# Biglari Holdings Inc. (BH) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Biglari Holdings Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1726173/000172617324000004/bh-20231231.htm
Accession: 0001726173-24-000004
Filing date: 2024-02-26
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/BH/
All MD&A years: /company/BH/mda/
Previous year: /company/BH/mda/fy2022/ (FY 2022)
Next year: /company/BH/mda/fy2024/ (FY 2024)

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

(dollars in thousands, except per-share data)

Biglari Holdings Inc. 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 financial 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 December 31, 2023, Mr. Biglari beneficially owns shares of the Company that represent approximately 66.8% of the economic interest and approximately 71.0% of the voting interest.

Business Acquisitions

On September 14, 2022, the Company purchased Preferred Shares of Abraxas Petroleum Corporation (“Abraxas Petroleum”) for $80,000. On October 26, 2022, the Company converted the Preferred Shares to 90% of the outstanding common stock of Abraxas Petroleum. On June 14, 2023, the remaining 10% of the outstanding common stock of Abraxas Petroleum was acquired for $5,387. 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 purchase price allocation included $70,200 of oil and gas properties, cash of $21,726, and liabilities, net of other assets, of $11,926. The Company’s financial results include the results of Abraxas Petroleum from the initial acquisition date to the end of the calendar year.

Discussion of Operations

Net earnings attributable to Biglari Holdings Inc. shareholders are disaggregated in the table that follows.

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["Operating businesses:"],["Restaurant","$","21,831","","","$","9,383","","","$","11,235"],["Insurance","10,262","","","7,662","","","11,290"],["Oil and gas","25,406","","","19,091","","","7,528"],["Brand licensing","8","","","1,313","","","2,364"],["Interest expense","(531)","","","(305)","","","(841)"],["Corporate and other","(17,814)","","","(9,806)","","","(9,829)"],["Total operating businesses","39,162","","","27,338","","","21,747"],["Investment partnership gains (losses)","14,646","","","(56,961)","","","8,899"],["Investment gains (losses)","1,731","","","(2,682)","","","4,832"],["Net earnings (loss)","55,539","","","(32,305)","","","35,478"],["Earnings (loss) attributable to noncontrolling interest","591","","","(287)","","","\u2014"],["Net earnings (loss) attributable to Biglari Holdings Inc. shareholders","$","54,948","","","$","(32,018)","","","$","35,478"]]
[[/GREPCENT_TABLE]]

The following discussion should be read in conjunction with Item 1, Business and our Consolidated Financial Statements and the notes thereto included in this Form 10-K. The following discussion should also be read in conjunction with the “Cautionary Note Regarding Forward-Looking Statements” and the risks and uncertainties described in Item 1A, Risk Factors, set forth above.

Our Management Discussion and Analysis generally discusses 2023 and 2022 items. Discussions of 2021 items can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 27, 2023.

Investment gains and losses in 2023 and 2022 were mainly derived from our investments in equity securities and included unrealized gains and losses from market price changes during the period. We believe that investment gains/losses are generally meaningless for analytical purposes in understanding our reported quarterly and annual results. These gains and losses have caused and will continue to cause significant volatility in our periodic earnings.

Through our subsidiaries, we engage in numerous diverse business activities. We operate on a decentralized management structure. The business segment data (Note 17 to the accompanying Consolidated Financial Statements) should be read in conjunction with this discussion.

Restaurants

Our restaurant businesses, which include Steak n Shake and Western Sizzlin, comprise 492 company-operated and franchise restaurants as of December 31, 2023.

