Biglari Holdings Inc. 2021 Form 10-K Summary
Business context and reporting period
Biglari Holdings Inc. is a diversified holding company reporting for the fiscal year ended December 31, 2021. Its principal businesses are restaurants, property and casualty insurance, oil and gas, brand licensing and media, and investments. The company is led by Chairman and CEO Sardar Biglari, who held approximately 66.2% of the economic interest and 70.4% of the voting interest at year-end.
Restaurant operations comprised 577 units at December 31, 2021, including 199 company-operated Steak n Shake restaurants, 159 Steak n Shake franchise partner units, 178 traditional Steak n Shake franchise units, 3 Western Sizzlin company-operated restaurants, and 38 Western Sizzlin franchise units. Forty-two Steak n Shake company-operated locations were closed, with management intending to refranchise most of them.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $366.1 million | $433.7 million | Down 15.6% |
| Net earnings (loss) | $35.5 million | $(38.0) million | Returned to profitability |
| Net earnings per equivalent Class A share | $111.83 | $(110.05) | Improved |
| Total assets | $894.8 million | $1,018.0 million | Down $123.2 million |
| Shareholders’ equity | $587.7 million | $564.8 million | Up $22.9 million |
| Notes payable | None | $152.3 million | Debt repaid |
| Cash and cash equivalents | $42.3 million | $24.5 million | Up $17.8 million |
- Total revenue declined primarily because Steak n Shake shifted company-operated restaurants to franchise partner units. Under the franchise partner model, the company records fees and its share of profits rather than the restaurants’ gross sales.
- Net earnings benefited from $8.9 million of after-tax investment partnership gains, $4.8 million of after-tax investment gains, and improved operating results.
- Net earnings attributable to operating businesses were $21.7 million, compared with a $8.4 million loss in 2020.
- Restaurant operations contributed $11.2 million of net earnings, compared with a $5.0 million loss in 2020. Restaurant earnings before income taxes were $14.5 million versus a $5.4 million loss.
- Insurance contributed $11.3 million, compared with $9.8 million in 2020. Pre-tax underwriting gain increased to $12.3 million from $10.0 million.
- Oil and gas contributed $7.5 million, compared with $1.9 million in 2020, reflecting higher commodity prices and a return to full production.
- Brand licensing contributed $2.4 million, compared with $1.4 million in 2020, despite lower revenue; the 2021 result included a favorable tax effect.
- Operating cash flow was $228.8 million, compared with $117.6 million in 2020, primarily due to $180.2 million of distributions from investment partnerships.
- Capital expenditures were $64.5 million, including approximately $40.0 million related to converting Steak n Shake restaurants to a self-service model.
- Cash used in financing activities was $156.2 million, primarily reflecting repayment of Steak n Shake’s term loan. Lease obligations totaled $121.4 million at year-end, including current and long-term obligations.
- Cash and investments totaled $599.6 million, including $474.2 million of investment partnership interests. The balance-sheet carrying value of the investment partnerships was $250.4 million after excluding the company’s stock held by those partnerships.
- The company reported no dividends and repurchased 198 Class A shares and 39,776 Class B shares through an affiliated purchaser during November and December 2021.
Material changes versus the prior comparable period
- The company returned to profitability, with net earnings of $35.5 million versus a $38.0 million net loss in 2020.
- Restaurant revenue fell 22.6% to $271.3 million, but restaurant earnings improved as 73 company-operated Steak n Shake locations were transitioned to franchise partner units and dining rooms reopened.
- Steak n Shake franchise partner fees increased to $55.6 million from $22.2 million, while traditional franchise royalties and fees increased to $21.7 million from $18.8 million.
- Restaurant impairments declined to $4.6 million from $23.6 million, reflecting lower pandemic-related impairment charges.
- Steak n Shake’s term loan was repaid in full on February 19, 2021. Notes payable declined from $152.3 million at year-end 2020 to zero.
- Investment partnership fair value declined to $474.2 million from $590.9 million, despite a $11.0 million pre-tax partnership gain, primarily because of $180.2 million of distributions and changes in the value of underlying investments.
- Investment partnership interests remain subject to rolling five-year lockups, with withdrawals generally paid over two years and potentially in kind.
- Capital expenditures increased substantially from $20.7 million to $64.5 million, primarily due to restaurant conversions and related capital investment.
Outlook, management commentary, risks and unusual items
Management expects to continue transitioning company-operated Steak n Shake restaurants to franchise partner or traditional franchise units and intends to refranchise most of the 42 closed company-operated locations. Revenue may continue to decline as the company records franchise fees and profit shares rather than gross company-restaurant sales.
COVID-19 and its variants continued to create uncertainty regarding restaurant traffic, labor availability, supply chains, asset impairment assessments, and future earnings and cash flows. Steak n Shake reopened most dining rooms during 2021 and implemented a self-service model.
- Restaurant risks include intense competition, food and wage inflation, labor shortages, commodity and energy price volatility, supply disruptions, adverse weather, food safety issues, and regulatory changes.
- Insurance results may be affected by inaccurate pricing, catastrophe losses, weather conditions, claim severity, reinsurance availability, and restrictions on subsidiary dividends imposed by insurance regulators.
- Oil and gas results are highly sensitive to crude oil and natural gas prices and to disruptions affecting shallow-water Gulf of Mexico operations.
- Investment partnership gains and losses can produce significant earnings volatility because the partnerships hold concentrated equity investments and recognize unrealized market-value changes.
- The company’s investment partnership interests are related-party investments managed by Biglari Capital, an entity owned by Mr. Biglari. The company paid $8.4 million in 2021 under its services agreement with Biglari-related entities.
- Mr. Biglari makes all major investment and capital allocation decisions and controls shareholder voting matters. The company is a controlled company under NYSE rules and may rely on exemptions from certain governance requirements.
- No incentive fees were earned by Mr. Biglari or the investment partnerships in 2021. The investment partnership agreements provide for a 25% incentive allocation on profits above a 6% hurdle and prior high-water mark.
- The company recorded $5.0 million of pre-tax gain on the sale of real estate and $6.4 million of total investment gains in 2021.
- The company reported $4.6 million of restaurant long-lived-asset impairment charges, but no goodwill or other intangible-asset impairment in 2021.
- Deloitte & Touche LLP issued unqualified opinions on the financial statements and internal control over financial reporting. The audit report emphasized the related-party investment partnerships and their lockup restrictions.
Most important facts for investors to verify
- Whether the franchise transition improves sustainable restaurant economics despite reducing reported revenue and increasing reliance on franchise partner performance.
- The operating status and refranchising prospects of the 42 closed Steak n Shake locations.
- The composition, concentration, valuation, lockup terms, and liquidity limitations of the $474.2 million investment partnership interests.
- The sensitivity of earnings and equity to equity-market declines, oil and gas prices, insurance catastrophes, food costs, and labor costs.
- The company’s remaining lease obligations and other fixed commitments after repayment of the term loan.
- The nature and financial impact of related-party fees, investment decisions, voting control, and potential conflicts involving Mr. Biglari and Biglari-related entities.
- Whether COVID-19-related operating restrictions, labor availability, supply-chain pressures, or future impairment testing could materially affect results.