Biglari Holdings Inc. — Form 10-Q Summary
Business Context and Reporting Period
Biglari Holdings Inc. is a diversified holding company with operations in restaurants, property and casualty insurance, oil and gas, and media and licensing. The company is led by Sardar Biglari, who held approximately 63.0% of the economic interest and 67.5% of the voting interest as of March 31, 2021. This report covers the quarter ended March 31, 2021; financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $94.3 million | $135.7 million |
| Net earnings | $71.7 million | $(137.9) million |
| Net margin | Approximately 76.1% | Approximately (101.6)% |
| Operating cash flow | $165.3 million | $50.5 million |
| Capital expenditures | $7.4 million | $6.5 million |
| Cash, equivalents and restricted cash | $33.6 million | $36.2 million |
- Investment partnership gains were $81.8 million, compared with a $175.7 million loss in Q1 2020, contributing $62.6 million after tax to net earnings.
- Operating businesses generated pretax earnings of $11.3 million, compared with a $3.7 million pretax loss in the prior-year quarter.
- Restaurant revenue declined 38.7% to $70.0 million. Restaurant operations generated $5.5 million of pretax earnings versus a $6.6 million pretax loss.
- Insurance revenue increased to $14.6 million from $9.7 million, while pretax earnings increased to $3.2 million from $2.9 million.
- Oil and gas revenue fell to $8.6 million from $11.4 million, but pretax earnings rose to $3.0 million from $2.5 million.
- Media and licensing revenue increased to $1.1 million from $0.5 million, and pretax earnings improved to $0.6 million from a $0.03 million loss.
- Total assets were $959.9 million at March 31, 2021, down from $1.018 billion at December 31, 2020. Shareholders’ equity increased to $639.1 million from $564.8 million, primarily due to quarterly earnings.
- Investments totaled $99.4 million. Investment partnership interests had a carrying value of $356.8 million, or $288.7 million net of related deferred taxes.
- Lease obligations totaled $123.9 million, including $14.9 million classified as current. The $152.3 million current portion of notes payable outstanding at December 31, 2020 was eliminated after repayment of the Steak n Shake term loan.
Material Changes Versus the Prior Comparable Period
- Net earnings swung from a $137.9 million loss to $71.7 million of earnings, almost entirely because investment partnerships moved from a substantial loss to a substantial gain.
- Operating cash flow more than tripled, primarily because investment partnership distributions increased to $150.6 million from $42.3 million.
- The company used $149.95 million to repay long-term debt, funded primarily by investment partnership distributions. The Steak n Shake term loan was repaid in full on February 19, 2021.
- Restaurant net sales decreased 47.5% to $55.0 million. The company attributed the decline primarily to continued dining-room closures and pandemic-related operating restrictions.
- Restaurant cost ratios improved: food cost declined to 28.3% of net sales from 30.0%, and restaurant operating costs declined to 45.9% from 51.1%, reflecting menu changes and greater use of drive-through, delivery, and takeout.
- Restaurant impairment charges declined to $0.3 million from $10.3 million in Q1 2020.
- Steak n Shake continued transitioning company-operated locations to franchise partners. Franchise partner units increased to 108 from 39 at March 31, 2020, while total restaurants declined to 591 from 605.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing provides no quantitative earnings or revenue guidance. Management stated that working capital needs are expected to be funded principally by operating cash flows and cash on hand, while financing alternatives will continue to be reviewed.
- COVID-19 remained a material risk. The majority of restaurant dining rooms remained closed at quarter-end, and management warned that the pandemic could continue to affect earnings, cash flows, and financial condition.
- Investment partnership results are highly volatile because they include changes in the market values of underlying investments. The partnerships are committed on a rolling five-year basis, and withdrawals may be paid over two years and potentially in kind.
- A hypothetical 10% change in the market price of investments would have changed the carrying value of investments by approximately $45.6 million and shareholders’ equity by approximately 5%.
- Southern Oil remains exposed to changes in crude oil and natural gas prices. Lower commodity prices could materially reduce operating results.
- The company disclosed legal proceedings but stated that liabilities beyond recorded amounts are not expected to be material. Previously disclosed shareholder litigation was completed in the company’s favor after the Indiana Supreme Court denied review.
- The Lion Fund II purchased 656 Class A shares at an average price of $743.65 and 1,888 Class B shares at an average price of $140.03 during March 2021. The purchases were not under a publicly announced repurchase program.
- Management reported that disclosure controls and procedures were effective as of March 31, 2021, with no material changes to internal control over financial reporting.
Investor Verification Items
- Verify the sustainability and cash character of the $150.6 million investment partnership distribution and the extent to which future earnings depend on market-value gains.
- Assess restaurant recovery prospects, including dining-room reopening, the self-service model, store closures, and the transition to franchise-partner units.
- Review investment partnership liquidity restrictions, valuation assumptions, related-party arrangements, and exposure to Biglari Holdings common stock held by the partnerships.
- Confirm the effect of the February 2021 debt repayment on future interest expense and available liquidity, while considering remaining lease obligations.
- Monitor COVID-19 developments, commodity prices, insurance loss ratios, and potential impairment of restaurant assets or goodwill.