[[GREPCENT_TABLE]]
[["","Steak n Shake","","Western Sizzlin"],["","Company- operated","","Franchise Partner","","Traditional Franchise","","Company- operated","","Franchise","","Total"],["Stores on December 31, 2020","276","","","86","","","194","","","3","","","39","","","598"],["Corporate stores transitioned","(73)","","","73","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Net restaurants opened (closed)","(4)","","","\u2014","","","(16)","","","\u2014","","","(1)","","","(21)"],["Stores on December 31, 2021","199","","","159","","","178","","","3","","","38","","","577"],["Corporate stores transitioned","(16)","","","16","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Net restaurants opened (closed)","(6)","","","\u2014","","","(24)","","","\u2014","","","(2)","","","(32)"],["Stores on December 31, 2022","177","","","175","","","154","","","3","","","36","","","545"],["Corporate stores transitioned","(6)","","","7","","","(1)","","","\u2014","","","\u2014","","","\u2014"],["Net restaurants opened (closed)","(23)","","","(1)","","","(25)","","","\u2014","","","(4)","","","(53)"],["Stores on December 31, 2023","148","","","181","","","128","","","3","","","32","","","492"]]
[[/GREPCENT_TABLE]]

As of December 31, 2023, 17 of the 148 company-operated Steak n Shake stores were closed. Steak n Shake plans to sell or lease 10 of the 17 locations and refranchise the balance.

12

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Management’s Discussion and Analysis (continued)

Restaurant operations for 2023, 2022, and 2021 are summarized below.

[[GREPCENT_TABLE]]
[["","2023","","","","2022","","","","2021"],["Revenue"],["Net sales","$","152,545","","","","","$","149,184","","","","","$","187,913"],["Franchise partner fees","72,552","","","","","63,853","","","","","55,641"],["Franchise royalties and fees","16,443","","","","","19,678","","","","","21,736"],["Other revenue","9,317","","","","","8,853","","","","","6,000"],["Total revenue","250,857","","","","","241,568","","","","","271,290"],["Restaurant cost of sales"],["Cost of food","44,993","","","29.5","%","","44,461","","","29.8","%","","55,315","","","29.4","%"],["Labor costs","47,090","","","30.9","%","","50,524","","","33.9","%","","58,159","","","30.9","%"],["Occupancy and other","45,903","","","30.1","%","","45,279","","","30.4","%","","54,017","","","28.7","%"],["Total cost of sales","137,986","","","","","140,264","","","","","167,491"],["Selling, general and administrative"],["General and administrative","44,120","","","17.6","%","","40,206","","","16.6","%","","39,940","","","14.7","%"],["Marketing","12,631","","","5.0","%","","13,921","","","5.8","%","","13,923","","","5.1","%"],["Other expenses (income)","(7,935)","","","(3.2)","%","","(2,294)","","","(0.9)","%","","3,323","","","1.2","%"],["Total selling, general and administrative","48,816","","","","","51,833","","","","","57,186"],["Impairments","3,947","","","1.6","%","","3,520","","","1.5","%","","4,635","","","1.7","%"],["Depreciation and amortization","27,031","","","10.8","%","","27,496","","","11.4","%","","21,484","","","7.9","%"],["Interest on finance leases and obligations","5,114","","","","","5,493","","","","","6,039"],["Earnings before income taxes","27,963","","","","","12,962","","","","","14,455"],["Income tax expense","6,132","","","","","3,579","","","","","3,220"],["Contribution to net earnings","$","21,831","","","","","$","9,383","","","","","$","11,235"]]
[[/GREPCENT_TABLE]]

Cost of food, labor, and occupancy and other costs are expressed as a percentage of net sales.

General and administrative, marketing, other expenses, impairments, and depreciation and amortization are expressed as a percentage of total revenue.

Net sales during 2023 were $152,545 as compared to $149,184 during 2022. For company-operated units, sales to the end customer are recorded as revenue generated by the Company, but for franchise partner units, only our share of the restaurants’ profits, along with certain fees, are recorded as revenue. Because we derive most of our revenue from our share of the profits, revenue will decline as we transition from company-operated units to franchise partner units.

Fees generated by our franchise partners were $72,552 during 2023 as compared to $63,853 during 2022. As of December 31, 2023, there were 181 franchise partner units as compared to 175 franchise partner units as of December 31, 2022. Included in the franchise partner fees were $22,687 and $20,426 of rental income during 2023 and 2022, respectively. Franchise partners rent buildings and equipment from Steak n Shake.

