Biglari (BH) - 2022 Q3 - Quarterly Report

Part I – Financial Information Financial Statements This section presents Biglari Holdings Inc.'s unaudited consolidated financial statements for Q3 and the first nine months of 2022, including balance sheets, earnings, cash flows, and notes Consolidated Balance Sheets Total assets decreased to $862.1 million from $894.8 million, mainly due to lower investment partnership values, while total shareholders' equity declined to $545.4 million Consolidated Balance Sheets (in thousands) | Account | Sep 30, 2022 (Unaudited) | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $862,145 | $894,807 | | Cash and cash equivalents | $64,842 | $42,349 | | Investment partnerships | $144,864 | $250,399 | | Total Liabilities | $316,737 | $307,111 | | Line of credit | $30,000 | $— | | Total Shareholders' Equity | $545,408 | $587,696 | Consolidated Statements of Earnings The company reported a Q3 2022 net income of $32.0 million, a turnaround from a $10.7 million loss, driven by investment partnership gains, but a nine-month net loss of $42.1 million Consolidated Statements of Earnings (in thousands) | Metric | Q3 2022 (Unaudited) | Q3 2021 (Unaudited) | First Nine Months 2022 (Unaudited) | First Nine Months 2021 (Unaudited) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $92,034 | $82,083 | $269,773 | $267,158 | | Restaurant operations | $59,437 | $59,144 | $179,608 | $196,424 | | Investment partnership gains (losses) | $29,658 | $(20,231) | $(82,244) | $27,344 | | Net Earnings (Loss) Attributable to BH | $32,005 | $(10,669) | $(42,073) | $40,301 | | Net Earnings (Loss) per Class A Share | $109.13 | $(33.74) | $(140.30) | $125.79 | Consolidated Statements of Cash Flows Net cash from operating activities decreased to $99.8 million, while investing activities used $102.5 million due to an acquisition, and financing provided $25.4 million from a new credit line Consolidated Statements of Cash Flows (in thousands) | Activity | First Nine Months 2022 (Unaudited) | First Nine Months 2021 (Unaudited) | | :--- | :--- | :--- | | Net cash provided by operating activities | $99,754 | $211,245 | | Net cash used in investing activities | $(102,464) | $(55,782) | | Net cash provided by (used in) financing activities | $25,353 | $(154,586) | | Increase in cash | $22,493 | $792 | Notes to Consolidated Financial Statements Notes detail accounting policies, business segments, the Abraxas Petroleum acquisition, and the significant impact of investment partnerships on earnings - On September 14, 2022, the company acquired Abraxas Petroleum Corporation for $80 million, funded by working capital and a line of credit, now a consolidated entity[26] - Investment partnerships generated a pre-tax gain of $29.7 million in Q3 2022 versus a loss of $20.2 million in Q3 2021, but recorded a pre-tax loss of $82.2 million for the first nine months of 2022 compared to a gain of $27.3 million in the prior year[43] Segment Revenue (in thousands) | Segment Revenue | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Restaurant Operations | $59,437 | $59,144 | | Insurance Operations | $16,312 | $14,723 | | Oil and Gas Operations | $14,380 | $7,353 | | Maxim (Licensing/Media) | $1,905 | $863 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses performance by segment, financial condition, liquidity, and cash flow changes, including the Abraxas Petroleum acquisition and new line of credit - The company's net earnings are highly volatile due to the significant impact of investment partnership gains and losses, which are recorded in the income statement[107][138] - On September 13, 2022, the company entered into a new $30 million revolving line of credit, fully drawn as of September 30, 2022, to help fund the Abraxas Petroleum acquisition[63][152] Results of Operations by Segment Segment performance review shows a shift in restaurant revenue to franchise fees, lower insurance underwriting gains, significant growth in oil and gas, and increased licensing revenue - The restaurant segment is transitioning to a franchise partner model, increasing 'Franchise partner fees' while decreasing 'Net sales', with 171 franchise partner units as of September 30, 2022, up from 140 a year prior[110][115][116] Segment Pre-Tax Earnings (Loss) (in thousands) | Segment Pre-Tax Earnings (Loss) | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Restaurant Operations | $4,333 | $(2,712) | | Insurance Operations | $3,092 | $3,842 | | Oil and Gas Operations | $7,241 | $2,982 | | Maxim (Licensing/Media) | $1,534 | $(56) | - First Guard's insurance underwriting gain decreased in Q3 and the first nine months of 2022 due to a higher loss ratio of 52.8% in Q3 2022 versus 46.5% in Q3 2021, while Southern Pioneer swung to an underwriting loss[127][128] - The Oil and Gas segment's earnings before tax increased to $7.2 million in Q3 2022 from $3.0 million in Q3 2021, driven by higher commodity prices and the contribution from the newly acquired Abraxas Petroleum[101][131][133] Financial Condition and Liquidity The company maintains significant liquidity despite a decrease in cash and investments to $279.7 million due to investment partnership losses, and operating cash flow declined due to lower distributions Total Cash and Investments (Fair Value, in thousands) | Account | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $64,842 | $42,349 | | Investments | $70,032 | $83,061 | | Fair value of interest in investment partnerships | $338,314 | $474,201 | | Total cash and investments | $473,188 | $599,611 | - Net cash from operating activities decreased to $99.7 million in the first nine months of 2022 from $211.2 million in 2021, mainly because distributions from investment partnerships fell to $51.2 million from $172.4 million[149] Quantitative and Qualitative Disclosures about Market Risk The company faces market risk from concentrated equity investments, with a 10% price change impacting carrying value by $21.5 million, and commodity price risk in oil and gas operations - The company holds concentrated equity positions through its investment partnerships, where a significant decline in the stock market or these specific investments could lead to a large net loss[158] - A hypothetical 10% change in the market price of the company's investments would result in a corresponding change in carrying value of $21.5 million[159] - The oil and natural gas business is exposed to commodity price fluctuations, where a material decline in crude oil or natural gas prices could have a material adverse effect on operations[161] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting - The Chief Executive Officer and Controller concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report[162] Part II – Other Information Other Information This section covers other required disclosures, including legal proceedings referenced in Note 13, and confirms no material changes to risk factors or unregistered equity sales - Information regarding legal proceedings is incorporated by reference from Note 13 to the Consolidated Financial Statements[165] - There have been no material changes from the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021[166]