Biglari Holdings Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the period ended March 31, 2020, filed May 8, 2020. Biglari Holdings operates restaurants, property and casualty insurance, oil and gas, and media and licensing businesses. Sardar Biglari is chairman and CEO and makes major investment and capital allocation decisions. The company’s largest operating businesses are Steak n Shake and Western Sizzlin.
The quarter was materially affected by the COVID-19 pandemic. Restaurant dining rooms were closed by the end of March, and 62 of 306 company-operated restaurants were temporarily closed at March 31, 2020.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $135.7 million | $181.9 million | Down 25.4% |
| Net earnings (loss) | $(137.9) million | $9.8 million | Declined $147.7 million |
| Loss per equivalent Class A share | $(400.37) | $28.36 | Material decline |
| Cash provided by operating activities | $50.5 million | $(10.0) million | Improved $60.5 million |
| Total assets at period-end | $947.6 million | Not comparable in filing table | Down from $1.139 billion at Dec. 31, 2019 |
| Shareholders’ equity at period-end | $479.2 million | Not comparable in filing table | Down from $616.3 million at Dec. 31, 2019 |
The net loss was driven primarily by a $175.7 million loss from investment partnerships, compared with a $34.2 million gain in the prior-year quarter. The company reported a $43.8 million income tax benefit, compared with $1.7 million of tax expense in Q1 2019.
- Restaurant revenue was $114.1 million, down from $173.8 million. Restaurant operations reported a pretax loss of $10.9 million, compared with a $18.5 million loss in Q1 2019.
- Restaurant net sales decreased 36.8% to $104.7 million. Food cost declined to 30.0% of net sales from 33.2%, and restaurant operating costs declined to 51.1% from 54.8%.
- Insurance revenue was $9.7 million, up from $7.2 million. Insurance pretax earnings increased to $2.9 million from $1.5 million.
- Southern Oil contributed $11.4 million of revenue and $2.2 million of net earnings. The business reduced production and expenses in response to lower oil demand and commodity prices.
- Impairment charges increased to $10.3 million from $1.9 million, primarily due to the planned permanent closure of 51 Steak n Shake restaurants and the expected effects of COVID-19.
- Interest expense declined to $2.5 million from $3.1 million. The company recorded a $4.3 million gain on debt extinguishment related to the retirement of $21.7 million of Steak n Shake debt.
Liquidity, Cash Flow, Debt, and Capital Structure
- Cash and cash equivalents were $33.3 million at March 31, 2020, down from $67.8 million at December 31, 2019.
- Direct investments were $81.3 million, compared with $44.9 million at year-end. The fair value of investment partnership interests was $392.2 million, compared with $666.1 million at year-end.
- Cash, cash equivalents, and restricted cash decreased $34.5 million during the quarter to $36.2 million.
- Operating cash flow of $50.5 million benefited substantially from $42.3 million of distributions from investment partnerships.
- Investing activities used $65.6 million, including $34.2 million for the Southern Pioneer acquisition, $30.1 million for purchases of limited partnership interests, and $6.5 million of capital expenditures, partially offset by fixed-maturity security redemptions.
- Financing activities used $19.4 million, including $17.9 million of principal payments.
- Total notes payable and other borrowings were $245.2 million, including $164.6 million classified as current and $80.6 million classified as long-term.
- Steak n Shake had $159.2 million outstanding under a term loan maturing March 19, 2021, with a 5.36% interest rate at March 31, 2020. Steak n Shake was evaluating refinancing alternatives; Biglari Holdings is not a guarantor.
- The company stated that Steak n Shake was in compliance with its debt covenants at March 31, 2020, but warned that the pandemic could impair refinancing options or covenant compliance.
Material Changes Versus the Prior Comparable Period
- Consolidated results shifted from $9.8 million of net earnings to a $137.9 million net loss, principally because investment partnership results shifted from a $34.2 million gain to a $175.7 million loss.
- Restaurant revenue fell $59.6 million, primarily because of COVID-19 dining-room closures and reduced customer demand.
- Steak n Shake company-operated stores declined from 408 at March 31, 2019 to 306 at March 31, 2020. Franchise partner units increased from three to 39.
- Insurance results improved, with First Guard pretax underwriting gain increasing 93.4% to $2.3 million. Southern Pioneer was acquired on March 9, 2020 and contributed results for the remainder of the quarter.
- The company completed the Southern Pioneer acquisition for $34.2 million net of cash acquired and recorded preliminary goodwill of $11.9 million.
- Shareholders’ equity decreased $137.1 million from December 31, 2019, primarily reflecting the quarterly net loss.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide quantified earnings or revenue guidance. Management expects COVID-19 to adversely affect nearly all operations in the second quarter, but states that the duration and severity of the pandemic cannot reasonably be estimated.
- Potential effects include restaurant closures, lower demand, supply-chain and workforce disruptions, lower oil prices and margins, investment-market volatility, credit losses, and future asset impairments.
- Management concluded that oil and gas properties were not impaired at March 31, 2020, but warned that prolonged low commodity prices could result in future impairments.
- Management concluded that goodwill was not impaired at March 31, 2020, but acknowledged that worsening pandemic effects could lead to goodwill or indefinite-lived asset impairment charges.
- The investment partnerships are subject to significant market volatility, 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 investment prices would change the carrying value of investments by approximately $40.0 million and shareholders’ equity by approximately 6%.
- Various legal proceedings were disclosed, but the company stated that material losses beyond amounts already accrued were not likely. Shareholder litigation concerning the dual-class structure was concluded in the company’s favor after the Indiana Supreme Court denied review on April 7, 2020.
- The company adopted the expected-credit-loss accounting standard effective January 1, 2020; management reported that the impact was not material.
Investor Verification Checklist
- Verify the pace and permanence of Steak n Shake restaurant closures, dining-room reopenings, sales recovery, and franchise-partner conversions.
- Monitor the March 2021 Steak n Shake debt maturity, refinancing progress, covenant compliance, and restrictions on upstreaming cash to the holding company.
- Reconcile investment partnership valuations, market exposures, liquidity restrictions, and the effect of subsequent market movements on earnings and equity.
- Assess whether COVID-19 results in additional restaurant, right-of-use asset, goodwill, or oil and gas impairments.
- Evaluate the sustainability of operating cash flow because Q1 2020 benefited materially from investment partnership distributions.
- Review Southern Pioneer’s completed purchase accounting and its future contribution to insurance premiums, underwriting results, and liquidity.