ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THROUGHOUT THIS ITEM 2 ALL NON TABULAR FINANCIAL RESULTS ARE PRESENTED IN THOUSANDS OF U.S. DOLLARS EXCEPT WHERE MILLIONS OF DOLLARS IS INDICATED.
Forward-Looking Statements
Statements made in this report, other reports and proxy statements filed with the Securities and Exchange Commission, communications to stockholders, press releases, and oral statements made by representatives of the Company that are not historical in nature, or that state the Company or management intentions, hopes, beliefs, expectations or predictions of the future, may constitute "forward-looking statements" within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements can often be identified by the use of forward-looking terminology, such as "could," "should," "will," "intended," "continue," "believe," "may," "expect," "hope," "anticipate," "goal," "forecast," "plan," "guidance" or "estimate" or the negative of these words, variations thereof or similar expressions. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties, and assumptions. It is important to note that any such performance and actual results, financial condition or business, could differ materially from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 1A (Risk Factors) of the Annual Report on Form 10-K for the fiscal year ended April 30, 2018, and elsewhere herein or in other reports filed with the SEC. Other unforeseen factors not identified herein could also have such an effect. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial condition or business over time.
The forward-looking statements in this report are only predictions and actual events or results may differ materially. In evaluating such statements, a number of risks, uncertainties and other factors could cause actual results, performance, financial condition, cash flows, prospects and opportunities to differ materially from those expressed in, or implied by, the forward-looking statements. These risks, uncertainties and other factors include those set forth in Item 1A (Risk Factors) of the Annual Report on Form 10-K for the fiscal year ended April 30, 2018, including the following factors:
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extensive regulation across our industries;
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evolving government regulations and law;
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the geographic location of our casino;
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customer concentration risk;
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risks associated with the potential acquisition of land at the Boot Hill Casino;
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industrial business cycles;
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marketability restrictions of our common stock;
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stock dilution caused by the annual employer match to our 401(k) plan;
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the possibility of a reverse-stock split;
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executive officers are family members;
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non-renewal of certain casino management contracts;
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changes in regulations of financial reporting;
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fluctuating fuel and energy costs;
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development, production, testing and marketing of new products;
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the stability of credit markets;
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cyber-security threats;
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acts of terrorism and war;
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inclement weather and natural disasters;
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risks associated with international sales;
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future acquisitions and investments;
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change of control restrictions;
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potential impairment losses;
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Except as expressly required by the federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this report.
Results of operations in any past period should not be considered indicative of the results to be expected for future periods. Fluctuations in operating results may also result in fluctuations in the price of the Company's common stock.
Investors should also be aware that while the Company, from time to time, communicates with securities analysts; it is against its policy to disclose any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are
not
the responsibility of Butler National Corporation.
Management Overview
Management is focused on increasing long-term shareholder value from increased cash generation, earnings growth, and prudently managing capital expenditures. We plan to do this by continuing to drive increased revenue from product and service innovations, strategic acquisitions, and targeted marketing programs.
We have two separate reporting segments: Aerospace Products and Professional Services. Aerospace Products and Professional Services do not share the same customers and suppliers and have substantially distinct businesses. The Aerospace Products operating segment provides products and services in the aerospace industry. Companies in Aerospace Products derive their revenue from system design, engineering, manufacturing, integration, installation, repairing, overhauling, servicing and distribution of aerostructures, avionics, aircraft components, accessories, subassemblies and systems. The Professional Services operating segment provides services in the gaming industry. Professional Services companies manage a gaming and entertainment facility and provide architectural and engineering services. These reporting segments operate through various subsidiaries and affiliates listed in the Company’s fiscal year 2018 Annual Report on Form 10-K.
Aerospace Products.
The Aerospace Products segment includes the manufacture, sale and service of electronic equipment and systems and technologies to enhance and support products related to aircraft. Additionally, we also operate several Federal Aviation Administration (the "FAA") Repair Stations. Companies in Aerospace Products concentrate on Learjets, Beechcraft King Air, Cessna turbine engine, Cessna multi-engine piston and Dassault Falcon 20 aircraft. Specifically, the design, distribution and support for products for older aircraft, or “Classic” aircraft are areas of focus for companies in Aerospace Products.
Products.
The products that the companies within this group design, engineer, manufacture, integrate, install, repair and service include:
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Aerial surveillance products
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GARMIN GTN Global Position System Navigator with Communication Transceiver
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Aerodynamic enhancement products
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J.E.T autopilot products
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Airspeed and altimeter systems
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Load sharing systems and switching equipment
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Avcon Fins
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Noise suppression systems
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ADS-B systems
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Rate gyroscopes
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Conversion of passenger configurations to cargo
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Replacement vertical accelerometers
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Cargo/sensor carrying pods
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Transient suppression devices
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Electronic navigation instruments, radios and transponders
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Attitude heading reference systems
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Modifications.
