Biglari Holdings Inc. 10-Q Summary
Business context and reporting period
Biglari Holdings is a diversified holding company with restaurant, insurance, oil and gas, licensing and media operations, and investment partnerships. Sardar Biglari serves as chairman and CEO and controlled approximately 66.3% of economic interest and 70.4% of voting interest as of June 30, 2022. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Key financial metrics
| Metric | Second quarter 2022 | Second quarter 2021 | First six months 2022 | First six months 2021 |
|---|---|---|---|---|
| Revenue | $92.4 million | $90.8 million | $177.7 million | $185.1 million |
| Operating-business earnings before tax | $15.4 million | $11.2 million | $24.7 million | $22.6 million |
| Investment partnership gains (losses) | $(105.2) million | $(34.2) million | $(111.9) million | $47.6 million |
| Net earnings (loss) | $(73.8) million | $(20.7) million | $(74.1) million | $51.0 million |
| Net loss per equivalent Class A share | $(244.37) | $(64.04) | $(244.29) | $158.06 |
| Cash flow from operations | Not separately provided for the quarter | Not separately provided for the quarter | $34.2 million | $187.2 million |
Revenue increased 1.7% in the quarter but declined 4.0% for the first six months. The quarterly increase reflected higher oil and gas, insurance and licensing revenue, partially offset by lower restaurant revenue. Operating businesses remained profitable, but consolidated results were dominated by investment losses.
Restaurant revenue was $60.3 million in the quarter and $120.2 million for the first six months, down from $67.3 million and $137.3 million, respectively. Oil and gas revenue increased to $14.4 million in the quarter and $24.3 million year to date, while insurance revenue increased to $16.4 million and $31.4 million.
Restaurant operations generated pre-tax earnings of $4.0 million in the quarter and $8.4 million year to date, compared with $3.6 million and $9.2 million in the prior-year periods. Higher labor and commodity costs pressured restaurant margins. As of June 30, 2022, the company had 560 restaurants, including 41 closed company-operated Steak n Shake locations; management plans to refranchise a majority of those closed locations.
Insurance pre-tax earnings declined to $2.4 million in the quarter and $3.8 million year to date, from $4.3 million and $7.6 million. First Guard and Southern Pioneer both experienced higher loss ratios; Southern Pioneer reported underwriting losses of $0.3 million in the quarter and $0.6 million year to date.
Southern Oil pre-tax earnings increased to $8.4 million in the quarter and $12.3 million year to date, compared with $3.0 million and $6.1 million. Maxim pre-tax earnings were $0.5 million in the quarter and $0.2 million year to date.
Financial position, cash flow and liquidity
- Cash and cash equivalents were $40.5 million at June 30, 2022, compared with $42.3 million at December 31, 2021.
- Direct investments were $71.8 million, down from $83.1 million. The fair value of investment partnership assets was $349.3 million, compared with $474.2 million at year-end.
- Total assets declined to $773.4 million from $894.8 million, primarily due to the decline in investment partnership values.
- Shareholders’ equity declined to $505.7 million from $587.7 million. Treasury stock recorded for company shares held by investment partnerships was $408.5 million.
- Net cash provided by operating activities was $34.2 million, versus $187.2 million in the prior-year period. The 2021 amount benefited from $158.1 million of distributions from investment partnerships, compared with $4.5 million in 2022.
- Investing activities used $32.8 million, including $16.4 million of capital expenditures, $19.4 million of purchases of limited partner interests and $78.1 million of investment purchases, partly offset by $81.0 million of investment sales and redemptions.
- Financing activities used $3.1 million for lease-related principal payments. The Steak n Shake term loan was fully repaid in February 2021, and no notes payable interest expense was recorded in 2022.
- Lease obligations totaled $116.4 million, including current and long-term obligations. Management expects working-capital needs to be funded principally through operating cash flow and cash on hand.
Material changes, outlook and risks
- The principal unusual item was a $111.9 million first-half loss from investment partnerships, compared with a $47.6 million gain in 2021. Management states that these market-value changes will continue to cause significant earnings volatility.
- Investment partnership losses reduced net earnings by $85.1 million after tax in the first six months. Investment partnership assets also hold Biglari Holdings shares, which are recorded as treasury stock and subject to related accounting eliminations.
- No specific revenue, earnings or cash-flow guidance was provided. Management expects operating subsidiaries to fund working capital from operations and cash on hand and continues to review financing alternatives.
- Restaurant revenue is expected to decline as company-operated units transition to franchise partner units because the company records only its profit share and fees for those units rather than end-customer sales.
- Key risks include concentrated equity investments, market-price volatility, oil and gas commodity-price exposure, higher restaurant labor and food costs, insurance loss experience, foreign-currency exposure and potential impairment of Western Sizzlin goodwill if franchised units continue to decline.
- Pending legal proceedings and unresolved claims were not expected by management to have a material effect beyond amounts already provided. The filing reports no material changes to previously disclosed risk factors.
Investor verification checklist
- Verify the market value, concentration and liquidity of the investment partnerships and the resulting sensitivity of equity and earnings.
- Assess whether restaurant refranchising improves cash generation despite reducing reported revenue, including the status of closed Steak n Shake locations.
- Monitor restaurant labor and commodity costs and the underwriting loss ratios at First Guard and Southern Pioneer.
- Evaluate Southern Oil results against oil and natural gas price trends and production levels.
- Review lease obligations, future lease payments and the company’s ability to fund working capital without investment-partnership distributions.
- Confirm the potential for Western Sizzlin goodwill impairment and any changes in litigation, insurance claims or other contingencies.