| Note 1. Summary of Significant Accounting Policies | Description of Business Biglari Holdings Inc. is a holding company
owning subsidiaries engaged in a number of diverse business activities, including media, property and casualty insurance, and restaurants.
The Company’s largest operating subsidiaries are involved in the franchising and operating of restaurants. Biglari Holdings
is founded and 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 Mr. Biglari. As of December 31, 2018, Mr. Biglari’s
beneficial ownership was approximately 56.9% of the Company’s outstanding Class A common stock and 54.3% of the Company’s
outstanding Class B common stock. Issuance of Dual Class Common Stock On March 5, 2018, the Company entered
into an agreement with its predecessor registrant, now known as OBH Inc. (the “Predecessor”), and BH Merger Company,
a wholly owned subsidiary of the Company. Pursuant to the agreement on April 30, 2018, BH Merger Company merged with and into the
Predecessor, with the Predecessor continuing as the surviving corporation and a wholly owned subsidiary of the Company. As a result of the April 30, 2018 transaction,
the Company has two classes of common stock, designated Class A common stock and Class B common stock. A share of Class B common
stock has economic rights equivalent to 1/5 th Since May 1, 2018, the shares
of the Company’s Class A common stock have traded on the New York Stock Exchange (“NYSE”) under
the ticker symbol “BH.A,” whereas the shares of the Company’s Class B common stock have traded on the
NYSE under the ticker symbol “BH”. For accounting purposes, the April 30,
2018 transaction has been treated as a merger of entities under common control. Accordingly, the consolidated financial position
and results of operations of the Predecessor has been included in the consolidated financial statements on a historical basis,
except for earnings per share which is impacted by the issuance of the new common shares. Principles of Consolidation The consolidated
financial statements include the accounts of the Company and its wholly-owned subsidiaries including Steak n Shake Inc.
(“Steak n Shake”), Western Sizzlin Corporation (“Western Sizzlin”), Maxim Inc. (“Maxim”,)
and First Guard Insurance Company and its agency, 1st Guard Corporation (collectively “First
Guard”). Intercompany accounts and transactions have been eliminated in consolidation. Cash, Cash Equivalents and Restricted
Cash Cash equivalents primarily consist of
U.S. Government securities and money market accounts, all of which have original maturities of three months or less. Cash equivalents
are carried at fair value. In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) 2016-18, Statement of Cash Flows: Restricted Cash Cash as reported on the statements of
cash flows consists of the following.
December 31,
2018 2017 2016
Cash and cash equivalents $ 48,557 $ 58,577 $ 75,808
Restricted cash included in other long-term assets 6,453 8,653 25
Cash, cash equivalents and restricted cash $ 55,010 $ 67,230 $ 75,833 Investments Our investments consist of available-for-sale
securities. Available-for-sale securities are carried at fair value with net unrealized gains or losses reported in the statements
of earnings. Realized gains and losses on disposals of investments are determined by specific identification of cost of investments
sold and are included in investment gains/losses, a component of other income. Investment Partnerships The Company holds a limited
interest in The Lion Fund, L.P. and The Lion Fund II, L.P. (collectively the “investment partnerships”). Biglari
Capital Corp. (“Biglari Capital”), an entity solely owned by Mr. Biglari, is the general partner of the
investment partnerships. Our interests in the investment partnerships are accounted as equity method investments because of
our retained limited partner interests. The Company records investment partnership gains (inclusive of the investment
partnerships’ unrealized gains and losses on their securities) as a component of other income based on our proportional
ownership interest in the partnerships. The investment partnerships are for purposes of generally accepted accounting
principles (“GAAP”), investment companies under the AICPA Audit and Accounting Guide Investment
Companies. Concentration of Equity Price Risk
The majority of our investments are conducted
through investment partnerships which generally hold common stocks. We also hold marketable securities directly. Through the investment
partnerships we hold a concentrated position in the common stock of Cracker Barrel Old Country Store, Inc. A significant decline
in the general stock market or in the prices of major investments may have a materially adverse effect on our earnings and on consolidated
shareholders’ equity. Receivables Our accounts receivable balance consists
primarily of franchisee, customer, and other receivables. We carry our accounts receivable at cost less an allowance for doubtful
accounts, which is based on a history of past write-offs and collections and current credit conditions. Allowance for doubtful
accounts was $3,901 and $2,298 at December 31, 2018 and 2017, respectively. Inventories Inventories are valued at the lower of
cost (first-in, first-out method) or market, and consist primarily of restaurant food items and supply inventory. Property and Equipment Property and equipment are stated at
cost less accumulated depreciation and amortization. Depreciation and amortization are recognized on the straight-line method over
the estimated useful lives of the assets (10 to 30 years for buildings and land improvements, and 3 to 10 years for equipment).