The companies in Aerospace Products have authority pursuant to Supplemental Type Certificates (“STCs”) and Parts Manufacturer Approval (“PMA”), issued by the Federal Aviation Administration, to build required parts and subassemblies and to make applicable installations. Companies in Aerospace Products perform modifications in the aviation industry including:
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Aerial photograph capabilities
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Extended tip fuel tanks
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Aerodynamic improvements
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Radar systems
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Avionics systems
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Reduced vertical separation minimums
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Cargo doors
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Special mission modifications
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Conversion from passenger to freighter configuration
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Stability enhancements
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Extended doors
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Traffic collision avoidance systems
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Special Mission Electronics.
We supply defense-related, commercial off-the-shelf products to various commercial entities and government agencies and subcontractors in order to update or extend the useful life of aircraft with older components and technology. These products include:
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Cabling
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HangFire Override Modules
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Electronic control systems
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Test equipment
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Gun Control Units for Apache and Blackhawk helicopters
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Gun Control Units for land and sea based military vehicles
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Professional Services.
The Professional Services segment includes the management of gaming facilities and related dining and entertainment facilities in Kansas and Oklahoma. We currently manage a gaming and entertainment facility. Boot Hill Casino and Resort features approximately 640 slot machines and 20 table games. Companies in Professional Services also provide licensed architectural services, including commercial and industrial building design, and engineering services.
Boot Hill.
BNSC, via BHCMC, LLC (“BHCMC”), a company in Professional Services, has managed The Boot Hill Casino and Resort in Dodge City, Kansas (“Boot Hill”) since 2009 pursuant to the Lottery Gaming Facility Management Contract, by and among BNSC, BHCMC and the Kansas Lottery, originally dated December 8, 2009, as subsequently amended (“Boot Hill Agreement”). As required by Kansas law, all games, gaming equipment and gaming operations at Boot Hill are owned and operated by the Kansas Lottery.
The Stables.
Since 1998, Butler National Service Corporation, a company in Professional Services and our wholly-owned subsidiary, has managed a Modoc Tribe of Oklahoma owned casino known as The Stables Casino in Miami, Oklahoma (“The Stables”) pursuant to the Stables Management Agreement originally dated December 12, 1996 and approved by the NIGC on January 14, 1997 as subsequently amended (the “Stables Agreement”). Under the terms of the Stables Agreement, BNSC received twenty percent (20%) of the net profits from The Stables. The Stables Agreement expired on September 30, 2018, and was not renewed.
Architectural and Engineering Services.
Companies in Professional Services provide licensed architectural, including commercial and industrial building design, and engineering services.
Results Overview
The nine months ending January 31, 2019 revenue increased 27% to $43.0 million compared to $33.8 million in the nine months ending January 31, 2018. In the nine months ending January 31, 2019 the professional services revenue was $23.4 million compared to $22.3 million in the nine months ending January 31, 2018, an increase of 5%. In the nine months ending January 31, 2019 the Aerospace Products revenue was $19.6 million compared to $11.5 million in the nine months ending January 31, 2018, an increase of 71%.
The nine months ending January 31, 2019 net income increased to $3.6 million compared to a net income of $342 in the nine months ending January 31, 2018. The nine months ending January 31, 2019, operating income increased to $4.5 million, from an operating income of $1.4 million in the nine months ending January 31, 2018.
