central Park South, Manhattan, South) NYNovember 2013 1.0 %$ 8,682 $ (7,855) $ 827 $ - 446,000 SF - 628 H N/A N/A215 Chrystie Street (4)Lower East Side ,Manhattan, NY December 2012 12.3 % (1,484) 1,327 (157) - 246,000 SF - 367 HJune 2014 CompletedCoral Beach and Tennis Club Coral Beach,Bermuda December 2013 49.0 % 6,048 (4,789) 1,259 - 52 Acres - 101 H N/A N/A 587 H ParkerNew York (119 W 56th St ) Midtown,Manhattan, NY July 2019 0.4 % 1,000 (480) 520 - 470,000 SF - 99 RMay 2020 December 2022 Hotels$ 14,246 $ (11,797) $ 2,449 $ -The Plaza at Harmon Meadow Secaucus, NJ March 2015 49.0 %$ 12,270 $ (4,200) $ 8,070 $ - - - 219,000 SF - - N/A N /A Wynn Las Vegas RetailLas Vegas, NV December 2016 1.6 % 3,945 3,499 7,444 - - - 160,000 SF - - N/A N/A Commercial$ 16,215 $ (701) $ 15,514 $ -Witkoff GP Partners (5) MultipleMarch 2017 15.0 %$ 9,986 $ (9,619) $ 367 $ - N/A N/A N/A N/A N/A1 QPS Tower (23-10 Queens Plaza South )Long Island City, NY December 2012 45.4 % (14,406) 14,406 - - N/A N/A N/AMarch 2014 CompletedWitkoff EB-5 Capital Partners MultipleSeptember 2018 49.0 % (1,041) 1,041 - - N/A N/A N/A N/A N/A Diverse Real Estate Portfolio$ (5,461) $ 5,828 $ 367 $ - Investments in real estate ventures$ 152,227 $ (39,881) $ 112,346 $ - Total Carrying Value$ 150,333 $ (28,948) $ 121,385 $ -
(1) Ownership percentage reflects our estimated current ownership percentage. Our actual percentage of ownership as well as the percentage of earnings and cash distributions may ultimately differ due to a number of factors, including potential dilution, financing or admission of additional partners.
41 -------------------------------------------------------------------------------- (2) This column only represents capital commitments required under the various joint venture agreements. However, many of the operating agreements provide for the operating partner to call capital. If a joint venture partner, such as New Valley, declines to fund the capital call, then the partner's ownership percentage could either be diluted or, in some situations, the character of a funding member's contribution would be converted from a capital contribution to a member loan. (3) The3621 Collins Ave venture is measured at cost, less impairment, following the guidance under ASC 821. The investment is included in Other Assets on the condensed consolidated balance sheets. (4) Equity in losses in excess of the joint ventures' carrying value were$157 as ofMarch 31, 2022 , and are classified in Other current liabilities. (5)The Witkoff GP Partners venture includes a$367 investment in500 Broadway , a Condominium andMixed Use Development inSanta Monica, CA. TBD -To be R - Residential N/A - Not applicable SF - Square feet H - Hotel rooms determined Units R Lots - Residential lots New Valley capitalizes net interest expense into the carrying value of its ventures whose projects were under development. Net capitalized interest costs included in Carrying Value as ofMarch 31, 2022 were$12,353 . This amount is included in the "Cumulative Earnings (Losses)" column in the table above. During the three months endedMarch 31, 2022 , New Valley capitalized$3,716 of interest costs and utilized (reversed)$20 of previously capitalized interest in connection with the recognition of equity in (losses) earnings, gains and liquidations from various ventures. 42 --------------------------------------------------------------------------------
Cash and capital resources
Cash, cash equivalents and restricted cash increased by
Cash provided by operations was$74,796 and$78,364 for the three months endedMarch 31, 2022 and 2021, respectively. The decline in cash provided from operations related primarily to the absence of cash from operations from Douglas Elliman for the three months endedMarch 31, 2022 as a result of the Distribution and changes in working capital (other than our MSA liability) as a result of additional payments of liabilities and a higher increase in accounts receivable (due to increased revenues) for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . The amounts were offset by increased obligations due under the MSA (due to increased unit volumes) for the three months endedMarch 31, 2022 as well as the absence, in 2022, of premiums paid during the three months endedMarch 31, 2021 to retire our 6.125% Senior Secured Notes due 2025. Cash provided by investing activities was$2,705 for the three months endedMarch 31, 2022 and cash used in investing activities was$18,505 for the three months endedMarch 31, 2021 . In the first three months of 2022, cash provided by investing activities was from the sale of investment securities of$16,933 , maturities of investment securities of$21,105 , distributions from investments in real estate ventures of$3,310 , and paydowns of investment securities of$63 . This was offset by the purchase of investment securities of$27,231 , investments in real estate ventures of$8,488 , capital