CKX Lands, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011; filed August 11, 2011. The financial statements are unaudited and should be read with the 2010 Form 10-K and prior-year Form 10-Q.
Business Context
CKX Lands owns land and related mineral, timber and agricultural interests. Oil and gas revenues, consisting primarily of royalties, lease rentals and geophysical revenue, provide most of the Company’s income. Production is from wells operated by other companies.
Financial Highlights
| Metric | Quarter Ended June 30, 2011 | Six Months Ended June 30, 2011 | Comparable 2010 Period |
|---|---|---|---|
| Total revenue | $355,572 | $662,516 | $537,424 quarter; $898,454 six months |
| Income from operations | $190,950 | $352,532 | $318,247 quarter; $555,453 six months |
| Net income | $163,928 | $295,730 | $268,144 quarter; $452,707 six months |
| Net income per share | $0.08 | $0.15 | $0.14 quarter; $0.23 six months |
| Operating margin | 53.7% | 53.2% | 59.2% quarter; 61.8% six months |
| Net margin | 46.1% | 44.6% | 49.9% quarter; 50.4% six months |
At June 30, 2011, cash and cash equivalents were $4.58 million, current assets were $5.39 million, certificates of deposit totaled $495,625, and securities available for sale totaled $799,044. Total assets were $10.53 million. Total liabilities were only $240,342, consisting primarily of deferred income taxes and trade payables; the filing does not report borrowings or other debt.
Six-month operating cash flow was $206,418, compared with $441,962 in the prior-year period. Investing activities used $547,872, primarily for land, timber and other asset purchases, and financing activities used $258,574 for dividends. Cash decreased by $600,028 to $4.58 million. The Company paid $0.07 per common share during the quarter and $0.14 per share during the six months.
Material Changes Versus the Prior Comparable Period
- Six-month revenue declined $235,938, or approximately 26%, to $662,516.
- Six-month oil and gas revenue declined $106,149 to $634,613. Gas production decreased to 32,665 MCF from 33,502 MCF, while the average gas price declined to $4.74 per MCF from $5.59. Oil production declined to 4,064 barrels from 5,259 barrels, partially offset by an increase in the average oil price to $100.05 per barrel from $77.00.
- Timber revenue declined sharply to $3,439 from $114,125 because the Company did not conduct the prior-year timber harvest for internal maintenance programs. Agriculture revenue declined to $24,464 from $43,567, primarily because one sugarcane-related lease was not renewed.
- Six-month net income declined $156,977, or approximately 35%, and net margin fell from 50.4% to 44.6%. The decline reflected lower revenue and the absence of the prior-year $28,526 gain on securities available for sale.
- General and administrative expense increased $17,294, primarily because of a one-time $17,500 public-company compliance expense.
- During the first quarter, the Company purchased two parcels totaling approximately 320 acres with standing timber for $592,750, including $330,665 of land and $262,085 of timber.
- Stockholders’ equity increased to $10.29 million from $10.25 million at December 31, 2010, after net income, dividends and a $3,481 increase in accumulated other comprehensive income.
Guidance, Outlook, Risks and Unusual Items
- Management believes existing cash, investments and operating cash flow are sufficient for operating requirements and strategic acquisitions.
- Management anticipates continuing the quarterly $0.07 per share dividend. Additional dividends may be declared depending on liquidity, capital resources and suitable timberland acquisitions with mineral potential.
- Oil and gas revenue is dependent on commodity prices, production levels and the operating decisions of third-party well operators. This creates material variability in revenue and cash flow.
- Timber harvesting remains selective because timber prices have been depressed; harvesting is generally limited to internal maintenance, age-class management and storm protection.
- The interim results are not necessarily indicative of full-year results. The filing states that management’s disclosure controls were effective and that there were no significant changes in internal control over financial reporting.
- The Company reports no reserve for uncertain tax positions and anticipates no tax interest or penalties.
Investor Verification Items
- Verify the sustainability of oil and gas royalty revenue given lower gas prices, lower production and reliance on third-party operators.
- Assess whether the sharp decline in timber revenue is temporary or reflects a continuing decision to limit harvesting.
- Review the valuation and volatility of the $799,044 securities portfolio and the effect of future realized or unrealized gains and losses.
- Confirm the availability and timing of cash and investments for acquisitions and the expected continuation of the $0.07 quarterly dividend.
- Evaluate the return potential and mineral prospects of the land and timber acquired for $592,750.
- Reconcile the fair-value note, which contains repeated June 30, 2010 date labels despite presenting amounts that appear to correspond to the current and prior periods.