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Biglari : Management's Discussion and Analysis of Financial Item 2. Condition and Results of Operations

05/08/2015 | 04:40pm US/Eastern

(dollars in thousands except per share data)


Biglari Holdings Inc. is a holding company owning subsidiaries engaged in a
number of diverse business activities, including media, property and casualty
insurance, as well as restaurants. The Company's largest operating subsidiaries
are involved in the franchising and operating of restaurants. The Company is led
by Sardar Biglari, Chairman and Chief Executive Officer of Biglari Holdings and
its major operating subsidiaries. The Company's long-term objective is to
maximize per-share intrinsic value. All major operating, investment, and capital
allocation decisions are made for the Company and its subsidiaries by Sardar
Biglari, Chairman and Chief Executive Officer.

On October 16, 2014, the Company's Board of Directors approved a change in the
Company's fiscal year-end moving from the last Wednesday in September to
December 31 of each year. As a result of the change in year end, the first
quarter for 2015 includes the period from January 1, 2015 to March 31, 2015. For
comparative purposes, the first quarter for 2014 includes the period from
January 1, 2014 to March 31, 2014. The comparative quarter is derived from the
books and records of the Company. In the opinion of management, the comparative
quarter reflects all adjustments necessary to present the financial position and
results of operations in accordance with generally accepted accounting
principles. After the year-end change, Steak n Shake continues to operate on a
52/53 week year ending on the last Wednesday of the calendar year. For the 2015
quarter, Steak n Shake's financial information included the period from January
1, 2015 to April 1, 2015. There were no significant transactions in the
intervening period.

Net earnings attributable to Biglari Holdings shareholders for the first quarter of 2015 and 2014 are disaggregated in the table that follows. Amounts are recorded after deducting income taxes.

                                                             First Quarter
                                                           2015         2014
Operating businesses:
   Restaurant                                            $  3,648     $   4,282
   Insurance                                                  436             2
   Media                                                   (3,900 )      (1,057 )
Total operating businesses                                    184         3,227
Corporate and other                                        (3,449 )        (781 )
Investment partnership gains                               15,112       (28,092 )
Interest expense on notes payable and other borrowings     (1,864 )      (1,784 )
                                                         $  9,983     $ (27,430 )


Our restaurant businesses include Steak n Shake and Western. As of March 31, 2015, Steak n Shake comprised 417 company-operated restaurants and 129 franchised units. Western comprised 4 company-operated restaurants and 67 franchised units.

Our insurance business is composed of First Guard Insurance Company and its agency, 1st Guard Corporation (collectively "First Guard"), which we acquired on March 19, 2014. First Guard is a direct underwriter of commercial trucking insurance, selling physical damage and nontrucking liability insurance to truckers.

Our media business is composed of Maxim. We acquired certain assets and liabilities of Maxim on February 27, 2014. Maxim's business lies principally in media and licensing.



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Restaurants

Steak n Shake and Western comprise 617 company-operated and franchised restaurants as of March 31, 2015.


                                                   Steak n Shake                            Western Sizzlin
                                        Company- operated        Franchised      Company-operated           Franchised        Total
Total stores as of December 31, 2013                   418               108                     3                   80            609
Net restaurants opened (closed)                         (3 )               7                     -                    -              4
Total stores as of March 31, 2014                      415               115                     3                   80            613

Total stores as of December 31, 2014                   417               128                     4                   68            617
Net restaurants opened (closed)                          -                 1                     -                   (1 )            -
Total stores as of March 31, 2015                      417               129                     4                   67            617



Earnings of our restaurant operations are summarized below.


                                                    First Quarter
                                              2015                 2014

Revenue

   Net sales                                $ 192,170            $ 180,440
   Franchise royalties and fees                 3,656                4,252
   Other revenue                                  910                  854
Total revenue                                 196,736              185,546

Restaurant cost of sales
   Cost of food                                57,111   29.7 %      53,021   29.4 %
   Restaurant operating costs                  93,327   48.6 %      87,455   48.5 %
   Rent                                         4,323    2.2 %       3,811    2.1 %
Total cost of sales                           154,761              144,287

Selling, general and administrative

   General and administrative                  16,408    8.3 %      16,540    8.9 %
   Marketing                                    9,930    5.0 %       8,814    4.8 %
   Other expenses                                 360    0.2 %         540    0.3 %
Total selling, general and administrative      26,698   13.6 %      25,894  

14.0 %


Depreciation and amortization                   6,157    3.1 %       5,933  

3.2 %


Interest on obligations under leases            2,475                2,425

Earnings before income taxes                    6,645                7,007

Income tax expense                              2,997                2,725

Net earnings                                $   3,648            $   4,282


Cost of food, restaurant operating costs and rent expense are expressed as a percentage of net sales. General and administrative, marketing, other expenses and depreciation and amortization are expressed as a percentage of total revenue.

