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, 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 set forth in Item 1A. (Risk Factors) of this Quarterly Report on Form 10-Q, and Item 1A. (Risk Factors) to the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2017 and reference to the Cautionary Statements filed by us as Exhibit 99 to the most recent Annual Report on Form 10-K. 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 Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2017 and the Cautionary Statements filed by us as Exhibit 99 to the most recent Annual Report on Form 10-K, including the following factors:
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the impact of general economic trends on the Company's business;
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sensitivity of demand related to changes in the U.S. dollar to foreign currency exchange rates;
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the deferral or termination of programs or contracts for convenience by customers;
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???
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market acceptance of the Company's Aerospace Products and or other planned products or product enhancements;
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increased fuel and energy costs and the downward pressure on demand for our aircraft business;
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???
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the ability to gain and maintain regulatory approval of existing products and services and receive regulatory approval of new businesses and products;
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the actions of regulatory, legislative, executive or judicial decisions of the federal, state or local level with regard to our business and the impact of any such actions;
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failure to retain/recruit key personnel;
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the availability of government funding to vendors and customers;
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any delays in receiving components from third party suppliers;
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the competitive environment;
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the bankruptcy or insolvency of one or more key customers or vendors;
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new product offerings from competitors;
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protection of intellectual property rights;
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the ability to service, supply or visit the international market;
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acts of terrorism and war and other uncontrollable events;
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joint ventures and other arrangements;
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low priced penny-stock regulations;
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general governance features;
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United States and other country defense spending cuts;
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our estimated effective income tax rates; estimated tax benefits; and merits of our tax position;
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potential future acquisitions;
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changes in laws, including increased tax rates, smoking bans, regulations or accounting standards, third-party relations and approvals, and decisions, disciplines and fines of courts, regulators and governmental bodies;
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the ability to timely and cost-effectively integrate companies that we acquire into our operations;
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construction factors, including delays, increased costs of labor and materials, availability of labor and materials, zoning issues, environmental restrictions, soil and water conditions, weather and other hazards, site access matters and building permit issues;
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litigation outcomes and judicial and governmental body actions, including gaming legislative action, referenda, regulatory disciplinary actions and fines and taxation;
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access to insurance on reasonable terms for our assets;
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cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations;
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as a supplier of military and other equipment to the U.S. Government, we are subject to unusual risks, such as the right of the U.S. Government contractor to terminate contracts for convenience and to conduct audits and investigations of our operations and performance;
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our reputation and ability to do business may be impacted by the improper conduct of employees, vendors, agents or business partners;
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changes in legislation or government regulations or policies can have a significant impact on our results of operations; and
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other factors disclosed from time to time in the Company's filings with the Securities and Exchange Commission.
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E
xcept 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.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. The Company does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events, circumstances or changes in expectations after the date of this Form 10-Q, or to reflect the occurrence of unanticipated events. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act of 1933, as amended (the "Securities Act") and 21E of the Securities Exchange Act of 1934 as amended.
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.
Our revenue is primarily derived from two very different business segments; Aerospace Products and Professional Services. These segments operate through various Butler National subsidiaries and affiliates listed in the Company's fiscal year 2017 annual report on Form 10-K.
Aerospace Products
Aerospace Products derives its revenue by designing system integration, engineering, manufacturing, installing, servicing, and repairing products for classic and current production aircraft. These products include JET autopilot service and repairs, Avcon provisions and system integration for special mission equipment installations, Butler Avionics equipment sales and installation, and Butler National electronic controls and safety equipment manufacture and sales. Aerospace customers range in size from owners and operators of small single engine airplanes to owners and operators of large commercial and military aircraft. Aerospace Products are sold to and serviced for customers located in many countries of the world.
