Biglari (BH) - 2019 Q3 - Quarterly Report

Part I – Financial Information Financial Statements The company presents its unaudited consolidated financial statements and key events for the period ended September 30, 2019 Consolidated Balance Sheets Total assets grew to $1.15 billion, driven by property and equipment increases and new operating lease assets Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2019 (Unaudited) | Dec 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $19,058 | $48,557 | | Investment partnerships | $561,479 | $557,480 | | Property and equipment, net | $355,489 | $274,716 | | Operating lease assets | $65,939 | $— | | Total Assets | $1,153,950 | $1,029,493 | | Liabilities & Equity | | | | Accounts payable and accrued expenses | $138,822 | $117,265 | | Long-term notes payable and other borrowings | $264,857 | $240,001 | | Operating lease liabilities | $59,668 | $— | | Total Liabilities | $552,430 | $459,038 | | Total Shareholders' Equity | $601,520 | $570,455 | Consolidated Statements of Earnings Net earnings reached $31.8 million for the first nine months of 2019, driven by investment gains despite lower revenue Statement of Earnings Summary (in thousands) | Metric | Q3 2019 | Q3 2018 | First Nine Months 2019 | First Nine Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $160,216 | $203,582 | $510,418 | $614,546 | | Restaurant Operations Revenue | $145,111 | $195,041 | $478,947 | $589,569 | | Investment partnership gains (losses) | $1,449 | $(19,008) | $69,801 | $(23,854) | | Earnings (loss) before income taxes | $(631) | $(24,902) | $38,801 | $(35,942) | | Net Earnings (Loss) | $(17) | $(13,703) | $31,775 | $(23,056) | | Net earnings (loss) per equivalent Class A share | $(0.05) | $(39.50) | $92.04 | $(66.12) | Consolidated Statements of Cash Flows Operating cash flow was $39.9 million, while investing activities used $63.3 million for the Southern Oil acquisition Cash Flow Summary - First Nine Months (in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $39,859 | $(5,584) | | Net cash provided by (used in) investing activities | $(63,276) | $2,221 | | Net cash used in financing activities | $(6,003) | $(5,797) | | Decrease in cash, cash equivalents and restricted cash | $(29,449) | $(9,223) | Notes to Consolidated Financial Statements Notes detail the Southern Oil acquisition, adoption of ASC 842, investment concentrations, and impairment charges - On September 9, 2019, the company acquired Southern Oil Company for $51.5 million in cash, marking its entry into the oil and gas exploration and production business[15] - The company adopted the new lease accounting standard ASC 842 on January 1, 2019, resulting in the recognition of operating lease assets of $63.3 million and operating lease liabilities of $69.7 million[26] - The company's investments in The Lion Fund partnerships are highly concentrated in the common stock of Cracker Barrel Old Country Store, Inc[42][127] - Impairment charges of $7.4 million were recorded in the first nine months of 2019, primarily due to the temporary closure of 106 Steak n Shake restaurants[44] - The company settled the Drake v. Steak n Shake and Clendenen v. Steak n Shake class action lawsuits for $8.35 million regarding the classification of managerial employees[81] Management's Discussion and Analysis (MD&A) Management discusses the Southern Oil acquisition, challenges at Steak n Shake, and the impact of investment gains - Steak n Shake's sales have declined since 2017, leading to lower profitability and the temporary closure of 106 company-operated restaurants as of September 30, 2019[101] - The significant swing to net earnings in 2019 is primarily due to gains from investment partnerships, which contributed $53.9 million to net earnings compared to a loss of $15.7 million in the prior year[103][126] Results of Operations: Restaurants The restaurant segment saw a significant sales decline and operating loss due to store closures and reduced traffic Restaurant Segment Earnings (in thousands) | Metric | First Nine Months 2019 | First Nine Months 2018 | | :--- | :--- | :--- | | Total Revenue | $478,947 | $589,569 | | Earnings (loss) before income taxes | $(21,343) | $59 | | Contribution to net earnings (loss) | $(14,888) | $1,914 | - Steak n Shake's same-store sales decreased 6.4% and customer traffic decreased 9.7% during the first nine months of 2019[111] - As of September 30, 2019, 106 Steak n Shake restaurants were temporarily closed pending identification of a franchise partner[106] Results of Operations: Insurance The insurance segment delivered solid growth in premiums earned and underwriting gains, increasing its net earnings Insurance Segment Earnings (in thousands) | Metric | First Nine Months 2019 | First Nine Months 2018 | | :--- | :--- | :--- | | Premiums written | $21,302 | $19,576 | | Pre-tax underwriting gain | $4,902 | $4,029 | | Contribution to net earnings | $4,465 | $3,629 | Results of Operations: Oil and Gas The newly acquired Oil and Gas segment contributed $6.5 million in revenue and $1.1 million in net earnings Oil and Gas Segment Earnings - Q3 2019 (in thousands) | Metric | Amount | | :--- | :--- | | Oil and gas revenue | $6,500 | | Earnings before income taxes | $1,448 | | Contribution to net earnings | $1,060 | Results of Operations: Investment Partnership Gains (Losses) Investment partnership gains of $69.8 million drove overall profitability, reversing prior year losses Investment Partnership Contribution (in thousands) | Metric | Q3 2019 | Q3 2018 | First Nine Months 2019 | First Nine Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Investment partnership gains (losses) | $1,449 | $(19,008) | $69,801 | $(23,854) | | Contribution to net earnings (loss) | $1,400 | $(12,889) | $53,891 | $(15,691) | - The investments held by the partnerships are largely concentrated in the common stock of Cracker Barrel Old Country Store, Inc[127] Financial Condition and Liquidity Shareholders' equity grew to $601.5 million, supported by strong operating cash flow despite acquisition spending - Consolidated shareholders' equity increased to $601.5 million at September 30, 2019, up from $570.5 million at year-end 2018, primarily due to net income of $31.8 million[131][6] - Cash used in investing activities was $63.3 million, which included $51.1 million for the acquisition of Southern Oil[134][135] - The outstanding balance on Steak n Shake's credit facility was $182.0 million as of September 30, 2019, with the loan maturing in March 2021[129][140] Quantitative and Qualitative Disclosures about Market Risk The company faces significant market risk from its concentrated equity investments and interest rate risk from its debt - The company's primary market risk is from its concentrated equity position in Cracker Barrel Old Country Store, Inc, held through its investment partnerships[145] - A hypothetical 10% change in investment market prices would result in a corresponding change to carrying value of $60.5 million and an approximate 8% change in shareholders' equity[146] - A hypothetical 100 basis point increase in short-term interest rates would reduce annual net earnings by approximately $1.4 million due to the variable-rate term loan[147] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls - The Chief Executive Officer and Controller concluded that the company's disclosure controls and procedures were effective as of the end of the period[148] - There were no material changes in internal control over financial reporting during the quarter ended September 30, 2019[149] Part II – Other Information Legal Proceedings The company discloses ongoing litigation, including an appealed shareholder lawsuit and settled employee class actions - A shareholder class action lawsuit alleging breach of fiduciary duty related to the company's dual-class stock structure was dismissed by the Superior Court but is currently under appeal[78][79][80] - The company settled two purported class action lawsuits (Drake v. Steak n Shake and Clendenen v. Steak n Shake) for $8.35 million[81] Risk Factors No material changes to previously disclosed risk factors were reported during the quarter - No material changes to risk factors were reported for the quarter[150] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None[150]