Leasehold improvements are amortized on the straight-line method over the shorter of the estimated useful lives of the improvements
or the term of the related leases. Interest costs associated with the construction of new restaurants are capitalized. Major improvements
are also capitalized while repairs and maintenance are expensed as incurred. We review our long-lived assets whenever events or
changes in circumstances indicate that their carrying amounts may not be recoverable. For purposes of this assessment, assets are
evaluated at the lowest level for which there are identifiable cash flows. If the future undiscounted cash flows of an asset are
less than the recorded value, an impairment is recorded for the difference between the carrying value and the estimated fair value
of the asset. Goodwill and Other Intangible Assets Goodwill and indefinite life intangible
assets are not amortized, but are tested for potential impairment on an annual basis, or more often if events or circumstances
change that could cause goodwill or indefinite life intangible assets to become impaired. Other purchased intangible assets are
amortized over their estimated useful lives, generally on a straight-line basis. We perform reviews for impairment of intangible
assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment
loss is recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are
less than its carrying value. When an impairment is identified, we reduce the carrying value of the asset to its estimated fair
value. No impairments were recorded on goodwill or intangible assets during 2018, 2017 or 2016. Refer to Note 6 for information
regarding our goodwill and other intangible assets. Operating Leases The Company leases certain property under
operating leases. Many of these lease agreements contain rent holidays, rent escalation clauses and/or contingent rent provisions.
Rent expense is recognized on a straight-line basis over the expected lease term, including cancellable option periods when failure
to exercise such options would result in an economic penalty. In addition, the rent commencement date of the lease term is the
earlier due date when we become legally obligated for the rent payments, the date when we take access to the property, or the grounds
for build out. Common Stock As a result of the transaction on April
30, 2018, the Predecessor’s common stock converted into the right to receive shares of Class A common stock and Class B
common stock. The treasury shares outstanding on April 30, 2018, were retired and not converted into Class A and Class B common
stock. The following table presents shares authorized, issued and outstanding.
December 31, 2018
Class A Class B December 31, 2017 December 31, 2016
Common stock authorized 500,000 10,000,000 2,500,000 2,500,000
Common stock issued 206,864 2,068,640 2,142,202 2,142,202
Treasury stock held by the Company - - (74,589) (75,009)
Outstanding shares 206,864 2,068,640 2,067,613 2,067,193 On an equivalent Class A common stock
basis, there were 620,592, 620,284 and 620,158 shares outstanding as of December 31, 2018, 2017 and 2016, respectively. Earnings Per Share Earnings per share of common stock is
based on the weighted average number of shares outstanding during the year. The shares of Company stock attributable to our limited
partner interest in the investment partnerships — based on our proportional ownership during this period — are considered
treasury stock on the consolidated balance sheet and thereby deemed not to be included in the calculation of weighted average common
shares outstanding. However, these shares are legally outstanding. The Company has applied the “two-class
method” of computing earnings per share as prescribed in ASC 260, “Earnings Per Share.” The issuance of dual
class common stock on April 30, 2018 is applied on a retrospective basis for the calculation of earnings per share. Accordingly,
earnings per share for 2018, 2017 and 2016 are impacted by the issuance of the new common shares. The equivalent Class A common
stock applied for computing earnings per share excludes the proportional shares of Biglari Holdings’ stock held by the investment
partnerships. The equivalent Class A common stock for the earnings per share calculation was 348,108, 368,150 and 366,678 for 2018,
2017 and 2016, respectively. There are no dilutive securities currently outstanding. Revenue Recognition Restaurant operations Restaurant operations revenues were as
follows.
2018 2017 2016
Net sales $ 740,922 $ 781,856 $ 795,322
Franchise royalties and fees 30,998 20,773 18,794
Other 3,770 4,524 3,798
$ 775,690 $ 807,153 $ 817,914 In accordance with ASC 606-10-50, the
Company disaggregates revenue from contracts with customers. The only Company segment that was affected significantly by ASC 606
was restaurants. The Company’s accounting policies and practices related to restaurant operations revenues consist of the
following under ASC 606. Net sales were composed of
retail sales of food through Company-owned stores. Company-owned store revenues are recognized, net of discounts and sales
taxes, when our obligation to perform is satisfied at the point of sale. Sales taxes related to these sales are collected
from customers and remitted to the appropriate taxing authority and are not reflected in the Company’s consolidated
statements of income as revenue. Franchise royalties and fees are
composed of royalties and fees from Steak n Shake and Western Sizzlin franchisees. Royalties are based upon a percentage of
sales of the franchised restaurant and are recognized as earned. Franchise royalties are billed on a monthly basis.