13

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Management’s Discussion and Analysis (continued)

The franchise royalties and fees generated by the traditional franchising business were $16,443 during 2023 as compared to $19,678 during 2022. The decrease in franchise royalties and fees was primarily due to the closing of certain traditional franchise stores. There were 160 traditional units open on December 31, 2023, as compared to 190 units open on December 31, 2022.

The cost of food at company-operated units in 2023 was $44,993, or 29.5% of net sales as compared to $44,461, or 29.8% of net sales in 2022. The cost of food expressed as a percentage of net sales in 2023 remained consistent with 2022.

The labor costs at company-operated restaurants during 2023 were $47,090, or 30.9% of net sales as compared to $50,524, or 33.9% of net sales in 2022. The 3-percentage-point decrease in costs was primarily attributable to a 2.7-percentage-point decrease in Steak n Shake’s labor costs as a result of a gain in productivity.

General and administrative expenses during 2023 were $44,120, or 17.6% of total revenue as compared to $40,206, or 16.6% of total revenue during 2022. General and administrative expenses increased during 2023 as compared to 2022 primarily because of higher salaries and wages. An increase in overall personnel and additional franchise partner training accounted for much of the increase in general and administrative expenses.

Other income increased during 2023 compared to 2022 primarily because of gains on the sale of real estate.

Interest on obligations under leases was $5,114 during 2023 versus $5,493 during 2022. The year-over-year decrease in interest expense was primarily attributable to the maturity and retirement of lease obligations.

To better convey the performance of the franchise partnership model, the table below shows the underlying sales, cost of food, labor costs, and other restaurant costs of the franchise partners. We believe the franchise partner information is useful to readers, as they have a direct effect on Steak n Shake’s profitability.

[[GREPCENT_TABLE]]
[["","2023","","","","2022"],["Revenue"],["Net sales and other","$","324,281","","","","","$","296,045"],["Restaurant cost of sales"],["Cost of food","$","91,317","","","28.2","%","","$","81,952","","","27.7","%"],["Labor costs","86,286","","","26.6","%","","84,191","","","28.4","%"],["Occupancy and other","66,135","","","20.4","%","","59,647","","","20.1","%"],["Total cost of sales","$","243,738","","","","","$","225,790"]]
[[/GREPCENT_TABLE]]

The Company’s consolidated financial statements do not include data in the table above. Figures are shown for information purposes only.

14

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Management’s Discussion and Analysis (continued)

Insurance

We view our insurance businesses as possessing two activities: underwriting and investing. Underwriting decisions are the responsibility of the unit managers, whereas investing decisions are the responsibility of our Chairman and CEO, Sardar Biglari. Our business units are operated under separate local management. Biglari Holdings’ insurance operations consist of First Guard and Southern Pioneer.

Underwriting results of our insurance operations are summarized below.

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["Underwriting gain (loss) attributable to:"],["First Guard","$","9,492","","","$","6,578","","","$","10,573"],["Southern Pioneer","(1,038)","","","(1,277)","","","1,744"],["Pre-tax underwriting gain","8,454","","","5,301","","","12,317"],["Income tax expense","1,775","","","1,113","","","2,587"],["Net underwriting gain","$","6,679","","","$","4,188","","","$","9,730"]]
[[/GREPCENT_TABLE]]

Earnings of our insurance operations are summarized below.

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["Premiums earned","$","61,225","","","$","59,949","","","$","55,411"],["Insurance losses","35,668","","","37,187","","","27,649"],["Underwriting expenses","17,103","","","17,461","","","15,445"],["Pre-tax underwriting gain","8,454","","","5,301","","","12,317"],["Other income and expenses"],["Investment income","3,074","","","1,380","","","704"],["Other income","1,555","","","3,223","","","1,414"],["Total other income","4,629","","","4,603","","","2,118"],["Earnings before income taxes","13,083","","","9,904","","","14,435"],["Income tax expense","2,821","","","2,242","","","3,145"],["Contribution to net earnings","$","10,262","","","$","7,662","","","$","11,290"]]
[[/GREPCENT_TABLE]]

Insurance premiums and other on the consolidated statement of earnings includes premiums earned, investment income, other income, and commissions. Commissions are in other income in the above table.

