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MarketScreener Homepage  >  Equities  >  OTC Bulletin Board - Other OTC  >  Butler National Corporation    BUKS

BUTLER NATIONAL CORPORATION (BUKS)
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BUTLER NATIONAL : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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09/14/2018 | 08:51pm CET

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 Facotrs) 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:





  ? extensive regulation across our industries;


  ? evolving government regulations and law;


  ? the geographic location of our casino;


  ? customer concentration risk;

? risks associated with the potential acquisition of land at the Boot Hill

    Casino;


  ? industrial business cycles;


  ? market competition;


  ? marketability restrictions of our common stock;


  ? stock dilution caused by the annual employer match to our 401(k) plan;


  ? the possibility of a reverse-stock split;


  ? executive officers are family members;


  ? non-renewal of certain casino management contracts;


  ? changes in regulations of financial reporting;


  ? fluctuating fuel and energy costs;


  ? fixed-price contracts;


  ? development, production, testing and marketing of new products;


  ? the stability of credit markets;


  ? cyber-security threats;


  ? acts of terrorism and war;


  ? inclement weather and natural disasters;


  ? loss of key personnel;


  ? risks associated with international sales;


  ? future acquisitions and investments;


  ? change of control restrictions;


  ? potential impairment losses;


  ? extensive taxation;



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.

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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 two gaming and entertainment facilities 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:




?  Aerial surveillance products           ?  GARMIN GTN Global Position 

System

                                             Navigator with Communication
                                             Transceiver

?  Aerodynamic enhancement products       ?  J.E.T autopilot products

?  Airspeed and altimeter systems         ?  Load sharing systems and switching
                                             equipment

?  Avcon Fins                             ?  Noise suppression systems

?  ADS-B systems                          ?  Rate gyroscopes

?  Conversion of passenger                ?  Replacement vertical accelerometers
   configurations to cargo

?  Cargo/sensor carrying pods             ?  Transient suppression devices

?  Electronic navigation instruments,     ?  Attitude heading reference systems
   radios and transponders




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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:



?  Aerial photograph capabilities         ?  Extended tip fuel tanks

?  Aerodynamic improvements               ?  Radar systems

?  Avionics systems                       ?  Reduced vertical separation minimums

?  Cargo doors                            ?  Special mission modifications

?  Conversion from passenger to           ?  Stability enhancements
   freighter configuration

?  Extended doors                         ?  Traffic collision avoidance
systems




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:



?  Cabling                                ?  HangFire Override Modules

?  Electronic control systems             ?  Test equipment

?  Gun Control Units for Apache and       ?  Gun Control Units for land and sea
   Blackhawk helicopters                     based military vehicles






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 two gaming and entertainment facilities. 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 Conference Center 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
receives twenty percent (20%) of the net profits from The Stables. The Stables
Agreement expires in September 30, 2018, and renewal is not planned.



Architectural and Engineering Services. Companies in Professional Services provide licensed architectural, including commercial and industrial building design, and engineering services.

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Results Overview



The three months ending July 31, 2018 revenue increased 15% to $13.4 million
compared to $11.6 million in the three months ending July 31, 2017. In the three
months ending July 31, 2018 the professional services revenue was $7.9 million
compared to $7.4 million in the three months ending July 31, 2017, an increase
of 7%. In the three months ending July 31, 2018 the Aerospace Products revenue
was $5.5 million compared to $4.2 million in the three months ending July 31,
2017, an increase of 30%.



The three months ending July 31, 2018 net income increased to $509 compared to a
net income of $238 in the three months ending July 31, 2017.  The three months
ending July 31, 2018, operating income increased to $901, from an operating
income of $646 in the three months ending July 31, 2017.



