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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022
or
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___ to ___
Commission file number 001-38477
| | |
BIGLARI HOLDINGS INC. |
(Exact name of registrant as specified in its charter) |
| | | | | | | | |
Indiana | | 82-3784946 |
(State or other jurisdiction of incorporation) | | (I.R.S. Employer Identification No.) |
| | | | | | | | | | | |
19100 Ridgewood Parkway, | Suite 1200 | | |
San Antonio, | TX | | 78259 |
(Address of principal executive offices) | | (Zip Code) |
(210) 344-3400
Registrant’s telephone number, including area code
17802 IH 10 West, Suite 400, San Antonio, TX 78257
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbols | Name of each exchange on which registered |
Class A Common Stock, no par value | BH.A | New York Stock Exchange |
Class B Common Stock, no par value | BH | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and an “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large accelerated filer | ☐ | Accelerated filer | ☒ |
Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
Number of shares of common stock outstanding as of November 1, 2022:
| | | | | |
Class A common stock – | 206,864 | |
Class B common stock – | 2,068,640 | |
BIGLARI HOLDINGS INC.
INDEX
PART 1 – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIGLARI HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands) | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| (Unaudited) | | |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 64,842 | | | $ | 42,349 | |
Investments | 70,032 | | | 83,061 | |
Receivables | 25,826 | | | 28,508 | |
Inventories | 3,704 | | | 3,803 | |
Other current assets | 13,147 | | | 7,088 | |
Total current assets | 177,551 | | | 164,809 | |
Property and equipment | 414,497 | | | 349,351 | |
Operating lease assets | 38,539 | | | 42,538 | |
Goodwill and other intangible assets | 75,933 | | | 77,010 | |
Investment partnerships | 144,864 | | | 250,399 | |
Other assets | 10,761 | | | 10,700 | |
Total assets | $ | 862,145 | | | $ | 894,807 | |
Liabilities and shareholders’ equity | | | |
Liabilities | | | |
Current liabilities: | | | |
Accounts payable and accrued expenses | $ | 101,503 | | | $ | 100,467 | |
Loss and loss adjustment expenses | 14,613 | | | 14,609 | |
Unearned premiums | 12,493 | | | 11,667 | |
Current portion of lease obligations | 17,093 | | | 16,898 | |
Total current liabilities | 145,702 | | | 143,641 | |
Lease obligations | 95,980 | | | 104,479 | |
Line of credit | 30,000 | | | — | |
Deferred taxes | 28,515 | | | 46,533 | |
Asset retirement obligations | 14,721 | | | 10,389 | |
Other liabilities | 1,819 | | | 2,069 | |
Total liabilities | 316,737 | | | 307,111 | |
Shareholders’ equity | | | |
Common stock | 1,138 | | | 1,138 | |
Additional paid-in capital | 381,788 | | | 381,788 | |
Retained earnings | 566,455 | | | 608,528 | |
Accumulated other comprehensive loss | (3,777) | | | (1,907) | |
Treasury stock, at cost | (409,119) | | | (401,851) | |
Biglari Holdings Inc. shareholders’ equity | 536,485 | | | 587,696 | |
Noncontrolling interests | 8,923 | | | — | |
Total shareholders' equity | 545,408 | | | 587,696 | |
Total liabilities and shareholders’ equity | $ | 862,145 | | | $ | 894,807 | |
See accompanying Notes to Consolidated Financial Statements.
