VECTOR GROUP LTD MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)
(Dollars in Thousands, Except Per Share Amounts)
Management’s Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”) is designed to provide a reader of
financial statements with a narrative from our management’s perspective. Our
MD&A is divided into the following sections:
•Overview •Recent Developments •Results of Operations
•Summary of Real Estate Investments
•Liquidity 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 and nine months endedSeptember 30, 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 ofSeptember 30, 2022 andDecember 31, 2021 and the results of our operations for the three and nine months endedSeptember 30, 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. The financial results of Douglas Elliman through the date of the Distribution are presented as income from discontinued operations, net of income taxes on our condensed consolidated statements of operations and are not included in our results from continuing operations discussed below. See Note 3 in our condensed consolidated financial statements.
Overview
We are a holding company and are engaged principally in two business segments:
•Tobacco: the manufacture and sale of discount cigarettes 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.
Our tobacco subsidiaries’ cigarettes are produced in 100 combinations of length,
style and packaging. Liggett’s current brand portfolio includes:
•Montego •Eagle 20's •Pyramid
•Grand Prix, Liggett Select,
label brands.
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 36 --------------------------------------------------------------------------------
cigarettes. The second segment of competition is comprised of a group of smaller
manufacturers and importers, most of which sell deep discount cigarettes.
Recent Developments
Montego. FromAugust 2020 toFebruary 2022 , Liggett expanded the distribution of its Montego deep discount brand nationally. Montego became Liggett's largest brand by volume during the second quarter of 2022. Prior toAugust 2020 , Montego was sold in select targeted markets in four states. Montego's unit volume represented approximately 50% of total unit volume sales for the three months endedSeptember 30, 2022 compared to approximately 17% of total unit volume sales for the three months endedSeptember 30, 2021 and approximately 44% for the nine months endedSeptember 30, 2022 compared to approximately 13% for the nine months endedSeptember 30, 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 endedSeptember 30, 2022 , approximately 20% 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. Nicotine. OnJune 21, 2022 , the FDA indicated it plans to publish a proposed rule inMay 2023 that establishes a tobacco product standard reducing the level of nicotine in cigarettes to non-addictive levels. Under the Tobacco Control Act ("TCA"), FDA may adopt a tobacco product standard for nicotine if the agency concludes that such a standard is appropriate for the protection of the public health. FDA may refer the proposed regulation to theTobacco Products Scientific Advisory Committee ("TPSAC") for a report and recommendation. FDA may consider a wide range of issues prior to the promulgation of a final rule, including the technical achievability of compliance with the proposed product standard. The rulemaking process could take many months or years and once a final rule is published it ordinarily would not be expected to take effect until at least one year after the date of publication. We cannot predict how a tobacco product standard reducing nicotine, 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.
Repurchase of 10.5% Senior Notes due 2026. In
the market
outstanding and recorded a gain of
Senior Notes that were repurchased have been retired.
Recent Developments in Tobacco-Related 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 throughAugust 3, 2021 . InApril 2022 , theMississippi Chancery Court affirmed the Special Master's findings and a final judgment was entered by the court onJune 1, 2022 . 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 37 -------------------------------------------------------------------------------- Liggett's payment obligations toMississippi . Liggett appealed the final judgment and posted a$24,000 bond inJune 2022 . We cannot predict the outcome of this matter but if the judgment is not overturned on appeal, it could have a material adverse effect on our consolidated financial position.
See “Legislation and Regulation” in Item 2 of the MD&A for further information
on litigation.
Results of Operations The following discussion provides an assessment of our results of operations, capital resources and liquidity and should be read in conjunction with our condensed consolidated financial statements included elsewhere in this report. The condensed consolidated financial statements include the accounts of Liggett, Vector Tobacco,Liggett Vector Brands , New Valley and other less significant subsidiaries. For purposes of this discussion and other consolidated financial reporting, our business segments for the three and nine months endedSeptember 30, 2022 and 2021 were Tobacco and Real Estate. The Tobacco segment consisted of the manufacture and sale of cigarettes.The Real Estate segment includes our investment inNew Valley , which includes investments in real estate and investments in real estate ventures. Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Revenues: Tobacco$ 377,995 $ 297,942 $ 1,061,355 $ 895,901 Real estate - 543 15,884 11,126 Total revenues$ 377,995 $ 298,485 $ 1,077,239 $ 907,027 Operating income (loss): Tobacco$ 88,107 (1)$ 91,779 (2)$ 254,078 (3)$ 276,557 (4) Real estate (3) (814) 7,839 (603) Corporate and Other (4,203) (8,950) (5) (12,179) (24,071) (6) Total operating income$ 83,901 $ 82,015 $ 249,738
(1) Operating income includes
(2) Operating income includes
(3) Operating income includes
associated with the MSA (which reduced cost of sales) and
of litigation settlement and judgment expense.
