The following Management Discussion and Analysis (MD&A) is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to the consolidated financial statements (Notes).
Our fiscal year ends on
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 revenues 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 on Exhibit 21 to this Form 10-K. 18
Table of Contents COVID-19 Overview: The pandemic caused by COVID-19 has caused volatility in world-wide financial markets since 2020, primarily due to uncertainty with respect to the severity and duration of the pandemic. Although many experts believe the pandemic has ended in 2022, the threat of outbreaks and new variations of the virus continue to affect operations and finances of businesses like ours. We have experienced lower customer headcount, which has been off-set by a larger net revenue per customer. We are experiencing, and expect to continue experiencing, lower demand for our professional services and increased costs and other challenges related to COVID-19 that adversely affects our business. The COVID-19 pandemic has impacted our business operations and financial results and continues to impact us in fiscal 2022. We face numerous uncertainties in estimating the direct and indirect effects on our present and future business operations, financial condition, results of operations, and liquidity. Due to several rapidly changing variables related to the COVID-19 pandemic, we cannot reasonably estimate future economic trends and the timing of when stability will return. Refer to Item 1A. "Risk Factors" for a disclosure of risk factors related to COVID-19. As the economy in general slowly recovers, and vaccinations rates in our operating territory improve and new infections decline, we have continued to see improvements in customer headcount. However, the unpredictable nature of the pandemic could again lead to closures, decreased traffic and demand, and increased COVID-19- related operating expenses, for the foreseeable future. While COVID-19 has resulted in, and will continue to bring, significant challenges and uncertainty to our operating environment, we believe that our resilient business model and the strength of our brand and balance sheet position us well to emerge from the pandemic. 19
Table of Contents Results Overview Our fiscal 2022 revenue increased 20% to
$73.5 millioncompared to $61.5 millionin fiscal 2021. In fiscal 2022 the Professional Services revenue increased 30%. There was an increase of 10% in the Aerospace Products revenue in fiscal 2022. Our fiscal 2022 net income was $12.2 millioncompared to net income of $2.5 millionin fiscal 2021. Earnings per share was $0.14for fiscal 2022 compared to $0.02in fiscal 2021. We continue focusing on our margin expansion initiatives, including efficiencies in our implementation and operational processes and controlling general and administrative expenses. The fiscal 2022 operating income was $16.1 million, an increase from $5.9 millionin fiscal 2021.
RESULTS OF OPERATIONS
Fiscal 2022 vs. Fiscal 2021
Percent of Percent of Percent Change (dollars in thousands) 2022 Total Revenue 2021 Total Revenue 2021-2022 Revenue: Professional Services
$ 39,14753 % $ 30,20549 % 30 % Aerospace Products 34,326 47 % 31,275 51 % 10 % Total revenues 73,473 100 % 61,480 100 % 20 % Costs and expenses: Cost of professional services 15,798 21 % 14,214 23 % 11 % Cost of aerospace products 22,434 30 % 23,293 38 % -4 % Marketing and advertising 5,236 7 % 3,752 6 % 40 % Employee benefits 2,573 4 % 2,571 4 % 0 % Depreciation and amortization 2,815 4 % 3,542 6 % -21 % General, administrative and other 8,488 12 % 8,208 13 % 3 % Total costs and expenses 57,344 78 % 55,580 90 % 3 % Operating income $ 16,12922 % $ 5,90010 % 173 % Revenue: Revenue increased to $73.5 millionin fiscal 2022, compared to $61.5 millionin fiscal 2021. 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 through BCS Design, Inc.("BCS"). Revenue from Professional Services increased 30% to $39.1 millionin fiscal 2022 compared to $30.2 millionin fiscal 2021. We increased our marketing effort into an expanded market area. We believe this resulted in an increase in patron visits and an increase in the average spend per visit. Aerospace Products derives its revenue by designing, engineering, manufacturing, installing, servicing and repairing products for classic and current production aircraft. Aerospace Products revenue increased 10% to $34.3 millionin fiscal 2022 compared to $31.3 millionin fiscal 2021. The increase in revenue is primarily due to an increase in aircraft avionics and special mission electronics business of $3.4 millionand a decrease in aircraft modification business of $351. Costs and expenses:
Costs and expenses related to professional services and aerospace products include the cost of engineering, labor, materials, equipment use, control systems, safety and of occupation.