expenditures of$1,222 , an increase in cash surrender value of life insurance policies of$765 , and purchase of long-term investments of$1,000 . In the first three months of 2021, cash used in investing activities was for the purchase of investment securities of$38,441 , investments in real estate ventures of$8,087 , capital expenditures of$1,931 , an increase in cash surrender value of life insurance policies of$564 , purchase of long-term investments of$5,813 , and an increase in restricted assets of$3 . This was offset by the sale of investment securities of$10,228 , paydowns of investment securities of$172 , maturities of investment securities of$13,968 , distributions from investments in real estate ventures of$7,577 , and proceeds from the sale or liquidation of long-term investments of$4,389 . Cash used in financing activities was$32,607 and$30,452 for the three months endedMarch 31, 2022 and 2021, respectively. In the first three months of 2022, cash was used for the dividends on common stock of$31,658 , repayments of debt of$11 , and other of$938 . In the first three months of 2021, cash used in financing activities consisted primarily of dividends and distributions on common stock of$32,273 and was offset by net impact of the refinancing of our Senior Secured Notes. The refinancing consisted of proceeds of$875,000 from the issuance of our 5.75% Senior Secured Notes due 2029 offset by deferred financing costs of$20,000 and the retirement of our 6.125% Senior Secured Notes due 2025 of$850,000 . In addition, cash used in financing activities in the 2021 period consisted of additional debt retirements of$3,158 . We use dividends from our tobacco and real estate subsidiaries, as well as cash and cash equivalents maintained at the corporate level, to fund our significant liquidity commitments at the corporate level (not including our tobacco and real estate operations). These liquidity commitments include cash interest expense of approximately$108,600 , dividends on our outstanding common shares of approximately$128,800 , which is based on an assumed quarterly cash dividend of$0.20 per share, and other corporate expenses and income taxes. As ofMarch 31, 2022 , we had cash and cash equivalents of$238,305 (including$45,572 of cash at Liggett), investment securities and long-term investments, which were carried at$183,137 (see Note 6 to condensed consolidated financial statements). As ofMarch 31, 2022 , our investments in real estate ventures were carried at$111,503 and our investment in real estate, net of accumulated depreciation, was carried at$9,039 . Limitation of interest expense deductible for income taxes. Since 2018, the amount of interest expense that is deductible in the computation of income tax liability has been limited to a percentage of adjusted taxable income, as defined by applicable law. In 2019 and 2020, the amount of deductible interest expense was limited to 50% of taxable income before interest, depreciation and amortization and, in 2021, the amount was limited to 30% of taxable income before interest, depreciation and amortization. In 2022, the amount is limited to 30% of taxable income before interest. However, interest expense allocable to a designated excepted trade or business is not subject to limitation. One such excepted trade or business is any electing real property trade or business, for which portions of our real estate businesses may qualify. If any interest expense is disallowed, we are permitted to carry forward the disallowed interest expense indefinitely. As a result of interest expense that is allocated to our real estate businesses (from the holding company) not being subject to the limitation, all of our interest expense to date has been tax deductible; however, after the Distribution, the allocation of interest expense to our real estate business is expected to decline. Without the benefit of such an excepted trade or business, a portion of our interest expense in future years may not be deductible, which may increase the after-tax cost of any new debt financings as well as the refinancing of our existing debt. Tobacco Litigation. As ofMarch 31, 2022 , 16 verdicts were entered in Engle progeny cases against Liggett. Several of these verdicts have been affirmed on appeal and have been satisfied by Liggett. Liggett has paid$40,111 , including interest and attorney's fees, to satisfy the final judgments entered against it. It is possible that additional cases could be decided unfavorably. 43 -------------------------------------------------------------------------------- Notwithstanding the comprehensive nature of the Engle Progeny Settlements of more than 5,200 cases, approximately 25 plaintiffs' claims remain outstanding. Therefore, we and Liggett may still be subject to periodic adverse judgments that could have a material adverse effect on our consolidated financial position, results of operations and cash flows.