(4) Operating income includes
associated with the MSA (which reduced cost of sales) and
litigation settlement and judgment expense.
(5) Operating loss includes transaction charges of
Distribution, and
(6) Operating loss includes transaction charges of
Distribution, and
38 --------------------------------------------------------------------------------
Pricing actions
Since
Brand
Liggett Select, Eve
Amount per pack Montego Eagle 20's Pyramid and Grand Prix
January 25, 2021 (1) $ 0.14 - P P P
June 28, 2021 (1) 0.14 - P P P
September 27, 2021 (1) 0.15 - P P P
January 31, 2022 (1) 0.10 P - - -
January 31, 2022 (1) 0.15 - P P P
April 29, 2022 (1) 0.16 - P P P
May 1,2022 (2) 0.10 P - - -
July 29, 2022 (1) 0.16 P P P P
October 28, 2022 (1) 0.16 - P P P
October 28, 2022 (1) 0.10 P - - -
(1) List price increase
(2) Promotional spending reduction
Three Months Ended
Revenues. Total revenues were$377,995 for the three months endedSeptember 30, 2022 compared to$298,485 for the three months endedSeptember 30, 2021 . The$79,510 (26.6%) increase in revenues was primarily due to an$80,053 increase in Tobacco revenues offset by a$543 decline in Real Estate revenues. Cost of sales. Total cost of sales was$267,023 for the three months endedSeptember 30, 2022 compared to$187,444 for the three months endedSeptember 30, 2021 . The$79,579 (42.5%) increase in cost of sales was primarily due to an$80,625 increase in Tobacco cost of sales. This was offset by a$1,046 decline in Real Estate cost of sales. Expenses. Operating expenses were$27,071 for the three months endedSeptember 30, 2022 compared to$29,026 for the same period last year. The$1,955 (6.7%) decline in operating expenses was primarily due to a$4,747 decline in Corporate and Other expenses and a$308 decline in Real Estate expenses. This was offset by a$3,100 increase in Tobacco expenses. Operating income. Operating income was$83,901 for the three months endedSeptember 30, 2022 compared to$82,015 for the same period last year. The$1,886 (2.3%) increase in operating income was due to a$4,747 decline in Corporate and Other operating loss and a$811 decline in Real Estate operating loss. This was offset by a$3,672 decline in Tobacco operating income. Other expenses. Other expenses were$30,512 and$35,327 for the three months endedSeptember 30, 2022 and 2021, respectively. For the three months endedSeptember 30, 2022 , other expenses primarily consisted of interest expense of$27,598 , equity in losses from real estate ventures of$1,903 , other expenses of$804 , and equity in losses from investments of$619 . This was offset by a gain of$412 recognized on the repurchase of the 10.5% Senior Notes. For the three months endedSeptember 30, 2021 , other expenses primarily consisted of interest expense of$28,226 , equity in losses from real estate ventures of$5,694 , and other, net of$1,451 . This was offset by equity in earnings from investments of$44 .
Income before provision for income taxes. Income before income taxes was
and
respectively.
Income tax expense. Income tax expense was$14,533 and$16,776 for the three months endedSeptember 30, 2022 and 2021, respectively. 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. 39 --------------------------------------------------------------------------------
Tobacco.
Tobacco revenues. All of our Tobacco sales were in the discount category in 2022 and 2021. For the three months endedSeptember 30, 2022 , Tobacco revenues were$377,995 compared to$297,942 for the three months endedSeptember 30, 2021 . Revenues increased by$80,053 (26.9%) due primarily to a 30.1% (636 million units) increase in sales volume, partially offset by a decline in the average selling price of our brands for the three months endedSeptember 30, 2022 due to changes in sales mix, which occurred primarily as a result of the volume increase in our deep discount brand, Montego, and the volume decline of our other brands, which are priced in the traditional discount category. For the three months endedSeptember 30, 2022 , our strategy for Montego was based on volume growth, while our strategy for Eagle 20's and Pyramid was based on income growth. Because Montego was in the volume growth phase, it became Liggett's largest brand by volume during the second quarter of 2022 and its volume has increased to approximately 50% of Liggett's total unit sales for the three months endedSeptember 30, 2022 from approximately 17% for the three months endedSeptember 30, 2021 . As a result of the growth in Montego's volume and price increases that began in the fourth quarter of 2018, Eagle 20's is now Liggett's second-largest brand and its percentage of Liggett's total unit sales has declined to approximately 33% for the three months endedSeptember 30, 2022 from approximately 56% for the three months endedSeptember 30, 2021 . Pyramid, Liggett's third-largest brand, also declined to approximately 12% of Liggett's total unit sales for the three months endedSeptember 30, 2022 from approximately 19% for the three months endedSeptember 30, 2021 . Tobacco cost of sales. The major components of our Tobacco cost of sales were as follows: Three Months EndedSeptember 30, 2022 2021 Manufacturing overhead, raw materials and labor $
41,128
Customer shipping and handling
2,276 1,815
Federal excise taxes, net
138,041 106,408
FDA expense
8,013 6,314
MSA expense, net of market share exemption 77,565 41,995
Total cost of sales $ 267,023 $ 186,398
The Tobacco segment's MSA expense is the most volume-sensitive component (on a
per-unit basis) of its cost of sales because, under the terms of the MSA, the
Tobacco segment has no payment obligations except to the extent that its U.S.