Aerospace is the legacy part of the Butler National business. Organized over 57 years ago, this business is based upon design engineering and installation innovations to enhance and support products related to airplanes and ground support equipment. These new products included: in the 1960's, aircraft electronic load sharing and system switching equipment, a number of airplane electronic navigation instruments, radios and transponders; in the 1970's, ground based VOR navigation equipment sold worldwide and GPS equipment as we know it today in civilian use; in the 1980's, special mission modifications to business jets for aerial surveillance and conversion of passenger configurations to cargo; in the 1990's, classic aviation support of aging airplanes with enhanced protection of electrical systems through transient suppression devices (TSD), control electronics for military weapon systems and improved aerodynamic control products (Avcon Fins) allowing stability at higher gross weights for additional special mission applications; in the 2000's, improved accuracy of the airspeed and altimeter systems to allow less vertical separation between flying airplanes (RVSM) and acquisition of the JET autopilot product line to support and replace aged electronic equipment in the classic fleet of Learjet airplanes; and in the 2010's, the acquisition of Butler Avionics to provide additional classic airplane support by retrofit of avionics from the past 40 years to modern state of the art equipment for sale worldwide using FAA supplemental type certification (STC). Aerospace is preparing for the 2020's through the development and certification of ADS-B systems in support of the FAA "NextGen" update of the Air Traffic Control system in the United States and many other countries.
Aerospace continues to be a focus for new product design and development. Butler National received FAA approvals of a number of products: Butler National's newly redesigned rate gyroscope for Learjets; the replacement vertical accelerometer safety device that resolves obsolescence as a key component of the legacy Learjet stall warning systems; Butler National's addition of the GARMIN GTN 650/750 Global Position System Navigator with Communication transceiver in the Learjet Model 50 series, 30 series and 20 series, Avcon's new cargo/sensor carrying pod that mounts to the bottom of a King Air aircraft, and the provisions for external stores on a Learjet Model 60 to enable it for special mission operations; and noise suppression for Learjet 20 series aircraft. We expect this segment will continue to grow in the future.
Professional Services
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.
In the early 1990's, management determined that more revenue stable business units were needed to sustain the Company. Members of the Board of Directors had contacts with several American Indian tribes and other members of the Board were associated with gaming operators in Las Vegas. After enactment of the 1988 Indian Gaming Regulatory Act ("IGRA") we reached out to various Indian tribes with land in the area to explore the opportunities for operations under IGRA. This resulted in the "Stables", an Indian owned casino on Modoc Indian land opened in September 1998 developed and managed by BNSC. The Stables Management Agreement has been available on the website maintained by the National Indian Gaming Commission ("NIGC"). The Stables Management Agreement was subsequently amended by various amendments dated April 30, 2003 (the "First Amendment"), November 30, 2006 (the "Second Amendment"), October 19, 2009 (the "Third Amendment") and September 22, 2011 (the "Fourth Amendment"). The result of the First Amendment, Second Amendment, Third Amendment and Fourth Amendment is to provide (a) that twenty (20%) of net profits from The Stables are distributed to BNSC, (b) to end per the joint venture agreement the participation of the Miami Indian tribe from the business and (c) to extend the duration of the Stables Management Agreement through September 30, 2018.
From this experience with IGRA and the success of the Indian gaming industry, we determined that the IGRA model may be applicable for state-owned gaming. We spent Butler National Corporation innovation, legal and market development funds to design and encourage the use of an Indian-owned gaming model in the State of Kansas. From these efforts, Kansas enacted the Kansas Expanded Lottery Act (KELA) in 2007 allowing four state-owned casinos to be developed in Kansas. In 2007, BNSC made application to manage a state-owned casino. In 2008, BNSC was awarded a fifteen year term to manage the Boot Hill Casino in Dodge City, Kansas pursuant to a Lottery Gaming Facility Management Contract (the "Boot Hill Casino Management Contract"). The Boot Hill Casino Management Contract was amended on December 29, 2009 (the "First Amendment to the Boot Hill Casino Management Contract") to bring the definition of "Fiscal Year" in line with the fiscal year of BNSC (May 1 to April 30). BHCMC was organized to be the manager of the Boot Hill Casino in Dodge City, Kansas. The casino opened in December 2009.