RESULTS OF OPERATIONS
NINE
MONTHS ENDING
JANUARY 31,
2019
COMPARED TO
NINE
MONTHS ENDING
JANUARY 31,
2018
(dollars in thousands)
|
|
Nine
Months
Ended
January 31,
2019
|
|
|
Percent
of Total
Revenue
|
|
|
Nine
Months
Ended
January 31,
2018
|
|
|
Percent
of Total
Revenue
|
|
|
Percent
Change
2018-2019
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Professional Services
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|
$
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23,423
|
|
|
|
54
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%
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$
|
22,340
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|
|
|
66
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%
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|
5
|
%
|
Aerospace Products
|
|
|
19,570
|
|
|
|
46
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%
|
|
|
11,476
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|
|
|
34
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%
|
|
|
71
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%
|
Total revenue
|
|
|
42,993
|
|
|
|
100
|
%
|
|
|
33,816
|
|
|
|
100
|
%
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
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Costs and expenses:
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|
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|
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|
|
|
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|
Costs of Professional Services
|
|
|
14,735
|
|
|
|
34
|
%
|
|
|
14,344
|
|
|
|
42
|
%
|
|
|
3
|
%
|
Cost of Aerospace Products
|
|
|
12,102
|
|
|
|
28
|
%
|
|
|
8,469
|
|
|
|
25
|
%
|
|
|
43
|
%
|
Marketing and advertising
|
|
|
3,056
|
|
|
|
7
|
%
|
|
|
2,729
|
|
|
|
9
|
%
|
|
|
12
|
%
|
Employee benefits
|
|
|
1,518
|
|
|
|
3
|
%
|
|
|
1,416
|
|
|
|
4
|
%
|
|
|
7
|
%
|
Depreciation and amortization
|
|
|
1,198
|
|
|
|
3
|
%
|
|
|
1,344
|
|
|
|
4
|
%
|
|
|
-11
|
%
|
General, administrative and other
|
|
|
5,852
|
|
|
|
14
|
%
|
|
|
4,112
|
|
|
|
12
|
%
|
|
|
42
|
%
|
Total costs and expenses
|
|
|
38,461
|
|
|
|
89
|
%
|
|
|
32,414
|
|
|
|
96
|
%
|
|
|
19
|
%
|
Operating income
|
|
$
|
4,532
|
|
|
|
11
|
%
|
|
$
|
1,402
|
|
|
|
4
|
%
|
|
|
223
|
%
|
Revenue:
Revenue
increased 27% to $43.0 million in the nine months ended January 31, 2019, compared to $33.8 million in the nine months ended January 31, 2018.
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●
|
Professional Services derives its revenue from (a) professional management services in the gaming industry through Butler National Service Corporation ("BNSC") and BHCMC, LLC ("BHCMC"), and (b) professional architectural, engineering and management support services. Revenue from Professional Services increased 5% for the nine months to $23.4 million at January 31, 2019 compared to $22.3 million at January 31, 2018.
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|
●
|
Aerospace Products derives its revenue by designing, engineering, manufacturing, installing, servicing and repairing products for classic and current production aircraft. Aerospace Products revenue increased 71% for the nine months to $19.6 million at January 31, 2019 compared to $11.5 million at January 31, 2018. The increase is primarily due to an increase in aircraft modification revenue of $3.8 million and an increase in avionics revenue of $4.3 million.
|
Costs and expenses:
Costs and expenses
related to Professional Services and Aerospace Products include the cost of engineering, labor, materials, equipment utilization, control systems, security and occupancy.
Costs and expenses increased 19% in the nine months ended January 31, 2019 to $38.5 million compared to $32.4 million in the nine months ended January 31, 2018. Costs and expenses were 89% of total revenue in the nine months ended January 31, 2019, as compared to 96% of total revenue in the nine months ended January 31, 2018.
Costs of Professional Services
increased 3% in the nine months ended January 31, 2019 to $14.7 million compared to $14.3 million in the nine months ended January 31, 2018. Costs were 34% of total revenue in the nine months ended January 31, 2019, as compared to 42% of total revenue in the nine months ended January 31, 2018.
Costs of Aerospace Products
increased 43% in the nine months ended January 31, 2019 to $12.1 million compared to $8.5 million for the nine months ended January 31, 2018. Costs were 28% of total revenue in the nine months ended January 31, 2019, as compared to 25% of total revenue in the nine months ended January 31, 2018.
Marketing and advertising expenses
increased 12% in the nine months ended January 31, 2019, to $3.1 million compared to $2.7 million in the nine months ended January 31, 2018. Expenses were 7% of total revenue in the nine months ended January 31, 2019, as compared to 9% of total revenue in the nine months ended January 31, 2018. Marketing and advertising expenses include advertising, sales and marketing labor, gaming development costs, and casino and product promotions.
Employee benefits expenses
as a percent of total revenue was 3% in the nine months ended January 31, 2019, compared to 4% in the nine months ended January 31, 2018. These expenses increased 7% to $1.5 million in the nine months ended January 31, 2019, compared to $1.4 million in the nine months ended January 31, 2018. These expenses include the employers' share of all federal, state and local taxes, paid time off for vacation, holidays and illness, employee health and life insurance programs and employer matching contributions to retirement plans.
Depreciation and amortization expenses
as a percent of total revenue was 3% in the nine months ended January 31, 2019, compared to 4% in the nine months ended January 31, 2018. These expenses decreased 11% to $1.2 million in the nine months ended January 31, 2019, from $1.3 million in the nine months ended January 31, 2018. These expenses include depreciation related to owned assets being depreciated over various useful lives and amortization of intangible items including the Kansas privilege fee related to the Boot Hill Casino being expensed over the term of the gaming contract with the State of Kansas. BHCMC, LLC depreciation and amortization expense for the nine months ended January 31, 2019 was $760 compared to $943 in the nine months ended January 31, 2018.
