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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended March 31, 2019
 
VECTOR GROUP LTD.
(Exact name of registrant as specified in its charter)
Delaware
1-5759
65-0949535
(State or other jurisdiction of incorporation
Commission File Number
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
4400 Biscayne Boulevard
Miami, Florida 33137
305-579-8000
(Address, including zip code and telephone number, including area code,
of the principal executive offices)
 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes o No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
x Large accelerated filer
o  Accelerated filer
o  Non-accelerated filer
o  Smaller reporting company
o  Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.
o Yes x No
Securities Registered Pursuant to 12(b) of the Act:
Title of each class:
Trading
Name of each exchange
 
Symbol(s)
on which registered:
Common stock, par value $0.10 per share
VGR
New York Stock Exchange
At May 7, 2019, Vector Group Ltd. had 140,959,065 shares of common stock outstanding.
 




VECTOR GROUP LTD.

FORM 10-Q

TABLE OF CONTENTS

 
Page
PART I. FINANCIAL INFORMATION
 
 
 
Item 1. Vector Group Ltd. Condensed Consolidated Financial Statements (Unaudited):
 
 
 
Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018
 
 
Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018
 
 
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018
 
 
Condensed Consolidated Statements of Stockholders' Deficiency for the three months ended March 31, 2019 and 2018
 
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018
 
 
Notes to Condensed Consolidated Financial Statements
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 4. Controls and Procedures
 
 
PART II. OTHER INFORMATION
 
 
 
Item 1. Legal Proceedings
 
 
Item 1A. Risk Factors
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 6. Exhibits
 
 
SIGNATURE


1

VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
Unaudited

 
March 31,
2019
 
December 31,
2018
ASSETS:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
312,638

 
$
584,581

Investment securities at fair value
134,652

 
131,569

Accounts receivable - trade, net
36,440

 
34,246

Inventories
101,977

 
90,997

Restricted assets
5,412

 
4,477

Other current assets
36,242

 
26,351

Total current assets
627,361

 
872,221

Property, plant and equipment, net
85,641

 
86,736

Investments in real estate, net
26,777

 
26,220

Long-term investments (of which $54,202 and $54,628 were carried at fair value)
66,768

 
66,259

Investments in real estate ventures
138,393

 
141,105

Operating lease right of use assets
124,723

 

Restricted assets
6,316

 
6,306

Goodwill and other intangible assets, net
266,065

 
266,611

Prepaid pension costs
24,179

 
23,869

Other assets
62,933

 
60,177

Total assets
$
1,429,156

 
$
1,549,504

LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
 
 
 
Current liabilities:
 
 
 
   Current portion of notes payable and long-term debt
$
41,080

 
$
256,134

   Current portion of fair value of derivatives embedded within convertible debt

 
6,635

 Current payments due under the Master Settlement Agreement
73,809

 
36,561

   Current portion of employee benefits
875

 
875

Income taxes payable, net
9,701

 
5,252

Litigation accruals
3,404

 
310

Current operating lease liability
20,414

 

Other current liabilities
153,334

 
179,153

Total current liabilities
302,617

 
484,920

Notes payable, long-term debt and other obligations, less current portion
1,387,945

 
1,386,697

Fair value of derivatives embedded within convertible debt
21,075

 
24,789

Non-current employee benefits
61,684

 
61,288

Deferred income taxes, net
39,823

 
37,411

Non-current operating lease liability
128,999

 

Payments due under the Master Settlement Agreement
16,383

 
16,383

Litigation accruals
19,027

 
21,794

Other liabilities
41,704

 
63,588

Total liabilities
2,019,257

 
2,096,870

Commitments and contingencies (Note 9)

 

Stockholders' deficiency:
 
 
 
Preferred stock, par value $1.00 per share, 10,000,000 shares authorized

 

Common stock, par value $0.10 per share, 250,000,000 shares authorized,140,899,065 and 140,914,642 shares issued and outstanding
14,090

 
14,092

Accumulated deficit
(580,581
)
 
(542,169
)
Accumulated other comprehensive loss
(24,098
)
 
(19,982
)
Total Vector Group Ltd. stockholders' deficiency
(590,589
)
 
(548,059
)
Non-controlling interest
488

 
693

Total stockholders' deficiency
(590,101
)
 
(547,366
)
Total liabilities and stockholders' deficiency
$
1,429,156

 
$
1,549,504


The accompanying notes are an integral part of the condensed consolidated financial statements.