The terms of the agreement between the Kansas Lottery and BNSC/BHCMC required the completion of an addition to the Boot Hill Casino. The Phase II expansion of Boot Hill Casino began in early 2012 and was completed in January 2013. Phase II expansion of the unfinished gaming floor space built during Phase I construction and tenant improvements was funded by tenant improvement leases, gaming machine acquisitions, and casino earnings. The Phase II expansion included the interior finish of 15,000 square feet of casino shell and provided for up to 216 additional gaming machines. Part of the expansion included a breezeway connecting the Boot Hill Casino and the Dodge City special events center (United Wireless Arena). Boot Hill Casino now has approximately 650 gaming machines on the floor. Boot Hill Casino acquired the naming rights to the City of Dodge City and Ford County owned conference center connected to the casino through the breezeway. The conference center is known as the Boot Hill Casino and Resort Conference Center.
Results Overview
The nine months ending January 31, 2018 revenue decreased 5% to $33.8 million compared to $35.5 million in the nine months ending January 31, 2017. In the nine months ending January 31, 2018 the professional services revenue was $22.3 million compared to $22.4 million in the nine months ending January 31, 2017, a
decrease of 0%. In the nine months ending January 31, 2018 the Aerospace Products revenue was $11.5 million compared to $13.1 million in the nine months ending January 31, 2017, a decrease of 12%.
The nine months ending January 31, 2018 net income decreased to $342
compared to a net income of $756 in the nine months ending January 31, 2017. The nine months ending January 31, 2018, operating income decreased to $1.4 million, from an operating income of $2.0 million in the nine months ending January 31, 2017.
RESULTS OF OPERATION
S
NINE MONTHS ENDING JANUARY 31, 2018 COMPARED TO NINE MONTHS ENDING JANUARY 31, 2017
(dollars in thousands)
|
|
Nine
Months
Ended
January 31, 2018
|
|
|
Percent
of Total
Revenue
|
|
|
Nine
Months
Ended
January 31, 2017
|
|
|
Percent
of Total
Revenue
|
|
|
Percent
Change
2017-2018
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Services
|
|
$
|
22,340
|
|
|
|
66
|
%
|
|
$
|
22,407
|
|
|
|
63
|
%
|
|
|
0
|
%
|
Aerospace Products
|
|
|
11,476
|
|
|
|
34
|
%
|
|
|
13,090
|
|
|
|
37
|
%
|
|
|
-12
|
%
|
Total revenue
|
|
|
33,816
|
|
|
|
100
|
%
|
|
|
35,497
|
|
|
|
100
|
%
|
|
|
-5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Professional Services
|
|
|
14,344
|
|
|
|
42
|
%
|
|
|
13,899
|
|
|
|
39
|
%
|
|
|
3
|
%
|
Cost of Aerospace Products
|
|
|
8,469
|
|
|
|
25
|
%
|
|
|
9,554
|
|
|
|
27
|
%
|
|
|
-11
|
%
|
Marketing and advertising
|
|
|
2,729
|
|
|
|
9
|
%
|
|
|
3,229
|
|
|
|
9
|
%
|
|
|
-15
|
%
|
Employee benefits
|
|
|
1,416
|
|
|
|
4
|
%
|
|
|
1,397
|
|
|
|
4
|
%
|
|
|
1
|
%
|
Depreciation and amortization
|
|
|
1,344
|
|
|
|
4
|
%
|
|
|
1,510
|
|
|
|
4
|
%
|
|
|
-11
|
%
|
General, administrative and other
|
|
|
4,112
|
|
|
|
12
|
%
|
|
|
3,912
|
|
|
|
11
|
%
|
|
|
5
|
%
|
Total costs and expenses
|
|
|
32,414
|
|
|
|
96
|
%
|
|
|
33,501
|
|
|
|
94
|
%
|
|
|
-3
|
%
|
Operating income
|
|
$
|
1,402
|
|
|
|
4
|
%
|
|
$
|
1,996
|
|
|
|
6
|
%
|
|
|
-30
|
%
|
Revenue:
Revenue
decreased 5% to $33.8 million in the nine months ended January 31, 2018, compared to $35.5 million in the nine months ended January 31, 2017. See "Operations by Segment" below for a discussion of the primary reasons for the increase in revenue.
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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 decreased 0% for the nine months to $22.3 million at January 31, 2018 compared to $22.4 million at January 31, 2017.
