Biglari Holdings Inc. 2018 Form 10-K Summary
Business context and reporting period
Biglari Holdings is a diversified holding company operating restaurants, commercial truck insurance, media and licensing businesses, and investment partnerships. The filing covers the fiscal year ended December 31, 2018; the source also provides unaudited quarterly data, including fourth-quarter results. The company is controlled by Chairman and CEO Sardar Biglari, who beneficially owned approximately 56.9% of Class A stock and 54.3% of Class B stock at year-end.
Restaurant operations consisted of 685 locations at December 31, 2018: 413 company-operated and 213 franchised Steak n Shake units, plus 4 company-operated and 55 franchised Western Sizzlin units. The company also operated First Guard insurance, Maxim media and licensing, and held interests in The Lion Fund and The Lion Fund II.
Financial results and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $809.9 million | $839.8 million | Down 3.6% |
| Net earnings | $19.4 million | $50.1 million | Down 61.3% |
| Net margin | 2.4% | 6.0% | Down approximately 360 bps |
| Net earnings per equivalent Class A share | $55.71 | $136.01 | Down 59.0% |
| Operating cash flow | $20.7 million | $25.8 million | Down $5.1 million |
| Capital expenditures | $15.3 million | $8.0 million | Up $7.3 million |
| Total assets | $1.029 billion | $1.064 billion | Down $34.1 million |
| Shareholders’ equity | $570.5 million | $571.3 million | Down $0.9 million |
Restaurant revenue was $775.7 million, down from $807.2 million. Net restaurant sales declined to $740.9 million from $781.9 million. Steak n Shake same-store sales decreased 5.1%, while customer traffic declined 7.0%. Restaurant operations recorded a pretax loss of $8.6 million, compared with pretax income of $2.3 million in 2017. Restaurant cost pressures included higher food commodities and wages; restaurant operating costs rose to 53.1% of net sales from 51.7%.
First Guard revenue increased to $27.6 million from $24.9 million, and its contribution to net earnings increased to $4.9 million from $3.1 million. The pretax underwriting gain increased 24.7% to $5.6 million.
Maxim revenue declined to $6.6 million from $7.7 million, but its contribution to net earnings improved to $0.8 million from $0.4 million. Investment partnership gains were $40.4 million pretax and contributed $33.2 million after tax, versus $7.0 million pretax and $11.1 million after tax in 2017. These gains primarily reflect changes in investment values and are volatile.
Fourth-quarter revenue was $195.3 million, with net earnings of $42.4 million and earnings of $122.53 per equivalent Class A share. Fourth-quarter results were materially stronger than the first three quarters, which each reported a net loss; the filing does not provide a complete quarterly segment reconciliation for this improvement.
Cash flow, debt and liquidity
- Cash, cash equivalents and restricted cash declined to $55.0 million from $67.2 million. Cash and cash equivalents alone were $48.6 million at year-end.
- Cash used in investing activities was $25.3 million, including $15.3 million of capital expenditures and $39.0 million contributed back to the investment partnerships after receiving $39.0 million of distributions.
- Cash used in financing activities was $7.5 million, including $2.2 million of long-term debt repayment and $5.2 million of payments on direct financing lease obligations.
- Total long-term notes payable and other borrowings were $240.0 million, compared with $257.0 million in 2017. Steak n Shake’s term loan had $183.7 million outstanding at year-end, bore interest at 6.28%, and matures March 19, 2021.
- Steak n Shake was in compliance with its debt covenants, but its credit facility restricts distributions to Biglari Holdings. Biglari Holdings is not a guarantor of the facility.
- Contractual obligations totaled $378.4 million, including $205.5 million of long-term debt obligations, $122.3 million of operating leases, $31.5 million of capital leases and finance obligations, and $17.0 million of purchase commitments.
Material changes, outlook and unusual items
- The April 30, 2018 transaction created dual-class common stock. Class B shares have one-fifth the economic rights of Class A shares and no voting rights. Class A and Class B shares began trading on the NYSE under BH.A and BH, respectively.
- The company adopted ASC 606 in 2018. The change increased reported franchise royalties and fees by $9.4 million and marketing expense by $9.7 million, with a $0.6 million unfavorable net earnings impact. Prior periods were not adjusted.
- Steak n Shake began a franchise partner program requiring a $10,000 upfront investment and allowing the franchisor to assess fees of up to 15% of sales and 50% of profits. Management continued to pursue the transition of company-operated restaurants to franchisees.
- Investment partnership fair value was $715.1 million at year-end, down from $925.3 million, and was subject to rolling five-year lock-ups. The investments were concentrated largely in Cracker Barrel Old Country Store stock. Management estimated that a 10% market-value change would affect investment value by approximately $59.6 million and shareholders’ equity by approximately 8%.
- The 2018 income tax benefit was $2.6 million, compared with a $63.0 million benefit in 2017. The 2017 benefit included a $51.7 million deferred tax benefit from the Tax Cuts and Jobs Act.
- The company recorded $5.7 million of long-lived asset impairments in 2018. No goodwill or intangible-asset impairment was recorded.
- The company does not provide specific revenue, earnings or cash-flow guidance in the filing. Management states that liquidity needs are expected to be funded through operating cash flow, cash on hand, existing credit facilities, and potential sales of excess properties and investments.
- ASC 842 lease accounting was expected to produce approximately $90 million of right-of-use assets and lease liabilities upon adoption on January 1, 2019, with no material expected effect on earnings or cash flow.
Risks, contingencies and governance considerations
- Results depend heavily on Mr. Biglari, who makes major operating, investment and capital-allocation decisions and controls shareholder voting matters.
- The company is a controlled company under NYSE rules and may rely on exemptions from certain corporate-governance requirements.
- Liquidity may be constrained by restrictions on subsidiary dividends, insurance regulation, Steak n Shake debt covenants, and the five-year investment-partnership lock-ups.
- Restaurant risks include declining traffic, intense competition, food and wage inflation, commodity availability, adverse weather, labor regulation, food safety and franchise regulation.
- Investment results are exposed to concentrated equity-market risk, valuation volatility, limited liquidity and related-party management arrangements. Biglari Capital, owned by Mr. Biglari, serves as general partner of the investment partnerships.
- Shareholder lawsuits challenging the dual-class structure were dismissed in December 2018; plaintiffs appealed on January 11, 2019. Management considers the claims without merit. The filing states that unresolved legal matters are not expected to be materially adverse, although outcomes remain uncertain.
- Under the trademark license, a change of control or certain employment-termination events could trigger royalties to Mr. Biglari. Using 2018 revenue as an illustration, annual royalties could be approximately $19 million, subject to the agreement’s terms.
Most important facts for investors to verify
- Whether Steak n Shake can reverse the 5.1% same-store sales decline and improve restaurant-level profitability.
- The composition, concentration and liquidity of the $715.1 million investment partnership interest, including the Cracker Barrel exposure and lock-up provisions.
- Steak n Shake’s ability to refinance or repay the $183.7 million term loan due in 2021 without restricting parent-company liquidity.
- The sustainability of 2018 earnings, given the large contribution from volatile investment gains and the sharp quarterly earnings swing.
- The economic and governance effects of the dual-class structure and Mr. Biglari’s control position.
- The impact of ASC 842 lease recognition, ASC 606 revenue presentation, asset impairments and future tax-rate changes on comparability.
- The status and potential financial exposure of the appeal involving the dual-class shareholder litigation.