Cigarette market share exceeds 1.93%. We estimate MSA expense based on total
domestic taxable cigarette shipments in the United States , our taxable shipments
and inflation. Based on assumptions discussed below, we estimated our MSA
expense increased to $0.57 per pack for the three months ended September 30,
2022 from our estimate of $0.40 per pack from the three months ended
September 30, 2021 . (We estimated our MSA expense was $0.40 per pack for the
year ended December 31, 2021 .)
Our MSA expense is impacted by total domestic taxable shipments in the United
States . As of September 30, 2022 , we estimate taxable shipments in the U.S. will
decline by 9% in 2022 compared to our estimate as of September 30, 2021 of a
decline of 7% in 2021. (The actual change in 2021 taxable shipments was a
decline of 6.1%.) We estimate our 2022 projected annual MSA expense changes by
approximately $1,900 for each 1% change in U.S. shipment volumes.
Inflationary pressures also impact Liggett's MSA expense, which is subject to an
annual inflation adjustment. The inflation adjustment is the greater of the U.S.
CPI rate or 3%. As of September 30, 2022 , Liggett's management assumed an
inflation adjustment to MSA expense of 9.0% compared to an assumption of 4.8% as
of September 30, 2021 . (The actual inflation adjustment to the MSA in 2021 was
7.0%.) Our annual MSA expense increases by approximately $2,500 for each 1%
increase in inflation more than 3%.
40
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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's cost of sales had not been impacted by
inflation. During the three months ended September 30, 2022 , Liggett experienced
an approximate 5.4% inflation increase in leaf tobacco and raw materials (on a
per-unit basis) compared to 1.0% during the three months ended September 30,
2021 . Further, when including labor costs, manufacturing overhead and shipping
costs with leaf tobacco and raw materials, Liggett experienced a 5.3% increase
in production costs (on a per-unit basis) during the three months ended
September 30, 2022 , compared to an increase in total production costs of 4.8%
during the three months ended September 30, 2021 .
Tobacco gross profit was $110,972 for the three months ended September 30, 2022
compared to $111,544 for the three months ended September 30, 2021 , a decline of
$572 (0.5%). The decline in gross profit for the three months ended
September 30, 2022 was primarily attributable to declines in net pricing (due to
the growth of the Montego brand) and higher per unit MSA expense and was
predominantly offset by a 30.1% increase in unit sales and increased pricing
across all brands. As a percentage of revenue (excluding Federal Excise Taxes),
Tobacco gross profit margin declined from 58.2% in the 2021 period to 46.2% in
the 2022 period primarily due to the growth of the Montego brand.
Tobacco expenses. Tobacco operating, selling, general and administrative
expenses, excluding settlements and judgments, were $22,834 and $19,753 for the
three months ended September 30, 2022 and 2021, respectively. The increase of
$3,081 was primarily due to the timing of compensation expense accruals and
increased marketing expenses and professional fee expenses. Total tobacco
product liability legal expenses, including settlements and judgments, were
$2,712 and $1,555 for the three months ended September 30, 2022 and 2021,
respectively.
Tobacco operating income. Tobacco operating income was $88,107 for the three
months ended September 30, 2022 compared to $91,779 for the three months ended
September 30, 2021 . The decline of $3,672 (4.0%) was primarily attributable to
lower gross profit and increased operating, selling, general and administrative
expenses.
Real Estate.
Real Estate revenues. Real Estate revenues were $0 and $543 for the three months
ended September 30, 2022 and 2021, respectively. In April 2022 , New Valley sold
Escena.