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???
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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 decreased 12% for the nine months to $11.5 million at January 31, 2018 compared to $13.1 million at January 31, 2017. This decrease is primarily due to a
decrease in aircraft modification revenue of $1.8 million. We anticipate future domestic military spending reductions and continued slow growth of the United States economy.
|
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 decreased 3% in the nine months ended January 31, 2018 to $32.4 million compared to $33.5 million in the nine months ended January 31, 2017. Costs and expenses were 96% of total revenue in the nine months ended January 31, 2018, as compared to 94% of total revenue in the nine months ended January 31, 2017.
Costs of Professional Services
increased 3% in the nine months ended January 31, 2018 to $14.3 million compared to $13.9 million in the nine months ended January 31, 2017. Costs were 42% of total revenue in the nine months ended January 31, 2018, as compared to 39% of total revenue in the nine months ended January 31, 2017.
Costs of Aerospace Products
decreased by 11% in the nine months ended January 31, 2018 to $8.5 million compared to $9.6 million for the nine months ended January 31, 2017. Costs were 25% of total revenue in the nine months ended January 31, 2018, as compared to 27% of total revenue in the nine months ended January 31, 2017.
Marketing and advertising expenses
decreased by 15% in the nine months ended January 31, 2018, to $2.7 million compared to $3.2 million in the nine months ended January 31, 2017. Expenses were 9% of total revenue in the nine months ended January 31, 2018, as compared to 9% of total revenue in the nine months ended January 31, 2017. 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 nine months ended January 31, 2018, compared to 4% in the nine months ended January 31, 2017. These expenses remained constant at $1.4 million in the nine months ended January 31, 2018, and $1.4 million in the nine months ended January 31, 2017. 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 4% in the nine months ended January 31, 2018, compared to 4% in the nine months ended January 31, 2017. These expenses decreased 11% to $1.3 million in the nine months ended January 31, 2018, from $1.5 million in the nine months ended January 31, 2017. 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, 2018 was $943 compared to $1.1 million in the nine months ended January 31, 2017.
General, administrative and other expenses
as a percent of total revenue was 12% in the nine months ended January 31, 2018, compared to 11% in the nine months ended January 31, 2017. These expenses increased 5% to $4.1 million in the nine months ended January 31, 2018, from $3.9 million in the nine months ended January 31, 2017.
Other income (expense):
Other income (expense)
was ($249) in the nine months ended January 31, 2018, compared with other income (expense) of ($337) in the nine months ended January 31, 2017. Interest related to obligations of BHCMC, LLC was $119 in the nine months ended January 31, 2018 compared to $159 in the nine months ended January 31, 2017.
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, 2018 and January 31, 2017:
(dollars in thousands)
|
|
Nine
Months
Ended
January 31, 2018
|
|
|
Percent
of Total
Revenue
|
|
|
Nine
Months
Ended
January 31, 2017
|
|
|
Percent
of Total
Revenue
|
|
|
Percent
Change
2017-2018
|
|
Professional Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boot Hill Casino
|
|
$
|
22,009
|
|
|
|
99
|
%
|
|
$
|
22,011
|
|
|
|
98
|
%
|
|
|
0
|
%
|
Management/Professional Services
|
|
|
331
|
|
|
|
1
|
%
|
|
|
396
|
|
|
|
2
|
%
|
|
|
-16
|
%
|
Revenue
|
|
|
22,340
|
|
|
|
100
|
%
|
|
|
22,407
|
|
|
|
100
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Professional Services
|
|
|
14,344
|
|
|
|
64
|
%
|
|
|
13,899
|
|
|
|
62
|
%
|
|
|
3
|
%
|