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Net sales during 2015 was $192,170, an increase of $11,730 over 2014. The
increased performance of our restaurant operations was largely driven by Steak n
Shake's same-store sales. Steak n Shake's same-store sales increased 6.0% during
2015, whereas customer traffic increased by 4.1%.

Franchise royalties and fees decreased 14.0% during 2015. The franchised units
remained relatively flat compared to the prior year with 14 net Steak n Shake
openings and 13 net Western closings during the 12 months, which ended March 31,
2015. The decrease in franchise fees is primarily attributable to the timing of
development fees forfeited and thereby realized in 2014.

Cost of food in 2015 was $57,111 or 29.7% of net sales, compared to $53,021 or
29.4% of net sales in 2014. The increased costs were primarily attributable to
higher sales.

Restaurant operating costs were $93,327 or 48.6% of net sales compared to $87,455 or 48.5% in 2014. The increased costs were mainly based on higher sales.

Selling, general and administrative expense was $26,698 or 13.6% of total revenues in 2015 and remained relatively flat compared to $25,894 or 14.0% of total revenues in 2014.

Interest on obligations under leases was $2,475 during 2015, versus $2,425 during 2014. The total obligations under leases outstanding at March 31, 2015 were $102,727.


Insurance

First Guard is a direct underwriter of commercial trucking insurance, selling
physical damage and nontrucking liability insurance to truckers. Earnings of our
insurance business are summarized below.

                                 First Quarter
                                 2015       2014
Premiums written               $  3,498     $ 274

   Insurance losses               2,168       192
   Underwriting expenses            795        56
   Pre-tax underwriting gain        535        26
Other income
   Commissions                       83        11
   Investment income                 73        10
   Other income (expense)           (31 )     (44 )
  Total other income                125       (23 )
Earnings before income taxes        660         3
Income tax expense                  224         1
Contribution to net earnings   $    436     $   2


On March 19, 2014, First Guard became a wholly-owned subsidiary of Biglari Holdings: thus, First Guard's inclusion is from the acquisition date for first quarter 2014.



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Media

Maxim's business lies principally in media and licensing. Earnings of our media operations are summarized below.

                                                   First Quarter
                                                 2015         2014
Revenue                                        $  5,438     $  1,496

Media cost of sales                               9,418        2,408
Selling, general and administrative expenses      1,906          766
Loss before income taxes                         (5,886 )     (1,678 )
Income tax benefit                               (1,986 )       (621 )
Contribution to net earnings                   $ (3,900 )   $ (1,057 )



On February 27, 2014, Maxim became a wholly-owned subsidiary of Biglari
Holdings. During the first quarter of 2015, we continued to make investments
into the brand, many of which are reflected in the reported expenses. We have
recruited personnel to rebuild the media business, both in print and in digital,
as well as to build a licensing business.Although expenses currently exceed
revenues, management expects the narrowing of the two as the year unfolds.

Investment Partnership Gains (Losses)

Earnings (losses) from our investments in partnerships are summarized below.


                                         First Quarter
                                       2015         2014
Investment partnership gain (loss)   $ 22,965     $ (45,842 )
Tax expense (benefit)                   7,853       (17,750 )
Contribution to net earnings         $ 15,112     $ (28,092 )



The Company recorded after-tax earnings from investment partnership gains of
$15,112 during the first quarter of 2015 vs. after-tax losses of $28,092 for the
first quarter of 2014.

Certain of the investment partnerships hold the Company's common stock as
investments. The Company's pro-rata share of its common stock held by the
investment partnerships is recorded as treasury stock even though these shares
are legally outstanding.  Gains and losses on Company common stock included in
the earnings of these partnerships are eliminated.

Interest Expense

The Company's interest expense is summarized below.


                                                            First Quarter
                                                          2015        2014
Interest expense on notes payable and other borrowings   $ 3,006     $ 2,877
Tax benefit                                                1,142       1,093
Interest expense net of tax                              $ 1,864     $ 1,784



Interest expense increased from $2,877 in 2014 to $3,006 in 2015. Included in
the 2014 expense was $1,133 of debt extinguishment expenses related to a
refinancing of Steak n Shake's former credit facility in March 2014. Steak n
Shake's current credit facility has higher debt balances and interest rates than
the former credit facility. The outstanding balance on March 31, 2015 was
$217,800 with a 4.75% interest rate.


