Butler National: Dual Engines Drive Margin Expansion and Growth Amidst Headwinds ($BUKS) - BUKS Stock Research Report

## Executive Summary / Key Takeaways * Butler National ($BUKS) operates a unique dual business model spanning specialized Aerospace Products and Gaming Management services, which collectively drove a 7% revenue increase and a significant 27% surge in operating income in fiscal year 2025. * The Aerospace segment, focused on aircraft modifications and special mission electronics, achieved 15% revenue growth and notable margin expansion (operating margin 17% vs 11%), benefiting from new STC approvals and strategic investments in fabrication capacity despite facing labor and supply chain challenges. * The Professional Services segment, anchored by the Boot Hill Casino, saw stable revenue but improved operating margin (24% vs 23%), with strong growth in the new Kansas sports wagering market offsetting a decline in traditional gaming influenced by local economic factors. * Management is strategically investing in future growth, planning approximately $12.5 million in capital expenditures for FY2026 focused on STC development, equipment, and facility expansion, supported by robust operating cash flow ($18.4 million in FY2025). * Key risks include customer concentration, dependence on government spending, regulatory uncertainty in gaming (especially regarding sports betting contract renewals), inflationary pressures on costs, and intense competition in both segments, requiring vigilant execution to sustain recent performance gains. ## A Tale of Two Segments: Butler National's Unique Foundation Butler National Corporation, established in 1960, has evolved into a company with a distinct dual identity, operating across the specialized Aerospace Products and Professional Services sectors. This structure allows the company to tap into diverse markets, balancing the cyclical nature and regulatory complexities inherent in each. The overarching strategy centers on enhancing long-term shareholder value through increased cash generation, earnings growth, strategic investments, and targeted market initiatives. This approach is designed to leverage the strengths of each segment while prudently managing capital. The company's history, particularly its deep roots in aerospace modifications and its strategic entry into gaming management, provides the foundation for its current market position. Recent years have seen significant strategic moves, including investments to bolster aerospace fabrication capabilities and the timely expansion into the burgeoning Kansas sports wagering market. These initiatives reflect a proactive stance in pursuing growth opportunities while navigating external challenges like supply chain disruptions and inflationary pressures. ## Aerospace Products: Engineering Growth and Expanding Margins The Aerospace Products segment is a cornerstone of Butler National's operations, specializing in the design, engineering, manufacturing, and servicing of critical components and modifications for various aircraft, including Learjet, Textron Beechcraft, King Air, and Textron Cessna turboprops. This segment encompasses Aircraft Modifications, Special Mission Electronics, and Aircraft Avionics. The company holds valuable FAA Supplemental Type Certificates (STCs) and Parts Manufacturer Approval (PMA), which are crucial authorizations enabling complex modifications and the manufacture of required parts. A key technological differentiator lies in the company's ability to develop and certify specialized modifications and electronic systems. For instance, recent STC approvals in fiscal year 2025 included configurations for the Avcon Special Mission Pod, the Avcon King Air Nose Extension, sensor arrays for environmental research on King Airs, and provisions for external stores on the Learjet Model 60. These developments provide a foundation for future sales and modifications. In Special Mission Electronics, the company manufactures control systems and ruggedized cabling, notably delivering the first 20 new M134 Gun Control Units in FY2025. While specific quantifiable performance metrics for these technologies relative to alternatives are not detailed, their FAA certification and application in specialized missions imply adherence to stringent performance and safety standards, contributing to a competitive moat in niche markets. The company actively invests in research and development, with expenditures of $952,000 in FY2025, to support new product development and maintain its technological edge. Operational execution in this segment is critical, particularly managing backlog and fabrication capacity. As of April 30, 2025, the Aerospace backlog stood at $33.611 million, increasing from $30.265 million in the prior year, although it slightly decreased to $28.859 million by June 23, 2025. This backlog represents a significant pipeline of work. To address the need for increased parts fabrication capacity driven by sales growth, the company acquired KC Machine in September 2023 and purchased a 33,600 square foot building in Newton, Kansas, in April 2025, adjacent to its existing campus. These investments aim to enhance internal fabrication capabilities and optimize production flow between facilities, addressing labor availability challenges. Competitively, the Aerospace segment operates against a diverse set of players, ranging from large original equipment manufacturers (OEMs) like Honeywell (HON) and RTX Corporation (RTX) to smaller independent shops. Larger competitors like HON and RTX possess substantially greater financial and R&D resources. For example, HON reported a gross margin of 38% and an operating margin of 20% in 2024, while RTX showed a gross margin of 19% and an operating margin of 8%. In comparison, Butler National's Aerospace segment achieved a 17% operating margin in FY2025, a significant improvement from 11% in FY2024, and its overall gross profit margin was 45.31% TTM. While Butler National's margins are competitive, its scale and R&D investment (estimated at 2-3% of revenue) are considerably smaller than those of industry giants. Butler National differentiates itself through specialized niche modifications, FAA certifications enabling potentially faster service times for specific regional aircraft, and cost-effectiveness in its targeted markets. However, it faces vulnerabilities related to customer concentration (one customer accounted for 14.8% of total revenue and 32.4% of receivables in FY2025) and dependence on government spending, which impacts demand for special mission products. Supply chain disruptions and intense competition for skilled labor also pose ongoing operational challenges.