Expenses
|
|
|
6,873
|
|
|
|
31
|
%
|
|
|
7,572
|
|
|
|
34
|
%
|
|
|
-9
|
%
|
Total costs and expenses
|
|
|
21,217
|
|
|
|
95
|
%
|
|
|
21,471
|
|
|
|
96
|
%
|
|
|
-1
|
%
|
Professional Services operating income before noncontrolling interest in BHCMC, LLC
|
|
$
|
1,123
|
|
|
|
5
|
%
|
|
$
|
936
|
|
|
|
4
|
%
|
|
|
20
|
%
|
(dollars in thousands)
|
|
Nine
Months
Ended
January 31, 2018
|
|
|
Percent
of Total
Revenue
|
|
|
Nine
Months
Ended
January 31, 2017
|
|
|
Percent
of Total
Revenue
|
|
|
Percent
Change
2017-2018
|
|
Aerospace Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
11,476
|
|
|
|
100
|
%
|
|
$
|
13,090
|
|
|
|
100
|
%
|
|
|
-12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Aerospace Products
|
|
|
8,469
|
|
|
|
74
|
%
|
|
|
9,554
|
|
|
|
73
|
%
|
|
|
-11
|
%
|
Expenses
|
|
|
2,728
|
|
|
|
24
|
%
|
|
|
2,476
|
|
|
|
19
|
%
|
|
|
10
|
%
|
Total costs and expenses
|
|
|
11,197
|
|
|
|
98
|
%
|
|
|
12,030
|
|
|
|
92
|
%
|
|
|
-7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace Products operating income
|
|
$
|
279
|
|
|
|
2
|
%
|
|
$
|
1,060
|
|
|
|
8
|
%
|
|
|
-74
|
%
|
Professional Services
|
???
|
Revenue from Professional Services decreased 0% for the nine months ended January 31, 2018 to $22.3 million compared to $22.4 million for the nine months ended January 31, 2017.
In the nine months ended January 31, 2018 Boot Hill Casino received gross receipts for the State of Kansas of $29.3 million compared to $29.5 million for the nine months ended January 31, 2017. Mandated fees, taxes and distributions reduced gross receipts by $9.9 million resulting in gaming revenue of $19.4 million for the nine months ended January 31, 2018, compared to a reduction to gross receipts of $10.0 million resulting in gaming revenue of $19.5 million for the nine months ended January 31, 2017. Non-gaming revenue at Boot Hill Casino increased to $2.7 million for the nine months ended January 31, 2018, compared to $2.5 million for the nine months ended January 31, 2017.
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 16% to $331 for the nine months ended January 31, 2018, compared to $396 for the nine months ended January 31, 2017.
|
|
???
|
Costs of Professional Services increased 3% in the nine months ended January 31, 2018 to $14.3
million compared to $13.9 million in the nine months ended January 31, 2017. Costs were 64% of segment total revenue in the nine months ended January 31, 2018, as compared to 62% of segment total revenue in the nine months ended January 31, 2017.
|
|
???
|
Expenses decreased 9% in the nine months ended January 31, 2018 to $6.9 million compared to $7.6 million in the nine months ended January 31, 2017. Expenses were 31% of segment total revenue in the nine months ended January 31, 2018, as compared to 34% of segment total revenue in the nine months ended January 31, 2017.
|
Aerospace Products
|
???
|
Revenue decreased 12% to $11.5 million in the nine months ended January 31, 2018, compared to $13.1 million in the nine months ended January 31, 2017. This decrease is primarily due to a decrease in aircraft modification revenue of $1.8 million. We anticipate future domestic military spending reductions and continued slow growth of the United States economy. In an effort to offset decreased domestic military spending, 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 decreased by 11% in the nine months ended January 31, 2018 to $8.5 million compared to $9.6 million for the nine months ended January 31, 2017.
Costs were 74% of segment total revenue in the nine months ended January 31, 2018, as compared to 73% of segment total revenue in the nine months ended January 31, 2017.
|
|
???
|
Expenses increased 10% in the nine months ended January 31, 2018 to $2.7
million compared to $2.5 million in the nine months ended January 31, 2017. Expenses were 24% of segment total revenue in the nine months ended January 31, 2018, as compared to 19% of segment total revenue in the nine months ended January 31, 2017.
