BIGLARI HOLDINGS INC. – 10-Q – Management's Discussion and Analysis of Financial ... .

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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 by Sardar 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 by
Mr. Biglari.

As of June 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 to Biglari 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 and Western Sizzlin,
comprise 560 company-operated and franchise restaurants as of June 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 June 30, 2022, 41 of the 176 company-operated Steak n Shake stores were
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.

                                               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.

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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 of June 30, 2022, there were 177 franchise partner units,
compared to 131 franchise partner units as of June 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 for Western
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



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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.

                                            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) $ 1,859$ 3,386$ 2,903

$ 5,917

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


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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 the Gulf 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) $ 6,369$ 2,336$ 9,293$ 4,691


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) $ 375$ 225$ 124

$ 705

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.

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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) $ (105,241)$ (34,191)$ (111,902)$ 47,575
Tax expense (benefit)

                      (24,894)        (7,996)        

(26,754) 11,121
Contribution to net earnings (loss) $ (80,347)$ (26,195)$ (85,148)$ 36,454


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 March 19, 2021. The Company
repaid Steak n Shake's outstanding balance in full on February 19, 2021.

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.
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