Butler 2005 10-K

Forward-Looking Statements

This Annual Report on Form 10-K includes forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, reflecting management’s current analysis and expectations, based on what management believes to be reasonable assumptions. Forward-looking statements may involve known and unknown risks, uncertainties and other factors, which may cause the actual results to differ materially from those projected, stated or implied, depending on such factors as: ability to generate cash, changes in tax rates or changes resulting from ongoing reviews of tax liabilities, ability to raise capital, ability to refinance, ability to execute productivity improvements and reduce costs, ability to execute and integrate acquisitions, ability to raise product prices, ability to execute divestitures, ability to realign business portfolio and segments, ability to achieve growth in earnings and cash flows, business climate, business performance, changes in tax laws or regulations, economic and competitive uncertainties, reduced level of customer orders, changes in strategies, risks in developing new products and technologies, risks in developing new market opportunities, environmental and safety regulations and clean-up costs, foreign exchange rates and exchange control regulations, foreign investment laws, the impact of changes in the value of pension fund assets and liabilities, changes in generally accepted accounting principles, legislative changes, adverse legal and regulatory developments, including increases in the number or financial exposures of claims, lawsuits, settlements or judgments, the financial capacity of settling insurers, the impact of increased accruals and reserves for such exposures, the outcome of litigation and appeals, and adverse changes in economic and political climates around the world, including terrorist activities, international hostilities, governmental instabilities and potential natural disasters. Accordingly, there can be no assurance that Butler will meet future results, performance or achievements expressed or implied by such forward-looking statements. As appropriate, additional factors are contained in other reports filed by Butler with the Securities and Exchange Commission. The words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions identify forward-looking statements. This paragraph is included to provide safe harbor for forward-looking statements, which are not generally required to be publicly revised as circumstances change, and which Butler does not intend to update except as may be required by law.

For purposes of this report, "Butler", the "Company", "we", "our", "us" or similar references mean Butler International, Inc. and our consolidated subsidiaries, unless the context requires otherwise.

Item 1. Business

During its 59-year history of providing services, Butler has served many prestigious companies in industries including aircraft, aerospace, defense, telecommunications, financial services, heavy equipment, manufacturing and more.

Butler International, Inc. provides outsourcing, project management and technical staff augmentation services that are performed onsite at the client’s facility, offsite at a Company-owned facility, or offshore at one of our facilities in Hyderabad, India. We offer expertise in technical, information technology, and telecommunications disciplines including: engineering design support primarily used for aerospace, defense and heavy equipment manufacturing; software applications development and implementation; enterprise network design and implementation, and telecommunications network systems implementation. Combined, aerospace/aircraft and defense are our largest and fastest growing vertical industry segments.

Our model for building client loyalty uniquely differentiates us from the competition. Our goal to get closer to our customers by tailoring our services to meet each customer’s special needs has allowed us to develop customized relationships with our clients. These customized relationships make us intrinsically valuable to our customers. By developing these relationships, we provide our customers the flexibility of a business partner who understands their business and can quickly step in and improve their processes and bottom-line. The average length tenure of our top ten client relationships is 23 years.

Companies primarily utilize our services to help them execute projects quickly, more affordably and with high quality. Many of our major clients are blue chip companies, or their various divisions and subsidiaries.

As of September 30, 2007, we had approximately 3,800 employees, of which approximately 3,400 billable employees provide services generally at client facilities both domestically and abroad, from a network of Butler offices.

We were incorporated in 1985 in Maryland. Our executive offices are located at New River Center, 200 East Las Olas Boulevard, Suite 1730, Ft. Lauderdale, Florida 33301 and our telephone number is (954) 761-2200. We maintain a website at www.butler.com. Butler’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website or www.sec.gov as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission.

Description of Services

Butler offers (i) outsourcing, (ii) project management or (iii) technical staff augmentation services as follows:

Outsourcing services involve instances where we manage an entire on-going operation on behalf of a client, thereby reducing the client’s cost and the burden of maintaining that operation. Engineering design utilizing CAD software and fleet maintenance are examples of outsourcing services provided by Butler. Outsourcing provides clients with efficient access to needed expertise. We typically deliver outsourcing services at offsite facilities established by Butler for such purposes.

Project management services involve projects wherein we assume responsibility for specifically defined projects, such as telecommunications network systems implementation, enterprise network design and implementation, or engineering design utilizing CAD software. Depending upon the nature of the assignment, the type of equipment required, and the particular needs of the client, project management services may be provided either onsite at the client’s facilities or offsite at a Butler-owned facility designed for the client’s specific purpose. We frequently obtain the necessary equipment for a project (if not available from the client) on a lease basis.

