Biglari Holdings Inc. — Form 10-Q Summary
Business context and reporting period
Biglari Holdings is a diversified holding company with restaurant, property and casualty insurance, oil and gas, licensing and media, and investment partnership activities. 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 September 30, 2023. This unaudited Form 10-Q covers the third quarter and first nine months ended September 30, 2023, compared with the corresponding 2022 periods.
Key financial metrics
- Revenue: Third-quarter revenue was $90.9 million, down from $92.0 million; nine-month revenue was $274.7 million, up from $269.8 million.
- Net earnings attributable to shareholders: Third-quarter loss was $56.5 million, or $(195.55) per equivalent Class A share, compared with earnings of $32.0 million, or $109.13 per share. Nine-month earnings were $10.3 million, or $35.44 per share, compared with a $42.1 million loss, or $(140.30) per share.
- Primary earnings volatility: Investment partnership losses were $89.6 million in the third quarter and $24.5 million for the first nine months, compared with gains of $29.7 million and losses of $82.2 million, respectively, in the prior-year periods. The third-quarter investment partnership loss reduced net earnings by $68.4 million after tax.
- Operating businesses: Net earnings contribution increased to $15.6 million in the third quarter and $29.3 million for the first nine months, from $9.6 million and $23.3 million, respectively. Nine-month contributions were $16.2 million from restaurants, $8.0 million from insurance, $18.5 million from oil and gas, and $0.1 million from brand licensing, partly offset by $13.0 million of corporate and other costs.
- Restaurant operations: Revenue increased 4.1% in the third quarter and 4.4% for the first nine months. Nine-month restaurant earnings before tax rose to $20.8 million from $12.8 million. The restaurant base declined to 510 locations from 545 at December 31, 2022, including 159 company-operated and 315 franchise locations across Steak n Shake and Western Sizzlin.
- Insurance: Nine-month insurance earnings before tax increased to $10.1 million from $6.9 million. First Guard produced a $7.4 million underwriting gain, while Southern Pioneer had a $0.7 million underwriting loss.
- Oil and gas: Nine-month revenue declined to $35.1 million from $38.6 million, but earnings before tax increased to $23.9 million from $19.6 million, primarily because of a $13.6 million gain on an Abraxas Petroleum royalty-based arrangement. The company noted an average West Texas Intermediate price of approximately $77.30 per barrel in the first nine months of 2023 versus $98.27 in 2022.
- Cash flow: Nine-month operating cash flow was $48.7 million, down from $99.8 million, primarily because 2022 included $51.2 million of investment partnership distributions. Investing cash usage was $56.2 million, including $41.5 million of partnership investments and $16.9 million of capital expenditures. Financing provided $4.4 million.
- Liquidity and investments: Cash and cash equivalents were $34.0 million, investments were $84.4 million, and the fair value of investment partnership interests was $445.7 million at September 30. Cash, investments, and partnership interests totaled $564.0 million before deducting $276.3 million representing company stock held by the partnerships.
- Debt and leases: The company had $19.0 million outstanding under its $30.0 million revolving line of credit at 8.0% interest, versus $10.0 million at year-end 2022. Lease obligations totaled $103.7 million, comprising $15.2 million current and $88.4 million long term.
- Balance sheet: Total assets were $827.2 million and total shareholders’ equity was $557.4 million at September 30, 2023. The company had no noncontrolling interests, compared with $8.6 million at December 31, 2022.
Material changes versus the prior comparable period
- Third-quarter results moved from a $32.0 million profit to a $56.5 million loss, driven principally by the $89.6 million investment partnership loss.
- Nine-month results improved from a $42.1 million loss to $10.3 million of earnings attributable to shareholders, reflecting stronger operating results and substantially lower investment partnership losses.
- Restaurant operating performance improved, with lower operating costs as a percentage of company-operated sales, although the store count declined and traditional franchise royalties fell.
- Insurance results improved, mainly because of better First Guard underwriting and lower prior-year claim development; Southern Pioneer remained unprofitable on an underwriting basis.
- Oil and gas earnings benefited from the $13.6 million Abraxas transaction gain, while Southern Oil revenue and earnings declined substantially.
- Cash and cash equivalents declined by $3.5 million from year-end, while investments and partnership interests increased. Borrowings under the revolving credit facility increased by $9.0 million.
- The company acquired the remaining 10% of Abraxas Petroleum for $5.4 million on June 14, 2023, eliminating the related noncontrolling interest.
Guidance, outlook, risks, contingencies, and unusual items
- The filing does not provide quantitative revenue, earnings, or cash-flow guidance.
- Management expects investment partnership gains and losses to continue causing significant earnings volatility because they include unrealized market-value changes. Management states that investment gains and losses are generally not meaningful for assessing underlying operating performance.
- Oil and gas results remain highly dependent on volatile oil and natural gas prices. The filing also identifies commodity-price exposure, including the lower 2023 average oil price.
- Steak n Shake had 27 closed company-operated stores at September 30, 2023. Three were contracted for sale, 16 were listed for lease or sale, and the remainder were expected to be reopened or refranchised.
- The company recorded $2.4 million of store impairment charges during the first nine months and $13.6 million of oil and gas property-related gain. These items are unusual and affect comparability.
- Southern Pioneer continued to report underwriting losses, primarily related to weather-related personal-line losses and higher expenses associated with a new policy administration system.
- The $30.0 million revolving credit facility matures on September 12, 2024 and includes financial maintenance covenants. The company stated that it was in compliance with all covenants at September 30, 2023.
- The company is subject to legal proceedings and unresolved claims, but management believes any liability beyond recorded amounts is unlikely to materially affect results, financial position, or cash flow.
- Biglari Enterprises, an entity owned by Mr. Biglari, received $6.3 million in service fees during the first nine months of 2023. Investment-management and capital-allocation decisions are substantially centralized with Mr. Biglari.
Important facts for investors to verify
- Reconcile reported earnings with operating-business earnings by separately analyzing investment partnership mark-to-market results and related tax effects.
- Review the carrying value, liquidity, leverage, and concentration of the investment partnerships, including the company stock held by those partnerships.
- Assess the sustainability of restaurant earnings amid the continuing transition from company-operated stores to franchise partners and the reduction in total locations.
- Determine whether the Abraxas royalty arrangement and $13.6 million gain are nonrecurring and how future production and reserves may develop without company-funded exploration expenditures.
- Monitor oil and gas prices, production volumes, depletion expense, and Southern Oil’s declining revenue and earnings.
- Evaluate Southern Pioneer’s underwriting performance, reserve adequacy, weather exposure, and policy-system implementation costs.
- Confirm availability and covenant compliance under the revolving credit facility before its September 2024 maturity.
- Review related-party service fees, incentive arrangements, and the implications of Mr. Biglari’s controlling voting and economic interests.