What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-26 compared with 2023-02-27 · 90 added, 83 removed, 294 unchanged (37% of the section changed)

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Business Acquisitions

On September 14, 2022, the Company purchased 685,505 shares of Series A Preferred Stock (the “Preferred Shares”) of Abraxas Petroleum Corporation (“Abraxas Petroleum”) for a purchase price of $80,000.

On September 14, 2022, the Company purchased Preferred Shares of Abraxas Petroleum Corporation (“Abraxas Petroleum”) for $80,000.

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

On June 14, 2023, the remaining 10% of the outstanding common stock of Abraxas Petroleum was acquired for $5,387.

The Company used working capital including its line of credit to fund the purchase of the Preferred Shares.

Abraxas Petroleum operates oil and natural gas properties in the Permian Basin.

The preliminary purchase price allocation includes $70,200 of oil and gas properties, cash of $21,726, and liabilities, net of other assets, of $11,926.

The Company’s financial results include the results of Abraxas Petroleum from the acquisition date to the end of the calendar year.

The revenues and operating results for Abraxas Petroleum were not significant to the Company.

On March 9, 2020, Biglari Holdings acquired the stock of Southern Pioneer Property & Casualty Insurance Company and its affiliated agency, Southern Pioneer Insurance Agency, Inc.

(collectively “Southern Pioneer”).

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

The Company’s financial results include the results of Southern Pioneer from the date of acquisition.

The purchase price allocation included $70,200 of oil and gas properties, cash of $21,726, and liabilities, net of other assets, of $11,926.

The Company’s financial results include the results of Abraxas Petroleum from the initial acquisition date to the end of the calendar year.

Discussion of Operations

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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.

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

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

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operated Franchise Total

Stores open on December 31, 2019 368 29 213 4 48 662

Stores on December 31, 2020 276 86 194 3 39 598

Corporate stores transitioned (73) 73 — — — —

Net restaurants opened (closed) (4) — (16) — (1) (21)

Stores open on December 31, 2020 276 86 194 3 39 598

Stores on December 31, 2021 199 159 178 3 38 577

Corporate stores transitioned (16) 16 — — — —

Net restaurants opened (closed) (6) — (24) — (2) (32)

Stores open on December 31, 2021 199 159 178 3 38 577

Stores on December 31, 2022 177 175 154 3 36 545

Corporate stores transitioned (6) 7 (1) — — —

Net restaurants opened (closed) (23) (1) (25) — (4) (53)

Stores open on December 31, 2022 177 175 154 3 36 545

Stores on December 31, 2023 148 181 128 3 32 492

As of December 31, 2023, 17 of the 148 company-operated Steak n Shake stores were closed.

We plan to refranchise a majority of our closed company-operated restaurants.

Steak n Shake plans to sell or lease 10 of the 17 locations and refranchise the balance.

Management’s Discussion and Analysis (continued)

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Cost of food 44,993 29.5 % 44,461 29.8 % 55,315 29.4 %

Restaurant operating costs 79,921 53.6 % 92,543 49.2 % 137,574 44.9 %

Occupancy costs 15,882 10.6 % 19,633 10.4 % 20,383 6.6 %

Labor costs 47,090 30.9 % 50,524 33.9 % 58,159 30.9 %

Occupancy and other 45,903 30.1 % 45,279 30.4 % 54,017 28.7 %

Total cost of sales 137,986 140,264 167,491

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Interest on finance leases and obligations 5,114 5,493 6,039

Earnings (loss) before income taxes 12,962 14,455 (5,352)

Income tax expense (benefit) 3,579 3,220 (391)

Earnings before income taxes 27,963 12,962 14,455

Income tax expense 6,132 3,579 3,220

Contribution to net earnings $ 21,831 $ 9,383 $ 11,235

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

Cost of food, labor, and occupancy and other costs are expressed as a percentage of net sales.

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

The COVID-19 pandemic adversely affected our restaurant operations and financial results.

Our restaurants were required to close their dining rooms during the first quarter of 2020.

The majority of Steak n Shake’s dining rooms remained closed through the end of 2020 but reopened during 2021, and in doing so implemented a self-service model.

Net sales during 2023 were $152,545 as compared to $149,184 during 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.

Management’s Discussion and Analysis (continued)

To better convey the underlying economics of the franchise partnership model, the table below shows the average unit sales, the cost of food, and the labor costs of franchise partners.

The average was based on 137 comparable franchise partner units, out of a total of 175.

