Biglari Holdings Inc. Form 10-Q Summary
Business Context and Reporting Period
Biglari Holdings is a diversified holding company with businesses in restaurants, property and casualty insurance, oil and gas, and media and licensing. The company’s largest operating businesses are Steak n Shake and Western Sizzlin restaurants. The filing covers the quarter and nine months ended September 30, 2021. Results are unaudited and should be read with the company’s 2020 Form 10-K.
Sardar Biglari serves as Chairman and Chief Executive Officer and beneficially owns approximately 65.0% of the economic interest and 70.3% of the voting interest.
Key Financial Metrics
| Metric | Third Quarter 2021 | Third Quarter 2020 | First Nine Months 2021 | First Nine Months 2020 |
|---|---|---|---|---|
| Revenue | $82.1 million | $101.8 million | $267.2 million | $334.0 million |
| Net earnings (loss) | $(10.7) million | $21.1 million | $40.3 million | $(74.3) million |
| Equivalent Class A earnings (loss) per share | $(33.74) | $60.07 | $125.79 | $(213.31) |
| Cash provided by operating activities | Not separately provided | Not separately provided | $211.2 million | $106.4 million |
Third-quarter 2021 revenue declined 19.4% year over year, while nine-month revenue declined 20.0%. The nine-month net earnings improvement primarily reflected favorable investment partnership results, lower impairments, improved operating business performance, and the absence of most interest expense following debt repayment.
Restaurant operations generated $59.1 million of third-quarter revenue and $196.4 million for the first nine months, compared with $79.7 million and $272.6 million, respectively, in 2020. Insurance revenue increased to $43.7 million for the first nine months from $38.7 million. Oil and gas revenue increased to $24.3 million from $19.6 million, while media and licensing revenue declined to $2.7 million from $3.2 million.
Operating businesses produced $26.6 million of pretax earnings in the first nine months of 2021, compared with a $2.7 million pretax loss in the prior-year period. Nine-month pretax earnings included $11.4 million from insurance, $9.0 million from oil and gas, $6.4 million from restaurants, and $0.9 million from media and licensing.
Investment partnership gains were $27.3 million in the first nine months of 2021 versus an $89.3 million loss in 2020. However, the partnerships generated a $20.2 million loss in the third quarter of 2021 compared with a $27.2 million gain in the third quarter of 2020, making quarterly earnings highly volatile.
Liquidity, Cash Flow, Debt, and Balance Sheet
- Cash and cash equivalents were $27.8 million at September 30, 2021, compared with $24.5 million at December 31, 2020.
- Investments were $99.0 million, compared with $94.9 million at year-end 2020.
- The fair value of investment partnership interests was $534.0 million, compared with $590.9 million at year-end. The balance-sheet carrying value was $273.1 million after excluding the company stock held by the partnerships.
- Total assets were $919.4 million, down from $1.018 billion, primarily because of distributions from investment partnerships.
- Total liabilities declined to $320.8 million from $453.1 million.
- Shareholders’ equity increased to $598.6 million from $564.8 million.
- Operating cash flow of $211.2 million included $172.4 million of distributions from investment partnerships.
- Capital expenditures were $46.5 million, including substantial spending on Steak n Shake’s conversion to a self-service model.
- Financing cash outflows were $154.6 million, including $150.0 million of principal debt repayment.
- Steak n Shake repaid its $152.5 million outstanding term loan in full on February 19, 2021. No notes payable remained outstanding at September 30, 2021.
- Lease obligations totaled $125.2 million, consisting of $17.2 million current and $107.9 million long term.
Material Changes Versus the Prior Comparable Period
- Restaurant revenue decreased primarily because company-operated units were converted to franchise partner units. Steak n Shake franchise partner units increased to 140 from 69 a year earlier, while company-operated units declined to 221 from 260.
- Restaurants operated 581 total stores at September 30, 2021, compared with 570 a year earlier and 598 at December 31, 2020. Forty-two company-operated Steak n Shake stores were temporarily closed.
- Restaurant operations generated $6.4 million of pretax earnings for the first nine months versus a $7.3 million pretax loss in 2020. Higher franchise partner fees and lower costs offset lower company-operated sales.
- Restaurant cost pressures increased: first-nine-month restaurant operating costs rose to 49.1% of net sales from 45.9%, and occupancy costs rose to 9.7% from 5.4%. Management stated that menu price increases were expected in the fourth quarter to improve margins.
- Steak n Shake spent $29.7 million during the first nine months on converting table-service restaurants to a self-service model, contributing to higher capital expenditures.
- Insurance underwriting gain increased to $9.4 million from $6.7 million. Southern Pioneer improved to a $1.5 million underwriting gain from a $0.2 million loss.
- Southern Oil pretax earnings increased to $9.0 million from $1.4 million, benefiting from improved commodity pricing and lower depletion expense.
- Impairment charges fell to $0.6 million from $21.8 million, including $18.1 million of restaurant impairments in the prior-year period.
- Interest expense on notes payable declined to $1.1 million from $7.0 million because the Steak n Shake term loan was repaid during the first quarter.
- The company and an affiliated investment partnership purchased 1,618 Class A shares at an average price of $850.71 and 12,937 Class B shares at an average price of $171.59 during August 2021.
Guidance, Outlook, Risks, and Unusual Items
- COVID-19 continues to pose risks to earnings, cash flow, and financial condition. Management stated that the long-term effects cannot be reasonably estimated.
- Restaurant performance remains exposed to labor costs, food inflation, store closures, operating model changes, and the execution of Steak n Shake’s self-service conversion.
- Management expected to increase menu prices in the fourth quarter to improve restaurant margins; this is a management expectation rather than formal quantitative guidance.
- Investment partnership gains and losses include unrealized changes in market values and can materially distort reported earnings. Management does not consider short-term investment fluctuations representative of operating performance.
- A hypothetical 10% increase or decrease in the market prices of investments would change the carrying value of investments by approximately $37.2 million and shareholders’ equity by approximately 5%.
- Southern Oil’s results are sensitive to crude oil and natural gas prices.
- Western Sizzlin has experienced a multiyear decline in franchised units; continued declines could require a goodwill impairment.
- The company is involved in various legal proceedings and unresolved claims but believes any liability beyond amounts accrued is unlikely to materially affect results, financial position, or cash flow.
- Related-party service fees paid to entities owned by Mr. Biglari totaled $6.3 million for the first nine months of 2021. The company’s investment partnerships are managed by an entity solely owned by Mr. Biglari.
Important Facts for Investors to Verify
- Whether the conversion of Steak n Shake stores to franchise partner and self-service models improves sustainable unit economics and cash generation.
- The number of temporarily closed restaurants and the pace of store closures, reopenings, and franchise transitions.
- Underlying operating performance excluding volatile investment partnership gains and losses.
- The sustainability of insurance underwriting gains, particularly at Southern Pioneer.
- Exposure of investment partnership values and shareholders’ equity to equity-market declines.
- Future capital expenditures and liquidity needs after the $152.5 million debt repayment.
- Oil and gas production levels and sensitivity to commodity prices.
- Potential goodwill or long-lived asset impairments, especially for Western Sizzlin and underperforming restaurant locations.