|
THIRD QUARTER FISCAL 2018 COMPARED TO THIRD QUARTER FISCAL 2017
(dollars in thousands)
|
|
Three
Months
Ended
January 31, 2018
|
|
|
Percent
of Total
Revenue
|
|
|
Three
Months
Ended
January 31, 2017
|
|
|
Percent
of Total
Revenue
|
|
|
Percent
Change
2017-2018
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Services
|
|
$
|
7,559
|
|
|
|
69
|
%
|
|
$
|
7,202
|
|
|
|
64
|
%
|
|
|
5
|
%
|
Aerospace Products
|
|
|
3,451
|
|
|
|
31
|
%
|
|
|
4,093
|
|
|
|
36
|
%
|
|
|
-16
|
%
|
Total revenue
|
|
|
11,010
|
|
|
|
100
|
%
|
|
|
11,295
|
|
|
|
100
|
%
|
|
|
-3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Professional Services
|
|
|
4,747
|
|
|
|
43
|
%
|
|
|
4,729
|
|
|
|
42
|
%
|
|
|
0
|
%
|
Cost of Aerospace Products
|
|
|
2,636
|
|
|
|
24
|
%
|
|
|
2,985
|
|
|
|
27
|
%
|
|
|
-12
|
%
|
Marketing and advertising
|
|
|
920
|
|
|
|
9
|
%
|
|
|
1,145
|
|
|
|
10
|
%
|
|
|
-20
|
%
|
Employee benefits
|
|
|
480
|
|
|
|
4
|
%
|
|
|
483
|
|
|
|
4
|
%
|
|
|
-1
|
%
|
Depreciation and amortization
|
|
|
362
|
|
|
|
3
|
%
|
|
|
496
|
|
|
|
4
|
%
|
|
|
-27
|
%
|
General, administrative and other
|
|
|
1,426
|
|
|
|
13
|
%
|
|
|
1,335
|
|
|
|
12
|
%
|
|
|
7
|
%
|
Total costs and expenses
|
|
|
10,571
|
|
|
|
96
|
%
|
|
|
11,173
|
|
|
|
99
|
%
|
|
|
-5
|
%
|
Operating income
|
|
$
|
439
|
|
|
|
4
|
%
|
|
|
122
|
|
|
|
1
|
%
|
|
|
260
|
%
|
Revenue:
Revenue
decreased 3% to $11.0 million in the three months ended January 31, 2018, compared to $11.3 million in the three months ended January 31, 2017. See "Operations by Segment" below for a discussion of the primary reasons for the increase in revenue.
|
???
|
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 three months to $7.6 million at January 31, 2018 compared to $7.2 million at January 31, 2017.
|
|
???
|
Aerospace Products derives its revenue by designing, engineering, manufacturing, installing, servicing and repairing products for classic and current production aircraft. Aerospace Products revenue decreased 16% for the three months to $3.5 million at January 31, 2018 compared to $4.1 million at January 31, 2017. This decrease is primarily due to a decrease in aircraft modification revenue of $752. We anticipate future domestic military spending reductions and continued slow growth of the United States economy.
|
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 decreased 5% in the three months ended January 31, 2018 to $10.6 million compared to $11.2 million in the three months ended January 31, 2017. Costs and expenses were 96% of total revenue in the three months ended January 31, 2018, as compared to 99% of total revenue in the three months ended January 31, 2017.
Costs of Professional Services
remained constant in the three months ended January 31, 2018 at $4.7 million compared to $4.7 million in the three months ended January 31, 2017. Costs were 43% of total revenue in the three months ended January 31, 2018, as compared to 42% of total revenue in the three months ended January 31, 2017.
Costs of Aerospace Products
decreased by 12% in the three months ended January 31, 2018 to $2.6 million compared to $3.0 million for the three months ended January 31, 2017. Costs were 24% of total revenue in the three months ended January 31, 2018, as compared to 27% of total revenue in the three months ended January 31, 2017.
Marketing and advertising expenses
decreased by 20% in the three months ended January 31, 2018, to $920 compared to $1.1 million in the three months ended January 31, 2017. Expenses were 9% of total revenue in the three months ended January 31, 2018, as compared to 10% of total revenue in the three months ended January 31, 2017. 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, 2018, compared to 4% in the three months ended January 31, 2017. These expenses decreased 1% to $480 in the three months ended January 31, 2018, from $483 in the three months ended January 31, 2017. 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, 2018, compared to 4% in the three months ended January 31, 2017. These expenses decreased 27% to $362 in the three months ended January 31, 2018, from $496 in the three months ended January 31, 2017. 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, 2018 was $229 compared to $351 in the three months ended January 31, 2017.