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## Professional Services: Gaming, Sports Wagering, and Local Economics The Professional Services segment is primarily focused on managing the Boot Hill Casino and Resort in Dodge City, Kansas, under a management contract with the State of Kansas, which owns the gaming operations. This segment provides traditional casino gaming (slots, table games), dining, entertainment, and, more recently, sports wagering. A significant development for this segment was the legalization of sports wagering in Kansas in September 2022. Butler National quickly capitalized on this opportunity, entering into provider contracts with major players like DraftKings (TICKER:DKNG), Golden Nugget, and Bally's (TICKER:BALY). The partnership with DraftKings (TICKER:DKNG) facilitates interactive and mobile sports wagering statewide, and a branded retail sportsbook opened at Boot Hill Casino in February 2023. Under the arrangement, the State of Kansas receives 10% of the profit from the sportsbook side, and Butler National shares a confidential percentage of the gross sports wagering win with its platform partners. Management estimates the overall profitability of the sportsbook operation to be around 5% to 6% of the dollar bet. This new revenue stream contributed $5.8 million in FY2025, a significant increase from $4.6 million in FY2024, helping to offset declines elsewhere in the segment. The potential to establish up to 50 remote marketing locations for sports betting across the state offers a pathway to expand reach into new markets. While sports wagering revenue grew, the segment's total revenue decreased by less than 1% in FY2025, primarily due to a $1.5 million decrease in traditional casino gaming revenue. This decline is attributed to economic factors impacting the local market area around Dodge City, heavily influenced by the agricultural, meat processing, and oil and gas industries. Reduced shifts and wages in local cattle processing and meat packing operations, coupled with increased inflation and drought conditions, have likely decreased customer discretionary income and patron visits. Despite the slight revenue dip, the segment's operating income increased by 5% to $9.142 million in FY2025, resulting in an improved operating margin of 24%, up from 23% in FY2024. This margin improvement suggests effective cost management within the segment. The gaming industry is highly competitive, with Boot Hill Casino competing against other casinos in Kansas and Oklahoma, as well as various non-gaming entertainment options and other forms of gaming like state lotteries and online platforms. The potential for legislative changes, such as a smoking ban (which could put Boot Hill at a disadvantage compared to Native American casinos where smoking is permitted) or expansion of Native American gaming, poses regulatory risks that could increase competition. Furthermore, the sports wagering management contract with the Kansas Lottery expires in 2027, and a legislative proviso bans the Lottery from negotiating renewals until July 2026, creating uncertainty regarding the future of this revenue stream. The segment is also subject to extensive taxation policies, including a 29% revenue share for legacy gaming and 10% for sports wagering paid to the State, in addition to mandated regulatory expense contributions ($2.7 million in FY2025). ## Financial Performance and Capital Allocation Butler National's consolidated financial performance in fiscal year 2025 demonstrated solid growth and improved profitability. Total revenue increased by 7% to $84.0 million, driven by the strong performance in the Aerospace Products segment. Operating income saw a substantial 27% increase, reaching $16.8 million, leading to an expansion of the consolidated operating margin to 20% from 17% in the prior year. This margin improvement reflects increased efficiencies, particularly in the Aerospace segment, and effective cost control measures, partially offset by higher general and administrative expenses driven by increased depreciation and insurance costs. Net income remained relatively stable at $12.6 million compared to $12.5 million in FY2024, impacted by lower gains from asset sales in FY2025 ($0.1 million total other income/expense vs. $3.5 million in FY2024).