To be included as a comparable franchise partner unit, a unit had to be operated by a franchise partner for all of 2022, and had to be open in 2021 as either a company-operated or a franchise partner unit.

Net sales $ 1,819 $ 1,595

Cost of food 502 27.6 % 448 28.1 %

Labor costs 500 27.5 % 435 27.3 %

Our franchise partner fees were $63,853 during 2022 as compared to $55,641 during 2021.

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 decline as we transition from company-operated units to franchise partner units.

Fees generated by our franchise partners were $72,552 during 2023 as compared to $63,853 during 2022.

As of December 31, 2023, there were 181 franchise partner units as compared to 175 franchise partner units as of December 31, 2022.

Included in franchise partner fees were $20,426 and $15,483 of rental income during 2022 and 2021, respectively.

Included in the franchise partner fees were $22,687 and $20,426 of rental income during 2023 and 2022, respectively.

Franchise partners rent buildings and equipment from Steak n Shake.

Management’s Discussion and Analysis (continued)

The franchise royalties and fees generated by the traditional franchising business were $16,443 during 2023 as compared to $19,678 during 2022.

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There were 160 traditional units open on December 31, 2023, as compared to 190 units open on December 31, 2022.

Other revenue in 2022 was $8,853 as compared to $6,000 in 2021.

The increase was primarily a result of gift card breakage, as our restaurants have seen fewer gift card redemptions since the onset of the pandemic.

The cost of food at company-operated units in 2023 was $44,993, or 29.5% of net sales as compared to $44,461, or 29.8% of net sales in 2022.

The decreases in the cost of food and operating costs are mainly attributable to the transitioning of company-operated units to franchise partner units.

The cost of food expressed as a percentage of net sales remained consistent with 2021.

The operating costs at company-operated restaurants during 2022 were $79,921, or 53.6% of net sales as compared to $92,543, or 49.2% of net sales in 2021.

As we transition to franchise partner units, the remaining company-operated units generate lower average unit volumes and correspondingly higher operating costs (including higher wages) as a percentage of net sales.

Selling, general and administrative expenses during 2022 were $51,833, or 21.5% of total revenue as compared to $57,186, or 21.1% of total revenue during 2021.

Selling, general and administrative expenses decreased during 2022 as compared to 2021 primarily because of lower professional costs.

Asset impairments decreased $1,115 during 2022 as compared to 2021.

Higher asset impairments were recorded in 2021 primarily because a large number of underperforming stores were affected by the pandemic.

Depreciation and amortization expense increased $6,012 during 2022 as compared to 2021.

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

The cost of food expressed as a percentage of net sales in 2023 remained consistent with 2022.

The labor costs at company-operated restaurants during 2023 were $47,090, or 30.9% of net sales as compared to $50,524, or 33.9% of net sales in 2022.

The 3-percentage-point decrease in costs was primarily attributable to a 2.7-percentage-point decrease in Steak n Shake’s labor costs as a result of a gain in productivity.

General and administrative expenses during 2023 were $44,120, or 17.6% of total revenue as compared to $40,206, or 16.6% of total revenue during 2022.

General and administrative expenses increased during 2023 as compared to 2022 primarily because of higher salaries and wages.

An increase in overall personnel and additional franchise partner training accounted for much of the increase in general and administrative expenses.

Other income increased during 2023 compared to 2022 primarily because of gains on the sale of real estate.

Interest on obligations under leases was $5,114 during 2023 versus $5,493 during 2022.

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

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

To better convey the performance of the franchise partnership model, the table below shows the underlying sales, cost of food, labor costs, and other restaurant costs of the franchise partners.

We believe the franchise partner information is useful to readers, as they have a direct effect on Steak n Shake’s profitability.

Net sales and other $ 324,281 $ 296,045

Restaurant cost of sales

Cost of food $ 91,317 28.2 % $ 81,952 27.7 %

Labor costs 86,286 26.6 % 84,191 28.4 %

Occupancy and other 66,135 20.4 % 59,647 20.1 %

Total cost of sales $ 243,738 $ 225,790

The Company’s consolidated financial statements do not include data in the table above.

Figures are shown for information purposes only.

Management’s Discussion and Analysis (continued)

We view our insurance businesses as possessing two activities:

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

Management’s Discussion and Analysis (continued)

Underwriting results of our insurance operations are summarized below.

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Commissions are in other income in the above table.

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

Management’s Discussion and Analysis (continued)

First Guard is a direct underwriter of commercial truck insurance, primarily 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.

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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.

However, 2021 was an abnormally favorable year with low claim frequency despite a return to pre-pandemic traffic patterns.