General, administrative and other expenses
as a percent of total revenue was 14% in the nine months ended January 31, 2019, compared to 12% in the nine months ended January 31, 2018. These expenses increased 42% to $5.9 million in the nine months ended January 31, 2019, from $4.1 million in the nine months ended January 31, 2018.
Other income (expense):
Interest expense and other income
were $1.8 million in the nine months ended January 31, 2019, compared with interest expense and other income of $(249) in the nine months ended January 31, 2018. Interest related to obligations of BHCMC, LLC was $(78) in the nine months ended January 31, 2019 compared to $(119) in the nine months ended January 31, 2018.
Operations by Segment
We have two operating segments, Professional Services and Aerospace Products. The Professional Services segment includes revenue contributions and expenditures associated with casino management services and professional architectural, engineering and management support services. Aerospace Products derives its revenue by designing, engineering, manufacturing, installing, servicing and repairing products for classic and current production aircraft.
The following table presents a summary of our operating segment information for the nine months ended January 31, 2019 and January 31, 2018:
(dollars in thousands)
|
|
Nine
Months
Ended
January 31,
2019
|
|
|
Percent
of Total
Revenue
|
|
|
Nine
Months
Ended
January 31,
2018
|
|
|
Percent
of Total
Revenue
|
|
|
Percent
Change
2018-2019
|
|
Professional Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boot Hill Casino
|
|
$
|
23,151
|
|
|
|
99
|
%
|
|
$
|
22,009
|
|
|
|
99
|
%
|
|
|
5
|
%
|
Management/Professional Services
|
|
|
272
|
|
|
|
1
|
%
|
|
|
331
|
|
|
|
1
|
%
|
|
|
-18
|
%
|
Revenue
|
|
|
23,423
|
|
|
|
100
|
%
|
|
|
22,340
|
|
|
|
100
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Professional Services
|
|
|
14,735
|
|
|
|
63
|
%
|
|
|
14,344
|
|
|
|
64
|
%
|
|
|
3
|
%
|
Expenses
|
|
|
7,898
|
|
|
|
34
|
%
|
|
|
6,873
|
|
|
|
31
|
%
|
|
|
15
|
%
|
Total costs and expenses
|
|
|
22,633
|
|
|
|
97
|
%
|
|
|
21,217
|
|
|
|
95
|
%
|
|
|
7
|
%
|
Professional Services operating income before noncontrolling interest in BHCMC, LLC
|
|
$
|
790
|
|
|
|
3
|
%
|
|
$
|
1,123
|
|
|
|
5
|
%
|
|
|
-30
|
%
|
(dollars in thousands)
|
|
Nine
Months
Ended
January 31,
2019
|
|
|
Percent
of Total
Revenue
|
|
|
Nine
Months
Ended
January 31,
2018
|
|
|
Percent
of Total
Revenue
|
|
|
Percent
Change
2018-2019
|
|
Aerospace Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
19,570
|
|
|
|
100
|
%
|
|
$
|
11,476
|
|
|
|
100
|
%
|
|
|
71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Aerospace Products
|
|
|
12,102
|
|
|
|
62
|
%
|
|
|
8,469
|
|
|
|
74
|
%
|
|
|
43
|
%
|
Expenses
|
|
|
3,726
|
|
|
|
19
|
%
|
|
|
2,728
|
|
|
|
24
|
%
|
|
|
37
|
%
|
Total costs and expenses
|
|
|
15,828
|
|
|
|
81
|
%
|
|
|
11,197
|
|
|
|
98
|
%
|
|
|
41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace Products operating income
|
|
$
|
3,742
|
|
|
|
19
|
%
|
|
$
|
279
|
|
|
|
2
|
%
|
|
|
1241
|
%
|
Professional Services
|
●
|
Revenue from Professional Services increased 5% for the nine months ended January 31, 2019 to $23.4 million compared to $22.3 million for the nine months ended January 31, 2018.
In the nine months ended January 31, 2019 Boot Hill Casino received gross receipts for the State of Kansas of $30.6 million compared to $29.3 million for the nine months ended January 31, 2018. Mandated fees, taxes and distributions reduced gross receipts by $10.1 million resulting in gaming revenue of $20.5 million for the nine months ended January 31, 2019, compared to a reduction to gross receipts of $9.9 million resulting in gaming revenue of $19.4 million for the nine months ended January 31, 2018. Non-gaming revenue at Boot Hill Casino increased 4% to $2.7 million for the nine months ended January 31, 2019, from $2.7 million for the nine months ended January 31, 2018.
