Biglari (BH_A) - 2019 Q3 - Quarterly Report

Part I – Financial Information Financial Statements The unaudited consolidated financial statements reflect the acquisition of Southern Oil and the adoption of the new lease accounting standard Consolidated Balance Sheets Total assets grew to $1.15 billion, driven by property additions 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 for the first nine months of 2019 reached $31.8 million, driven by investment gains 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 an 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, lease accounting changes, and a $7.4 million impairment charge - 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) Investment gains offset restaurant operating losses, while the Southern Oil acquisition diversifies operations - Steak n Shake's sales have declined since 2017, leading to lower profitability; to address this, the company is emphasizing a franchise partnership program and has temporarily closed 106 company-operated restaurants as of September 30, 2019[101] - The significant swing from a net loss in 2018 to net earnings in 2019 is primarily due to gains from investment partnerships, which contributed $53.9 million to net earnings in the first nine months of 2019 compared to a loss of $15.7 million in the prior year period[103][126] Results of Operations: Restaurants The restaurant segment faced a $109.4 million sales decline and a pre-tax loss of $21.3 million - 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] 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 | Results of Operations: Insurance The insurance segment delivered solid growth with an 8.8% increase in premiums earned 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 new oil and gas segment contributed $6.5 million in revenue in its first partial quarter 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 partnerships generated $69.8 million in pre-tax gains, driving overall company profitability - The investments held by the partnerships are largely concentrated in the common stock of Cracker Barrel Old Country Store, Inc[127] 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) | Financial Condition and Liquidity Shareholders' equity grew to $601.5 million, supported by strong operating cash flow - 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 - 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 - 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 is appealing a dismissed shareholder lawsuit and settled two employee class-action lawsuits - 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 - No unregistered sales of equity securities or use of proceeds occurred during the period[150]