Real Estate revenues and cost of sales for the three months ended
2022
Three Months Ended
September 30,
2022 2021
Real Estate Revenues:
Sales on facilities located on investments in real estate $ - $ 543
Revenues from investments in real estate - -
Total real estate revenues $
–
Real Estate Cost of Sales: Cost of sales from investments in real estate $ -$ 28 Cost of sales on facilities located on investments in real estate - 1,018 Total real estate cost of sales $
–
Operating, selling, administrative and general expenses$ 3 $ 311 Operating loss$ (3) $ (814)
___________________________________
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Corporate and Other.
Corporate and Other operating loss. The operating loss at the Corporate and Other segment was$4,203 for the three months endedSeptember 30, 2022 compared to$8,950 for the same period in 2021. The decline in the 2022 period was primarily due to the absence of transaction charges of$3,426 related to the Distribution of Douglas Elliman, which occurred inDecember 2021 .
Nine Months Ended
2021
Revenues. Total revenues were$1,077,239 for the nine months endedSeptember 30, 2022 compared to$907,027 for the nine months endedSeptember 30, 2021 . The$170,212 (18.8%) increase in revenues was primarily due to a$165,454 increase in Tobacco revenues related to increased unit volume and a$4,758 increase in Real Estate revenues. Cost of sales. Total cost of sales was$751,076 for the nine months endedSeptember 30, 2022 compared to$566,242 for the nine months endedSeptember 30, 2021 . The$184,834 (32.6%) increase in cost of sales was primarily due to a$187,175 increase in Tobacco cost of sales primarily related to increased sales volume, offset by a$2,341 decline in Real Estate cost of sales. Expenses. Operating expenses were$76,425 for the nine months endedSeptember 30, 2022 compared to$88,902 for the same period last year. The$12,477 (14.0%) decline was due to an$11,892 decline in Corporate and Other expense and a$1,343 decline in Real Estate expenses for the nine months endedSeptember 30, 2022 . This was offset by a$758 increase in Tobacco expenses. Operating income. Operating income was$249,738 for the nine months endedSeptember 30, 2022 compared to operating income of$251,883 for the same period last year as a result of a decline in Tobacco operating income of$22,479 due primarily to declines in net pricing (due to the growth of the Montego brand) and higher per unit MSA expense. This was offset by an increase in Real Estate operating income of$8,442 , which was associated with the sale of Escena, and a decline in Corporate and Other operating loss of$11,892 . Other expenses. Other expenses were$97,463 for the nine months endedSeptember 30, 2022 compared to other expenses of$82,446 for the nine months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , other expenses primarily consisted of interest expense of$83,420 , equity in losses from investments of$5,172 , other expenses of$5,043 , and equity in losses from real estate ventures of$4,240 . This was offset by a gain of$412 recognized on the repurchase of the 10.5% Senior Notes. For the nine months endedSeptember 30, 2021 , other expenses primarily consisted of interest expense of$85,019 and loss on extinguishment of debt of$21,362 . This was offset by other income of$9,868 , equity in earnings from real estate ventures$12,505 and equity in earnings from investments of$1,562 .
Income before provision for income taxes. Income before income taxes was
respectively.
Income tax expense. Income tax expense was$41,724 for the nine months endedSeptember 30, 2022 compared to income tax expense of$52,994 for the nine months endedSeptember 30, 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. 42 --------------------------------------------------------------------------------
Tobacco.
Tobacco revenues. All of our Tobacco sales were in the discount category in 2022 and 2021. For the nine months endedSeptember 30, 2022 , Tobacco revenues were$1,061,355 compared to$895,901 for the nine months endedSeptember 30, 2021 . Revenues increased by$165,454 (18.5%) due primarily to a 21.5% (1,381 million units) increase in unit sales volume, partially offset by a decline in the average selling price of our brands due to changes in sales mix, which occurred primarily as a result of the volume increase in our deep discount brand, Montego, and the volume decline in our other brands which are priced in the traditional discount category. For the nine months endedSeptember 30, 2022 , our strategy for Montego was based on volume growth, while our strategy for Eagle 20's and Pyramid was based on income growth. Because Montego was in the volume growth phase, it became Liggett's largest brand by volume during the nine months endedSeptember 30, 2022 and its volume has increased to approximately 44% of Liggett's total unit sales for the nine months endedSeptember 30, 2022 from approximately 13% for the nine months endedSeptember 30, 2021 . As a result of the growth in Montego's volume and price increases that began in the fourth quarter of 2018, Eagle 20's is now Liggett's second largest brand and its percentage of Liggett's total unit sales has declined to approximately 37% for the nine months endedSeptember 30, 2022 from approximately 59% for the nine months endedSeptember 30, 2021 . Pyramid, Liggett's third-largest brand, also declined to approximately 14% of Liggett's total unit sales for the nine months endedSeptember 30, 2022 from approximately 20% for the nine months endedSeptember 30, 2021 . Tobacco cost of sales. The major components of our Tobacco cost of sales were as follows: Nine Months EndedSeptember 30, 2022 2021
Manufacturing overhead, raw materials and labor
Customer shipping and handling
6,573 5,116 Federal excise taxes, net 392,004 322,857 FDA expense 22,261 18,008 MSA expense, net of market share exemption 208,591 (1) 120,189 (2) Total cost of sales$ 743,749 $ 556,574
(1) Includes
MSA expense (which reduced cost of sales).