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Corporate and Other


Corporate and other exclude restaurant, insurance and media companies. Corporate
and other registered a net loss of $3,449 in 2015 versus a net loss of $781 in
2014. The increase in net loss was primarily attributable to expenses for a
proxy contest in 2015.

Income Tax Expense

Consolidated income tax expense was $7,190 in the current quarter, versus a benefit of $18,377 in 2014. During the first quarter of 2015 the Company recorded tax expense of $7,853 on $22,965 of investment partnership gains compared to a tax benefit of $17,750 on $45,842 of investment partnership losses during the first quarter of 2014.

Financial Condition


Our balance sheet continues to maintain significant liquidity. Our consolidated
shareholders' equity on March 31, 2015 was $731,059, an increase of $5,508
compared to the December 31, 2014 balance. The increase during the first quarter
of 2015 was primarily attributable to net earnings of $9,983 offset by an
increase in treasury stock of $4,274.

Consolidated cash and investments are summarized below.

                                                                 March 31,       December 31,
                                                                    2015             2014
Cash and cash equivalents                                        $  112,787     $      129,669
Investments                                                          21,377             10,800
Fair value of interest in investment partnerships                   802,689            776,899
Total cash and investments                                          936,853            917,368

Less: portion of Company stock held by investment partnerships (86,020 ) (78,917 ) Carrying value of cash and investments on balance sheet $ 850,833

$ 838,451




Certain investment partnerships hold the Company's common stock as
investments. The Company's pro-rata share of its common stock held by the
investment partnerships is recorded as treasury stock for financial reporting
purposes even though these shares are legally outstanding.  Gains and losses
concerning company stock are not included in the earnings of the Company.

Liquidity

Cash used in operating activities during 2015 was $241 compared to $7,012 cash
provided by operating activities during 2014. The change is primarily due to
cash flows from earnings. Excluding partnership gains and losses the Company had
a net loss of $5,129 during 2015 compared to net earnings of $662 during 2014.

Net cash used in investing activities during 2015 of $14,479 was primarily
because of purchases of bonds of $11,494 and capital expenditures of $3,487. Net
cash used in investing activities of $46,145 during 2014 primarily consisted of
acquisitions of Maxim and First Guard.

Net cash used in financing activities was $2,157 during 2015 as compared to net
cash provided by financing activities of $99,702 during 2014. During 2015 we
incurred payments on long-term debt and lease obligations of $2,135. During 2014
we generated cash from financing activities which primarily resulted from an
increase in Steak n Shake borrowings as a result of a debt refinancing during
the quarter. Of the total net proceeds, $50,000 was used to pay a cash dividend
to Biglari Holdings and the remaining loan proceeds are being used by Steak n
Shake for working capital and general corporate purposes.

We intend to meet the working capital needs of our operating subsidiaries principally through anticipated cash flows generated from operations, cash on hand, existing credit facilities, and the sale of excess properties and investments. We continually review available financing alternatives.

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Steak n Shake Credit Facility
On March 19, 2014, Steak n Shake and its subsidiaries entered into a new credit
agreement. This credit agreement provides for a senior secured term loan
facility in an aggregate principal amount of $220,000 and a senior secured
revolving credit facility in an aggregate principal amount of up to $30,000.

The term loan is scheduled to mature on March 19, 2021. It amortizes at an
annual rate of 1.0% in equal quarterly installments, beginning June 30, 2014, at
0.25% of the original principal amount of the term loan, subject to mandatory
prepayments from excess cash flow, asset sales and other events described in the
credit agreement. The balance will be due at maturity. The revolver will be
available on a revolving basis until March 19, 2019.

Steak n Shake has the right to request an incremental term loan facility from
participating lenders and/or eligible assignees at any time, up to an aggregate
total principal amount not to exceed $70,000 if certain customary conditions
within the credit agreement are met.

Borrowings bear interest at a rate per annum equal to a base rate or a
Eurodollar rate (minimum of 1%) plus an applicable margin. Interest on the term
loan is based on a Eurodollar rate plus an applicable margin of 3.75% or on the
prime rate plus an applicable margin of 2.75%. Interest on loans under the
revolver is based on a Eurodollar rate plus an applicable margin ranging from
2.75% to 4.25% or on the prime rate plus an applicable margin ranging from 1.75%
to 3.25%. The applicable margins on revolver loans are contingent on Steak n
Shake's total leverage ratio. The revolver also carries a commitment fee ranging
from 0.40% to 0.50% per annum, according to Steak n Shake's total leverage
ratio, on the unused portion of the revolver.