The remaining management and Professional Services revenue includes professional management services in the gaming industry, and licensed architectural services. Professional Services revenue excluding Boot Hill Casino decreased 19% to $272 for the nine months ended January 31, 2019, compared to $331 for the nine months ended January 31, 2018.
|
|
|
|
|
●
|
Costs of Professional Services increased 3% in the nine months ended January 31, 2019 to $14.7 million compared to $14.3 million in the nine months ended January 31, 2018. Costs were 63% of segment total revenue in the nine months ended January 31, 2019, as compared to 64% of segment total revenue in the nine months ended January 31, 2018.
|
|
|
|
|
●
|
Expenses increased 15% in the nine months ended January 31, 2019 to $7.9 million compared to $6.9 million in the nine months ended January 31, 2018. Expenses were 34% of segment total revenue in the nine months ended January 31, 2019, as compared to 31% of segment total revenue in the nine months ended January 31, 2018.
|
Aerospace Products
|
●
|
Revenue increased 71% to $19.6 million in the nine months ended January 31, 2019, compared to $11.5 million in the nine months ended January 31, 2018. The increase is primarily due to an increase in aircraft modification revenue of $3.8 million and an increase in avionics of $4.3 million. We have invested in the development of several STCs. These STCs are state of the art avionics and we are aggressively marketing both domestically and internationally.
|
|
|
|
|
●
|
Costs of Aerospace Products increased by 43% in the nine months ended January 31, 2019 to $12.1 million compared to $8.5 million for the nine months ended January 31, 2018. Costs were 62% of segment total revenue in the nine months ended January 31, 2019, as compared to 74% of segment total revenue in the nine months ended January 31, 2018.
|
|
|
|
|
●
|
Expenses increased 37% in the nine months ended January 31, 2019 to $3.7 million compared to $2.7 million in the nine months ended January 31, 2018. Expenses were 19% of segment total revenue in the nine months ended January 31, 2019, as compared to 24% of segment total revenue in the nine months ended January 31, 2018.
|
THIRD
QUARTER FISCAL
2019
COMPARED TO
THIRD
QUARTER FISCAL
2018
(dollars in thousands)
|
|
Three
Months
Ended
January 31,
2019
|
|
|
Percent
of Total
Revenue
|
|
|
Three
Months
Ended
January 31,
2018
|
|
|
Percent
of Total
Revenue
|
|
|
Percent
Change
2018-2019
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Services
|
|
$
|
7,617
|
|
|
|
53
|
%
|
|
$
|
7,559
|
|
|
|
69
|
%
|
|
|
1
|
%
|
Aerospace Products
|
|
|
6,675
|
|
|
|
47
|
%
|
|
|
3,451
|
|
|
|
31
|
%
|
|
|
93
|
%
|
Total revenue
|
|
|
14,292
|
|
|
|
100
|
%
|
|
|
11,010
|
|
|
|
100
|
%
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Professional Services
|
|
|
4,996
|
|
|
|
35
|
%
|
|
|
4,747
|
|
|
|
43
|
%
|
|
|
5
|
%
|
Cost of Aerospace Products
|
|
|
3,642
|
|
|
|
25
|
%
|
|
|
2,636
|
|
|
|
24
|
%
|
|
|
38
|
%
|
Marketing and advertising
|
|
|
1,021
|
|
|
|
7
|
%
|
|
|
920
|
|
|
|
9
|
%
|
|
|
11
|
%
|
Employee benefits
|
|
|
532
|
|
|
|
4
|
%
|
|
|
480
|
|
|
|
4
|
%
|
|
|
11
|
%
|
Depreciation and amortization
|
|
|
415
|
|
|
|
3
|
%
|
|
|
362
|
|
|
|
3
|
%
|
|
|
15
|
%
|
General, administrative and other
|
|
|
1,873
|
|
|
|
13
|
%
|
|
|
1,426
|
|
|
|
13
|
%
|
|
|
31
|
%
|
Total costs and expenses
|
|
|
12,479
|
|
|
|
87
|
%
|
|
|
10,571
|
|
|
|
96
|
%
|
|
|
18
|
%
|
Operating income
|
|
$
|
1,813
|
|
|
|
13
|
%
|
|
|
439
|
|
|
|
4
|
%
|
|
|
313
|
%
|
Revenue:
Revenue
increased 30% to $14.3 million in the three months ended January 31, 2019, compared to $11.0 million in the three months ended January 31, 2018.
|
●
|
Professional Services derives its revenue from (a) professional management services in the gaming industry through Butler National Service Corporation ("BNSC") and BHCMC, LLC ("BHCMC"), and (b) professional architectural, engineering and management support services. Revenue from Professional Services increased 1% for the three months to $7.6 million at January 31, 2019 compared to $7.6 million at January 31, 2018.
|
|
●
|
Aerospace Products derives its revenue by designing, engineering, manufacturing, installing, servicing and repairing products for classic and current production aircraft. Aerospace Products revenue increased 93% for the three months to $6.7 million at January 31, 2019 compared to $3.5 million at January 31, 2018. The increase is primarily due to an increase in aircraft modification revenue of $1.7 million and an increase in avionics revenue of $1.5 million.
|
Costs and expenses:
Costs and expenses
related to Professional Services and Aerospace Products include the cost of engineering, labor, materials, equipment utilization, control systems, security and occupancy.