BIGLARI HOLDINGS INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in thousands except per share amounts) | | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
| 2022 | | 2021 | | 2022 | | 2021 |
| (Unaudited) | | (Unaudited) |
Revenues | | | | | | | |
Restaurant operations | $ | 59,437 | | | $ | 59,144 | | | $ | 179,608 | | | $ | 196,424 | |
Insurance premiums and other | 16,312 | | | 14,723 | | | 47,745 | | | 43,729 | |
Oil and gas | 14,380 | | | 7,353 | | | 38,632 | | | 24,310 | |
Licensing and media | 1,905 | | | 863 | | | 3,788 | | | 2,695 | |
| 92,034 | | | 82,083 | | | 269,773 | | | 267,158 | |
Cost and expenses | | | | | | | |
Restaurant cost of sales | 36,162 | | | 41,694 | | | 107,469 | | | 129,297 | |
Insurance losses and underwriting expenses | 13,245 | | | 10,672 | | | 40,812 | | | 31,733 | |
Oil and gas production costs | 4,090 | | | 2,050 | | | 11,752 | | | 6,957 | |
Licensing and media costs | 345 | | | 880 | | | 1,975 | | | 1,749 | |
Selling, general and administrative | 15,469 | | | 16,889 | | | 48,275 | | | 50,848 | |
Impairments | — | | | — | | | 20 | | | 559 | |
Depreciation, depletion, and amortization | 8,456 | | | 7,682 | | | 24,127 | | | 22,239 | |
Interest expense on leases | 1,372 | | | 1,462 | | | 4,169 | | | 4,619 | |
Interest expense on borrowings | 67 | | | — | | | 67 | | | 1,121 | |
| 79,206 | | | 81,329 | | | 238,666 | | | 249,122 | |
Other income | | | | | | | |
Investment gains (losses) | (849) | | | 4,534 | | | (4,184) | | | 6,465 | |
Investment partnership gains (losses) | 29,658 | | | (20,231) | | | (82,244) | | | 27,344 | |
Total other income (expenses) | 28,809 | | | (15,697) | | | (86,428) | | | 33,809 | |
Earnings (loss) before income taxes | 41,637 | | | (14,943) | | | (55,321) | | | 51,845 | |
Income tax expense (benefit) | 9,598 | | | (4,274) | | | (13,282) | | | 11,544 | |
Net earnings (loss) | 32,039 | | | (10,669) | | | (42,039) | | | 40,301 | |
Earnings attributable to noncontrolling interest | 34 | | | — | | | 34 | | | — | |
Net earnings (loss) attributable to Biglari Holdings Inc. shareholders | $ | 32,005 | | | $ | (10,669) | | | $ | (42,073) | | | $ | 40,301 | |
| | | | | | | |
Net earnings (loss) per equivalent Class A share * | $ | 109.13 | | | $ | (33.74) | | | $ | (140.30) | | | $ | 125.79 | |
*Net earnings (loss) per equivalent Class B share outstanding are one-fifth of the equivalent Class A share or $21.83 and $(28.06) for the third quarter and first nine months of 2022, respectively, and $(6.75) and $25.16 for the third quarter and first nine months of 2021, respectively.
See accompanying Notes to Consolidated Financial Statements.
BIGLARI HOLDINGS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
| (Unaudited) | | (Unaudited) | | |
Net earnings (loss) | $ | 32,039 | | | $ | (10,669) | | | $ | (42,039) | | | $ | 40,301 | | | | | |
Foreign currency translation | (618) | | | (49) | | | (1,870) | | | (378) | | | | | |
Comprehensive income (loss) | 31,421 | | | (10,718) | | | (43,909) | | | 39,923 | | | | | |
Comprehensive income attributable to noncontrolling interests | 34 | | | — | | | 34 | | | — | | | | | |
Total comprehensive income (loss) attributable to Biglari Holdings Inc. shareholders | $ | 31,387 | | | $ | (10,718) | | | $ | (43,943) | | | $ | 39,923 | | | | | |
See accompanying Notes to Consolidated Financial Statements.
