BIGLARI HOLDINGS INC. (dollars in thousands except per share data)
OverviewBiglari 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 bySardar 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 byMr. Biglari . As ofJune 30, 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. OnMarch 9, 2020 ,Biglari Holdings acquired the stock ofSouthern 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 second quarter are included in the Company's consolidated financial statements. OnSeptember 9, 2019 , a wholly-owned subsidiary of the Company,Southern Oil Company , acquired the stock ofSouthern Oil of Louisiana Inc. (collectively "Southern Oil"). Southern Oil primarily operates oil and natural gas properties offshore in the shallow waters of theGulf of Mexico . Net earnings (loss) attributable toBiglari Holdings shareholders are disaggregated in the table that follows. Amounts are recorded after deducting income taxes. Second Quarter First Six Months 2020 2019 2020 2019 Operating businesses: Restaurant$ (2,527 ) $ (1,424 ) $ (10,469 ) $ (14,767 ) Insurance 2,299 1,459 4,615 2,675 Oil and gas (1,312 ) - 889 - Media and licensing 376 132 351 48 Total operating businesses (1,164 ) 167 (4,614 ) (12,044 ) Corporate (2,191 ) (2,085 ) (3,681 ) (3,999 ) Investment gains 1,192 - 1,192 - Investment partnership gains (losses) 45,365 26,254 (88,994 ) 52,491 Interest expense on notes payable and debt extinguishment (736 ) (2,362 ) 678 (4,656 )$ 42,466 $ 21,974 $ (95,419 ) $ 31,792 Restaurant businesses include Steak nShake Inc. ("Steak n Shake") andWestern Sizzlin Corporation ("Western Sizzlin").Steak n Shake andWestern Sizzlin are engaged in the ownership, operation, and franchising of restaurants. Insurance businesses are composed ofFirst 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
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
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Restaurants
Steak n Shake and
Steak n Shake Western Sizzlin
Company- Franchise Traditional
operated Partner Franchise Company-operated Franchise Total Total stores as of December 31, 2019 368 29 213 4 48 662 Corporate stores transitioned (23 ) 22 1 - - - Net restaurants opened (closed) (56 ) - (13 ) - (8 ) (77 ) Total stores as of June 30, 2020 289 51 201 4 40 585 Total stores as of December 31, 2018 411 2 213 4 55 685 Corporate stores transitioned (6 ) 6 - - - - Net restaurants opened (closed) (106 ) - - - (3 ) (109 ) Total stores as of June 30, 2019 299 8 213 4 52 576
Most of our restaurant dining rooms were closed byMarch 17, 2020 with the remainder closing before the end of the first quarter because of the COVID-19 pandemic. In addition, as ofJune 30, 2020 , 59 of the 289 company-operated Steak n Shake stores were temporarily closed. As ofJune 30, 2019 , 103 of the 299 company-operated Steak n Shake stores were temporarily closed.
Earnings of our restaurant operations are summarized below.
Second Quarter First Six Months
2020 2019 2020 2019
Revenue
Net sales $ 69,487 $ 152,062 $ 174,215 $ 317,693
Franchise
royalties and
fees 4,072 6,725 9,283 13,379
Franchise
partner fees 4,537 421 7,881 679
Other revenue 668 853 1,529 2,085
Total revenue 78,764 160,061 192,908 333,836
Restaurant
cost of sales
Cost of food 19,929 28.7 % 47,316 31.1 % 51,372 29.5 % 102,293 32.2 %
Restaurant
operating
costs 26,955 38.8 % 78,595 51.7 % 80,452 46.2 % 169,390 53.3 %
Occupancy
costs 3,875 5.6 % 5,839 3.8 % 8,851 5.1 % 12,516 3.9 %
Total cost of
sales 50,759 131,750 140,675 284,199
Selling,
general and
administrative
General and
administrative 9,189 11.7 % 12,021 7.5 % 18,087 9.4 % 29,122 8.7 %
Marketing . 5,695 7.2 % 10,117 6.3 % 14,515 7.5 % 23,246 7.0 %
Other expenses 983 1.2 % 1,179 0.7 % 1,267 0.7 % 1,472 0.4 %
Total selling,
general and
administrative 15,867 20.1 % 23,317 14.6 % 33,869 17.6 % 53,840 16.1 %
Impairments 7,819 9.9 % 438 0.3 % 18,119 9.4 % 2,338 0.7 %
Depreciation
and
amortization 4,686 5.9 % 5,104 3.2 % 9,712 5.0 % 10,473 3.1 %
Interest on
finance leases
and
obligations 1,286 2,003 3,086 4,012
Earnings
(loss) before
income taxes (1,653 ) (2,551 ) (12,553 ) (21,026 )
Income tax
expense
(benefit) 874 (1,127 ) (2,084 ) (6,259 )
Contribution
to net
earnings $ (2,527 ) $ (1,424 ) $ (10,469 ) $ (14,767 ) 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, drive in, and delivery. Steak n Shake is seeking to reopen dining rooms with counter service. The transition to a counter-service model will require significant investments in equipment. Steak n Shake intends to fund these investments mainly by selling owned real estate
via an auction process.
