Biglari (BH) - 2020 Q2 - Quarterly Report

Part I - Financial Information Item 1. Financial Statements The company's financial statements for the period ending June 30, 2020, show a significant net loss, primarily due to investment partnership losses and the COVID-19 pandemic's impact on restaurant operations, with total assets decreasing from $1.14 billion to $989 million Consolidated Balance Sheets - Total assets decreased to $988.8 million as of June 30, 2020, from $1.14 billion at December 31, 2019, primarily due to a reduction in investment partnership value, while total liabilities and shareholders' equity also declined[5] Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 (Unaudited) | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $988,818 | $1,139,309 | | Cash and cash equivalents | $36,438 | $67,772 | | Investment partnerships | $369,129 | $505,542 | | Total Liabilities | $466,268 | $523,011 | | Total current liabilities | $301,593 | $139,817 | | Long-term notes payable | $77,927 | $263,182 | | Total Shareholders' Equity | $522,550 | $616,298 | Consolidated Statements of Earnings - The company reported a net loss of $95.4 million for the first six months of 2020, a significant shift from $31.8 million net earnings in 2019, mainly driven by a $116.5 million loss from investment partnerships and nearly halved restaurant revenues due to COVID-19[6][7] Key Earnings Data (in thousands) | Metric | Q2 2020 | Q2 2019 | First Six Months 2020 | First Six Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $96,502 | $168,343 | $232,202 | $350,202 | | Restaurant Operations Revenue | $78,764 | $160,061 | $192,908 | $333,836 | | Investment Partnership Gains (Losses) | $59,248 | $34,198 | $(116,494) | $68,352 | | Net Earnings (Loss) | $42,466 | $21,974 | $(95,419) | $31,792 | | EPS (Class A) | $121.51 | $63.50 | $(275.04) | $91.85 | Consolidated Statements of Cash Flows - Net cash provided by operating activities for the first six months of 2020 was $98.7 million, a substantial improvement from the $8.3 million used in 2019, primarily due to $83.8 million in distributions from investment partnerships offsetting the net loss[9][10][137] Cash Flow Summary - First Six Months (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $98,685 | $(8,295) | | Net cash used in investing activities | $(103,360) | $(8,619) | | Net cash used in financing activities | $(24,156) | $(3,984) | | Decrease in cash | $(28,834) | $(20,895) | Notes to Consolidated Financial Statements - The COVID-19 pandemic significantly impacted operating businesses, leading to $14.4 million in impairment charges in the restaurant segment due to permanent closures and dining room shutdowns, while the company also acquired Southern Pioneer Property & Casualty Insurance Company in March 2020[15][16][35] - The company's investment partnerships experienced significant losses, with the carrying value of the company's interest dropping from $505.5 million at year-end 2019 to $369.1 million at June 30, 2020, with these partnerships accounted for under the equity method[25][28] - Steak n Shake's senior secured term loan, with an outstanding balance of $153.6 million, is scheduled to mature on March 19, 2021, and the company is currently evaluating refinancing options[52] - Shareholder lawsuits alleging breach of fiduciary duty related to the company's dual-class stock structure were concluded in the company's favor, with the Indiana Supreme Court denying the plaintiffs' petition to transfer in April 2020[74] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the significant net loss in the first half of 2020 to volatile investment partnership results and the severe operational impact of the COVID-19 pandemic on its restaurant segment, which saw net sales decline 45.2% year-over-year, prompting a transition to a counter-service model and store closures, while the company maintains significant liquidity despite the upcoming maturity of Steak n Shake's $153.6 million term loan Results of Operations - Restaurants - The COVID-19 pandemic severely impacted restaurant operations, with most dining rooms closing by March 17, 2020, resulting in a 45.2% decrease in net sales for the first six months of 2020 compared to the same period in 2019[100][105][106] - Steak n Shake is transitioning company-operated restaurants to a franchise partner model, increasing franchise partner units from 8 to 51 year-over-year, and moving to a counter-service model requiring significant equipment investment[100][105][107] - The company recorded impairment charges of $18.1 million in the first six months of 2020, primarily due to the closure of Steak n Shake stores[112] Restaurant Revenue Performance - First Six Months (in thousands) | Revenue Category | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $174,215 | $317,693 | -45.2% | | Franchise royalties and fees | $9,283 | $13,379 | -30.6% | | Franchise partner