What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-05 compared with 2021-08-06 · 9 added, 172 removed, 27 unchanged (87% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Net sales for the second quarter and first six months of 2021 were $49,403 and $104,353, respectively, representing a decrease of $20,084 or 28.9%, and $69,862 or 40.1%, compared to the second quarter and first six months of 2020, respectively.

The year-over-year decrease in revenue of company-operated restaurants is primarily due to the shift of company units to franchise partner units.

For company-operated units, sales to the end customer are recorded as revenue generated by the Company, but for franchise partner units, only our share of the restaurants’ profits, along with certain fees, are recorded as revenue.

Because we derive most of our revenue from our share of the profits, revenue will continue to decline with each transition of a company-operated unit to a franchise partner unit.

Franchise partner fees were $12,383 during the second quarter of 2021, compared to $4,537 during the second quarter of 2020.

Franchise partner fees were $20,236 during the first six months of 2021, compared to $7,881 during the first six months of 2020.

As of June 30, 2021, there were 131 franchise partner units, compared to 51 franchise partner units as of June 30, 2020.

The cost of food during the second quarter and first six months of 2021 was $14,727 or 29.8% of net sales, and $30,281 or 29.0% of net sales, respectively, compared to $19,929 or 28.7% of net sales, and $51,372 or 29.5% of net sales in the second quarter and first six months of 2020, respectively.

Restaurant operating costs during the second quarter of 2021 were $22,058 or 44.6% of net sales, compared to $26,955 or 38.8% of net sales in the second quarter of 2020.

Restaurant operating costs during the first six months of 2021 were $47,255 or 45.3% of net sales, compared to $80,452 or 46.2% of net sales in the first six months of 2020.

The decrease in operating costs is mainly attributable to the transitioning of company-operated units to franchise partner units.

General and administrative costs during the second quarter and first six months of 2021 were $10,481 and $18,161, respectively, compared to $9,189 and $18,087 in the second quarter and first six months of 2020, respectively.

The year-over-year general and administrative costs were higher in 2021 primarily because of one-time savings obtained during the second quarter of 2020.

Marketing expenses during the second quarter and first six months of 2021 were $3,287 or 4.9% of total revenue, and $7,910 or 5.8% of total revenue, respectively, compared to $5,695 or 7.2% of total revenue, and $14,515 or 7.5% of total revenue during the second quarter and first six months of 2020, respectively.

Marketing expenses decreased primarily due to the decision to shift to a digital marketing strategy.

Our restaurants recorded an impairment to long-lived assets of $261 and $7,819 in the second quarters of 2021 and 2020, respectively, and $559 and $18,119 in the first six months of 2021 and 2020, respectively.

The 2021 impairments are primarily attributable to Steak n Shake store closures.

The 2020 impairments were connected to dining room closures during the pandemic.

We view our insurance businesses as possessing two activities:

underwriting and investing.

Underwriting decisions are the responsibility of the unit managers, whereas investing decisions are the responsibility of our Chairman and CEO, Sardar Biglari.

Business units are operated under separate local management.

Biglari Holdings’ insurance operations consist of First Guard and Southern Pioneer.

Underwriting results of our insurance operations are summarized below.

Second Quarter First Six Months

2021 2020 2021 2020

Underwriting gain attributable to :

First Guard $ 2,959 $ 2,553 $ 5,090 $ 4,876

Southern Pioneer 701 (496) 1,114 (289)

Pre-tax underwriting gain 3,660 2,057 6,204 4,587

Income tax expense 769 432 1,303 963

Net underwriting gain $ 2,891 $ 1,625 $ 4,901 $ 3,624

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Earnings of our insurance operations are summarized below.

Second Quarter First Six Months

2021 2020 2021 2020

Premiums written $ 13,575 $ 13,321 $ 27,265 $ 22,163

Insurance losses 6,362 6,901 13,383 11,075

Underwriting expenses 3,553 4,363 7,678 6,501

Pre-tax underwriting gain 3,660 2,057 6,204 4,587

Other income and expenses

Investment income and commissions 642 1,100 1,387 1,932

Other income (expenses) 17 (89) (35) (538)

Total other income 659 1,011 1,352 1,394

Earnings before income taxes 4,319 3,068 7,556 5,981

Income tax expense 933 769 1,639 1,366

Contribution to net earnings $ 3,386 $ 2,299 $ 5,917 $ 4,615

Insurance premiums and other on the consolidated statement of earnings includes premiums earned, investment income, other income and commissions.

First Guard is a direct underwriter of commercial truck insurance, selling physical damage and nontrucking liability insurance to truckers.

First Guard’s insurance products are marketed primarily through direct response methods via the internet or by telephone.

