Biglari Holdings Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended September 30, 2020. Biglari Holdings operates restaurants, property and casualty insurance, oil and gas, and media/licensing businesses, and holds investment partnerships. The company is led by Sardar Biglari, who makes major investment and capital-allocation decisions and beneficially owns approximately 66.3% of Class A and 56.6% of Class B shares.
Results were materially affected by COVID-19. Restaurant dining rooms were closed during the first quarter, oil demand and prices declined, and operating businesses incurred pandemic-related costs and impairments. On March 9, 2020, the company acquired Southern Pioneer Property & Casualty Insurance Company and its agency.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Revenue | $101.8 million | $160.2 million | $334.0 million | $510.4 million |
| Pre-tax earnings (loss) | $26.7 million | ($0.6 million) | ($97.8 million) | $38.8 million |
| Net earnings (loss) | $21.1 million | ($0.02 million) | ($74.3 million) | $31.8 million |
| Equivalent Class A EPS | $60.07 | ($0.05) | ($213.31) | $92.04 |
| Net margin | 20.7% | approximately 0% | (22.2%) | 6.2% |
Q3 earnings were substantially driven by a $27.2 million investment-partnership gain, which contributed $21.1 million after tax. The first-nine-month loss included an $89.3 million investment-partnership loss, compared with a $69.8 million gain in the prior-year period. Investment results are volatile and include changes in market values of underlying securities.
- Operating businesses: Q3 after-tax contribution was $3.5 million, compared with $3.0 million in 2019. The first-nine-month contribution was a $1.2 million loss, compared with a $9.0 million loss in 2019.
- Restaurants: Q3 revenue was $79.7 million, down 45.1%; first-nine-month revenue was $272.6 million, down 43.1%. Restaurant operations generated a $0.5 million pre-tax loss in Q3 and a $13.0 million pre-tax loss year to date.
- Insurance: Q3 revenue was $14.4 million and after-tax contribution was $2.2 million; first-nine-month after-tax contribution was $6.8 million. First-nine-month pre-tax underwriting gain was $6.7 million.
- Oil and gas: Q3 revenue was $6.0 million and after-tax contribution was $0.4 million. Production was reduced in response to weak commodity markets and was subsequently restored in part as prices improved.
- Media and licensing: Q3 revenue was $1.7 million and after-tax contribution was $0.9 million; first-nine-month after-tax contribution was $1.2 million.
Liquidity, cash flow, debt, and balance sheet
- Cash and cash equivalents were $33.2 million at September 30, 2020, compared with $67.8 million at December 31, 2019. Investments were $85.1 million, compared with $44.9 million.
- Fair value of investment-partnership interests was $514.6 million, down from $666.1 million. After excluding the company’s stock held by the partnerships, carrying value of cash and investments was $501.9 million, down from $618.2 million.
- Total assets were $983.6 million, compared with $1.139 billion at year-end. Shareholders’ equity was $538.2 million, compared with $616.3 million.
- Operating cash flow for the first nine months was $106.4 million, compared with $39.9 million in 2019. The increase was largely attributable to $97.3 million of distributions from investment partnerships.
- Investing cash flow was negative $112.1 million, including $34.2 million for the Southern Pioneer acquisition, $13.3 million of capital expenditures, and net investment purchases of approximately $68.5 million.
- Financing cash flow was negative $26.4 million. The company retired $26.8 million of Steak n Shake debt during the first nine months.
- Steak n Shake’s secured term loan had $153.1 million outstanding at September 30, 2020, bore interest at 4.75%, and matures March 19, 2021. Biglari Holdings is not a guarantor. Management reported compliance with covenants at September 30, 2020.
- Western Sizzlin had $0.5 million outstanding under its revolver at September 30, 2020 and reduced the balance to zero on October 30, 2020.
Material changes versus the prior comparable period
- Q3 restaurant net sales declined 50.5%, and same-store traffic declined 54.2%. First-nine-month net sales declined 46.8%, with same-store traffic down 44.6%.
- Restaurants declined to 570 locations from 662 at December 31, 2019. Company-operated Steak n Shake stores declined to 260, while franchise-partner units increased to 69 from 29 at year-end 2019.
- Restaurant impairments increased to $21.8 million for the first nine months from $7.4 million, primarily from Steak n Shake closures and pandemic-related effects. International restaurant lease-right impairments added $3.7 million.
- Restaurant cost of food improved to 29.3% of net sales for the first nine months from 31.4%, while restaurant operating costs declined substantially due to closures and conversion to franchise partners.
- Insurance revenue and earnings increased primarily because Southern Pioneer was acquired in March 2020. First Guard’s first-nine-month underwriting gain rose to $7.0 million from $4.9 million.
- Interest expense declined to $11.7 million from $15.2 million for the first nine months. A $5.7 million pre-tax gain on debt extinguishment was recorded in connection with Steak n Shake debt retirement.
- Deferred tax liabilities declined, including the liability associated with investment partnerships, reflecting partnership losses and changes in investment values.
Outlook, risks, contingencies, and unusual items
The filing provides no formal revenue, earnings, or margin guidance. Management’s stated long-term objective is to maximize per-share intrinsic value. Steak n Shake is seeking to convert its full-service model to a self-service model, but available capital expenditures are constrained by its debt agreement.
- COVID-19 may continue to adversely affect restaurant traffic, restaurant closures, operating costs, oil demand, commodity prices, earnings, cash flows, liquidity, and asset values.
- Steak n Shake’s $153.1 million term loan matures in March 2021. Management states that refinancing may not be available and that pandemic conditions could impair refinancing or covenant compliance.
- Future impairments of restaurant assets, right-of-use assets, goodwill, and oil and gas properties remain possible. No goodwill impairment was recorded through September 30, 2020.
- Investment-partnership interests are valued using Level 3 methods and are committed on a rolling five-year basis. Withdrawals may be paid over two years and may be made in kind rather than cash.
- A hypothetical 10% change in investment prices would change the carrying value of investments by approximately $46.9 million and shareholders’ equity by approximately 7%.
- Related-party service fees paid to entities owned by Mr. Biglari were $6.3 million in the first nine months. The investment partnerships’ general partner is also solely owned by Mr. Biglari.
- Shareholder litigation concerning the dual-class structure was concluded in the company’s favor after the Indiana Supreme Court denied review in April 2020. Management states that unresolved claims are not expected to be material.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Steak n Shake’s ability to refinance or repay the $153.1 million term loan at its March 2021 maturity.
- Restaurant reopening levels, same-store traffic, store closures, self-service conversion costs, and franchise-partner growth.
- Whether COVID-19 and oil-market conditions lead to additional impairments or liquidity needs.
- The composition, valuation, liquidity restrictions, and future performance of the investment partnerships, which materially affected reported earnings and equity.
- The sustainability of operating cash flow, given that a substantial portion of 2020 cash generation came from investment-partnership distributions.
- The effects of Southern Pioneer’s integration and underwriting performance on consolidated insurance results.