Biglari (BH) - 2019 Q4 - Annual Report

Part I Business Biglari Holdings Inc. is a diversified holding company primarily operating in restaurants, insurance, media, and oil and gas, with significant investments in private funds controlled by its CEO - The company operates across four main segments: restaurants, insurance, media/licensing, and oil/gas[4] - Chairman and CEO Sardar Biglari beneficially owned approximately 64.4% of Class A and 55.4% of Class B common stock as of December 31, 2019, giving him significant control over the company[5] - On September 9, 2019, the company acquired Southern Oil of Louisiana Inc., entering the oil and gas business[19] Restaurant Units as of December 31, 2019 | Brand | Company-Operated | Franchise Partner | Traditional Franchise | Total | | :--- | :--- | :--- | :--- | :--- | | Steak n Shake | 368 (107 temporarily closed) | 29 | 213 | 610 | | Western Sizzlin | 4 | 0 | 48 | 52 | - The company has significant investments in The Lion Fund, L.P. and The Lion Fund II, L.P., with a fair value of $666.1 million as of December 31, 2019, subject to a rolling five-year lock-up period[22] Risk Factors The company faces significant risks including heavy dependence on its controlling CEO, declining restaurant profitability, concentrated investment exposure, and upcoming debt maturities - The company is highly dependent on its Chairman and CEO, Sardar Biglari, who makes all major investment and capital allocation decisions and holds over 50% of voting stock[26][27] - Steak n Shake's credit facility, with $181.5 million outstanding, matures on March 19, 2021, and the inability to refinance this debt could negatively impact operations[39] - The company's investments are unusually concentrated, primarily in the common stock of Cracker Barrel Old Country Store, Inc., held through investment partnerships, making shareholders' equity vulnerable to stock value declines[51] - Capital invested in The Lion Fund partnerships is subject to a five-year lock-up period, restricting access to a significant portion of the company's capital[48] - The restaurant business faces intense competition, and Steak n Shake has experienced declining sales and profitability, with 107 stores temporarily closed as of year-end 2019[37][41] Unresolved Staff Comments The company reports no unresolved staff comments - None[64] Properties As of December 31, 2019, the company's restaurant operations comprised 662 locations, with 152 owned land and buildings, primarily in the United States, while oil and gas properties are offshore in the Gulf of Mexico Total Restaurant Locations by Type (as of Dec 31, 2019) | Type | Steak n Shake | Western Sizzlin | Total | | :--- | :--- | :--- | :--- | | Company Operated | 368 | 4 | 372 | | Franchise Partner | 29 | 0 | 29 | | Traditional Franchise | 213 | 48 | 261 | | Total | 610 | 52 | 662 | - Of the 368 company-operated Steak n Shake restaurants, 107 were temporarily closed at year-end[67] - The company owns the land and building for 152 of its restaurant locations[66] Legal Proceedings The company is involved in various legal proceedings, including a shareholder class action lawsuit regarding its dual-class stock structure and a settled class-action lawsuit with former restaurant managers - A shareholder class action lawsuit alleging breach of fiduciary duty concerning the dual-class stock structure was dismissed but is subject to a pending petition for review by the Indiana Supreme Court[72][73] - On July 26, 2019, the company settled two class-action lawsuits (Drake v. Steak n Shake and Clendenen v. Steak n Shake) for $8.35 million related to the alleged improper classification of managerial employees as exempt[74] Mine Safety Disclosures This item is not applicable to the company - Not applicable[75] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Biglari Holdings' Class A and Class B common stocks are traded on the NYSE, with no dividends ever declared, and the CEO made personal stock purchases in late 2019 - The company's Class A (BH.A) and Class B (BH) common stocks are listed on the New York Stock Exchange[76] - Biglari Holdings has never declared a dividend[77] - From November 5 to November 26, 2019, Sardar Biglari purchased 7,699 shares of Class A common stock at an average price of $557.33 per share[79] - The company does not have any equity compensation plans[82] Selected Financial Data The company's total revenues have declined over the past five years, while net earnings have been volatile, and total assets and shareholders' equity have shown modest growth Selected Financial Data (2015-2019, in thousands) | (in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total revenues | $668,838 | $809,894 | $839,804 | $850,076 | $861,452 | | Net earnings (loss) | $45,380 | $19,392 | $50,071 | $99,451 | $(15,843) | | Total assets | $1,139,309 | $1,029,493 | $1,063,584 | $1,096,967 | $987,079 | | Long-term notes payable | $263,182 | $240,001 | $256,994 | $281,555 | $296,062 | | Shareholders' equity | $616,298 | $570,455 | $571,328 | $531,940 | $451,372 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2019, net earnings increased to $45.4 million, primarily driven by investment partnership gains, despite a larger loss in the restaurant segment and the acquisition of Southern Oil Net Earnings by Segment (After-Tax, in thousands) | (in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Restaurant | $(10,734) | $(2,613) | $9,725 | | Insurance | $5,584 | $4,915 | $3,097 | | Oil and gas | $5,921 | — | — | | Media | $572 | $796 | $435 | | Total operating businesses | $2,085 | $3,570 | $13,763 | | Investment partnership gains | $60,773 | $33,240 | $11,080 | | Total Net Earnings | $45,380 | $19,392 | $50,071 | - On September 9, 2019, the company acquired Southern Oil for $51.5 million in cash, marking its entry into the oil and gas sector[88] - Consolidated shareholders' equity increased by $45.8 million to $616.3 million at year-end 2019, primarily due to net income of $45.4 million[119] - Net cash from operating activities increased to $93.7 million in 2019 from $20.7 million in 2018, largely due to a $99.7 million increase in distributions from investment partnerships[122] Results of Operations The restaurant segment's loss widened in 2019 due to declining sales and traffic at Steak n Shake, while insurance gains grew, and the new oil and gas segment contributed positively Restaurant Operations Key Metrics (2019 vs 2018) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net Sales | $578.2M | $740.9M | | Same-Store Sales Change | -6.9% | N/A | | Customer Traffic Change | -11.2% | N/A | | Earnings (loss) before tax | $(16.8M) | $(8.6M) | Insurance Operations Pre-Tax Underwriting Gain | (in thousands) | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Pre-tax underwriting gain | $6,477 | $5,634 | +15.0% | Oil and Gas Operations (Post-Acquisition 2019) | (in thousands) | Amount | | :--- | :--- | | Oil and gas revenue | $24,436 | | Earnings before income taxes | $8,032 | - Investment partnership gains, which are highly volatile and concentrated in Cracker Barrel stock, increased to $78.1 million pre-tax in 2019 from $40.4 million in 2018[113] Financial Condition, Liquidity and Capital Resources The company maintains significant liquidity, primarily from investment partnerships, with cash from operations surging in 2019, while evaluating refinancing options for Steak n Shake's debt maturing in 2021 Consolidated Cash and Investments (in thousands) | Category | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $67,772 | $48,557 | | Investments | $44,856 | $33,860 | | Fair value of interest in investment partnerships | $666,123 | $715,102 | | Total cash and investments | $778,751 | $801,982 | Summary of Cash Flow Activities (in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash from operating activities | $93,683 | $20,678 | | Net cash used in investing activities | $(69,982) | $(25,290) | | Net cash used in financing activities | $(8,010) | $(7,530) | - Steak n Shake's term loan of $181.5 million matures on March 19, 2021, and the company is evaluating refinancing options, but alternatives may not be available on commensurate terms[125] Critical Accounting Policies The company's critical accounting policies involve significant management judgment and estimates, particularly for consolidation, asset impairment, reserve estimation, and tax and lease accounting - Significant judgment is required for policies including: consolidation, impairment of restaurant assets, estimation of oil and gas reserves, income taxes, goodwill impairment testing, and lease accounting[130] - Impairment of restaurant assets is tested when events indicate a possible impairment by comparing the asset's carrying value to its undiscounted future cash flows[134] - Goodwill and indefinite-lived intangible assets are tested for impairment annually using both market and income approaches, which require significant management judgment[137] Quantitative and Qualitative Disclosures About Market Risk The company faces significant market risks from its concentrated equity investments, interest rate exposure on variable-rate debt, and commodity price volatility in its oil and gas segment - The company has significant equity price risk due to a concentrated investment in Cracker Barrel Old Country Store, Inc., where a hypothetical 10% price change would alter investment fair value by $55.0 