What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-05 compared with 2022-05-06 · 162 added, 9 removed, 34 unchanged (83% of the section changed)

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

Franchise partner fees were $16,425 during the second quarter of 2022, as compared to $12,383 during the second quarter of 2021.

Franchise partner fees were $32,049 and $20,236 during the first six months of 2022 and 2021, respectively.

As of June 30, 2022, there were 177 franchise partner units, compared to 131 franchise partner units as of June 30, 2021.

For a franchise partner to be awarded a restaurant, he or she must demonstrate the gold standard in service.

The franchise royalties and fees generated by the traditional franchising business were $5,237 during the second quarter of 2022, as compared to $4,594 during the second quarter of 2021.

Franchise royalties and fees during the first six months of 2022 were $10,383 compared to $9,729 during the first six months of 2021.

The cost of food during the second quarter and first six months of 2022 was $11,365, or 30.2% of net sales, and $22,325, or 29.4% of net sales, respectively, as compared to $14,727, or 29.8% of net sales, and $30,281, or 29.0% of net sales, during the second quarter and first six months of 2021, respectively.

The increase in cost of food as a percentage of net sales during 2022 compared to 2021 was attributable to higher commodity costs for Western Sizzlin.

Steak n Shake’s cost of food as a percentage of net sales was unchanged.

Restaurant operating costs during the second quarter of 2022 were $20,350, or 54.0% of net sales, as compared to $22,058, or 44.6% of net sales, in the second quarter of 2021.

Restaurant operating costs during the first six months of 2022 were $40,382, or 53.2% of net sales, as compared to $47,255, or 45.3% of net sales, in the first six months of 2021, respectively.

The increase in restaurant operating costs as a percentage of net sales during 2022 compared to 2021 was primarily related to higher labor costs.

General and administrative costs during the second quarter and first six months of 2022 were $10,121 and $18,771, respectively, compared to $10,481 and $18,161 in the second quarter and first six months of 2021.

The decrease in expenses during the second quarter of 2022 compared to 2021 was primarily because of lower legal and professional fees.

Marketing expenses during the second quarter and first six months of 2022 were $3,087 and $6,831, respectively, as compared $3,287 and $7,910 during the second quarter and first six months of 2021, respectively.

The Company recorded impairment charges of $20 in the second quarter and first six months of 2022.

Impairment charges were $261 and $559 in the second quarter and first six months of 2021, respectively.

Impairments during 2021 are related to underperforming stores.

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.

Our 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

2022 2021 2022 2021

Underwriting gain (loss) attributable to:

First Guard $ 1,714 $ 2,959 $ 2,446 $ 5,090

Southern Pioneer (281) 701 (618) 1,114

Pre-tax underwriting gain 1,433 3,660 1,828 6,204

Income tax expense 301 769 384 1,303

Net underwriting gain $ 1,132 $ 2,891 $ 1,444 $ 4,901

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

2022 2021 2022 2021

Premiums earned $ 15,226 $ 13,575 $ 29,395 $ 27,265

Insurance losses 9,244 6,362 18,832 13,383

Underwriting expenses 4,549 3,553 8,735 7,678

Pre-tax underwriting gain 1,433 3,660 1,828 6,204

Other income and expenses

Investment income 257 291 470 457

Other income (expenses) 741 368 1,497 895

Total other income 998 659 1,967 1,352

Earnings before income taxes 2,431 4,319 3,795 7,556

Income tax expense 572 933 892 1,639

Contribution to net earnings (loss) $ 1,859 $ 3,386 $ 2,903 $ 5,917

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

2022 2021 2022 2021

Amount % Amount % Amount % Amount %

Premiums earned $ 9,015 100.0 % $ 8,225 100.0 % $ 17,746 100.0 % $ 16,302 100.0 %

Insurance losses 5,465 60.6 % 3,809 46.3 % 11,653 65.7 % 7,811 47.9 %

Underwriting expenses 1,836 20.4 % 1,457 17.7 % 3,647 20.6 % 3,401 20.9 %

Total losses and expenses 7,301 81.0 % 5,266 64.0 % 15,300 86.3 % 11,212 68.8 %

Pre-tax underwriting gain $ 1,714 $ 2,959 $ 2,446 $ 5,090

Southern Pioneer

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

A summary of Southern Pioneer’s underwriting results follows.

Second Quarter First Six Months

2022 2021 2022 2021

Amount % Amount % Amount % Amount %

Premiums earned $ 6,211 100.0 % $ 5,350 100.0 % $ 11,649 100.0 % $ 10,963 100.0 %

Insurance losses 3,779 60.8 % 2,553 47.7 % 7,179 61.6 % 5,572 50.8 %

Underwriting expenses 2,713 43.7 % 2,096 39.2 % 5,088 43.7 % 4,277 39.0 %

Total losses and expenses 6,492 104.5 % 4,649 86.9 % 12,267 105.3 % 9,849 89.8 %

Pre-tax underwriting gain (loss) $ (281) $ 701 $ (618) $ 1,114

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

Insurance - Investment Income

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

Second Quarter First Six Months

2022 2021 2022 2021

Interest, dividends and other investment income:

First Guard $ 122 $ 13 $ 196 $ 30

Southern Pioneer 135 278 274 427

Pre-tax investment income 257 291 470 457

Income tax expense 54 61 99 96

Net investment income $ 203 $ 230 $ 371 $ 361

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

2022 2021 2022 2021

Oil and gas revenue $ 14,440 $ 8,365 $ 24,252 $ 16,957

Oil and gas production costs 3,843 2,494 7,662 4,907

Depreciation, depletion and accretion 1,534 2,191 3,053 4,569

General and administrative expenses 642 654 1,195 1,416

Earnings before income taxes 8,421 3,026 12,342 6,065

Income tax expense 2,052 690 3,049 1,374

Contribution to net earnings (loss) $ 6,369 $ 2,336 $ 9,293 $ 4,691

Brand Licensing

Maxim’s business lies principally in licensing and media.

