Biglari Holdings Inc. 10-Q

Item 2. 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. Insurance 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 20 Table of Contents Item 2. 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 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 21 Table of Contents Item 2. 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. Oil and Gas 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. 22 Table of Contents Item 2. 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 Taxes 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. 23 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Financial Condition Consolidated cash and investments are summarized below. June 30, 2022 December 31, 2021 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 Less: 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. Liquidity Our balance sheet continues to maintain significant liquidity. Consolidated cash flow activities are summarized below. First Six Months 2022 2021 Net cash provided by operating activities $ 34,204 $ 187,208 Net cash used in investing activities (32,819) (32,839) Net cash used in financing activities (3,134) (153,136) Effect of exchange rate changes on cash (88) (24) 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. The decrease in cash provided by operating activities is mainly attributable to distributions from investment partnerships of $4,500 f or 2022 and $158,070 for 2021. The distributions during 2021 were primarily used to repay Steak n Shake’s debt. Cash used in investing activities during 2022 was $32,819 compared to $32,839 in 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. We continually review available financing alternatives. Steak n Shake Credit Facility On March 19, 2014, Steak n Shake and its subsidiaries entered into a credit agreement which provided for a senior secured term loan facility in an aggregate principal amount of $220,000. The term loan was scheduled to mature on March 19, 2021. The Company repaid the balance of Steak n Shake’s term facility on February 19, 2021. 24 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Critical Accounting Policies Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Certain accounting policies require management to make estimates and judgments concerning transactions that will be settled several years in the future. Amounts recognized in our consolidated financial statements from such estimates are necessarily based on numerous assumptions involving varying and potentially significant degrees of judgment and uncertainty. Accordingly, the amounts currently reflected in our consolidated financial statements will likely increase or decrease in the future as additional information becomes available. There have been no material changes to critical accounting policies previously disclosed in our annual report on Form 10-K for the year ended December 31, 2021. Recently Issued Accounting Pronouncements No recently issued accounting pronouncements were applicable for this Quarterly Report on Form 10-Q. Cautionary Note Regarding Forward-Looking Statements This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In general, forward-looking statements include estimates of future revenues, cash flows, capital expenditures, or other financial items, and assumptions underlying any of the foregoing. Forward-looking statements reflect management’s current expectations regarding future events and use words such as “anticipate,” “believe,” “expect,” “may,” and other similar terminology. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. Investors should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. These forward-looking statements are all based on currently available operating, financial, and competitive information and are subject to various risks and uncertainties. Our actual future results and trends may differ materially depending on a variety of factors, many beyond our control, including, but not limited to, the risks and uncertainties described in Item 1A, Risk Factors of our annual report on Form 10-K and Item 1A of this report. We undertake no obligation to publicly update or revise them, except as may be required by law.