million[144][145] - The company is exposed to interest rate risk on Steak n Shake's credit facility, where a hypothetical 100 basis point rate increase would impact net earnings by approximately $1.4 million[146] - The Southern Oil business is exposed to commodity price risk, as its earnings are significantly affected by changes in oil and gas prices[148] Financial Statements and Supplementary Data This section includes the independent auditor's unqualified opinion on the consolidated financial statements, which also highlight the adoption of a new lease accounting standard and significant related-party investments Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on the company's consolidated financial statements, noting the adoption of ASC 842 and emphasizing significant related-party investment partnerships - The auditor, Deloitte & Touche LLP, issued an unqualified opinion on the financial statements[151] - The audit report emphasizes the matter of significant investments in related-party investment partnerships, which totaled $505.5 million at carrying value as of December 31, 2019[156] - The audit of internal controls excluded Southern Oil Company, which was acquired on September 9, 2019[161] Consolidated Financial Statements The consolidated financial statements present the company's financial position, results of operations, and cash flows, showing total assets of $1.14 billion and net earnings of $45.4 million for 2019 Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Assets | $1,139,309 | $1,029,493 | | Investment partnerships | $505,542 | $557,480 | | Total Liabilities | $523,011 | $459,038 | | Long-term notes payable | $263,182 | $240,001 | | Shareholders' Equity | $616,298 | $570,455 | Consolidated Statement of Earnings Highlights (in thousands) | Account | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total Revenues | $668,838 | $809,894 | $839,804 | | Restaurant operations revenue | $610,220 | $775,690 | $807,153 | | Investment partnership gains | $78,133 | $40,411 | $6,965 | | Net Earnings | $45,380 | $19,392 | $50,071 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, including the Southern Oil acquisition, concentrated related-party investments, ASC 842 adoption, and segment reporting highlighting restaurant losses versus investment gains - 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 liabilities of $69.7 million on the balance sheet[219] - The carrying value of investments in The Lion Fund partnerships was $505.5 million at year-end 2019, controlled by CEO Sardar Biglari and subject to a rolling 5-year lock-up[224][227] - The company has a services agreement with entities owned by Mr. Biglari, paying a fixed fee of $8.4 million in 2019 for business and administrative services[283] Segment Earnings (Loss) Before Tax (in thousands) | Segment | 2019 | 2018 | | :--- | :--- | :--- | | Restaurant Operations | $(16,819) | $(8,611) | | First Guard (Insurance) | $7,103 | $6,215 | | Southern Oil | $8,032 | — | | Maxim (Media) | $742 | $1,068 | | Investment partnership gains | $78,133 | $40,411 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable - Not applicable[320] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019, excluding the recently acquired Southern Oil, with no material changes to internal controls during the fourth quarter - The CEO and Controller concluded that disclosure controls and procedures were effective as of December 31, 2019[321] - The assessment of internal controls over financial reporting excluded Southern Oil, which was acquired on September 9, 2019[321][324] - The effectiveness of internal control over financial reporting was audited by Deloitte & Touche LLP, who issued an unqualified opinion[325] Other Information The company reports no other information - None[325] Part III Directors, Executive Compensation, Security Ownership, and Related Transactions Information for Items 10 through 14 is incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting of Shareholders - The information for Part III (Items 10-14) is not included in this 10-K and is incorporated by reference from the company's 2020 definitive proxy statement[327] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements included in the report and provides a comprehensive list of exhibits filed with the 10-K, including governance documents and required certifications - This section lists all financial statements, the auditor's report, and management's report on internal control included in Item 8[329] - A list of exhibits filed with the report is provided, including governance documents, material contracts, and required certifications[331][333] Form 10-K Summary This item is not applicable - Not applicable[334]