In addition, Liggett may be required to make additional payments, including posting a bond to appeal any unfavorable judgments, related to the
litigation that could have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows. See Recent Developments in Dispute.
Management cannot predict the cash requirements related to any future settlements or judgments, including cash required to bond any appeals, and there is a risk that those requirements will not be able to be met. Management is unable to make a reasonable estimate of the amount or range of loss that could result from an unfavorable outcome of the cases pending against Liggett or the costs of defending such cases. It is possible that our consolidated financial position, results of operations or cash flows could be materially adversely affected by an unfavorable outcome in any such tobacco-related litigation.
Vector debt.
6.125% Senior Secured Notes. OnFebruary 1, 2021 , the 6.125% Senior Secured Notes due 2025 were redeemed in full and we recorded a loss on the extinguishment of debt of$21,362 for the three months endedMarch 31, 2021 , including$13,013 of premium and$8,349 of other costs and non-cash interest expense related to the recognition of previously unamortized deferred finance costs. 5.75% Senior Secured Notes due 2029. OnJanuary 28, 2021 , we completed the sale of$875,000 in aggregate principal amount of our 5.75% Senior Secured Notes due 2029 ("5.75% Senior Secured Notes") to qualified institutional buyers and non-U.S. persons in a private offering pursuant to the exemptions from the registration requirements of the Securities Act of 1933, as amended, (the "Securities Act") contained in Rule 144A and Regulation S thereunder. The aggregate net cash proceeds from the sale of the 5.75% Senior Secured Notes were approximately$855,500 after deducting the initial purchaser's discount and estimated expenses and fees in connection with the offering. We used the net cash proceeds from the 5.75% Senior Secured Notes offering, together with cash on hand, to redeem all of our outstanding 6.125% Senior Secured Notes due 2025, including accrued interest and premium thereon, onJanuary 28, 2021 . The 5.75% Senior Secured Notes pay interest on a semi-annual basis at a rate of 5.75% per year and mature on the earlier ofFebruary 1, 2029 and the date that is 91 days before the final stated maturity date of our 10.5% Senior Notes due 2026 ("10.5% Senior Notes") if such 10.5% Senior Notes have not been repurchased and cancelled or refinanced by such date. Prior toFebruary 1, 2024 , we may redeem some or all of the 5.75% Senior Secured Notes at any time at a make-whole redemption price. On or afterFebruary 1, 2024 , we may redeem some or all of the 5.75% Senior Secured Notes at a premium that will decline over time, plus accrued and unpaid interest, if any, to the redemption date. In addition, any time prior toFebruary 1, 2024 , we may redeem up to 40% of the aggregate outstanding amount of the 5.75% Senior Secured Notes with the net proceeds of certain equity offerings at 105.75% of the aggregate principal amount of the 5.75% Senior Secured Notes, plus accrued and unpaid interest, if any, to the redemption date, if at least 60% of the aggregate principal amount of the 5.75% Senior Secured Notes originally issued remains outstanding after such redemption, and the redemption occurs within 90 days of the closing of such equity offering. In the event of a change of control, as defined in the indenture governing the 5.75% Senior Secured Notes (the "2029 Indenture"), each holder of the 5.75% Senior Secured Notes may require us to repurchase some or all of our 5.75% Senior Secured Notes at a repurchase price equal to 101% of their aggregate principal amount plus accrued and unpaid interest, if any, to the date of purchase. If we sell certain assets and do not apply the proceeds as required pursuant to the 2029 Indenture, we must offer to repurchase the 5.75% Senior Secured Notes at the prices listed in the 2029 Indenture. The 5.75% Senior Secured Notes are fully and unconditionally guaranteed, subject to