Biglari Holdings Inc. quarterly report, Q3 FY2021

Biglari Holdings Inc. Form 10-Q Summary

Business Context and Reporting Period

Biglari Holdings is a diversified holding company with businesses in restaurants, property and casualty insurance, oil and gas, and media and licensing. The company’s largest operating businesses are Steak n Shake and Western Sizzlin restaurants. The filing covers the quarter and nine months ended September 30, 2021. Results are unaudited and should be read with the company’s 2020 Form 10-K.

Sardar Biglari serves as Chairman and Chief Executive Officer and beneficially owns approximately 65.0% of the economic interest and 70.3% of the voting interest.

Key Financial Metrics

Metric	Third Quarter 2021	Third Quarter 2020	First Nine Months 2021	First Nine Months 2020
Revenue	$82.1 million	$101.8 million	$267.2 million	$334.0 million
Net earnings (loss)	$(10.7) million	$21.1 million	$40.3 million	$(74.3) million
Equivalent Class A earnings (loss) per share	$(33.74)	$60.07	$125.79	$(213.31)
Cash provided by operating activities	Not separately provided	Not separately provided	$211.2 million	$106.4 million

Third-quarter 2021 revenue declined 19.4% year over year, while nine-month revenue declined 20.0%. The nine-month net earnings improvement primarily reflected favorable investment partnership results, lower impairments, improved operating business performance, and the absence of most interest expense following debt repayment.

Restaurant operations generated $59.1 million of third-quarter revenue and $196.4 million for the first nine months, compared with $79.7 million and $272.6 million, respectively, in 2020. Insurance revenue increased to $43.7 million for the first nine months from $38.7 million. Oil and gas revenue increased to $24.3 million from $19.6 million, while media and licensing revenue declined to $2.7 million from $3.2 million.

Operating businesses produced $26.6 million of pretax earnings in the first nine months of 2021, compared with a $2.7 million pretax loss in the prior-year period. Nine-month pretax earnings included $11.4 million from insurance, $9.0 million from oil and gas, $6.4 million from restaurants, and $0.9 million from media and licensing.

Investment partnership gains were $27.3 million in the first nine months of 2021 versus an $89.3 million loss in 2020. However, the partnerships generated a $20.2 million loss in the third quarter of 2021 compared with a $27.2 million gain in the third quarter of 2020, making quarterly earnings highly volatile.

Liquidity, Cash Flow, Debt, and Balance Sheet

Cash and cash equivalents were $27.8 million at September 30, 2021, compared with $24.5 million at December 31, 2020.
Investments were $99.0 million, compared with $94.9 million at year-end 2020.
The fair value of investment partnership interests was $534.0 million, compared with $590.9 million at year-end. The balance-sheet carrying value was $273.1 million after excluding the company stock held by the partnerships.
Total assets were $919.4 million, down from $1.018 billion, primarily because of distributions from investment partnerships.
Total liabilities declined to $320.8 million from $453.1 million.
Shareholders’ equity increased to $598.6 million from $564.8 million.
Operating cash flow of $211.2 million included $172.4 million of distributions from investment partnerships.
Capital expenditures were $46.5 million, including substantial spending on Steak n Shake’s conversion to a self-service model.
Financing cash outflows were $154.6 million, including $150.0 million of principal debt repayment.
Steak n Shake repaid its $152.5 million outstanding term loan in full on February 19, 2021. No notes payable remained outstanding at September 30, 2021.
Lease obligations totaled $125.2 million, consisting of $17.2 million current and $107.9 million long term.

Material Changes Versus the Prior Comparable Period

Restaurant revenue decreased primarily because company-operated units were converted to franchise partner units. Steak n Shake franchise partner units increased to 140 from 69 a year earlier, while company-operated units declined to 221 from 260.
Restaurants operated 581 total stores at September 30, 2021, compared with 570 a year earlier and 598 at December 31, 2020. Forty-two company-operated Steak n Shake stores were temporarily closed.
Restaurant operations generated $6.4 million of pretax earnings for the first nine months versus a $7.3 million pretax loss in 2020. Higher franchise partner fees and lower costs offset lower company-operated sales.
Restaurant cost pressures increased: first-nine-month restaurant operating costs rose to 49.1% of net sales from 45.9%, and occupancy costs rose to 9.7% from 5.4%. Management stated that menu price increases were expected in the fourth quarter to improve margins.
Steak n Shake spent $29.7 million during the first nine months on converting table-service restaurants to a self-service model, contributing to higher capital expenditures.
Insurance underwriting gain increased to $9.4 million from $6.7 million. Southern Pioneer improved to a $1.5 million underwriting gain from a $0.2 million loss.
Southern Oil pretax earnings increased to $9.0 million from $1.4 million, benefiting from improved commodity pricing and lower depletion expense.
Impairment charges fell to $0.6 million from $21.8 million, including $18.1 million of restaurant impairments in the prior-year period.
Interest expense on notes payable declined to $1.1 million from $7.0 million because the Steak n Shake term loan was repaid during the first quarter.
The company and an affiliated investment partnership purchased 1,618 Class A shares at an average price of $850.71 and 12,937 Class B shares at an average price of $171.59 during August 2021.

Guidance, Outlook, Risks, and Unusual Items

COVID-19 continues to pose risks to earnings, cash flow, and financial condition. Management stated that the long-term effects cannot be reasonably estimated.
Restaurant performance remains exposed to labor costs, food inflation, store closures, operating model changes, and the execution of Steak n Shake’s self-service conversion.
Management expected to increase menu prices in the fourth quarter to improve restaurant margins; this is a management expectation rather than formal quantitative guidance.
Investment partnership gains and losses include unrealized changes in market values and can materially distort reported earnings. Management does not consider short-term investment fluctuations representative of operating performance.
A hypothetical 10% increase or decrease in the market prices of investments would change the carrying value of investments by approximately $37.2 million and shareholders’ equity by approximately 5%.
Southern Oil’s results are sensitive to crude oil and natural gas prices.
Western Sizzlin has experienced a multiyear decline in franchised units; continued declines could require a goodwill impairment.
The company is involved in various legal proceedings and unresolved claims but believes any liability beyond amounts accrued is unlikely to materially affect results, financial position, or cash flow.
Related-party service fees paid to entities owned by Mr. Biglari totaled $6.3 million for the first nine months of 2021. The company’s investment partnerships are managed by an entity solely owned by Mr. Biglari.

Important Facts for Investors to Verify

Whether the conversion of Steak n Shake stores to franchise partner and self-service models improves sustainable unit economics and cash generation.
The number of temporarily closed restaurants and the pace of store closures, reopenings, and franchise transitions.
Underlying operating performance excluding volatile investment partnership gains and losses.
The sustainability of insurance underwriting gains, particularly at Southern Pioneer.
Exposure of investment partnership values and shareholders’ equity to equity-market declines.
Future capital expenditures and liquidity needs after the $152.5 million debt repayment.
Oil and gas production levels and sensitivity to commodity prices.
Potential goodwill or long-lived asset impairments, especially for Western Sizzlin and underperforming restaurant locations.