15

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Management’s Discussion and Analysis (continued)

First Guard

First Guard is a direct underwriter of commercial truck insurance, primarily selling physical damage and nontrucking liability insurance to truckers. First Guard’s insurance products are marketed primarily through direct response methods via the Internet or by telephone. First Guard’s cost-efficient direct response marketing methods enable it to be a low-cost insurer. A summary of First Guard’s underwriting results follows.

[[GREPCENT_TABLE]]
[["","","2023","","2022","","2021"],["","","Amount","","%","","Amount","","%","","Amount","","%"],["Premiums earned","","$","36,917","","","100.0","%","","$","35,914","","","100.0","%","","$","33,521","","","100.0","%"],["Insurance losses","","20,861","","","56.5","%","","22,299","","","62.1","%","","16,338","","","48.7","%"],["Underwriting expenses","","6,564","","","17.8","%","","7,037","","","19.6","%","","6,610","","","19.7","%"],["Total losses and expenses","","27,425","","","74.3","%","","29,336","","","81.7","%","","22,948","","","68.4","%"],["Pre-tax underwriting gain","","$","9,492","","","","","$","6,578","","","","","$","10,573"]]
[[/GREPCENT_TABLE]]

First Guard’s ratio of losses and loss adjustment expenses to premiums earned was 56.5% during 2023 as compared to 62.1% during 2022. First Guard’s underwriting results in 2023 were in line with its historical performance despite cost inflation in property and physical damage claims, which began to accelerate in 2022.

Southern Pioneer

Southern Pioneer underwrites garage liability and commercial property insurance, as well as homeowners and dwelling fire insurance. A summary of Southern Pioneer’s underwriting results follows.

[[GREPCENT_TABLE]]
[["","","2023","","2022","","2021"],["","","Amount","","%","","Amount","","%","","Amount","","%"],["Premiums earned","","$","24,308","","","100.0","%","","$","24,035","","","100.0","%","","$","21,890","","","100.0","%"],["Insurance losses","","14,807","","","60.9","%","","14,888","","","61.9","%","","11,311","","","51.7","%"],["Underwriting expenses","","10,539","","","43.4","%","","10,424","","","43.4","%","","8,835","","","40.4","%"],["Total losses and expenses","","25,346","","","104.3","%","","25,312","","","105.3","%","","20,146","","","92.1","%"],["Pre-tax underwriting gain (loss)","","$","(1,038)","","","","","$","(1,277)","","","","","$","1,744"]]
[[/GREPCENT_TABLE]]

Southern Pioneer’s ratio of losses and loss adjustment expenses to premiums earned was 60.9% during 2023 as compared to 61.9% during 2022. Southern Pioneer’s performance in both years was primarily attributable to weather-related losses.

16

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Management’s Discussion and Analysis (continued)

Insurance – Investment Income

A summary of net investment income attributable to our insurance operations follows.

[[GREPCENT_TABLE]]
[["","","2023","","2022","","2021"],["Interest, dividends, and other investment income:"],["First Guard","","$","1,873","","","$","751","","","$","133"],["Southern Pioneer","","1,201","","","629","","","571"],["Pre-tax investment income","","3,074","","","1,380","","","704"],["Income tax expense","","646","","","289","","","148"],["Net investment income","","$","2,428","","","$","1,091","","","$","556"]]
[[/GREPCENT_TABLE]]

We consider investment income as a component of our aggregate insurance operating results. However, we consider investment gains and losses, whether realized or unrealized, as non-operating.

Oil and Gas

A summary of revenue and earnings of oil and gas operations follows.

