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Item 2. Management’s Discussion and Analysis

2023-08-04 compared with 2023-05-05 · 13 added, 272 removed, 32 unchanged (90% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(dollars in thousands except per share data)

Biglari Holdings Inc.

is a holding company owning subsidiaries engaged in a number of diverse business activities, including property and casualty insurance, licensing and media, restaurants, and oil and gas.

Biglari Holdings is founded and led by Sardar Biglari, Chairman and Chief Executive Officer of the Company.

Biglari Holdings’ management system combines decentralized operations with centralized financial decision-making.

Operating decisions for the various business units are made by their respective managers.

All major investment and capital allocation decisions are made for the Company and its subsidiaries by Mr.

As of March 31, 2023, Mr.

Biglari beneficially owns shares of the Company that represent approximately 66.3% of the economic interest and 70.4% of the voting interest.

On September 14, 2022, the Company purchased Series A Preferred Stock (the “Preferred Shares”) of Abraxas Petroleum Corporation for a purchase price of $80 million.

On October 26, 2022, the Company exchanged the Preferred Shares for 90% of the outstanding common stock of Abraxas Petroleum.

Net earnings (loss) attributable to Biglari Holdings Inc.

shareholders are disaggregated in the table that follows.

Amounts are recorded after deducting income taxes.

First Quarter

Operating businesses:

Restaurant $ 5,840 $ 3,262

Insurance 2,169 1,044

Oil and gas 1,670 2,924

Brand licensing 91 (251)

Interest expense (129) —

Corporate and other (2,998) (2,651)

Total operating businesses 6,643 4,328

Investment partnership gains (losses) 56,029 (4,801)

Investment gains 2,865 175

Net earnings (loss) 65,537 (298)

Earnings attributable to noncontrolling interest 651 —

Net earnings (loss) attributable to Biglari Holdings Inc.

shareholders $ 64,886 $ (298)

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

Our restaurant businesses, which include Steak n Shake and Western Sizzlin, comprise 532 company-operated and franchise restaurants as of March 31, 2023.

Steak n Shake Western Sizzlin

operated Franchise

Partner Traditional

Franchise Company-

operated Franchise Total

Total stores as of December 31, 2022

177 175 154 3 36 545

Corporate stores transitioned (3) 3 — — — —

Net restaurants opened (closed) (2) — (11) — — (13)

Total stores as of March 31, 2023

172 178 143 3 36 532

Total stores as of December 31, 2021

199 159 178 3 38 577

Corporate stores transitioned (12) 12 — — — —

Net restaurants opened (closed) (3) — 1 — — (2)

Total stores as of March 31, 2022

184 171 179 3 38 575

As of March 31, 2023, 36 of the 172 company-operated Steak n Shake stores were closed.

Steak n Shake has contracted to sell seven of the 36 closed stores.

An additional seventeen closed stores are listed with brokers for lease or sale.

Steak n Shake plans to refranchise the remaining closed company-operated restaurants.

During the first quarter of 2023, Steak n Shake reopened two stores and sold one property;

all were closed as of December 31, 2022.

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

Restaurant operations are summarized below.

First Quarter

Net sales $ 36,894 $ 38,216

Franchise partner fees 17,912 15,624

Franchise royalties and fees 4,258 5,146

Other revenue 2,065 861

Total revenue 61,129 59,847

Restaurant cost of sales

Cost of food 10,448 28.3 % 10,960 28.7 %

Restaurant operating costs 18,457 50.0 % 20,032 52.4 %

Occupancy costs 3,833 10.4 % 4,360 11.4 %

Total cost of sales 32,738 35,352

Selling, general and administrative

General and administrative 10,463 17.1 % 8,650 14.5 %

Marketing 2,953 4.8 % 3,744 6.3 %

Other expenses (income) (1,612) (2.6) % 45 0.1 %

Total selling, general and administrative 11,804 19.3 % 12,439 20.8 %

Impairments (776) —

Depreciation and amortization (6,707) (6,214)

Interest on finance leases and obligations (1,307) (1,412)

Earnings (loss) before income taxes 7,797 4,430

Income tax expense (benefit) 1,957 1,168

Contribution to net earnings $ 5,840 $ 3,262

Cost of food, restaurant operating costs, and occupancy costs are expressed as a percentage of net sales.

General and administrative, marketing and other expenses are expressed as a percentage of total revenue.

Net sales for 2023 were $36,894, representing a decrease of $1,322 or 3.5% compared to 2022.

The decrease in revenue of company-owned 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 restaurant’s 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 as we transition from company-operated units to franchise partner units.

Our franchise partner fees were $17,912 during the first quarter of 2023, as compared to $15,624 during the first quarter of 2022.

As of March 31, 2023, there were 178 franchise partner units, compared to 171 franchise partner units as of March 31, 2022.

Included in franchise partner fees were $5,575 and $4,774 of rental income during the first quarter of 2023 and 2022, respectively.