Technical staff augmentation services are provided to supplement a client’s existing work force with technical professionals who possess engineering design, mechanical, telecommunications, or information technology skills tailored to the particular needs of the client’s business. Staff can be added or removed as needed, helping the client avoid extra costs associated with recruiting and hiring new employees with specialized skills.

Charges for our services are billed to clients based either on (i) an hourly rate per contract employee, (ii) an hourly rate plus equipment charges (and overhead charges, if applicable), or (iii) a fixed price or a fixed unit price. Fixed price arrangements typically are subject to bid. Staff augmentation typically is billed on an hourly rate per contract employee supplied, and upon termination of the assignment there is no further cost to us or to the client for the services of the contract employee. Outsourcing and project management services may be billed on an hourly, per unit, or fixed price basis, or a combination of such billing arrangements.

Description of Technical, Information Technology and Telecommunications Disciplines

Butler provides outsourcing, project management and staff augmentation services in disciplines in which it has developed expertise: (i) Technical Services (ii) Telecommunications Services and (iii) Information Technology Services. Additional segment information is included in Note 1 of our 2005 audited consolidated financial statements.

Technical Services involve skilled technical and engineering personnel providing services to companies worldwide competing in a wide range of industries including aircraft/aerospace, defense, heavy equipment/machinery, research, energy, electronics, and pharmaceutical. As an example, our aerospace and defense clients utilize technical services to design and manufacture components for weapon systems and aircraft. Technical services also encompass engineering support services including; strategic consulting, project management, drafting and design, and total outsourcing, while specializing in establishing, managing, and staffing dedicated engineering support centers carrying out both long-term and short-term projects. Utilizing leading edge software design platforms such as Pro/ENGINEER, CATIAUnigraphics, and AutoCAD, our employees provide both staff augmentation and project engineering support in a number of different areas including design engineering, stress analysis/simulation, NC Programming, design, drafting, checking, and technical writing/illustration.

Telecommunications Services help telecommunications equipment manufacturers and service providers upgrade wireless and wireline network infrastructure to support enhanced voice, high-speed data and video services. Services may be performed in the central office, which is the nerve center of the public network, or in the outside plant, and at cell site locations. Services include integration of wireless, optical, and broadband network systems, including engineering, installation and test (EF&I). Employees are skilled in working with a wide range of network equipment. Butler operates a technical training facility in its Irving, Texas location devoted to broadening employee technical competencies and verification of employee capabilities.

Butler also provides fleet services, primarily to certain key clients, which involve customized fleet operations for major ground fleet-holders nationwide. The services we provide include vehicle maintenance and repair and total fleet management solutions. Most of these services are provided by A.S.E. (Automotive Service Excellence) certified technicians.

Information Technology Services help companies implement business solutions that harness the power of technology to optimize business performance. Butler delivers Quality Assurance services that help clients implement more effective software quality assurance testing processes, which help prevent software defects from causing costly business interruptions. We also provide clients with onsite, offsite and offshore application development and implementation services. Butler provides the expertise clients need in order to successfully launch new, or enhance existing software applications critical to internal and external business operations. Additionally, we provide enterprise network services, which help organizations design and implement internal networks capable of addressing the demands stemming from e-business activity and inherent security risks. Clients also utilize our information technology staffing services to augment their internal IT staff. Butler provides these services to a variety of industries including financial services, telecommunications, and consumer products. Our employees are specialists in a wide variety of applications, operating systems and platforms, offering a broad range of information technology expertise.

International Operations

Butler developed formalized offshore service delivery models through its employees that work onsite at our Hyderabad, India office since 2000 to support client projects. Offshore delivery models help clients achieve greater cost efficiencies, meet timeline and quality objectives, and access skilled resources more readily. Engineering design services, software quality assurance services, and telecommunications services are among the technical services we provide through an offshore delivery model. Currently, approximately 3.0% of our direct personnel are employed in the India facility. Approximately 21% of our indirect headcount are currently employed in India. The direct employees provide service to our clients and the indirect employees provide general, administrative and support services for Butler. International operations accounted for less than 1% of our net sales in fiscal years 2005, 2004 and 2003.

