Biglari Holdings Inc. — 2018 Q3 Form 10-Q Summary
Business Context and Reporting Period
Biglari Holdings is a diversified holding company with restaurant operations through Steak n Shake and Western Sizzlin, commercial trucking insurance through First Guard, and media and licensing activities through Maxim. The company is led by Sardar Biglari, who makes major operating, investment, and capital allocation decisions. This filing covers the quarter and first nine months ended September 30, 2018; amounts are in thousands except per-share data.
On April 30, 2018, the company completed a recapitalization creating Class A and Class B common stock. Class B shares have one-fifth the economic rights of Class A shares and no voting rights. Class A began trading under BH.A and Class B under BH on the NYSE on May 1, 2018.
Financial Results and Key Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $203,582 | $214,234 | $614,546 | $630,581 |
| Operating business earnings before tax | $(561) | $(1,751) | $5,067 | $5,715 |
| Investment partnership gains/(losses) | $(19,008) | $(43,859) | $(23,854) | $(31,589) |
| Loss before income taxes | $(24,902) | $(49,926) | $(35,942) | $(40,480) |
| Income tax benefit | $11,199 | $25,226 | $12,886 | $21,085 |
| Net loss | $(13,703) | $(24,700) | $(23,056) | $(19,395) |
| Loss per equivalent Class A share | $(39.50) | $(66.96) | $(66.12) | $(52.51) |
Total revenue declined 5.0% in the quarter and 2.5% for the first nine months. Net loss margins were approximately 6.7% and 3.8%, respectively, based on reported revenue.
- Restaurant revenue decreased to $195,041 in Q3 and $589,569 for nine months. Company-owned restaurant net sales fell 6.8% and 4.0%, respectively.
- Steak n Shake same-store sales declined 6.9% in Q3 and 4.0% for nine months; customer traffic declined 6.6% and 6.8%, respectively.
- Restaurant operations reported a pre-tax loss of $2,656 in Q3 and essentially breakeven pre-tax earnings of $59 for nine months.
- First Guard revenue increased to $7,038 in Q3 and $20,330 for nine months. Its pre-tax earnings rose to $1,813 and $4,624, respectively.
- Maxim revenue declined to $1,503 in Q3 and $4,647 for nine months; nine-month pre-tax loss improved to $90 from $487.
- Investment partnership losses were $23,854 for nine months, primarily reflecting changes in market values. The partnerships are concentrated largely in Cracker Barrel Old Country Store stock.
Cash Flow, Liquidity, Debt, and Capital Structure
| Metric | September 30, 2018 | December 31, 2017 |
|---|---|---|
| Cash and cash equivalents | $48,345 | $58,577 |
| Investments | $27,790 | $23,289 |
| Investment partnerships | $496,655 | $566,021 |
| Total assets | $974,015 | $1,063,584 |
| Total liabilities | $445,597 | $492,256 |
| Shareholders’ equity | $528,418 | $571,328 |
| Total notes payable and other borrowings | $251,441 | $263,742 |
- Operating cash flow was $(5,584) in the first nine months of 2018 versus $16,944 provided in the prior-year period, mainly due to working-capital uses, including payment of a $7,353 accrued 2017 incentive fee and net gift-card redemptions.
- Investing activities provided $2,221, including a $26,000 return of capital from investment partnerships, partly offset by $10,400 of capital expenditures and $7,340 of partnership investments.
- Financing activities used $5,797, including $1,650 of long-term debt principal payments and $4,021 of lease-obligation payments.
- Cash, cash equivalents, and restricted cash decreased $9,223 to $58,007 at September 30, 2018.
- Steak n Shake’s secured term loan had $184,248 outstanding, bore interest at 6.00%, and matures March 19, 2021. The company reported compliance with all covenants; Biglari Holdings is not a guarantor.
- Management expects working-capital needs to be funded through operating cash flow, cash on hand, existing credit facilities, and potential sales of excess properties and investments.
Material Changes Versus the Prior Comparable Period
- Reported net loss improved in Q3 because investment partnership losses were less severe, but nine-month net loss increased from $19,395 to $23,056 as operating performance weakened and interest expense increased.
- Restaurant cost of food improved to 30.0% of net sales in both Q3 and the nine-month period, while restaurant operating costs increased to 53.9% and 52.7%, primarily due to higher wages and benefits.
- First Guard pre-tax earnings increased substantially, supported by higher premiums written and a stronger underwriting gain.
- Interest expense on notes payable increased to $8,619 for nine months from $8,321, while the term-loan balance declined from the prior comparable date.
- ASC 606 was adopted using the modified retrospective method. It increased reported Q3 revenue by $2,220 and reduced Q3 net earnings by $154 versus amounts that would have been reported under the prior method; nine-month revenue increased by $7,216 and net earnings decreased by $129. The balance-sheet impact was not material.
- The April recapitalization created the dual-class share structure and affected reported earnings-per-share calculations.
Outlook, Risks, Contingencies, and Unusual Items
- No quantitative earnings or revenue guidance was provided. Management’s stated long-term objective is to maximize per-share intrinsic value.
- Investment results and equity are exposed to market volatility, particularly because investment partnerships hold a concentrated position in Cracker Barrel. Management estimated that a hypothetical 10% change in investment prices would change investment carrying value by approximately $53,301 and shareholders’ equity by approximately 8%.
- 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 company faces shareholder litigation alleging breaches of fiduciary duty and unjust enrichment related to the recapitalization and dual-class stock issuance. The company believes the claims are without merit and does not expect liabilities beyond recorded amounts to be material based on the filing.
- Mr. Biglari beneficially owns approximately 56.3% of outstanding Class A stock and 54.3% of Class B stock. Related-party arrangements include a services agreement requiring a fixed fee to entities owned by Mr. Biglari and a license agreement that could require a 2.5% royalty following specified triggering events.
- The company anticipates that adoption of the new lease standard will materially affect the balance sheet but not cash. It was still evaluating the impact of the credit-loss standard.
- Management disclosed no material changes to previously reported risk factors. The filing states that disclosure controls and procedures were effective as of September 30, 2018.
Important Facts for Investors to Verify
- Whether Steak n Shake can reverse declining same-store sales and customer traffic while controlling wage and operating-cost pressure.
- The valuation, concentration, liquidity restrictions, and future performance of the investment partnerships, particularly their Cracker Barrel position.
- The March 2021 maturity and 6.00% interest rate of the Steak n Shake term loan, including covenant compliance and restrictions on upstream dividends.
- The potential financial and governance consequences of the shareholder litigation and the dual-class recapitalization.
- The effect of ASC 606 and the forthcoming lease standard on reported revenue, expenses, assets, liabilities, and comparability.
- The sustainability of liquidity given negative operating cash flow in the first nine months and reliance on investment distributions, asset sales, or other financing alternatives.