fees | $7,881 | $679 | +1060.7% | | Total revenue | $192,908 | $333,836 | -42.2% | Results of Operations - Insurance - The insurance segment's contribution to net earnings increased to $4.6 million in the first six months of 2020 from $2.7 million in the prior-year period, supported by the acquisition of Southern Pioneer in March 2020[96][114] Insurance Operations Performance - First Six Months (in thousands) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Premiums written | $22,163 | $13,926 | | Pre-tax underwriting gain | $4,587 | $2,768 | | Contribution to net earnings | $4,615 | $2,675 | Results of Operations - Other Segments - The Oil and Gas segment (Southern Oil) faced challenges from significantly decreased oil demand due to the COVID-19 pandemic, leading the company to cut production and expenses, and recorded a pre-tax loss of $1.7 million in Q2 2020[121] - The Media and Licensing segment (Maxim) saw its contribution to net earnings increase to $351 thousand for the first six months of 2020, up from $48 thousand in the same period of 2019[123] Investment Partnership Gains (Losses) Investment Partnership Contribution to Net Earnings (in thousands) | Period | Pre-Tax Gains (Losses) | Contribution to Net Earnings (Loss) | | :--- | :--- | :--- | | Q2 2020 | $59,248 | $45,365 | | Q2 2019 | $34,198 | $26,254 | | First Six Months 2020 | $(116,494) | $(88,994) | | First Six Months 2019 | $68,352 | $52,491 | - Gains and losses from investment partnerships are highly volatile and include changes in market values of underlying investments, with the company's pro-rata share of its own common stock held by the partnerships treated as treasury stock and related gains/losses eliminated from earnings[128][129] Financial Condition and Liquidity - The company maintains significant liquidity, with total cash and investments (at fair value) of $583.2 million as of June 30, 2020[136] - Steak n Shake's credit facility has an outstanding balance of $153.6 million as of June 30, 2020, maturing on March 19, 2021, and the company is actively evaluating refinancing options, noting potential adverse effects from the pandemic on financing availability[141] - During the first six months of 2020, the company retired $26.8 million of debt under Steak n Shake's credit facility[139][144] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk stems from its equity investments held directly and through investment partnerships, where a hypothetical 10% change in market price would impact carrying value by approximately $45.4 million, alongside interest rate risk on its variable-rate term loan, where a 100 basis point increase would impact net earnings by about $1.0 million - The company's main market risk is from equity investments, where a hypothetical 10% change in the market price of investments would result in a corresponding change in carrying value of $45.4 million[148][149] - The company is exposed to interest rate risk on its term loan, where a hypothetical 100 basis point increase in short-term interest rates would impact net earnings by approximately $1.0 million[150] Item 4. Controls and Procedures Based on an evaluation as of June 30, 2020, the Chief Executive Officer and Controller concluded that the company's disclosure controls and procedures were effective, with no material changes to internal control over financial reporting occurring during the quarter - The Chief Executive Officer and Controller concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[151] - There were no material changes in internal control over financial reporting during the quarter ended June 30, 2020[152] Part II - Other Information Item 1. Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 14 of the financial statements, which details the successful conclusion of shareholder litigation in the company's favor - The report refers to Note 14 of the Consolidated Financial Statements for information on legal proceedings[153] Item 1A. Risk Factors There have been no material changes from the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2019, and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 - No material changes to risk factors were reported for the quarter[153] Other Items (2, 3, 4, 5) The company reported no unregistered sales of equity securities, no defaults upon senior securities, and no other material information required to be disclosed under these items, with mine safety disclosures not applicable - The company reported 'None' for Item 2 (Unregistered Sales of Equity Securities), Item 3 (Defaults Upon Senior Securities), and Item 5 (Other Information), while Item 4 (Mine Safety Disclosures) was 'Not applicable'[154] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications pursuant to the Sarbanes-Oxley Act and Interactive Data Files (XBRL) - Lists required certifications (31.01, 31.02, 32.01) and Interactive Data Files (101, 104) as exhibits[154]