Initial franchise fees received are deferred when amounts are received and recognized as revenue on a straight-line basis
over the term (typically 20 years) of each respective franchise agreement. This represents a change in methodology, under the
adoption of ASC 606 because we have historically recognized initial franchise fees upon the opening of a franchise
restaurant. During the year ended December 31,
2018, restaurant operations recognized $3,096 in revenue related to initial franchise fees. As of December 31, 2018 and
January 1, 2018, restaurant operations had deferred revenue recorded in accrued expenses related to franchise fees of $9,075
and $10,581, respectively. Restaurant operations expects to recognize approximately $649 in 2019 and the balance in the
years 2020 through 2039. Our advertising arrangements
with franchisees are reported in franchise royalties and fees. This represents a change in methodology under the
adoption of ASC 606 as we have historically applied advertising funds from the franchisees directly to various marketing
programs. The new guidance requires the Company to recognize the marketing contributions received from franchisees as
revenue and record a corresponding increase to marketing expense as the funds are applied to marketing programs as required
by our franchise agreements. During the year ended December
31, 2018, restaurant operations recognized $9,675 in revenue related to franchisee advertising fees. As of December 31, 2018
and January 1, 2018, restaurant operations had deferred revenue recorded in accrued expenses related to franchisee
advertising fees of $2,255 and $2,064, respectively. Restaurant operations expects to recognize approximately $1,128 of
deferred revenue during 2019 and the balance in 2020. Restaurant operations sells gift
cards to customers which can be redeemed for retail food sales within our stores. Gift cards are recorded as deferred revenue
when issued and are subsequently recorded as net sales upon redemption. Restaurant operations estimates breakage related to
gift cards when the likelihood of redemption is remote. This estimate utilizes historical trends based on the vintage of the
gift card. Breakage on gift cards is recorded as other revenue in proportion to the rate of gift card redemptions by
vintage. This represents a change in the methodology, under the adoption of ASC 606, used to estimate breakage for we
have historically recognized breakage for the portion of the gift card balances that remained outstanding following 48 months
of issuance. For the year ended December 31,
2018, restaurant operations recognized $27,081 of revenue from gift card redemptions. As of December 31, 2018 and January 1,
2018, restaurant operations had deferred revenue recorded in accrued expenses related to unredeemed gift cards of $22,685
and $20,968, respectively. The Company expects to recognize approximately $18,132 in 2019 and the balance in the years
2020 through 2022. Insurance premiums and commissions Insurance premiums are earned over the
terms of the related policies. Expenses incurred in connection with acquiring new insurance business, including acquisition costs,
are charged to operations as incurred. Premiums earned are stated net of amounts ceded to reinsurer. Media advertising and other Magazine subscription and advertising
revenues are recognized at the magazine cover date. The unearned portion of magazine subscriptions is deferred until the magazine’s
cover date, at which time a proportionate share of the gross subscription price is recognized as revenues, net of any commissions
paid to subscription agents. Also included in subscription revenues are revenues generated from single-copy sales of magazines
through retail outlets such as newsstands, supermarkets, convenience stores and drugstores and on certain digital devices, which
may or may not result in future subscription sales. Revenues from retail outlet sales are recognized based on gross sales less
a provision for estimated returns. License revenue is recognized when earned. We derive value and revenues from intellectual property
assets through a range of licensing and business activities, including licensing and syndication of our trademarks and copyrights
in the United States and internationally. Restaurant Cost of Sales Cost of sales includes the cost of food,
restaurant operating costs and restaurant rent expense. Cost of sales excludes depreciation and amortization, which is presented
as a separate line item on the consolidated statement of earnings. Insurance Losses and Underwriting
Expenses Liabilities for estimated unpaid losses
and loss adjustment expenses with respect to claims occurring on or before the balance sheet date are established under insurance
contracts issued by our insurance subsidiaries. Such estimates include provisions for reported claims or case estimates, provisions
for incurred but not reported claims and legal and administrative costs to settle claims. The estimates of unpaid losses and amounts
recoverable under reinsurance are established and continually reviewed by using a variety of actuarial, statistical and analytical
techniques. Reinsurance contracts do not relieve the ceding company of its obligations to indemnify policyholders with respect
