Biglari Holdings Inc. 2019 Form 10-K Summary
Business context and reporting period
Biglari Holdings is a diversified holding company with restaurant, insurance, oil and gas, media and licensing, and investment activities. The filing covers the fiscal year ended December 31, 2019; fourth-quarter figures are presented as unaudited quarterly data. Sardar Biglari is Chairman and CEO and beneficially owns approximately 64.4% of Class A stock and 55.4% of Class B stock.
The restaurant businesses remained the largest operating activity. At year-end, the company had 662 restaurant locations: 368 Steak n Shake company-operated units, 29 Steak n Shake franchise partner units, 213 Steak n Shake traditional franchise units, 4 Western Sizzlin company-operated units, and 48 Western Sizzlin franchise units. Of the 368 company-operated Steak n Shake restaurants, 107 were temporarily closed.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenues | $668.8 million | $809.9 million | Down 17.4% |
| Net earnings | $45.4 million | $19.4 million | Up $26.0 million |
| Net earnings per equivalent Class A share | $131.64 | $55.71 | Up $75.93 |
| Earnings before income taxes | $55.1 million | $16.8 million | Up $38.4 million |
| Net margin | 6.8% | 2.4% | Up approximately 4.4 percentage points |
| Cash flow from operations | $93.7 million | $20.7 million | Up $73.0 million |
| Total assets | $1.139 billion | $1.029 billion | Up $109.8 million |
| Shareholders’ equity | $616.3 million | $570.5 million | Up $45.8 million |
Restaurant revenue declined to $610.2 million from $775.7 million. Net restaurant sales fell 22.0% to $578.2 million, driven by a 6.9% decline in Steak n Shake same-store sales, an 11.2% decline in customer traffic, and store closures. Restaurant operations generated a pretax loss of $16.8 million, compared with a $8.6 million loss in 2018. Steak n Shake accounted for a pretax loss of $18.6 million.
First Guard insurance revenue increased to $30.1 million, and its pretax earnings increased to $7.1 million from $6.2 million. The underwriting gain increased 15.0% to $6.5 million. Maxim revenue declined to $4.1 million from $6.6 million, while its contribution to net earnings declined to $0.6 million.
Southern Oil was acquired on September 9, 2019 for $51.5 million in cash. It contributed $24.4 million of revenue and $5.9 million of net earnings from the acquisition date through year-end.
Investment partnership gains were $78.1 million before tax and contributed $60.8 million to net earnings, compared with $40.4 million and $33.2 million, respectively, in 2018. These gains include changes in the market values of underlying investments and may be volatile. The investment partnerships had a reported fair value of $666.1 million at year-end, with a carrying value of $505.5 million after the adjustment for Biglari Holdings shares held by the partnerships.
Cash and cash equivalents were $67.8 million, compared with $48.6 million at December 31, 2018. Total cash and investments, including investment partnerships, were $778.8 million before deducting $160.6 million attributable to company stock held by the partnerships. Net cash used in investing activities was $70.0 million, including $51.1 million for the Southern Oil acquisition. Net cash used in financing activities was $8.0 million.
Total notes payable and other borrowings were $270.3 million, including $181.5 million outstanding under Steak n Shake’s term loan before debt discounts and issuance costs. The Steak n Shake facility matures March 19, 2021, and the company was evaluating refinancing alternatives. Biglari Holdings is not a guarantor of the facility. Total operating and finance lease liabilities were approximately $76.2 million at year-end.
Fourth-quarter results
| Metric | Q4 2019 | Q4 2018 |
|---|---|---|
| Total revenues | $158.4 million | $195.3 million |
| Earnings before income taxes | $16.3 million | $52.7 million |
| Net earnings | $13.6 million | $42.4 million |
| Net earnings per equivalent Class A share | $39.64 | $122.53 |
Material changes versus the prior comparable period
- Consolidated revenue decreased 17.4%, primarily because of restaurant sales declines and closures.
- Net earnings increased mainly because investment partnership gains rose by $37.7 million and Southern Oil contributed post-acquisition earnings, partially offset by weaker restaurant results and higher income taxes.
- Restaurant operations moved further into a loss, with pretax losses increasing from $8.6 million to $16.8 million. Restaurant impairments increased to $8.2 million from $5.7 million.
- Operating cash flow increased substantially because distributions from investment partnerships rose to $129.3 million from $29.7 million, largely reflecting partnership tax-related distributions.
- Assets and liabilities increased substantially following the Southern Oil acquisition and the January 1, 2019 adoption of ASC 842 lease accounting. ASC 842 added significant right-of-use assets and lease liabilities but did not materially affect earnings or operating cash flow.
- The company transitioned 29 corporate Steak n Shake restaurants to franchise partner units and closed 23 restaurants net during 2019.
Outlook, risks, contingencies and unusual items
Management anticipated reopening temporarily closed Steak n Shake restaurants as counter-service units or franchise partner locations, but provided no quantified earnings or revenue guidance. The filing states that there is no assurance the strategy will restore profitability.
- Steak n Shake’s $181.5 million term loan matures in 2021 and requires refinancing or repayment at maturity. Failure to refinance or comply with covenants could adversely affect liquidity and operations.
- Access to parent-company liquidity is constrained by subsidiary debt covenants, insurance dividend regulations, and five-year lock-up provisions on investment partnership interests. Withdrawals from the partnerships may be paid over two years and potentially in kind.
- The investment portfolio is concentrated, including a significant position in Cracker Barrel Old Country Store. Management estimated that a 10% change in investment prices would change investment fair value by approximately $55.0 million and shareholders’ equity by approximately 7%.
- Investment partnership gains are market-sensitive and include unrealized gains and losses. The partnerships are controlled by Biglari-related entities, and the company paid $8.4 million in 2019 service fees under a related-party services agreement.
- Southern Oil exposes the company to volatile oil and natural gas prices, offshore operational disruptions, environmental obligations, and regulatory risks. The company recorded a $10.6 million asset retirement obligation associated with the acquisition.
- A shareholder lawsuit concerning the dual-class structure was dismissed by the trial court and affirmed by the Indiana Court of Appeals. As of the filing date, the Indiana Supreme Court had not ruled on the shareholders’ petition to transfer.
- The company settled two former-manager wage-and-hour class actions for $8.35 million, recorded in 2019 selling, general and administrative expense.
- Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting. Southern Oil was excluded from management’s internal-control assessment and represented approximately 7.2% of total assets, 3.7% of revenues, and 13.0% of net earnings for 2019.
Important facts for investors to verify
- Whether Steak n Shake can successfully reopen or franchise the 107 temporarily closed stores and reverse declining traffic and same-store sales.
- The availability, pricing, and covenant terms of refinancing for the Steak n Shake term loan before its March 2021 maturity.
- The composition, concentration, valuation methodology, and lock-up terms of the $666.1 million investment partnership interest.
- The sustainability of 2019 investment partnership gains and the extent to which operating businesses, rather than investment gains, generate recurring earnings and cash flow.
- The effect of oil and gas prices, offshore production performance, reserve estimates, and asset retirement obligations on Southern Oil’s future results.
- The implications of related-party control, Biglari’s ownership concentration, the services agreement, and the dual-class share structure for minority shareholders.
- The status and potential exposure related to the pending petition to the Indiana Supreme Court and other legal proceedings.