RESULTS OF OPERATIONS



THREE MONTHS ENDING JULY 31, 2018 COMPARED TO THREE MONTHS ENDING JULY 31, 2017



                                      Three                         Three
                                      Months                        Months
                                      Ended         Percent         Ended         Percent         Percent
                                     July 31,       of Total       July 31,       of Total        Change
(dollars in thousands)                 2018         Revenue          2017         Revenue        2017-2018
Revenue:
Professional Services               $    7,948             59 %   $    7,439             64 %             7 %
Aerospace Products                       5,456             41 %        4,210             36 %            30 %
Total revenue                           13,404            100 %       11,649            100 %            15 %

Costs and expenses:
Costs of Professional Services           4,812             36 %        4,834             42 %             0 %
Cost of Aerospace Products               4,130             31 %        3,033             26 %            36 %
Marketing and advertising                  975              7 %          853              7 %            14 %
Employee benefits                          505              4 %          476              4 %             6 %
Depreciation and amortization              388              3 %          482              4 %           -20 %
General, administrative and other        1,693             12 %        1,325             11 %            28 %
Total costs and expenses                12,503             93 %       11,003             94 %            14 %
Operating income                    $      901              7 %   $      646              6 %            39 %




Revenue:



Revenue increased 15% to $13.4 million in the three months ended July 31, 2018,
compared to $11.6 million in the three months ended July 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 7% for the three months to $7.9 million at July 31,
    2018 compared to $7.4 million in the three months ended July 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 increased 30% for the

three months to $5.5 million at July 31, 2018 compared to $4.2 million at July

    31, 2017.




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 14% in the three months ended July 31, 2018 to
$12.5 million compared to $11.0 million in the three months ended July 31, 2017.
Costs and expenses were 93% of total revenue in the three months ended July 31,
2018, as compared to 94% of total revenue in the three months ended July 31,
2017.



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Costs of Professional Services remained constant in the three months ended July
31, 2018 at $4.8 million compared to $4.8 million in the three months ended July
31, 2017. Costs were 36% of total revenue in the three months ended July 31,
2018, as compared to 42% of total revenue in the three months ended July 31,
2017.



Costs of Aerospace Products increased by 36% in the three months ended July 31,
2018 to $4.1 million compared to $3.0 million for the three months ended July
31, 2017. Costs were 31% of total revenue in the three months ended July 31,
2018, as compared to 26% of total revenue in the three months ended July 31,
2017.



Marketing and advertising expenses increased by 14% in the three months ended
July 31, 2018, to $975 compared to $853 in the three months ended July 31, 2017.
Expenses were 7% of total revenue in the three months ended July 31, 2018, as
compared to 7% of total revenue in the three months ended July 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 July 31, 2018, compared to 4% in the three months ended July 31,
2017. These expenses increased to $505 in the three months ended July 31, 2018,
from $476 in the three months ended July 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 July 31, 2018, compared to 4% in the three months ended
July 31, 2017. These expenses decreased 20% to $388 in the three months ended
July 31, 2018, from $482 in the three months ended July 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 July 31, 2018 was $245 compared to $351 in
the three months ended July 31, 2017.



General, administrative and other expenses as a percent of total revenue was 12%
in the three months ended July 31, 2018, compared to 11% in the three months
ended July 31, 2017. These expenses increased 28% to $1.7 million in the three
months ended July 31, 2018, from $1.3 million in the three months ended July 31,
2017.



Other income (expense):



Interest expense and other income were $209 in the three months ended July 31,
2018, compared with interest expense and other income of ($86) in the three
months ended July 31, 2017.  Interest related to obligations of BHCMC, LLC was
$29 in the three months ended July 31, 2018 compared to $43 in the three months
ended July 31, 2017.



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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 July 31, 2018 and July 31, 2017:



                                    Three                         Three
                                    Months                        Months
                                    Ended         Percent         Ended         Percent         Percent
                                   July 31,       of Total       July 31,       of Total        Change
(dollars in thousands)               2018         Revenue          2017         Revenue        2017-2018
Professional Services
Revenue
Boot Hill Casino                  $    7,841             99 %   $    7,299             98 %             7 %
Management/Professional
Services                                 107              1 %          140              2 %           -24 %
Revenue                                7,948            100 %        7,439            100 %             7 %

Costs of Professional Services         4,812             60 %        4,834             65 %             0 %
Expenses                               2,592             33 %        2,252             30 %            15 %
Total costs and expenses               7,404             93 %        7,086             95 %             4 %
Professional Services operating
income before noncontrolling
interest in BHCMC, LLC            $      544              7 %   $      353              5 %            54 %




                                        Three                         Three
                                        Months                        Months
                                        Ended         Percent         Ended         Percent         Percent
                                       July 31,       of Total       July 31,       of Total        Change
(dollars in thousands)                   2018         Revenue          2017         Revenue        2017-2018
Aerospace Products
Revenue                               $    5,456            100 %   $    4,210            100 %            30 %

Costs of Aerospace Products                4,130             75 %        3,033             72 %            36 %
Expenses                                     969             18 %          884             21 %            10 %
Total costs and expenses                   5,099             93 %        3,917             93 %            30 %

Aerospace Products operating income   $      357              7 %   $      293              7 %            22 %




Professional Services


? Revenue from Professional Services increased 7% for the three months ended

July 31, 2018 to $7.9 million compared to $7.4 million for the three months

ended July 31, 2017.

