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BIGLARI HOLDINGS INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
(dollars in thousands except per share data) OverviewBiglari Holdings is a holding company owning subsidiaries engaged in a number of diverse business activities, including property and casualty insurance, media and licensing, restaurants, and oil and gas. The Company's largest operating subsidiaries are involved in the franchising and operating of restaurants.Biglari Holdings was founded and is led bySardar Biglari , Chairman and Chief Executive Officer of the Company. The Company's long-term objective is to maximize per-share intrinsic value. All major investment and capital allocation decisions are made for the Company and its subsidiaries byMr. Biglari . As ofSeptember 30, 2021 ,Mr. Biglari beneficially owns shares of the Company that represent approximately 65.0% of the economic interest and 70.3% of the voting interest. OnMarch 9, 2020 ,Biglari Holdings acquired the stock ofSouthern Pioneer Property & Casualty Insurance Company and its agency,Southern Pioneer Insurance Agency, Inc. (collectively "Southern Pioneer"). The Company's financial results include the results of Southern Pioneer from the date of acquisition. Net earnings (loss) attributable toBiglari Holdings shareholders are disaggregated in the table that follows. Amounts are recorded after deducting income taxes. Third Quarter First Nine Months 2021 2020 2021 2020 Operating businesses: Restaurant$ (1,515) $ (15) $ 5,146 $ (6,199) Insurance 2,985 2,204 8,902 6,819 Oil and gas 2,325 389 7,016 1,278 Media and licensing (43) 885 662 1,236 Interest expense - (1,612) (841) (5,219) Total operating businesses 3,752 1,851 20,885 (2,085) Corporate and other (2,526) (2,081) (6,649) (5,762) Investment gains 3,390 276 4,896 1,468 Investment partnership gains (losses) (15,285) 21,055 21,169 (67,939)$ (10,669) $ 21,101 $ 40,301 $ (74,318) Restaurant businesses include Steak nShake Inc. andWestern Sizzlin Corporation . Steak n Shake andWestern Sizzlin are engaged in the ownership, operation, and franchising of restaurants. Insurance businesses are composed ofFirst Guard Insurance Company ("First Guard") and Southern Pioneer. First Guard is a direct underwriter of commercial trucking insurance, selling physical damage and nontrucking liability insurance to truckers. Southern Pioneer underwrites garage liability insurance, commercial property, as well as homeowners and dwelling fire insurance. Oil and gas business is composed ofSouthern Oil Company ("Southern Oil"). Media and licensing business is composed ofMaxim Inc. 17
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Restaurants Steak n Shake andWestern Sizzlin comprise 581 company-operated and franchise restaurants as ofSeptember 30, 2021 . Steak n Shake Western Sizzlin Company- Franchise Traditional Company- operated Partner Franchise operated Franchise Total Total stores as of December 31, 2020 276 86 194 3 39 598 Corporate stores transitioned (54) 54 - - - - Net restaurants opened (closed) (1) - (15) - (1)
(17)
Total stores as of September 30, 2021 221 140 179 3 38
581
Total stores as of December 31, 2019 368 29 213 4 48 662 Corporate stores transitioned (41) 40 1 - - - Net restaurants opened (closed) (67) - (15) (1) (9)
(92)
Total stores as of September 30, 2020 260 69 199 3 39 570
As of
were temporarily closed.
18
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Earnings of our restaurant operations are summarized below.
Third Quarter First Nine Months
2021 2020 2021 2020
Revenue
Net sales $ 41,916 $ 67,617 $ 146,269 $ 241,832
Franchise partner fees 11,508 6,894 31,744 14,775
Franchise royalties and fees 4,865 4,421 14,594 13,704
Other revenue 855 742 3,817 2,271
Total revenue 59,144 79,674 196,424 272,582
Restaurant cost of sales
Cost of food 13,123 31.3 % 19,508 28.9 % 43,404 29.7 % 70,880 29.3 %
Restaurant operating costs 24,496 58.4 % 30,451 45.0 % 71,751 49.1 % 110,903 45.9 %
Occupancy costs 4,075 9.7 % 4,103 6.1 % 14,142 9.7 % 12,954 5.4 %
Total cost of sales 41,694 54,062 129,297 194,737
Selling, general and
administrative
General and administrative 9,255 15.6 % 12,059 15.1 % 27,416 14.0 % 30,146 11.1 %
Marketing 2,302 3.9 % 3,891 4.9 % 10,212 5.2 % 18,406 6.8 %
Other expenses 1,332 2.3 % 454 0.6 % 2,266 1.2 % 1,721 0.6 %
Total selling, general and
administrative 12,889 21.8 % 16,404 20.6 % 39,894 20.3 % 50,273 18.4 %
Impairments - (3,698) (559) (21,817)
Depreciation and amortization (5,811) (4,376) (15,615)
(14,088)
Gain on debt extinguishment - - - 5,713 Interest on finance leases and obligations (1,462) (1,593) (4,619)
(4,679)
Earnings (loss) before income taxes (2,712) (459) 6,440 (7,299) Income tax expense (benefit) (1,197) (444) 1,294 (1,100) Contribution to net earnings$ (1,515) $ (15) $ 5,146 $ (6,199) 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. The novel coronavirus ("COVID-19") was declared a pandemic by theWorld Health Organization in March of 2020. Government and private sector responses to contain its spread began to affect our operating businesses significantly that same month. The COVID-19 pandemic has adversely affected our restaurant operations, as 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. Steak n Shake has been reopening its dining rooms this year, and in doing so has implemented a self-service model. The transformation has resulted in higher capital expenditures in 2021 as compared to 2020. In the first nine months of 2021, Steak n Shake spent$29,708 in capital expenditures related to the conversion of table-service restaurants to self-service restaurants. 19