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The company generated robust cash flow from operating activities, totaling $18.4 million in fiscal year 2025, a significant increase from $7.54 million in FY2024. This strong operating cash flow provides ample liquidity to fund strategic investments and manage debt obligations. Investing activities used $5.4 million, reflecting capital expenditures on STCs, buildings, equipment, and aircraft, partially offset by proceeds from asset sales. Financing activities used $5.6 million, including debt repayments ($5.0 million) and stock repurchases ($2.3 million), partially offset by new borrowings ($2.0 million).

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Butler National maintains a moderate level of debt, with total long-term debt (net of current maturities) at $29.87 million as of April 30, 2025. The company was compliant with its debt covenants, including maintaining a debt service coverage ratio of 1.30 to 1.00 and a liquidity covenant of $1.5 million unrestricted cash. The company's cash position increased by $7.4 million during the year, ending FY2025 with $25.23 million in cash and cash equivalents. Looking ahead, management anticipates capital expenditures of approximately $12.5 million in fiscal year 2026. These planned investments are strategically directed towards developing new STCs ($5.0 million), acquiring equipment ($4.5 million), and funding buildings and improvements ($3.0 million), supporting the expansion of fabrication capabilities and ongoing product innovation in the Aerospace segment. Additionally, the gaming management contract requires significant capital investment on the casino property, with approximately $9 million required by the end of 2024 (as mentioned in prior periods) and over $1 million annually in the subsequent contract term. The company's strong operating cash flow and available credit facilities are expected to be sufficient to cover these planned expenditures and ongoing operational needs. The company also continues to return value to shareholders through its stock repurchase program, which was recently increased to $15 million in June 2025.

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## Outlook and Key Risks Management's outlook for Butler National is cautiously optimistic, acknowledging the dependence on external factors such as economic conditions, inflation, regulatory changes, and labor availability. While the company enjoys a strong backlog in Aerospace Products, particularly in special mission electronics, it anticipates continued vigorous competition for skilled labor, which is expected to drive labor costs higher. In the Professional Services segment, the impact of local economic conditions, specifically reduced activity in the cattle processing and meat packing industries, is expected to continue putting downward pressure on traditional casino gaming revenue through fiscal year 2026. Despite these headwinds, the strategic investments in Aerospace capacity and ongoing STC development are aimed at driving future growth. The sports wagering operation, while subject to regulatory uncertainty regarding contract renewals, represents a significant new revenue stream with potential for further expansion through remote marketing locations. However, several key risks could impact the company's ability to achieve its objectives. Customer concentration, particularly in the Aerospace segment, makes the company vulnerable to the loss of a major customer. Dependence on government spending for defense-related products and international sales exposes the company to shifts in geopolitical priorities and trade policies, including the impact of tariffs. The cyclical nature of both the aerospace and gaming industries means that economic downturns could adversely affect demand. Regulatory risks are particularly pronounced in the gaming segment, with potential changes in laws, tax rates, and the uncertainty surrounding the renewal of the sports wagering contract posing significant challenges. Inflationary pressures continue to increase operating costs, and the company's ability to pass these costs on to customers may be limited, potentially impacting margins. Competition for both customers and skilled personnel remains intense across both segments. Furthermore, operational challenges, supply chain disruptions, and the potential for impairment losses on assets represent ongoing execution risks. ## Conclusion Butler National Corporation presents a compelling investment narrative built on the foundation of its two distinct business segments. The company's recent financial performance, particularly the significant expansion in operating income and strong operating cash flow in fiscal year 2025, demonstrates effective operational execution and strategic positioning. The Aerospace segment's growth, fueled by new product development and investments in fabrication capacity, coupled with the promising new revenue stream from sports wagering in the Professional Services segment, provides clear pathways for future expansion. While the company faces notable risks, including customer concentration, regulatory uncertainty in gaming, and macro-economic pressures like inflation and labor shortages, management's focus on strategic investments, operational efficiencies, and targeted market initiatives positions Butler National to pursue continued growth. The planned capital expenditures for FY2026 underscore a commitment to enhancing capabilities and developing new opportunities. For investors, the story of Butler National is one of a small-cap company leveraging niche expertise and strategic agility to drive profitability and generate cash, navigating a complex landscape with a clear focus on long-term value creation, provided it can effectively manage the inherent risks and execute on its growth initiatives.