CKX Lands, Inc. — Form 10-Q Summary
Business context and reporting period
CKX Lands, Inc. is a Louisiana-based landowner with three operating segments: oil and gas, timber, and surface interests. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018, compared with the corresponding 2017 periods. The company is a smaller reporting company and reported 1,942,495 common shares outstanding.
Financial performance and position
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 |
|---|---|---|
| Total revenue | $394,033 | $397,005 |
| Income from operations | $227,801 | $254,755 |
| Net income | $151,704 | $213,480 |
| Basic and diluted EPS | $0.08 | $0.11 |
| Metric | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|
| Total revenue | $740,728 | $595,776 |
| Income from operations | $1,275,782 | $283,963 |
| Income before income taxes | $1,301,658 | $304,538 |
| Net income | $989,065 | $258,100 |
| Basic and diluted EPS | $0.51 | $0.13 |
| Dividends per share | $0.12 | $0.10 |
Second-quarter operating margin was approximately 57.8% and net margin was approximately 38.5%. Six-month operating income includes an $881,654 gain on the sale of land and equipment; therefore, the six-month operating and net margins are substantially affected by this unusual item. The filing does not present a clearly defined adjusted margin excluding the gain.
- Second-quarter revenue was broadly flat year over year, while net income declined 29% because of higher general and administrative expense and the absence of the prior-year comparable benefit.
- Six-month revenue increased 24.3%, primarily from timber revenue of $355,008 versus $8,966 in 2017. Oil and gas revenue declined to $286,255 from $333,362, and surface revenue declined to $99,465 from $253,448.
- Six-month operating expenses were $79,824 versus $64,004. General and administrative expense increased to $266,309 from $250,233.
- Net cash provided by operating activities was only $5,132, down from $162,083, despite higher reported net income, principally because the land-sale gain is noncash and because of changes in working capital.
- Investing activities provided $244,250, including $996,494 of land and equipment sale proceeds, partly offset by certificate-of-deposit purchases and timber and asset purchases.
- Financing activities used $233,099 for dividends. Ending cash and restricted cash was $1,668,687 versus $1,518,481 at June 30, 2017.
Liquidity, assets, and liabilities
- Total assets were $15.42 million at June 30, 2018, up from $14.72 million at December 31, 2017.
- Current assets were $4.02 million, including $795,332 of cash, $873,355 of restricted cash, and $2.14 million of current certificates of deposit. An additional $2.185 million of certificates of deposit was classified as noncurrent.
- Current liabilities were $161,556 and total liabilities were $349,220. The filing reports no borrowings or other debt obligations.
- Stockholders’ equity increased to $15.07 million from $14.32 million, reflecting six-month net income of $989,065 less $233,099 of dividends.
- Management stated that cash, cash equivalents, and certificates of deposit were adequate for projected operations and possible land acquisitions.
Outlook, commentary, risks, and unusual items
- Management expects oil and gas activity to be comparable to 2017 annual levels, but oil and gas revenue depends on production, commodity prices, producer activity, and new discoveries.
- Management expects the timber market to remain challenging during 2018, although dryer weather and continued marketing supported significantly higher timber revenue during the first half.
- Surface revenue is unpredictable and declined because no pipeline right-of-way revenue was received in 2018. Lease, geophysical, pipeline, utility, and other right-of-way revenues may vary materially between periods.
- The company sold four land parcels in a planned Section 1031 deferred exchange. The identified replacement properties were later deemed unacceptable, so the exchange will not be completed. Restricted cash of $873,355 remained at June 30, 2018, and tax expense on the gain was accrued.
- The company declared and paid a $0.12-per-share dividend. Future dividends will be considered during the first quarter of each year based on prior-year operating cash flow, economic conditions, and other factors; future dividends are not assured.
- A related party, Stream Wetlands Services, LLC, paid $38,333 for an extension of an exclusive right to evaluate and market certain company lands through February 28, 2019. Any additional financial benefit is uncertain.
- Principal risks include dependence on third parties for oil and gas exploration and development, fluctuations in oil, gas, and timber prices, and natural disasters affecting approximately 10,612 net acres of timberland.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2018, with no significant changes in internal control over financial reporting.
Investor verification points
- Verify the sustainability of six-month earnings after excluding the $881,654 land-sale gain.
- Reconcile the very low $5,132 operating cash flow with reported net income and assess recurring cash generation.
- Confirm the availability and restrictions on the $873,355 of restricted cash following the failed 1031 exchange.
- Assess the volatility and concentration of revenue, including the significant increase in timber revenue and the identified customers representing at least 5% of revenue.
- Review future oil and gas production, commodity prices, timber harvest activity, and potential surface or right-of-way transactions.
- Confirm the terms and potential conflicts associated with the related-party Stream Wetlands Services arrangement.