(2) Includes
MSA expense (which reduced cost of sales).
The Tobacco segment's MSA expense is the most volume-sensitive component (on a per-unit basis) of its cost of sales because, under the terms of the MSA, the Tobacco segment has no payment obligations except to the extent that itsU.S. Cigarette market share exceeds 1.93%. 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$0.54 per pack for the nine months endedSeptember 30, 2022 from our estimate of$0.38 per pack from the nine months endedSeptember 30, 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 ofSeptember 30, 2022 , we estimate taxable shipments in theU.S. will decline by 9.0% in 2022 compared to our estimate as ofSeptember 30, 2021 of a decline of 7.0% in 2021. (The actual change in 2021 taxable shipments was a decline of 6.1%.) We estimate our 2022 projected annual MSA expense changes by approximately$1,900 for each 1% change inU.S. shipment volumes. 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%. As ofSeptember 30, 2022 , Liggett's management assumed an inflation adjustment to MSA expense of 9.0% compared to an assumption of 4.8% as ofSeptember 30, 2021 . (The actual inflation adjustment to the MSA in 2021 was 7.0%.) Our annual MSA expense increases by approximately$2,500 for each 1% increase in inflation more than 3%. 43 -------------------------------------------------------------------------------- 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's cost of sales had not been significantly impacted by inflation. During the nine months endedSeptember 30, 2022 , Liggett experienced a 4.5% increase in leaf tobacco and raw materials (on a per-unit basis) compared to 1.2% during the nine months endedSeptember 30, 2021 . Further, when including labor costs, manufacturing overhead and shipping costs with leaf tobacco and raw materials, Liggett experienced a 4.1% increase in production costs (on a per-unit basis) during the nine months endedSeptember 30, 2022 , compared to a 2.3% increase in production costs during the nine months endedSeptember 30, 2021 . Tobacco gross profit was$317,606 for the nine months endedSeptember 30, 2022 compared to$339,327 for the nine months endedSeptember 30, 2021 , a decline of$21,721 (6.4%). This decline in gross profit for the nine months endedSeptember 30, 2022 was primarily attributable to declines in net pricing (due to the growth of the Montego brand) and higher per unit MSA expense and was partially offset by a 21.5% increase in unit sales and increased pricing across all brands. As a percentage of revenue (excluding Federal Excise Taxes), Tobacco gross profit margin declined from 59.2% in the 2021 period to 47.4% in the 2022 period primarily due to the growth of the Montego brand. Tobacco expenses. Tobacco operating, selling, general and administrative expenses, excluding settlements and judgments, were$63,368 for the nine months endedSeptember 30, 2022 compared to$62,753 for the nine months endedSeptember 30, 2021 . The increase of$615 was primarily due to higher professional fees and expenses. Tobacco product liability legal expenses, including settlements and judgments, were$6,035 and$4,622 for the nine months endedSeptember 30, 2022 and 2021, respectively. Tobacco operating income. Tobacco operating income was$254,078 for the nine months endedSeptember 30, 2022 compared to$276,557 for the nine months endedSeptember 30, 2021 . The decline of$22,479 (8.1%) was attributable to lower gross profit and increased operating, selling, general and administrative expenses.
Real Estate.
Real Estate revenues. Real Estate revenues were$15,884 and$11,126 for the nine months endedSeptember 30, 2022 and 2021, respectively. Real Estate revenues increased by$4,758 . InApril 2022 , New Valley sold Escena and recognized$12,600 in revenues.
Real Estate revenues, cost of sales, expenses and operating income for the nine
months ended
Nine Months Ended
September 30,
2022 2021
Real Estate Revenues:
Sales on facilities located on investments in real estate $ 3,259 $ 3,476
Revenues from investments in real estate 12,625 7,650
Total real estate revenues $
15,884
Real Estate Cost of Sales: Cost of sales from investments in real estate $
5,891
Cost of sales on facilities located on investments in real estate 1,436
2,896 Total real estate cost of sales $
7,327
Operating, selling, administrative and general expenses$ 718 $ 2,061 Operating income (loss)$ 7,839 $ (603) 44
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Corporate and Other.