In the three months ended July 31, 2018Boot Hill Casino received gross

receipts for the State of Kansas of $10.4 million compared to $9.7 million for

the three months ended July 31, 2017. Mandated fees, taxes and distributions

reduced gross receipts by $3.4 million resulting in gaming revenue of $7.0

million for the three months ended July 31, 2018, compared to a reduction to

gross receipts of $3.3 million resulting in gaming revenue of $6.4 million for

the three months ended July 31, 2017. Non-gaming revenue at Boot Hill Casino

increased to $876 for the three months ended July 31, 2018, compared to $873

    for the three months ended July 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 24% to $107 for the three months ended July 31, 2018,
    compared to $140 for the three months ended July 31, 2017.



? Costs of Professional Services remained constant in the three months ended

July 31, 2018 at $4.8 million compared to $4.8 million in the three months

ended July 31, 2017. Costs were 60% of segment total revenue in the three

months ended July 31, 2018, as compared to 65% of segment total revenue in the

    three months ended July 31, 2017.




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? Expenses increased 15% in the three months ended July 31, 2018 to $2.6 million

compared to $2.3 million in the three months ended July 31, 2017. Expenses

were 33% of segment total revenue in the three months ended July 31, 2018, as

compared to 30% of segment total revenue in the three months ended July 31,

    2017.




Aerospace Products



? Revenue increased 30% to $5.5 million in the three months ended July 31, 2018,

compared to $4.2 million in the three months ended July 31, 2017. The increase

in revenue was due to an increase of $762 in modification business and a $484

increase in avionics business. 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 36% in the three months ended July

31, 2018 to $4.1 million compared to $3.0 million for the three months ended

July 31, 2017. Costs were 75% of segment total revenue in the three months

ended July 31, 2018, as compared to 72% of segment total revenue in the three

    months ended July 31, 2017.




  ? Expenses increased 10% in the three months ended July 31, 2018 to $969

compared to $884 in the three months ended July 31, 2017. Expenses were 18%

of segment total revenue in the three months ended July 31, 2018, as compared

to 21% of segment total revenue in the three months ended July 31, 2017.





Employees



Other than persons employed by our gaming subsidiaries there were 93 full time
and 6 part time employees on July 31, 2018, compared to 87 full time and 2 part
time employees on July 31, 2017. As of September 7, 2018, staffing is 95 full
time and 3 part time employees. Our staffing at Boot Hill Casino & Resort on
July 31, 2018 was 186 full time and 66 part time employees compared to 173 full
time and 90 part time employees on July 31, 2017. At September 7, 2018 there are
182 full time and 68 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:



                      Members of
                       Board of         Equity             Income
Membership Interest    Managers        Ownership       (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 three months ended July 31, 2018 our cash position increased by $192.
Net income was $922 for the three months ended July 31, 2018. Cash flows
provided by operating activities was $1.5 million for the three months ended
July 31, 2018. Non-cash activities consisting of depreciation and amortization
provided $750 million. Customer deposits increased our cash position by $1.3
million while inventories decreased our cash position by $391. Accounts
receivable decreased our cash position by $118. Gaming facility mandated
payments decreased our cash position by $282. Prepaid expenses and other assets
decreased our cash by $462. A decrease in accounts payable, a decrease in
accrued expenses, and an increase in other current liabilities decreased our
cash by an additional $408.



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Cash used in investing activities was $227 for the three months ended July 31,
2018. We invested $20 to purchase equipment, $66 in furniture and fixtures and
$141 to develop and enhance STCs.



Cash used in financing activities was $1.1 million for the three months ended
July 31, 2018. We made repayments on our debt of $403 and decreased promissory
notes by $711. We purchased company stock of $6. The stock was acquired and
placed 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 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 most 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.

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