BIGLARI HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
| | | | | | | | | | | |
| First Nine Months |
| 2022 | | 2021 |
| (Unaudited) |
Operating activities | | | |
Net earnings (loss) | $ | (42,039) | | | $ | 40,301 | |
Adjustments to reconcile net earnings (loss) to operating cash flows: | | | |
Depreciation, depletion, and amortization | 24,127 | | | 22,239 | |
Provision for deferred income taxes | (22,289) | | | 16,625 | |
Asset impairments and other non-cash expenses | 20 | | | 696 | |
Gains on disposal of assets | (905) | | | (306) | |
Investment and investment partnership (gains) losses | 86,428 | | | (34,461) | |
Distributions from investment partnerships | 51,200 | | | 172,420 | |
Changes in receivables, inventories and other assets | 7,240 | | | 3,608 | |
Changes in accounts payable and accrued expenses | (4,028) | | | (9,877) | |
Net cash provided by operating activities | 99,754 | | | 211,245 | |
Investing activities | | | |
Capital expenditures | (23,437) | | | (46,486) | |
Proceeds from property and equipment disposals | 2,201 | | | 2,749 | |
Acquisition of a business, net of cash acquired | (54,899) | | | — | |
Purchases of limited partner interests | (23,886) | | | (4,800) | |
Purchases of investments | (110,837) | | | (81,923) | |
Sales of investments and redemptions of fixed maturity securities | 108,394 | | | 74,678 | |
Net cash used in investing activities | (102,464) | | | (55,782) | |
Financing activities | | | |
Proceeds from revolving credit facility | 30,000 | | | — | |
Principal payments on long-term debt | — | | | (149,952) | |
Principal payments on direct financing lease obligations | (4,647) | | | (4,634) | |
Net cash provided by (used in) financing activities | 25,353 | | | (154,586) | |
Effect of exchange rate changes on cash | (150) | | | (85) | |
Increase in cash, cash equivalents and restricted cash | 22,493 | | | 792 | |
Cash, cash equivalents and restricted cash at beginning of year | 43,687 | | | 29,666 | |
Cash, cash equivalents and restricted cash at end of third quarter | $ | 66,180 | | | $ | 30,458 | |
| | | | | | | | | | | |
| First Nine Months |
| 2022 | | 2021 |
| (Unaudited) |
Cash and cash equivalents | $ | 64,842 | | | $ | 27,795 | |
Restricted cash in other long-term assets | 1,338 | | | 2,663 | |
Cash, cash equivalents and restricted cash at end of third quarter | $ | 66,180 | | | $ | 30,458 | |
See accompanying Notes to Consolidated Financial Statements.
BIGLARI HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Biglari Holdings Inc. Shareholders’ Equity | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Non-controlling Interests | | Total |
Balance at December 31, 2021 | $ | 1,138 | | | $ | 381,788 | | | $ | 608,528 | | | $ | (1,907) | | | $ | (401,851) | | | $ | — | | | $ | 587,696 | |
Net earnings (loss) | | | | | (298) | | | | | | | | | (298) | |
Other comprehensive loss | | | | | | | (231) | | | | | | | (231) | |
Adjustment to treasury stock for holdings in investment partnerships | | | | | | | | | 130 | | | | | 130 | |
Balance at March 31, 2022 | $ | 1,138 | | | $ | 381,788 | | | $ | 608,230 | | | $ | (2,138) | | | $ | (401,721) | | | $ | — | | | $ | 587,297 | |
Net earnings (loss) | | | | | (73,780) | | | | | | | | | (73,780) | |
Other comprehensive loss | | | | | | | (1,021) | | | | | | | (1,021) | |
Adjustment to treasury stock for holdings in investment partnerships | | | | | | | | | (6,760) | | | | | (6,760) | |
Balance at June 30, 2022 | $ | 1,138 | | | $ | 381,788 | | | $ | 534,450 | | | $ | (3,159) | | | $ | (408,481) | | | $ | — | | | $ | 505,736 | |
Net earnings | | | | | 32,005 | | | | | | | 34 | | | 32,039 | |
Other comprehensive loss | | | | | | | (618) | | | | | | | (618) | |
Adjustment to treasury stock for holdings in investment partnerships | | | | | | | | | (638) | | | | | (638) | |
Transactions with noncontrolling interests | | | | | | | | | | | 8,889 | | | 8,889 | |
Balance at September 30, 2022 | $ | 1,138 | | | $ | 381,788 | | | $ | 566,455 | | | $ | (3,777) | | | $ | (409,119) | | | $ | 8,923 | | | $ | 545,408 | |
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| Biglari Holdings Inc. Shareholders’ Equity | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Non-controlling interests | | Total |
Balance at December 31, 2020 | $ | 1,138 | | | $ | 381,788 | | | $ | 573,050 | | | $ | (1,531) | | | $ | (389,617) | | | $ | — | | | $ | 564,828 | |
Net earnings | | | | | 71,707 | | | | | | | | | 71,707 | |
Other comprehensive loss | | | | | | | (444) | | | | | | | (444) | |
Adjustment to treasury stock for holdings in investment partnerships | | | | | | | | | 3,049 | | | | | 3,049 | |
Balance at March 31, 2021 | $ | 1,138 | | | $ | 381,788 | | | $ | 644,757 | | | $ | (1,975) | | | $ | (386,568) | | | $ | — | | | $ | 639,140 | |
Net earnings (loss) | | | | | (20,737) | | | | | | | | | (20,737) | |
Other comprehensive income | | | | | | | 115 | | | | | | | 115 | |
Adjustment to treasury stock for holdings in investment partnerships | | | | | | | | | (5,026) | | | | | (5,026) | |
Balance at June 30, 2021 | $ | 1,138 | | | $ | 381,788 | | | $ | 624,020 | | | $ | (1,860) | | | $ | (391,594) | | | $ | — | | | $ | 613,492 | |
Net earnings (loss) | | | | | (10,669) | | | | | | | | | (10,669) | |
Other comprehensive loss | | | | | | | (49) | | | | | | | (49) | |
Adjustment to treasury stock for holdings in investment partnerships | | | | | | | | | (4,208) | | | | | (4,208) | |
Balance at September 30, 2021 | $ | 1,138 | | | $ | 381,788 | | | $ | 613,351 | | | $ | (1,909) | | | $ | (395,802) | | | $ | — | | | $ | 598,566 | |
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See accompanying Notes to Consolidated Financial Statements.
