Biglari Holdings Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018; filed August 3, 2018. Biglari Holdings operates restaurants, commercial trucking insurance, media and investment partnerships. The April 30, 2018 merger created dual-class Class A and Class B common stock; Class B has one-fifth the economic rights of Class A and no voting rights.
Key Financial Metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $208.7 million | $213.0 million | $411.0 million | $416.3 million |
| Restaurant revenue | $200.6 million | $204.9 million | $394.5 million | $400.6 million |
| Pre-tax earnings (loss) | $(8.4) million | $35.0 million | $(11.0) million | $9.4 million |
| Net earnings (loss) | $(7.5) million | $21.1 million | $(9.4) million | $5.3 million |
| Net margin | (3.6%) | 9.9% | (2.3%) | 1.3% |
| Operating cash flow | Not separately provided for the quarter | $(0.5) million | $16.4 million |
- Restaurant operations contributed $1.6 million of net earnings in the second quarter and $1.2 million in the first six months, compared with $0.7 million and $3.2 million, respectively, in 2017.
- First Guard insurance contributed $1.8 million and $2.2 million of net earnings for the quarter and six months, up from $0.9 million and $1.5 million. Premiums written increased 7.9% in the quarter and 7.5% year to date.
- Investment partnership losses were $8.3 million in the quarter and $4.8 million year to date, compared with gains of $37.2 million and $12.3 million in the comparable periods. These results largely reflect market-value changes in concentrated equity investments, including Cracker Barrel Old Country Store.
- Cash, cash equivalents and restricted cash were $57.1 million at June 30, 2018, down from $67.2 million at year-end 2017. Cash and cash equivalents were $48.4 million.
- Total assets were $1.01 billion and shareholders’ equity was $542.7 million, compared with $1.06 billion and $571.3 million at December 31, 2017.
- Notes payable and other borrowings totaled $258.3 million, including $252.0 million long term. Steak n Shake’s secured term loan had $184.8 million outstanding, bore interest at 5.85%, and matures March 19, 2021.
Material Changes Versus Prior Period
- Total revenue declined 2.0% in the quarter and 1.3% in the first six months.
- Steak n Shake same-store sales declined 3.4% in the quarter and 2.5% year to date; customer traffic declined 6.4% and 6.8%, respectively.
- Restaurant net sales declined 3.4% in the quarter and 2.6% year to date, while franchise royalties and fees increased 45.3% and 36.4%.
- Restaurant operating costs increased to 51.5% of net sales in the quarter and 52.1% year to date, from 50.6% and 51.3%. General and administrative expenses increased primarily because of higher legal and professional fees.
- Corporate expenses increased to $3.5 million of after-tax loss in the quarter and $6.1 million year to date, partly due to shareholder litigation and dual-class stock implementation costs.
- Operating cash flow fell from $16.4 million provided in the first six months of 2017 to $0.5 million used in 2018, primarily because of lower earnings and working-capital timing.
- The company adopted ASC 606 using the modified retrospective method. The adoption increased reported 2018 revenue and expenses, with a $90 thousand increase to opening retained earnings; management stated the balance-sheet impact was not material.
Outlook, Risks and Unusual Items
- No formal revenue, earnings or cash-flow guidance was provided. Management expects to fund working capital through operating cash flows, cash on hand, credit facilities, and sales of excess properties and investments.
- Investment partnerships are committed on a rolling five-year basis, and withdrawals may be paid over two years and potentially in securities rather than cash. A hypothetical 10% change in investment prices would change investment carrying value by approximately $56.4 million and shareholders’ equity by approximately 8%.
- Steak n Shake’s credit facility restricts dividends to Biglari Holdings; the company reported compliance with all covenants at June 30, 2018. Western’s $43 thousand revolver balance was paid in full on July 18, 2018.
- Shareholders filed consolidated litigation alleging breaches of fiduciary duty and unjust enrichment related to the recapitalization and dual-class share issuance. The company considers the claims without merit and expects no material liability based on currently available information.
- Related-party arrangements include a services agreement with entities owned by Sardar Biglari for $700 thousand per month during its first year and investment partnerships managed by Biglari Capital, also owned by Mr. Biglari.
- The company is highly dependent on restaurant performance, concentrated investment valuations, interest rates, commodity and labor costs, and the ability of subsidiaries to distribute cash.
Investor Verification Checklist
- Verify the sustainability of Steak n Shake’s negative same-store sales and customer-traffic trends.
- Reconcile ASC 606 effects on franchise fees, advertising revenue, gift cards and marketing expenses when comparing 2018 with 2017.
- Monitor the concentrated investment partnership portfolio, particularly exposure to Cracker Barrel, and related valuation volatility.
- Assess liquidity at the parent level given negative year-to-date operating cash flow, subsidiary dividend restrictions and potential withdrawal limits on investment partnerships.
- Review the March 2021 Steak n Shake debt maturity, interest-rate exposure and covenant compliance.
- Track shareholder litigation, related-party fees, Mr. Biglari’s control ownership and the economic and voting differences between Class A and Class B shares.