Biglari Holdings Inc. — Form 10-Q Summary
Business context and reporting period
Biglari Holdings is a diversified holding company led by Chairman and CEO Sardar Biglari. Its businesses include restaurants, property and casualty insurance, media and licensing, oil and gas, and investment partnerships. The report covers the quarter and first nine months ended September 30, 2019; financial statements are unaudited and presented under U.S. GAAP.
Restaurant operations remained the largest operating business. At September 30, 2019, Steak n Shake had 302 company-operated and 217 franchise units, while Western Sizzlin had 4 company-operated and 50 franchise units.
Key financial metrics
| Metric | Third quarter 2019 | Third quarter 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Total revenue | $160.2 million | $203.6 million | $510.4 million | $614.5 million |
| Earnings before taxes | $(0.6) million | $(24.9) million | $38.8 million | $(35.9) million |
| Net earnings | $(0.02) million | $(13.7) million | $31.8 million | $(23.1) million |
| Equivalent Class A EPS | $(0.05) | $(39.50) | $92.04 | $(66.12) |
| Operating cash flow | Not separately presented | Not separately presented | $39.9 million | $(5.6) million |
Revenue declined approximately 21% in the quarter and 17% year to date. The third-quarter pretax margin was approximately negative 0.4% and the year-to-date pretax margin was approximately 7.6%; net margins were approximately negative 0.01% and 6.2%, respectively. Year-to-date results were substantially affected by $69.8 million of investment partnership gains, compared with a $23.9 million loss in the prior-year period.
- Restaurant revenue was $145.1 million in the quarter and $478.9 million year to date, down from $195.0 million and $589.6 million, respectively.
- Steak n Shake same-store sales declined 6.5% in the quarter and 6.4% year to date. Customer traffic declined 13.3% and 9.7%, respectively.
- Restaurant operations recorded pretax losses of $0.3 million in the quarter and $21.3 million year to date, versus losses of $2.7 million and pretax income of $0.1 million in the comparable periods.
- First Guard insurance contributed $1.8 million of net earnings in the quarter and $4.5 million year to date, up from $1.4 million and $3.6 million.
- Southern Oil, acquired September 9, 2019, contributed $6.5 million of revenue, $1.4 million of pretax earnings, and $1.1 million of net earnings in the quarter.
- Investment partnership gains contributed $1.4 million after tax in the quarter and $53.9 million year to date, versus an after-tax loss of $12.9 million and $15.7 million, respectively.
Cash flow, liquidity, debt, and capital structure
- Cash, cash equivalents, and restricted cash decreased $29.4 million during the first nine months to $25.6 million at September 30, 2019; unrestricted cash and cash equivalents were $19.1 million.
- Cash and direct investments totaled $62.8 million. The fair value of investment partnership interests was $714.2 million, or $561.5 million on the balance sheet after adjustments for the Company stock held by the partnerships.
- Operating cash flow of $39.9 million primarily reflected distributions from investment partnerships. Investing cash flow was negative $63.3 million, including $51.1 million for the Southern Oil acquisition and $8.4 million of capital expenditures.
- Total notes payable and other borrowings were approximately $271.9 million, including $7.0 million current and $264.9 million long term. Operating lease liabilities totaled $71.4 million and finance lease liabilities totaled $11.7 million.
- Steak n Shake had $182.0 million outstanding under its secured term loan, bearing interest at 5.80% and maturing March 19, 2021. The Company stated that all covenants were met; Biglari Holdings is not a guarantor.
- Shareholders’ equity increased to $601.5 million from $570.5 million at December 31, 2018, primarily due to year-to-date net earnings.
Material changes versus the prior comparable period
- Southern Oil was acquired for $51.5 million in cash and added a new oil and gas reporting segment.
- Restaurant revenue and profitability deteriorated, driven primarily by temporary store closures and continuing Steak n Shake sales declines. The company-operated Steak n Shake store count fell from 413 at December 31, 2018 to 302 at September 30, 2019, including 106 temporarily closed restaurants.
- Insurance profitability improved, while media and licensing revenue declined.
- Investment partnership results shifted from significant losses in 2018 to significant gains in 2019. The partnerships’ investments were largely concentrated in Cracker Barrel Old Country Store, Inc.
- The Company adopted ASC 842 lease accounting on January 1, 2019, recording material operating lease assets and liabilities and a $1.5 million cumulative-effect increase to retained earnings. The adoption materially affected the balance sheet but not earnings or cash flow.
- Restaurant impairments increased to $5.1 million in the quarter and $7.4 million year to date, primarily due to closed stores, compared with $0.3 million and $0.7 million in the prior-year periods.
- Steak n Shake recorded $8.35 million of legal settlements in selling, general and administrative expense during the first nine months.
- The incentive agreement with Mr. Biglari was amended in March 2019 to remove the annual limitation on incentive compensation and the requirement to use 30% of incentive payments to purchase Company shares. Change-of-control and severance provisions were eliminated, and a related license agreement was terminated.
Outlook, commentary, risks, and unusual items
Management did not provide quantitative financial guidance in the filing. Management stated that Steak n Shake is emphasizing its franchise partnership model to address sales declines and improve profitability, but cautioned that it may not secure suitable franchise partners or restore profitability.
- Future restaurant impairments remain possible, and the 106 temporarily closed Steak n Shake restaurants represent a material operating risk.
- Investment partnership results and shareholders’ equity are highly sensitive to equity-market movements and concentrated holdings. Management estimated that a 10% change in investment prices would change investment carrying value and shareholders’ equity by approximately $60.5 million.
- Investment partnership interests are committed on a rolling five-year basis, and withdrawals may be paid over two years and potentially in kind rather than cash.
- The Steak n Shake credit facility restricts dividends to Biglari Holdings and is secured by substantially all Steak n Shake assets. Funding disruptions could affect liquidity and operations.
- The Company faces shareholder litigation concerning its dual-class structure; the trial court dismissed the lawsuits, and an appeal argued October 7, 2019 was awaiting decision at the filing date.
- The Company settled two employment classification cases for $8.35 million. Management stated that other unresolved legal matters are not expected to have a material effect beyond recorded amounts.
- Interest-rate sensitivity was material: a hypothetical 100-basis-point increase in short-term rates was estimated to reduce net earnings by approximately $1.4 million.
- Biglari’s beneficial ownership was approximately 60.7% of Class A stock and 55.4% of Class B stock, creating significant control and related-party governance considerations.
Important facts for investors to verify
- Whether the franchise partnership strategy reverses Steak n Shake’s same-store sales declines and reopens or monetizes the 106 temporarily closed restaurants.
- The sustainability and cash realizability of investment partnership gains, including concentration in Cracker Barrel and the five-year liquidity restrictions.
- Southern Oil’s post-acquisition production, reserves, capital requirements, and exposure to offshore operating risks.
- Steak n Shake’s ability to refinance or repay the $182.0 million term loan at or before its March 2021 maturity.
- The ultimate outcome and potential cost of the dual-class shareholder litigation appeal.
- The effect of related-party agreements and the amended incentive arrangement on future compensation and capital allocation.