Corporate and Other loss. The operating loss at the Corporate and Other segment was$12,179 for the nine months endedSeptember 30, 2022 compared to$24,071 for the same period in 2021. The decline in the 2022 period was due in part to the absence of transaction charges of$3,426 related to the Distribution of Douglas Elliman, which occurred inDecember 2021 . 45 --------------------------------------------------------------------------------
Summary of Real Estate Investments
We own and seek to acquire investment interests in various domestic and international real estate projects through debt and equity investments. Our real estate investments primarily include the following projects as ofSeptember 30, 2022 : (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 of September New Valley Units and/or Hotel Construction Start Projected Location Date of Initial Investment (1) (Returned) (Losses)
30, 2022 (2) Projected Residential and/or Hotel Area Projected Commercial Space Rooms Date Construction End Date
Master planned community, golf
course, and club house in Palm 667 R Lots
Escena, net (liquidated April 2022 ) Springs, CA March 2008 100 % $ (17,516) $ 17,516 $ - $ - 450 Acres 450 H N/A N/A
Investments in real estate, net $ (17,516) $ 17,516 $ - $ -
Investments in real estate ventures:
111 Murray Street TriBeCa , Manhattan, NY May 2013 9.5 % $ 7,285 $ (4,414) $ 2,871 $ - 330,000 SF 1,700 SF 157 R September 2014 Completed
87 Park (8701 Collins Avenue ) Miami Beach, FL December 2013 23.1 % (6,485) 6,485 - - 160,000 SF TBD 70 R October 2015 Completed
Financial District, Manhattan,
125 Greenwich Street NY August 2014 13.4 % 7,992 (7,992) - - 306,000 SF 16,000 SF 273 R March 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 H May 2015 Completed
Monad Terrace (1300 West Ave ) Miami Beach, FL May 2015 19.6 % 7,635 (7,635) - - 160,000 SF - 59 R May 2016 Completed
Takanasee (805 Ocean Ave ) Long Branch, NJ December 2015 22.8 % 5,456 (5,456) - - 63,000 SF - 13 R June 2017 TBD
Dime (209 Havemeyer St ) Brooklyn, NY November 2017 16.5 % 9,145 (7,329) 1,816 - 100,000 SF 150,000 SF 177 R May 2017 Completed
Meatpacking District,
Meatpacking Plaza (44 Ninth Ave ) Manhattan, NY April 2019 16.9 % 10,692 (3,047) 7,645 - 8,741 SF 76,919 SF 15 R July 2021 September 2023
Five Park (500 Alton Road ) Miami Beach, FL September 2019 38.9 % 18,098 1,151 19,249 - 472,000 SF 15,000 SF 238 R April 2020 September 2024
9 DeKalb Avenue Brooklyn, NY April 2019 4.2 % 5,000 1,263 6,263 - 450,000 SF 120,000 SF 540 R March 2019 September 2023
Natura Miami, FL December 2019 77.8 % 7,626 5,291 12,917 - 460,000 SF - 460 R December 2019 February 2023
Ritz-Carlton Villas (4701 Meridian
Avenue) Miami Beach, FL December 2020 50.0 % 4,109 (197) 3,912 - 58,000 SF - 15 R October 2020 February 2023
2000 N. Atlantic Ave. Daytona Beach, FL November 2021 75.0 % 2,069 92 2,161 - TBD TBD TBD
Society Nashville (915 Division St) Nashville, TN November 2021 89.1 % 21,500 1,597 23,097 - 335,000 SF 8,000 SF 502 R July 2022 April 2025
3621 Collins Ave (3) Miami Beach, FL March 2022 2.5 % 1,000 - 1,000 - TBD TBD TBD
Alchemy Nash Square Raleigh, NC June 2022 75.0 % 410 12 422 - TBD TBD TBD
Aventura View (2999 NE 191st St ) Aventura, FL June 2022 12.5 % 4,000 - 4,000 - TBD 105,000 SF N/A N/A
2261 NE 164th St North Miami Beach, FL August 2022 35.0 % 4,000 - 4,000 - TBD TBD TBD
Condominium and Mixed Use Development $ 126,720 $ (37,367) $ 89,353 $ -
Riverchase Landing Hoover, AL October 2021 50.0 % $ 11,350 $ (1,374) $ 9,976 $ - 746,000 SF N/A 468 R N/A N/A
Apartment Buildings $ 11,350 $ (1,374) $ 9,976 $ -
Park Lane Hotel (36 Central Park Central Park South, Manhattan,
South) NY November 2013 1.0 % $ 8,682 $ (8,094) $ 588 $ - 446,000 SF - 628 H N/A N/A
215 Chrystie Street Lower East Side , Manhattan, NY December 2012 12.3 % (1,328) 1,328 - - 246,000 SF - 367 H June 2014 Completed
Coral Beach and Tennis Club Coral Beach, Bermuda December 2013 49.0 % 6,048 (4,222) 1,826 - 52 Acres - 101 H N/A N/A
587 H
Parker New York (119 W 56th St ) Midtown, Manhattan, NY July 2019 0.4 % 1,000 (672) 328 - 470,000 SF - 99 R May 2020 April 2023
Hotels $ 14,402 $ (11,660) $ 2,742 $ -
The Plaza at Harmon Meadow Secaucus, NJ March 2015 49.0 % $ 12,270 $ (4,362) $ 7,908 $ - - - 219,000 SF - - N/A N /A
Wynn Las Vegas Retail Las Vegas, NV December 2016 1.6 % 3,426 4,068 7,494 - - - 160,000 SF - - N/A N/A
Commercial $ 15,696 $ (294) $ 15,402 $ -
Witkoff GP Partners (4) Multiple March 2017 15.0 % $ 9,986 $ (9,619) $ 367 $ - N/A N/A N/A N/A N/A
1 QPS Tower (23-10 Queens Plaza South ) Long Island City, NY December 2012 45.4 % (16,141) 16,141 - - N/A N/A N/A March 2014 Completed
