Biglari Holdings Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands except per share data) Overview 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. Biglari. As of March 31, 2024, Mr. Biglari beneficially owns shares of the Company that represent approximately 71.5% of the voting interest. 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 2024 2023 Operating businesses: Restaurant $ 3,473 $ 5,840 Insurance 1,738 2,169 Oil and gas 1,149 1,670 Brand licensing (265) 91 Interest expense — (129) Corporate and other (1,996) (2,998) Total operating businesses 4,099 6,643 Investment partnership gains 17,148 56,029 Investment gains 1,332 2,865 Net earnings 22,579 65,537 Earnings attributable to noncontrolling interest — 651 Net earnings attributable to Biglari Holdings Inc. shareholders $ 22,579 $ 64,886 18 Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Restaurants Our restaurant businesses, which include Steak n Shake and Western Sizzlin, comprise 485 company-operated and franchise restaurants as of March 31, 2024. Steak n Shake Western Sizzlin Company- operated Franchise Partner Traditional Franchise Company- operated Franchise Total Total stores as of December 31, 2023 148 181 128 3 32 492 Corporate stores transitioned 3 (3) — — — — Net restaurants opened (closed) (3) — (3) — (1) (7) Total stores as of March 31, 2024 148 178 125 3 31 485 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 As of March 31, 2024, 15 of the 148 company-operated Steak n Shake stores were closed. Steak n Shake plans to sell or lease 9 of the 15 locations and refranchise the balance. 19 Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Restaurant operations are summarized below. First Quarter 2024 2023 Revenue Net sales $ 38,735 $ 36,894 Franchise partner fees 17,758 17,912 Franchise royalties and fees 3,477 4,258 Other revenue 2,026 2,065 Total revenue 61,996 61,129 Restaurant cost of sales Cost of food 10,974 28.3 % 10,448 28.3 % Labor costs 12,429 32.1 % 11,603 31.4 % Occupancy and other 11,018 28.4 % 10,687 29.0 % Total cost of sales 34,421 32,738 Selling, general and administrative General and administrative 11,730 18.9 % 10,463 17.1 % Marketing 2,945 4.8 % 2,953 4.8 % Other expenses (income) (234) (0.4) % (1,612) (2.6) % Total selling, general and administrative 14,441 23.3 % 11,804 19.3 % Impairments 107 0.2 % 776 1.3 % Depreciation and amortization 6,835 11.0 % 6,707 11.0 % Interest on finance leases and obligations 1,314 1,307 Earnings before income taxes 4,878 7,797 Income tax expense 1,405 1,957 Contribution to net earnings $ 3,473 $ 5,840 Cost of food, labor costs, and occupancy and other costs are expressed as a percentage of net sales. General and administrative, marketing, other expenses, impairments, and depreciation are expressed as a percentage of total revenue. Net sales for the first quarter of 2024 were $38,735 as compared to $36,894 during the first quarter of 2023. The increase in net sales was primarily due to an increase in Steak n Shake’s same-store sales of 9.9% during the first quarter of 2024. 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 decline as we transition from company-operated units to franchise partner units. Our franchise partner fees were $17,758 during the first quarter of 2024, as compared to $17,912 during the first quarter of 2023. As of March 31, 2024 and 2023, there were 178 franchise partner units. Included in franchise partner fees were $5,705 and $5,575 of rental income during the first quarter of 2024 and 2023, respectively. Franchise partners rent buildings and equipment from Steak n Shake. Our share of franchise partner fees was lower primarily because our franchise partners’ food and labor expenses were 1.8 percentage points higher during the first quarter of 2024 as compared to the first quarter of 2023. 20 Table of Contents 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 $3,477 during the first quarter of 2024, as compared to $4,258 during the first quarter of 2023. The decrease in franchise royalties and fees was primarily due to the closing of traditional franchise stores. There were 125 Steak n Shake traditional units open on March 31, 2024, as compared to 143 units open on March 31, 2023. The cost of food at company-operated units during the first quarter of 2024 was $10,974 or 28.3% of net sales, as compared to $10,448 or 28.3% of net sales during the first quarter of 2023. The cost of food expressed as a percentage of net sales in 2024 remained consistent with 2023. Labor costs at company-operated restaurants during the first quarter of 2024 were $12,429 or 32.1% of net sales, as compared to $11,603 or 31.4% of net sales during the first quarter of 2023. Labor costs expressed as a percentage of net sales in 2024 remained consistent with 2023. General and administrative expenses during the first quarter of 2024 were $11,730 or 18.9% of total revenue, as compared to $10,463 or 17.1% of total revenue during the first quarter of 2023. General and administrative expenses increased in 2024 as compared to 2023 primarily because of higher salaries and wages. Salaries and wages were higher due to an increase in Steak n Shake’s personnel. Interest on obligations under leases was $1,314 during the first quarter of 2024 versus $1,307 during the first quarter of 2023. Other income was $234 during the first quarter of 2024 versus $1,612 during the first quarter of 2023. Western Sizzlin received a settlement of $450 during 2024 and Steak n Shake recorded gains of sales of properties of $1,431 during 2023. 