Earnings of operations are summarized below.

Second Quarter First Six Months

2022 2021 2022 2021

Licensing and media revenue $ 1,249 $ 709 $ 1,883 $ 1,832

Licensing and media costs 677 389 1,630 869

General and administrative expenses 71 20 88 40

Earnings before income taxes 501 300 165 923

Income tax expense 126 75 41 218

Contribution to net earnings (loss) $ 375 $ 225 $ 124 $ 705

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.

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

Investment Gains

Investment losses net of tax for the second quarter of 2022 and 2021 were $2,805 and $908, respectively.

Investment losses net of tax for the first six months of 2022 were $2,630 compared to investment gains net of tax for the first six months of 2021 of $1,506.

Dividends earned on investments are reported as investment 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.

Investment Partnership Gains

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

Second Quarter First Six Months

2022 2021 2022 2021

Investment partnership gains (losses) $ (105,241) $ (34,191) $ (111,902) $ 47,575

Tax expense (benefit) (24,894) (7,996) (26,754) 11,121

Contribution to net earnings (loss) $ (80,347) $ (26,195) $ (85,148) $ 36,454

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.

These gains and losses have caused and will continue to cause significant volatility in our periodic earnings.

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 in the Company’s consolidated financial results.

Interest Expense

The Company’s interest expense is summarized below.

Second Quarter First Six Months

2022 2021 2022 2021

Interest expense on notes payable $ — $ — $ — $ 1,121

Tax benefit — — — 280

Interest expense net of tax $ — $ — $ — $ 841

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

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

Corporate and Other

Corporate expenses exclude the activities of the restaurant, insurance, brand licensing, and oil and gas businesses.

Corporate and other net losses during the second quarter and first six months of 2022 were relatively flat compared to the same period in 2021.

Income tax benefit for the second quarter of 2022 was $22,709 compared to $6,198 for the second quarter of 2021.

Income tax benefit for the first six months of 2022 was $22,880 compared to an income tax expense of $15,818 for the first six months of 2021.

The variance in income taxes between 2022 and 2021 is attributable to taxes on income generated by the investment partnerships.

Investment partnership pre-tax losses were $111,902 during the first six months of 2022 compared to pre-tax gains of $47,575 during the first six months of 2021.

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

Financial Condition

Consolidated cash and investments are summarized below.

2022 December 31,

Cash and cash equivalents $ 40,512 $ 42,349

Investments 71,771 83,061

Fair value of interest in investment partnerships 349,339 474,201

Total cash and investments 461,622 599,611

portion of Company stock held by investment partnerships (197,586) (223,802)

Carrying value of cash and investments on balance sheet $ 264,036 $ 375,809

Unrealized gains/losses of Biglari Holdings’ stock held by the investment partnerships are eliminated in the Company’s consolidated financial results.

Our balance sheet continues to maintain significant liquidity.

Consolidated cash flow activities are summarized below.

First Quarter

First Six Months

Net cash provided by operating activities $ 34,204 $ 187,208

2 unchanged sentences

Effect of exchange rate changes on cash (88) (24)

Increase in cash, cash equivalents and restricted cash $ 3,428 $ 3,935

Increase (decrease) in cash, cash equivalents and restricted cash $ (1,837) $ 1,209

Cash provided by operating activities was $34,204 during 2022 compared to $187,208 in 2021.

2 unchanged sentences

Cash used in investing activities during 2022 was $32,819 compared to $32,839 in 2021.

Capital expenditures were $1,846 higher in 2022 compared to 2021.

The increase in capital expenditures relates to Steak n Shake’s continued transformation to counter service.

Proceeds from property disposals were $2,640 higher during 2021 compared to 2022.

Purchases of investments, net of maturities and sales, were $2,811 higher during 2022 compared to 2021.

Cash used in financing activities was $150,997 higher in 2021 compared to 2022.

The Company repaid Steak n Shake’s debt and made principal payments on direct financing lease obligations of $152,561 during 2021.

Capital expenditures were lower during 2022 by $10,425 compared to 2021 as Steak n Shake incurred higher capital expenditures during 2021 for its transition to a self-service model.

The lower capital expenditures were primarily offset by higher purchases of limited partner interests of $14,586 during 2022.

Cash used in financing activities was $3,134 in 2022 compared to $153,136 in 2021.

The Company repaid Steak n Shake’s debt during 2021.

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

4 unchanged sentences

The Company repaid the balance of Steak n Shake’s term facility on February 19, 2021.

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

Critical Accounting Policies

6 unchanged sentences

No recently issued accounting pronouncements were applicable for this Quarterly Report on Form 10-Q.

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

Cautionary Note Regarding Forward-Looking Statements

8 unchanged sentences

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