Biglari Holdings Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
Biglari Holdings is a diversified holding company with restaurant operations, commercial trucking insurance, media and licensing activities, and investment partnerships. The company is led by Sardar Biglari, who beneficially owned approximately 54.8% of the outstanding common stock as of March 31, 2018. This report covers the quarter ended March 31, 2018, with comparisons to the first quarter of 2017.
On April 30, 2018, the company completed a reorganization involving New BH. Existing shareholders received Class A and non-voting Class B shares of the new public parent. Beginning May 1, 2018, Class A shares traded as BH.A and Class B shares traded as BH on the NYSE.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $202.2 million | $203.4 million | Down 0.6% |
| Restaurant revenue | $193.9 million | $195.7 million | Down 0.9% |
| Insurance and other revenue | $6.5 million | $6.1 million | Up 7.7% |
| Media revenue | $1.7 million | $1.6 million | Up 7.7% |
| Loss before income taxes | $2.6 million | $25.6 million | Improved by $23.0 million |
| Net loss | $1.8 million | $15.8 million | Improved by $14.0 million |
| Equivalent Class A loss per share | $5.15 | $42.72 | Improved |
| Cash flow from operations | $(9.4) million | $9.9 million | Down $19.3 million |
The reported pre-tax margin was approximately negative 1.3% in Q1 2018 versus negative 12.6% in Q1 2017. The improvement primarily reflected a $28.5 million year-over-year swing in investment partnership results, partly offset by weaker restaurant performance and higher corporate expenses.
- Investment partnerships: Pre-tax gain of $3.5 million versus a $25.0 million loss in the prior-year quarter; after-tax contribution was $3.1 million versus a $15.2 million loss.
- Restaurants: Pre-tax loss of $0.6 million versus $3.8 million of pre-tax earnings. Steak n Shake same-store sales declined 1.7% and customer traffic declined 7.2%.
- Insurance: Pre-tax earnings declined to $0.5 million from $1.0 million. Premiums written increased 7.1% to $6.3 million, but underwriting gains declined to $0.4 million from $0.9 million.
- Media: Pre-tax loss improved to $0.2 million from $0.3 million.
- Cash and liquidity: Cash and cash equivalents were $45.4 million at March 31, 2018, down from $58.6 million at December 31, 2017. Including investments and the fair value of investment partnership interests, reported cash and investments totaled $992.3 million before deducting $372.3 million attributable to company stock held by the partnerships.
- Debt: Current and long-term notes payable and other borrowings totaled $261.5 million, including $185.3 million outstanding under the Steak n Shake term loan. The term loan bore interest at 5.40% and matures March 19, 2021. Total borrowings declined from $263.7 million at December 31, 2017.
- Equity: Shareholders’ equity was $551.7 million, down from $571.3 million at year-end, primarily because the company recorded its proportionate interest in shares purchased by The Lion Fund II as treasury stock.
Material changes versus the prior comparable period
- Restaurant net sales declined $3.5 million, while food costs increased to 30.1% of net sales from 28.8%, primarily due to higher bacon, cheese and beef costs.
- Restaurant operating costs increased to 52.7% of net sales from 52.0%, principally because of higher wages and benefits.
- Restaurant general and administrative expenses increased to 7.8% of total restaurant revenue from 7.1%; marketing expenses increased to 7.0% from 6.4%.
- Steak n Shake had 415 company-operated and 201 franchised units at quarter-end. Western had four company-operated and 58 franchised units, for 678 total restaurants versus 664 a year earlier.
- Operating cash flow turned negative, largely because of working-capital timing, including the timing of a $7.4 million incentive-fee payment and a $20.0 million decrease in accounts payable and accrued expenses.
- The company adopted ASC 606 using the modified retrospective method. The adoption increased reported Q1 2018 revenue and reduced the reported net loss by approximately $95,000; the opening retained-earnings adjustment was $90,000 and the balance-sheet impact was not material.
- Corporate net loss increased to $2.7 million from $1.9 million, partly because of legal and professional costs related to shareholder litigation and the dual-class stock implementation.
Outlook, commentary, risks and unusual items
Management stated that its long-term objective is to maximize per-share intrinsic value and that major operating, investment and capital-allocation decisions are made by Mr. Biglari. The company did not provide quantitative revenue or earnings guidance.
Management expects to fund working-capital needs through operating cash flows, cash on hand, existing credit facilities, and potential sales of excess properties and investments. Steak n Shake was in compliance with its credit-facility covenants at March 31, 2018, although the facility restricts dividends to the parent and is secured by substantially all Steak n Shake assets.
- The investment partnerships are concentrated largely in Cracker Barrel Old Country Store stock. A hypothetical 10% change in investment prices would have changed the carrying value of investments and shareholders’ equity by approximately $57.5 million.
- The 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.
- Two purported shareholder class actions challenge the reorganization and dual-class stock issuance. The company considers the claims without merit and intends to defend them vigorously; management stated that excess liability beyond recorded amounts is not expected to be material.
- The new Class B shares have no voting rights and may be less attractive to institutional investors, acquisition targets or stock-index providers. The company also identified potential pressure on trading prices and possible future regulatory restrictions on dual-class listings.
- A related-party services agreement with entities owned by Mr. Biglari requires a fixed fee of $700,000 per month during its first year, subject to adjustments in later years.
- No goodwill impairment was recorded. Management identified significant judgment in goodwill and investment valuations, including market multiples, projections, discount rates and other unobservable inputs.
Important facts for investors to verify
- Verify the post-April 30, 2018 share exchange, Class A/Class B economic and voting rights, share counts and trading symbols.
- Monitor Steak n Shake same-store sales, customer traffic, commodity costs, labor costs and franchise-unit growth.
- Assess the concentration, valuation and liquidity terms of the Lion Fund investments, particularly the exposure to Cracker Barrel.
- Review the $185.3 million Steak n Shake term loan, its 5.40% interest rate, covenant compliance and March 2021 maturity.
- Evaluate whether negative operating cash flow and declining cash balances are temporary working-capital effects or evidence of pressure on operating liquidity.
- Follow the shareholder litigation and any related costs, settlements or effects on the corporate reorganization.
- Reconcile reported revenue and expense trends under ASC 606 with prior-period results, which were not restated.