Costs and expenses increased by 3% in fiscal year 2022 to
Marketing and advertising expenses as a percent of total revenue was 7% in fiscal 2022, as compared to 6% in fiscal 2021. These expenses increased 40% to
$5.2 millionin fiscal 2022, from $3.8 millionin fiscal 2021. Marketing and advertising expenses include advertising, sales and marketing labor, gaming development costs, and casino and product promotions. The increase is primarily due to increasing our marketing efforts into an expanded market area. 20
Employee benefits expenses as a percent of total revenue was 4% in fiscal 2022, compared to 4% in fiscal 2021. These expenses remained constant at
$2.6 millionin fiscal 2022 and fiscal 2021. 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 as a percent of total revenue was 4% in fiscal 2022, compared to 6% in fiscal 2021. These expenses decreased to $2.8 millionin fiscal 2022, from $3.5 millionin fiscal 2021. These expenses include depreciation related to owned assets being depreciated over various useful lives and amortization of intangible items including the Kansasprivilege fee related to the Boot Hill Casinobeing expensed over the term of the gaming contract with the State of Kansas. BHCMC, LLCdepreciation and amortization expense for fiscal 2022 was $2.3 millioncompared to $3.1 millionin fiscal 2021.
General, administrative and other expenses as a percentage of total revenue were 12% in fiscal year 2022, compared to 13% in fiscal year 2021. These expenses increased by 3% to reach
Other income (expenses):
Interest and other income (expense) were (
$613) in fiscal 2022 compared with interest and other income (expense) of ($3.1)millionin fiscal 2021, a decrease of $2,518, from fiscal 2021 to fiscal 2022. The decrease is due primarily to the forgiveness of the Paycheck Protection Program loan of $2.0 millionfrom the Small Business Administration, a gain on the sale of an airplane of $75, and a reduction of interest of $449.
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 fiscal years 2022 and 2021:
Percent of Percent of Percent Change (dollars in thousands) 2022 Revenue 2021 Revenue 2021-2022 Professional Services Revenue Boot Hill Casino
$ 38,76999 % $ 29,95199 % 29 % Management/Professional Services 378 1 % 254 1 % 49 % Revenue 39,147 100 % 30,205 100 % 30 % Costs of Professional Services 15,798 41 % 14,214 47 % 11 % Expenses 13,378 34 % 10,945 36 % 22 % Total costs and expenses 29,176 75 % 25,159 83 % 16 % Professional Services operating income before noncontrolling interest in BHCMC, LLC $ 9,97125 % $ 5,04617 % 98 % Percent of Percent of Percent Change (dollars in thousands) 2022 Revenue 2021 Revenue 2021-2022 Aerospace Products Revenue $ 34,326100 % $ 31,275100 % 10 % Costs of Aerospace Products 22,434 65 % 23,293 74 % -4 % Expenses 5,734 17 % 7,128 23 % -20 % Total costs and expenses 28,168 82 % 30,421 97 % -7 % Aerospace Products operating income $ 6,15818 % $ 8543 % 621 % 21
Table of Contents Professional Services
? Professional Services revenue increased 30% to
a larger market area. We believe this has led to an increase in customers
visits and an increase in average spend per visit.
In fiscal 2022
Boot Hill Casinoreceived gross receipts for the State of Kansasof $50.2 millioncompared to $39.3 millionin fiscal 2021. Mandated fees, taxes and distributions reduced gross receipts by $15.8 millionresulting in gaming revenue of $34.4 millionin fiscal 2022 compared to $26.8 millionin fiscal 2021, an increase of 28%. Non-gaming revenue at Boot Hill Casinowas $4.4 millionin fiscal 2022 compared to $3.1 millionin fiscal 2021. 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 Casinoincreased 49% to $378in fiscal 2022 compared to $254in fiscal 2021.