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. First Quarter 2024 2023 Revenue Net sales and other $ 80,788 $ 77,952 Restaurant cost of sales Cost of food $ 23,170 28.7 % $ 20,871 26.8 % Labor costs 21,765 26.9 % 20,940 26.9 % Occupancy and other 16,778 20.8 % 15,867 20.4 % Total cost of sales $ 61,713 $ 57,678 The Company’s consolidated financial statements do not include data in the table above. Figures are shown for information purposes only. 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. 21 Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Underwriting results of our insurance operations are summarized below. First Quarter 2024 2023 Underwriting gain attributable to: First Guard $ 800 $ 1,862 Southern Pioneer 59 (111) Pre-tax underwriting gain 859 1,751 Income tax expense 180 368 Net underwriting gain $ 679 $ 1,383 Earnings of our insurance operations are summarized below. First Quarter 2024 2023 Premiums earned $ 15,922 $ 14,764 Insurance losses 10,878 8,596 Underwriting expenses 4,185 4,417 Pre-tax underwriting gain 859 1,751 Other income and expenses Investment income 915 585 Other income and expenses 472 451 Total other income 1,387 1,036 Earnings before income taxes 2,246 2,787 Income tax expense 508 618 Contribution to net earnings $ 1,738 $ 2,169 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. First Quarter 2024 2023 Amount % Amount % Premiums earned $ 9,310 100.0 % $ 8,899 100.0 % Insurance losses 6,775 72.8 % 5,244 58.9 % Underwriting expenses 1,735 18.6 % 1,793 20.1 % Total losses and expenses 8,510 91.4 % 7,037 79.0 % Pretax underwriting gain $ 800 $ 1,862 First Guard produced an underwriting gain in the first quarter of 2024, despite having a higher ratio of losses and loss adjustment expenses to premiums earned (72.8%) than it had during the first quarter of 2023 (58.9%). 22 Table of Contents 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 2024 2023 Amount % Amount % Premiums earned $ 6,612 100.0 % $ 5,865 100.0 % Insurance losses 4,103 62.1 % 3,352 57.2 % Underwriting expenses 2,450 37.0 % 2,624 44.7 % Total losses and expenses 6,553 99.1 % 5,976 101.9 % Pretax underwriting gain (loss) $ 59 $ (111) Southern Pioneer’s underwriting gain was primarily attributable to a lower expense ratio. The prior year’s higher expense ratio was 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 2024 2023 Interest, dividends and other investment income: First Guard $ 570 $ 387 Southern Pioneer 345 198 Pre-tax investment income 915 585 Income tax expense 192 123 Net investment income $ 723 $ 462 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. 23 Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Oil and Gas A summary of revenues and earnings of our oil and gas operations follows. First Quarter 2024 2023 Oil and gas revenues $ 9,510 $ 12,223 Oil and gas production costs 4,499 5,471 Depreciation, depletion and accretion 2,792 2,850 Gain on sale of properties (481) — General and administrative expenses 1,234 1,799 Earnings before income taxes 1,466 2,103 Income tax expense 317 433 Contribution to net earnings $ 1,149 $ 1,670 Our oil and gas business is highly dependent on oil and natural gas prices. The lower natural gas prices and lower production during 2024 caused decreases in revenues and production costs. Production decreases were primarily because several gas wells were shut-in along with the natural depletion of oil and gas reserves. During the third quarter of 2023, Abraxas Petroleum entered into a royalty-based arrangement with an unaffiliated party to conduct development activities; however, Abraxas Petroleum will not be required to fund any exploration expenditures on its undeveloped properties. In the first quarter of 2024, Abraxas Petroleum sold additional undeveloped reserves, which resulted in a gain of $481. 