As of March 31, 2015, the interest rate on the term loan was 4.75%.

The credit agreement includes customary affirmative and negative covenants and events of default, as well as a financial maintenance covenant, solely with respect to the revolver, relating to the maximum total leverage ratio.


Both the term loan and the revolver have been secured by first priority security
interests on substantially all the assets of Steak n Shake. Biglari Holdings is
not a guarantor under the credit facility. Approximately $118,589 of the
proceeds of the term loan were used to repay all outstanding amounts under Steak
n Shake's former credit facility and to pay related fees and expenses, $50,000
of such proceeds were used to pay a cash dividend to Biglari Holdings, and the
remaining term loan proceeds of approximately $51,411 are being used by Steak n
Shake for working capital and general corporate purposes. At March 31, 2015
$217,800 was outstanding under the term loan, and no amount is outstanding under
the revolver.

Steak n Shake had $10,188 in standby letters of credit outstanding as of March 31, 2015 and December 31, 2014.


Western Revolver
As of March 31, 2015, Western has $955 due June 13, 2015.

Critical Accounting Policies
Management's discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. Certain accounting policies require management to make estimates
and judgments concerning transactions that will be settled several years in the
future. Amounts recognized in our consolidated financial statements from such
estimates are necessarily based on numerous assumptions involving varying and
potentially significant degrees of judgment and uncertainty. Accordingly, the
amounts currently reflected in our consolidated financial statements will likely
increase or decrease in the future as additional information becomes
available. There have been no material changes to critical accounting policies
previously disclosed in our transition period report on form 10-K for the
transition period September 25, 2014 to December 31, 2014.


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Effects of Governmental Regulations and Inflation
Most Restaurant operations employees are paid hourly rates related to minimum
wage laws. Any increase in the legal minimum wage would directly increase our
operating costs. We are also subject to various laws related to zoning, land
use, health and safety standards, working conditions, and accessibility
standards. Any changes in these laws that require improvements to our
restaurants would increase our operating costs.

Inflation in food, labor, fringe benefits, energy costs, transportation costs and other operating costs directly affect our operations.


The federal healthcare reform legislation that became law in March 2010 (known
as the Patient Protection and Affordable Care Act ["PPACA"]) mandates menu
labeling of certain nutritional aspects of restaurant menu items such as
caloric, sugar, sodium, and fat content. Altering our recipes in response to
such legislation could increase our costs and/or change the flavor profile of
our menu offerings which could have an adverse impact on our results of
operations. Additionally, if our customers perceive our menu items to contain
unhealthy caloric, sugar, sodium, or fat content, our results of operations
could be further adversely affected.

Additionally, minimum employee health care coverage mandated by state or federal
legislation, such as the PPACA, could significantly increase our employee health
benefit costs or require us to alter the benefits we provide to our employees.
While we are assessing the potential impact the PPACA will have on our business,
certain of the mandates in the legislation are not yet effective. If our
employee health benefit costs increase, we cannot provide assurance that we will
be able to offset these costs through increased revenue or reductions in other
costs, which could have an adverse effect on our results of operations and
financial condition.

Recently Issued Accounting Pronouncements
For detailed information regarding recently issued accounting pronouncements and
the expected impact on our consolidated financial statements, see Note 2, "New
Accounting Standards" in the accompanying notes to consolidated financial
statements included in Part I, Item 1 of this quarterly report on form 10-Q.

Cautionary Note Regarding Forward-Looking Statements
This report includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. In general, forward-looking
statements include estimates of future revenues, cash flows, capital
expenditures, or other financial items, and assumptions underlying any of the
foregoing. Forward-looking statements reflect management's current expectations
regarding future events and use words such as "anticipate," "believe," "expect,"
"may," and other similar terminology. A forward-looking statement is neither a
prediction nor a guarantee of future events or circumstances, and those future
events or circumstances may not occur. Investors should not place undue reliance
on the forward-looking statements, which speak only as of the date of this
report. These forward-looking statements are all based on currently available
operating, financial, and competitive information and are subject to various
risks and uncertainties. Our actual future results and trends may differ
materially depending on a variety of factors, many beyond our control,
including, but not limited to, the risks and uncertainties described in Item 1A,
Risk Factors of our transition report on form 10-K. We undertake no obligation
to publicly update or revise them, except as may be required by law.


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© Edgar Online, source Glimpses

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