to the underlying insurance contracts. Liabilities for insurance losses of $1,891 and $1,907 are included in accrued expenses in
the consolidated balance sheet as of December 31, 2018 and 2017, respectively. Marketing Expense Advertising costs are charged to expense
at the later of the date the expenditure is incurred or the date the promotional item is first communicated. Marketing expense
is included in selling, general and administrative expenses in the consolidated statement of earnings. Insurance Reserves We self-insure a significant portion
of expected losses under our workers’ compensation, general liability, auto, directors’ and officers’ and medical
liability insurance programs, and record a reserve for our estimated losses on all unresolved open claims and our estimated incurred
but not reported claims at the anticipated cost to us. Insurance reserves are recorded in accrued expenses in the consolidated
balance sheet. Savings Plans Several of our subsidiaries also sponsor
deferred compensation and defined contribution retirement plans, such as 401(k) or profit sharing plans. Employee contributions
to the plans are subject to regulatory limitations and the specific plan provisions. Some of the plans allow for discretionary
contributions as determined by management. Employer contributions expensed with respect to these plans were not material. Foreign Currency Translation The Company has certain subsidiaries
located in foreign jurisdictions. For subsidiaries whose functional currency is other than the U.S. dollar, the translation
of functional currency statements to U.S. dollar statements uses end-of-period exchange rates for assets and liabilities, weighted
average exchange rates for revenue and expenses, and historical rates for equity. The resulting currency translation adjustment
is recorded in accumulated other comprehensive income, as a component of equity. Use of Estimates Preparation of the consolidated financial
statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could differ from the estimates. New Accounting Standards In January 2017, the Financial Accounting
Standards Board (“FASB”) issued ASU 2017-04, Intangibles - Goodwill
and Other: Simplifying the Test for Goodwill Impairment. In November 2016, the FASB issued ASU
2016-18, Statement of Cash Flows: Restricted Cash In October 2016, the FASB issued ASU
2016-17, Interests Held through Related Parties That Are under Common Control. In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. In June 2016, the FASB issued ASU 2016-13,
Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments In February 2016, the FASB issued ASU
2016-02, Leases Leases (Topic 842): Targeted Improvements, The guidance permits the use of a modified
retrospective approach, which requires an entity to recognize and measure leases existing at, or entered into after, the beginning
of the earliest comparative period presented. Alternatively, the guidance permits a “Comparatives Under 840 Option”
that changes the date of initial application to the beginning of the period of adoption. We will be electing the Comparatives Under
840 Option in which we will apply ASC 840 to all comparative periods, including disclosures, and recognize the effects of applying
ASC 842 as a cumulative-effect adjustment to retained earnings as of the effective date (January 1, 2019). We will elect the package
of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to
carryforward the historical lease classification. In addition, we elected certain practical expedients and accounting policies
including an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. We will
recognize those lease payments in the consolidated statements of earnings on a straight-line basis over the lease term. The standard will have a material
impact on our consolidated balance sheets, but will not have a material impact on our consolidated statements of earnings and
statements of cash flow. The most significant impact will be the recognition of right of use assets and lease liabilities for
operating leases. Although our accounting for existing capital leases remains substantially unchanged, the adoption of the
standard will result in the recognition of right of use assets and lease liabilities for operating leases of approximately
$90,000 as of January 1, 2019. In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606) The following table summarizes the impact
of the adoption of ASC 606 on revenues, operating expenses and net earnings for 2018.
As Reported Adjustments Amounts without
Statements of Earnings
Revenues
Restaurant operations
Net sales $ 740,922 $ - $ 740,922
Franchise royalties and fees 30,998 9,417 21,581
Other 3,770 (463) 4,233
Selling, general and administrative 132,808 9,689 123,119
Earnings before income taxes 16,755 (735) 17,490
Income tax benefit (2,637) (184) (2,453)
Net earnings 19,392 (551) 19,943 The impact of ASC 606 on the Company’s
balance sheet as of December 31, 2018 was not material. The cumulative change in retained earnings as of January 1, 2018 was $90.
Upon adoption of ASC 606, the Company changed its restaurant operations accounting policies for the recognition of franchise fees,
recording of advertising arrangements, and recognition of gift card revenue. The adoption of ASC 606 did not have any significant impact on our insurance or media/licensing businesses. |