Witkoff EB-5 Capital Partners Multiple September 2018 49.0 % (1,041) 1,041 - - N/A N/A N/A N/A N/A
Diverse Real Estate Portfolio $ (7,196) $ 7,563 $ 367 $ -
Investments in real estate ventures $ 160,972 $ (43,132) $ 117,840 $ -
Total Carrying Value $ 143,456 $ (25,616) $ 117,840 $ -
46
-------------------------------------------------------------------------------- (1) The Percentage Owned reflects our estimated current ownership percentage. Our actual ownership percentage as well as the percentage of earnings and cash distributions may ultimately differ as a result of a number of factors including potential dilution, financing or admission of additional partners. (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)
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 of September 30, 2022 were $11,749 . This amount is
included in the "Cumulative Earnings (Losses)" column in the table above. During
the nine months ended September 30, 2022 , New Valley capitalized $3,152 of
interest costs and utilized (reversed) $60 of previously capitalized interest in
connection with the recognition of equity in (losses) earnings, gains and
liquidations from various ventures.
47
--------------------------------------------------------------------------------
Liquidity and Capital Resources
Cash, cash equivalents and restricted cash increased by
for the nine months ended
Cash provided by operations was$329,017 and$311,337 for the nine months endedSeptember 30, 2022 and 2021, respectively. The increase in cash provided from operations related primarily to increased obligations due under the MSA (due to increased unit volumes as a result of the growth of Montego) and lower payments made under the MSA for the nine months endedSeptember 30, 2022 as well as the absence, in 2022, of premiums paid during the nine months endedSeptember 30, 2021 to retire our 6.125% Senior Secured Notes due 2025. The amounts were offset by absence of cash from operations from Douglas Elliman for the nine months endedSeptember 30, 2022 as a result of the Distribution. InJune 2022 , Liggett appealed the final judgment related to theMississippi litigation and posted a bond of$24,000 . The amount of the bond has been included as a component of restricted cash atSeptember 30, 2022 , and, therefore, has not been included as a reduction in cash provided by operations in our condensed consolidated financial statement of cash flows for the nine months endedSeptember 30, 2022 . Cash used in investing activities was$3,504 and$36,045 for the nine months endedSeptember 30, 2022 and 2021, respectively. In the first nine months of 2022, cash used in investing activities was for the purchase of investment securities of$48,828 , investments in real estate ventures of$19,644 , capital expenditures of$8,759 , purchase of long-term investments of$4,312 , and an increase in cash surrender value of life insurance policies of$1,268 . This was offset by maturities of investment securities of$49,789 , the sale of investment securities of$21,152 , proceeds from the sale or liquidation of long-term investments of$4,413 , distributions from investments in real estate ventures of$3,791 , paydowns of investment securities of$157 and a decrease in restricted assets of$5 . In the first nine months of 2021, cash used in investing activities was for the purchase of investment securities of$99,287 , investments in real estate ventures of$15,912 , capital expenditures of$11,103 , an increase in cash surrender value of life insurance policies of$1,253 , purchase of long-term investments of$13,053 , purchase of subsidiaries of$500 and an increase in restricted assets of$5 . This was offset by maturities of investment securities of$50,731 , the sale of investment securities of$33,517 , distributions from investments in real estate ventures of$11,879 , proceeds from the sale or liquidation of long-term investments of$8,509 , paydowns of investment securities of$415 and proceeds from sale of fixed assets of$17 . Liggett has entered into purchase commitments of approximately$14,000 related to factory modernization throughout 2022 and 2023 and has funded approximately$4,500 of these capital commitments as ofSeptember 30, 2022 . The remaining$9,500 of capital expenditures will be incremental to Liggett's recurring capital expenditure program. Cash used in financing activities was$109,822 and$101,915 for the nine months endedSeptember 30, 2022 and 2021, respectively. In the first nine months of 2022, cash was used for the dividends on common stock of$96,636 , repurchase and repayments of debt of$12,246 , other of$938 and net repayments of debt under the revolver of$2 . Repurchases and repayments of debt for the nine months endedSeptember 30, 2022 included our repurchase in the market of$12,865 in aggregate principal amount of our 10.5% Senior Notes due 2026 at a price of$12,222 plus accrued interest. The Senior Notes that were repurchased have been retired. In the first nine months of 2021, cash was used in financing activities for repayments of debt of$859,801 , which consisted primarily of the retirement of our 6.125% Senior Secured Notes due 2025 of$850,000 , dividends and distributions on common stock of$98,403 and other of$102 . This was offset by the net impact of the refinancing of our Senior Secured Notes and contributions from a non-controlling interest of Douglas Elliman of$1,500 . 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$20,109 . 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$107,200 , dividends on our outstanding common shares of approximately$126,700 , which is based on an assumed quarterly cash dividend of$0.20 per share and other corporate expenses and income taxes. As ofSeptember 30, 2022 , we had cash and cash equivalents of$384,963 (including$174,386 of cash at Liggett), investment securities and long-term investments, which were carried at$160,218 (see Note 5 to condensed consolidated financial statements). As ofSeptember 30, 2022 , our investments in real estate ventures were carried at$116,840 . 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 48 -------------------------------------------------------------------------------- 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 ofSeptember 30, 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. Notwithstanding the comprehensive nature of the Engle Progeny Settlements of more than 5,200 cases, 22 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. InJune 2022 , Liggett appealed the final judgment related to theMississippi litigation and posted a bond of$24,000 . Liggett may be required to make additional payments toMississippi which could have a material adverse effect on the Company's consolidated financial position. The potential exposures for unpaid principal and pre-judgment interest were approximately$16,700 and$22,100 (as ofSeptember 2022 ), respectively. See Recent Developments in Tobacco-Related Litigation. 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 Indebtedness.
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 nine months endedSeptember 30, 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 49 --------------------------------------------------------------------------------
the 2029 Indenture and the security documents relating thereto.
Ltd.
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 indebtedness is substituted for indebtedness. The following table
summarizes the requirements of these financial test and the extent to which we
would have satisfied these requirements had the 2029 Indenture been in effect as
of September 30, 2022 .
Indenture September 30,
Covenant Requirement 2022
Consolidated EBITDA, as defined $75,000 $372,480
Leverage ratio, as defined <3.0 to 1 2.27 to 1
Secured leverage ratio, as defined <1.5 to 1 0.84 to 1
As of
to the 2029 Indenture.
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 102.625%, as ofNovember 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 test and the
extent to which we satisfied these requirements as of
50 --------------------------------------------------------------------------------
Covenant Indenture Requirement
2022
Consolidated EBITDA, as defined N/A
Fixed charge coverage ratio, as defined >2.0 to 1 3.14 to 1 Net leverage ratio, as defined <4.0 to 1 2.17 to 1 Secured leverage ratio, as defined <3.75 to 1
2.55 to 1
As of
related to the 2026 Indenture.
InSeptember 2022 , we repurchased in the market$12,865 in aggregate principal amount of our 10.5% Senior Notes and have retired the Senior Notes that were repurchased. 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 ofSeptember 30, 2022 and the related Condensed Consolidating Statements of Operations for the nine months endedSeptember 30, 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 ofSeptember 30, 2022 andDecember 31, 2021 and the related Summarized Combined Statements of Operations for the nine months endedSeptember 30, 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:
September 30, December 31,
2022 2021
Assets:
Current assets $ 661,604 $ 487,797
Noncurrent assets 293,666 274,292
Intercompany receivables from Nonguarantor
Subsidiaries 2,427 1,832
Liabilities:
Current liabilities 380,692 194,097
Noncurrent liabilities 1,514,554 1,536,792
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