Costs and expenses increased 18% in the three months ended January 31, 2019 to $12.5 million compared to $10.6 million in the three months ended January 31, 2018. Costs and expenses were 87% of total revenue in the three months ended January 31, 2019, as compared to 96% of total revenue in the three months ended January 31, 2018.
Costs of Professional Services
increased 5% in the three months ended January 31, 2019 to $5.0 million compared to $4.7 million in the three months ended January 31, 2018. Costs were 35% of total revenue in the three months ended January 31, 2019, as compared to 43% of total revenue in the three months ended January 31, 2018.
Costs of Aerospace Products
increased 38% in the three months ended January 31, 2019 to $3.6 million compared to $2.6 million for the three months ended January 31, 2018. Costs were 25% of total revenue in the three months ended January 31, 2019, as compared to 24% of total revenue in the three months ended January 31, 2018.
Marketing and advertising expenses
increased 11% in the three months ended January 31, 2019, to $1.0 million compared to $920 in the three months ended January 31, 2018. Expenses were 7% of total revenue in the three months ended January 31, 2019, as compared to 9% of total revenue in the three months ended January 31, 2018. Marketing and advertising expenses include advertising, sales and marketing labor, gaming development costs, and casino and product promotions.
Employee benefits expenses
as a percent of total revenue was 4% in the three months ended January 31, 2019, compared to 4% in the three months ended January 31, 2018. These expenses increased 11% to $532 in the three months ended January 31, 2019, from $480 in the three months ended January 31, 2018. These expenses include the employers' share of all federal, state and local taxes, paid time off for vacation, holidays and illness, employee health and life insurance programs and employer matching contributions to retirement plans.
Depreciation and amortization expenses
as a percent of total revenue was 3% in the three months ended January 31, 2019, compared to 3% in the three months ended January 31, 2018. These expenses increased 15% to $415 in the three months ended January 31, 2019, from $362 in the three months ended January 31, 2018. These expenses include depreciation related to owned assets being depreciated over various useful lives and amortization of intangible items including the Kansas privilege fee related to the Boot Hill Casino being expensed over the term of the gaming contract with the State of Kansas. BHCMC, LLC depreciation and amortization expense for the three months ended January 31, 2019 was $265 compared to $229 in the three months ended January 31, 2018.
General, administrative and other expenses
as a percent of total revenue was 13% in the three months ended January 31, 2019, compared to 13% in the three months ended January 31, 2018. These expenses increased 31% to $1.9 million in the three months ended January 31, 2019, from $1.4 million in the three months ended January 31, 2018.
Other income (expense):
Interest Expense and other income
were $341 in the three months ended January 31, 2019, compared with interest expense and other income of $(82) in the three months ended January 31, 2018. Interest related to obligations of BHCMC, LLC was $(22) in the three months ended January 31, 2019 compared to $(37) in the three months ended January 31, 2018.
Operations by Segment
We have two operating segments, Professional Services and Aerospace Products. The Professional Services segment includes revenue contributions and expenditures associated with casino management services and professional architectural, engineering and management support services. Aerospace Products derives its revenue by designing, engineering, manufacturing, installing, servicing and repairing products for classic and current production aircraft.