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Net sales for the third quarter and first nine months of 2021 were$41,916 and$146,269 , respectively, representing a decrease of$25,701 or 38.0%, and$95,563 or 39.5%, compared to the third quarter and first nine months of 2020, respectively. The year-over-year decrease in revenue of company-operated 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 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 continue to decline with each transition of a company-operated unit to a franchise partner unit. Franchise partner fees were$11,508 during the third quarter of 2021, compared to$6,894 during the third quarter of 2020. Franchise partner fees were$31,744 during the first nine months of 2021, compared to$14,775 during the first nine months of 2020. As ofSeptember 30, 2021 , there were 140 franchise partner units, compared to 69 franchise partner units as ofSeptember 30, 2020 . The cost of food during the third quarter and first nine months of 2021 was$13,123 , and$43,404 , respectively, compared to$19,508 , and$70,880 in the third quarter and first nine months of 2020, respectively. Restaurant operating costs during the third quarter of 2021 were$24,496 , compared to$30,451 in the third quarter of 2020. Restaurant operating costs during the first nine months of 2021 were$71,751 , compared to$110,903 in the first nine months of 2020. The decreases in cost of food and operating costs are mainly attributable to the transitioning of company-operated units to franchise partner units. The increase in operating costs as a percentage of net sales is mainly attributable to increasing wages. The Company expects to increase menu prices in the fourth quarter to improve margins. General and administrative costs during the third quarter and first nine months of 2021 were$9,255 and$27,416 , respectively, compared to$12,059 and$30,146 in the third quarter and first nine months of 2020, respectively. The year-over-year general and administrative costs were lower in 2021 primarily because of legal and professional fees incurred during the third quarter of 2020. Marketing expenses during the third quarter and first nine months of 2021 were$2,302 and$10,212 , respectively, compared to$3,891 and$18,406 during the third quarter and first nine months of 2020, respectively. Marketing expenses decreased primarily due to the decision to shift to a digital marketing strategy. Our restaurants recorded an impairment to long-lived assets of$0 and$3,698 in the third quarters of 2021 and 2020, respectively, and$559 and$21,817 in the first nine months of 2021 and 2020, respectively. The 2021 impairments are primarily attributable to Steak n Shake store closures. The 2020 impairments were connected to dining room closures during the pandemic. Insurance We view our insurance businesses as possessing two activities: underwriting and investing. Underwriting decisions are the responsibility of the unit managers, whereas investing decisions are the responsibility of our Chairman and CEO,Sardar Biglari . Business units are operated under separate local management.Biglari Holdings' insurance operations consist of First Guard and Southern Pioneer. Underwriting results of our insurance operations are summarized below. Third Quarter First
Nine Months
2021 2020 2021
2020
Underwriting gain attributable to: First Guard$ 2,832 $ 2,077 $ 7,922 $ 6,953 Southern Pioneer 397 60 1,511 (229) Pre-tax underwriting gain 3,229 2,137 9,433 6,724 Income tax expense 681 449 1,984 1,412 Net underwriting gain$ 2,548 $ 1,688 $ 7,449 $ 5,312 20
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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
2021 2020 2021 2020
Premiums written $ 13,901 $ 13,427 $ 41,166 $ 35,590
Insurance losses 6,657 7,419 20,040 18,494
Underwriting expenses 4,015 3,871 11,693 10,372
Pre-tax underwriting gain 3,229 2,137 9,433 6,724
Other income and expenses
Investment income and commissions 646 817 2,033 2,749
Other expenses (33) (284) (68) (822)
Total other income 613 533 1,965 1,927
Earnings before income taxes 3,842 2,670 11,398 8,651
Income tax expense 857 466 2,496 1,832
Contribution to net earnings $ 2,985 $ 2,204 $ 8,902 $ 6,819
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
2021 2020 2021 2020
Amount % Amount % Amount % Amount %
Premiums written $ 8,458 100.0 % $ 7,505 100.0 % $ 24,760 100.0 % $ 22,195 100.0 %
Insurance losses 3,935 46.5 % 3,736 49.8 % 11,746 47.4 % 10,268 46.3 %
Underwriting expenses 1,691 20.0 % 1,692 22.5 % 5,092 20.6 % 4,974 22.4 %
Total losses and expenses 5,626 66.5 % 5,428 72.3 % 16,838 68.0 % 15,242 68.7 %
Pre-tax underwriting gain $ 2,832 $ 2,077 $ 7,922 $ 6,953
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Southern Pioneer Southern Pioneer underwrites garage liability insurance, commercial property, as well as homeowners and dwelling fire insurance. The financial results for Southern Pioneer are from the date of acquisitionMarch 9, 2020 . A summary of Southern Pioneer's underwriting results follows. Third Quarter First Nine Months 2021 2020 2021 2020 Amount % Amount % Amount % Amount % Premiums written$ 5,443 100.0 %$ 5,922 100.0 %$ 16,406 100.0 %$ 13,395 100.0 % Insurance losses 2,722 50.0 % 3,683 62.2 % 8,294 50.6 % 8,226 61.4 % Underwriting expenses 2,324 42.7 % 2,179 36.8 % 6,601 40.2 % 5,398 40.3 % Total losses and expenses 5,046 92.7 % 5,862 99.0 % 14,895 90.8 % 13,624 101.7 % Pre-tax underwriting gain$ 397 $ 60 $ 1,511 $ (229)
Insurance - Investment Income
A summary of net investment income attributable to our insurance operations
follows.
