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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 ofSeptember 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. OnSeptember 14, 2022 , the Company completed the purchase of 685,505 shares of Series A Preferred Stock (the "Preferred Shares") of Abraxas Petroleum Corporation ("Abraxas Petroleum") for a purchase price of$80,000 . OnOctober 26, 2022 , the Company converted the preferred stock to 90% of the outstanding common stock of Abraxas Petroleum. We have concluded that Abraxas Petroleum is a consolidated entity and have recorded noncontrolling interests attributable to the interest held by other shareholders. The Company used working capital including its line of credit to fund the purchase of the Preferred Shares. Abraxas Petroleum operates oil and natural gas properties in thePermian Basin . The Company's financial results include the results of Abraxas Petroleum from the acquisition date to the end of the third quarter. The revenues and operating results for Abraxas Petroleum were not significant to the Company for the third quarter. Net earnings (loss) attributable toBiglari Holdings shareholders are disaggregated in the table that follows. Amounts are recorded after deducting income taxes. Third Quarter First Nine Months 2022 2021 2022 2021 Operating businesses: Restaurant$ 3,320 $ (1,515) $ 9,588 $ 5,146 Insurance 2,389 2,985 5,292 8,902 Oil and gas 5,574 2,325 14,867 7,016 Brand licensing 1,150 (43) 1,274 662 Interest expense (52) - (52) (841) Corporate and other (2,742) (2,526) (7,630) (6,649) Total operating businesses 9,639 1,226 23,339 14,236 Investment gains (657) 3,390 (3,287) 4,896 Investment partnership gains (losses) 23,057 (15,285) (62,091) 21,169 32,039 (10,669) (42,039) 40,301 Earnings attributable to noncontrolling interest 34 - 34 -$ 32,005 $ (10,669) $ (42,073) $ 40,301 20
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Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Restaurants Our restaurant businesses, which include Steak n Shake andWestern Sizzlin , comprise 552 company-operated and franchise restaurants as ofSeptember 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 (12) 12 - - - - Net restaurants opened (closed) (6) - (19) - -
(25)
Total stores as of September 30, 2022 181 171 159 3 38
552
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 As ofSeptember 30, 2022 , 39 of the 181 company-operated Steak n Shake stores were closed. We plan to refranchise a majority of our closed company-operated restaurants. 21
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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.
Third Quarter First Nine Months
2022 2021 2022 2021
Revenue
Net sales $ 37,448 $ 41,916 $ 113,345 $ 146,269
Franchise partner fees 15,880 11,508 47,929 31,744
Franchise royalties and fees 5,089 4,865 15,472 14,594
Other revenue 1,020 855 2,862 3,817
Total revenue 59,437 59,144 179,608 196,424
Restaurant cost of sales
Cost of food 11,359 30.3 % 13,123 31.3 % 33,684 29.7 % 43,404 29.7 %
Restaurant operating costs 20,745 55.4 % 24,496 58.4 % 61,127 53.9 % 71,751 49.1 %
Occupancy costs 4,058 10.8 % 4,075 9.7 % 12,658 11.2 % 14,142 9.7 %
Total cost of sales 36,162 41,694 107,469 129,297
Selling, general and
administrative
General and administrative 9,556 16.1 % 9,255 15.6 % 28,327 15.8 % 27,416 14.0 %
Marketing 2,758 4.6 % 2,302 3.9 % 9,589 5.3 % 10,212 5.2 %
Other expenses (825) (1.4) % 1,332 2.3 % (1,141) (0.6) % 2,266 1.2 %
Total selling, general and
administrative 11,489 19.3 % 12,889 21.8 % 36,775 20.5 % 39,894 20.3 %
Impairments - - (20) (559)
Depreciation and amortization (6,081) (5,811) (18,401) (15,615)
Interest on finance leases and
obligations (1,372) (1,462) (4,169) (4,619)
Earnings (loss) before income
taxes 4,333 (2,712) 12,774 6,440
Income tax expense (benefit) 1,013 (1,197) 3,186 1,294
Contribution to net earnings
(loss) $ 3,320 $ (1,515) $ 9,588 $ 5,146
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 third quarter and first nine months of 2022 were $37,448 and
$113,345 , respectively, representing a decrease of $4,468 or 10.7% and $32,924
or 22.5%, compared to the third quarter and first nine 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.
