CKX LANDS, INC. annual report, FY2018

Full document

CKX Lands, Inc. — Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2018; filed March 21, 2019. The filing is an annual report rather than a standalone fourth-quarter report. CKX owns and manages approximately 13,991 net acres in Louisiana and generates income from oil and gas royalties, timber sales, and surface leases.

Financial Performance and Position

Metric20182017Change
Total revenue$1,194,763$1,144,585+4.4%
Operating income$1,368,351$541,129+152.9%
Net income$1,115,060$522,863+113.2%
Basic and diluted EPS$0.57$0.27+111.1%
Net cash from operating activities$241,562$404,253-40.2%
  • Revenue mix: Oil and gas revenue was $581,463, down 4.5%; timber sales were $454,177, up 102.7%; and surface revenue was $159,123, down 48.9%.
  • Margins: Net margin was approximately 93.3%, compared with 45.7% in 2017. Operating margin was approximately 114.5%, primarily because of the $881,654 gain on sale of land and equipment.
  • Oil and gas: Oil revenue rose 14.9% to $487,276, while gas revenue fell 45.3% to $89,700. Net oil production declined to 6,956 barrels from 8,169; net gas production declined to 25,776 MCF from 42,927 MCF.
  • Liquidity: Current assets were $5.63 million versus current liabilities of $216,815. Cash was $1.86 million, certificates of deposit totaled $4.095 million, and mutual funds totaled approximately $244,825.
  • Debt: CKX had no borrowings outstanding at year-end. Its unsecured revolving credit line permits borrowings of up to $1.0 million, bears interest at 4.25%, and matures June 25, 2019.
  • Balance sheet: Total assets were $15.60 million, total liabilities were $404,479, and stockholders’ equity was $15.20 million.
  • Cash flows: Investing activities provided $199,869, including $982,242 from sales of fixed assets, while financing activities used $233,099 for dividends. The company paid a $0.12-per-share dividend in 2018, compared with $0.10 in 2017.

Material Changes Versus 2017

  • Revenue increased modestly because the doubling of timber revenue more than offset lower oil and gas and surface revenue.
  • Timber performance benefited from continued marketing, additional stumpage agreements, and drier weather that improved harvesting conditions.
  • Surface revenue declined primarily because pipeline right-of-way revenue received in 2017 did not recur in 2018.
  • Net income increased substantially, principally because the gain on sale of land and equipment increased to $881,654 from $34,711. The 2018 gain included sales of wholly owned land, a one-sixth interest in land, and equipment.
  • General and administrative expense increased $78,492 to $573,532, primarily due to officer bonuses related to land disposition administration and higher accounting, legal, and professional fees.
  • Operating cash flow decreased despite higher net income, principally because the larger land-sale gain is excluded from operating cash flow.
  • CKX adopted new revenue recognition and restricted-cash accounting guidance in 2018; management reported no cumulative revenue-recognition adjustment.

Outlook, Risks, and Unusual Items

  • Management plans to evaluate acquisitions and divestitures of commercial, agricultural, timber, and other real estate, including potential purchases outside southwest Louisiana and possible commercial or residential development.
  • Management expects to continue marketing timber and seeking additional stumpage agreements, although stumpage prices were described as depressed relative to recent historical levels.
  • CKX began directly managing most of its lands in 2017 and expects direct management and regional economic activity could support increased surface revenue.
  • Oil and gas production is controlled by unrelated third-party operators. Revenues are exposed to commodity prices, production declines, depletion, operator activity, and the absence of reserve information available to CKX.
  • Material concentration risks include dependence on southwest Louisiana, commodity prices, timber harvesting conditions, hurricanes and flooding, environmental liabilities, third-party property managers, and several significant customers. Approximately 46.41% of 2018 revenue came from four customers.
  • Management concluded that disclosure controls and internal control over financial reporting were not effective as of December 31, 2018 because of material weaknesses involving limited staffing, inadequate segregation of duties, and insufficient evidence of review and oversight, including outsourced processes. CKX has only one part-time employee, who serves as principal executive and financial officer.
  • The company had no legal proceedings at December 31, 2018 and no off-balance-sheet arrangements. A planned 1031 exchange was not completed after the identified replacement properties were deemed unacceptable.
  • The audited financial statements received an unqualified opinion. The auditor was not engaged to express an opinion on internal control effectiveness.

Investor Verification Priorities

  1. Verify the sustainability of 2018 earnings excluding the $881,654 land-and-equipment gain and other nonrecurring surface revenue.
  2. Assess whether timber revenue and harvesting volumes can remain elevated given depressed stumpage prices and weather sensitivity.
  3. Review oil and gas production declines, third-party operator activity, commodity prices, and the lack of company-accessible reserve data.
  4. Evaluate remediation plans, staffing, and oversight improvements addressing the disclosed material weaknesses in internal controls.
  5. Confirm dividend decisions under the new policy, which depends on prior-year operating cash flow and prevailing economic conditions rather than a regular or extra dividend framework.
  6. Review customer concentration, related-party transactions, environmental exposure, and risks associated with concentrated Louisiana land holdings.