2



VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
Unaudited

 
Three Months Ended
 
March 31,
 
2019
 
2018
Revenues:
 
 
 
   Tobacco*
$
256,756

 
$
267,116

   Real estate
164,168

 
161,850

       Total revenues
420,924

 
428,966

 
 
 
 
Expenses:
 
 
 
 Cost of sales:
 
 
 
   Tobacco*
177,303

 
184,962

   Real estate
108,717

 
109,313

       Total cost of sales
286,020

 
294,275

 
 
 
 
Operating, selling, administrative and general expenses
92,314

 
89,076

Litigation settlement and judgment income

 
(2,469
)
Operating income
42,590

 
48,084

 
 
 
 
Other income (expenses):
 
 
 
Interest expense
(37,520
)
 
(45,947
)
Change in fair value of derivatives embedded within convertible debt
10,349

 
10,567

Equity in losses from real estate ventures
(2,439
)
 
(6,560
)
Equity in earnings from investments
1,362

 
1,162

Net gains (losses) recognized on investment securities
4,773

 
(3,340
)
Other, net
2,667

 
1,646

Income before provision for income taxes
21,782

 
5,612

Income tax expense
6,749

 
1,948

 
 
 
 
Net income
15,033

 
3,664

 
 
 
 
Net (income) loss attributed to non-controlling interest
(80
)
 
3,547

 
 
 
 
Net income attributed to Vector Group Ltd.
$
14,953

 
$
7,211

 
 
 
 
Per basic common share:
 
 
 
 
 
 
 
Net income applicable to common shares attributed to Vector Group Ltd.
$
0.09

 
$
0.04

 
 
 
 
Per diluted common share:
 
 
 
 
 
 
 
Net income applicable to common shares attributed to Vector Group Ltd.
$
0.08

 
$
0.04

                                      

* Revenues and cost of sales include federal excise taxes of $104,633 and $112,801, respectively.


The accompanying notes are an integral part of the condensed consolidated financial statements.

3




VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
Unaudited
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
 
Net income
$
15,033

 
$
3,664

 
 
 
 
Net unrealized gains (losses) on investment securities available for sale:
 
 
 
Change in net unrealized gains (losses)
377

 
(692
)
Net unrealized (gains) losses reclassified into net income
(33
)
 
595

Net unrealized gains (losses) on investment securities available for sale
344

 
(97
)
 


 
 
Net change in pension-related amounts
 
 
 
Amortization of loss
457

 
442

Net change in pension-related amounts
457

 
442

 
 
 
 
Other comprehensive income
801

 
345

 
 
 
 
Income tax effect on:
 
 
 
Change in net unrealized gains (losses) on investment securities
(104
)
 
189

Net unrealized (gains) losses reclassified into net income on investment securities
9

 
(163
)
Pension-related amounts
(125
)
 
(121
)
Income tax provision on other comprehensive income
(220
)
 
(95
)
 
 
 
 
Other comprehensive income, net of tax
581

 
250

 
 
 
 
Comprehensive income
15,614

 
3,914

 
 
 
 
Comprehensive (income) loss attributed to non-controlling interest
(80
)
 
3,547

Comprehensive income attributed to Vector Group Ltd.
$
15,534

 
$
7,461


The accompanying notes are an integral part of the condensed consolidated financial statements.