General, administrative and other expenses
as a percent of total revenue was 13% in the three months ended January 31, 2018, compared to 12% in the three months ended January 31, 2017. These expenses increased 7% to $1.4 million in the three months ended January 31, 2018, from $1.3 million in the three months ended January 31, 2017.
Other income (expense):
Other income (expense)
was ($82) in the three months ended January 31, 2018, compared with other income (expense) of ($95) in the three months ended January 31, 2017. Interest related to obligations of BHCMC, LLC was $37 in the three months ended January 31, 2018 compared to $50 in the three months ended January 31, 2017.
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, 2018 and January 31, 2017:
(dollars in thousands)
|
|
Three
Months
Ended
January 31, 2018
|
|
|
Percent
of Total
Revenue
|
|
|
Three
Months
Ended
January 31, 2017
|
|
|
Percent
of Total
Revenue
|
|
|
Percent
Change
2017-2018
|
|
Professional Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boot Hill Casino
|
|
$
|
7,483
|
|
|
|
99
|
%
|
|
$
|
7,056
|
|
|
|
98
|
%
|
|
|
6
|
%
|
Management/Professional Services
|
|
|
76
|
|
|
|
1
|
%
|
|
|
146
|
|
|
|
2
|
%
|
|
|
-48
|
%
|
Revenue
|
|
|
7,559
|
|
|
|
100
|
%
|
|
|
7,202
|
|
|
|
100
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Professional Services
|
|
|
4,747
|
|
|
|
63
|
%
|
|
|
4,729
|
|
|
|
66
|
%
|
|
|
0
|
%
|
Expenses
|
|
|
2,256
|
|
|
|
30
|
%
|
|
|
2,486
|
|
|
|
34
|
%
|
|
|
-9
|
%
|
Total costs and expenses
|
|
|
7,003
|
|
|
|
93
|
%
|
|
|
7,215
|
|
|
|
100
|
%
|
|
|
-3
|
%
|
Professional Services operating income (loss) before noncontrolling interest in BHCMC, LLC
|
|
$
|
556
|
|
|
|
7
|
%
|
|
$
|
(13
|
)
|
|
|
0
|
%
|
|
|
|
|
(dollars in thousands)
|
|
Three
Months
Ended
January 31, 2018
|
|
|
Percent
of Total
Revenue
|
|
|
Three
Months
Ended
January 31, 2017
|
|
|
Percent
of Total
Revenue
|
|
|
Percent
Change
2017-2018
|
|
Aerospace Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,451
|
|
|
|
100
|
%
|
|
$
|
4,093
|
|
|
|
100
|
%
|
|
|
-16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Aerospace Products
|
|
|
2,636
|
|
|
|
76
|
%
|
|
|
2,985
|
|
|
|
73
|
%
|
|
|
-12
|
%
|
Expenses
|
|
|
932
|
|
|
|
27
|
%
|
|
|
973
|
|
|
|
24
|
%
|
|
|
-4
|
%
|
Total costs and expenses
|
|
|
3,568
|
|
|
|
103
|
%
|
|
|
3,958
|
|
|
|
97
|
%
|
|
|
-10
|
%
|
Aerospace Products operating income (loss)
|
|
$
|
(117
|
)
|
|
|
-3
|
%
|
|
$
|
135
|
|
|
|
3
|
%
|
|
|
|
|
Professional Services
|
???
|
Revenue from Professional Services increased 5% for the three months ended January 31, 2018 to $7.6 million compared to $7.2 million for the three months ended January 31, 2017.
In the three months ended January 31, 2018 Boot Hill Casino received gross receipts for the State of Kansas of $10.0 million compared to $9.5 million for the three months ended January 31, 2017. 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, 2018, compared to a reduction to gross receipts of $3.3 million resulting in gaming revenue of $6.2 million for the three months ended January 31, 2017. Non-gaming revenue at Boot Hill Casino increased to $872 for the three months ended January 31, 2018, compared to $870 for the three months ended January 31, 2017.
