Biglari Holdings Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Franchise partner fees were $15,880 during the third quarter of 2022, as compared to $11,508 during the third quarter of 2021. Franchise partner fees were $47,929 and $31,744 during the first nine months of 2022 and 2021, respectively. As of September 30, 2022, there were 171 franchise partner units, compared to 140 franchise partner units as of September 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 $5,089 during the third quarter of 2022, as compared to $4,865 during the third quarter of 2021. Franchise royalties and fees during the first nine months of 2022 were $15,472 compared to $14,594 during the first nine months of 2021. The cost of food as a percentage of net sales during the third quarter and first nine months of 2022 was 30.3% and 29.7%, respectively, as compared to 31.3% and 29.7% of net sales during the third quarter and first nine months of 2021, respectively. Cost of food as a percentage of net sales were lower during the third quarter of 2022 compared to 2021 primarily because of higher menu prices. Restaurant operating costs as a percentage of net sales during the third quarter of 2022 were 55.4%, as compared to 58.4% of net sales in the third quarter of 2021. Restaurant operating costs during the first nine months of 2022 were 53.9% of net sales, as compared to 49.1% of net sales in 2021. The increase during the first nine months was primarily the result of higher wages. Selling, general and administrative costs during the third quarter and first nine months of 2022 were $11,489 and $36,775, respectively, compared to $12,889 and $39,894 in the third quarter and first nine months of 2021, respectively. Steak n Shake recorded gains on the disposal of assets of $1,084 and $1,749 in the third quarter and first nine months of 2022, respectively. The Company recorded no impairment charges in the third quarter and $20 in the first nine months of 2022. The Company recorded no impairment charges in the third quarter and $559 in the first nine 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. Third Quarter First Nine Months 2022 2021 2022 2021 Underwriting gain (loss) attributable to: First Guard $ 2,354 $ 2,832 $ 4,800 $ 7,922 Southern Pioneer (483) 397 (1,101) 1,511 Pre-tax underwriting gain 1,871 3,229 3,699 9,433 Income tax expense 392 681 776 1,984 Net underwriting gain $ 1,479 $ 2,548 $ 2,923 $ 7,449 23 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. Third Quarter First Nine Months 2022 2021 2022 2021 Premiums earned $ 15,116 $ 13,901 $ 44,511 $ 41,166 Insurance losses 8,814 6,657 27,646 20,040 Underwriting expenses 4,431 4,015 13,166 11,693 Pre-tax underwriting gain 1,871 3,229 3,699 9,433 Other income and expenses Investment income 362 195 832 652 Other income (expenses) 859 418 2,356 1,313 Total other income 1,221 613 3,188 1,965 Earnings before income taxes 3,092 3,842 6,887 11,398 Income tax expense 703 857 1,595 2,496 Contribution to net earnings (loss) $ 2,389 $ 2,985 $ 5,292 $ 8,902 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. Third Quarter First Nine Months 2022 2021 2022 2021 Amount % Amount % Amount % Amount % Premiums earned $ 9,112 100.0 % $ 8,458 100.0 % $ 26,858 100.0 % $ 24,760 100.0 % Insurance losses 4,815 52.8 % 3,935 46.5 % 16,468 61.3 % 11,746 47.4 % Underwriting expenses 1,943 21.3 % 1,691 20.0 % 5,590 20.8 % 5,092 20.6 % Total losses and expenses 6,758 74.1 % 5,626 66.5 % 22,058 82.1 % 16,838 68.0 % Pre-tax underwriting gain $ 2,354 $ 2,832 $ 4,800 $ 7,922 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. Third Quarter First Nine Months 2022 2021 2022 2021 Amount % Amount % Amount % Amount % Premiums earned $ 6,004 100.0 % $ 5,443 100.0 % $ 17,653 100.0 % $ 16,406 100.0 % Insurance losses 3,999 66.6 % 2,722 50.0 % 11,178 63.3 % 8,294 50.6 % Underwriting expenses 2,488 41.4 % 2,324 42.7 % 7,576 42.9 % 6,601 40.2 % Total losses and expenses 6,487 108.0 % 5,046 92.7 % 18,754 106.2 % 14,895 90.8 % Pre-tax underwriting gain (loss) $ (483) $ 397 $ (1,101) $ 1,511 24 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. Third Quarter First Nine Months 2022 2021 2022 2021 Interest, dividends and other investment income: First Guard $ 202 $ 54 $ 398 $ 84 Southern Pioneer 160 141 434 568 Pre-tax investment income 362 195 832 652 Income tax expense 76 41 175 137 Net investment income $ 286 $ 154 $ 657 $ 515 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 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. Third Quarter First Nine Months 2022 2021 2022 2021 Oil and gas revenue $ 12,688 $ 7,353 $ 36,940 $ 24,310 Oil and gas production costs 3,484 2,050 11,146 6,957 Depreciation, depletion and accretion 1,873 1,717 4,926 6,286 General and administrative expenses 536 604 1,731 2,020 Earnings before income taxes 6,795 2,982 19,137 9,047 Income tax expense 1,564 657 4,613 2,031 Contribution to net earnings $ 5,231 $ 2,325 $ 14,524 $ 7,016 Abraxas Petroleum Abraxas Petroleum operates oil and gas properties in the Permian Basin. Earnings for Abraxas Petroleum from the date of acquisition on September 14, 2022 are summarized below. Third