The following table presents a summary of our operating segment information for the three months ended January 31, 2019 and January 31, 2018:
(dollars in thousands)
|
|
Three
Months
Ended
January 31,
2019
|
|
|
Percent
of Total
Revenue
|
|
|
Three
Months
Ended
January 31,
2018
|
|
|
Percent
of Total
Revenue
|
|
|
Percent
Change
2018-2019
|
|
Professional Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boot Hill Casino
|
|
$
|
7,564
|
|
|
|
99
|
%
|
|
$
|
7,483
|
|
|
|
99
|
%
|
|
|
1
|
%
|
Management/Professional Services
|
|
|
53
|
|
|
|
1
|
%
|
|
|
76
|
|
|
|
1
|
%
|
|
|
-30
|
%
|
Revenue
|
|
|
7,617
|
|
|
|
100
|
%
|
|
|
7,559
|
|
|
|
100
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Professional Services
|
|
|
4,996
|
|
|
|
65
|
%
|
|
|
4,747
|
|
|
|
63
|
%
|
|
|
5
|
%
|
Expenses
|
|
|
2,420
|
|
|
|
32
|
%
|
|
|
2,256
|
|
|
|
30
|
%
|
|
|
7
|
%
|
Total costs and expenses
|
|
|
7,416
|
|
|
|
97
|
%
|
|
|
7,003
|
|
|
|
93
|
%
|
|
|
6
|
%
|
Professional Services operating income before noncontrolling interest in BHCMC, LLC
|
|
$
|
201
|
|
|
|
3
|
%
|
|
$
|
556
|
|
|
|
7
|
%
|
|
|
-64
|
%
|
(dollars in thousands)
|
|
Three
Months
Ended
January 31,
2019
|
|
|
Percent
of Total
Revenue
|
|
|
Three
Months
Ended
January 31,
2018
|
|
|
Percent
of Total
Revenue
|
|
|
Percent
Change
2018-2019
|
|
Aerospace Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
6,675
|
|
|
|
100
|
%
|
|
$
|
3,451
|
|
|
|
100
|
%
|
|
|
93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Aerospace Products
|
|
|
3,642
|
|
|
|
55
|
%
|
|
|
2,636
|
|
|
|
76
|
%
|
|
|
38
|
%
|
Expenses
|
|
|
1,421
|
|
|
|
21
|
%
|
|
|
932
|
|
|
|
27
|
%
|
|
|
52
|
%
|
Total costs and expenses
|
|
|
5,063
|
|
|
|
76
|
%
|
|
|
3,568
|
|
|
|
103
|
%
|
|
|
42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace Products operating income (loss)
|
|
$
|
1,612
|
|
|
|
24
|
%
|
|
$
|
(117
|
)
|
|
|
-3
|
%
|
|
|
N/A
|
|
Professional Services
|
●
|
Revenue from Professional Services increased 1% for the three months ended January 31, 2019 to $7.6 million compared to $7.6 million for the three months ended January 31, 2018.
In the three months ended January 31, 2019 Boot Hill Casino received gross receipts for the State of Kansas of $10.0 million compared to $10.0 million for the three months ended January 31, 2018. Mandated fees, taxes and distributions reduced gross receipts by $3.4 million resulting in gaming revenue of $6.6 million for the three months ended January 31, 2019, compared to a reduction to gross receipts of $3.4 million resulting in gaming revenue of $6.6 million for the three months ended January 31, 2018. Non-gaming revenue at Boot Hill Casino increased to $935 for the three months ended January 31, 2019, compared to $872 for the three months ended January 31, 2018.
The remaining management and Professional Services revenue includes professional management services in the gaming industry, and licensed architectural services. Professional Services revenue excluding Boot Hill Casino decreased 30% to $53 for the three months ended January 31, 2019, compared to $76 for the three months ended January 31, 2018.
|
|
|
|
|
●
|
Costs of Professional Services increased 5% in the three months ended January 31, 2019 to $5.0 million compared to $4.7 million in the three months ended January 31, 2018. Costs were 65% of segment total revenue in the three months ended January 31, 2019, as compared to 63% of segment total revenue in the three months ended January 31, 2018.
|
|
|
|
|
●
|
Expenses increased 7% in the three months ended January 31, 2019 to $2.4 million compared to $2.3 million in the three months ended January 31, 2018. Expenses were 32% of segment total revenue in the three months ended January 31, 2019, as compared to 30% of segment total revenue in the three months ended January 31, 2018.
|
Aerospace Products
|
●
|
Revenue increased 93% to $6.7 million in the three months ended January 31, 2019, compared to $3.5 million in the three months ended January 31, 2018. The increase is primarily due to an increase in aircraft modification revenue of $1.7 million and an increase in avionics revenue of $1.5 million. We have invested in the development of several STCs. These STCs are state of the art avionics and we are aggressively marketing both domestically and internationally.
|
|
|
|
|
●
|
Costs of Aerospace Products increased 38% in the three months ended January 31, 2019 to $3.6 million compared to $2.6 million for the three months ended January 31, 2018. Costs were 55% of segment total revenue in the three months ended January 31, 2019, as compared to 76% of segment total revenue in the three months ended January 31, 2018.
|
|
|
|
|
●
|
Expenses increased 52% in the three months ended January 31, 2019 to $1.4 million compared to $932 in the three months ended January 31, 2018. Expenses were 21% of segment total revenue in the three months ended January 31, 2019, as compared to 27% of segment total revenue in the three months ended January 31, 2018.
|
Employees
Other than persons employed by our gaming subsidiaries there were 101 full time and 3 part time employees on January 31, 2019, compared to 90 full time and 3 part time employees on January 31, 2018. As of March 8, 2019, staffing is 101 full time and 3 part time employees. Our staffing at Boot Hill Casino & Resort on January 31, 2019 was 185 full time and 62 part time employees compared to 174 full time and 72 part time employees on January 31, 2018. At March 8, 2019 there were 184 full time and 69 part time employees. None of the employees are subject to any collective bargaining agreements.