4



VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY
(Dollars in Thousands, Except Share Amounts)
Unaudited

 
Vector Group Ltd. Stockholders' Deficiency
 
 
 
 
 
 
Additional Paid-In
 
 
 
Accumulated
Other Comprehensive
 
Non-controlling
 
 
 
Common Stock
 
 
Accumulated
 
 
 
 
 
Shares
 
Amount
 
Capital
 
Deficit
 
Loss
 
Interest
 
Total
Balance as of January 1, 2019
140,914,642

 
$
14,092

 
$

 
$
(542,169
)
 
$
(19,982
)
 
$
693

 
$
(547,366
)
Impact of adoption of new accounting standards

 

 

 
3,147

 
(4,697
)
 

 
(1,550
)
Net income

 

 

 
14,953

 

 
80

 
15,033

Total other comprehensive income

 

 

 

 
581

 

 
581

Distributions and dividends on common stock ($0.40 per share)

 

 
(2,264
)
 
(56,512
)
 

 

 
(58,776
)
Surrender of shares in connection with restricted stock vesting
(15,577
)
 
(2
)
 
(172
)
 

 

 

 
(174
)
Stock-based compensation

 

 
2,436

 

 

 

 
2,436

Distributions to non-controlling interest

 

 

 

 

 
(285
)
 
(285
)
Balance as of March 31, 2019
140,899,065

 
$
14,090

 
$

 
$
(580,581
)
 
$
(24,098
)
 
$
488

 
$
(590,101
)

 
Vector Group Ltd. Stockholders' Deficiency
 
 
 
 
 
 
Additional Paid-In
 
 
 
Accumulated
Other Comprehensive
 
Non-controlling
 
 
 
Common Stock
 
 
Accumulated
 
 
 
 
 
Shares
 
Amount
 
Capital
 
Deficit
 
Loss
 
Interest
 
Total
Balance as of January 1, 2018
134,365,424

 
$
13,437

 
$

 
$
(414,785
)
 
$
(12,571
)
 
$
82,159

 
$
(331,760
)
Impact of adoption of new accounting standards

 

 

 
1,094

 
(6,036
)
 
(7,915
)
 
(12,857
)
Net income

 

 

 
7,211

 

 
(3,547
)
 
3,664

Total other comprehensive income

 

 

 

 
250

 

 
250

Distributions and dividends on common stock ($0.38 per share)

 

 
(2,384
)
 
(53,516
)
 

 

 
(55,900
)
Effect of stock dividend*
6,718,271

 
672

 

 
(672
)
 

 

 

Stock-based compensation

 

 
2,384

 

 

 

 
2,384

Balance as of March 31, 2018
141,083,695

 
$
14,109

 
$

 
$
(460,668
)
 
$
(18,357
)
 
$
70,697

 
$
(394,219
)
                        
*    Represents the effect of the September 27, 2018 stock dividend on the first quarter 2018 common-stock activity.

The accompanying notes are an integral part of the condensed consolidated financial statements.

5



VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Unaudited

 
Three Months Ended
 
Three Months Ended
 
March 31,
2019
 
March 31,
2018
Net cash provided by operating activities
$
19,726

 
$
40,714

Cash flows from investing activities:
 
 
 
Sale of investment securities
7,759

 
2,357

Maturities of investment securities
11,308

 
8,112

Purchase of investment securities
(20,623
)
 
(4,364
)
Investments in real estate ventures
(871
)
 
(533
)
Distributions from investments in real estate ventures
1,134

 
219

Increase in cash surrender value of life insurance policies
(238
)
 
(36
)
Increase in restricted assets
(7
)
 
(4
)
Capital expenditures
(3,825
)
 
(3,987
)
Repayments of notes receivable

 
32

Purchase of subsidiaries
(668
)
 

Pay downs of investment securities
258

 
446

Investments in real estate, net
(641
)
 
