Biglari (BH) - 2019 Q2 - Quarterly Report

Part I – Financial Information Financial Statements The company achieved $31.8 million net earnings in H1 2019, reversing a $9.4 million loss in H1 2018, driven by investment gains and an increase in total assets to $1.15 billion Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 ($ thousands) | December 31, 2018 ($ thousands) | | :--- | :--- | :--- | | Total Assets | $1,154,669 | $1,029,493 | | Cash and cash equivalents | $27,662 | $48,557 | | Investment partnerships | $622,066 | $557,480 | | Total Liabilities | $552,307 | $459,038 | | Total Shareholders' Equity | $602,362 | $570,455 | Consolidated Earnings Summary (in thousands) | Period | Revenues ($ thousands) | Investment Partnership Gains (Losses) ($ thousands) | Net Earnings (Loss) ($ thousands) | | :--- | :--- | :--- | :--- | | Q2 2019 | $168,343 | $34,198 | $21,974 | | Q2 2018 | $208,739 | $(8,341) | $(7,539) | | First Six Months 2019 | $350,202 | $68,352 | $31,792 | | First Six Months 2018 | $410,964 | $(4,846) | $(9,353) | Consolidated Cash Flow Summary - First Six Months (in thousands) | Activity | 2019 ($ thousands) | 2018 ($ thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | $(8,295) | $(465) | | Net cash used in investing activities | $(8,619) | $(5,714) | | Net cash used in financing activities | $(3,984) | $(3,932) | | Decrease in cash | $(20,895) | $(10,166) | - The company adopted ASC 842 on January 1, 2019, recognizing $63.3 million in operating lease assets and $69.7 million in operating lease liabilities[18] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes H1 2019 profitability to strong investment partnerships, despite significant restaurant segment operational challenges and a strategic shift to a franchise partnership model - Steak n Shake's sales have declined since 2017, leading to 103 temporary restaurant closures as of June 30, 2019, as the company emphasizes its franchise partnership program for profitability improvement[101] Net Earnings (Loss) Contribution by Segment - First Six Months (in thousands) | Segment | 2019 ($ thousands) | 2018 ($ thousands) | | :--- | :--- | :--- | | Restaurant | $(14,767) | $1,184 | | Insurance | $2,675 | $2,204 | | Media | $48 | $(155) | | Investment partnership gains (losses) | $52,491 | $(2,802) | | Total Net Earnings (Loss) | $31,792 | $(9,353) | Restaurants - The restaurant segment reported a pre-tax loss of $21.0 million in H1 2019, reversing a $2.7 million profit in H1 2018, primarily due to declining Steak n Shake sales[106] - Steak n Shake's same-store sales decreased by 6.5% and customer traffic fell by 8.1% in H1 2019, largely due to temporary store closures[108] - Cost of food as a percentage of net sales increased to 32.2% in H1 2019 from 30.0% in 2018 due to a promotion, while operating costs also rose due to higher wages[110][111] Insurance Insurance Segment Performance - First Six Months (in thousands) | Metric | 2019 ($ thousands) | 2018 ($ thousands) | | :--- | :--- | :--- | | Premiums written | $13,926 | $12,833 | | Pre-tax underwriting gain | $2,768 | $2,432 | | Contribution to net earnings | $2,675 | $2,204 | - Premiums earned in H1 2019 increased by 8.5% year-over-year, indicating steady growth in the insurance business[115] Investment Partnership Gains (Losses) - The company recorded pre-tax investment partnership gains of $68.4 million in H1 2019, a significant turnaround from a $4.8 million loss in H1 2018, driving overall net earnings[120] - Investment partnerships hold a highly concentrated position in the common stock of Cracker Barrel Old Country Store, Inc[121] Financial Condition and Liquidity - Consolidated shareholders' equity increased by $31.9 million to $602.4 million in H1 2019, primarily driven by $31.8 million in net income[126] - Cash used in operating activities increased significantly to $8.3 million in H1 2019 from $0.5 million in the prior year, mainly due to decreased restaurant revenues[129] - Steak n Shake had $182.6 million outstanding on its term loan facility as of June 30, 2019, maturing in March 2021 with an interest rate of 6.19%[124][135] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk stems from its concentrated equity investment in Cracker Barrel Old Country Store, Inc., and interest rate risk on its variable-rate term loan - The company's investment partnerships hold a concentrated position in Cracker Barrel Old Country Store, Inc. common stock, exposing it to price fluctuations[140] - A hypothetical 10% change in investment market prices would alter the carrying value by approximately $66.4 million[141] - The company faces interest rate risk on its term loan, where a hypothetical 100 basis point increase in short-term rates would impact net earnings by approximately $1.4 million[142] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting - The CEO and Controller concluded that the company's disclosure controls and procedures were effective as of June 30, 2019[143] Part II – Other Information Legal Proceedings The company settled two class action lawsuits against Steak n Shake for $8.35 million and is appealing the dismissal of a shareholder lawsuit regarding its dual-class stock structure - The company settled two class action lawsuits (Drake v. Steak n Shake and Clendenen v. Steak n Shake) for $8.35 million, related to managerial employee classification[82] - A shareholder lawsuit alleging breach of fiduciary duty regarding the dual-class stock structure was dismissed, but an appeal was filed on January 11, 2019, which the company is defending[80][81] Risk Factors A material change to risk factors highlights the significant risk that Steak n Shake's franchise conversion strategy may not succeed in reversing declining sales and profitability - A key risk is that Steak n Shake's franchise partnership conversion strategy may fail to reverse declining sales and profitability[146] - There is no assurance Steak n Shake will find suitable franchise partners for its 103 temporarily closed stores or that the new model will succeed, potentially requiring additional financing[147] Unregistered Sales of Equity Securities and Use of Proceeds Between May and June 2019, Chairman and CEO Sardar Biglari purchased 7,702 Class A and 23,646 Class B common shares through open market transactions - From May to June 2019, CEO Sardar Biglari purchased 7,702 shares of Class A and 23,646 shares of Class B common stock in open market transactions[154][155]