Biglari Holdings Inc. — Q1 2024 Form 10-Q Summary
Business context and reporting period
Biglari Holdings is a diversified holding company with restaurant, property and casualty insurance, oil and gas, licensing and media, and investment partnership activities. The company is led by Sardar Biglari, who held approximately 71.5% of voting power as of March 31, 2024. This filing covers the unaudited quarter ended March 31, 2024, compared with the first quarter of 2023.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $89.5 million | $90.2 million | (0.8%) |
| Net earnings attributable to shareholders | $22.6 million | $64.9 million | (65.2%) |
| Equivalent Class A EPS | $79.56 | $222.28 | (64.2%) |
| Net margin | 25.2% | 72.0% | Down materially |
| Cash flow from operations | $19.1 million | $19.9 million | (4.0%) |
| Capital expenditures | $4.6 million | $5.9 million | (22.5%) |
Investment partnership gains were $22.0 million, compared with $72.6 million in the prior-year quarter, and remained the principal source of consolidated earnings. After tax, investment partnership gains contributed $17.1 million, compared with $56.0 million. Investment gains declined to $1.7 million from $3.6 million.
Operating businesses generated $4.1 million of net earnings, down from $6.6 million. Restaurant operations contributed $3.5 million, insurance $1.7 million, oil and gas $1.1 million, while brand licensing generated a $0.3 million loss.
At March 31, 2024, cash and cash equivalents were $34.5 million, investments were $97.7 million, and the carrying value of investment partnerships was $220.8 million. Total assets were $885.3 million and shareholders’ equity was $618.6 million. Total cash, investments, and the fair value of investment partnership interests were $677.2 million before deducting $324.2 million representing the company stock held by those partnerships.
The company had no balance on its $30.0 million line of credit and no balance on Western Sizzlin’s $0.5 million revolver. Lease obligations totaled $106.4 million, including $14.5 million current and $91.9 million long-term. Management stated that all line-of-credit covenants were satisfied at quarter-end.
Material changes versus the prior comparable period
- Revenue was broadly stable overall, as higher restaurant and insurance revenue was offset by lower oil and gas and licensing revenue.
- Restaurant revenue increased 1.4% to $62.0 million. Steak n Shake same-store sales increased 9.9%, but restaurant earnings fell to $4.9 million from $7.8 million because of higher general and administrative costs, lower franchise royalties, lower franchise partner profitability, and the absence of prior-year property-sale gains.
- The restaurant portfolio declined to 485 locations from 532 a year earlier. Traditional Steak n Shake units declined to 125 from 143. Management plans to sell or lease nine of 15 closed company-operated Steak n Shake locations and refranchise the remainder.
- Insurance revenue increased to $17.7 million from $16.2 million, but insurance earnings declined to $2.2 million from $2.8 million. First Guard’s loss ratio increased to 72.8% from 58.9%; Southern Pioneer improved from a $0.1 million underwriting loss to a $0.1 million gain.
- Oil and gas revenue fell to $9.5 million from $12.2 million because of lower natural gas prices and production. Earnings declined to $1.5 million from $2.1 million, partly offset by a $0.5 million gain on the sale of undeveloped reserves.
- Maxim revenue fell to $0.2 million from $0.6 million, producing a $0.4 million pretax loss versus $0.1 million of pretax earnings.
- Cash increased by $6.5 million during the quarter, compared with a $2.1 million increase in the prior-year period. Operating cash flow was relatively stable, while investing and financing cash uses were lower.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide quantitative earnings, revenue, or capital expenditure guidance. Management expects investment partnership gains and losses to create significant volatility in periodic earnings because they include changes in the market values of underlying investments, including unrealized gains and losses.
Key operating sensitivities include restaurant labor, food, occupancy, franchise partner profitability, traditional franchise closures, insurance claims estimates, oil and natural gas prices and production, and licensing activity. The oil and gas business is particularly dependent on commodity prices and reserve depletion.
Insurance claim liabilities are based on estimates, including incurred-but-not-reported claims. The company recorded a $3.3 million reduction in estimated prior accident-year liabilities during Q1 2024, compared with a $1.7 million reduction in Q1 2023.
The company reported $0.1 million of restaurant asset impairments in Q1 2024 versus $0.8 million in Q1 2023. No goodwill impairment was recorded. Legal proceedings and unresolved claims were not expected by management to have a material effect beyond amounts already provided, although the filing notes that ultimate liabilities remain uncertain.
Biglari Enterprises, an entity owned by Mr. Biglari, received $2.4 million in service fees during the quarter, compared with $2.1 million in Q1 2023. The Lion Fund purchased 1,021 Class A shares at an average price of $953.21 and 11,405 Class B shares at an average price of $188.27 during March 2024.
Important facts for investors to verify
- Whether investment partnership market gains or losses, which drove most of Q1 earnings, are sustainable or primarily unrealized and volatile.
- The composition, valuation, liquidity, and tax impact of the investment partnerships, including their substantial holdings of Biglari Holdings stock.
- Progress and economics of Steak n Shake’s company-operated store closures, sales, leasing, and refranchising strategy.
- Restaurant labor and franchise partner cost trends, traditional franchise unit closures, and their effect on earnings.
- First Guard’s higher loss ratio and the adequacy of insurance claim reserves, including the effect of prior-year reserve releases.
- Exposure to oil and natural gas prices, production declines, shut-in wells, and reserve depletion.
- Renewal or refinancing arrangements for the $30.0 million line of credit, which matures on September 12, 2024, despite having no outstanding balance at quarter-end.
- Related-party service fees and the potential effects of the incentive arrangements involving Mr. Biglari and Biglari-affiliated entities.