(355
)
Net cash (used in) provided by investing activities
(6,414
)
 
1,887

Cash flows from financing activities:
 
 
 
Repayments of debt
(230,466
)
 
(490
)
Borrowings under revolver
94,400

 
55,170

Repayments on revolver
(87,420
)
 
(61,728
)
Dividends and distributions on common stock
(60,459
)
 
(57,187
)
Distributions to non-controlling interest
(285
)
 

Net cash used in financing activities
(284,230
)
 
(64,235
)
Net decrease in cash, cash equivalents and restricted cash
(270,918
)
 
(21,634
)
Cash, cash equivalents and restricted cash, beginning of period
591,729

 
310,937

Cash, cash equivalents and restricted cash, end of period
$
320,811

 
$
289,303


The accompanying notes are an integral part of the condensed consolidated financial statements.

6

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)
Basis of Presentation:
The condensed consolidated financial statements of Vector Group Ltd. (the “Company” or “Vector”) include the accounts of Liggett Group LLC (“Liggett”), Vector Tobacco Inc. (“Vector Tobacco”), Liggett Vector Brands LLC (“Liggett Vector Brands”), New Valley LLC (“New Valley”) and other less significant subsidiaries. New Valley includes the accounts of Douglas Elliman Realty, LLC (“Douglas Elliman”) and other less significant subsidiaries. All significant intercompany balances and transactions have been eliminated.
Liggett and Vector Tobacco are engaged in the manufacture and sale of cigarettes in the United States. Liggett Vector Brands coordinates Liggett and Vector Tobacco’s sales and marketing efforts. Certain references to “Liggett” refer to the Company’s tobacco operations, including the business of Liggett and Vector Tobacco, unless otherwise specified. New Valley is engaged in the real estate business.
The unaudited, interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and, in management’s opinion, contain all adjustments, consisting only of normal recurring items, necessary for a fair statement of the results for the periods presented. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission (“SEC”). The consolidated results of operations for interim periods should not be regarded as necessarily indicative of the results that may be expected for the entire year.
(b)
Distributions and Dividends on Common Stock:

The Company records distributions on its common stock as dividends in its condensed consolidated statement of stockholders’ deficiency to the extent of retained earnings. Any amounts exceeding retained earnings are recorded as a reduction to additional paid-in capital to the extent paid-in-capital is available and then to accumulated deficit. The Company’s stock dividends are recorded as stock splits and given retroactive effect to earnings per share for all periods presented.

(c)
Earnings Per Share (“EPS”):

Information concerning the Company’s common stock has been adjusted to give retroactive effect to the 5% stock dividend distributed to Company stockholders on September 27, 2018. All per share amounts and references to share amounts have been updated to reflect the retrospective effect of the stock dividend.

Net income for purposes of determining basic EPS was as follows:

 
Three Months Ended
 
March 31,
 
2019
 
2018
Net income attributed to Vector Group Ltd.
$
14,953

 
$
7,211

Income attributed to participating securities
(2,003
)
 
(1,772
)
Net income applicable to common shares attributed to Vector Group Ltd.
$
12,950

 
$
5,439




7

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Net income for purposes of determining diluted EPS was as follows:

 
Three Months Ended
 
March 31,
 
2019
 
2018
Net income attributed to Vector Group Ltd.
$
14,953

 
$
7,211

Income attributable to 7.5% Variable Interest Senior Convertible Notes
(1,246
)
 

Income attributed to participating securities
(2,003
)
 
(1,772
)
Net income applicable to common shares attributed to Vector Group Ltd.
$
11,704

 
$
5,439



 
Basic and diluted EPS were calculated using the following common shares:

 
Three Months Ended
 
March 31,
 
2019
 
2018
Weighted-average shares for basic EPS
139,493,555

 
139,288,460

Plus incremental shares related to convertible debt
2,776,775

 

Plus incremental shares related to stock options and non-vested restricted stock
14,670

 
338,591

Weighted-average shares for diluted EPS
142,285,000

 
139,627,051



The following non-vested restricted stock and shares issuable upon the conversion of convertible debt were outstanding during the three months ended March 31, 2019 and 2018, but were not included in the computation of diluted EPS because the impact of the per share expense associated with the restricted stock were greater than the average market price of the common shares during the respective periods and the common shares issuable under the convertible debt were anti-dilutive to EPS.