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["Oil and gas revenue","$","45,071","","","$","57,546","","","$","33,004"],["Oil and gas production costs","17,365","","","17,842","","","10,470"],["Depreciation, depletion, and accretion","10,339","","","8,013","","","8,073"],["Gain on sale of properties","(13,563)","","","\u2014","","","\u2014"],["General and administrative expenses","5,164","","","6,500","","","4,748"],["Earnings before income taxes","25,766","","","25,191","","","9,713"],["Income tax expense (benefit)","360","","","6,100","","","2,185"],["Contribution to net earnings","$","25,406","","","$","19,091","","","$","7,528"]]
[[/GREPCENT_TABLE]]

Our oil and gas business is highly dependent on oil and natural gas prices. The average West Texas Intermediate price per barrel for the year ended December 31, 2023, was approximately $77.64 as compared to approximately $94.53 for the year ended December 31, 2022. It is expected that the prices of oil and gas commodities will remain volatile, which will be reflected in our financial results.

Oil and gas production costs have remained constant despite a decrease in revenue primarily because of the acquisition of Abraxas Petroleum and costs to repair nonperforming wells at Southern Oil. Depreciation, depletion, and accretion expense during 2023 increased $2,326 as compared to 2022, primarily due to the acquisition of Abraxas Petroleum in the third quarter of 2022, offset by temporarily shutting producing wells.

During the third quarter of 2023, Abraxas Petroleum entered into a royalty-based arrangement with an unaffiliated party to conduct development activities that will establish proved undeveloped reserves on its proportional share; however, Abraxas Petroleum will not be required to fund any exploration expenditures on its undeveloped properties. As a result of the transaction, a gain of $13,563 was recorded in 2023.

17

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Management’s Discussion and Analysis (continued)

Abraxas Petroleum

Abraxas Petroleum operates oil and natural gas properties in the Permian Basin. Earnings for Abraxas Petroleum from the date of acquisition, September 14, 2022, are summarized below.

[[GREPCENT_TABLE]]
[["","2023","","2022"],["Oil and gas revenue","$","27,576","","","$","11,455"],["Oil and gas production costs","9,605","","","4,487"],["Depreciation, depletion, and accretion","6,359","","","2,510"],["Gain on sale of properties","(13,563)","","","\u2014"],["General and administrative expenses","2,765","","","3,806"],["Earnings before income taxes","22,410","","","652"],["Income tax expense (benefit)","(384)","","","154"],["Contribution to net earnings","$","22,794","","","$","498"]]
[[/GREPCENT_TABLE]]

Southern Oil

Southern Oil primarily operates oil and natural gas properties offshore in the shallow waters of the Gulf of Mexico. Earnings for Southern Oil are summarized below.

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["Oil and gas revenue","$","17,495","","","$","46,091","","","$","33,004"],["Oil and gas production costs","7,760","","","13,355","","","10,470"],["Depreciation, depletion, and accretion","3,980","","","5,503","","","8,073"],["General and administrative expenses","2,399","","","2,694","","","4,748"],["Earnings before income taxes","3,356","","","24,539","","","9,713"],["Income tax expense","744","","","5,946","","","2,185"],["Contribution to net earnings","$","2,612","","","$","18,593","","","$","7,528"]]
[[/GREPCENT_TABLE]]

18

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Management’s Discussion and Analysis (continued)

Brand Licensing

Maxim’s business lies principally in licensing and media. Earnings of operations are summarized below.

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["Licensing and media revenue","$","2,118","","","$","4,577","","","$","3,203"],["Licensing and media cost","1,840","","","2,695","","","2,275"],["General and administrative expenses","267","","","122","","","114"],["Earnings before income taxes","11","","","1,760","","","814"],["Income tax expense","3","","","447","","","(1,550)"],["Contribution to net earnings","$","8","","","$","1,313","","","$","2,364"]]
[[/GREPCENT_TABLE]]

Licensing and media revenue decreased $2,459 in 2023 compared to 2022 primarily because an important licensing transaction shifted from 2023 to 2024.

