Company Quick10K Filing
Biglari
Price1.00 EPS-74,223,000
Shares-0 P/E-0
MCap-0 P/FCF-0
Net Debt154 EBIT91
TEV154 TEV/EBIT2
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-08
10-K 2019-12-31 Filed 2020-02-24
10-Q 2019-09-30 Filed 2019-11-01
10-Q 2019-06-30 Filed 2019-08-02
10-Q 2019-03-31 Filed 2019-05-03
10-K 2018-12-31 Filed 2019-02-25
10-Q 2018-09-30 Filed 2018-11-02
10-Q 2018-06-30 Filed 2018-08-03
10-Q 2018-03-31 Filed 2018-05-04
8-K 2020-05-08
8-K 2020-02-22
8-K 2019-11-01
8-K 2019-10-31
8-K 2019-09-09
8-K 2019-08-02
8-K 2019-05-03
8-K 2019-04-25
8-K 2019-02-23
8-K 2018-11-02
8-K 2018-08-03
8-K 2018-05-04

BH 10Q Quarterly Report

Part 1 - Financial Information
Item 1. Financial Statements
Note 1. Summary of Significant Accounting Policies
Note 2. New Accounting Standards
Note 3. Earnings per Share
Note 4. Investments
Note 5. Investment Partnerships	
Note 6. Property and Equipment
Note 7. Goodwill and Other Intangible Assets
Note 8. Restaurant Operations Revenues
Note 9. Accounts Payable and Accrued Expenses
Note 10. Notes Payable and Other Borrowings
Note 11. Leased Assets and Lease Commitments
Note 12. Accumulated Other Comprehensive Income
Note 13. Income Taxes
Note 14. Commitments and Contingencies
Note 15. Fair Value of Financial Assets
Note 16. Related Party Transactions
Note 17. Business Segment Reporting
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.01 ex3101to10q07428007_05082020.htm
EX-31.02 ex3102to10q07428007_05082020.htm
EX-32.01 ex3201to10q07428007_05082020.htm

Biglari Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
1.21.00.70.50.20.02016201720182020
Assets, Equity
0.30.20.10.1-0.0-0.12016201720182020
Rev, G Profit, Net Income
0.10.10.0-0.0-0.1-0.12016201720182020
Ops, Inv, Fin

10-Q 1 form10q07428007_05082020.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

 ☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

 

or

 

 ☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____

 

Commission file number 001-38477

 

BIGLARI HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

INDIANA   82-3784946
(State or other jurisdiction of incorporation)   (I.R.S. Employer Identification No.)

 

17802 IH 10 West, Suite 400

San Antonio, Texas

 

 

78257

(Address of principal executive offices)   (Zip Code)

 

(210) 344-3400

Registrant’s telephone number, including area code

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbols  Name of each exchange on which registered

Class A Common Stock, no par value

BH.A

New York Stock Exchange

Class B Common Stock, no par value BH New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and an “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer x Non-accelerated filer o  Smaller reporting company o Emerging growth company o 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Number of shares of common stock outstanding as of May 6, 2020:

Class A common stock –   206,864 
Class B common stock –   2,068,640 

 

 

 

BIGLARI HOLDINGS INC.

INDEX 

 

   
      Page No.
Part I – Financial Information    
       
Item 1. Financial Statements      
  Consolidated Balance Sheets — March 31, 2020 and December 31, 2019   1  
  Consolidated Statements of Earnings — First Quarter 2020 and 2019   2  
  Consolidated Statements of Comprehensive Income — First Quarter 2020 and 2019   2  
  Consolidated Statements of Cash Flows — First Quarter 2020 and 2019   3  
  Consolidated Statements of Changes in Shareholders’ Equity — First Quarter 2020 and 2019   4  
  Notes to Consolidated Financial Statements   5  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   17  
Item 3. Quantitative and Qualitative Disclosures about Market Risk   25  
Item 4. Controls and Procedures   25  
         
Part II – Other Information      
         
Item 1. Legal Proceedings   26  
Item 1A. Risk Factors   26  
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   26  
Item 3. Defaults Upon Senior Securities   26  
Item 4. Mine Safety Disclosures   26  
Item 5. Other Information   26  
Item 6. Exhibits   26  
Signatures   27  

 

 

 

PART 1 – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

 

BIGLARI HOLDINGS INC.

 

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

 

   March 31,
2020
  December 31,
2019
    (Unaudited)      
Assets          
Current assets:          
Cash and cash equivalents  $33,281   $67,772 
Investments   81,252    44,856 
Receivables   17,440    21,640 
Inventories   4,001    4,674 
Other current assets   6,809    6,449 
Total current assets   142,783    145,391 
Property and equipment   337,625    350,627 
Operating lease assets   57,209    59,719 
Goodwill and other intangible assets   78,780    67,389 
Investment partnerships   318,689    505,542 
Other assets   12,542    10,641 
Total assets  $947,628   $1,139,309 
           
Liabilities and shareholders’ equity          
Liabilities          
Current liabilities:          
Accounts payable and accrued expenses  $133,840   $121,079 
Current portion of operating lease liabilities   11,738    11,635 
Current portion of notes payable and other borrowings   164,632    7,103 
Total current liabilities   310,210    139,817 
Long-term notes payable and other borrowings   80,566    263,182 
Operating lease liabilities   50,345    53,271 
Deferred taxes   15,689    54,230 
Asset retirement obligations   9,652    10,447 
Other liabilities   1,976    2,064 
Total liabilities   468,438    523,011 
           
Shareholders’ equity          
Common stock   1,138    1,138 
Additional paid-in capital   381,788    381,788 
Retained earnings   473,154    611,039 
Accumulated other comprehensive loss   (3,122)   (2,810)
Treasury stock, at cost   (373,768)   (374,857)
Biglari Holdings Inc. shareholders’ equity   479,190    616,298 
Total liabilities and shareholders’ equity  $947,628   $1,139,309 

 

See accompanying Notes to Consolidated Financial Statements.

1

 

BIGLARI HOLDINGS INC.

 

CONSOLIDATED STATEMENTS OF EARNINGS

(dollars in thousands except per share amounts)

   First Quarter
   2020  2019
   (Unaudited)
Revenues      
Restaurant operations  $114,144   $173,775 
Insurance premiums and other   9,674    7,207 
Oil and gas   11,374    —   
Media and licensing   508    877 
    135,700    181,859 
Cost and expenses          
Restaurant cost of sales   89,916    152,449 
Insurance losses and underwriting expenses   6,312    5,625 
Oil and gas production costs   3,076    —   
Media and licensing costs   506    948 
Selling, general and administrative   21,573    32,991 
Impairments   10,300    1,900 
Depreciation and amortization   10,062    5,471 
    141,745    199,384 
Other income (expenses)          
Interest expense   (2,474)   (3,058)
Interest on finance leases and obligations   (1,800)   (2,009)
Gain on debt extinguishment   4,346    —   
Investment partnership gains (losses)   (175,742)   34,154 
Total other income (expenses)   (175,670)   29,087 
Earnings (loss) before income taxes   (181,715)   11,562 
Income tax expense (benefit)   (43,830)   1,744 
Net earnings (loss)  $(137,885)  $9,818 
Earnings per share          
Net earnings (loss) per equivalent Class A share *  $(400.37)  $28.36 

 

*Net earnings (loss) per equivalent Class B share outstanding are one-fifth of the equivalent Class A share or $(80.07) for the first quarter of 2020 and $5.67 for the first quarter of 2019.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in thousands)

   First Quarter
   2020  2019
   (Unaudited)
  
Net earnings (loss)  $(137,885)  $9,818 
Other comprehensive income:          
Foreign currency translation   (312)   (304)
Other comprehensive income (loss), net   (312)   (304)
Total comprehensive income (loss)  $(138,197)  $9,514 

 

 

See accompanying Notes to Consolidated Financial Statements.