Current Markets and Marketing Strategy

Butler is focused on growing its business with its top customers, who are loyal Butler customers as well as industry leaders in aerospace, defense, heavy construction equipment, telecommunications and financial services. Our strategy for success combines three elements: leverage our position as a provider of quality services to more fully penetrate strategic growth accounts, increase emphasis on sales and marketing, and offer clients global services - a blend of onsite, offsite, and/or offshore services appropriate to the client’s unique preferences. Butler believes there is significant market potential for its services. The growing trend among companies to embrace offshore outsourcing, the nation’s continued emphasis on defense, and Verizon’s Fiber to the Premise (FTTP) initiative are some of its more significant potential market opportunities. Butler’s client-focused strategy is expected to continue to fuel our success. Butler’s client relationships evolve based on its ability to provide services that address the client’s specific business needs in a way that meets or exceeds their satisfaction. Based on Butler’s 2005 annual client satisfaction survey, 91.7 percent of Butler’s clients are satisfied with the services Butler provides, and 64.1 percent say Butler is their best-in-class provider. Additionally, Butler enjoys an average 23-year tenure with its top accounts. Leveraging its long-standing client relationships and reputation for quality, Butler believes it will be successful in increasing its share of business with its top strategic account base. Finally, Butler acquired through foreclosure the net assets of Chief Executive Magazine in December 2005 and has taken over its operation. Management believes that Chief Executive Magazine’s Roundtables and CEO Conferences, which currently draw over 250 CEO’s from leading companies per year, positions Butler as a thought leader and provides Butler with networking opportunities.

We believe that investing in additional sales talent to increase Butler’s presence at key strategic accounts will contribute to Butler’s future growth. Butler’s major investment in sales positions was during 2005. As of July 31, 2006, analysis showed overall investment in the sales team has already yielded positive profit margins, without significantly increasing our cost structure as a percent of sales, including the continued shift of back-office support activity to our offices in Hyderabad, India. As new positions are created to support Butler’s business growth, or as existing positions are vacated due to attrition, we will evaluate the impact to the organization of shifting the position to its offshore facility.

Butler believes that its experience in providing services internationally, its centers in India, and its long history of providing services onsite at the client’s facility or offsite at one of Butler’s domestic Engineering and Technology Development Centers, present the client with a unique value proposition: global services from a U.S. based provider they have known and trusted for years. Butler is in a position to offer any combination of onsite, offsite, or offshore service delivery that is appropriate to the client’s unique preferences. Additionally, our 59-year history of providing technical services and long-standing client relationships are evidence of Butler’s stability.

Research suggests a growing trend among companies to move some operations offshore and we view this as a significant market opportunity. According to Forrester Marketing Research, as many as 60 percent of Fortune 1000 companies have not yet begun or are just starting to investigate offshore outsourcing. As a U.S. based company, Butler is uniquely positioned to capture business overseas and beat out its offshore competitors. Butler believes it will be successful in growing its business by assisting its existing clients, as well as new clients, with their migration to an offshore model.

Aerospace and defense continues to be one of our largest and fastest growing industry segments. This trend has continued in 2006 as evidenced by the nation’s continued need for military aircraft and weapons. Butler has been serving the aerospace and defense industries for decades, including companies such as Northrop Grumman, United Technologies, Boeing, and BAE Systems, and programs such as the Joint Strike Fighter (JSF), the Global Hawk and other Unmanned Aerial Vehicles (UAV), the Black Hawk helicopter, and the Bradley Fighting Vehicle.

Verizon, one of Butler’s top customers, will be spending a significant amount of money over the next 10 to 15 years to install fiber connections to every home and business in its 29-state territory. Verizon expects its Fiber to the Premise (FTTP) and FIOS initiatives will give it a competitive edge over cable companies by enabling it to offer high-speed transmission of everything from regular phone service to high-definition TV. Butler believes that these initiatives will result in increased demand for its telecommunications services.

Clients

Butler provides its services directly to approximately 600 client companies. In fiscal years 2005 and 2004, Northrop Grumman accounted for approximately 12% and 11%, respectively, of net sales. In 2003, Los Alamos National Labs (University of California) and United Technologies Corp. each accounted for approximately 12% of net sales. No other client individually represented more than 10% of net sales in fiscal years 2005, 2004 and 2003. A substantial amount of our net sales were derived from large well-established U.S. companies. Butler derives almost 80% of its revenues from a combination of aerospace/defense contractors and telecommunication providers.

Butler is committed to quality and believes that clients award a greater share of business to suppliers that consistently deliver high quality services. Butler’s award winning quality program includes an annual satisfaction survey to measure customers’ satisfaction level with Butler’s services, as well as competitors’ services. The results are analyzed and used company-wide to continuously improve Butler’s service offerings. In 2005, client satisfaction with Butler’s services was 91.7 percent, the tenth consecutive year that client satisfaction has exceeded 90 percent. As part of the survey, clients rate who is the best in class of service providers. In 2005, 64.1 percent of clients rated Butler their best-in-class provider. In seven years since its inception we have achieved a rating of 55 percent or better in best of class provider. Butler focuses on those services in which it tends to be the client-rated best-in-class provider. We believe its longevity with its top clients is attributed to its ability to consistently deliver quality services.