 
Three Months Ended
 
March 31,
 
2019
 
2018
  Weighted-average shares of non-vested restricted stock
1,340,781

 

  Weighted-average expense per share
$
18.82

 
$

  Weighted-average number of shares issuable upon conversion of debt
10,901,963

 
28,819,626

  Weighted-average conversion price
$
21.28

 
$
16.96





8

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


(d)
Fair Value of Derivatives Embedded within Convertible Debt:

The Company has estimated the fair value of the embedded derivatives based principally on the results of a valuation model. A readily determinable fair value of the embedded derivatives is not available. The estimated fair value of the derivatives embedded within the convertible debt is based principally on the present value of future dividend payments expected to be received by the convertible debt holders over the term of the debt. The discount rate applied to the future cash flows is estimated based on a spread in the yield of the Company’s debt when compared to risk-free securities with the same duration. The valuation model assumes future dividend payments by the Company and utilizes interest rates and credit spreads for secured to unsecured debt, unsecured to subordinated debt and subordinated debt to preferred stock to determine the fair value of the derivatives embedded within the convertible debt. The valuation also considers other items, including current and future dividends and the volatility of Vector’s stock price. At March 31, 2019, the range of estimated fair values of the Company’s embedded derivatives was between $21,022 and $21,125. The Company recorded the fair value of its embedded derivatives at the approximate midpoint of the range at $21,075 as of March 31, 2019. At December 31, 2018, the range of estimated fair values of the Company’s embedded derivatives was between $31,371 and $31,519. The Company recorded the fair value of its embedded derivatives at the midpoint of the range at $31,424 as of December 31, 2018. The estimated fair value of the Company’s embedded derivatives could change significantly based on future market conditions. (See Note 8.)

(e)
Investments in Real Estate Ventures:
In accounting for its investments in real estate ventures, the Company identified its participation in Variable Interest Entities (“VIE”), which are defined as (a) entities in which the equity investment at risk is not sufficient to finance its activities without additional subordinated financial support; (b) as a group, the equity investors at risk lack (1) the power to direct the activities of a legal entity that most significantly impact the entity’s economic performance, (2) the obligation to absorb the expected losses of the entity, or (3) the right to receive the expected residual returns of the entity; or (c) as a group, the equity investors have voting rights that are not proportionate to their economic interests and the entity’s activities involve or are conducted on behalf of an investor with a disproportionately small voting interest.
The Company’s interest in VIEs is primarily in the form of equity ownership. The Company examines specific criteria and uses judgment when determining if the Company is the primary beneficiary of a VIE. Factors considered include risk and reward sharing, experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE’s executive committee, existence of unilateral kick-out rights exclusive of protective rights or voting rights and level of economic disproportionality between the Company and its other partner(s).
Accounting guidance requires the consolidation of VIEs in which the Company is the primary beneficiary. The guidance requires consolidation of VIEs that an enterprise has a controlling financial interest. A controlling financial interest will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
The Company’s maximum exposure to loss in its investments in unconsolidated VIEs is limited to its investment in the VIE, any unfunded capital commitments to the VIE, and, in some cases, guarantees in connection with debt on the specific project. The Company’s maximum exposure to loss in its investment in consolidated VIEs is limited to its investment, which is the carrying value of the investment net of the non-controlling interest. Creditors of the consolidated VIEs have no recourse to the general credit of the primary beneficiary.