? Costs increased by 11% in fiscal 2022 to
in fiscal 2021. Costs were 41% of segment total revenue in fiscal 2022, compared to 47% of segment total revenue in fiscal 2021. ? Expenses increased 22% in fiscal 2022 to
$13.4 millioncompared to
for fiscal year 2022, compared to 36% of total segment revenue for fiscal year 2021.
the increase is mainly due to 1) an increase in marketing efforts in a
expanded market area and 2) professional services are growing at a faster pace
than Aerospace Products and were awarded a larger share of the share capital
allocation pool. Aerospace Products
? Revenues increased by 10% to reach
increased our aircraft avionics and special mission electronics business by
have invested in the development of several STCs. These STCs are the state of the
art avionics and we are aggressively marketing both domestically and internationally.
? Costs decreased by 4% for
in fiscal 2021. Costs represented 65% of total segment revenue in fiscal 2022,
compared to 74% of total segment revenue in fiscal 2021. Lower costs
is mainly due to a change in the product mix in the modification of the aircraft
? Expenses decreased by 20% in fiscal year 2022 to
in fiscal year 2021. Spending represented 17% of total segment revenue in fiscal year 2022,
compared to 23% of total segment revenue for fiscal 2021. The decline is due
mainly to the turnover of Aerospace Products, which is growing at a slower rate than
Professional Services and were allocated a smaller portion of the company’s budget
Liquidity and capital resources (in thousands)
April 30, 2022, the Company has a line of credit with Kansas State Bankin the form of a promissory note with an intereset rate 3.65% totaling $2,000. The unused line at April 30, 2022was $2,000. There were no advances made on the line of credit during the year ended April 30, 2022. The line of credit is due on demand and is collateralized by a first and second position on all assets of the Company. One note with Academy Bank, N.A.for $32,667collateralized by all of BHCMC's assets and compensation under the State management contract with an interest rate of 5.32% payable over seven years with an initial twenty-year amortization and a balloon payment of $19,250at the end of seven years. The second note with Academy Bank, N.A.for $12,721collateralized by all of BHCMC's assets and compensation under the State management contract with an interest rate of 5.75% payable in full over five years. These notes contain a covenant to maintain a debt service coverage ratio of 1.3 to 1.0. These notes also contain a liquidity covenant requiring the Company to maintain an aggregate sum of $1.5 millionof unrestricted cash. We are in compliance with these covenants at April 30, 2022. At April 30, 2022, there is one note with 1st Source Bankwith an interest rate of 6.25% collateralized by an aircraft security agreement totaling $534. This note was used to purchase an aircraft. This note matures in January 2023.
A note with
April 30, 2022, there is a note payable with Patriots Bankwith an interest rate of 4.35% collateralized by aircraft security agreements totaling $1,197. This note matures in March 2029.
We are not in default of any of our tickets at
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 2022 and beyond. 22
During fiscal 2022 our cash position decreased by
$9.5 million. Net income was $12.2 million. Cash flows from operating activities provided $11.0 million. Non-cash activities consisting of depreciation and amortization contributed $5.3 million, 401(k) stock issues contributed $807, gain on sale of airplanes used $75, forgiveness of debt used $2.0 millionand deferred compensation contributed $585. Deferred income taxes increased our cash position by $174. Accounts receivable decreased our cash position by $1.7 million. Inventories decreased our cash position by $304. Accounts payable and contract liability decreased our cash position by $4.1 million. Contract assets decreased our cash position by $1.0 million. Prepaid expenses and other assets increased our cash by $141, while gaming facility mandated payments increased our cash by an additional $172. Accrued liabilities, other liabilities and income tax payable increased our cash position by $832.
Cash allocated to investing activities was
towards the STCs,
Cash used in financing activities was
$11.1 million. We increased our debt by $1.3 million. We made repayments on our debt of $4.4 million. We used $7.7 millionto purchase the noncontrolling interest of BHCMC, LLC. We reduced our lease liability by $108. We purchased company stock of $168. The stock acquired was placed in treasury. The Company anticipates capital expenditures in fiscal year 2023 to be approximately $4.8 million, consisting of $1.3 millionon STC's, $700on the construction of a new hangar, $2.0 millionon equipment and furnishings, and $800on the implementation of sports wagering. We anticipate our cash balance will be sufficient to cover cash requirements through the current fiscal year. The COVID pandemic caused a global recession and the sustainability of the economic recovery remains unclear. The COVID pandemic has also significantly increased economic and demand uncertainty, has caused inflationary pressure in the U.S.and elsewhere, and has led to disruption and volatility in demand for our services. The COVID pandemic may negatively affect our capital resources and operations. The Bureau of Labor Statisticsreported that the Consumer Price Index increased 7 percent in 2021, indicating the largest increase since 1982. Many of our operating expenses are sensitive to increases in inflation including equipment prices, fuel costs, and employee-related costs. Insurance costs have also significantly increased with most major carriers. Furthermore, inflationary pressures the market is currently experiencing may increase costs for materials, supplies, and services. Rising inflation may also drive demand for increases in compensation for employees which may result in increase in labor costs. With increasing costs, we may have to increase our prices to maintain the same level of profitability.