2

 

BIGLARI HOLDINGS INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

   First Quarter
   2020  2019
   (Unaudited)
Operating activities          
Net earnings (loss)  $(137,885)  $9,818 
Adjustments to reconcile net earnings (loss) to operating cash flows:          
Depreciation and amortization   10,062    5,471 
Provision for deferred income taxes   (38,132)   (7,415)
Asset impairments and other non-cash expenses   10,548    2,139 
Gains on disposal of assets   (1,272)   (185)
Gain on debt extinguishment   (4,346)   —   
Investment partnership (gains) losses   175,742    (34,154)
Distributions from investment partnerships   42,300    —   
Changes in receivables and inventories   7,465    7,842 
Changes in other assets   1,891    53 
Changes in accounts payable and accrued expenses   (15,896)   6,394 
Net cash provided by (used in) operating activities   50,477    (10,037)
Investing activities          
Capital expenditures   (6,473)   (3,564)
Proceeds from property and equipment disposals   1,824    320 
Acquisition of business, net of cash acquired   (34,240)   —   
Distributions from investment partnerships   —      40,000 
Purchases of limited partner interests   (30,100)   (40,000)
Purchases of investments   (105,430)   (23,510)
Redemptions of fixed maturity securities   108,845    21,300 
Net cash used in investing activities   (65,574)   (5,454)
Financing activities          
Proceeds from revolving credit facility   50    —   
Principal payments on long-term debt   (17,933)   (550)
Principal payments on direct financing lease obligations   (1,525)   (1,418)
Net cash used in financing activities   (19,408)   (1,968)
Effect of exchange rate changes on cash   14    (5)
Decrease in cash, cash equivalents and restricted cash   (34,491)   (17,464)
Cash, cash equivalents and restricted cash at beginning of year   70,696    55,010 
Cash, cash equivalents and restricted cash at end of first quarter  $36,205   $37,546 

 

See accompanying Notes to Consolidated Financial Statements.

 


3

 

BIGLARI HOLDINGS INC.

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(dollars in thousands)

 

   Common Stock  Additional Paid-In Capital  Retained Earnings  Accumulated
Other Comprehensive Income (Loss)
  Treasury Stock  Total
Balance at December 31, 2019  $1,138   $381,788   $611,039   $(2,810)  $(374,857)  $616,298 
Net earnings (loss)             (137,885)             (137,885)
Other comprehensive income, net                  (312)        (312)
Adjustment to treasury stock for                              
  holdings in investment partnerships                       1,089    1,089 
Balance at March 31, 2020  $1,138   $381,788   $473,154   $(3,122)  $(373,768)  $479,190 
                               
    Common Stock    Additional Paid-In Capital    Retained Earnings    Accumulated
Other
Comprehensive Income (Loss)
    Treasury Stock       Total 
Balance at December 31, 2018  $1,138   $381,904   $564,160   $(2,516)  $(374,231)  $570,455 
Net earnings (loss)             9,818              9,818 
Adoption of accounting standards             1,499              1,499 
Other comprehensive income, net                  (304)        (304)
Adjustment to treasury stock for                              
holdings in investment partnerships                       (114)   (114)
Balance at March 31, 2019  $1,138   $381,904   $575,477   $(2,820)  $(374,345)  $581,354 

 

See accompanying Notes to Consolidated Financial Statements.

4

 

BIGLARI HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(dollars in thousands, except share and per share data)

 

Note 1. Summary of Significant Accounting Policies

 

Description of Business

The accompanying unaudited consolidated financial statements of Biglari Holdings Inc. (“Biglari Holdings” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) applicable to interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In our opinion, all adjustments considered necessary to present fairly the results of the interim periods have been included and consist only of normal recurring adjustments. The results for the interim periods shown are not necessarily indicative of results for the entire fiscal year. The financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2019.

 

Biglari Holdings is a holding company owning subsidiaries engaged in a number of diverse business activities, including property and casualty insurance, media and licensing, restaurants, and oil and gas. The Company’s largest operating subsidiaries are involved in the franchising and operating of restaurants. Biglari Holdings is founded and led by Sardar Biglari, Chairman and Chief Executive Officer of the Company. The Company’s long-term objective is to maximize per-share intrinsic value. All major investment and capital allocation decisions are made for the Company and its subsidiaries by Mr. Biglari.

 

As of March 31, 2020, Mr. Biglari’s beneficial ownership was approximately 64.4% of the Company’s outstanding Class A common stock and 55.4% of the Company’s outstanding Class B common stock.

 

The novel coronavirus (“COVID-19”) was declared a pandemic by the World Health Organization, which caused governments to contain its spread, thereby significantly affecting our operating businesses beginning in March and will likely adversely affect nearly all of our operations in the second quarter. The risks and uncertainties resulting from the pandemic that may affect our future earnings, cash flows and financial condition include the nature and duration of the curtailment or closure and the long-term effect on the demand for our products and services.

 

Business Acquisition

On March 9, 2020, Biglari Holdings acquired the stock of Southern Pioneer Property & Casualty Insurance Company, and its agency, Southern Pioneer Insurance Agency, Inc. (collectively “Southern Pioneer”). Southern Pioneer underwrites specialty insurance products including garage liability insurance, commercial property coverage for auto dealers as well as homeowners, dwelling fire insurance and credit-related insurance coverages. The financial results for Southern Pioneer from the acquisition date to the end of the first quarter are included in the Company’s consolidated financial statements. The acquisition date fair values of assets and liabilities of Southern Pioneer are provisional and subject to revision as the related valuations are completed. Pro-forma financial information of Southern Pioneer is not material.

 

On September 9, 2019, a wholly-owned subsidiary of the Company, Southern Oil Company, acquired the stock of Southern Oil of Louisiana Inc. (collectively “Southern Oil”). Southern Oil primarily operates oil and natural gas properties offshore in the shallow waters of the Gulf of Mexico. Pro-forma financial information of Southern Oil is not material.

 

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries including Steak n Shake Inc. (“Steak n Shake”), Western Sizzlin Corporation (“Western Sizzlin”), Maxim Inc. (“Maxim”), Southern Oil, First Guard Insurance Company (“First Guard”), and Southern Pioneer.  Intercompany accounts and transactions have been eliminated in consolidation. 

5

 

Note 2. New Accounting Standards

 

In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP; however, ASU 2016-13 requires that credit losses be presented as an allowance rather than as a write-down. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2019. The Company adopted ASU 2016-13 effective January 1, 2020. The impact of this standard is not material to the Company’s financial statements and related disclosures.

 

Note 3. Earnings Per Share

 

Earnings per share of common stock is based on the weighted average number of shares outstanding during the year. The shares of Company stock attributable to our limited partner interest in The Lion Fund, L.P. and The Lion Fund II, L.P. (collectively, the “investment partnerships”) — based on our proportional ownership during this period — are considered treasury stock on the consolidated balance sheet and thereby deemed not to be included in the calculation of weighted average common shares outstanding. However, these shares are legally outstanding.

 

The following table presents shares authorized, issued and outstanding on March 31, 2020 and December 31, 2019.

 

   March 31, 2020  December 31, 2019
    Class A    Class B    Class A    Class B 
Common stock authorized   500,000    10,000,000    500,000    10,000,000 
Common stock issued and outstanding   206,864    2,068,640    206,864    2,068,640 

 

The Company has applied the “two-class method” of computing earnings per share as prescribed in ASC 260, “Earnings Per Share.” 

 

On an equivalent Class A common stock basis, there were 620,592 shares outstanding as of March 31, 2020 and December 31, 2019. There are no dilutive securities outstanding.

 

For financial reporting purposes, the proportional ownership of the Company’s common stock owned by the investment partnerships is excluded in the earnings per share calculation. After giving effect for the investment partnerships’ proportional ownership of common stock, the equivalent Class A weighted average number of common shares during the first quarters of 2020 and 2019 were 344,391 and 346,223, respectively.

 

Note 4. Investments

Available for sale investments were $76,789 and $40,393 as of March 31, 2020 and December 31, 2019, respectively. Investments in equity securities and a related derivative position of $4,463 are also included in investments. The investments are recorded at fair value. The fair value of investments acquired with Southern Pioneer was $36,876.