9

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


(f)
Other, Net:

Other, net consisted of:
 
Three Months Ended
 
March 31,
 
2019
 
2018
Interest and dividend income
$
3,208

 
$
1,922

Net periodic benefit cost other than the service costs
(541
)
 
(253
)
Other expense

 
(23
)
Other, net
$
2,667

 
$
1,646



(g)
Other Current Liabilities:
Other current liabilities consisted of:
 
March 31, 2019
 
December 31, 2018
Accounts payable
$
11,704

 
$
13,144

Accrued promotional expenses
30,909

 
37,940

Accrued excise and payroll taxes payable, net
12,710

 
14,612

Accrued interest
27,571

 
38,673

Commissions payable
18,199

 
12,975

Accrued salary and benefits
13,352

 
30,228

Contract liabilities
7,824

 

Allowance for sales returns
7,318

 
6,935

Other current liabilities
23,747

 
24,646

Total other current liabilities
$
153,334

 
$
179,153



(h)
Goodwill and Other Intangible Assets, Net:
The components of “Goodwill and other intangible assets, net” were as follows:
 
March 31,
2019
 
December 31,
2018
Goodwill
$
78,008

 
$
77,568

 
 
 
 
Indefinite life intangibles:
 
 
 
Intangible asset associated with benefit under the MSA
107,511

 
107,511

Trademark - Douglas Elliman
80,000

 
80,000

 
 
 
 
Intangibles with a finite life, net
546

 
1,532

 
 
 
 
  Total goodwill and other intangible assets, net
$
266,065

 
$
266,611





10

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


(i)
Reconciliation of Cash, Cash Equivalents and Restricted Cash:

The components of “Cash, cash equivalents and restricted cash” in the Statement of Cash Flows were as follows:
 
March 31,
2019
 
December 31,
2018
Cash and cash equivalents
$
312,638

 
$
584,581

Restricted cash and cash equivalents included in current restricted assets
3,719

 
2,697

Restricted cash and cash equivalents included in non-current restricted assets
4,454

 
4,451

  Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
$
320,811

 
$
591,729



Amounts included in current restricted assets and non-current restricted assets represent cash and cash equivalents required to be deposited into escrow for bonds required to appeal adverse product liability judgments, amounts required for letters of credit related to office leases, and certain deposit requirements for banking arrangements. The restrictions related to the appellate bonds will remain in place until the appeal process has been completed. The restrictions related to the letters of credit will remain in place for the duration of the respective lease. The restrictions related to the banking arrangements will remain in place for the duration of the arrangement.
 
(j)    New Accounting Pronouncements:

Accounting Standards Updates (“ASU”) adopted in 2019:
In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements (“ASU 2018-09”). This standard does not prescribe any new accounting guidance, but instead makes minor improvements and clarifications of several different FASB Accounting Standards Codification areas based on comments and suggestions made by various stakeholders. Certain updates were applicable immediately while others were effective for the Company’s fiscal year beginning January 1, 2019. Adoption of this update did not have a material impact on the Company’s condensed consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), which allows for stranded tax effects in accumulated other comprehensive income resulting from the Tax Act to be reclassified to retained earnings. The Company adopted ASU 2018-02 effective January 1, 2019. The reclassification from the adoption of this standard resulted in a decrease of $4,697 to accumulated deficit and an increase of $4,697 to accumulated other comprehensive loss.
In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which provides guidance for accounting for leases. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification. The lease classification will determine whether the lease expense is recognized based on an effective interest rate method or on a straight-line basis over the term of the lease. Accounting for lessors remains largely unchanged from current U.S. GAAP. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11 “Leases (Topic 842): Targeted Improvements” (ASU 2018-11). ASU 2018-10 clarifies certain areas within ASU 2016-02. Prior to ASU 2018-11, a modified retrospective transition was required for financing or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements. ASU 2018-11 allows entities an additional transition method to the existing requirements whereby an entity could adopt the provisions of ASU 2016-02 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption. ASU 2018-11 also allows a practical expedient that permits lessors to not separate non-lease components from the associated lease component if certain conditions are present. In December 2018, the FASB also issued ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, which requires lessors to exclude lessor costs paid directly to a third party by lessees from lease revenues and expenses, provides an election for lessors to exclude sales taxes and other similar taxes collected from lessees from consideration in the contract, and clarifies lessors accounting for variable payments related to lease and nonlease components. ASU 2016-02, ASU 2018-10, ASU 2018-11 and ASU 2018-20 was effective for the Company’s fiscal year beginning January 1, 2019 and subsequent interim periods.