BIGLARI HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(dollars in thousands, except share and per share data)
Note 1. Summary of Significant Accounting Policies
Description of Business
The accompanying unaudited consolidated financial statements of Biglari Holdings Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) applicable to interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In our opinion, all adjustments considered necessary to present fairly the results of the interim periods have been included and consist only of normal recurring adjustments. The results for the interim periods shown are not necessarily indicative of results for the entire fiscal year. The financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2021.
Biglari Holdings is a holding company owning subsidiaries engaged in a number of diverse business activities, including property and casualty insurance, licensing and media, restaurants, and oil and gas. The Company’s largest operating subsidiaries are involved in the franchising and operating of restaurants. Biglari Holdings is founded and led by Sardar Biglari, Chairman and Chief Executive Officer of the Company.
Biglari Holdings’ management system combines decentralized operations with centralized finance decision-making. Operating decisions for the various business units are made by their respective managers. All major investment and capital allocation decisions are made for the Company and its subsidiaries by Mr. Biglari.
As of September 30, 2022, Mr. Biglari beneficially owns shares of the Company that represent approximately 66.3% of the economic interest and approximately 70.4% of the voting interest.
Business Acquisition
On September 14, 2022, the Company completed the purchase of 685,505 shares of Series A Preferred Stock (the "Preferred Shares") of Abraxas Petroleum Corporation ("Abraxas Petroleum") for a purchase price of $80,000. On October 26, 2022, the Company converted the preferred stock to 90% of the outstanding common stock of Abraxas Petroleum. We have concluded that Abraxas Petroleum is a consolidated entity and have recorded noncontrolling interests attributable to the interest held by other shareholders. The Company used working capital including its line of credit to fund the purchase of the Preferred Shares. Abraxas Petroleum operates oil and natural gas properties in the Permian Basin. The Company’s financial results include the results of Abraxas Petroleum from the acquisition date to the end of the third quarter. The revenues and operating results for Abraxas Petroleum were not significant to the Company for the third quarter.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries, including Steak n Shake Inc., Western Sizzlin Corporation, First Guard Insurance Company, Maxim Inc., Southern Pioneer Property & Casualty Insurance Company, Southern Oil Company and Abraxas Petroleum. Intercompany accounts and transactions have been eliminated in consolidation.
Note 2. Earnings Per Share
Earnings per share of common stock is based on the weighted average number of shares outstanding during the year. The shares of Company stock attributable to our limited partner interest in The Lion Fund, L.P. and The Lion Fund II, L.P. (collectively, the “investment partnerships”) — based on our proportional ownership during this period — are considered treasury stock on the consolidated balance sheet and thereby deemed not to be included in the calculation of weighted average common shares outstanding. However, these shares are legally outstanding.
On June 8, 2022, The Lion Fund II, L.P. transferred 83,465 shares of Biglari Holdings’ Class A common stock and 890,272 shares of Biglari Holdings’ Class B common stock to The Lion Fund, L.P.