Liquidity and Capital Resources
We believe that our current banks will provide the necessary capital for our business operations. However, we continue to maintain contact with other banks that have an interest in funding our working capital needs to continue our growth in operations in fiscal 2019 and beyond.
The ownership structure of BHCMC, LLC is now:
Membership Interest
|
|
Members of
Board of
Managers
|
|
|
Equity
Ownership
|
|
|
Income
(Loss)
Sharing
|
|
Class A
|
|
|
3
|
|
|
|
20%
|
|
|
|
40%
|
|
Class B
|
|
|
4
|
|
|
|
80%
|
|
|
|
60%
|
|
Our wholly owned subsidiary, Butler National Service Corporation continues friendly discussions with the other member of BHCMC, LLC to explore the possible acquisition by Butler National Service Corporation of the other member's 20% equity interest in BHCMC, LLC. If and when a definitive agreement is reached, such definitive agreement and a press release concerning the acquisition will be issued to describe the terms of the agreement and the intentions of the members. We have not set a definitive timetable for our discussions and there can be no assurances that the process will result in any transaction being announced or completed. At present there is no disagreement between the members of BHCMC, LLC. We do not plan to disclose or comment on developments until further disclosure is deemed appropriate.
BHCMC, LLC, rents the casino building under the terms of a 25 year lease from BHC Development L.C. ("BHCD"). Butler National Service Corporation continues friendly discussions with BHC Development L.C. to explore the possible acquisition by Butler National Service Corporation of the casino building and related land. If and when a definitive agreement is reached, such definitive agreement and press release concerning the acquisition will be issued to describe the terms of the agreement and the intentions of the members. Butler National Corporation, its management, and its subsidiaries have no ownership interest in BHCI or BHCD.
Analysis and Discussion of Cash Flow
During the nine months ended January 31, 2019 our cash position increased by $1.5 million. Net income was $5.0 million for the nine months ended January 31, 2019. Cash flows provided by operating activities was $7.5 million for the nine months ended January 31, 2019. For the nine months ended January 31, 2019, non-cash activities consisting of depreciation and amortization provided $2.4 million. Customer deposits increased our cash position by $1.9 million while inventories decreased our cash position by $1.5 million. Accounts receivable decreased our cash position by $668. A decrease in income tax receivable increased our cash position by $219. Gaming facility mandated payments decreased our cash position by $244. Prepaid expenses and other assets decreased our cash by $431. A decrease in accounts payable and an increase in accrued expenses and other current liabilities increased our cash by an additional $879.
Cash used in investing activities was $1.5 million for the nine months ended January 31, 2019. We invested $36 in building additions, $199 to purchase equipment, $707 in furniture and fixtures and $557 to develop and enhance STCs.
Cash used in financing activities was $4.5 million for the nine months ended January 31, 2019. We made repayments on our debt of $1.2 million and decreased promissory notes by $2.4 million. We made a distribution to our non-controlling member of $720, and purchased company common stock of $214 and placed such stock in treasury.
Critical Accounting Policies and Estimates
:
We believe that there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amount of revenue and other significant areas involving management judgments and estimates. These significant accounting policies relate to revenue recognition, the use of estimates, long-lived assets, and Supplemental Type Certificates. These policies and our procedures related to these policies are described in detail below and under specific areas within this "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Revenue Recognition:
See footnote 3 to the condensed consolidated financial statements.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our financial statements.
Significant estimates include assumptions about collection of accounts receivable, inventory obsolescence, the valuation of long-lived assets, including the STC’s, valuation for deferred tax assets and useful life of fixed and other long-term assets.
Long-lived Assets:
The Company accounts for its long-lived assets in accordance with ASC Topic 360-10, "Accounting for the Impairment or Disposal of Long-Lived Assets." ASC Topic 360-10 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value or disposable value.
Supplemental Type Certificates:
Supplemental Type Certificates (STCs) are authorizations granted by the Federal Aviation Administration (FAA) for specific modification of a certain aircraft. The STC authorizes us to perform modifications, installations, and assemblies on applicable customer-owned aircraft. Costs incurred to obtain STCs are capitalized and subsequently amortized over a seven year life. The legal life of an STC is indefinite.
Changing Prices and Inflation
We have experienced upward pressure from inflation in fiscal year 2019. From fiscal year 2018 to fiscal year 2019 a majority of the increases we experienced were in material costs. This additional cost may not be transferable to our customers resulting in lower income in the future. We anticipate fuel costs and possibly interest rates to rise in fiscal 2019 and 2020.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.