Management’s Discussion and Analysis (continued)

Southern Pioneer

Southern Pioneer underwrites garage liability and commercial property insurance, 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.

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Southern Pioneer’s ratio of losses and loss adjustment expenses to premiums earned was 60.9% during 2023 as compared to 61.9% during 2022.

Southern Pioneer’s 2022 performance was primarily attributable to higher claim frequency and severity (mainly related to adverse weather) in several niche lines.

Southern Pioneer’s performance in both years was primarily attributable to weather-related losses.

Management’s Discussion and Analysis (continued)

Insurance – Investment Income

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

Management’s Discussion and Analysis (continued)

Biglari Holdings’ oil and gas operations consist of Southern Oil and Abraxas Petroleum.

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.

A summary of revenue and earnings of oil and gas operations follows.

2023 2022 2021

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Depreciation, depletion, and accretion 10,339 8,013 8,073

Gain on sale of properties (13,563) — —

General and administrative expenses 5,164 6,500 4,748

Earnings before income taxes 25,766 25,191 9,713

Income tax expense 5,946 2,185 128

Income tax expense (benefit) 360 6,100 2,185

Contribution to net earnings $ 25,406 $ 19,091 $ 7,528

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

Demand for petroleum grew in 2022, with our financial results benefiting from stronger prices and margins.

The average West Texas Intermediate price per barrel for the year ended December 31, 2023, was approximately $77.64 as compared to approximately $94.53 for the year ended December 31, 2022.

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

Depreciation, depletion, and accretion expense during 2022 decreased $2,570 as compared to 2021, primarily due to temporarily shutting in producing wells.

Oil and gas production costs have remained constant despite a decrease in revenue primarily because of the acquisition of Abraxas Petroleum and costs to repair nonperforming wells at Southern Oil.

Depreciation, depletion, and accretion expense during 2023 increased $2,326 as compared to 2022, primarily due to the acquisition of Abraxas Petroleum in the third quarter of 2022, offset by temporarily shutting producing wells.

During the third quarter of 2023, Abraxas Petroleum entered into a royalty-based arrangement with an unaffiliated party to conduct development activities that will establish proved undeveloped reserves on its proportional share;

however, Abraxas Petroleum will not be required to fund any exploration expenditures on its undeveloped properties.

As a result of the transaction, a gain of $13,563 was recorded in 2023.

Management’s Discussion and Analysis (continued)

Abraxas Petroleum

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Depreciation, depletion, and accretion 6,359 2,510

Gain on sale of properties (13,563) —

General and administrative expenses 2,765 3,806

Earnings before income taxes 22,410 652

Income tax expense (benefit) (384) 154

Contribution to net earnings $ 22,794 $ 498

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.

2023 2022 2021

Oil and gas revenue $ 17,495 $ 46,091 $ 33,004

Oil and gas production costs 7,760 13,355 10,470

Depreciation, depletion, and accretion 3,980 5,503 8,073

General and administrative expenses 2,399 2,694 4,748

Earnings before income taxes 3,356 24,539 9,713

Income tax expense 744 5,946 2,185

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Contribution to net earnings $ 8 $ 1,313 $ 2,364

Licensing and media revenue decreased $2,459 in 2023 compared to 2022 primarily because an important licensing transaction shifted from 2023 to 2024.

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

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Investment Gains and Investment Partnership Gains

Investment losses were $3,393 ($2,682 net of tax) in 2022 as compared to investment gains of $6,401 ($4,832 net of tax) in 2021.

Investment gains in 2021 included a gain from the sale of real estate of $5,047 ($3,785 net of tax).

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

Investment gains were $2,211 ($1,731 net of tax) in 2023 as compared to investment losses of $3,393 ($2,682 net of tax) in 2022.

Dividends and interest 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.

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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 or annual results.

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

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

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

There was no balance on the line of credit on December 31, 2023.

The balance on the line of credit was $10,000 on December 31, 2022.

The consolidated income tax benefit was $10,722 in 2022 versus an expense of $6,789 in 2021.

The change in income tax expense was primarily due to a tax benefit of $18,992 for investment partnership losses in 2022.

The consolidated income tax expense was $9,308 in 2023 versus a benefit of $10,722 in 2022.

During 2023, the Company recognized tax benefits of $5,660 associated with the tax attributes of Abraxas Petroleum’s oil and gas properties offset by an increase in tax expense of $23,786 for investment partnership gains in 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 for 2022 remained consistent with the preceding year.

Corporate and other net losses increased in 2023 compared to 2022 primarily due to an incentive fee of $7,271.