Note 2. Earnings Per Share (continued)
The following table presents shares authorized, issued and outstanding on September 30, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Class A | | Class B | | Class A | | Class B |
Common stock authorized | 500,000 | | | 10,000,000 | | | 500,000 | | | 10,000,000 | |
Common stock issued and outstanding | 206,864 | | | 2,068,640 | | | 206,864 | | | 2,068,640 | |
The Company has applied the “two-class method” of computing earnings per share as prescribed in Accounting Standards Codification (“ASC”) 260, “Earnings Per Share”. The equivalent Class A common stock applied for computing earnings per share excludes the proportional shares of Biglari Holdings’ stock held by the investment partnerships. In the tabulation below is the weighted average equivalent Class A common stock for earnings per share. There are no dilutive securities outstanding.
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| Third Quarter | | First Nine Months |
| 2022 | | 2021 | | 2022 | | 2021 |
Equivalent Class A common stock outstanding | 620,592 | | | 620,592 | | | 620,592 | | | 620,592 | |
Proportional ownership of Company stock held by investment partnerships | 327,317 | | | 304,356 | | | 320,711 | | | 300,215 | |
Equivalent Class A common stock for earnings per share | 293,275 | | | 316,236 | | | 299,881 | | | 320,377 | |
Note 3. Investments
We classify investments in fixed maturity securities at the acquisition date as either available-for-sale or held-to-maturity and re-evaluate the classification at each balance sheet date. Securities classified as held-to-maturity are carried at amortized cost, reflecting the ability and intent to hold the securities to maturity. Realized gains and losses on disposals of investments are determined on a specific identification basis. Dividends earned on investments are reported as investment income by our insurance companies. We consider investment income as a component of our aggregate insurance operating result. However, we consider investment gains and losses, whether realized or unrealized, as non-operating.
Investment losses for the third quarter and first nine months of 2022 were $849 and $4,184, respectively. Investment gains in the third quarter and first nine months of 2021 were $4,534 and $6,465, respectively.
Note 4. Investment Partnerships
The Company reports on the limited partnership interests in investment partnerships under the equity method of accounting. We record our proportional share of equity in the investment partnerships but exclude Company common stock held by said partnerships. The Company’s pro-rata share of its common stock held by the investment partnerships is recorded as treasury stock even though these shares are legally outstanding. The Company records gains/losses from investment partnerships (inclusive of the investment partnerships’ unrealized gains and losses on their securities) in the consolidated statements of earnings based on our carrying value of these partnerships. The fair value is calculated net of the general partner’s accrued incentive fees. Gains and losses on Company common stock included in the earnings of these partnerships are eliminated because they are recorded as treasury stock.
Biglari Capital Corp. is the general partner of the investment partnerships and is an entity solely owned by Mr. Biglari.
Note 4. Investment Partnerships (continued)
The fair value and adjustment for Company common stock held by the investment partnerships to determine the carrying value of our partnership interest are presented below.
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| Fair Value | | Company Common Stock | | Carrying Value |
Partnership interest at December 31, 2021 | $ | 474,201 | | | $ | 223,802 | | | $ | 250,399 | |
Investment partnership gains (losses) | (119,864) | | | (37,620) | | | (82,244) | |
Distributions (net of contributions) | (16,023) | | | | | (16,023) | |
Changes in proportionate share of Company stock held | | | 7,268 | | | (7,268) | |
Partnership interest at September 30, 2022 | $ | 338,314 | | | $ | 193,450 | | | $ | 144,864 | |
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| Fair Value | | Company Common Stock | | Carrying Value |
Partnership interest at December 31, 2020 | $ | 590,926 | | | $ | 171,376 | | | $ | 419,550 | |
Investment partnership gains (losses) | 110,690 | | | 83,346 | | | 27,344 | |
Distributions (net of contributions) | (167,620) | | | | | (167,620) | |
Changes in proportionate share of Company stock held | | | 6,185 | | | (6,185) | |
Partnership interest at September 30, 2021 | $ | 533,996 | | | $ | 260,907 | | | $ | 273,089 | |
The carrying value of the investment partnerships net of deferred taxes is presented below.
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| September 30, 2022 | | December 31, 2021 |
Carrying value of investment partnerships | $ | 144,864 | | | $ | 250,399 | |
Deferred tax liability related to investment partnerships | (22,176) | | | (44,532) | |
Carrying value of investment partnerships net of deferred taxes | $ | 122,688 | | | $ | 205,867 | |
The Company’s proportionate share of Company stock held by investment partnerships at cost was $409,119 and $401,851 at September 30, 2022 and December 31, 2021, respectively, and was recorded as treasury stock.