We acquired Maxim with the idea of transforming its business model. The magazine developed the Maxim brand, a franchise we are utilizing to generate nonmagazine revenue, notably through licensing, a cash-generating business related to consumer products, services, and events.

Investment Gains and Investment Partnership Gains

Investment gains were $2,211 ($1,731 net of tax) in 2023 as compared to investment losses of $3,393 ($2,682 net of tax) in 2022. Dividends and interest earned on investments are reported as investment income by our insurance companies. We consider investment income as a component of our aggregate insurance operating results. However, we consider investment gains and losses, whether realized or unrealized, as non-operating.

Earnings from our investments in partnerships are summarized below.

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["Investment partnership gains (losses)","$","19,440","","","$","(75,953)","","","$","10,953"],["Tax expense (benefit)","4,794","","","(18,992)","","","2,054"],["Contribution to net earnings","$","14,646","","","$","(56,961)","","","$","8,899"]]
[[/GREPCENT_TABLE]]

Investment partnership gains include gains/losses from changes in the market values of underlying investments and dividends earned by the partnerships. Dividend income has a lower effective tax rate than income from capital gains. These gains and losses have caused and will continue to cause significant volatility in our periodic earnings.

The investment partnerships hold the Company’s common stock as investments. 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. Gains and losses on Company common stock included in the earnings of the partnerships are eliminated in the Company’s consolidated financial results.

Investment gains and losses in 2023 and 2022 were mainly derived from our investments in equity securities and included unrealized gains and losses from market price changes during the period. We believe that investment gains/losses are generally meaningless for analytical purposes in understanding our reported quarterly or annual results. These gains and losses have caused and will continue to cause significant volatility in our periodic earnings.

19

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Management’s Discussion and Analysis (continued)

Interest Expense

The Company’s interest expense is summarized below.

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["Interest expense on notes payable and other borrowings","$","(681)","","","$","(399)","","","$","(1,121)"],["Tax benefit","(150)","","","(94)","","","(280)"],["Interest expense net of tax","$","(531)","","","$","(305)","","","$","(841)"]]
[[/GREPCENT_TABLE]]

The Company paid Steak n Shake’s outstanding credit facility in full in February 2021. On September 13, 2022, Biglari Holdings entered into a line of credit in an aggregate principal amount of up to $30,000. There was no balance on the line of credit on December 31, 2023. The balance on the line of credit was $10,000 on December 31, 2022.

Income Taxes

The consolidated income tax expense was $9,308 in 2023 versus a benefit of $10,722 in 2022. During 2023, the Company recognized tax benefits of $5,660 associated with the tax attributes of Abraxas Petroleum’s oil and gas properties offset by an increase in tax expense of $23,786 for investment partnership gains in 2023.

Corporate and Other

Corporate expenses exclude the activities of the restaurant, insurance, brand licensing, and oil and gas businesses. Corporate and other net losses increased in 2023 compared to 2022 primarily due to an incentive fee of $7,271.

Financial Condition

Our consolidated shareholders’ equity on December 31, 2023, was $599,330, an increase of $52,364 as compared to the December 31, 2022 balance. The increase in shareholders’ equity was primarily due to net income of $54,948 and an increase in additional paid-in capital for purchases of noncontrolling interest of $3,806, offset by a change in treasury stock of $6,662.

Consolidated cash and investments are summarized below.

[[GREPCENT_TABLE]]
[["","December 31,"],["","2023","","2022"],["Cash and cash equivalents","$","28,066","","","$","37,467"],["Investments","91,879","","","69,466"],["Fair value of interest in investment partnerships","472,772","","","383,004"],["Total cash and investments","592,717","","","489,937"],["Less: portion of Company stock held by investment partnerships","(273,669)","","","(227,210)"],["Carrying value of cash and investments on balance sheet","$","319,048","","","$","262,727"]]
[[/GREPCENT_TABLE]]

Unrealized gains/losses of Biglari Holdings’ stock held by the investment partnerships are eliminated in the Company’s consolidated financial results.