 

Note 5. Investment Partnerships

The Company reports on the limited partnership interests in investment partnerships under the equity method of accounting. We record our proportional share of equity in the investment partnerships but exclude Company common stock held by said partnerships. The Company’s pro-rata share of its common stock held by the investment partnerships is recorded as treasury stock even though they are legally outstanding.  The Company records gains/losses from investment partnerships (inclusive of the investment partnerships’ unrealized gains and losses on their securities) in the consolidated statements of earnings based on our carrying value of these partnerships. The fair value is calculated net of the general partner’s accrued incentive fees. Gains and losses on Company common stock included in the earnings of these partnerships are eliminated because they are recorded as treasury stock. 

 

Biglari Capital Corp. (“Biglari Capital”) is the general partner of the investment partnerships and is an entity solely owned by Mr. Biglari. 

6

 

Note 5. Investment Partnerships (continued)

 

The fair value and adjustment for Company common stock held by the investment partnerships to determine the carrying value of our partnership interest is presented below.

 

   Fair Value  Company Common Stock  Carrying Value
Partnership interest at December 31, 2019  $666,123   $160,581   $505,542 
Investment partnership gains (losses)   (261,708)   (85,966)   (175,742)
Contributions (net of distributions) to investment partnerhips   (12,200)        (12,200)
Increase in proportionate share of Company stock held        (1,089)   1,089 
Partnership interest at March 31, 2020  $392,215   $73,526   $318,689 
                
    Fair Value    Company Common Stock    Carrying Value 
Partnership interest at December 31, 2018  $715,102   $157,622   $557,480 
Investment partnership gains   73,096    38,942    34,154 
Increase in proportionate share of Company stock held        114    (114)
Partnership interest at March 31, 2019  $788,198   $196,678   $591,520 

 

The carrying value of the investment partnerships net of deferred taxes is presented below.

 

  

March 31,

2020

 

December 31,

2019

Carrying value of investment partnerships  $318,689   $505,542 
Deferred tax liability related to investment partnerships   (17,893)   (56,518)
Carrying value of investment partnerships net of deferred taxes  $300,796   $449,024 

 

The Company’s proportionate share of Company stock held by investment partnerships at cost is $373,768 and $374,857 at March 31, 2020 and December 31, 2019, respectively, and is recorded as treasury stock.

 

The carrying value of the partnership interest approximates fair value adjusted by the value of held Company stock. Fair value is according to our proportional ownership interest of the fair value of investments held by the investment partnerships. The fair value measurement is classified as level 3 within the fair value hierarchy.

 

Gains/losses from investment partnerships recorded in the Company’s consolidated statements of earnings are presented below.

 

    First Quarter 
    2020    2019 
Gains (losses) on investment partnership  $(175,742)  $34,154 
Tax expense (benefit)   (41,383)   7,917 
Net earnings (loss)  $(134,359)  $26,237 

 

On December 31 of each year, the general partner of the investment partnerships, Biglari Capital, will earn an incentive reallocation fee for the Company’s investments equal to 25% of the net profits above an annual hurdle rate of 6% over the previous high-water mark. Our policy is to accrue an estimated incentive fee throughout the year. The total incentive reallocation from Biglari Holdings to Biglari Capital includes gains on the Company’s common stock. Gains and losses on the Company’s common stock and the related incentive reallocations are eliminated in our financial statements. Our investments in these partnerships are committed on a rolling 5-year basis.

 

There were no incentive reallocations from Biglari Holdings to Biglari Capital during the first quarters of 2020 and 2019. 

7

 

Note 5. Investment Partnerships (continued)

 

Summarized financial information for The Lion Fund, L.P. and The Lion Fund II, L.P. is presented below.

 

  Equity in Investment Partnerships 
    Lion Fund    Lion Fund II 
Total assets as of March 31, 2020  $71,735   $393,855 
Total liabilities as of March 31, 2020  $682   $27,384 
Revenue for the first quarter ended March 31, 2020  $(45,894)  $(248,460)
Earnings for the first quarter ended March 31, 2020  $(45,910)  $(249,573)
Biglari Holdings’ ownership interest as of March 31, 2020   66.1%   93.1%
           
Total assets as of December 31, 2019  $117,135   $758,663 
Total liabilities as of December 31, 2019  $158   $114,639 
Revenue for the first quarter ended March 31, 2019  $19,764   $67,550 
Earnings for the first quarter ended March 31, 2019  $19,748   $65,102 
Biglari Holdings’ ownership interest as of March 31, 2019   66.1%   92.2%

 

Revenue in the above summarized financial information of the investment partnerships includes investment income and unrealized gains and losses on investments.

 

Note 6. Property and Equipment

Property and equipment is composed of the following.

 

  

March 31,

 2020

 

December 31,

2019

Land  $150,345   $150,147 
Buildings   140,480    144,243 
Land and leasehold improvements   150,861    157,141 
Equipment   196,654    196,264 
Oil and gas properties   78,435    77,475 
Construction in progress   3,737    3,789 
    720,512    729,059 
Less accumulated depreciation and amortization   (382,887)   (378,432)
Property and equipment, net  $337,625   $350,627 

 

Depletion expense related to oil and gas properties was $4,737 during the first quarter of 2020 and is included in depreciation and amortization within the consolidated statement of earnings.

 

The COVID-19 pandemic had an adverse effect on our restaurant operations, thereby resulting in the evaluation of company-operated restaurants for recoverability. Consequently, the Company recorded impairment charges of $10,300 for the first quarter of 2020 because of the decision to permanently close 51 Steak n Shake restaurants as well as the expected impact of the COVID-19 pandemic on the future operating performance of other company-operated restaurants. The Company recorded an impairment to long-lived assets of $1,900 in the first quarter of 2019 primarily related to Steak n Shake closed stores. The fair value of the long-lived assets was determined based on Level 3 inputs using a discounted cash flow model.

The COVID-19 pandemic has caused oil demand to significantly decrease, creating oversupplied markets, and resulting in lower commodity prices and margins. The Company evaluated the potential impact on its oil and gas properties, but concluded they were not impaired during the first quarter of 2020. However, protracted low commodity prices may require impairments in future periods.

 

The duration and extent of the COVID-19 pandemic cannot be reasonably estimated at this time. The risks and uncertainties resulting from the pandemic may lead to future impairment of long-lived assets including right of use assets. In addition, significant estimates and assumptions used in the evaluation of long-lived assets for impairment may be subject to significant adjustments in future periods. 

8

 

Note 7. Goodwill and Other Intangible Assets

Goodwill

Goodwill consists of the excess of the purchase price over the fair value of the net assets acquired in connection with business acquisitions. The Company purchased Southern Pioneer on March 9, 2020. The preliminary purchase price allocation reflects goodwill of $11,865.

 

A reconciliation of the change in the carrying value of goodwill is as follows.

 

       March 31, 2020
Balance at beginning of year      $40,040 
Goodwill from acquisition       11,865 
Change in foreign exchange rates during the first quarter of 2020       (11)
Balance at end of period      $51,894 

 

We evaluate goodwill and any indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. Goodwill impairment occurs when the estimated fair value of goodwill is less than its carrying value. The valuation methodology and underlying financial information included in our determination of fair value require significant management judgments. We use both market and income approaches to derive fair value. The judgments in these two approaches include, but are not limited to, comparable market multiples, long-term projections of future financial performance, and the selection of appropriate discount rates used to determine the present value of future cash flows. Changes in such estimates or the application of alternative assumptions could produce significantly different results. No impairment charges for goodwill were recorded in the first quarters of 2020 or 2019.

 

In response to the adverse effects of the COVID-19 pandemic, we considered whether goodwill needed to be evaluated for impairment as of March 31, 2020, specifically related to goodwill for certain restaurant reporting units.  Making estimates of the fair value of reporting units at this time are significantly affected by assumptions on the severity, duration and long-term effects of the pandemic on the reporting unit’s operations.  We considered the available facts and made qualitative assessments and judgments for what we believed represent reasonably possible outcomes. Although the fair values of certain of these reporting units declined since the time that the most recent annual impairment tests were conducted, we concluded it is more likely than not that goodwill was not impaired as of March 31, 2020.  However, COVID-19 pandemic events will continue to evolve and the negative effects on our operations could prove to be worse than we currently estimate and lead us to record goodwill or indefinite-lived asset impairment charges prior to the next annual impairment review.