The carrying value of the partnership interest approximates fair value adjusted by the value of held Company stock. Fair value of our partnership interest is assessed according to our proportional ownership interest of the fair value of investments held by the investment partnerships. Unrealized gains and losses on marketable securities held by the investment partnerships affect our net earnings.
Gains/losses from investment partnerships recorded in the Company’s consolidated statements of earnings are presented below.
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| Third Quarter | | First Nine Months | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
Gains (losses) from investment partnerships | $ | 29,658 | | | $ | (20,231) | | | $ | (82,244) | | | $ | 27,344 | | | | | |
Tax expense (benefit) | 6,601 | | | (4,946) | | | (20,153) | | | 6,175 | | | | | |
Contribution to net earnings (loss) | $ | 23,057 | | | $ | (15,285) | | | $ | (62,091) | | | $ | 21,169 | | | | | |
On December 31 of each year, the general partner of the investment partnerships, Biglari Capital Corp., will earn an incentive reallocation fee for the Company’s investments equal to 25% of the net profits above an annual hurdle rate of 6% over the previous high-water mark. Our policy is to accrue an estimated incentive fee throughout the year. The total incentive reallocation from Biglari Holdings to Biglari Capital Corp. includes gains on the Company’s common stock. Gains and losses on the Company’s common stock and the related incentive reallocations are eliminated in our financial statements.
There were no incentive reallocations from Biglari Holdings to Biglari Capital Corp. during the first nine months of 2022 and 2021.
Note 4. Investment Partnerships (continued)
Summarized financial information for The Lion Fund, L.P. and The Lion Fund II, L.P. is presented below.
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| Equity in Investment Partnerships |
| Lion Fund | | Lion Fund II |
Total assets as of September 30, 2022 | $ | 247,357 | | | $ | 307,446 | |
Total liabilities as of September 30, 2022 | $ | 9,973 | | | $ | 162,520 | |
Revenue for the first nine months of 2022 | $ | (46,341) | | | $ | (88,378) | |
Earnings for the first nine months of 2022 | $ | (46,544) | | | $ | (89,771) | |
Biglari Holdings’ ownership interest as of September 30, 2022 | 88.2 | % | | 87.7 | % |
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Total assets as of December 31, 2021 | $ | 114,749 | | | $ | 564,022 | |
Total liabilities as of December 31, 2021 | $ | 7,763 | | | $ | 130,417 | |
Revenue for the first nine months of 2021 | $ | 35,639 | | | $ | 94,078 | |
Earnings for the first nine months of 2021 | $ | 35,584 | | | $ | 93,548 | |
Biglari Holdings’ ownership interest as of September 30, 2021 | 62.4 | % | | 93.9 | % |
Revenue in the financial information of the investment partnerships, summarized above, includes investment income and unrealized gains and losses on investments.
Note 5. Property and Equipment
Property and equipment is composed of the following.
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| September 30, 2022 | | December 31, 2021 |
Land | $ | 142,813 | | | $ | 144,605 | |
Buildings | 151,138 | | | 148,605 | |
Land and leasehold improvements | 147,765 | | | 147,349 | |
Equipment | 230,712 | | | 224,581 | |
Oil and gas properties | 140,916 | | | 74,147 | |
Construction in progress | 5,744 | | | 2,815 | |
| 819,088 | | | 742,102 | |
Less accumulated depreciation, depletion, and amortization | (404,591) | | | (392,751) | |
Property and equipment, net | $ | 414,497 | | | $ | 349,351 | |
Depletion expense related to oil and gas properties was $4,345 and $5,875 during the first nine months of 2022 and 2021, respectively.
The Company recorded an impairment to restaurant long-lived assets of $559 in the first nine months of 2021 related to underperforming stores. The fair value of the long-lived assets was determined based on Level 3 inputs using a discounted cash flow model and quoted prices for the properties. There were no impairments of property and equipment in 2022.
As of September 30, 2022, $5,002 of property and equipment is recorded as held for sale within other current assets.
Note 6. Goodwill and Other Intangible Assets
Goodwill
Goodwill consists of the excess of the purchase price over the fair value of the net assets acquired in connection with business acquisitions.
