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.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 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 byMr. Biglari . As ofMarch 31, 2023 ,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 purchased Series A Preferred Stock (the "Preferred Shares") of Abraxas Petroleum Corporation for a purchase price of$80 million . OnOctober 26, 2022 , the Company exchanged the Preferred Shares for 90% of the outstanding common stock of Abraxas Petroleum. Net earnings (loss) attributable toBiglari Holdings Inc. shareholders are disaggregated in the table that follows. Amounts are recorded after deducting income taxes. First Quarter 2023 2022 Operating businesses: Restaurant$ 5,840 $ 3,262 Insurance 2,169 1,044 Oil and gas 1,670 2,924 Brand licensing 91 (251) Interest expense (129) - Corporate and other (2,998) (2,651) Total operating businesses 6,643 4,328 Investment partnership gains (losses) 56,029 (4,801) Investment gains 2,865 175 Net earnings (loss) 65,537 (298) Earnings attributable to noncontrolling interest 651 -
Net earnings (loss) attributable to
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Table of Contents
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 532 company-operated and franchise restaurants as ofMarch 31, 2023 . Steak n Shake Western Sizzlin Company- Franchise Traditional Company- operated Partner Franchise operated Franchise Total 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
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
As ofMarch 31, 2023 , 36 of the 172 company-operated Steak n Shake stores were closed. Steak n Shake has contracted to sell seven of the 36 closed stores. An additional seventeen closed stores are listed with brokers for lease or sale. Steak n Shake plans to refranchise the remaining closed company-operated restaurants.
During the first quarter of 2023, Steak n Shake reopened two stores and sold one
property; all were closed as of
19
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Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Restaurant operations are summarized below.
First Quarter
2023 2022
Revenue
Net sales $ 36,894 $ 38,216
Franchise partner fees 17,912 15,624
Franchise royalties and fees 4,258 5,146
Other revenue 2,065 861
Total revenue 61,129 59,847
Restaurant cost of sales
Cost of food 10,448 28.3 % 10,960 28.7 %
Restaurant operating costs 18,457 50.0 % 20,032 52.4 %
Occupancy costs 3,833 10.4 % 4,360 11.4 %
Total cost of sales 32,738 35,352
Selling, general and administrative
General and administrative 10,463 17.1 % 8,650 14.5 %
Marketing 2,953 4.8 % 3,744 6.3 %
Other expenses (income) (1,612) (2.6) %
45 0.1 %
Total selling, general and administrative 11,804 19.3 % 12,439 20.8 %
Impairments (776)
-
Depreciation and amortization (6,707)
(6,214)
Interest on finance leases and obligations (1,307)
(1,412)
Earnings (loss) before income taxes 7,797
4,430
Income tax expense (benefit) 1,957
1,168
Contribution to net earnings$ 5,840 $
3,262
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. Net sales for 2023 were$36,894 , representing a decrease of$1,322 or 3.5% compared to 2022. 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. Our franchise partner fees were$17,912 during the first quarter of 2023, as compared to$15,624 during the first quarter of 2022. As ofMarch 31, 2023 , there were 178 franchise partner units, compared to 171 franchise partner units as ofMarch 31, 2022 . Included in franchise partner fees were$5,575 and$4,774 of rental income during the first quarter of 2023 and 2022, respectively. Franchise partners rent buildings and equipment from Steak n Shake. 20
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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$4,258 during the first quarter of 2023, as compared to$5,146 during the first quarter of 2022. The decrease in franchise royalties and fees was primarily because of reduced marketing by franchisees. There were 143 Steak n Shake traditional units open onMarch 31, 2023 , as compared to 179 units open onMarch 31, 2022 . The cost of food at company-operated units during the first quarter of 2023 was$10,448 or 28.3% of net sales, as compared to$10,960 or 28.7% of net sales during the first quarter of 2022. The cost of food expressed as a percentage of net sales remained relatively consistent. The operating costs at company-operated restaurants during the first quarter of 2023 were$18,457 or 50.0% of net sales, as compared to$20,032 or 52.4% of net sales during the first quarter of 2022. The decrease in operating costs as a percentage of net sales was mainly attributable to lower labor costs.
General and administrative expenses during the first quarter of 2023 were
revenue during the first quarter of 2022. The increase in general and
administrative expenses was mainly attributable to increased support for
franchise partnerships.
Marketing expense decreased by$791 during the first quarter of 2023 compared to the first quarter of 2022. The decrease was primarily attributable to reduced marketing by traditional franchisees.
During the first quarter of 2023, Steak n Shake sold the property of a former
company-operated restaurant for a gain of
The Company recorded impairment charges of
related to underperforming stores. There were no impairments in the first
quarter of 2022.
Depreciation and amortization expense was
during 2022. The year-over-year increase is primarily attributable to higher
capital expenditures incurred in 2022 and 2021.
Interest on obligations under leases was$1,307 during 2023 versus$1,412 during 2022. The year-over-year decrease in interest expense is primarily attributable to the maturity and retirement of lease obligations.