Since providing services is Butler’s core business, we continuously streamline our processes and systems and as a result, are capable of managing resources, costs, productivity, and quality often with greater efficiency than clients are capable of achieving on their own. Rather than facing the challenges of ramping up or scaling back resources in line with fluctuations in market demand, clients choosing to utilize Butler avoid costs associated with maintaining a workforce of underutilized employees. Butler’s effective recruiting and resource management, training to build the technical competencies in greatest demand, and award-winning employee programs to attract and retain top talent help the client achieve greater cost efficiencies and improved business performance.

Employees

As of September 30, 2007, Butler had approximately 3,800 employees in the United States and abroad, and believes that its relationship with its employees is positive, as evidenced by the annual employee satisfaction survey results. In 2005, more than 80% of our employees expressed overall satisfaction with Butler.

Approximately 2% of Butler’s employees are covered by collective bargaining agreements. Butler’s services are provided by technical/professional employees who are hired by Butler and assigned to work on a full-time basis for a specific client project. The duration of the assignment depends on the client project or requirement, and averages approximately five to eight months. Technical/professional employees fall into one of two categories; (1) salaried employees, and (2) contracted employees. Salaried employees continue to work for Butler after an assignment ends, usually starting their next assignment immediately, but sometimes working on internal projects while "on the bench."

Contracted employees are terminated if a new assignment is not identified. However, Butler has many initiatives and programs in place to secure reassignment of technical/professional employees.

In order to deliver value to its customers, Butler invests in what it considers to be its greatest asset, its people. It is the policy of Butler to assure that employees are fully trained in the most current systems and technologies they support. We provide employees with training opportunities to increase their level of expertise, improve work processes, learn higher value skills, and use state-of-the-art-technology so that their value is recognizable within the client organization.

Butler offers employees in-house training and also offers tuition reimbursement to employees for courses offered by accredited educational institutions that are relevant to their field and career path. We encourage and reimburse any expense incurred while attending user group meetings, seminars, or conferences. Lastly, we also provide for over-the-shoulder training or team based training by allowing for non-billable time on occasion while a new employee is trained into the group.

Butler offers a high quality benefit package that is competitive within its industry. Butler found that the benefits offered is both an attraction to new employees joining our company as well as a magnet to those employees already on the payroll. Butler can also customize benefit plans to meet the needs of its customers and assigned contract employees. The standard benefits offered to recruited employees may include:

• Paid Holidays
• Group Legal Plan
• Credit Union Membership
• Paid Vacation
• 401(k) Plan with Immediate Eligibility
• Free ‘butlerteam.com’ e-mail address
• Direct Deposit
• Flexible Spending Account
• Work/Life Balance Program
• Voluntary Long-Term Disability
• Vision Coverage
• Candidate Referral Bonus Program
• Voluntary Life and AD&D Insurance (with option to convert to a personal policy upon termination from Butler)
• Major Medical and Dental (includes Basic Life & AD&D insurance)
• Recreational Discounts (on-line access to discounts for shopping, entertainment, etc.)
• Auto and Homeowners Insurance

To assist in fulfilling its personnel needs, a computerized retrieval system facilitates the rapid selection of resumes on file so that customers’ requirements are filled quickly.

Management expects that changing technologies will continue to create demands for new skills faster than the permanent workforce can respond, resulting in a shortage of specialized technical skills. At the same time, increased labor force mobility provides a sizable labor pool available to technical services companies like Butler. As a result, Butler expects that an adequate supply of qualified people will continue to be available to recruit and satisfy client requirements. Communication via the Internet and aggressive recruiting efforts are also part of our proactive approach.

Butler’s number one priority is to exceed its customers’ expectations by providing superior customer value. By focusing on employee satisfaction and empowering employees through innovative training initiatives, we continuously improve the services we provide to our customers.

Competition

Butler is in a unique position regarding direct competition. The industry in the United States is highly fragmented and characterized by specialized regional and local firms serving specific geographic territories and industries. Butler’s biggest competitors tend to be smaller, niche-market companies.

Although Butler has no long-term contracts, the average length of our top ten client relationships is 23 years. Butler attributes its longevity to the ability to provide affordable high quality services. Butler’s customization of services for each client adds value and marks us in a different competitive category.

The ability to provide offshore outsourcing gives Butler a competitive advantage over many of its traditional competitors, but also introduces competition from companies that provide offshore services exclusively. Many of Butler’s traditional competitors lack offshore facilities or are not otherwise prepared to provide services through an offshore delivery model. Butler believes it can effectively compete with offshore service providers by leveraging its long-standing client relationships, customization of services, and 59-year history of providing technical services. Management believes these attributes make Butler a trustworthy partner for clients venturing into the offshore outsourcing arena.