A reconciliation of the change in the carrying value of goodwill is as follows.
| | | | | |
| Goodwill |
Goodwill at December 31, 2021 | $ | 53,547 | |
Change in foreign exchange rates during the first nine months of 2022 | (83) | |
Goodwill at September 30, 2022 | $ | 53,464 | |
We evaluate goodwill and any indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. Goodwill impairment occurs when the estimated fair value of goodwill is less than its carrying value. GAAP allows entities testing for impairment the option of performing a qualitative assessment before calculating the fair value of a reporting unit for the goodwill impairment test. We use both qualitative and quantitative assessments. The valuation methodology and underlying financial information included in our quantitative determination of fair value require significant management judgments. We use both market and income approaches to derive fair value of reporting units utilizing a quantitative assessment. The judgments in these two approaches include, but are not limited to, comparable market multiples, long-term projections of future financial performance, and the selection of appropriate discount rates used to determine the present value of future cash flows. Changes in such estimates or the application of alternative assumptions could produce significantly different results. No impairment was recorded in the first nine months of 2022 or 2021. Western Sizzlin has experienced a decline in its franchised units for several years. If Western Sizzlin’s franchised units continue to decline, an impairment of its goodwill may be necessary.
Other Intangible Assets
Intangible assets with indefinite lives are composed of the following.
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| Trade Names | | Lease Rights | | Total |
Balance at December 31, 2021 | $ | 15,876 | | | $ | 7,587 | | | $ | 23,463 | |
Impairment to lease rights | — | | | (20) | | | (20) | |
Change in foreign exchange rates during the first nine months of 2022 | — | | | (974) | | | (974) | |
Balance at September 30, 2022 | $ | 15,876 | | | $ | 6,593 | | | $ | 22,469 | |
Intangible assets with indefinite lives consist of trade names and lease rights. Fair values were determined using Level 3 inputs and available market data.
Note 7. Restaurant Operations Revenues
Restaurant operations revenues were as follows.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
Net sales | $ | 37,448 | | | $ | 41,916 | | | $ | 113,345 | | | $ | 146,269 | | | | | |
Franchise partner fees | 15,880 | | | 11,508 | | | 47,929 | | | 31,744 | | | | | |
Franchise royalties and fees | 5,089 | | | 4,865 | | | 15,472 | | | 14,594 | | | | | |
Other | 1,020 | | | 855 | | | 2,862 | | | 3,817 | | | | | |
| $ | 59,437 | | | $ | 59,144 | | | $ | 179,608 | | | $ | 196,424 | | | | | |
Net Sales
Net sales are composed of retail sales of food through company-operated stores. Company-operated store revenues are recognized, net of discounts and sales taxes, when our obligation to perform is satisfied at the point of sale. Sales taxes related to these sales are collected from customers and remitted to the appropriate taxing authority and are not reflected in the Company’s consolidated statements of earnings as revenue.
Note 7. Restaurant Operations Revenues (continued)
Franchise Partner Fees
Franchise partner fees are composed of up to 15% of sales as well as 50% of profits. We are therefore fully affected by the operating results of the business, unlike in a traditional franchising arrangement, where the franchisor obtains a royalty fee based on sales only. We generate most of our revenue from our share of the franchise partners’ profits. An initial franchise fee of ten thousand dollars is recognized during the year the operator becomes a franchise partner. The Company recognizes franchise partner fees monthly as underlying restaurant sales occur.
The Company leases or subleases property and equipment to franchise partners under lease arrangements. Both real estate and equipment rental payments are charged to franchise partners and are recognized in accordance with ASC 842, “Leases”. During the third quarter of 2022 and 2021, restaurant operations recognized $5,362 and $4,277, respectively, in franchise partner fees related to rental income. During the first nine months ended September 30, 2022 and September 30, 2021, restaurant operations recognized $15,193 and $10,910, respectively, in franchise partner fees related to rental income.
Franchise Royalties and Fees
Franchise royalties and fees from Steak n Shake and Western Sizzlin franchisees are based upon a percentage of sales of the franchise restaurant and are recognized as earned. Franchise royalties are billed on a monthly basis. Initial franchise fees when a new restaurant opens or at the start of a new franchise term are recorded as deferred revenue when received and recognized as revenue over the term of the franchise agreement.