Net sales for the second quarter and first six months of 2020 were$69,487 and$174,215 , respectively, representing a decrease of$82,575 or 54.3% and$143,478 or 45.2% over the second quarter and first six months of 2019, respectively.Franchise royalties and fees decreased by$2,653 or 39.4% during the second quarter of 2020 compared to 2019.Franchise royalties and fees decreased by$4,096 or 30.6% during the first six months of 2020 compared to 2019.Reserves were realized for franchisees who closed their stores during
the pandemic. Franchise partner fees were$4,537 during second quarter 2020 compared to$421 during 2019.Franchise partner fees were$7,881 during the first six months of 2020 compared to$679 during 2019.As ofJune 30, 2020 , there were 51 franchise partner units compared to eight franchise partner units as ofJune 30, 2019 . Cost of food during the second quarter and first six months of 2020 was$19,929 or 28.7% of net sales and$51,372 or 29.5% of net sales, respectively, compared to the second quarter and first six months in 2019 of$47,316 or 31.1% and$102,293 or 32.2%, respectively. The decrease is primarily attributable to a reduced menu offering along with fewer promotions. Restaurant operating costs during the second quarter of 2020 were$26,955 compared to$78,595 in 2019. The closure of restaurants, transition to franchise partners, and the closure of dining rooms account for the decline in restaurant operating costs. Restaurant operating costs during the first six months of 2020 were$80,452 compared to$169,390 in 2019.The decrease is primarily because
of reduced labor costs. General and administrative costs during the second quarter and first six months of 2020 were$9,189 or 11.7% of total revenues and$18,087 or 9.4% of total revenues, respectively, compared to expenses in the second quarter and first six months of 2019, which were$12,021 or 7.5% of total revenues and$29,122 or 8.7% of total revenues, respectively. The lower expenses were primarily because of non-recurring settlement expenses during 2019. Marketing expense during the second quarter and first six months of 2020 were$5,695 or 7.2% of total revenues and$14,515 or 7.5% of total revenues, respectively, compared to expenses during the second quarter and first six months of 2019 of$10,117 or 6.3% of total revenues and$23,246 or 7.0% of total revenues, respectively. Management determined to minimize its level of marketing expenditures in the second quarter of 2020. Our restaurants obtained one-time savings in the second quarter by negotiating with various vendors, reducing overall expenses.These reductions were derived because of the COVID-19 pandemic. Steak n Shake recorded an impairment to long-lived assets of$7,819 and$438 in the second quarters of 2020 and 2019, respectively, and$18,119 and$2,338 during the first six months of 2020 and 2019, respectively. The impairments are primarily attributable to the closure of Steak n Shake stores. 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 second quarter and first six months of 2020 were$13,321 and$22,163 , respectively, and pre-tax underwriting gain during the second quarter and first six months of 2020 were$2,057 and
$4,587 , respectively. 19 Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Earnings of our insurance operations are summarized below.
Second Quarter First Six Months
2020 2019 2020 2019
Premiums written $ 13,321 $ 7,065 $ 22,163 $ 13,926
Insurance losses 6,901 4,060 11,075 8,235
Underwriting expenses 4,363 1,438 6,501 2,923
Pre-tax underwriting gain 2,057 1,567 4,587 2,768
Other income and expensesInvestment income and commissions 1,100 352 1,932
698
Other income (expenses) (89 ) (69 ) (538 ) (72 )
Total other income 1,011 283 1,394 626
Earnings before income taxes 3,068 1,850 5,981 3,394
Income tax expense 769 391 1,366 719
Contribution to net earnings $ 2,299 $ 1,459 $ 4,615 $ 2,675 First Guard's underwriting results are summarized below.
Second Quarter First Six Months
2020 2019 2020 2019
Premiums written $ 7,275 $ 7,065 $ 14,690 $ 13,926
Insurance losses 2,974 4,060 6,532 8,235
Underwriting expenses 1,748 1,438 3,282 2,923
Pre-tax underwriting gain
Southern Pioneer's underwriting results are summarized below.
2020
Second First Six
Quarter Months
Premiums written $ 6,046 $ 7,473
Insurance losses 3,927 4,543
Underwriting expenses 2,615 3,219
Pre-tax underwriting gain (loss)
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 theGulf of Mexico . Southern Oil was acquired onSeptember 9 , 2019.Earnings for Southern Oil are summarized below. Second Quarter First Six Months 2020 2020 Oil and gas revenue $ 2,151 $ 13,525 Oil and gas production costs 1,323 4,399 Depreciation, depletion and accretion 1,979
6,847
General and administrative expenses 556
1,516
Earnings (loss) before income taxes (1,707 )
763 Income tax benefit (395 ) (126 )
Contribution to net earnings$ (1,312 ) $
889 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.