22
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Franchise partner fees were$15,880 during the third quarter of 2022, as compared to$11,508 during the third quarter of 2021. Franchise partner fees were$47,929 and$31,744 during the first nine months of 2022 and 2021, respectively. As ofSeptember 30, 2022 , there were 171 franchise partner units, compared to 140 franchise partner units as ofSeptember 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$5,089 during the third quarter of 2022, as compared to$4,865 during the third quarter of 2021. Franchise royalties and fees during the first nine months of 2022 were$15,472 compared to$14,594 during the first nine months of 2021. The cost of food as a percentage of net sales during the third quarter and first nine months of 2022 was 30.3% and 29.7%, respectively, as compared to 31.3% and 29.7% of net sales during the third quarter and first nine months of 2021, respectively. Cost of food as a percentage of net sales were lower during the third quarter of 2022 compared to 2021 primarily because of higher menu prices. Restaurant operating costs as a percentage of net sales during the third quarter of 2022 were 55.4%, as compared to 58.4% of net sales in the third quarter of 2021. Restaurant operating costs during the first nine months of 2022 were 53.9% of net sales, as compared to 49.1% of net sales in 2021. The increase during the first nine months was primarily the result of higher wages. Selling, general and administrative costs during the third quarter and first nine months of 2022 were$11,489 and$36,775 , respectively, compared to$12,889 and$39,894 in the third quarter and first nine months of 2021, respectively. Steak n Shake recorded gains on the disposal of assets of$1,084 and$1,749 in the third quarter and first nine months of 2022, respectively. The Company recorded no impairment charges in the third quarter and$20 in the first nine months of 2022. The Company recorded no impairment charges in the third quarter and$559 in the first nine 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.
Third Quarter
First Nine Months
2022 2021 2022 2021
Underwriting gain (loss) attributable to:
First Guard $ 2,354 $ 2,832 $ 4,800 $ 7,922
Southern Pioneer (483) 397 (1,101) 1,511
Pre-tax underwriting gain 1,871 3,229 3,699 9,433
Income tax expense 392 681 776 1,984
Net underwriting gain $ 1,479 $ 2,548 $ 2,923 $ 7,449
23
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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
2022 2021 2022 2021
Premiums earned $ 15,116 $ 13,901 $ 44,511 $ 41,166
Insurance losses 8,814 6,657 27,646 20,040
Underwriting expenses 4,431 4,015 13,166 11,693
Pre-tax underwriting gain 1,871 3,229 3,699 9,433
Other income and expenses
Investment income 362 195 832 652
Other income (expenses) 859 418 2,356 1,313
Total other income 1,221 613 3,188 1,965
Earnings before income taxes 3,092 3,842 6,887 11,398
Income tax expense 703 857
1,595 2,496
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.
Third Quarter First Nine Months
2022 2021 2022 2021
Amount % Amount % Amount % Amount %
Premiums earned $ 9,112 100.0 % $ 8,458 100.0 % $ 26,858 100.0 % $ 24,760 100.0 %
Insurance losses 4,815 52.8 % 3,935 46.5 % 16,468 61.3 % 11,746 47.4 %
Underwriting expenses 1,943 21.3 % 1,691 20.0 % 5,590 20.8 % 5,092 20.6 %
Total losses and expenses 6,758 74.1 % 5,626 66.5 % 22,058 82.1 % 16,838 68.0 %
Pre-tax underwriting gain $ 2,354 $ 2,832 $ 4,800 $ 7,922
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.