First Guard’s cost-efficient direct response marketing methods enable it to be a low-cost insurer.

A summary of First Guard’s underwriting results follows.

Second Quarter First Six Months

2021 2020 2021 2020

Amount % Amount % Amount % Amount %

Premiums written $ 8,225 100.0 % $ 7,275 100.0 % $ 16,302 100.0 % $ 14,690 100.0 %

Insurance losses 3,809 46.3 % 2,974 40.9 % 7,811 47.9 % 6,532 44.5 %

Underwriting expenses 1,457 17.7 % 1,748 24.0 % 3,401 20.9 % 3,282 22.3 %

Total losses and expenses 5,213 64.0 % 4,722 64.9 % 11,212 68.8 % 9,814 66.8 %

Pre-tax underwriting gain $ 3,012 $ 2,553 $ 5,090 $ 4,876

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Southern Pioneer

Southern Pioneer underwrites garage liability insurance, commercial property, as well as homeowners and dwelling fire insurance.

The financial results for Southern Pioneer are from the date of acquisition March 9, 2020.

A summary of Southern Pioneer’s underwriting results follows.

Second Quarter First Six Months

2021 2020 2021 2020

Amount % Amount % Amount % Amount %

Premiums written $ 5,350 100.0 % $ 6,046 100.0 % $ 10,963 100.0 % $ 7,473 100.0 %

Insurance losses 2,553 47.7 % 3,927 65.0 % 5,572 50.8 % 4,543 60.8 %

Underwriting expenses 2,096 39.2 % 2,615 43.3 % 4,277 39.0 % 3,219 43.1 %

Total losses and expenses 4,649 86.9 % 6,542 108.3 % 9,849 89.8 % 7,762 103.9 %

Pre-tax underwriting gain $ 701 $ (496) $ 1,114 $ (289)

Insurance - Investment Income

A summary of net investment income attributable to our insurance operations follows.

Second Quarter First Six Months

2021 2020 2021 2020

Interest, dividends and other investment income:

First Guard $ 13 $ 22 $ 30 $ 171

Southern Pioneer 278 415 427 700

Pre-tax investment income 291 437 457 871

Income tax expense 61 92 96 183

Net investment income $ 230 $ 345 $ 361 $ 688

We consider investment income as a component of our aggregate insurance operating results.

However, we consider investment gains and losses, whether realized or unrealized, as non-operating.

Southern Oil primarily operates oil and natural gas properties offshore in the shallow waters of the Gulf of Mexico.

Earnings for Southern Oil are summarized below.

Second Quarter First Six Months

2021 2020 2021 2020

Oil and gas revenue $ 8,365 $ 2,151 $ 16,957 $ 13,525

Oil and gas production costs 2,494 1,323 4,907 4,399

Depreciation, depletion and accretion 2,191 1,979 4,569 6,847

General and administrative expenses 654 556 1,416 1,516

Earnings before income taxes 3,026 (1,707) 6,065 763

Income tax expense 690 (395) 1,374 (126)

Contribution to net earnings $ 2,336 $ (1,312) $ 4,691 $ 889

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

The COVID-19 pandemic caused oil demand to significantly decrease in early 2020, creating oversupplied markets that resulted in lower commodity prices and margins.

However, crude oil prices increased in mid-2020 in response to the lifting of COVID-19 restrictions.

Uncertainty and unpredictability remain around the extent to which the COVID-19 pandemic will impact our future results.

Media and Licensing

Maxim's business lies principally in media and licensing.

Earnings of our media and licensing operations are summarized below.

Second Quarter First Six Months

2021 2020 2021 2020

Media and licensing revenue $ 709 $ 982 $ 1,832 $ 1,490

Media and licensing costs 389 437 869 943

General and administrative expenses 20 58 40 92

Earnings before income taxes 300 487 923 455

Income tax expense 75 111 218 104

Contribution to net earnings $ 225 $ 376 $ 705 $ 351

We acquired Maxim with the idea of transforming its business model.

The magazine developed the Maxim brand, a franchise we are utilizing to generate nonmagazine revenue, notably through licensing, a cash-generating business related to consumer products, services, and events.

Investment Gains and Investment Partnership Gains

Investment losses net of tax for the second quarter of 2021 were $908 and investment gains net of tax for the first six months of 2021 were $1,506.

Investment gains net of tax were $1,192 during the second quarter and first six months of 2020.

Dividends earned on investments are reported as other income by our insurance companies.

We consider investment income as a component of our aggregate insurance operating results.

However, we consider investment gains and losses, whether realized or unrealized as non-operating.

Earnings (loss) from our investments in partnerships are summarized below.

