Biglari Holdings Inc. — Form 10-Q 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 company is led by Sardar Biglari, who held approximately 64.3% of the economic interest and 69.6% of the voting interest as of June 30, 2021. This unaudited filing covers the quarter and six months ended June 30, 2021, with comparisons to the same periods of 2020.
Key financial metrics
| Metric | Second quarter 2021 | Second quarter 2020 | First six months 2021 | First six months 2020 |
|---|---|---|---|---|
| Revenue | $90.8 million | $96.5 million | $185.1 million | $232.2 million |
| Pre-tax earnings (loss) | ($26.9 million) | $57.2 million | $66.8 million | ($124.5 million) |
| Net earnings (loss) | ($20.7 million) | $42.5 million | $51.0 million | ($95.4 million) |
| Equivalent Class A earnings (loss) per share | ($64.04) | $121.51 | $158.06 | ($275.04) |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $187.2 million | $98.7 million |
Net margin was approximately negative 22.8% in the second quarter and positive 27.5% for the first six months, versus positive 44.0% and negative 41.1%, respectively, in the comparable 2020 periods. The changes were driven primarily by volatile investment partnership results rather than operating businesses.
- Restaurant revenue decreased 14.5% in the quarter and 28.8% for the first six months to $67.3 million and $137.3 million, respectively. Restaurant pre-tax earnings improved to $3.6 million and $9.2 million from a $0.3 million loss and a $6.8 million loss.
- Insurance revenue was $14.4 million in the quarter and $29.0 million for the first six months. Insurance pre-tax earnings increased to $4.3 million and $7.6 million from $3.1 million and $6.0 million.
- Oil and gas revenue increased to $8.4 million in the quarter and $17.0 million for the first six months, while pre-tax earnings increased to $3.0 million and $6.1 million from a $1.7 million loss and $0.8 million.
- Investment partnership gains were a $34.2 million loss in the quarter and a $47.6 million gain for the first six months, compared with a $59.2 million gain and a $116.5 million loss in the 2020 periods.
- Cash, cash equivalents, and investments totaled $124.3 million at June 30, 2021. The fair value of investment partnership interests was $551.9 million, while the balance-sheet carrying value was $311.9 million. Total assets were $933.9 million and shareholders’ equity was $613.5 million.
- Steak n Shake’s term loan was repaid in full on February 19, 2021. Notes payable were zero at June 30, 2021, compared with $152.3 million of current notes payable at December 31, 2020. Lease obligations totaled $122.4 million, including current and long-term amounts.
Material changes versus the prior comparable period
- Revenue declined primarily because company-operated Steak n Shake restaurants were transitioned to franchise partner units. Franchise partner fees increased to $12.4 million in the quarter and $20.2 million for the first six months, from $4.5 million and $7.9 million.
- Steak n Shake company-operated stores declined to 230 from 289 at June 30, 2020, while franchise partner units increased to 131 from 51. The restaurant system had 588 locations at June 30, 2021, including 49 temporarily closed company-operated Steak n Shake stores.
- Restaurant impairments declined to $0.3 million in the quarter and $0.6 million for the first six months, from $7.8 million and $18.1 million in 2020.
- Insurance underwriting improved to a $3.7 million pre-tax gain in the quarter and $6.2 million for the first six months, compared with $2.1 million and $4.6 million. Southern Pioneer shifted from an underwriting loss to an underwriting gain.
- Operating cash flow increased by $88.5 million for the first six months, largely because distributions from investment partnerships increased to $158.1 million from $83.8 million. The distributions were primarily used to repay Steak n Shake debt.
- Capital expenditures increased to $26.8 million from $10.0 million. Financing cash outflows increased to $153.1 million, principally reflecting the $150.0 million debt repayment.
- Income taxes changed from a $29.1 million benefit in the first six months of 2020 to $15.8 million of expense in 2021, primarily reflecting the reversal from investment partnership losses to gains.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal revenue, earnings, or capital expenditure guidance. Management states that its long-term objective is to maximize per-share intrinsic value and that major investment and capital allocation decisions are made by Mr. Biglari.
- COVID-19 continues to create uncertainty across the operating businesses. Steak n Shake dining rooms were reopened during 2021 using a self-service model; labor costs were 26.8% of net sales in the second quarter for reopened units.
- Investment partnership results can materially increase or reduce reported earnings because they include unrealized market gains and losses. Management does not consider quarterly investment fluctuations representative of operating performance.
- A hypothetical 10% increase or decrease in the market price of investments would change investment carrying values by approximately $40.8 million and shareholders’ equity by approximately 5%.
- Southern Oil is exposed to fluctuations in crude oil and natural gas prices. Restaurant performance remains exposed to store closures, operating costs, labor costs, and franchise transitions.
- Goodwill impairment is a continuing risk, particularly for Western Sizzlin if its franchised units continue to decline. No goodwill impairment was recorded in the first six months of 2021.
- The company reports various legal proceedings and unresolved claims but believes any liability beyond recorded amounts is unlikely to materially affect results. Previously disclosed shareholder litigation was concluded in the company’s favor.
- Related-party service fees paid to entities owned by Mr. Biglari were $4.2 million in the first six months of 2021. The investment partnerships’ general partner is also solely owned by Mr. Biglari.
- Controls and procedures were assessed as effective as of June 30, 2021, and the filing reports no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the continued transition from company-operated to franchise partner restaurants improves sustainable earnings despite reducing reported revenue.
- The valuation, liquidity, and concentration of the investment partnerships, including their holdings of Biglari Holdings common stock.
- The sustainability of the $187.2 million first-half operating cash flow, particularly the reliance on $158.1 million of partnership distributions.
- The operating status and economics of the 49 temporarily closed Steak n Shake stores.
- Future oil and gas prices, insurance loss trends, COVID-19 effects, and potential restaurant or goodwill impairments.
- The implications of Mr. Biglari’s controlling voting position and related-party service and incentive arrangements.