 

Other Intangible Assets

Other intangible assets are composed of the following.

 

   March 31, 2020  December 31, 2019
   Gross carrying amount  Accumulated amortization  Total  Gross carrying amount  Accumulated amortization  Total
Franchise agreement  $5,310   $(5,310)  $—     $5,310   $(5,178)  $132 
Other   810    (796)   14    810    (792)   18 
Total   6,120    (6,106)   14    6,120    (5,970)   150 
Intangible assets with indefinite lives:                              
Trade names   15,876    —      15,876    15,876    —      15,876 
Other assets with indefinite lives   10,996    —      10,996    11,323    —      11,323 
Total intangible assets  $32,992   $(6,106)  $26,886   $33,319   $(5,970)  $27,349 

 

Intangible assets subject to amortization consist of franchise agreements connected with the purchase of Western Sizzlin as well as rights to favorable leases related to prior acquisitions. These intangible assets are being amortized over their estimated weighted average of useful lives ranging from eight to twelve years. Amortization expense for the first quarters of 2020 and 2019 was $136 and $137, respectively. The Company’s intangible assets with definite lives will fully amortize in 2020. Intangible assets with indefinite lives consist of trade names, franchise rights as well as lease rights.

9

 

Note 8. Restaurant Operations Revenues

 

Restaurant operations revenues were as follows.

 

   First Quarter
   2020  2019
Net sales  $104,728   $165,631 
Franchise royalties and fees   5,211    6,654 
Franchise partner fees   3,344    258 
Other   861    1,232 
   $114,144   $173,775 

 

Net sales

Net sales are composed of retail sales of food through company-operated stores. Company-operated store revenues are recognized, net of discounts and sales taxes, when our obligation to perform is satisfied at the point of sale. Sales taxes related to these sales are collected from customers and remitted to the appropriate taxing authority and are not reflected in the Company’s consolidated statements of earnings as revenue.

 

Franchise royalties and fees

Franchise royalties and fees are composed of royalties and fees from Steak n Shake and Western Sizzlin franchisees. Royalties are based upon a percentage of sales of the franchise restaurant and are recognized as earned. Franchise royalties are billed on a monthly basis. Initial franchise fees when a new restaurant opens or at the start of a new franchise term are recorded as deferred revenue when received and recognized as revenue over the term of the franchise agreement. Our advertising arrangements with franchisees are reported in franchise royalties and fees. 

 

Franchise partner fees

Steak n Shake is in the process of transitioning company-operated restaurants to franchise partners. The franchise agreement stipulates that the franchisee make an upfront investment totaling ten thousand dollars. Potential franchise partners are screened based on entrepreneurial attitude and ability, but they become franchise partners based on achievement. Each must meet the gold standard in service. Franchise partners are required to be hands-on operators. We limit a franchisee to a single location. As the franchisor Steak n Shake assesses a fee of up to 15% of sales as well as 50% of profits.

 

Gift card revenue

Restaurant operations sells gift cards to customers which can be redeemed for retail food sales within our stores. Gift cards are recorded as deferred revenue when issued and are subsequently recorded as net sales upon redemption. Restaurant operations estimates breakage related to gift cards when the likelihood of redemption is remote. This estimate utilizes historical trends based on the vintage of the gift card. Breakage on gift cards is recorded as other revenue in proportion to the rate of gift card redemptions by vintage. 

 

Note 9. Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses include the following.

 

  

March 31,

 2020

 

December 31,

2019

Accounts payable  $36,289   $32,626 
Gift card liability   17,063    20,745 
Salaries, wages, and vacation   5,328    10,667 
Taxes payable   20,030    29,275 
Self-insurance accruals   21,442    11,070 
Deferred revenue   25,395    10,454 
Other   8,293    6,242 
Accounts payable and accrued expenses  $133,840   $121,079 

10

 

 Note 10. Notes Payable and Other Borrowings

 

Notes payable and other borrowings include the following.

 

Current portion of notes payable and other borrowings 

March 31,

2020

 

December 31,

 2019

Notes payable  $159,219   $2,200 
Unamortized original issue discount and debt issuance costs   (986)   (982)
Western Sizzlin revolver   50    —   
Finance obligations   4,800    4,252 
Finance lease liabilities   1,549    1,633 
Total current portion of notes payable and other borrowings  $164,632   $7,103 
           
Long-term notes payable and other borrowings          
Notes payable  $—     $179,298 
Unamortized original issue discount and debt issuance costs   —      (252)
Finance obligations   73,309    74,497 
Finance leases liabilities   7,257    9,639 
Total long-term notes payable and other borrowings  $80,566   $263,182 

  

Steak n Shake Credit Facility

On March 19, 2014, Steak n Shake and its subsidiaries entered into a credit agreement which provided for a senior secured term loan facility in an aggregate principal amount of $220,000. The term loan is scheduled to mature on March 19, 2021. As of March 31, 2020, $159,219 was outstanding. The Company is evaluating refinancing options. Alternative financing may not be available on terms commensurate with its current financing arrangement. In addition, the duration of the pandemic could have a material adverse effect on financing options or Steak n Shake’s ability to comply with the terms of its credit agreement. Biglari Holdings is not a guarantor under the credit facility.

 

The term loan amortizes in equal quarterly installments at an annual rate of 1.0% of the original principal amount of the term loan, subject to mandatory prepayments from excess cash flow, asset sales and other events described in the credit agreement. The balance will be due at maturity.

 

Interest on the term loan is based on a Eurodollar rate plus an applicable margin of 3.75% or on the prime rate plus an applicable margin of 2.75%. The interest rate on the term loan was 5.36% as of March 31, 2020.

 

The credit agreement includes customary affirmative and negative covenants and events of default. Steak n Shake’s credit facility contains restrictions on its ability to pay dividends to Biglari Holdings.

 

The term loan is secured by first priority security interests in substantially all the assets of Steak n Shake. Disruptions in debt capital markets that restrict access to funding when needed could adversely affect the results of operations, liquidity and capital resources of Steak n Shake.

 

The fair value of long-term debt, excluding capitalized lease obligations, was approximately $80,000 at March 31, 2020. The fair value of our debt was estimated based on quoted market prices. The fair value was determined to be a Level 3 fair value measurement.

 

The Company retired $21,729 of debt on February 18, 2020.

 

Western Sizzlin Revolver

Western Sizzlin had $50 and $0 of debt outstanding under its revolver as of March 31, 2020 and December 31, 2019, respectively. 

11

 

Note 11. Leased Assets and Lease Commitments

 

A significant portion of our operating and finance lease portfolio includes restaurant locations. The Company’s operating leases with a term of 12 months or greater were recognized as operating right-of-use assets and liabilities and recorded as operating lease assets and operating lease liabilities. Historical capital leases and certain historical build-to-suit leases were reclassified from obligations under leases to finance lease assets and liabilities. Finance lease assets are recorded in property and equipment and finance lease liabilities are recorded in notes payable and other borrowings. Historical sale-and-leaseback transactions in which the Company is deemed to have a continued interest in the leased asset are recorded as property and equipment and as finance obligations. Finance obligations are recorded in notes payable and other borrowings.

 

Operating lease expense and finance lease depreciation expense are recognized on a straight-line basis over the lease term.

 

Total lease cost consists of the following.

 

   First Quarter 
   2020   2019 
Finance lease costs:          
  Amortization of right-of-use assets  $479   $492 
  Interest on lease liabilities   178    207 
Operating lease costs *   3,736    3,857 
Total lease costs  $4,393   $4,556 
           
*Includes short-term leases, variable lease costs and sublease income, which are immaterial

  

Supplemental cash flow information related to leases is as follows.

 

    First Quarter 
   2020   2019 
Cash paid for amounts included in the measurement of lease liabilities:          
Financing cash flows from finance leases  $413   $402 
Operating cash flows from finance leases  $171   $207 
Operating cash flows from operating leases  $3,993   $4,191 
Right-of-use assets obtained in exchange for lease obligations:          
Finance lease liabilities  $—     $1,097 
Operating lease liabilities  $73   $5,570 

  

Supplemental balance sheet information related to leases is as follows.