Second Quarter First Six Months

2021 2020 2021 2020

Investment partnership gains (losses) $ (34,191) $ 59,248 $ 47,575 $ (116,494)

Tax expense (benefit) (7,996) 13,883 11,121 (27,500)

Contribution to net earnings $ (26,195) $ 45,365 $ 36,454 $ (88,994)

Investment partnership gains include gains/losses from changes in market values of underlying investments and dividends earned by the partnerships.

Dividend income has a lower effective tax rate than income from capital gains.

Changes in the market values of investments can be highly volatile.

The investment partnerships hold the Company’s common stock as investments.

The Company’s pro-rata share of its common stock held by the investment partnerships is recorded as treasury stock even though these shares are legally outstanding.

Gains and losses on Company common stock included in the earnings of the partnerships are eliminated.

Investments affect our reported quarterly earnings based on their carrying value.

We do not regard the quarterly or annual fluctuations in our investments to be meaningful in understanding the operating results of our businesses.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Interest Expense

The Company’s interest expense is summarized below.

Second Quarter First Six Months

2021 2020 2021 2020

Interest expense on notes payable $ — $ 2,349 $ 1,121 $ 4,823

Tax benefit — 588 280 1,216

Interest expense net of tax $ — $ 1,761 $ 841 $ 3,607

Steak n Shake’s term loan was scheduled to mature on March 19, 2021.

As of December 31, 2020, $152,506 was outstanding.

The Company repaid Steak n Shake's outstanding balance in full on February 19, 2021.

Corporate and Other

Corporate expenses exclude the activities in the restaurant, media and licensing, insurance, and oil and gas businesses.

Corporate net losses during the second quarter and first six months of 2021 were relatively flat compared to the same period during 2020.

Income tax benefit for the second quarter of 2021 was $6,198 compared to an income tax expense of $14,764 for the second quarter of 2020.

Income tax expense for the first six months of 2021 was $15,818 compared to a benefit of $29,066 for the first six months of 2020.

The variance in income taxes between 2021 and 2020 is attributable to taxes on income generated by the investment partnerships.

Investment partnership pretax gains were $47,575 during the first six months of 2021 compared to pretax losses of $116,494 during the first six months of 2020.

Financial Condition

Consolidated cash and investments are summarized below.

2021 December 31,

Cash and cash equivalents $ 28,212 $ 24,503

Investments 96,094 94,861

Fair value of interest in investment partnerships 551,942 590,926

Total cash and investments 676,248 710,290

portion of Company stock held by investment partnerships (240,064) (171,376)

Carrying value of cash and investments on balance sheet $ 436,184 $ 538,914

Our balance sheet continues to maintain significant liquidity.

Consolidated cash flow activities are summarized below.

First Six Months

Net cash provided by operating activities $ 187,208 $ 98,685

Net cash used in investing activities (32,839) (103,360)

Net cash used in financing activities (153,136) (24,156)

Effect of exchange rate changes on cash (24) (3)

Increase (decrease) in cash, cash equivalents and restricted cash $ 1,209 $ (28,834)

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Cash provided by operating activities was $187,208 during the first six months of 2021 compared to cash provided by operating activities of $98,685 during the first six months of 2020.

The increase in cash provided by operating activities is mainly attributable to distributions from investment partnerships of $158,070 for 2021 and $83,830 for 2020.

Cash provided by operating activities was $211,245 during the first nine months of 2021 compared to cash provided by operating activities of $106,367 during the first nine months of 2020.

The increase in cash provided by operating activities is mainly attributable to distributions from investment partnerships of $172,420 f or 2021 and $97,330 for 2020.

The distributions during 2021 were primarily used to repay Steak n Shake's debt.

Cash used in investing activities during the first six months of 2021 was $32,839 compared to $103,360 during the first six months of 2020.

Cash used in investing activities during the first nine months of 2021 was $55,782 compared to $112,081 during the first nine months of 2020.

Use of cash in investing activities was higher during 2020 primarily due to the acquisition of Southern Pioneer and purchases of limited partner interests.

Capital expenditures increased during 2021 compared to 2020 primarily because of expenditures associated with Steak n Shake's transition to a counter service model.

We intend to meet the working capital needs of our operating subsidiaries principally through anticipated cash flows generated from operations and cash on hand.

22 unchanged sentences

We undertake no obligation to publicly update or revise them, except as may be required by law.

Quantitative and Qualitative Disclosures About Market Risk

The majority of our investments are conducted through investment partnerships which generally hold common stocks.

We also hold marketable securities directly.

A significant decline in the general stock market or in the prices of major investments may produce a large net loss and decrease in our consolidated shareholders’ equity.

Decreases in values of equity investments can have a materially adverse effect on our earnings and on consolidated shareholders’ equity.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis