Biglari Holdings Inc. — 2020 Second-Quarter Form 10-Q
Business context and reporting period
Biglari Holdings is a diversified holding company with restaurant, property and casualty insurance, oil and gas, media and licensing, and investment partnership activities. The filing covers the quarter and six months ended June 30, 2020. Results were materially affected by the COVID-19 pandemic, including restaurant dining-room closures, reduced oil demand, lower commodity prices, and market volatility.
On March 9, 2020, the Company acquired Southern Pioneer Property & Casualty Insurance Company and its agency. Its results are included from the acquisition date. Southern Oil, acquired in September 2019, was included for the first time in the comparable six-month 2020 results.
Key financial metrics
| Metric | Second quarter 2020 | Second quarter 2019 | First six months 2020 | First six months 2019 |
|---|---|---|---|---|
| Total revenue | $96.5 million | $168.3 million | $232.2 million | $350.2 million |
| Net earnings attributable to shareholders | $42.5 million | $22.0 million | $(95.4) million | $31.8 million |
| Equivalent Class A EPS | $121.51 | $63.50 | $(275.04) | $91.85 |
| Investment partnership gains/(losses) | $59.2 million | $34.2 million | $(116.5) million | $68.4 million |
| Net cash from operating activities | Not separately presented for the quarter | $98.7 million | $(8.3) million |
Second-quarter earnings were driven primarily by $59.2 million of investment partnership gains, $1.5 million of investment gains, and a $1.4 million gain on debt extinguishment. The six-month loss was driven primarily by the $116.5 million investment partnership loss.
- Restaurant revenue declined 50.8% in the second quarter and 42.2% for the first six months, to $78.8 million and $192.9 million, respectively.
- Insurance revenue increased to $14.6 million in the second quarter and $24.3 million for the first six months, partly reflecting Southern Pioneer.
- Oil and gas revenue was $2.2 million in the second quarter and $13.5 million for the first six months; second-quarter operations generated a $1.7 million pretax loss.
- Restaurant operations generated pretax losses of $1.7 million in the second quarter and $12.6 million for the first six months.
- Insurance operations generated pretax earnings of $3.1 million in the second quarter and $6.0 million for the first six months.
- Restaurant impairment charges were $7.8 million in the second quarter and $18.1 million for the first six months, compared with $0.4 million and $2.3 million in the respective 2019 periods.
Financial position, debt and liquidity
| Balance-sheet item | June 30, 2020 | December 31, 2019 |
|---|---|---|
| Cash and cash equivalents | $36.4 million | $67.8 million |
| Investments | $84.8 million | $44.9 million |
| Investment partnerships, carrying value | $369.1 million | $505.5 million |
| Total assets | $988.8 million | $1.139 billion |
| Total liabilities | $466.3 million | $523.0 million |
| Shareholders’ equity | $522.6 million | $616.3 million |
| Total notes payable and other borrowings | $238.0 million | $270.3 million |
Cash, cash equivalents and restricted cash decreased by $28.8 million during the first six months. Operating cash flow of $98.7 million was more than offset by $103.4 million of investing outflows and $24.2 million of financing outflows. Operating cash flow benefited substantially from $83.8 million of distributions from investment partnerships.
Steak n Shake’s secured term loan had $153.6 million outstanding at June 30, 2020, bore interest at 4.75%, and matures March 19, 2021. The Company was evaluating refinancing alternatives and warned that financing may not be available on comparable terms. Biglari Holdings is not a guarantor. The Company reported compliance with all debt covenants as of June 30, 2020. Western Sizzlin had $0.4 million outstanding under its revolver.
Material changes versus the prior comparable period
- Restaurant net sales fell 54.3% in the second quarter and 45.2% for the first six months, reflecting dining-room closures, reduced operations, store closures, and the transition of company-operated stores to franchise partners.
- Steak n Shake and Western Sizzlin restaurants declined from 662 at December 31, 2019 to 585 at June 30, 2020. Steak n Shake had 59 temporarily closed company-operated stores at quarter-end.
- Franchise partner fees increased to $4.5 million in the second quarter and $7.9 million for the first six months, versus $0.4 million and $0.7 million in the 2019 periods. Steak n Shake had 51 franchise partner units at June 30, 2020, versus eight a year earlier.
- Investment partnership results reversed from a $68.4 million gain in the first six months of 2019 to a $116.5 million loss in the first six months of 2020. The partnerships’ fair value declined to $461.9 million from $666.1 million at December 31, 2019.
- Debt declined through $26.8 million of term-loan retirements, including a $5.7 million pretax gain on extinguishment.
- Insurance pretax earnings increased from $3.4 million to $6.0 million for the first six months, while media and licensing pretax earnings increased from $0.1 million to $0.5 million.
Outlook, risks, contingencies and unusual items
- Management stated that the duration and extent of COVID-19 cannot be reasonably estimated and may continue to adversely affect earnings, cash flows, liquidity, financing, and financial condition.
- Steak n Shake intends to reopen dining rooms using a counter-service model, requiring significant equipment investment. Management expects to fund much of this investment through sales of owned real estate via an auction process.
- Prolonged low oil and gas prices could result in future impairment charges. No impairment was recorded for oil and gas properties during the first six months.
- Management concluded that goodwill was not impaired at June 30, 2020, but acknowledged that worsening pandemic effects could lead to future goodwill or long-lived-asset impairments.
- Investment partnership values are highly sensitive to equity-market movements. A hypothetical 10% change in investment prices would change the carrying value of investments by approximately $45.4 million and shareholders’ equity by approximately 7%.
- The investment partnership interests are committed on a rolling five-year basis, and withdrawals may be paid over two years and may be paid in kind rather than cash.
- Legal proceedings concerning the Company’s dual-class structure were concluded in the Company’s favor after the Indiana Supreme Court denied review on April 7, 2020.
- The Company adopted the credit-loss standard ASU 2016-13 effective January 1, 2020; management reported that the impact was not material.
- Mr. Biglari beneficially owned approximately 64.4% of Class A stock and 55.4% of Class B stock as of June 30, 2020. Major investment and capital-allocation decisions are made by him.
Investor verification checklist
- Verify the refinancing plan and repayment capacity for the $153.6 million Steak n Shake term loan maturing in March 2021.
- Assess restaurant traffic, store reopenings, permanent closures, franchise-partner conversions, and the effect of the counter-service strategy.
- Reconcile operating cash flow to the $83.8 million of investment-partnership distributions and evaluate the sustainability of those distributions.
- Review the valuation and liquidity of the investment partnerships, including their Level 3 fair-value classification and exposure to market declines.
- Monitor potential future impairments of restaurant assets, lease rights, goodwill, and oil and gas properties.
- Evaluate Southern Pioneer’s underwriting performance and integration following the March 2020 acquisition.
- Confirm covenant compliance, restrictions on upstreaming cash from Steak n Shake, and the availability of financing alternatives.