Biglari Holdings Inc. — Fiscal 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. The filing is an annual report, not a standalone fourth-quarter filing. Biglari Holdings is a diversified holding company with restaurant, insurance, oil and gas, brand licensing, and investment activities. Sardar Biglari, Chairman and CEO, held approximately 66.3% of the economic interest and 70.4% of the voting interest.
Business Context
- Restaurant operations comprised 545 units at year-end: 177 company-operated Steak n Shake units, 175 Steak n Shake franchise partner units, 154 traditional Steak n Shake franchise units, 3 Western Sizzlin company-operated units, and 36 Western Sizzlin franchise units. Thirty-nine Steak n Shake company-operated units were closed, with most expected to be refranchised.
- Insurance operations consisted of First Guard and Southern Pioneer. Oil and gas operations included Southern Oil and the 90%-owned Abraxas Petroleum, acquired in September 2022. Maxim principally conducts brand licensing and media activities.
- Investment partnerships had a reported fair value of $383.0 million at December 31, 2022, subject to rolling five-year lock-up periods.
Key Financial Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenue | $368.2 million | $366.1 million | 0.6% increase |
| Net earnings attributable to shareholders | $(32.0) million | $35.5 million | Reversed to a loss |
| Equivalent Class A loss per share | $(107.43) | $111.83 | Declined materially |
| Total assets | $828.5 million | $894.8 million | 7.4% decrease |
| Biglari Holdings shareholders’ equity | $547.0 million | $587.7 million | $40.7 million decrease |
| Notes payable and other borrowings | $10.0 million | None reported | New line-of-credit balance |
| Net cash provided by operating activities | $127.8 million | $228.8 million | $100.9 million decrease |
| Capital expenditures | $29.7 million | $64.5 million | $34.8 million decrease |
Profitability: The company reported a pretax loss of $43.0 million versus pretax earnings of $42.3 million in 2021. The consolidated net loss was driven primarily by a $76.0 million pretax loss from investment partnerships and a $3.4 million investment loss. The filing does not provide a single consolidated operating margin; based on reported revenue and pretax earnings, pretax margin was approximately negative 11.7% in 2022 versus positive 11.5% in 2021.
Liquidity and debt: Cash and cash equivalents were $37.5 million, while reported cash and investments totaled $489.9 million before deducting the value of Biglari Holdings shares held by the investment partnerships. The carrying value of cash and investments on the balance sheet was $262.7 million after that deduction. A revolving line of credit of up to $30.0 million was entered into in September 2022; $10.0 million was outstanding at year-end at a 6.53% interest rate. The company was in compliance with applicable covenants. Lease obligations totaled approximately $108.8 million.
Material Changes Versus 2021
- Revenue mix shifted: Restaurant revenue declined to $241.6 million from $271.3 million, primarily because company-operated units were converted to franchise partner units. Franchise partner fees increased to $63.9 million from $55.6 million, while company-operated net sales declined to $149.2 million from $187.9 million.
- Restaurant profitability weakened: Restaurant contribution to net earnings declined to $9.4 million from $11.2 million. Operating costs rose to 53.6% of company-operated net sales from 49.2%, reflecting lower volumes and higher labor costs at remaining company-operated locations.
- Insurance results deteriorated: Insurance contribution to net earnings fell to $7.7 million from $11.3 million. First Guard’s loss ratio increased to 62.1% from 48.7%; Southern Pioneer produced a $1.3 million underwriting loss compared with a $1.7 million gain in 2021, mainly due to higher claim frequency and severity associated with adverse weather.
- Oil and gas improved: Oil and gas contribution to net earnings increased to $19.1 million from $7.5 million. Southern Oil benefited from stronger commodity prices, including an average West Texas Intermediate price of approximately $94.53 per barrel versus $68.17 in 2021. Abraxas contributed $0.5 million after its acquisition.
- Investment performance reversed: Investment partnership losses were $76.0 million after an $8.9 million gain in 2021. The fair value of investment partnership interests declined to $383.0 million from $474.2 million.
- Cash generation declined: Operating cash flow fell primarily because distributions from investment partnerships decreased to $70.7 million from $180.2 million. Investing cash outflows increased due to the Abraxas acquisition and purchases of limited partner interests.
Outlook, Risks, Contingencies, and Unusual Items
- Management expects restaurant revenue to continue declining as company-operated restaurants transition to franchise partner units, although the economics of franchise partner fees differ from reported company-operated sales.
- Oil and gas results remain highly sensitive to crude oil and natural gas prices, production disruptions, severe weather, regulatory developments, and environmental obligations.
- Investment partnership results may continue to create significant earnings and equity volatility because they include unrealized market-value changes and may be concentrated in a limited number of securities.
- The investment partnerships are controlled by entities owned by Mr. Biglari. Contributions are subject to five-year lock-ups, and withdrawals may be distributed over two years or in kind. The company also pays $8.4 million annually under a services agreement with related parties owned by Mr. Biglari.
- The company is dependent on Mr. Biglari for major investment and capital allocation decisions. His control may limit the ability of other shareholders to influence governance or strategic outcomes.
- Insurance reserves, restaurant asset impairments, oil and gas reserve estimates, deferred tax assets, and fair values involve significant judgments. Restaurant long-lived asset impairment was identified as a critical audit matter; $3.5 million of restaurant impairment charges were recorded in 2022.
- Abraxas Petroleum was excluded from management’s 2022 internal-control assessment. Its reported amounts represented approximately 9.8% of consolidated assets, 3.1% of revenue, and 2.5% of net earnings for the applicable 2022 period.
- Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting. The audit report emphasized the related-party investment partnerships and their lock-up restrictions.
- No dividend has ever been declared. The company reported that routine legal proceedings were not expected to have a material effect, although outcomes can be uncertain.
Most Important Facts for Investors to Verify
- Whether the transition from company-operated restaurants to franchise partners improves underlying economics despite reducing reported revenue.
- The sustainability and liquidity of the $383.0 million investment partnership position, including lock-ups, concentration, related-party control, and subsequent market performance.
- Whether insurance loss ratios normalize, particularly at Southern Pioneer and First Guard.
- The sensitivity of oil and gas earnings and reserves to commodity prices, production levels, and regulatory or environmental costs.
- The terms, covenants, maturity, and refinancing requirements of the $30.0 million line of credit and the company’s substantial lease obligations.
- The integration and internal-control status of Abraxas Petroleum following its 2022 acquisition.