Other Revenue
Restaurant operations sells gift cards to customers which can be redeemed for retail food sales within our stores. Gift cards are recorded as a liability when issued and are subsequently recorded as net sales upon redemption. Restaurant operations estimates breakage related to gift cards when the likelihood of redemption is remote. This estimate utilizes historical trends based on the vintage of the gift card. Breakage on gift cards is recorded as other revenue in proportion to the rate of gift card redemptions by vintage.
Note 8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include the following.
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| September 30, 2022 | | December 31, 2021 |
Accounts payable | $ | 34,288 | | | $ | 36,684 | |
Gift card and other marketing | 15,985 | | | 19,244 | |
Insurance accruals | 5,971 | | | 6,428 | |
Salaries, wages and vacation | 6,902 | | | 5,905 | |
Deferred revenue | 4,831 | | | 6,683 | |
Taxes payable | 21,583 | | | 11,392 | |
Professional fees | 1,998 | | | 11,731 | |
Oil and gas payable | 5,586 | | | 1,936 | |
Other | 4,359 | | | 464 | |
Accounts payable and accrued expenses | $ | 101,503 | | | $ | 100,467 | |
Note 9. Line of Credit and Note Payable
Bigari Holdings Line of Credit
On September 13, 2022, Biglari Holdings entered into a line of credit in an aggregate principal amount of up to $30,000. The line of credit will be available on a revolving basis until September 12, 2024. The line of credit includes customary covenants, as well as financial maintenance covenants. The balance of the line of credit on September 30, 2022 was $30,000.
Steak n Shake Credit Facility
On March 19, 2014, Steak n Shake and its subsidiaries entered into a credit agreement which provided for a senior secured term loan facility in an aggregate principal amount of $220,000. The term loan was scheduled to mature on March 19, 2021. The Company repaid the balance of Steak n Shake’s term facility on February 19, 2021.
Note 10. Lease Assets and Obligations
Lease obligations include the following.
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Current portion of lease obligations | September 30, 2022 | | December 31, 2021 |
Finance lease liabilities | $ | 1,214 | | | $ | 1,414 | |
Finance obligations | 5,119 | | | 4,944 | |
Operating lease liabilities | 10,760 | | | 10,540 | |
Total current portion of lease obligations | $ | 17,093 | | | $ | 16,898 | |
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Long-term lease obligations | | | |
Finance lease liabilities | $ | 4,431 | | | $ | 5,347 | |
Finance obligations | 60,009 | | | 63,119 | |
Operating lease liabilities | 31,540 | | | 36,013 | |
Total long-term lease obligations | $ | 95,980 | | | $ | 104,479 | |
Nature of Leases
Steak n Shake and Western Sizzlin operate restaurants that are located on sites owned by us or leased from third parties. In addition, they own sites and lease sites from third parties that are leased and/or subleased to franchise partners and franchisees.
Lease Costs
A significant portion of our operating and finance lease portfolio includes restaurant locations. We recognize fixed lease expense for operating leases on a straight-line basis over the lease term. For finance leases, we recognize amortization expense on the right-of-use asset and interest expense on the lease liability over the lease term.
Total lease cost consists of the following.
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| Third Quarter | | First Nine Months | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
Finance lease costs: | | | | | | | | | | | |
Amortization of right-of-use assets | $ | 309 | | | $ | 404 | | | $ | 1,023 | | | $ | 1,205 | | | | | |
Interest on lease liabilities | 102 | | | 126 | | | 325 | | | 399 | | | | | |
Operating and variable lease costs | 3,577 | | | 4,011 | | | 10,782 | | | 11,189 | | | | | |
Sublease income | (2,895) | | | (3,771) | | | (8,487) | | | (9,786) | | | | | |
Total lease costs | $ | 1,093 | | | $ | 770 | | | $ | 3,643 | | | $ | 3,007 | | | | | |
Supplemental cash flow information related to leases is as follows.
| | | | | | | | | | | |
| First Nine Months |
| 2022 | | 2021 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Financing cash flows from finance leases | $ | 1,116 | | | $ | 1,226 | |
Operating cash flows from finance leases | $ | 324 | | | $ | 384 | |
Operating cash flows from operating leases | $ | 9,347 | | | $ | 9,806 | |
Note 10. Lease Assets and Obligations (continued)
Supplemental balance sheet information related to leases is as follows.
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Finance leases: | | | |
Property and equipment, net | $ | 4,619 | | | $ | 5,634 | |
Weighted-average lease terms and discount rates are as follows.