 

  

March 31,

2020

 

December 31,

2019

Finance leases:          
Property and equipment, net  $7,177   $10,783 
           
  Current portion of notes payable and other borrowings  $1,549   $1,633 
  Long-term notes payable and other borrowings   7,257    9,639 
Total finance lease liablities  $8,806   $11,272 

  

Weighted-average lease terms and discount rates are as follows.

 

   

March 31,

2020

Weighted-average remaining lease terms:    
  Finance leases    6.3 years 
  Operating leases    6.0 years 
     
Weighted-average discount rates:    
  Finance leases   7.1%
  Operating leases   6.9%

 

12

 

Note 11. Leased Assets and Lease Commitments (continued)

  

Maturities of lease liabilities as of March 31, 2020 are as follows.

 

Year  Operating Leases  Finance Leases
 2020   $11,664   $1,587 
 2021    14,945    2,116 
 2022    12,850    1,618 
 2023    11,027    1,410 
 2024    8,884    1,374 
 After 2024    17,007    2,756 
 Total lease payments    76,377    10,861 
   Less interest    14,294    2,055 
 Total lease liabilities   $62,083   $8,806 

 

Note 12. Accumulated Other Comprehensive Income

 

During the first quarters of 2020 and 2019, accumulated other comprehensive losses decreased by $312 and $304, respectively, due to changes in foreign currency translation adjustments. As of March 31, 2020 and 2019, the balances in accumulated comprehensive loss were $3,122 and $2,820, respectively. There were no reclassifications from accumulated other comprehensive income to earnings during the first quarters of 2020 and 2019.

 

Note 13. Income Taxes

In determining the quarterly provision for income taxes, the Company used a discrete effective tax rate method based on statutory tax rates for the first quarters of 2020 and 2019. Our periodic effective income tax rate is affected by the relative mix of pre-tax earnings or losses and underlying income tax rates applicable to the various taxing jurisdictions.

 

Income tax benefit for the first quarter of 2020 was $43,830 compared to an income tax expense of $1,744 for the first quarter of 2019.  The variance in income taxes between 2020 and 2019 is attributable to taxes on income generated by the investment partnerships. Investment partnership pretax losses were $175,742 during the first quarter of 2020, compared to pretax gains of $34,154 during the first quarter of 2019.

 

As of March 31, 2020 and December 31, 2019, we had $348 of unrecognized tax benefits, which are included in other liabilities in the consolidated balance sheets.

 

Note 14. Commitments and Contingencies

We are involved in various legal proceedings and have certain unresolved claims pending. We believe, based on examination of these matters and experiences to date, that the ultimate liability, if any, in excess of amounts already provided in our consolidated financial statements is not likely to have a material effect on our results of operations, financial position or cash flow.

 

On January 29, 2018, a shareholder of the Company filed a purported class action complaint against the Company and the members of our Board of Directors in the Superior Court of Hamilton County, Indiana. The shareholder generally alleges claims of breach of fiduciary duty by the members of our Board of Directors and unjust enrichment to Mr. Biglari as a result of the dual class structure.

 

On March 26, 2018, a shareholder of the Company filed a purported class action complaint against the Company and the members of our Board of Directors in the Superior Court of Hamilton County, Indiana. This shareholder generally alleges claims of breach of fiduciary duty by the members of our Board of Directors. This shareholder sought to enjoin the shareholder vote on April 26, 2018 to approve the dual class structure. On April 16, 2018, the shareholder withdrew the motion to enjoin the shareholder vote on April 26, 2018.

 

On May 17, 2018, the shareholders who filed the January 29, 2018 complaint and the March 26, 2018 complaint filed a new, consolidated complaint against the Company and the members of our Board of Directors in the Superior Court of Hamilton County, Indiana. The shareholders generally allege claims of breach of fiduciary duty by the members of our Board of Directors and unjust enrichment to Mr. Biglari arising out of the dual class structure, including the ability to vote the Company’s shares that are eliminated for financial reporting purposes. The shareholders seek, for themselves and on behalf of all other shareholders as a class, a declaration that the defendants breached their duty to the shareholders and the class, and to recover unspecified damages, pre-judgment and post-judgment interest, and an award of their attorneys’ fees and other costs.

13

 

Note 14. Commitments and Contingencies (continued)

 

On December 14, 2018, the judge of the Superior Court of Hamilton County, Indiana issued an order granting the Company’s motion to dismiss the shareholders’ lawsuits. On January 11, 2019, the shareholders filed an appeal of the judge’s order dismissing the lawsuits. On December 4, 2019, the Indiana Court of Appeals issued a unanimous decision affirming the trial court’s decision to dismiss the shareholder litigation. On January 20, 2020, the shareholders filed a petition to transfer with the Indiana Supreme Court seeking review of the decision of the Court of Appeals.  The Company opposed the petition.  On April 7, 2020, the Indiana Supreme Court denied the petition to transfer. All of the cases referenced above are completed and each case was concluded in the Company’s favor.

 

Note 15. Fair Value of Financial Assets

The fair values of substantially all of our financial instruments were measured using market or income approaches. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, the fair values presented are not necessarily indicative of the amounts that could be realized in an actual current market exchange. The use of alternative market assumptions and/or estimation methodologies may have a material effect on the estimated fair value.

 

The hierarchy for measuring fair value consists of Levels 1 through 3, which are described below.

 

·Level 1 – Inputs represent unadjusted quoted prices for identical assets or liabilities exchanged in active markets.

 

·Level 2 – Inputs include directly or indirectly observable inputs (other than Level 1 inputs) such as quoted prices for similar assets or liabilities exchanged in active or inactive markets; quoted prices for identical assets or liabilities exchanged in inactive markets; other inputs that may be considered in fair value determinations of the assets or liabilities, such as interest rates and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Pricing evaluations generally reflect discounted expected future cash flows, which incorporate yield curves for instruments with similar characteristics, such as credit ratings, estimated durations and yields for other instruments of the issuer or entities in the same industry sector.

 

·Level 3 – Inputs include unobservable inputs used in the measurement of assets and liabilities. Management is required to use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets or liabilities and we may be unable to corroborate the related observable inputs. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in pricing assets or liabilities.

 

The following methods and assumptions were used to determine the fair value of each class of the following assets recorded at fair value in the consolidated balance sheets:

 

Cash equivalents: Cash equivalents primarily consist of money market funds which are classified within Level 1 of the fair value hierarchy.

 

Equity securities: The Company’s investments in equity securities are classified within Level 1 of the fair value hierarchy. 

 

Bonds: The Company’s investments in bonds are classified within Level 1 of the fair value hierarchy.

 

Non-qualified deferred compensation plan investments: The assets of the non-qualified plan are set up in a rabbi trust. They represent mutual funds and publicly traded securities, each of which are classified within Level 1 of the fair value hierarchy.

 

Derivative instruments: Options related to equity securities are marked to market each reporting period and are classified within Levels 1 and 2 of the fair value hierarchy depending on the instrument.

14

 

Note 15. Fair Value of Financial Assets (continued)

 

As of March 31, 2020 and December 31, 2019, the fair values of financial assets were as follows.

 

   March 31, 2020  December 31, 2019
       
    Level 1    Level 2    Level 3    Total    Level 1    Level 2    Level 3    Total 
Assets                                        
Cash equivalents  $23,138   $—     $—     $23,138   $43,095   $—     $—     $43,095 
Equity securities   5,605    5,714    —      11,319    25    6,397    —      6,422 
Bonds   49,518    2,500    —      52,018    38,911    —      —      38,911 
Options on equity securities   —      2,849    —      2,849    —      2,166    —      2,166 
Non-qualified deferred compensation plan investments   1,541    —      —      1,541    2,175    —      —      2,175 
Total assets at fair value  $79,802   $11,063   $—     $90,865   $84,206   $8,563   $—     $92,769 

   

There were no changes in our valuation techniques used to measure fair values on a recurring basis.

 

Note 16. Related Party Transactions

Services Agreement

During 2017, the Company entered into a services agreement with Biglari Enterprises LLC and Biglari Capital Corp. (collectively, the “Biglari Entities”) under which the Biglari Entities provide services to the Company. The services agreement has a five-year term, effective on October 1, 2017. The fixed fee of $700 per month can be adjusted annually. The monthly fee will remain at $700 during 2020. The Company paid Biglari Enterprises $2,100 in service fees during the first quarter of 2020 and 2019. The services agreement does not alter the hurdle rate connected with the incentive reallocation paid to Biglari Capital Corp. The Biglari Entities are owned by Mr. Biglari.