Financial Condition

Our consolidated shareholders’ equity on December 31, 2022, was $546,966, a decrease of $40,730 as compared to the December 31, 2021 balance.

The decrease in shareholders’ equity was primarily due to a net loss of $32,018 and an increase in treasury stock of $7,829.

Our consolidated shareholders’ equity on December 31, 2023, was $599,330, an increase of $52,364 as compared to the December 31, 2022 balance.

The increase in shareholders’ equity was primarily due to net income of $54,948 and an increase in additional paid-in capital for purchases of noncontrolling interest of $3,806, offset by a change in treasury stock of $6,662.

Consolidated cash and investments are summarized below.

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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 (continued)

Our balance sheet continues to maintain significant liquidity.

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Increase (decrease) in cash, cash equivalents, and restricted cash $ (9,151) $ (4,882) $ 14,021

Management’s Discussion and Analysis (continued)

In 2023, cash from operating activities decreased by $54,823 as compared to 2022.

The change was primarily attributable to a decrease in distributions from investment partnerships from $180,170 in 2021 to $70,700 in 2022.

The distributions during 2022 were primarily used to acquire Abraxas Petroleum, and the distributions during 2021 were primarily used to repay Steak n Shake’s term loan.

Net cash used in investing activities increased during 2022 by $78,080 as compared to 2021.

The change was primarily due to the acquisition of Abraxas Petroleum of $58,274, net of cash acquired, as well as purchases of limited partner interests of $48,570 during 2022.

Cash provided by financing activities of $3,860 during 2022 was primarily because of the $10,000 draw on the Company’s line of credit.

Cash used in financing activities of $156,157 during 2021 was primarily attributable to the repayment of Steak n Shake’s outstanding balance of its term debt.

The change was primarily attributable to distributions from investment partnerships of $14,500 in 2023 compared to $70,700 in 2022.

The distributions during 2022 were primarily used to acquire Abraxas Petroleum.

Net cash used in investing activities was $70,525 lower during 2023 as compared to 2022.

Capital expenditures were $6,341 higher in 2022 primarily due to Steak n Shake’s implementation of a self-service model.

Proceeds from sales of property and equipment were $19,309 higher in 2023 primarily due to the sale of oil and gas properties for $13,563 and the sale of restaurant properties for $10,883.

During 2022, the Company acquired 90% of Abraxas Petroleum for $58,274, net of cash acquired.

In 2023, the Company acquired the remaining 10% of Abraxas Petroleum for $5,387.

Cash used by financing activities of $16,132 during 2023 was primarily due to net repayments on the Company’s line of credit.

Cash provided by financing activities of $3,860 during 2022 was primarily due to net borrowings on the Company’s line of credit.

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

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As of December 31, 2023, we were in compliance with all covenants.

The balance of the line of credit on December 31, 2022, was $10,000.

Our interest rate was 6.53% on December 31, 2022, which is based on the 30-day Secured Overnight Financing Rate plus 2.728%.

Steak n Shake Credit Facility

On March 19, 2014, Steak n Shake and its subsidiaries entered into a credit agreement that 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 Steak n Shake’s outstanding balance in full on February 19, 2021.

There was no balance on the line of credit on December 31, 2023.

The balance of the line of credit was $10,000 on December 31, 2022.

Our interest rate is based on the 30-day Secured Overnight Financing Rate plus 2.73%.

Western Sizzlin Revolver

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The Company records gains from the investment partnerships (inclusive of the investment partnerships’ unrealized gains and losses on their securities) in the consolidated statement of earnings based on our proportional ownership interest in the investment partnerships.

Management’s Discussion and Analysis (continued)

Impairment of Restaurant Long-lived Assets

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Determining the future cash flows expected to be generated by an asset requires significant judgment regarding future performance of the asset, fair market value if the asset were to be sold, and other financial and economic assumptions.

Management’s Discussion and Analysis (continued)

Oil and Natural Gas Reserves

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For finance leases, we recognize amortization expense on the right-of-use asset and interest expense on the lease liability over the lease term.

Management’s Discussion and Analysis (continued)

Recently Issued Accounting Pronouncements

For detailed information regarding recently issued accounting pronouncements and the expected impact on our consolidated financial statements, see Note 1 “Summary of Significant Accounting Policies” in the accompanying notes to consolidated financial statements included in Part II, Item 8 of this report on Form 10-K.

Cautionary Note Regarding Forward-Looking Statements

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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-K

Item 7. Management’s Discussion and Analysis