Biglari Holdings Inc. — 2020 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2020, including fourth-quarter information. Biglari Holdings is a diversified holding company with restaurant, property and casualty insurance, oil and gas, media and licensing, and investment activities. Its principal operating businesses are Steak n Shake and Western Sizzlin. Sardar Biglari is Chairman and CEO and controls approximately 67.2% of Class A and 60.6% of Class B common stock.
The company operated or franchised 598 restaurants at year-end, including 276 company-operated Steak n Shake units, 86 Steak n Shake franchise-partner units, 194 traditional Steak n Shake franchise units, and 42 Western Sizzlin units. Fifty-seven company-operated Steak n Shake locations were closed at year-end. The company acquired Southern Pioneer Property & Casualty Insurance Company and its agency on March 9, 2020.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $433.7 million | $668.8 million | Down 35.1% |
| Loss before income taxes | $50.2 million | Profit of $55.1 million | Material deterioration |
| Net earnings attributable to shareholders | Loss of $38.0 million | Profit of $45.4 million | Material deterioration |
| Equivalent Class A EPS | $(110.05) | $131.64 | Down $241.69 |
| Operating cash flow | $117.6 million | $93.7 million | Up $23.9 million |
| Capital expenditures | $20.7 million | $17.7 million | Up $3.0 million |
| Shareholders’ equity | $564.8 million | $616.3 million | Down $51.5 million |
Fourth-quarter 2020 revenue was $99.6 million, compared with $158.4 million in the fourth quarter of 2019. Fourth-quarter net earnings were $36.3 million, compared with $13.6 million in the prior-year quarter. The quarterly comparison was substantially affected by investment partnership results and other non-operating items.
Restaurant revenue fell to $350.7 million from $610.2 million. Restaurant operations recorded a $5.4 million pretax loss, compared with a $16.8 million loss in 2019. Net sales declined to $306.6 million from $578.2 million, primarily because of dining-room and store closures. Franchise partner fees increased to $22.2 million from $3.8 million as the company transitioned more units to franchise partners.
Insurance earnings increased to $9.8 million from $5.6 million. Premiums written were $49.2 million, including $19.0 million from Southern Pioneer after its acquisition. Pretax underwriting gain increased to $10.0 million from $6.5 million.
Oil and gas revenue increased to $26.3 million from $24.4 million, but net earnings declined to $1.9 million from $5.9 million because of lower commodity prices, production cuts, and higher depletion and administrative expenses. Media and licensing earnings increased to $1.4 million from $0.6 million.
Investment partnership losses were $43.0 million, compared with gains of $78.1 million in 2019. The company also reported $3.6 million of investment gains. The fair value of investment partnership interests was $590.9 million, while their consolidated carrying value was $419.6 million after excluding the company’s stock held by the partnerships.
Cash, cash equivalents, and restricted cash totaled $29.7 million at year-end, including $24.5 million of cash and cash equivalents. Total cash and investments, including investment partnerships at fair value, were $710.3 million; the balance-sheet carrying value after eliminating company stock held by the partnerships was $538.9 million.
Debt and other borrowings totaled $234.2 million at year-end, including $159.0 million classified as current and $75.2 million long-term. Steak n Shake’s $152.5 million term debt outstanding at December 31, 2020 was repaid in full on February 19, 2021. Long-term notes payable and other borrowings at year-end consisted of finance obligations and finance lease liabilities.
The effective income tax result was a $12.2 million benefit in 2020, compared with $9.8 million of expense in 2019, primarily reflecting the tax benefit from investment partnership losses.
Material changes versus the prior comparable period
- COVID-19 caused dining-room closures beginning in the first quarter, with most restaurant dining rooms remaining closed through year-end. Restaurant revenue declined approximately 43%.
- Restaurant locations declined from 662 to 598, while Steak n Shake franchise-partner units increased from 29 to 86.
- Restaurant impairment charges increased to $19.6 million from $8.2 million. The company also recorded $0.3 million of goodwill impairment and $3.7 million of impairment related to international lease rights.
- Southern Pioneer was acquired in March 2020 and contributed $21.7 million of revenue and $2.8 million of pretax earnings for the post-acquisition period.
- Operating cash flow improved despite the consolidated net loss, largely because of distributions from investment partnerships and noncash investment losses.
- Investing cash outflows increased to $129.5 million, including $70.1 million of purchases of investment partnership interests and $36.2 million for the Southern Pioneer acquisition.
- Shareholders’ equity declined primarily because of the $38.0 million net loss and a $14.8 million increase in treasury stock related to company shares held by the investment partnerships.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide quantitative earnings or revenue guidance. Steak n Shake intends to reopen dining rooms selectively after converting its full-service model to self-service. The estimated investment for this conversion is $100 to $200 per restaurant. Management also intends to reopen most of the 57 closed company-operated locations, but the timing and ultimate operating results remain uncertain.
Management cautioned that COVID-19 may continue to affect earnings, cash flows, financial condition, restaurant operations, franchisees, investments, asset values, and impairment estimates. Oil and gas results remain sensitive to crude oil and natural gas prices, production levels, weather, and regulatory conditions.
Investment partnership interests are related-party investments controlled by Mr. Biglari’s affiliated entities. They are subject to rolling five-year lockups, and withdrawals may be paid over two years and potentially in kind. The partnerships also provide for a 25% incentive allocation on profits above a 6% hurdle and prior high-water mark. The company paid $8.4 million in 2020 under its related-party services agreement with entities owned by Mr. Biglari.
Additional risks include concentrated equity investments, potential impairment of restaurant assets and goodwill, insurance underwriting and catastrophe risk, commodity-price volatility, competition, regulatory requirements, litigation, liquidity constraints at the holding-company level, and dependence on Mr. Biglari. The company has never declared a dividend.
The company reported no off-balance-sheet arrangements. Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2020, although Southern Pioneer was excluded from the assessment because it was acquired during the year. The independent auditor issued an unqualified opinion and included an emphasis-of-matter paragraph regarding the related-party investment partnerships.
Most important facts for investors to verify
- Whether restaurant dining rooms reopen successfully under the self-service model and whether the closed Steak n Shake locations return to profitability.
- The sustainability and cash accessibility of the $590.9 million fair value of investment partnership interests, including lockups, concentration, related-party governance, and valuation risk.
- The company’s post-February 2021 liquidity and capital structure following repayment of the $152.5 million Steak n Shake term debt.
- COVID-19-related impairment exposure, particularly for restaurant long-lived assets, goodwill, and international lease rights.
- Insurance underwriting performance and reserve adequacy following the Southern Pioneer acquisition.
- Exposure to oil and gas price volatility and the effect of future production changes on cash flow.
- Governance and related-party matters arising from Mr. Biglari’s voting control, services agreement, investment partnerships, and incentive arrangements.