Third Quarter First Nine Months
2021 2020 2021 2020
Interest, dividends and other investment
income:
First Guard $ 54 $ 75 $ 84 $ 246
Southern Pioneer 141 121 568 821
Pre-tax investment income 195 196 652 1,067
Income tax expense 41 41 137 224
Net investment income $ 154 $ 155 $ 515 $ 843
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 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
2021 2020 2021 2020
Oil and gas revenue $ 7,353 $ 6,029 $ 24,310 $ 19,554
Oil and gas production costs 2,050 2,171 6,957 6,570
Depreciation, depletion and accretion 1,717 2,804 6,286 9,651
General and administrative expenses 604 462 2,020 1,978
Earnings before income taxes 2,982 592 9,047 1,355
Income tax expense 657 203 2,031 77
Contribution to net earnings $ 2,325 $ 389 $ 7,016 $ 1,278
22
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The COVID-19 pandemic caused oil demand to significantly decrease in early 2020,
creating oversupplied markets that resulted in lower commodity prices and
margins. However, crude oil prices increased in mid-2020 in response to the
lifting of COVID-19 restrictions.
Media and Licensing
Maxim's business lies principally in media and licensing. Earnings of our media
and licensing operations are summarized below.
Third Quarter First Nine Months
2021 2020 2021 2020
Media and licensing revenue $ 863 $ 1,719 $ 2,695 $ 3,209
Media and licensing costs 880 548 1,749 1,491
General and administrative expenses 39 21 79 113
Earnings before income taxes (56) 1,150 867 1,605
Income tax expense (benefit) (13) 265 205 369
Contribution to net earnings $ (43) $ 885 $ 662 $ 1,236
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 third quarter and first nine months of 2021 were$3,390 and$4,896 , respectively. Investment gains net of tax were$276 and$1,468 during the third quarter and first nine months of 2020, respectively. Investment gains during the third quarter of 2021 included a gain from the sale of real estate of$3,785 , net of tax. Dividends earned on investments are reported as other 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. Third Quarter
First Nine Months
2021 2020 2021 2020
Investment partnership gains (losses) $ (20,231) $ 27,218 $ 27,344 $ (89,276)
Tax expense (benefit) (4,946) 6,163 6,175 (21,337)
Contribution to net earnings $ (15,285) $ 21,055 $ 21,169 $ (67,939)
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. Changes
in the market values of investments can be highly volatile.
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.
Investments affect our reported quarterly earnings based on their carrying
value. We do not regard the quarterly or annual fluctuations in our investments
to be meaningful in understanding the operating results of our businesses.
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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
2021 2020 2021
2020
Interest expense on notes payable $ -
$ 6,973 Tax benefit - 538 280 1,754 Interest expense net of tax $ -$ 1,612 $ 841 $ 5,219 Steak n Shake's term loan was scheduled to mature onMarch 19, 2021 . As ofDecember 31, 2020 ,$152,506 was outstanding. The Company repaid Steak n Shake's outstanding balance in full onFebruary 19, 2021 . Corporate and Other Corporate expenses exclude the activities in the restaurant, media and licensing, insurance, and oil and gas businesses. Corporate net losses during the third quarter and first nine months of 2021 were relatively flat compared to the same period during 2020. Income Taxes Income tax benefit for the third quarter of 2021 was$4,274 compared to an income tax expense of$5,617 for the third quarter of 2020. Income tax expense for the first nine months of 2021 was$11,544 compared to a benefit of$23,449 for the first nine months of 2020. The variance in income taxes between 2021 and 2020 is attributable to taxes on income generated by the investment partnerships. Investment partnership pretax gains were$27,344 during the first nine months of 2021 compared to pretax losses of$89,276 during the first nine months of 2020.
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