11

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


On January 1, 2019, the Company adopted ASU No. 2016-02- Leases (Topic 842) applying the modified retrospective method and the option presented under ASU 2018-11 to transition only active leases as of January 1, 2019 with a cumulative effect adjustment as of that date. See Note 3 - Leases, for additional accounting policy and transition disclosures.

ASUs to be adopted in future periods:
In October 2018, the FASB issued ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. The guidance requires indirect interests held through related parties under common control arrangements be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the impact of the new guidance on our condensed consolidated financial statements.
In October 2018, the FASB issued ASU No. 2018-16, Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (“ASU 2018-16”), which amends ASC 815, Derivatives and Hedging. This ASU adds the OIS rate based on SOFR to the list of permissible benchmark rates for hedge accounting purposes. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Adoption of ASU 2018-16 will be on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after the date of adoption. The Company is currently assessing the impact the adoption of ASU 2018-16 will have on the Company’s condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact the adoption of ASU 2018-15 will have on the Company’s condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). ASU 2018-14 eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year. The ASU also removes the disclosure requirements for the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost and the benefit obligation for postretirement health care benefits. ASU 2018-14 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020. Early adoption is permitted. The adoption of ASU 2018-14 will impact financial statement disclosure with no impact on operating results.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which is designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. The ASU eliminates disclosures such as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The ASU also adds new disclosure requirements for Level 3 measurements. ASU No. 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of ASU 2018-13 will impact financial statement disclosure with no impact on operating results.

2.
REVENUE RECOGNITION


Revenue Recognition Accounting Pronouncement Adoption

On January 1, 2018, the Company adopted Topic 606 applying the modified retrospective method. The following practical expedients and optional disclosure exemptions available under Topic 606 have been applied:
1.
The Company applied the optional exemption in paragraph 606-10-50-14 of Topic 606, and has not disclosed the amount of the transaction price allocated to the remaining performance obligations for the Real Estate property management business because the contracts to provide property management services are typically annual contracts.

12

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


2.
The Company applied the optional exemption in paragraph 606-10-50-14A of Topic 606, and has not disclosed the amount of the transaction price allocated to the remaining performance obligations for the Real Estate development marketing business because the transaction prices in these contracts are comprised entirely of variable consideration based on the ultimate selling price of each unit in the subject property.

