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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)
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 ofJune 30, 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. Second Quarter First Six Months 2022 2021 2022 2021 Operating businesses: Restaurant$ 3,006 $ 2,543 $ 6,268 $ 6,661 Insurance 1,859 3,386 2,903 5,917 Oil and gas 6,369 2,336 9,293 4,691 Brand licensing 375 225 124 705 Interest expense - - - (841) Corporate and other (2,237) (2,124) (4,888) (4,123) Total operating businesses 9,372 6,366 13,700 13,010 Investment gains (2,805) (908) (2,630) 1,506 Investment partnership gains (losses) (80,347) (26,195) (85,148) 36,454$ (73,780) $ (20,737) $ (74,078) $ 50,970 Restaurants Our restaurant businesses, which include Steak n Shake andWestern Sizzlin , comprise 560 company-operated and franchise restaurants as ofJune 30, 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 (18) 18 - - - - Net restaurants opened (closed) (5) - (12) - -
(17)
Total stores as of June 30, 2022 176 177 166 3 38
560
Total stores as of December 31, 2020 276 86 194 3 39 598 Corporate stores transitioned (45) 45 - - - - Net restaurants opened (closed) (1) - (8) - (1)
(10)
Total stores as of June 30, 2021 230 131 186 3 38
588
As of
closed. We plan to refranchise a majority of our closed company-operated
restaurants.
18
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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.
Second Quarter First Six Months
2022 2021 2022 2021
Revenue
Net sales $ 37,681 $ 49,403 $ 75,897 $ 104,353
Franchise partner fees 16,425 12,383 32,049 20,236
Franchise royalties and fees 5,237 4,594 10,383 9,729
Other revenue 981 946 1,842 2,962
Total revenue 60,324 67,326 120,171 137,280
Restaurant cost of sales
Cost of food 11,365 30.2 % 14,727 29.8 % 22,325 29.4 % 30,281 29.0 %
Restaurant operating costs 20,350 54.0 % 22,058 44.6 % 40,382 53.2 % 47,255 45.3 %
Occupancy costs 4,240 11.3 % 5,202 10.5 % 8,600 11.3 % 10,067 9.6 %
Total cost of sales 35,955 41,987 71,307 87,603
Selling, general and
administrative
General and administrative 10,121 16.8 % 10,481 15.6 % 18,771 15.6 % 18,161 13.2 %
Marketing 3,087 5.1 % 3,287 4.9 % 6,831 5.7 % 7,910 5.8 %
Other expenses (361) (0.6) % 1,075 1.6 % (316) (0.3) % 934 0.7 %
Total selling, general and
administrative 12,847 21.3 % 14,843 22.0 % 25,286 21.0 % 27,005 19.7 %
Impairments (20) (261) (20) (559)
Depreciation and amortization (6,106) (5,094) (12,320) (9,804)
Interest on finance leases and
obligations (1,385) (1,537) (2,797) (3,157)
Earnings (loss) before income
taxes 4,011 3,604 8,441 9,152
Income tax expense (benefit) 1,005 1,061 2,173 2,491
Contribution to net earnings
(loss) $ 3,006 $ 2,543 $ 6,268 $ 6,661
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 the second quarter and first six months of 2022 were $37,681 and
$75,897 , respectively, representing a decrease of $11,722 or 23.7% and $28,456
or 27.3%, compared to the second quarter and first six months of 2021,
respectively. 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.
19
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Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Franchise partner fees were$16,425 during the second quarter of 2022, as compared to$12,383 during the second quarter of 2021. Franchise partner fees were$32,049 and$20,236 during the first six months of 2022 and 2021, respectively. As ofJune 30, 2022 , there were 177 franchise partner units, compared to 131 franchise partner units as ofJune 30, 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$5,237 during the second quarter of 2022, as compared to$4,594 during the second quarter of 2021. Franchise royalties and fees during the first six months of 2022 were$10,383 compared to$9,729 during the first six months of 2021. The cost of food during the second quarter and first six months of 2022 was$11,365 , or 30.2% of net sales, and$22,325 , or 29.4% of net sales, respectively, as compared to$14,727 , or 29.8% of net sales, and$30,281 , or 29.0% of net sales, during the second quarter and first six months of 2021, respectively. The increase in cost of food as a percentage of net sales during 2022 compared to 2021 was attributable to higher commodity costs forWestern Sizzlin . Steak n Shake's cost of food as a percentage of net sales was unchanged. Restaurant operating costs during the second quarter of 2022 were$20,350 , or 54.0% of net sales, as compared to$22,058 , or 44.6% of net sales, in the second quarter of 2021. Restaurant operating costs during the first six months of 2022 were$40,382 , or 53.2% of net sales, as compared to$47,255 , or 45.3% of net sales, in the first six months of 2021, respectively. The increase in restaurant operating costs as a percentage of net sales during 2022 compared to 2021 was primarily related to higher labor costs. General and administrative costs during the second quarter and first six months of 2022 were$10,121 and$18,771 , respectively, compared to$10,481 and$18,161 in the second quarter and first six months of 2021. The decrease in expenses during the second quarter of 2022 compared to 2021 was primarily because of lower legal and professional fees. Marketing expenses during the second quarter and first six months of 2022 were$3,087 and$6,831 , respectively, as compared$3,287 and$7,910 during the second quarter and first six months of 2021, respectively. The Company recorded impairment charges of$20 in the second quarter and first six months of 2022. Impairment charges were$261 and$559 in the second quarter and first six months of 2021, respectively. Impairments during 2021 are related to underperforming stores. 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.
