Biglari Holdings Inc. 10-Q Summary
Business Context and Reporting Period
Biglari Holdings is a diversified holding company with restaurant operations, commercial trucking insurance, media and licensing activities, and investment partnerships. The filing covers the quarter and six months ended June 30, 2019. Sardar Biglari is Chairman and CEO and makes major operating, investment, and capital allocation decisions. He beneficially owned approximately 60.7% of Class A and 55.4% of Class B shares at June 30, 2019.
Key Financial Metrics
| Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 |
|---|---|---|---|---|
| Total revenue | $168.3 million | $208.7 million | $350.2 million | $411.0 million |
| Pre-tax earnings (loss) | $27.9 million | $(8.4) million | $39.4 million | $(11.0) million |
| Net earnings (loss) | $22.0 million | $(7.5) million | $31.8 million | $(9.4) million |
| Net margin | 13.1% | (3.6%) | 9.1% | (2.3%) |
| Equivalent Class A EPS | $63.50 | $(21.73) | $91.85 | $(26.76) |
Investment partnership gains were $34.2 million in the quarter and $68.4 million for the first six months, versus losses of $8.3 million and $4.8 million, respectively, in the comparable 2018 periods. These gains were the primary driver of consolidated profitability. The partnerships’ investments are heavily concentrated in Cracker Barrel Old Country Store, Inc., creating significant market-value sensitivity.
Restaurant revenue declined to $160.1 million in the quarter and $333.8 million year to date. Restaurant operations generated pre-tax losses of $2.6 million and $21.0 million, respectively, compared with pre-tax earnings of $3.3 million and $2.7 million in the prior-year periods. First Guard contributed pre-tax earnings of $1.9 million in the quarter and $3.4 million year to date.
Cash and cash equivalents were $27.7 million at June 30, 2019, compared with $48.6 million at December 31, 2018. Including investments and the fair value of investment partnership interests, total cash and investments were $836.1 million, or $691.2 million after excluding the portion representing Biglari Holdings stock held by the partnerships. Total current assets were $87.7 million versus $114.9 million at year-end.
Operating cash flow was negative $8.3 million for the first six months, compared with negative $0.5 million in 2018. Investing cash flow was negative $8.6 million, including $6.2 million of capital expenditures. Financing cash flow was negative $4.0 million. Cash, cash equivalents and restricted cash decreased by $20.9 million to $34.1 million.
Total notes payable and other borrowings were $272.7 million, including $265.8 million classified as long term. Steak n Shake’s senior secured term loan had $182.6 million outstanding, a 6.19% interest rate, and a March 2021 maturity. The company reported compliance with all debt covenants; Biglari Holdings is not a guarantor of the Steak n Shake facility. Operating and finance lease liabilities totaled $84.4 million.
Shareholders’ equity increased to $602.4 million from $570.5 million at December 31, 2018, principally because of year-to-date net earnings. The company adopted ASC 842 lease accounting in 2019, recognizing material right-of-use assets and lease liabilities but no material earnings or cash-flow impact.
Material Changes Versus the Prior Comparable Period
- Total revenue fell 19.3% in the quarter and 14.8% year to date, primarily because of lower restaurant sales.
- Steak n Shake same-store sales declined 5.9% in the quarter and 6.5% year to date; customer traffic declined 9.2% and 8.1%, respectively.
- Restaurant net sales decreased 20.7% in the quarter and 15.8% year to date. Food costs increased to 31.1% and 32.2% of net sales, respectively, from 29.8% and 30.0%, partly due to a promotion. Restaurant operating costs also increased as a percentage of sales, principally because of higher wages.
- Steak n Shake had 103 temporarily closed company-operated restaurants at June 30, 2019 while it sought franchise partners. Total restaurant locations declined to 576 from 685 at December 31, 2018, primarily reflecting the temporary closures.
- First Guard premiums earned increased 8.6% in the quarter and 8.5% year to date, although quarterly pre-tax underwriting earnings declined to $1.6 million from $2.0 million.
- Media revenue declined 38.2% in the quarter and 44.6% year to date, although media produced a small profit in both 2019 periods.
- Corporate net losses improved to $2.2 million in the quarter and $4.2 million year to date, primarily because of lower legal costs.
- Mr. Biglari purchased 7,702 Class A shares at reported monthly average prices of $563.07 and $609.62 and 23,646 Class B shares at reported monthly average prices of $100.03 and $104.48 during May and June. The filing reports no purchases under a publicly announced repurchase plan.
Outlook, Risks, Contingencies, and Unusual Items
Management is emphasizing Steak n Shake’s franchise partnership model to address declining sales and profitability. Management stated that there is no assurance it will secure suitable franchise partners or that the strategy will restore profitability. Future impairment charges are possible for temporarily closed restaurants; $2.0 million of related impairments was recorded in the first six months of 2019.
The investment partnerships are committed on a rolling five-year basis, and withdrawals may be paid over two years and potentially in kind rather than cash. A hypothetical 10% change in investment prices would change the carrying value of investments by approximately $66.4 million and shareholders’ equity by approximately 8%. The partnerships’ concentrated exposure to Cracker Barrel represents a major market risk.
The company expects to fund operating needs through operating cash flows, cash on hand, existing credit facilities, and sales of excess properties and investments. However, Steak n Shake’s declining operating performance, restricted ability to distribute cash under its credit facility, and potential need for additional financing could pressure liquidity.
Steak n Shake agreed to settle the Drake and Clendenen employment-related class actions for $8.35 million; the settlement was approved July 26, 2019. A shareholder lawsuit concerning the dual-class structure was dismissed in December 2018, and the plaintiffs appealed in January 2019. The company believes the claim is without merit. Management stated that other legal matters are not expected to have a material effect beyond recorded amounts.
The March 2019 amendment to the incentive agreement removed the annual limitation on Mr. Biglari’s incentive compensation and the requirement to use 30% of incentive payments to purchase company shares. Change-of-control and severance provisions were eliminated, and the trademark license agreement with Mr. Biglari was terminated.
Most Important Facts to Verify
- Whether Steak n Shake can convert the 103 temporarily closed restaurants to franchise partnerships and reverse continuing same-store sales and traffic declines.
- Whether consolidated earnings are sustainable without significant investment partnership gains, particularly given the concentration in Cracker Barrel shares.
- Cash generation, debt-service capacity, and the ability to refinance or repay the $182.6 million Steak n Shake term loan before its March 2021 maturity.
- The valuation and liquidity terms of the investment partnerships, including the five-year commitment and potential in-kind or delayed distributions.
- The effect of restaurant impairments, the $8.35 million litigation settlement, wage and food-cost pressure, and any additional restructuring costs.
- The economic and governance implications of the related-party services agreement and the amended incentive agreement with entities owned by Mr. Biglari.