Biglari Holdings Inc. 10-Q Summary
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, 2022. This unaudited Form 10-Q covers the quarter ended March 31, 2022, compared with the first quarter of 2021.
Financial Performance and Position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $85.4 million | $94.3 million | Down 9.5% |
| Operating businesses pretax earnings | $9.4 million | $11.3 million | Down $1.9 million |
| Investment gains | $0.2 million | $3.1 million | Down $2.9 million |
| Investment partnership gains (losses) | $(6.7) million | $81.8 million | Unfavorable change |
| Net earnings (loss) | $(0.3) million | $71.7 million | Unfavorable change |
| Equivalent Class A EPS | $(0.98) | $223.29 | Unfavorable change |
| Net cash from operating activities | $21.1 million | $165.3 million | Down $144.2 million |
| Capital expenditures | $9.3 million | $7.4 million | Up $1.8 million |
| Cash, cash equivalents and restricted cash | $47.1 million | $33.6 million | Up $13.5 million |
Restaurant revenue declined to $59.8 million from $70.0 million. Net sales fell 30.5% to $38.2 million as company-operated restaurants were transitioned to franchise partner units; franchise partner fees increased to $15.6 million from $7.9 million. Restaurant pretax earnings declined to $4.4 million from $5.5 million.
Insurance earnings declined to $1.4 million from $3.2 million. The insurance underwriting gain fell to $0.4 million from $2.5 million, as loss ratios increased at both First Guard and Southern Pioneer. First Guard's pretax underwriting gain fell to $0.7 million from $2.1 million, while Southern Pioneer moved to a $0.3 million underwriting loss from a $0.4 million gain.
Oil and gas pretax earnings increased to $3.9 million from $3.0 million, and net earnings contribution increased to $2.9 million from $2.4 million. Maxim produced a $0.3 million pretax loss compared with $0.6 million of pretax earnings in the prior-year quarter.
At March 31, 2022, total assets were $885.9 million, including $45.8 million of cash and cash equivalents, $87.2 million of investments, and $242.4 million of investment partnerships. Total liabilities were $298.6 million and shareholders' equity was $587.3 million.
The company had no notes payable outstanding. Lease obligations totaled $118.2 million, comprising $17.1 million of current obligations and $101.2 million of long-term obligations. The prior-year quarter included $1.1 million of interest expense on notes payable; the Steak n Shake term loan had been repaid in February 2021.
Material Changes, Outlook, Risks and Unusual Items
- Investment partnership results were the principal driver of the earnings decline. The partnerships reported a $6.7 million pretax loss in Q1 2022 versus an $81.8 million gain in Q1 2021. Management states that market-value changes in the partnerships can cause significant earnings volatility.
- Operating cash flow declined primarily because investment partnership distributions were $4.5 million in Q1 2022 versus $150.6 million in Q1 2021. The prior-year distributions were largely used to repay Steak n Shake debt.
- Steak n Shake continued converting company-operated stores to franchise partner units. The company had 575 total restaurants at March 31, 2022, including 171 Steak n Shake franchise partner units versus 108 a year earlier. Forty of 184 company-operated Steak n Shake stores were closed, and management plans to refranchise a majority of the closed locations.
- Restaurant cost pressures increased: restaurant operating costs were 52.4% of net sales versus 45.9% in the prior-year quarter, while general and administrative expenses rose primarily because of higher personnel costs. No restaurant impairment was recorded in Q1 2022, compared with $0.3 million in Q1 2021.
- Management states that liquidity remains significant and expects operating subsidiaries' working capital needs to be funded principally through operating cash flows and cash on hand. The company continues to review financing alternatives.
- Key market risks include concentrated equity investments, which can materially affect earnings and shareholders' equity; a hypothetical 10% change in investment prices would change the carrying value of investments by approximately $33.0 million and shareholders' equity by approximately 4%. Southern Oil is also exposed to oil and gas price volatility.
- Other risks include restaurant execution and franchise transitions, insurance loss experience, potential goodwill impairment at Western Sizzlin if franchised units continue to decline, and COVID-19-related effects. Management reported no material change in previously disclosed risk factors.
- The company is involved in legal proceedings and unresolved claims, but management believes liabilities exceeding recorded amounts are unlikely to have a material effect on results, financial position or cash flow.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2022, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Verify the sustainability and cash conversion of the restaurant franchise partner model, including the effect of lower reported revenue and higher partner fees.
- Review the composition, concentration, valuation and liquidity of the investment partnerships and the sensitivity of earnings and equity to market movements.
- Assess insurance loss trends, particularly the deterioration in First Guard and Southern Pioneer underwriting results.
- Monitor Southern Oil earnings for changes in crude oil and natural gas prices and production costs.
- Confirm total lease obligations, future lease payments and the company's continuing capital expenditure requirements.
- Evaluate potential goodwill impairment risk at Western Sizzlin and the status of closed Steak n Shake locations targeted for refranchising.
- Consider related-party arrangements, including $2.1 million of quarterly service fees paid to entities owned by Mr. Biglari and the performance-based incentive agreement.