Second Quarter
First Six Months
2022 2021 2022 2021
Underwriting gain (loss) attributable to:
First Guard $ 1,714 $ 2,959 $ 2,446 $ 5,090
Southern Pioneer (281) 701 (618) 1,114
Pre-tax underwriting gain 1,433 3,660 1,828 6,204
Income tax expense 301 769 384 1,303
Net underwriting gain $ 1,132 $ 2,891 $ 1,444 $ 4,901
20
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Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Earnings of our insurance operations are summarized below.
Second Quarter First Six Months
2022 2021 2022 2021
Premiums earned $ 15,226 $ 13,575 $ 29,395 $ 27,265
Insurance losses 9,244 6,362 18,832 13,383
Underwriting expenses 4,549 3,553 8,735 7,678
Pre-tax underwriting gain 1,433 3,660 1,828 6,204
Other income and expenses
Investment income 257 291 470 457
Other income (expenses) 741 368 1,497 895
Total other income 998 659 1,967 1,352
Earnings before income taxes 2,431 4,319 3,795 7,556
Income tax expense 572 933 892 1,639
Contribution to net earnings (loss)
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.
Second Quarter First Six Months
2022 2021 2022 2021
Amount % Amount % Amount % Amount %
Premiums earned $ 9,015 100.0 % $ 8,225 100.0 % $ 17,746 100.0 % $ 16,302 100.0 %
Insurance losses 5,465 60.6 % 3,809 46.3 % 11,653 65.7 % 7,811 47.9 %
Underwriting expenses 1,836 20.4 % 1,457 17.7 % 3,647 20.6 % 3,401 20.9 %
Total losses and expenses 7,301 81.0 % 5,266 64.0 % 15,300 86.3 % 11,212 68.8 %
Pre-tax underwriting gain $ 1,714 $ 2,959 $ 2,446 $ 5,090
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.
Second Quarter First Six Months
2022 2021 2022 2021
Amount % Amount % Amount % Amount %
Premiums earned $ 6,211 100.0 % $ 5,350 100.0 % $ 11,649 100.0 % $ 10,963 100.0 %
Insurance losses 3,779 60.8 % 2,553 47.7 % 7,179 61.6 % 5,572 50.8 %
Underwriting expenses 2,713 43.7 % 2,096 39.2 % 5,088 43.7 % 4,277 39.0 %
Total losses and expenses 6,492 104.5 % 4,649 86.9 % 12,267 105.3 % 9,849 89.8 %
Pre-tax underwriting gain (loss) $ (281) $ 701 $ (618) $ 1,114
21
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Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Insurance - Investment Income
A summary of net investment income attributable to our insurance operations
follows.
Second Quarter First Six Months
2022 2021 2022 2021
Interest, dividends and other investment
income:
First Guard $ 122 $ 13 $ 196 $ 30
Southern Pioneer 135 278 274 427
Pre-tax investment income 257 291 470 457
Income tax expense 54 61 99 96
Net investment income $ 203 $ 230 $ 371 $ 361
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 theGulf of Mexico . Earnings for Southern Oil are summarized below. Second Quarter First Six Months 2022 2021 2022 2021 Oil and gas revenue$ 14,440 $ 8,365 $ 24,252 $ 16,957 Oil and gas production costs 3,843 2,494 7,662 4,907 Depreciation, depletion and accretion 1,534 2,191 3,053 4,569 General and administrative expenses 642 654 1,195 1,416 Earnings before income taxes 8,421 3,026 12,342 6,065 Income tax expense 2,052 690
3,049 1,374
Contribution to net earnings (loss)
Brand Licensing Maxim's business lies principally in licensing and media. Earnings of operations are summarized below. Second Quarter First Six Months 2022 2021 2022 2021 Licensing and media revenue$ 1,249 $ 709 $ 1,883 $ 1,832 Licensing and media costs 677 389 1,630 869 General and administrative expenses 71 20 88 40 Earnings before income taxes 501 300 165 923 Income tax expense 126 75 41 218
Contribution to net earnings (loss)
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.
22
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Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Investment Gains Investment losses net of tax for the second quarter of 2022 and 2021 were$2,805 and$908 , respectively. Investment losses net of tax for the first six months of 2022 were$2,630 compared to investment gains net of tax for the first six months of 2021 of$1,506 . 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.
Investment Partnership Gains
Earnings (loss) from our investments in partnerships are summarized below.
Second Quarter
First Six Months
2022 2021 2022 2021
Investment partnership gains (losses)
Tax expense (benefit)
(24,894) (7,996)
(26,754) 11,121
Contribution to net earnings (loss)
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.
Interest Expense
The Company's interest expense is summarized below.
Second Quarter
First Six Months
2022 2021 2022 2021
Interest expense on notes payable $ - $ - $ - $ 1,121
Tax benefit - - - 280
Interest expense net of tax $ - $ - $ - $ 841
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 second quarter and first six months of 2022 were relatively flat compared to the same period in 2021. Income Taxes Income tax benefit for the second quarter of 2022 was$22,709 compared to$6,198 for the second quarter of 2021. Income tax benefit for the first six months of 2022 was$22,880 compared to an income tax expense of$15,818 for the first six months of 2021. The variance in income taxes between 2022 and 2021 is attributable to taxes on income generated by the investment partnerships. Investment partnership pre-tax losses were$111,902 during the first six months of 2022 compared to pre-tax gains of$47,575 during the first six months of 2021. 23
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Table of Contents
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