 

Incentive Agreement Amendment

The Incentive Agreement was amended on March 26, 2019 to remove the annual limitation on Mr. Biglari’s incentive compensation, as well as the requirement of Mr. Biglari to use 30% of his incentive payments to purchase shares of the Company. In connection with the amendment, the change of control and severance provisions contained in the Incentive Agreement were eliminated and the License Agreement was terminated. The amendment became effective in 2019.

 

Note 17. Business Segment Reporting

 

Our reportable business segments are organized in a manner that reflects how management views those business activities. Our restaurant operations include Steak n Shake and Western Sizzlin. Our insurance operations include First Guard and Southern Pioneer. The Company also reports segment information for Maxim and Southern Oil. Other business activities not specifically identified with reportable business segments are presented in corporate. We report our earnings from investment partnerships separate from our corporate expenses. We assess and measure segment operating results based on segment earnings as disclosed below. Segment earnings from operations are neither necessarily indicative of cash available to fund cash requirements, nor synonymous with cash flow from operations. The tabular information that follows shows data of our reportable segments reconciled to amounts reflected in the consolidated financial statements.

15

 

Note 17. Business Segment Reporting (continued)

 

A disaggregation of our consolidated data for the first quarter of 2020 and 2019 is presented in the tables which follow.

 

   Revenue
   First Quarter 
    2020    2019 
Operating Businesses:          
Restaurant Operations:          
Steak n Shake  $111,113   $170,111 
Western Sizzlin   3,031    3,664 
Total Restaurant Operations   114,144    173,775 
           
Insurance Operations:          
First Guard   7,884    7,207 
Southern Pioneer   1,790    —   
Total Insurance Operations   9,674    7,207 
           
Southern Oil   11,374    —   
           
Maxim   508    877 
   $135,700   $181,859 

 

 

   Earnings (Losses) Before Income Taxes
   First Quarter 
    2020    2019 
Operating Businesses:          
Restaurant Operations:          
Steak n Shake  $(10,937)  $(18,858)
Western Sizzlin   37    383 
Total Restaurant Operations   (10,900)   (18,475)
           
Insurance Operations:          
First Guard   2,441    1,544 
Southern Pioneer   472    —   
Total Insurance Operations   2,913    1,544 
           
Southern Oil   2,470    —   
           
Maxim   (32)   (112)
           
Total Operating Businesses   (5,549)   (17,043)
Corporate and Investments:          
Corporate   (2,296)   (2,491)
Investment partnership gains (losses)   (175,742)   34,154 
Total Corporate and Investments   (178,038)   31,663 
           
Interest expense on notes payable and debt extinguishment gains   1,872    (3,058)
   $(181,715)  $11,562 

  

16

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

(dollars in thousands except per share data)

 

Overview

 

Biglari Holdings is a holding company owning subsidiaries engaged in a number of diverse business activities, including property and casualty insurance, media and licensing, restaurants, and oil and gas. The Company’s largest operating subsidiaries are involved in the franchising and operating of restaurants. Biglari Holdings is founded and led by Sardar Biglari, Chairman and Chief Executive Officer of the Company. The Company’s long-term objective is to maximize per-share intrinsic value. All major investment and capital allocation decisions are made for the Company and its subsidiaries by Mr. Biglari.

 

As of March 31, 2020, Mr. Biglari’s beneficial ownership was approximately 64.4% of the Company’s outstanding Class A common stock and 55.4% of the Company’s outstanding Class B common stock.

 

On March 9, 2020, Biglari Holdings acquired the stock of Southern Pioneer Property & Casualty Insurance Company and its agency, Southern Pioneer Insurance Agency, Inc. (collectively “Southern Pioneer”). The financial results for Southern Pioneer from the acquisition date to the end of the first quarter are included in the Company’s consolidated financial statements.

 

On September 9, 2019, a wholly-owned subsidiary of the Company, Southern Oil Company, acquired the stock of Southern Oil of Louisiana Inc. (collectively “Southern Oil”). Southern Oil primarily operates oil and natural gas properties offshore in the shallow waters of the Gulf of Mexico.

 

Net earnings (loss) attributable to Biglari Holdings shareholders are disaggregated in the table that follows. Amounts are recorded after deducting income taxes.

 

    First Quarter 
    2020    2019 
Operating businesses:          
Restaurant  $(7,942)  $(13,343)
Insurance   2,316    1,216 
Oil and gas   2,201    —   
Media and licensing   (25)   (84)
Total operating businesses   (3,450)   (12,211)
Corporate   (1,490)   (1,914)
Investment partnership gains (losses)   (134,359)   26,237 
Interest expense on notes payable and debt extinguishment   1,414    (2,294)
   $(137,885)  $9,818 

  

Restaurant businesses include Steak n Shake Inc. (“Steak n Shake”) and Western Sizzlin Corporation (“Western Sizzlin”). Steak n Shake and Western Sizzlin are engaged in the ownership, operation, and franchising of restaurants.

 

Insurance businesses are composed of First Guard Insurance Company (“First Guard”) and Southern Pioneer. First Guard is a direct underwriter of commercial trucking insurance, selling physical damage and nontrucking liability insurance to truckers. Southern Pioneer underwrites specialty insurance products including garage liability insurance, commercial property coverage for auto dealers as well as homeowners, dwelling fire insurance and credit-related insurance coverages.

 

Media and licensing business is composed of Maxim Inc. (“Maxim”).

 

Oil and gas business is composed of Southern Oil. Southern Oil primarily operates oil and natural gas properties offshore in the shallow waters of the Gulf of Mexico.

17

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Restaurants

 

Steak n Shake and Western Sizzlin comprise 605 company-operated and franchise restaurants as of March 31, 2020.

 

http:||content.edgar-online.com|edgar_conv_img|2009|12|14|0001144204-09-064464_SPACER.GIF  Steak n Shake  Western Sizzlin   
   Company- operated  Franchise
Partner
  Traditional
Franchise
  Company-operated  Franchise  Total
Total stores as of December 31, 2019   368    29    213    4    48    662 
Corporate stores transitioned   (11)   10    1    —      —      —   
Net restaurants opened (closed)   (51)   —      (6)   —      —      (57)
Total stores as of March 31, 2020   306    39    208    4    48    605 
                               
Total stores as of December 31, 2018   411    2    213    4    55    685 
Corporate stores transitioned   (1)   1    —      —      —      —   
Net restaurants opened (closed)   (2)   —      —      —      —      (2)
Total stores as of March 31, 2019   408    3    213    4    55    683 

  

Most of our restaurant dining rooms were closed by March 17, 2020 with the remainder closing before the end of the first quarter because of the COVID-19 pandemic. In addition, as of March 31, 2020, 62 of the 306 company-operated stores were temporarily closed. As of March 31, 2019, 44 of the 408 company-operated stores were temporarily closed.

 

Earnings of our restaurant operations are summarized below.

 

     First Quarter       
    2020         2019      
Revenue                    
Net sales  $104,728        $165,631      
Franchise royalties and fees   5,211         6,654      
Franchise partner fees   3,344         258      
Other revenue   861         1,232      
Total revenue   114,144         173,775      
                     
Restaurant cost of sales                    
Cost of food   31,443    30.0%   54,977    33.2%
Restaurant operating costs   53,497    51.1%   90,795    54.8%
Occupancy costs   4,976    4.8%   6,677    4.0%
Total cost of sales   89,916         152,449      
                     
Selling, general and administrative                    
General and administrative   8,898    7.8%   17,101    9.8%
Marketing   8,820    7.7%   13,129    7.6%
Other expenses   284    0.2%   293    0.2%
Total selling, general and administrative   18,002    15.8%   30,523    17.6%
                     
Impairments   10,300    9.0%   1,900    1.1%
                     
Depreciation and amortization   5,026    4.4%   5,369    3.1%
                     
Interest on finance leases and obligations   1,800         2,009      
                     
Earnings (loss) before income taxes   (10,900)        (18,475)     
                     
Income tax expense (benefit)   (2,958)        (5,132)     
                     
Contribution to net earnings  $(7,942)       $(13,343)     

  

Cost of food, restaurant operating costs and rent expense are expressed as a percentage of net sales.

