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Item 2. Management’s Discussion and Analysis

2024-08-09 compared with 2024-05-10 · 11 added, 283 removed, 31 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, 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

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

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 485 company-operated and franchise restaurants as of March 31, 2024.

Steak n Shake Western Sizzlin

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.

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

Restaurant operations are summarized below.

First Quarter

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.

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

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.

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.

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

Underwriting results of our insurance operations are summarized below.

First Quarter

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

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 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 $ 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%).

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 $ 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

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.

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 $ 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

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

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

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 $ 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

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

Investment partnership gains $ 21,985 $ 72,588

Tax expense 4,837 16,559

Contribution to net earnings $ 17,148 $ 56,029

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

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 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,

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

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.

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 $ 20,910 $ 31,518

2 unchanged sentences

Effect of exchange rate changes on cash (7) 98

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.

Decrease in cash, cash equivalents and restricted cash $ (1,374) $ (6,336)

In 2024, cash from operating activities decreased by $10,608 as compared to 2023.

The change was primarily attributable to a decrease in cash flows from Steak n Shake’s operations.

Cash used in investing activities decreased during 2024 by $8,888 as compared to 2023 primarily due to an increase in proceeds from property and equipment disposals.

Cash used in financing activities decreased during 2024 by $6,787 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.

Biglari Holdings 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.

As of June 30, 2024, we were in compliance with all covenants.

There was no balance on the line of credit on June 30, 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.

As of June 30, 2024, Western Sizzlin had a balance of $50 under its revolver.

As of December 31, 2023, there was no debt outstanding under 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