BIGLARI HOLDINGS INC. – 10-Q – 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. The Company's largest operating subsidiaries are involved in the franchising and operating of restaurants.Biglari Holdings is founded and led bySardar Biglari , Chairman and Chief Executive Officer of the Company.Biglari Holdings' management system combines decentralized operations with centralized finance 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 byMr. Biglari . As ofMarch 31, 2022 ,Mr. Biglari beneficially owns shares of the Company that represent approximately 66.3% of the economic interest and 70.4% of the voting interest. Net earnings (loss) attributable toBiglari Holdings shareholders are disaggregated in the table that follows. Amounts are recorded after deducting income taxes. First Quarter 2022 2021 Operating businesses: Restaurant$ 3,262 $ 4,118 Insurance 1,044 2,531 Oil and gas 2,924 2,355 Brand licensing (251) 480 Interest expense - (841) Corporate and other (2,651) (1,999) Total operating businesses 4,328 6,644 Investment gains 175 2,414
Investment partnership gains (losses) (4,801) 62,649
$ (298) $ 71,707 Restaurants Our restaurant businesses, which include Steak n Shake andWestern Sizzlin , comprise 575 company-operated and franchise restaurants as ofMarch 31, 2022 . Steak n Shake Western Sizzlin Company- Franchise Traditional Company- operated Partner Franchise operated Franchise Total 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
Total stores as of December 31, 2020 276 86 194 3 39 598 Corporate stores transitioned (22) 22 - - - - Net restaurants opened (closed) (1) - (5) - (1)
(7)
Total stores as of March 31, 2021 253 108 189 3 38
591
As of
closed. We plan to refranchise a majority of our closed company-operated
restaurants.
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Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Restaurant operations are summarized below.
First Quarter
2022 2021
Revenue
Net sales $ 38,216 $ 54,950
Franchise partner fees 15,624 7,853
Franchise royalties and fees 5,146 5,135
Other revenue 861 2,016
Total revenue 59,847 69,954
Restaurant cost of sales
Cost of food 10,960 28.7 % 15,554 28.3 %
Restaurant operating costs 20,032 52.4 % 25,197 45.9 %
Occupancy costs 4,360 11.4 % 4,865 8.9 %
Total cost of sales 35,352 45,616
Selling, general and administrative
General and administrative 8,650 14.5 % 7,680 11.0 %
Marketing 3,744 6.3 % 4,623 6.6 %
Other expenses 45 0.1 %
(141) (0.2) %
Total selling, general and administrative 12,439 20.8 % 12,162 17.4 %
Impairments -
(298)
Depreciation and amortization (6,214)
(4,710)
Interest on finance leases and obligations (1,412)
(1,620)
Earnings (loss) before income taxes 4,430
5,548
Income tax expense (benefit) 1,168
1,430
Contribution to net earnings$ 3,262 $
4,118
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"), declared a pandemic by the World Health
Organization in March 2020 , caused governments to impose restrictive measures to
contain its spread. 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 were reopened during 2021, and in doing so a self-service model has
been implemented.
Net sales for 2022 were $38,216 , representing a decrease of $16,734 or 30.5%
compared to 2021. 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 a franchise
partner units.
19
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Franchise partner fees were$15,624 during 2022, as compared to$7,853 during 2021. As ofMarch 31, 2022 , there were 171 franchise partner units, compared to 108 franchise partner units as ofMarch 31, 2021 . For a franchise partner to be awarded a restaurant, he or she must demonstrate the gold standard in service.
The franchise royalties and fees generated by the traditional franchising
business were
The cost of food in 2022 was$10,960 or 28.7% of net sales, as compared to$15,554 or 28.3% of net sales in 2021. The decrease in cost was due to a reduction in the number of company-operated stores. Restaurant operating costs during 2022 were$20,032 or 52.4% of net sales, as compared to$25,197 or 45.9% of net sales in 2021. General and administrative costs increased by$970 in 2022 compared to 2021, primarily because of an increase in personnel costs. Marketing expenses were relatively flat as a percentage of total revenue in 2022 as compared to 2021.