certain customary automatic release provisions, on a joint and several basis by all of our wholly-owned domestic subsidiaries that are engaged in the conduct of our cigarette businesses, which subsidiaries, as of the issuance date of the 5.75% Senior Secured Notes, were also guarantors under our outstanding 10.5% Senior Notes. The 5.75% Senior Secured Notes are not guaranteed byNew Valley LLC , or any of our subsidiaries engaged in our real estate business conducted through our subsidiary,New Valley LLC . The guarantees provided by certain of the guarantors are secured by first priority or second priority security interests in certain collateral of such guarantors pursuant to security and pledge agreements, subject to certain permitted liens and exceptions as further described in the 2029 Indenture and the security documents relating thereto.Vector Group Ltd. does not provide any security for the 5.75% Senior Secured Notes. The 2029 Indenture contains covenants that restrict the payment of dividends if our consolidated earnings before interest, taxes, depreciation and amortization ("Consolidated EBITDA"), as defined in the 2029 Indenture, for the most recently ended four full quarters is less than$75,000 . The 2029 Indenture also restricts the incurrence of debt if our Leverage Ratio and our Secured Leverage Ratio, each as defined in the 2029 Indenture, exceed 3.0 to 1.0 and 1.5 to 1.0, respectively. Our Leverage Ratio is defined in the 2029 Indenture as the ratio of our and our guaranteeing subsidiaries' total debt less the fair market value of our cash, investment securities and long-term investments to Consolidated EBITDA, as defined in the 2029 Indenture. Our Secured Leverage Ratio is defined in the 2029 Indenture in the same manner as the Leverage Ratio, except that secured 44 --------------------------------------------------------------------------------
indebtedness replaces indebtedness. The following table summarizes the requirements of these financial tests and the extent to which we would have met these requirements had the 2029 Indenture been in effect as of
Indenture March 31, Covenant Requirement 2022 Consolidated EBITDA, as defined$75,000 $408,772 Leverage ratio, as defined <3.0 to 1 2.42 to 1
Secured leverage ratio, as defined
From
10.5% Senior Notes due 2026. In 2018 and 2019, we sold$325,000 and$230,000 , respectively, in aggregate principal amount of our 10.5% Senior Notes to qualified institutional buyers and non-U.S. persons pursuant to the exemptions from the registration requirements of the Securities Act contained in Rule 144A and Regulation S thereunder. The 10.5% Senior Notes were fully and unconditionally guaranteed subject to certain customary automatic release provisions on a joint and several basis by all of our wholly-owned domestic subsidiaries that are engaged in the conduct of our cigarette businesses. The 10.5% Senior Notes pay interest on a semi-annual basis at a rate of 10.5% per year and mature onNovember 1, 2026 . We may presently redeem such bonds at price of 105.25% and the redemption price declines to 102.625% onNovember 1, 2022 and 100% onNovember 1, 2023 . In addition, in the event of a change of control, as defined in the indenture governing the 10.5% Senior Notes (the "2026 Indenture"), each holder of the 10.5% Senior Notes may require us to make an offer to repurchase some or all of our 10.5% Senior Notes at a repurchase price equal to 101% of their aggregate principal amount plus accrued and unpaid interest, if any, to the date of purchase. If we sell certain assets and do not apply the proceeds as required pursuant to the 2026 Indenture, we must offer to repurchase the 10.5% Senior Notes at the prices listed in the 2026 Indenture. The indenture governing our 10.5% Senior Notes contains covenants that restrict the payment of dividends and certain other distributions subject to certain exceptions, including exceptions for (1) dividends and other distributions in an amount up to 50% of our consolidated net income, plus certain specified proceeds received by us, if no event of default has occurred, and