Business Context and Reporting Period
Biglari Holdings Inc. filed an unaudited Form 10-Q for the quarter and first nine months ended September 30, 2022. The holding company operates restaurant, insurance, oil and gas, and licensing and media businesses, while also holding investment partnership interests. Sardar Biglari serves as Chairman and CEO and beneficially controls approximately 66.3% of economic interest and 70.4% of voting interest.
On September 14, 2022, the Company acquired preferred shares of Abraxas Petroleum for $80.0 million. The preferred shares were converted into 90% of Abraxas’s common stock on October 26, 2022. Abraxas was consolidated from the acquisition date, with results not significant to third-quarter consolidated results.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | First 9 Months 2022 | First 9 Months 2021 |
|---|---|---|---|---|
| Revenue | $92.0 million | $82.1 million | $269.8 million | $267.2 million |
| Earnings before taxes | $41.6 million | $(14.9) million | $(55.3) million | $51.8 million |
| Net earnings attributable to shareholders | $32.0 million | $(10.7) million | $(42.1) million | $40.3 million |
| Equivalent Class A earnings per share | $109.13 | $(33.74) | $(140.30) | $125.79 |
| Cash flow from operations | Not separately provided | Not separately provided | $99.8 million | $211.2 million |
Quarterly revenue increased primarily from higher oil and gas, insurance, and licensing revenue. The quarter benefited from $29.7 million of investment partnership gains, compared with a $20.2 million loss in the prior-year quarter. For the nine-month period, investment partnership losses were $82.2 million, compared with $27.3 million of gains in 2021, producing a significant year-to-date loss.
Operating businesses generated $16.1 million of pre-tax earnings in the third quarter and $40.9 million for the first nine months. Corporate and other expenses were $3.3 million in the quarter and $9.8 million year to date. The filing does not present a single consolidated operating margin; operating results were affected by the mix of restaurant, insurance, oil and gas, and investment activities.
Segment and Operating Results
- Restaurants: Revenue was $59.4 million in the quarter and $179.6 million for the first nine months, compared with $59.1 million and $196.4 million, respectively. Pre-tax earnings increased to $4.3 million from a $2.7 million loss in the quarter and rose to $12.8 million from $6.4 million year to date. Company-operated restaurant sales declined as stores transitioned to franchise partner units, while franchise partner fees increased to $15.9 million in the quarter and $47.9 million year to date.
- Insurance: Revenue increased to $16.3 million in the quarter and $47.7 million year to date. Pre-tax earnings declined to $3.1 million and $6.9 million, respectively, from $3.8 million and $11.4 million. Southern Pioneer reported underwriting losses of $0.5 million in the quarter and $1.1 million year to date.
- Oil and gas: Revenue increased to $14.4 million in the quarter and $38.6 million year to date, compared with $7.4 million and $24.3 million. Pre-tax earnings increased to $7.2 million and $19.6 million. Abraxas contributed $1.7 million of revenue and $0.4 million of pre-tax earnings after acquisition.
- Licensing and media: Revenue increased to $1.9 million in the quarter and $3.8 million year to date. Pre-tax earnings were $1.5 million and $1.7 million, compared with a small loss and $0.9 million of earnings in the comparable periods.
Cash Flow, Liquidity, Debt, and Capital Resources
- Cash, cash equivalents, and restricted cash totaled $66.2 million at September 30, 2022, compared with $43.7 million at December 31, 2021. Cash and cash equivalents alone were $64.8 million.
- Operating cash flow was $99.8 million, down from $211.2 million. The decrease principally reflected lower distributions from investment partnerships: $51.2 million in 2022 versus $172.4 million in 2021.
- Investing activities used $102.5 million, including $23.4 million of capital expenditures, $54.9 million for the Abraxas acquisition, and $23.9 million for purchases of limited partner interests.
- Financing activities provided $25.4 million, including $30.0 million of borrowings under a new revolving credit facility. The Company made $4.6 million of principal payments on direct financing lease obligations.
- The revolving credit facility has availability of up to $30.0 million, matures on September 12, 2024, and had a $30.0 million balance at quarter end. Management stated that the Company was in compliance with all covenants.
- Total liabilities were $316.7 million and total shareholders’ equity was $545.4 million at September 30, 2022. Lease obligations totaled $113.1 million, including current and long-term amounts.
- Cash and investments, including the fair value of investment partnership interests but excluding the Company’s stock held by those partnerships, totaled $279.7 million on a carrying-value basis, down from $375.8 million at year-end 2021.
Material Changes, Outlook, Risks, and Unusual Items
- Investment partnership results were highly volatile: a $29.7 million pre-tax gain in the third quarter contrasted with a $20.2 million loss in the prior-year quarter, while the nine-month result shifted from a $27.3 million gain to an $82.2 million loss.
- The Company’s investment partnerships hold concentrated equity positions. Management stated that a hypothetical 10% change in investment prices would change the carrying value of investments by approximately $21.5 million and shareholders’ equity by approximately 3%.
- Restaurant revenue is expected to decline as company-operated locations are converted to franchise partner locations because the Company records only its share of franchise partner profits and related fees rather than the partners’ full sales.
- As of September 30, 2022, the restaurant system had 552 locations, down from 577 at December 31, 2021. Thirty-nine of 181 company-operated Steak n Shake locations were closed, and management planned to refranchise a majority of the closed locations.
- Insurance results were pressured by higher losses, particularly at First Guard and Southern Pioneer. Southern Pioneer’s combined losses and expenses exceeded premiums earned in both the quarter and first nine months.
- Oil and gas earnings remain exposed to changes in crude oil and natural gas prices. A material decline in commodity prices could adversely affect operations and earnings.
- The filing provides no formal revenue, earnings, or cash flow guidance. Management expects to fund operating working capital principally through operating cash flow and cash on hand and continues to review financing alternatives.
- Legal proceedings and unresolved claims exist, but management believes any liability beyond recorded amounts is not likely to be material. No material changes to previously disclosed risk factors were reported.
- Related-party service fees paid to entities owned by Mr. Biglari were $6.3 million during the first nine months of both 2022 and 2021.
Investor Verification Checklist
- Verify the valuation, concentration, and liquidity of the investment partnerships, including their exposure to Biglari Holdings stock and the impact of future market movements.
- Assess whether the $30.0 million revolving credit balance and related covenants constrain liquidity or capital allocation.
- Track the economics of the Steak n Shake refranchising strategy, including franchise partner fees, store closures, unit counts, labor costs, and restaurant-level profitability.
- Evaluate Southern Pioneer’s adverse underwriting trend and First Guard’s higher loss ratio.
- Review Abraxas Petroleum’s post-acquisition contribution, ownership structure, noncontrolling interest, and future capital requirements.
- Reconcile operating cash flow with investment partnership distributions and determine the sustainability of cash generation without recurring partnership distributions.
- Consider the effect of oil and gas price volatility and concentrated equity investment exposure on future earnings and shareholders’ equity.