Third Quarter First Nine Months
2022 2021 2022 2021
Amount % Amount % Amount % Amount %
Premiums earned $ 6,004 100.0 % $ 5,443 100.0 % $ 17,653 100.0 % $ 16,406 100.0 %
Insurance losses 3,999 66.6 % 2,722 50.0 % 11,178 63.3 % 8,294 50.6 %
Underwriting expenses 2,488 41.4 % 2,324 42.7 % 7,576 42.9 % 6,601 40.2 %
Total losses and expenses 6,487 108.0 % 5,046 92.7 % 18,754 106.2 % 14,895 90.8 %
Pre-tax underwriting gain (loss) $ (483) $ 397 $ (1,101) $ 1,511
24
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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.
Third Quarter First Nine Months
2022 2021 2022 2021
Interest, dividends and other investment
income:
First Guard $ 202 $ 54 $ 398 $ 84
Southern Pioneer 160 141 434 568
Pre-tax investment income 362 195 832 652
Income tax expense 76 41 175 137
Net investment income $ 286 $ 154 $ 657 $ 515
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 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. Third Quarter First Nine Months 2022 2021 2022 2021 Oil and gas revenue$ 12,688 $ 7,353 $ 36,940 $ 24,310 Oil and gas production costs 3,484 2,050 11,146 6,957 Depreciation, depletion and accretion 1,873 1,717 4,926 6,286 General and administrative expenses 536 604 1,731 2,020 Earnings before income taxes 6,795 2,982 19,137 9,047 Income tax expense 1,564 657 4,613 2,031 Contribution to net earnings$ 5,231 $ 2,325 $ 14,524 $ 7,016 Abraxas Petroleum Abraxas Petroleum operates oil and gas properties in thePermian Basin . Earnings for Abraxas Petroleum from the date of acquisition onSeptember 14, 2022 are summarized below. Third Quarter 2022 Oil and gas revenue$ 1,692 Oil and gas production costs 606 Depreciation, depletion and accretion
360
General and administrative expenses 280 Earnings before income taxes 446 Income tax expense 103 Contribution to net earnings 343 Earnings attributable to noncontrolling interests
34
Net earnings attributable to
309
25
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Brand Licensing Maxim's business lies principally in licensing and media. Earnings of operations are summarized below. Third Quarter First Nine Months 2022 2021 2022 2021 Licensing and media revenue$ 1,905 $ 863 $ 3,788 $ 2,695 Licensing and media costs 345 880 1,975 1,749 General and administrative expenses 26 39 114
79
Earnings (loss) before income taxes 1,534 (56) 1,699
867
Income tax expense (benefit) 384 (13) 425
205
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.
Investment Gains
Investment losses net of tax for the third quarter of 2022 were$657 compared to investment gains net of tax for the third quarter of 2021 of$3,390 . Investment losses net of tax for the first nine months of 2022 were$3,287 compared to investment gains net of tax for the first nine months of 2021 of$4,896 . 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.
Third Quarter
First Nine Months
2022 2021 2022 2021
Investment partnership gains (losses)
Tax expense (benefit)
6,601 (4,946)
(20,153) 6,175
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.
26
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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
2022 2021 2022 2021
Interest expense on notes payable $ 67 $ - $ 67 $ 1,121
Tax benefit 15 - 15 280
Interest expense net of tax $ 52 $ - $ 52 $ 841
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 third quarter and first nine months of 2022 were relatively flat compared to
the same period in 2021.
Income Taxes
Income tax expense for the third quarter of 2022 was $9,598 compared to an
income tax benefit of $4,274 for the third quarter of 2021. Income tax benefit
for the first nine months of 2022 was $13,282 compared to an income tax expense
of $11,544 for the first nine 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 gains were $29,658
during the third quarter of 2022 compared to pre-tax losses of $20,231 during
the third quarter of 2021. Investment partnership pre-tax losses were $82,244
during the first nine months of 2022 compared to pre-tax gains of $27,344 during
the first nine months of 2021.
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS Nine Months Ended September 30, 2022 and 2021 ($ in Millions, Except Share Data)
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