 

General and administrative, marketing, other expenses, impairments and depreciation and amortization are expressed as a percentage of total revenue.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

The COVID-19 pandemic has adversely affected our operations and financial results. During the first quarter, we closed the dining rooms in all our restaurants. However, most of our restaurants remained open with limited operations such as takeout, drive-through, and delivery. However, the COVID-19 pandemic could cause disruptions to our supply chain. Moreover, we cannot predict how the outbreak of COVID-19 will alter the future demand of our products.

 

Net sales decreased by $60,903 or 36.8% during first quarter 2020 compared to 2019. Franchise royalties and fees decreased by $1,443 or 21.7% during 2020 compared to 2019.

 

Franchise partner fees were $3,344 during first quarter 2020 compared to $258 during 2019. As of March 31, 2020, there were 39 franchise partner units as compared to three franchise partner units as of March 31, 2019.

 

Cost of food decreased as a percentage of net sales by 3.2% during the first quarter of 2020 compared to 2019. The decrease is primarily attributable to fewer promotional items.

 

Restaurant operating costs decreased as a percentage of net sales by 3.7% during the first quarter of 2020 compared to 2019. The decrease is primarily because of reduced labor costs.

 

General and administrative costs decreased by $8,203 during the first quarter of 2020 compared to 2019. The lower expenses were primarily because of non-recurring settlement expenses during 2019.

 

Marketing expense decreased by $4,309 in the first quarter of 2020 compared to 2019 primarily driven by a reduction in television and print advertising.

 

Steak n Shake recorded an impairment to long-lived assets of $10,300 and $1,900 in the first quarters of 2020 and 2019, respectively. The impairments are primarily attributable to the closure of Steak n Shake stores.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Insurance

 

We view our insurance businesses as possessing two activities: underwriting and investing. Underwriting decisions are the responsibility of the unit managers, whereas investing decisions are the responsibility of our Chairman and CEO, Sardar Biglari. Business units are operated under separate local management.

 

Biglari Holdings’ insurance operations consist of First Guard and Southern Pioneer. First Guard is a direct underwriter of commercial trucking insurance, selling physical damage and nontrucking liability insurance to truckers. First Guard’s insurance products are marketed primarily through direct response methods via the Internet or by telephone.  First Guard’s cost-efficient direct response marketing methods enable it to be a low-cost trucking insurer. Southern Pioneer underwrites specialty insurance products including garage liability insurance, commercial property coverage for auto dealers as well as homeowners, dwelling fire insurance and credit-related insurance coverages. The financial results for Southern Pioneer are from the acquisition date (March 9, 2020) to the end of the quarter.

 

Premiums earned by the insurance group during the first quarter of 2020 were $8,842 and pre-tax underwriting gain during the first quarter of 2020 was $2,530. Premiums earned by First Guard during the first quarter of 2020 were $7,415, an increase of $554 or 8.1% compared to 2019. Pre-tax underwriting gain for First Guard during the first quarter of 2020 was $2,323, an increase of $1,122 or 93.4% compared to 2019.

 

Southern Pioneer’s operating results since the date of acquisition were not significant to Biglari Holdings for the quarter. However, we expect Southern Pioneer to have a major impact on our insurance results in future periods.

 

Earnings of our insurance operations are summarized below.

 

    First Quarter  
    2020    2019 
Premiums written  $8,842   $6,861 
           
Insurance losses   4,174    4,175 
Underwriting expenses   2,138    1,485 
Pre-tax underwriting gain   2,530    1,201 
Other income and expenses          
Investment income and commissions   832    346 
Other income (expenses)   (449)   (3)
Total other income   383    343 
Earnings before income taxes   2,913    1,544 
Income tax expense   597    328 
Contribution to net earnings  $2,316   $1,216 
           
           
    First Quarter  
    2020    2019 
Underwriting gain:          
First Guard  $2,323   $1,201 
Southern Pioneer   207    —   
Pre-tax underwriting gain  $2,530   $1,201 

  

Insurance premiums and other on the consolidated statement of earnings includes premiums earned, investment income and commissions. In the table above, investment income and commissions are included in other income.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Oil and Gas

 

Southern Oil primarily operates oil and natural gas properties offshore in the shallow waters of the Gulf of Mexico. Southern Oil was acquired on September 9, 2019. Earnings for Southern Oil are summarized below.

 

   First Quarter
   2020
Oil and gas revenue  $11,374 
      
Oil and gas production costs   3,076 
      
Depreciation, depletion and accretion   4,868 
General and administrative expenses   960 
      
Earnings before income taxes   2,470 
      
Income tax expense   269 
      
Contribution to net earnings  $2,201 

 

The COVID-19 pandemic has caused oil demand to significantly decrease, creating oversupplied markets, and resulting in lower commodity prices and margins. In response, the Company has significantly cut production and expenses. Southern Oil is a debt-free company.

 

Media and Licensing

 

Earnings of our media and licensing operations are summarized below.

 

    First Quarter  
    2020    2019 
Media and licensing revenue  $508   $877 
           
Media and licensing costs   506    948 
General and administrative expenses   34    41 
Earnings (loss) before income taxes   (32)   (112)
Income tax benefit   (7)   (28)
Contribution to net earnings  $(25)  $(84)

  

We acquired Maxim with the idea of transforming its business model. The magazine developed the Maxim brand, a franchise we are utilizing to generate nonmagazine revenue, notably through licensing, a cash-generating business related to consumer products, services, and events.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Investment Partnership Gains (Losses)

 

Earnings (loss) from our investments in partnerships are summarized below.

 

    First Quarter  
    2020    2019 
Investment partnership gains (losses)  $(175,742)  $34,154 
Tax expense (benefit)   (41,383)   7,917 
Contribution to net earnings  $(134,359)  $26,237 

  

Investment partnership gains include gains/losses from changes in market values of underlying investments and dividends earned by the partnerships. Dividend income has a lower effective tax rate than income from capital gains. Changes in the market values of investments can be highly volatile.

 

The investment partnerships hold the Company’s common stock as investments. The Company’s pro-rata share of its common stock held by the investment partnerships is recorded as treasury stock even though these shares are legally outstanding. Gains and losses on Company common stock included in the earnings of the partnerships are eliminated.

 

Interest Expense and Debt Extinguishment

 

The Company’s interest expense is summarized below.

 

    First Quarter  
    2020    2019 
Interest expense on notes payable and other borrowings  $2,474   $3,058 
Tax benefit   628    764 
Interest expense net of tax  $1,846   $2,294 

  

The Company recorded a gain on debt extinguishment of $4,346 ($3,260 net of tax) during the first quarter of 2020 in connection with Steak n Shake’s debt retirement of $21,729.

 

The outstanding balance on Steak n Shake’s credit facility on March 31, 2020 was $159,219 compared to $183,148 on March 31, 2019. The interest rate was 5.36% as of March 31, 2020 and 6.25% as of March 31, 2019.

 

Corporate

 

Corporate expenses exclude the activities in the restaurant, media and licensing, insurance, and oil and gas businesses. Corporate net losses during the first quarter of 2020 were relatively flat compared to the same period during 2019.

 

Income Taxes

 

Income tax benefit for the first quarter of 2020 was $43,830 compared to an income tax expense of $1,744 for the first quarter of 2019.  The variance in income taxes between 2020 and 2019 is attributable to taxes on income generated by the investment partnerships. Investment partnership pretax losses were $175,742 during the first quarter of 2020, compared to pretax gains of $34,154 during the first quarter of 2019.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Financial Condition

 

Consolidated cash and investments are summarized below.

 

   March 31, 2020  December 31, 2019
Cash and cash equivalents  $33,281   $67,772 
Investments   81,252    44,856 
Fair value of interest in investment partnerships   392,215    666,123 
Total cash and investments   506,748    778,751 
Less: portion of Company stock held by investment partnerships   (73,526)   (160,581)
Carrying value of cash and investments on balance sheet  $433,222   $618,170 

  

Liquidity

Our balance sheet continues to maintain significant liquidity. Consolidated cash flow activities are summarized below.