The Company recorded impairment charges of
related to underperforming stores. There were no impairments in 2022.
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.
Underwriting results of our insurance operations are summarized below.
First Quarter
2022 2021
Underwriting gain attributable to:
First Guard $ 732 $ 2,131
Southern Pioneer (337) 413
Pretax underwriting gain 395 2,544
Income tax expense 83 534
Net underwriting gain $ 312 $ 2,010
Earnings of our insurance operations are summarized below.
First Quarter
2022 2021
Premiums earned $ 14,169 $ 13,690
Insurance losses 9,588 7,021
Underwriting expenses 4,186 4,125
Pretax underwriting gain 395 2,544
Other income and expenses
Investment income 213 166
Other income (expenses) 756 527
Total other income 969 693
Earnings before income taxes 1,364 3,237
Income tax expense 320 706
Contribution to net earnings $ 1,044 $ 2,531
20
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Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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
2022 2021
Amount % Amount %
Premiums earned $ 8,731 100.0 % $ 8,077 100.0 %
Insurance losses 6,188 70.9 % 4,002 49.5 %
Underwriting expenses 1,811 20.7 % 1,944 24.1 %
Total losses and expenses 7,999 91.6 % 5,946 73.6 %
Pretax underwriting gain $ 732 $ 2,131
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
2022 2021
Amount % Amount %
Premiums earned $ 5,438 100.0 % $ 5,613 100.0 %
Insurance losses 3,400 62.5 % 3,019 53.8 %
Underwriting expenses 2,375 43.7 % 2,181 38.9 %
Total losses and expenses 5,775 106.2 % 5,200 92.7 %
Pretax underwriting gain (loss) $ (337) $ 413
Insurance - Investment Income
A summary of net investment income attributable to our insurance operations
follows.
First Quarter
2022 2021
Interest, dividends and other investment income:
First Guard $ 74 $ 17
Southern Pioneer 139 149
Pretax investment income 213 166
Income tax expense 45 35
Net investment income $ 168 $ 131
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.
21
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Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Oil and Gas Southern Oil primarily operates oil and natural gas properties offshore in the shallow waters of theGulf of Mexico . Earnings for Southern Oil are summarized below. First Quarter 2022 2021 Oil and gas revenue$ 9,812 $ 8,592 Oil and gas production costs 3,819 2,413
Depreciation, depletion and accretion 1,519 2,378
General and administrative expenses
553 762 Earnings before income taxes 3,921 3,039 Income tax expense 997 684 Contribution to net earnings$ 2,924 $ 2,355 Brand Licensing Maxim's business lies principally in licensing and media. Earnings of operations are summarized below. First Quarter 2022 2021 Licensing and media revenue$ 634 $ 1,123 Licensing and media costs 953 480 General and administrative expenses 17 20 Earnings before income taxes (336) 623 Income tax expense (benefit) (85) 143 Contribution to net earnings$ (251) $ 480
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 2022 and 2021 were$175 and$2,414 , respectively. Dividends earned on investments are reported as investment income by our insurance companies. We consider investment income as a component of our aggregate insurance operating results. However, we consider investment gains and losses, whether realized or unrealized, as non-operating.
Earnings (loss) from our investments in partnerships are summarized below.
First Quarter
2022 2021
Investment partnership gains (losses)
Tax expense (benefit)
(1,860) 19,117 Contribution to net earnings$ (4,801) $ 62,649 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. 22
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Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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.
Interest Expense
The Company's interest expense is summarized below.
First Quarter
2022 2021
Interest expense on notes payable $ -
Tax benefit
- 280
Interest expense net of tax $ -
Steak n Shake's term loan was scheduled to mature on
repaid Steak n Shake's outstanding balance in full on
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 2022 were relatively flat compared to the same period during 2021.
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