Franchise partners rent buildings and equipment from Steak n Shake.

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

The franchise royalties and fees generated by the traditional franchising business were $4,258 during the first quarter of 2023, as compared to $5,146 during the first quarter of 2022.

The decrease in franchise royalties and fees was primarily because of reduced marketing by franchisees.

There were 143 Steak n Shake traditional units open on March 31, 2023, as compared to 179 units open on March 31, 2022.

The cost of food at company-operated units during the first quarter of 2023 was $10,448 or 28.3% of net sales, as compared to $10,960 or 28.7% of net sales during the first quarter of 2022.

The cost of food expressed as a percentage of net sales remained relatively consistent.

The operating costs at company-operated restaurants during the first quarter of 2023 were $18,457 or 50.0% of net sales, as compared to $20,032 or 52.4% of net sales during the first quarter of 2022.

The decrease in operating costs as a percentage of net sales was mainly attributable to lower labor costs.

General and administrative expenses during the first quarter of 2023 were $10,463 or 17.1% of total revenue, as compared to $8,650 or 14.5% of total revenue during the first quarter of 2022.

The increase in general and administrative expenses was mainly attributable to increased support for franchise partnerships.

Marketing expense decreased by $791 during the first quarter of 2023 compared to the first quarter of 2022.

The decrease was primarily attributable to reduced marketing by traditional franchisees.

During the first quarter of 2023, Steak n Shake sold the property of a former company-operated restaurant for a gain of $1,431.

The Company recorded impairment charges of $776 in the first quarter of 2023 related to underperforming stores.

There were no impairments in the first quarter of 2022.

Depreciation and amortization expense was $6,707 during 2023 versus $6,214 during 2022.

The year-over-year increase is primarily attributable to higher capital expenditures incurred in 2022 and 2021.

Interest on obligations under leases was $1,307 during 2023 versus $1,412 during 2022.

The year-over-year decrease in interest expense is primarily attributable to the maturity and retirement of lease obligations.

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.

First Quarter

Underwriting gain attributable to:

First Guard $ 1,862 $ 732

Southern Pioneer (111) (337)

Pre-tax underwriting gain 1,751 395

Income tax expense 368 83

Net underwriting gain $ 1,383 $ 312

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

Earnings of our insurance operations are summarized below.

First Quarter

Premiums earned $ 14,764 $ 14,169

Insurance losses 8,596 9,588

Underwriting expenses 4,417 4,186

Pre-tax underwriting gain 1,751 395

Other income and expenses

Investment income 585 213

Other income (expenses) 451 756

Total other income 1,036 969

Earnings before income taxes 2,787 1,364

Income tax expense 618 320

Contribution to net earnings $ 2,169 $ 1,044

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.

First Quarter

Amount % Amount %

Premiums earned $ 8,899 100.0 % $ 8,731 100.0 %

Insurance losses 5,244 58.9 % 6,188 70.9 %

Underwriting expenses 1,793 20.1 % 1,811 20.7 %

Total losses and expenses 7,037 79.0 % 7,999 91.6 %

Pretax underwriting gain $ 1,862 $ 732

First Guard’s ratio of losses and loss adjustment expenses to premiums earned was 58.9% during the first quarter of 2023 as compared to 70.9% during the first quarter of 2022.

First Guard’s underwriting results in 2023 were in line with its historical performance despite cost inflation in property and physical damage claims, which began to accelerate in 2022.

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

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.

First Quarter

Amount % Amount %

Premiums earned $ 5,865 100.0 % $ 5,438 100.0 %

Insurance losses 3,352 57.2 % 3,400 62.5 %

Underwriting expenses 2,624 44.7 % 2,375 43.7 %

Total losses and expenses 5,976 101.9 % 5,775 106.2 %

Pretax underwriting gain (loss) $ (111) $ (337)

Southern Pioneer’s ratio of losses and loss adjustment expenses to premiums earned was 57.2% during the first quarter of 2023 as compared to 62.5% during the first quarter of 2022.

Southern Pioneer’s underwriting losses were primarily attributable to a higher expense ratio, an increase caused by information technology projects related to the implementation of a new policy administration system.

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

First Quarter

Interest, dividends and other investment income:

First Guard $ 387 $ 74

Southern Pioneer 198 139

Pre-tax investment income 585 213

Income tax expense 123 45

Net investment income $ 462 $ 168

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.

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

A summary of revenues and earnings of our oil and gas operations follows.

First Quarter

Oil and gas revenues $ 12,223 $ 9,812

Oil and gas production costs 5,471 3,819

Depreciation, depletion and accretion 2,850 1,519

General and administrative expenses 1,799 553

Earnings before income taxes 2,103 3,921

Income tax expense 433 997

Contribution to net earnings $ 1,670 $ 2,924

Our oil and gas business is highly dependent on oil and natural gas prices.

The average West Texas Intermediate price per barrel for the first quarter of 2023 was approximately $76.11 as compared to approximately $94.82 in the first quarter of 2022.