20

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Management’s Discussion and Analysis (continued)

Liquidity

Our balance sheet continues to maintain significant liquidity. Consolidated cash flow activities are summarized below.

[[GREPCENT_TABLE]]
[["","2023","","2022","","2021"],["Net cash provided by operating activities","$","73,002","","","$","127,825","","","$","228,767"],["Net cash used in investing activities","(66,080)","","","(136,605)","","","(58,525)"],["Net cash provided by (used in) financing activities","(16,132)","","","3,860","","","(156,157)"],["Effect of exchange rate changes on cash","59","","","38","","","(64)"],["Increase (decrease) in cash, cash equivalents, and restricted cash","$","(9,151)","","","$","(4,882)","","","$","14,021"]]
[[/GREPCENT_TABLE]]

In 2023, cash from operating activities decreased by $54,823 as compared to 2022. The change was primarily attributable to distributions from investment partnerships of $14,500 in 2023 compared to $70,700 in 2022. The distributions during 2022 were primarily used to acquire Abraxas Petroleum.

Net cash used in investing activities was $70,525 lower during 2023 as compared to 2022. Capital expenditures were $6,341 higher in 2022 primarily due to Steak n Shake’s implementation of a self-service model. Proceeds from sales of property and equipment were $19,309 higher in 2023 primarily due to the sale of oil and gas properties for $13,563 and the sale of restaurant properties for $10,883. During 2022, the Company acquired 90% of Abraxas Petroleum for $58,274, net of cash acquired. In 2023, the Company acquired the remaining 10% of Abraxas Petroleum for $5,387.

Cash used by financing activities of $16,132 during 2023 was primarily due to net repayments on the Company’s line of credit. Cash provided by financing activities of $3,860 during 2022 was primarily due to net borrowings on the Company’s line of credit.

We intend to meet the working capital needs of our operating subsidiaries, principally through cash flows generated from operations and cash on hand. We continually review available financing alternatives.

Biglari 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 13, 2024. The line of credit includes customary covenants, as well as financial maintenance covenants. As of December 31, 2023, we were in compliance with all covenants. There was no balance on the line of credit on December 31, 2023. The balance of the line of credit was $10,000 on December 31, 2022. Our interest rate is based on the 30-day Secured Overnight Financing Rate plus 2.73%.

Western Sizzlin Revolver

Western Sizzlin’s available line of credit is $500. As of December 31, 2023 and 2022, Western Sizzlin had no debt outstanding under its revolver.

Critical Accounting Policies

Certain accounting policies require us to make estimates and judgments in determining the amounts reflected in the consolidated financial statements. Such estimates and judgments necessarily involve varying, and possibly significant, degrees of uncertainty. Accordingly, certain amounts currently recorded in the financial statements will likely be adjusted in the future based on new available information and changes in other facts and circumstances. A discussion of our principal accounting policies that required the application of significant judgments as of December 31, 2023, follows.

Consolidation

The consolidated financial statements include the accounts of Biglari Holdings Inc. and the wholly owned subsidiaries of Biglari Holdings Inc. The analysis as to whether to consolidate an entity is subject to a significant amount of judgment. All intercompany accounts and transactions are eliminated in consolidation.

Our interests in the investment partnerships are accounted for as equity method investments because of our retained limited partner interest in the investment partnerships. The Company records gains from the investment partnerships (inclusive of the investment partnerships’ unrealized gains and losses on their securities) in the consolidated statement of earnings based on our proportional ownership interest in the investment partnerships.

