Business Context and Reporting Period
Biglari Holdings Inc. is a diversified holding company with restaurant, insurance, oil and gas, licensing and media operations, and investment partnerships. The company is led by Sardar Biglari, who held approximately 66.3% of the economic interest and 70.4% of the voting interest as of March 31, 2023. This unaudited Form 10-Q covers the quarter ended March 31, 2023, compared with the first quarter of 2022.
On October 26, 2022, the company acquired 90% of Abraxas Petroleum after exchanging $80 million of preferred stock for Abraxas common stock. Abraxas contributed $7.3 million of first-quarter 2023 revenue and $1.2 million of pretax earnings.
Financial Performance and Position
- Revenue: $90.2 million, up from $85.4 million, primarily reflecting the addition of Abraxas and higher restaurant franchise partner fees.
- Net earnings: $65.5 million, compared with a $0.3 million loss. Net earnings attributable to Biglari Holdings shareholders were $64.9 million, or $222.28 per equivalent Class A share, compared with a $0.3 million loss, or $(0.98) per share.
- Investment results: Investment partnership gains were $72.6 million versus a $6.7 million loss in the prior-year quarter. After tax, these gains contributed $56.0 million to net earnings. Investment gains contributed an additional $2.9 million after tax.
- Operating businesses: Operating businesses contributed $6.6 million to net earnings, compared with $4.3 million in the prior-year quarter. Pretax operating-business earnings increased to $12.6 million from $9.4 million.
- Margins: Consolidated net margin was approximately 72.3%, compared with a negative margin in the prior-year quarter; this comparison is heavily distorted by investment partnership gains. Restaurant operations generated $7.8 million of pretax earnings on $61.1 million of revenue, versus $4.4 million on $59.8 million of revenue.
- Cash flow: Operating cash flow was $19.9 million, compared with $21.1 million. Capital expenditures were $5.9 million, and net cash used in investing activities was $12.7 million.
- Liquidity: Cash and cash equivalents were $39.4 million, investments were $79.7 million, and cash, cash equivalents and restricted cash totaled $41.0 million at quarter-end. Management stated that working-capital needs are expected to be funded principally from operating cash flow and cash on hand.
- Debt and leases: The company had $6.5 million outstanding under its $30.0 million revolving credit facility at March 31, 2023, bearing interest at 7.3%; the balance was repaid in April 2023. Total lease obligations were $106.2 million, including $90.1 million long term.
- Balance sheet: Total assets increased to $907.2 million from $828.5 million, primarily due to the increase in investment partnership assets. Total shareholders’ equity increased to $621.2 million from $555.6 million.
Material Changes Versus the Prior Comparable Period
- Restaurant revenue increased 2.1% to $61.1 million, while restaurant pretax earnings increased 76.0% to $7.8 million. Company-operated net sales declined 3.5% as stores transitioned to franchise partner units, while franchise partner fees increased to $17.9 million from $15.6 million.
- The restaurant portfolio declined to 532 locations from 575 a year earlier. At March 31, 2023, 178 units were franchise partner restaurants and 143 were traditional franchise units. Thirty-six of 172 company-operated Steak n Shake stores were closed.
- Insurance pretax earnings increased to $2.8 million from $1.4 million. The aggregate pretax underwriting gain increased to $1.8 million from $0.4 million, helped by improved loss ratios at First Guard and Southern Pioneer.
- Oil and gas revenue increased to $12.2 million from $9.8 million due to Abraxas, but pretax earnings declined to $2.1 million from $3.9 million. Southern Oil earnings fell as average West Texas Intermediate prices declined to approximately $76.11 per barrel from $94.82.
- Maxim’s pretax result improved to income of $0.1 million from a $0.3 million loss as licensing and media costs declined.
- Income tax expense increased to $19.7 million from a $0.2 million benefit, primarily because of the change from investment partnership losses to gains.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal revenue or earnings guidance. Management stated that investment partnership gains and losses may cause significant volatility in periodic earnings and that such results are generally not meaningful for evaluating recurring operating performance.
- Oil and gas results remain highly sensitive to volatile oil and natural gas prices. The filing specifically notes that commodity-price volatility will affect future results.
- Restaurant revenue may continue to decline as company-operated stores are converted to franchise partner units because the company records only its profit share and certain fees for franchise partner units rather than their full sales.
- First Guard reported cost inflation in property and physical-damage claims. Southern Pioneer continued to experience elevated expenses associated with implementing a new policy administration system.
- The company recorded a $0.8 million impairment charge for underperforming restaurant stores and recognized a $1.4 million gain on the sale of a former Steak n Shake restaurant property.
- The investment partnerships’ carrying value increased to $230.8 million from $155.8 million. The company reported a related deferred tax liability of $40.4 million, with a majority expected not to become due until dissolution of the partnerships.
- Legal proceedings and unresolved claims were not expected by management to have a material effect beyond amounts already provided. The filing reported no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Separate recurring operating performance from the $56.0 million after-tax contribution from investment partnership gains.
- Review the composition, valuation and market exposure of the investment partnerships, including their holdings of Biglari Holdings stock and the related deferred tax liability.
- Monitor restaurant closures, refranchising progress, franchise partner profitability and the effect of lower traditional franchise royalties.
- Track oil and gas production, commodity prices and Abraxas’s contribution following the 2022 acquisition.
- Confirm that the $6.5 million revolving credit balance was repaid in April 2023 and assess remaining lease obligations and liquidity needs.
- Evaluate the sustainability of insurance underwriting gains, including claims inflation and Southern Pioneer’s technology-related expenses.