Critical accounting 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 Discussion and Analysis of Financial Condition and Results of Operations." In addition, Note 1 to the consolidated financial statements expands upon discussion of our accounting policies.
Revenue recognition: Revenue recognition: ASC Topic 606, “Revenues from Contracts with Customers”
Under ASC 606, revenue is recognized when a customer obtains control of promised services in an amount that reflects the consideration we expect to receive in exchange for those services. To achieve this core principal, the Company applies the following five steps:
1) Identify the contract(s) with a customer
A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party's rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable based on the customer's intent and ability to pay the promised consideration.
2) Identification of performance obligations in the contract
At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer. Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services, the Company must apply judgment to determine whether promised services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised services are accounted for as a combined performance obligation.
3) Determination of the transaction price
The transaction price is the amount that an entity allocates to the performance obligations identified in the contract and, therefore, represents the amount of revenue recognized as those performance obligations are satisfied. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. 23
Table of Contents
4) Allocation of the transaction price to the performance obligations in the
contract Once a contract and associated performance obligations have been identified and the transaction price has been determined, ASC 606 requires an entity to allocate the transaction price to each performance obligation identified. This is generally done in proportion to the standalone selling prices of each performance obligation (i.e., on a relative standalone selling price basis). As a result, any discount within the contract generally is allocated proportionally to all the separate performance obligations in the contract. The Company is applying the right to invoice practical expedient to recognize revenue. As a result, the entity bypasses the steps of determining the transaction price, allocating that transaction price and determining when to recognize revenue as it will recognize revenue as billed by multiplying the price assigned to the good or service, by the units.
5) Recognition of revenue when, or over time, we satisfy a performance obligation
Revenue is recognized when or as performance obligations are satisfied by transferring control of a promised good or service to a customer. Control transfers either over time or at a point in time. Revenue is recognized when control of the promised services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Aircraft modifications are performed under fixed-price contracts. Revenue from fixed-priced contracts are recognized on the percentage-of-completion method, measured by the direct labor incurred compared to total estimated direct labor. Using direct labor best represents the progress on a contract.
Revenues from avionics products are recognized when they are shipped. Payment for these Avionics products is due within 30 days of the invoice date after shipment. Revenues from gaming management and other general/professional services are recognized as the service is rendered.
Regarding warranties and returns, our products are special order and are not suitable for return. Our products are unique upon installation and tested prior to their release to the customer and acceptance by the customer. In the rare event of a warranty claim, the claim is processed through the normal course of business and may include additional charges to the customer. In our opinion, any future warranty work would not be material to the consolidated financial statements. Gaming revenue is the gross gaming win as reported by the
Kansas Lotterycasino reporting systems, less the mandated payments by and for the State of Kansas. Electronic games-slots and table games revenue is the aggregate of gaming wins and losses. Liabilities are recognized for chips and "ticket-in, ticket-out" coupons in the customers' possession, and for accruals related to anticipated payout of progressive jackpots. Progressive gaming machines, which contain base jackpots that increase at a progressive rate based on the number of coins played, are deducted from revenue as the value of jackpots increase. Food, beverage, and other revenue is recorded when the service is received and paid. 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 consolidated financial statements. Significant estimates include assumptions about collection of accounts receivable, the valuation, and recognition of stock-based compensation expense, valuation for deferred tax assets and useful life of fixed assets. We believe any changes in these estimates will not result in a materially adverse affect to the Company's financial position or results of operations. 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
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