Second Quarter First Six Months
2020 2019 2020 2019
Media and licensing revenue $ 982 $ 865 $ 1,490 $ 1,742
Media and licensing costs 437 641 943 1,589General and administrative expenses 58 48 92
89
Earnings before income taxes 487 176 455 64
Income tax expense 111 44 104 16
Contribution to net earnings $ 376 $ 132 $ 351 $ 48
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.
Investment Gains
Investment gains were $1,192 (net of tax) during the second quarter of 2020.The
Company did not have investment gains/losses during the first quarter of 2020 or
the first six months of 2019.Interest and dividends earned on investments are
reported as other income by our insurance companies. We consider investment
income as a component of our aggregate insurance operating results. However, we
consider investment gains and losses, whether realized or unrealized as
non-operating.
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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.
Second Quarter First Six Months
2020 2019 2020 2019
Investment partnership gains (losses) $ 59,248 $ 34,198 $ (116,494 ) $ 68,352
Tax expense (benefit) 13,883 7,944 (27,500 ) 15,861
Contribution to net earnings $ 45,365 $ 26,254 $ (88,994 ) $ 52,491
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.
Second Quarter First Six Months
2020 2019 2020 2019
Interest expense on notes payable and
other borrowings $ 2,349 $ 3,150 $ 4,823 $ 6,208
Tax benefit 588 788 1,216 1,552
Interest expense net of tax $ 1,761 $ 2,362 $ 3,607 $ 4,656 The Company recorded a gain on debt extinguishment of$1,367 ($1,025 net of tax) during the second quarter of 2020 in connection with Steak n Shake's debt retirement of$5,063 . During the first quarter of 2020, the Company recorded a gain on debt extinguishment of$4,346 ($3,260 net of tax) in connection with Steak n Shake's debt retirement of$21,729 . The outstanding balance on Steak n Shake's credit facility onJune 30, 2020 was$153,606 compared to$182,598 onJune 30 , 2019.The interest rate was 4.75% as ofJune 30, 2020 and 6.19% as ofJune 30, 2019 . Corporate Corporate expenses exclude the activities in the restaurant, media and licensing, insurance, and oil and gas businesses. Corporate net losses during the second quarter and first six months of 2020 were relatively flat compared to the same period during 2019. Income Taxes Income tax expense for the second quarter of 2020 was$14,764 compared to$5,896 for the second quarter of 2019. Income tax benefit for the first six months of 2020 was$29,066 compared to an income tax expense of$7,640 for the first six months 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$116,494 during the first six months of 2020, compared to pretax gains of$68,352 during the first six months 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.
December
June 30, 2020 31, 2019
Cash and cash equivalents $ 36,438 $ 67,772
Investments 84,785 44,856Fair value of interest in investment partnerships 461,927
666,123
Total cash and investments 583,150
778,751
Less: portion of Company stock held by investment partnerships (92,798 ) (160,581 ) Carrying value of cash and investments on balance sheet$ 490,352 $ 618,170 Liquidity
Our balance sheet continues to maintain significant liquidity. Consolidated cash flow activities are summarized below.
First Six Months
2020 2019
Net cash provided by (used in) operating activities
(103,360 ) (8,619 )
Net cash used in financing activities (24,156 ) (3,984 )
Effect of exchange rate changes on cash (3 ) 3
Decrease in cash, cash equivalents and restricted cash
Cash provided by operating activities was$98,685 during the first six months of 2020 compared to cash used in operating activities of$8,295 during the first six months 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 six months of 2020 was$103,360 compared to$8,619 during the first six months of 2019. Cash used in investing activities during the first six months of 2020 included capital expenditures of$10,040 , purchases of investments net of redemptions of fixed maturity securities of$60,904 and acquisition of business for$34,240 (net of cash acquired). Cash used in investing activities during the first six months of 2019 included capital expenditures of$6,238 and purchases of investments net of redemptions of fixed maturity securities of$2,771 .
During the first six months of 2020 and 2019 we incurred debt payments of
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
OnMarch 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 onMarch 19, 2021 . As ofJune 30, 2020 ,$153,606 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 4.75% as of
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The credit agreement includes customary affirmative and negative covenants and events of default. As ofJune 30, 2020 , we were in compliance with all covenants. Steak n Shake's credit facility contains restrictions on its ability to pay dividends toBiglari Holdings .
The term loan is secured by first priority security interests in substantially all the assets of Steak n Shake.
The Company retired
Western Sizzlin Revolver
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 inthe 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 endedDecember 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.
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