 

    First Quarter 
    2020    2019 
Net cash provided by (used in) operating activities  $50,477   $(10,037)
Net cash used in investing activities   (65,574)   (5,454)
Net cash used in financing activities   (19,408)   (1,968)
Effect of exchange rate changes on cash   14    (5)
Decrease in cash, cash equivalents and restricted cash  $(34,491)  $(17,464)

  

Cash provided by operating activities was $50,477 during the first quarter of 2020 compared to cash used in operating activities of $10,037 during the first quarter of 2019. The increase in cash provided by operations during 2020 compared to 2019 was primarily due to distributions from investment partnerships.

 

Cash used in investing activities during the first quarter of 2020 was $65,574 compared to $5,454 during the first quarter of 2019. Cash used in investing activities during the first quarter of 2020 included capital expenditures of $6,473, purchases of investments net of redemptions of fixed maturity securities of $26,685 and acquisition of business for $34,240 (net of cash acquired). Cash used in investing activities during the first quarter of 2019 included capital expenditures of $3,564 and purchases of investments net of redemptions of fixed maturity securities of $2,210.

 

During the first quarter of 2020 and 2019 we incurred debt payments of $19,458 and $1,968, respectively. On February 18, 2020, the Company retired $21,729 of term loan under Steak n Shake’s credit facility.

 

We intend to meet the working capital needs of our operating subsidiaries principally through anticipated cash flows generated from operations, cash on hand, existing credit facilities, and the sale of excess properties and investments. We continually review available financing alternatives.

 

Steak n Shake Credit Facility

On March 19, 2014, Steak n Shake and its subsidiaries entered into a credit agreement which provided for a senior secured term loan facility in an aggregate principal amount of $220,000. The term loan is scheduled to mature on March 19, 2021. As of March 31, 2020, $159,219 was outstanding. The Company is evaluating refinancing options. Alternative financing may not be available on terms commensurate with its current financing arrangement. In addition, the duration of the pandemic could have a material adverse effect on financing options or Steak n Shake’s ability to comply with the terms of its credit agreement. Biglari Holdings is not a guarantor under the credit facility.

 

The term loan amortizes in equal quarterly installments at an annual rate of 1.0% of the original principal amount of the term loan, subject to mandatory prepayments from excess cash flow, asset sales and other events described in the credit agreement. The balance will be due at maturity.

 

Interest on the term loan is based on a Eurodollar rate plus an applicable margin of 3.75% or on the prime rate plus an applicable margin of 2.75%. The interest rate on the term loan was 5.36% as of March 31, 2020.

 

The credit agreement includes customary affirmative and negative covenants and events of default. As of March 31, 2020, we were in compliance with all covenants. Steak n Shake’s credit facility contains restrictions on its ability to pay dividends to Biglari Holdings.

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The term loan is secured by first priority security interests in substantially all the assets of Steak n Shake.

 

The Company retired $21,729 of debt on February 18, 2020.

 

Western Sizzlin Revolver

Western Sizzlin had $50 and $0 of debt outstanding under its revolver as of March 31, 2020 and December 31, 2019, respectively. 

 

Critical Accounting Policies

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Certain accounting policies require management to make estimates and judgments concerning transactions that will be settled several years in the future. Amounts recognized in our consolidated financial statements from such estimates are necessarily based on numerous assumptions involving varying and potentially significant degrees of judgment and uncertainty. Accordingly, the amounts currently reflected in our consolidated financial statements will likely increase or decrease in the future as additional information becomes available. There have been no material changes to critical accounting policies previously disclosed in our annual report on Form 10-K for the year ended December 31, 2019.

 

Recently Issued Accounting Pronouncements

For detailed information regarding recently issued accounting pronouncements and the expected impact on our consolidated financial statements, see Note 2, “New Accounting Standards” in the accompanying notes to consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

Cautionary Note Regarding Forward-Looking Statements

This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In general, forward-looking statements include estimates of future revenues, cash flows, capital expenditures, or other financial items, and assumptions underlying any of the foregoing. Forward-looking statements reflect management’s current expectations regarding future events and use words such as “anticipate,” “believe,” “expect,” “may,” and other similar terminology. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. Investors should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. These forward-looking statements are all based on currently available operating, financial, and competitive information and are subject to various risks and uncertainties. Our actual future results and trends may differ materially depending on a variety of factors, many beyond our control, including, but not limited to, the risks and uncertainties described in Item 1A, Risk Factors of our annual report on Form 10-K and Item 1A of this report. We undertake no obligation to publicly update or revise them, except as may be required by law.

24

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

The majority of our investments are conducted through investment partnerships which generally hold common stocks. We also hold marketable securities directly. A significant decline in the general stock market or in the prices of major investments may produce a large net loss and decrease in our consolidated shareholders’ equity. Decreases in values of equity investments can have a materially adverse effect on our earnings and on consolidated shareholders’ equity.

 

We prefer to hold equity investments for very long periods of time so we are not troubled by short-term price volatility with respect to our investments. Our interests in the investment partnerships are committed on a rolling 5-year basis, and any distributions upon our withdrawal of funds will be paid out over two years (and may be paid in kind rather than in cash). Market prices for equity securities are subject to fluctuation. Consequently, the amount realized in the subsequent sale of an investment may significantly differ from the reported market value. A hypothetical 10% increase or decrease in the market price of our investments would result in a respective increase or decrease in the carrying value of our investments of $39,994 along with a corresponding change in shareholders’ equity of approximately 6%.

 

Interest on the term loan is based on a Eurodollar rate plus an applicable margin of 3.75% or on the prime rate plus an applicable margin of 2.75%. At March 31, 2020, a hypothetical 100 basis point increase in short-term interest rates would have an impact of approximately $1,200 on our net earnings.

 

We have had minimal exposure to foreign currency exchange rate fluctuations in the first quarters of 2020 and 2019.

 

ITEM 4.

 

Controls and Procedures

 

Based on an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), our Chief Executive Officer and Controller have concluded that our disclosure controls and procedures were effective as of March 31, 2020.

 

There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2020 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting. 

25

 

 Part II Other Information

 

Item 1.

 

lEGAL PROCEEDINGS

 

Information in response to this Item is included in Note 14 to the Consolidated Financial Statements included in Part 1, Item 1 of this Form 10-Q and is incorporated herein by reference.

 

Item 1A.

 

Risk Factors

 

Our significant business risks are described in Item 1A to Form 10-K for the year ended December 31, 2019 to which reference is made herein. These risk factors are supplemented for the items described below. The risks and uncertainties we describe are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business or operations. Any adverse effect on our business, financial condition or operating results could result in a decline in the value of our securities and the loss of all or part of your investment.

 

Epidemics, pandemics or other outbreaks, including COVID-19, could hurt our operating businesses.

 

The outbreak of COVID-19 has adversely affected, and in the future it or other epidemics, pandemics or outbreaks may adversely affect, our operations, including our investments. This is or may be due to closures or restrictions requested or mandated by governmental authorities, disruption to supply chains and workforce, reduction of demand for our products and services, credit losses when customers and other counterparties fail to satisfy their obligations to us, and volatility in global equity securities markets, among other factors.

 

Unfavorable general economic conditions may significantly reduce our operating earnings and impair our ability to access capital markets at a reasonable cost.

 

Our operating businesses are subject to economic conditions affecting the general economy or the specific industries in which they operate. To the extent that economic conditions in the U.S. and worldwide are depressed by the effects of COVID-19 or otherwise, one or more of our significant operations could be materially harmed. In addition, our restaurant operations utilize debt as a component of their capital structures, and depend on access to borrowed funds through the capital markets at reasonable rates. To the extent that access to the capital markets is restricted or the cost of funding increases, these operations could be adversely affected.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

_________________

* Furnished herewith.

26

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

         
Date:  May 8, 2020        
   
    Biglari Holdings inc.
         
    By:   /s/ Bruce Lewis
        Bruce Lewis
Controller
           

 

27