Quarter 2022 Oil and gas revenue $ 1,692 Oil and gas production costs 606 Depreciation, depletion and accretion 360 General and administrative expenses 280 Earnings before income taxes 446 Income tax expense 103 Contribution to net earnings 343 Earnings attributable to noncontrolling interests 34 Net earnings attributable to Biglari Holdings Inc. shareholders $ 309 25 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Brand Licensing Maxim’s business lies principally in licensing and media. Earnings of operations are summarized below. Third Quarter First Nine Months 2022 2021 2022 2021 Licensing and media revenue $ 1,905 $ 863 $ 3,788 $ 2,695 Licensing and media costs 345 880 1,975 1,749 General and administrative expenses 26 39 114 79 Earnings (loss) before income taxes 1,534 (56) 1,699 867 Income tax expense (benefit) 384 (13) 425 205 Contribution to net earnings (loss) $ 1,150 $ (43) $ 1,274 $ 662 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 Investment losses net of tax for the third quarter of 2022 were $657 compared to investment gains net of tax for the third quarter of 2021 of $3,390. Investment losses net of tax for the first nine months of 2022 were $3,287 compared to investment gains net of tax for the first nine months of 2021 of $4,896. 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. Third Quarter First Nine Months 2022 2021 2022 2021 Investment partnership gains (losses) $ 29,658 $ (20,231) $ (82,244) $ 27,344 Tax expense (benefit) 6,601 (4,946) (20,153) 6,175 Contribution to net earnings (loss) $ 23,057 $ (15,285) $ (62,091) $ 21,169 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. 26 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Interest Expense The Company’s interest expense is summarized below. Third Quarter First Nine Months 2022 2021 2022 2021 Interest expense on notes payable $ 67 $ — $ 67 $ 1,121 Tax benefit 15 — 15 280 Interest expense net of tax $ 52 $ — $ 52 $ 841 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 third quarter and first nine months of 2022 were relatively flat compared to the same period in 2021. Income Taxes Income tax expense for the third quarter of 2022 was $9,598 compared to an income tax benefit of $4,274 for the third quarter of 2021. Income tax benefit for the first nine months of 2022 was $13,282 compared to an income tax expense of $11,544 for the first nine 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 gains were $29,658 during the third quarter of 2022 compared to pre-tax losses of $20,231 during the third quarter of 2021. Investment partnership pre-tax losses were $82,244 during the first nine months of 2022 compared to pre-tax gains of $27,344 during the first nine months of 2021. Financial Condition Consolidated cash and investments are summarized below. September 30, 2022 December 31, 2021 Cash and cash equivalents $ 64,842 $ 42,349 Investments 70,032 83,061 Fair value of interest in investment partnerships 338,314 474,201 Total cash and investments 473,188 599,611 Less: portion of Company stock held by investment partnerships (193,450) (223,802) Carrying value of cash and investments on balance sheet $ 279,738 $ 375,809 Unrealized gains/losses of Biglari Holdings’ stock held by the investment partnerships are eliminated in the Company’s consolidated financial results. 27 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity Our balance sheet continues to maintain significant liquidity. Consolidated cash flow activities are summarized below. First Nine Months 2022 2021 Net cash provided by operating activities $ 99,754 $ 211,245 Net cash used in investing activities (102,464) (55,782) Net cash provided by (used in) financing activities 25,353 (154,586) Effect of exchange rate changes on cash (150) (85) Increase in cash, cash equivalents and restricted cash $ 22,493 $ 792 Cash provided by operating activities was $99,754 during 2022 compared to $211,245 in 2021. The decrease in cash provided by operating activities is mainly attributable to distributions from investment partnerships of $51,200 f or 2022 and $172,420 for 2021. The distributions during 2021 were primarily used to repay Steak n Shake’s debt. Cash used in investing activities during 2022 was $102,464 compared to $55,782 in 2021. Capital expenditures were lower during 2022 by $23,049 compared to 2021. Steak n Shake incurred higher capital expenditures during 2021 for its transition to a self-service model. Cash provided by financing activities was $25,353 in 2022 compared to $154,586 used 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. Biglari Holdings Line of Credit On September 13, 2022, Biglari Holdings entered into a line of credit in an aggregate principal amount of up to $30,000. The line of credit will be available on a revolving basis until September 12, 2024. The line of credit includes customary covenants, as well as financial maintenance covenants. As of September 30, 2022, we were in compliance with all covenants. The balance of the line of credit on September 30, 2022 was $30,000. 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. 28 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.