Biglari Holdings Inc. — 2019 Q1 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2019, compared with the first quarter of 2018. Biglari Holdings operates restaurants, commercial trucking insurance, and media businesses, and owns investment partnerships. Sardar Biglari is chairman and chief executive officer and makes major operating, investment, and capital-allocation decisions. As of March 31, 2019, he beneficially owned approximately 56.9% of Class A stock and 54.3% of Class B stock.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $181.9 million | $202.2 million |
| Restaurant revenue | $173.8 million | $193.9 million |
| Insurance premiums and other revenue | $7.2 million | $6.5 million |
| Media advertising and other revenue | $0.9 million | $1.7 million |
| Earnings before taxes | $11.6 million | $(2.6) million |
| Net earnings | $9.8 million | $(1.8) million |
| Net earnings per equivalent Class A share | $28.36 | $(5.15) |
| Operating cash flow | $(10.0) million | $(9.4) million |
Net earnings benefited materially from $34.2 million of investment partnership gains, compared with $3.5 million in the prior-year quarter. After related tax expense, investment partnerships contributed $26.2 million to net earnings. Net margin was approximately 5.4%, versus a negative margin in Q1 2018; this comparison was driven primarily by investment gains rather than operating improvement.
Restaurant operations reported a pretax loss of $18.5 million, compared with a $0.6 million loss in Q1 2018. Steak n Shake same-store sales declined 7.9% and customer traffic declined 7.7%. Food costs increased to 33.2% of net sales from 30.1%, principally due to a promotion, while restaurant operating costs increased to 56.3% from 52.7%, principally due to higher wages and benefits. Restaurant general and administrative expense increased to 9.8% of revenue from 7.8%.
First Guard improved its pretax earnings to $1.5 million from $0.5 million. Premiums earned increased 8.4% to $6.9 million, and the pretax underwriting gain increased to $1.2 million from $0.4 million. Maxim reported a pretax loss of $0.1 million versus a $0.2 million loss.
At March 31, 2019, cash and cash equivalents were $31.1 million, investments were $40.7 million, and the fair value of investment partnership interests was $788.2 million. Total assets were $1.13 billion and shareholders’ equity was $581.4 million. Total notes payable and other borrowings were approximately $271.4 million, excluding operating lease liabilities. The Steak n Shake term loan had $183.1 million outstanding, bore interest at 6.25%, and matures March 19, 2021. The company stated that it was in compliance with all debt covenants.
Cash, cash equivalents, and restricted cash decreased $17.5 million during the quarter to $37.5 million. Investing cash flow included $3.6 million of capital expenditures, $40.0 million distributed from investment partnerships, and a corresponding $40.0 million purchase of limited partner interests. Management expects working-capital needs to be funded through operating cash flows, cash on hand, existing credit facilities, and potential sales of excess properties and investments.
Material changes versus the prior comparable period
- Total revenue declined 10.1%, primarily because restaurant revenue fell 10.4%; restaurant net sales declined 10.7%.
- Steak n Shake’s company-operated restaurant count fell to 367 from 415 at March 31, 2018, including 44 temporarily closed locations awaiting franchise partners. Total system restaurants declined to 639 from 678.
- Operating businesses shifted from a small pretax loss of $0.2 million to a $16.9 million loss, principally because of the restaurant deterioration.
- Investment partnership gains increased by $30.7 million and drove the company-wide return to profitability.
- General and administrative expense included a $3.0 million accrual related to a jury verdict against Steak n Shake. The company also recorded $1.9 million of long-lived-asset impairment charges.
- ASC 842 lease accounting was adopted on January 1, 2019, adding operating lease assets of $63.3 million and operating lease liabilities of $69.7 million at adoption, with a $1.5 million cumulative-effect increase to retained earnings. The filing states that adoption materially affected the balance sheet but did not materially affect earnings or cash flow.
Guidance, outlook, risks, contingencies, and unusual items
The filing provides no specific revenue, earnings, margin, or capital-expenditure guidance. Management’s stated long-term objective is to maximize per-share intrinsic value. The filing cautions that results are subject to restaurant performance, labor and food costs, investment-market volatility, financing availability, and other risks.
Investment partnerships are largely concentrated in Cracker Barrel Old Country Store, Inc. A hypothetical 10% change in investment prices would change the carrying value of investments by approximately $63.2 million and shareholders’ equity by approximately 8%. Partnership interests are committed on a rolling five-year basis, and withdrawals may be paid over two years and potentially in kind.
Steak n Shake faces litigation concerning alleged misclassification of managers and unpaid overtime. In February 2019, a jury returned a verdict against Steak n Shake in the Drake matter; post-trial proceedings were ongoing, and the company planned to appeal. A separate manager-class action remained conditionally certified. Shareholder litigation concerning the dual-class structure was dismissed by the trial court, but an appeal was filed in January 2019. Management stated that amounts beyond recorded provisions are not expected to be material, although the filing does not provide a final exposure amount for the employment litigation.
On March 26, 2019, the company amended its incentive agreement with Mr. Biglari, removing the $10.0 million annual incentive-compensation cap and the requirement to use 30% of incentive payments to purchase company shares. Change-of-control and severance provisions were eliminated, and a royalty-free license agreement with Mr. Biglari was terminated.
Most important facts for investors to verify
- Whether Steak n Shake can reverse declining same-store sales, improve labor and food-cost ratios, and reopen or franchise temporarily closed restaurants.
- The sustainability and cash-conversion quality of earnings, given that Q1 profitability depended heavily on investment partnership gains while operating cash flow was negative.
- The valuation, concentration, liquidity restrictions, and potential volatility of the investment partnerships, particularly their exposure to Cracker Barrel.
- The outcome and financial exposure from the Drake and Clendenen employment cases and the shareholder litigation appeal.
- The March 2019 incentive-agreement amendment, including potential effects on future compensation and related-party governance.
- Debt maturity and refinancing risk, especially the $183.1 million Steak n Shake term loan due in 2021 and restrictions on dividends to the parent.
- The effect of ASC 842 lease liabilities and the company’s total fixed payment obligations, including approximately $72.3 million of operating lease liabilities and $12.5 million of finance lease liabilities at March 31, 2019.