Revenue Recognition Policies
Revenue is measured based on a consideration specified in a contract with a customer less any sales incentives. Revenue is recognized when (a) an enforceable contract with a customer exists, that has commercial substance, and collection of substantially all consideration for services is probable; and (b) the performance obligations to the customer are satisfied either over time or at a point in time.
Tobacco sales: Revenue from cigarette sales, which include federal excise taxes billed to customers, are recognized upon shipment of cigarettes when control has passed to the customer. Average collection terms for Tobacco sales range between three and twelve days from the time that the cigarettes are shipped to the customer. The Company records a liability for goods estimated to be returned in other current liabilities and the associated receivable for anticipated federal excise tax refunds in other current assets on the condensed consolidated balance sheet. The liability for returned goods is based principally on sales volumes and historical return rates. The estimated costs of sales incentives, including customer incentives and trade promotion activities, are based principally on historical experience and are accounted for as reductions in Tobacco revenue. Expected payments for sales incentives are included in other current liabilities on the Company’s condensed consolidated balance sheet. The Company accounts for shipping and handling costs as fulfillment costs as part of cost of sales.
Real estate sales: Real estate commissions and other payments earned by the Company’s real estate brokerage businesses are recognized as revenue when the real estate sale is completed or lease agreement is executed, which is the point in time that the performance obligation is satisfied. Any commission and other payments received in advance are deferred until the satisfaction of the performance obligation. Corresponding agent commission expenses, including any advance commission or other direct expense payments, are deferred and recognized as cost of sales concurrently with related revenues.
The Company’s Real Estate revenue contracts with customers do not have multiple material performance obligations to customers under Topic 606, except for contracts in the Company’s development marketing business. Contracts in the development marketing business provide the Company with the exclusive right to sell units in a subject property for a commission fee per unit sold calculated as a percentage of the sales price of each unit. Accordingly, a performance obligation exists for each unit in the development marketing property under contract, and a portion of the total contract transaction price is allocated to and recognized at the time each unit is sold.
The total contract transaction price is allocated to each unit in the subject property and recognized when the performance obligation, i.e. the sale of each unit, is satisfied. Accordingly, the transaction price allocated to the remaining performance obligations for the development marketing business represents variable consideration allocated entirely to wholly unsatisfied performance obligations.
Under development marketing service arrangements, dedicated staff are required for a subject property and these costs are typically reimbursed from the customer through advance payments that are recoupable from future commission earnings. Advance payments received and associated direct costs paid are deferred, allocated to each unit in the subject property, and recognized at the time of the completed sale of each unit.
Development marketing service arrangements also include direct fulfillment costs incurred in advance of the satisfaction of the performance obligation. The Company capitalizes costs incurred in fulfilling a contract with a customer if the fulfillment costs 1) relate directly to an existing contract or anticipated contract, 2) generate or enhance resources that will be used to satisfy performance obligations in the future, and 3) are expected to be recovered. These costs are amortized over the estimated customer relationship period which is the contract term. The Company uses an amortization method that is consistent with the pattern of transfer of goods or services to its customers by allocating these costs to each unit in the subject property and expensing these costs as each unit sold is closed over the contract.
Commission revenue is recognized at the time the performance obligation is met for commercial leasing contracts, which is when the lease agreement is executed, as there are no further performance obligations, including any amounts of future payments under extended payment terms.

13

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Property management revenue arrangements consist of providing operational and administrative services to manage a subject property. Fees for these services are typically billed and collected monthly. Property management service fees are recognized as revenue over time using the output method as the performance obligations under the customer arrangement are satisfied each month.
Title insurance commission fee revenue is earned when the sale of the title insurance policy is completed, which corresponds to the point in time when the underlying real estate sale is completed, which is when the performance obligation is satisfied.

Disaggregation of Revenue
In the following table, revenue is disaggregated by major product line for the Tobacco segment:
 
 
Three Months Ended
 
 
March 31,
 
 
2019
 
2018
Tobacco Segment Revenues:
 
 
 
 
Core Discount Brands - PYRAMID, GRAND PRIX, LIGGETT SELECT, EVE and EAGLE 20’s
 
$
233,106

 
$
241,531

Other Brands
 
23,650

 
25,585

Total tobacco revenues
 
$
256,756

 
$
267,116


In the following table, revenue is disaggregated by major services line and primary geographical market for the Real Estate segment:

 
 
Three Months Ended March 31, 2019
 
 
New York City
 
Northeast
 
Southeast
 
West
 
Total
Real Estate Segment Revenues:
 
 
 
 
 
 
 
 
 
 
Commission brokerage income
 
$
65,679

 
$
31,111

 
$
22,971

 
$
18,529

 
$
138,290

Development marketing
 
11,386

 

 
2,630

 
7

 
14,023

Property management revenue
 
8,167

 
184