we are in compliance with a Fixed Charge Coverage Ratio (as defined in the indenture to our 10.5% Senior Notes) of at least 2.0 to 1.0, and (2) dividends and other distributions in an unlimited amount, if no event of default has occurred and we are in compliance with a Net Leverage Ratio (as defined in the indenture to our 10.5% Senior Notes) no greater than 4.0 to 1.0. As a result, absent an event of default, we can pay dividends if the Net Leverage ratio is below 4.0 to 1.0, regardless of the value of the Fixed Charge Coverage Ratio at the time. The indenture to our 10.5% Senior Notes also restricts our ability to incur debt if our Fixed Charge Coverage Ratio is less than 2.0 to 1.0, and restricts our ability to secure debt to the extent doing so would cause our Secured Leverage Ratio (as defined in the indenture to our 10.5% Senior Notes) to exceed 3.75 to 1.0, unless our 10.5% Senior Notes are secured on an equal and ratable basis. Our Fixed Charge Coverage Ratio is defined in the indenture to our 10.5% Senior Notes as the ratio of our Consolidated EBITDA to our Fixed Charges (each as defined in the indenture to our 10.5% Senior Notes). Our Net Leverage Ratio is defined in the indenture as the ratio of our and our guaranteeing subsidiaries' total debt less our cash, cash equivalents, and the fair market value of our investment securities, long-term investments, investments in real estate, net, and investments in real estate ventures, to Consolidated EBITDA, as defined in the indenture to our 10.5% Senior Notes. Our Secured Leverage Ratio is defined in the indenture to our 10.5% Senior Notes as the ratio of our and our guaranteeing subsidiaries' total secured debt, to Consolidated EBITDA, as defined in the indenture to our 10.5% Senior Notes.
The following table summarizes the requirements of these financial tests and the extent to which we have met these requirements at
March 31, Covenant Indenture Requirement 2022 Consolidated EBITDA, as defined N/A
Fixed charge coverage ratio, as defined >2.0 to 1 3.16 to 1 Net leverage ratio, as defined <4.0 to 1 2.5 to 1 Secured leverage ratio, as defined <3.75 to 1
2.47 to 1
From
45 -------------------------------------------------------------------------------- Guarantor Summarized Financial Information.Vector Group Ltd. (the "Issuer") and its wholly-owned domestic subsidiaries that are engaged in the conduct of its cigarette business (the "Subsidiary Guarantors") have filed a shelf registration statement for the offering of debt and equity securities on a delayed or continuous basis and we are including this condensed consolidating financial information in connection therewith. Any such debt securities may be issued by us and guaranteed by our Subsidiary Guarantors. New Valley and any of its subsidiaries (the "Nonguarantor Subsidiaries") will not guarantee any such debt securities. Both the Subsidiary Guarantors and the Nonguarantor Subsidiaries are wholly-owned by the Issuer. The Condensed Consolidating Balance Sheet as ofMarch 31, 2022 and the related Condensed Consolidating Statements of Operations for the three months endedMarch 31, 2022 of the Issuer, Subsidiary Guarantors and Nonguarantor Subsidiaries are set forth in Exhibit 99.2. Presented herein are the Summarized Combined Balance Sheets as ofMarch 31, 2022 andDecember 31, 2021 and the related Summarized Combined Statements of Operations for the three months endedMarch 31, 2022 for the Issuer and the Subsidiary Guarantors (collectively, the "Obligor Group "). The summarized combined financial information is presented after the elimination of: (i) intercompany transactions and balances among theObligor Group , and (ii) equity in earnings from and investments in the Nonguarantor Subsidiaries.
Summarized combined balance sheets:
March 31, December 31, 2022 2021 Assets: Current assets$ 505,607 $ 487,797 Noncurrent assets 270,874 274,292 Intercompany receivables from Nonguarantor Subsidiaries 2,302 1,832 Liabilities: Current liabilities 224,200 194,097 Noncurrent liabilities 1,525,770 1,536,792
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