It is expected that the prices of oil and gas commodities will remain volatile, which will be reflected in our financial results.

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.

First Quarter

Oil and gas revenues $ 4,971 $ 9,812

Oil and gas production costs 2,340 3,819

Depreciation, depletion and accretion 1,184 1,519

General and administrative expenses 553 553

Earnings before income taxes 894 3,921

Income tax expense 155 997

Contribution to net earnings $ 739 $ 2,924

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

Abraxas Petroleum

Abraxas Petroleum operates oil and gas properties in the Permian Basin of West Texas.

Earnings for Abraxas Petroleum are summarized below.

First Quarter

Oil and gas revenues $ 7,252

Oil and gas production costs 3,131

Depreciation, depletion and accretion 1,666

General and administrative expenses 1,246

Earnings before income taxes 1,209

Income tax expense 278

Contribution to net earnings $ 931

Brand Licensing

Maxim’s business lies principally in licensing and media.

Earnings of operations are summarized below.

First Quarter

Licensing and media revenues $ 595 $ 634

Licensing and media costs 452 953

General and administrative expenses 21 17

Earnings before income taxes 122 (336)

Income tax expense (benefit) 31 (85)

Contribution to net earnings $ 91 $ (251)

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 gains net of tax for the first quarter of 2023 and 2022 were $2,865 and $175, respectively.

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.

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

First Quarter

Investment partnership gains (losses) $ 72,588 $ (6,661)

Tax expense (benefit) 16,559 (1,860)

Contribution to net earnings $ 56,029 $ (4,801)

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

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.

Investment gains and losses in 2023 and 2022 were mainly derived from our investments in equity securities and included unrealized gains and losses from market price changes during the period.

We believe that investment and derivative gains/losses are generally meaningless for analytical purposes in understanding our reported quarterly and annual results.

Interest Expense

The Company’s interest expense is summarized below.

First Quarter

Interest expense on line of credit $ 167 $ —

Tax benefit 38 —

Interest expense net of tax $ 129 $ —

On September 13, 2022, Biglari Holdings entered into a line of credit in an aggregate principal amount of up to $30,000.

The balance of the line of credit was $6,500 and $10,000 on March 31, 2023 and December 31, 2022, respectively.

Our interest rate was 7.3% on March 31, 2023.

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 first quarter of 2023 were relatively consistent to the same period during 2022.

Income tax expense for the first quarter of 2023 was $19,738 compared to an income tax benefit of $171 for the first quarter of 2022.

The variance in income taxes between 2023 and 2022 is attributable to taxes on income generated by the investment partnerships.

Investment partnership pretax gains were $72,588 during the first quarter of 2023 compared to pretax losses of $6,661 during the first quarter of 2022.

Financial Condition

Consolidated cash and investments are summarized below.

March 31, 2023 December 31,

Cash and cash equivalents $ 39,363 $ 37,467

Investments 79,652 69,466

Fair value of interest in investment partnerships 507,499 383,004

Total cash and investments 626,514 489,937

portion of Company stock held by investment partnerships (276,656) (227,210)

Carrying value of cash and investments on balance sheet $ 349,858 $ 262,727

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

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

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 $ 31,518 $ 34,204

2 unchanged sentences

Effect of exchange rate changes on cash 98 (88)

Increase in cash, cash equivalents and restricted cash $ 2,146 $ 3,428

The increase in cash during 2023 was $2,146 compared to $3,428 during 2022.

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.

Decrease in cash, cash equivalents and restricted cash $ (6,336) $ (1,837)

In 2023, cash from operating activities decreased by $2,686 as compared to 2022.

The change was primarily attributable to distributions from investment partnerships that occurred in 2022.

Net cash used in investing activities decreased during 2023 by $4,345 as compared to 2022.

Capital expenditures were $5,856 less in 2023 as compared to 2022;

however, proceeds from sales of assets were $9,561 more in 2023 as compared to 2022.

Offsetting these increases of cash were payments for purchases of noncontrolling interest of $5,387 in 2023 and increased investments, net of maturities and sales of $5,685 in 2023 as compared to 2022.

The change in cash used in financing activities was primarily due to net payments on the Company’s line of credit of $6,400 during 2023.

Biglari Holdings Line of Credit

2 unchanged sentences

The line of credit includes customary covenants, as well as financial maintenance covenants.

The balance on the line of credit on March 31, 2023 was $6,500.

The line of credit was paid in full in April 2023.

As of June 30, 2023, we were in compliance with all covenants.

The balance of the line of credit on June 30, 2023 was $3,600 and $10,000 on December 31, 2022.

On June 30, 2023, the interest rate was 7.8%.

Western Sizzlin Revolver

Western Sizzlin’s available line of credit is $500.

As of March 31, 2023, Western Sizzlin had no debt outstanding on its revolver.

As of June 30, 2023 and December 31, 2022, Western Sizzlin had no debt outstanding on its revolver.

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

10 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