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 48% to $76 for the three months ended January 31, 2018, compared to $146 for the three months ended January 31, 2017.
|
|
???
|
Costs of Professional Services remained constant in the three months ended January 31, 2018 at $4.7 million compared to $4.7 million in the three months ended January 31, 2017. Costs were 63% of segment total revenue in the three months ended January 31, 2018, as compared to 66% of segment total revenue in the three months ended January 31, 2017.
|
|
???
|
Expenses decreased 9% in the three months ended January 31, 2018 to $2.3 million compared to $2.5 million in the three months ended January 31, 2017. Expenses were 30% of segment total revenue in the three months ended January 31, 2018, as compared to 34% of segment total revenue in the three months ended January 31, 2017.
|
Aerospace Products
|
???
|
Revenue decreased 16% to $3.5 million in the three months ended January 31, 2018, compared to $4.1 million in the three months ended January 31, 2017. This decrease is primarily due to a decrease in aircraft modification revenue of $752. We anticipate future domestic military spending reductions and continued slow growth of the United States economy. In an effort to offset decreased domestic military spending, 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 decreased by 12% in the three months ended January 31, 2018 to $2.6 million compared to $3.0 million for the three months ended January 31, 2017.
Costs were 76% of segment total revenue in the three months ended January 31, 2018, as compared to 73% of segment total revenue in the three months ended January 31, 2017.
|
|
???
|
Expenses decreased 4% in the three months ended January 31, 2018 to $932 compared to $973 in the three months ended January 31, 2017.
Expenses were 27% of segment total revenue in the three months ended January 31, 2018, as compared to 24% of segment total revenue in the three months ended January 31, 2017.
|
Employees
Other than persons employed by our gaming subsidiaries there were 90 full time and 3 part time employees on January 31, 2018, compared to 84 full time and 3 part time employees on January 31, 2017. As of March 9, 2018, staffing is 90 full time and 3 part time employees. Our staffing at Boot Hill Casino & Resort on January 31, 2018 was 174 full time and 72 part time employees compared to 180 full time and 80 part time employees on January 31, 2017. At March 9, 2018 there are 171 full time and 74 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 2018 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, 2018 our cash position decreased by $1.3 million. Net income was $1.0 million for the nine months ended January 31, 2018. Cash flows provided by operating activities was $3.0 million for the nine months ended January 31, 2018. For the nine months ended January 31, 2018, non-cash activities consisting of depreciation and amortization contributed $2.6 million. Customer deposits decreased our cash position by $150
while inventories decreased our cash position by $1.2 million. Accounts receivable increased our cash position by $2.2 million. Gaming facility mandated payments decreased our cash position by $322. Prepaid expenses and other assets decreased our cash by $124, while a decrease in accounts payable and a decrease in accrued expenses and other current liabilities decreased our cash by an additional $1.4 million. Deferred tax assets increased our cash position by $274.
Cash used in investing activities was $1.8
million for the nine months ended January 31, 2018. We invested $65 in building additions, $482 to purchase equipment, $503 in furniture and fixtures and $784 to develop and enhance STCs.
Cash used in financing activities was $2.4
million for the nine months ended January 31, 2018. We made repayments on our debt of $1.8 million and decreased promissory notes by $109. We made a distribution to our non-controlling member of $360 and purchased company stock of $142 and placed such stock in treasury.
Critical Accounting Policies and Estimates
:
We discuss our critical accounting policies and estimates in Item 7, ???Management's Discussion and Analysis of Financial Condition and Results of Operations,??? in our Annual Report on Form 10-K for the year ended April 30, 2017 filed with the SEC on July 21, 2017. We have made no significant change in our critical accounting policies since April 30, 2017.
Changing Prices and Inflation
We have experienced upward pressure from inflation in fiscal year 2018. From fiscal year 2017 to fiscal year 2018 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 interest rates to rise in fiscal 2018 and 2019.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.