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Management’s Discussion and Analysis (continued)

Impairment of Restaurant Long-lived Assets

We review company-operated restaurants for impairment on a restaurant-by-restaurant basis when events or circumstances indicate a possible impairment. Assets included in the impairment assessment generally consist of property, equipment, and leasehold improvements directly associated with an individual restaurant as well as any related finance or operating lease assets. We test for impairment by comparing the carrying value of the asset to the undiscounted future cash flows expected to be generated by the asset. If the total estimated future cash flows are less than the carrying amount of the asset, the carrying value is written down to the estimated fair value, and a loss is recognized in earnings. Determining the future cash flows expected to be generated by an asset requires significant judgment regarding future performance of the asset, fair market value if the asset were to be sold, and other financial and economic assumptions.

Oil and Natural Gas Reserves

Crude oil and natural gas reserves are estimates of future production that impact certain asset and expense accounts. Proved reserves are the estimated quantities of oil and gas that geoscience and engineering data demonstrate with reasonable certainty to be economically producible in the future under existing economic conditions, operating methods, and government regulations. Proved reserves include both developed and undeveloped volumes. Proved developed reserves represent volumes expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are volumes expected to be recovered from new wells on undrilled proved acreage, or from existing wells where expenditure is required for recompletion. We estimate our proved oil and natural gas reserves in accordance with the guidelines established by the SEC. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of reserves are subject to change as additional information becomes available.

Income Taxes

We record deferred tax assets or liabilities, which are based on differences between financial reporting and the tax basis of assets and liabilities and are measured using the currently enacted rates and laws that will be in effect when the differences are expected to reverse. We record deferred tax assets to the extent we believe there will be sufficient future taxable income to utilize those assets prior to their expiration. To the extent deferred tax assets are unable to be utilized, we would record a valuation allowance against the unrealizable amount and record that amount as a charge against earnings. Due to changing tax laws and state income tax rates, significant judgment is required to estimate the effective tax rate applicable to tax differences arising from reversal in the future. We must also make estimates about the sufficiency of taxable income in future periods to offset any deductions related to deferred tax assets currently recorded.

Goodwill and Other Intangible Assets

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. The valuation methodology and underlying financial information included in our determination of fair value require significant managerial judgment. Based on a review of the qualitative factors, if we determine it is not more likely than not that the fair value is less than the carrying value, we may bypass the quantitative impairment test. We may also elect not to perform the qualitative assessment for the reporting unit or intangible assets and perform a quantitative impairment test instead.

Leases

We determine whether a contract is or contains a lease at contract inception based on the presence of identified assets and our right to obtain substantially all of the economic benefit from, or to direct the use of, such assets. When we determine a lease exists, we record a right-of-use asset and corresponding lease liability on our consolidated balance sheets. Right-of-use assets represent our right to use an underlying asset for the lease term. Lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets are recognized at the commencement date at the value of the lease liability and are adjusted for any prepayments, lease incentives received, and initial direct costs incurred. Lease liabilities are recognized at the lease commencement date based on the present value of remaining lease payments over the lease term. As the discount rate implicit in the lease is not readily determinable in most of our leases, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Our lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We do not record lease contracts with a term of 12 months or less on our consolidated balance sheets. 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.

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Management’s Discussion and Analysis (continued)

Recently Issued Accounting Pronouncements

For detailed information regarding recently issued accounting pronouncements and the expected impact on our consolidated financial statements, see Note 1 “Summary of Significant Accounting Policies” in the accompanying notes to consolidated financial statements included in Part II, Item 8 of this report on Form 10-K.

Cautionary Note Regarding Forward-Looking Statements

This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In general, forward-looking statements include estimates of future revenues, cash flows, capital expenditures, or other financial items, and assumptions underlying any of the foregoing. Forward-looking statements reflect management’s current expectations regarding future events and use words such as “anticipate,” “believe,” “expect,” “may,” and other similar terminology. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. Investors should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. These forward-looking statements are all based on currently available operating, financial, and competitive information and are subject to various risks and uncertainties. Our actual future results and trends may differ materially depending on a variety of factors, many beyond our control, including, but not limited to, the risks and uncertainties described in Item 1A, Risk Factors, set forth above. We undertake no obligation to publicly update or revise them, except as may be required by law.