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 2024 2023 Oil and gas revenues $ 5,868 $ 7,252 Oil and gas production costs 2,819 3,131 Depreciation, depletion and accretion 1,547 1,666 Gain on sale of properties (481) — General and administrative expenses 596 1,246 Earnings before income taxes 1,387 1,209 Income tax expense 319 278 Contribution to net earnings $ 1,068 $ 931 24 Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) 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. First Quarter 2024 2023 Oil and gas revenues $ 3,642 $ 4,971 Oil and gas production costs 1,680 2,340 Depreciation, depletion and accretion 1,245 1,184 General and administrative expenses 638 553 Earnings before income taxes 79 894 Income tax expense (benefit) (2) 155 Contribution to net earnings $ 81 $ 739 Brand Licensing Maxim’s business lies principally in licensing and media. Earnings of operations are summarized below. First Quarter 2024 2023 Licensing and media revenues $ 212 $ 595 Licensing and media costs 503 452 General and administrative expenses 63 21 Earnings (loss) before income taxes (354) 122 Income tax expense (benefit) (89) 31 Contribution to net earnings $ (265) $ 91 Licensing revenue was lower during 2024 as compared to 2023 primarily due to fewer licensing events in the first quarter of 2024. 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 2024 and 2023 were $1,332 and $2,865, respectively. 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. However, we consider investment gains and losses, whether realized or unrealized, as non-operating. Earnings from our investments in partnerships are summarized below. First Quarter 2024 2023 Investment partnership gains $ 21,985 $ 72,588 Tax expense 4,837 16,559 Contribution to net earnings $ 17,148 $ 56,029 25 Table of Contents 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 2024 and 2023 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. These gains and losses have caused and will continue to cause significant volatility in our periodic earnings. Interest Expense The Company’s interest expense is summarized below. First Quarter 2024 2023 Interest expense on note payable and other borrowings $ — $ (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. There was no balance on the line of credit on March 31, 2024, or December 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 2024 were relatively consistent to the same period during 2023. Income Taxes Income tax expense for the first quarter of 2024 was $6,816 compared to an income tax expense of $19,738 for the first quarter of 2023. The variance in income taxes between 2024 and 2023 is attributable to taxes on income generated by the investment partnerships. Investment partnership pretax gains were $21,985 during the first quarter of 2024 compared to pretax gains of $72,588 during the first quarter of 2023. Financial Condition Consolidated cash and investments are summarized below. March 31, 2024 December 31, 2023 Cash and cash equivalents $ 34,536 $ 28,066 Investments 97,725 91,879 Fair value of interest in investment partnerships 544,909 472,772 Total cash and investments 677,170 592,717 Less: portion of Company stock held by investment partnerships (324,152) (273,669) Carrying value of cash and investments on balance sheet $ 353,018 $ 319,048 Unrealized gains/losses of Biglari Holdings’ stock held by the investment partnerships are eliminated in the Company’s consolidated financial results. 26 Table of Contents 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 Quarter 2024 2023 Net cash provided by operating activities $ 19,125 $ 19,923 Net cash used in investing activities (11,242) (12,735) Net cash used in financing activities (1,403) (5,050) Effect of exchange rate changes on cash (10) 8 Increase in cash, cash equivalents and restricted cash $ 6,470 $ 2,146 The increase in cash during 2024 was $6,470 compared to $2,146 during 2023. The increase is primarily due to a decrease in cash used in investing activities and financing activities. Cash from operating activities in the first quarter of 2024 remained consistent with the first quarter of 2023. Cash used in investing activities was $1,493 lower during the first quarter of 2024 as compared to 2023. The decrease is primarily due to lower investment activity during 2024. Purchases of investments, net of proceeds from redemptions of fixed maturity securities, decreased by $2,655 in 2024 compared to 2023. Cash used by financing activities was $3,647 lower during the first quarter of 2024 as compared to 2023 primarily due to principal payments on the Company’s line of credit in 2023. Biglari Holdings ’ Line of Credit Biglari Holdings’ available line of credit is $30,000. The line of credit matures on September 12, 2024. The line of credit includes customary covenants, as well as financial maintenance covenants. As of March 31, 2024, we were in compliance with all covenants. There was no balance on the line of credit on March 31, 2024, or December 31, 2023. Western Sizzlin Revolver Western Sizzlin’s available line of credit is $500. As of March 31, 2024, and December 31, 2023, Western Sizzlin had no debt outstanding on its revolver. 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, 2023. Recently Issued Accounting Pronouncements No recently issued accounting pronouncements were applicable for this Quarterly Report on Form 10-Q. 27 Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.