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
2023 2022
Underwriting gain attributable to:
First Guard $ 1,862 $ 732
Southern Pioneer (111) (337)
Pre-tax underwriting gain 1,751 395
Income tax expense 368 83
Net underwriting gain $ 1,383 $ 312
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Earnings of our insurance operations are summarized below.
First Quarter
2023 2022
Premiums earned $ 14,764 $ 14,169
Insurance losses 8,596 9,588
Underwriting expenses 4,417 4,186
Pre-tax underwriting gain 1,751 395
Other income and expenses
Investment income 585 213
Other income (expenses) 451 756
Total other income 1,036 969
Earnings before income taxes 2,787 1,364
Income tax expense 618 320
Contribution to net earnings $ 2,169 $ 1,044
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
2023 2022
Amount % Amount %
Premiums earned $ 8,899 100.0 % $ 8,731 100.0 %
Insurance losses 5,244 58.9 % 6,188 70.9 %
Underwriting expenses 1,793 20.1 % 1,811 20.7 %
Total losses and expenses 7,037 79.0 % 7,999 91.6 %
Pretax underwriting gain $ 1,862 $ 732
First Guard's ratio of losses and loss adjustment expenses to premiums earned
was 58.9% during the first quarter of 2023 as compared to 70.9% during the first
quarter of 2022. First Guard's underwriting results in 2023 were in line with
its historical performance despite cost inflation in property and physical
damage claims, which began to accelerate in 2022.
22
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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
2023 2022
Amount % Amount %
Premiums earned $ 5,865 100.0 % $ 5,438 100.0 %
Insurance losses 3,352 57.2 % 3,400 62.5 %
Underwriting expenses 2,624 44.7 % 2,375 43.7 %
Total losses and expenses 5,976 101.9 % 5,775 106.2 %
Pretax underwriting gain (loss) $ (111) $ (337)
Southern Pioneer's ratio of losses and loss adjustment expenses to premiums
earned was 57.2% during the first quarter of 2023 as compared to 62.5% during
the first quarter of 2022. Southern Pioneer's underwriting losses were primarily
attributable to a higher expense ratio, an increase 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
2023 2022
Interest, dividends and other investment income:
First Guard $ 387 $ 74
Southern Pioneer 198 139
Pre-tax investment income 585 213
Income tax expense 123 45
Net investment income $ 462 $ 168
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.
23
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Oil and Gas
A summary of revenues and earnings of our oil and gas operations follows.
First Quarter
2023 2022
Oil and gas revenues $ 12,223 $ 9,812
Oil and gas production costs 5,471 3,819
Depreciation, depletion and accretion 2,850 1,519
General and administrative expenses 1,799 553
Earnings before income taxes 2,103 3,921
Income tax expense 433 997
Contribution to net earnings $ 1,670 $ 2,924
Our oil and gas business is highly dependent on oil and natural gas prices. The
average West Texas Intermediate price per barrel for the first quarter of 2023
was approximately $76.11 as compared to approximately $94.82 in the first
quarter of 2022. It is expected that the prices of oil and gas commodities will
remain volatile, which will be reflected in our financial results.
Southern Oil
Southern Oil primarily operates oil and natural gas properties offshore in the shallow waters of theGulf of Mexico . Earnings for Southern Oil are summarized below. First Quarter 2023 2022 Oil and gas revenues$ 4,971 $ 9,812 Oil and gas production costs 2,340 3,819
Depreciation, depletion and accretion 1,184 1,519
General and administrative expenses
553 553 Earnings before income taxes 894 3,921 Income tax expense 155 997 Contribution to net earnings$ 739 $ 2,924 24
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Abraxas Petroleum
Abraxas Petroleum operates oil and gas properties in the
Texas
First Quarter
2023
Oil and gas revenues $ 7,252
Oil and gas production costs 3,131
Depreciation, depletion and accretion 1,666
General and administrative expenses 1,246
Earnings before income taxes 1,209
Income tax expense 278
Contribution to net earnings $ 931
Brand Licensing
Maxim's business lies principally in licensing and media. Earnings of operations
are summarized below.
First Quarter
2023 2022
Licensing and media revenues $ 595 $ 634
Licensing and media costs 452 953
General and administrative expenses 21 17
Earnings before income taxes 122 (336)
Income tax expense (benefit) 31 (85)
Contribution to net earnings $ 91 $ (251)
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 2023 and 2022 were$2,865 and$175 , 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
2023 2022
Investment partnership gains (losses) $ 72,588 $ (6,661)
Tax expense (benefit) 16,559 (1,860)
Contribution to net earnings $ 56,029 $ (4,801)
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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 2023 and 2022 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.
Interest Expense
The Company's interest expense is summarized below.
First Quarter
2023 2022
Interest expense on line of credit $ 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 . The balance of the line of credit
was $6,500 and $10,000 on March 31, 2023 and December 31, 2022 , respectively.
Our interest rate was 7.3% on March 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 2023 were relatively consistent to the same period during 2022.
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