Kratos Defense & Security Solutions, Inc. (KTOS) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Kratos Defense and Security Solutions Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] I would now like to introduce you host for today's conference Ms. Marie Mendoza, Vice President and General Counsel. Ma’am, you may begin.

Good afternoon, everyone. And thank you for joining us for the Kratos Defense and Security Solutions fourth quarter 2015 conference call. With me today is Eric DeMarco, Kratos' President and Chief Executive Officer; and Deanna Lund, Kratos' Executive Vice President and Chief Financial Officer. Before we begin the substance of today's call, I’d like everyone to please take note of the Safe Harbor paragraph that is included at the end of today's press release. This paragraph emphasis the major uncertainties and risks inherent in the forward-looking statements we will make this afternoon. Please keep these uncertainties and risks in mind as we discuss future strategic initiatives, operational outlook, and financial guidance during today's call. Today's call will also include a discussion of non-GAAP financial measures, as that term is defined in Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today’s press release we have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP. With that, I will now turn the call over to Eric DeMarco.

Thank you, Marie. Good afternoon. Based on recent industry related and Kratos specific events, we believe that the defense industry budget bottomed in 2014, 2015. The framework has now been set with the recent Federal fiscal 2016, 2017 by a part of some spending agreement, the 2016 budget agreements, and the President's 2017 DOD budget submission for growth to begin in 2016. In the fourth quarter Kratos saw sequential growth across virtually all of our businesses which Deanna will discuss in her remarks. In Q4 we successful completed another flight of Kratos AFSAT on unmanned aerial target drone system on our navy program and we remain on track to commence LRIP later on in 2016. In Q4 we also remained on track in our unmanned business to begin LRIP on a separate confidential program later on in '16 or early ’17, which is also expected to ramp up to full rate production over the next couple of years. These two programs combined once in full rate production, are expected to contribute in excess of 100 million in incremental annual revenue to our company and this does not include potential additional international asset sales opportunities we believe will materialize once we successfully achieve U.S. Navy 177 operating capability. In Q4 we successfully completed our planned series of demonstration flights at China Lake with Kratos unmanned combat aerial system or UTAP-22 achieving 100% of our objectives. Kratos UTAP-22 was a low cost unmanned combat aerial system capable of mark 0.96 with manned fighter light performance which can perform its mission in an A2AD environment. The Kratos has internally developed and funded over the past few years and which is at the forefront of the DOD's third offset strategy and Defense Innovation initiative. Since the successful completion of the UTAP-22 demonstration flights, we have been in discussions with the potential user entities we have been in communication with last 2 years. These user entities have provided Kratos the critical inputs regarding their respective needs, gaps, and desired UTAP capability characteristics with this information incorporated into the UTAB-22 aircraft and the successful demonstration flight series objectives. We are also now in preliminary discussions with certain entities regarding weapon and other systems integration into Kratos UTAP-22. We are very encouraged regarding the interest we have received over the past two months from certain of these entities and also congressionally. And we are hopeful to be able to report to you in the near future additional important customer specific related progress with Kratos UTAP-22 initiative. For competitive reasons, we will not be providing any additional information regarding the UTAP-22 and other related initiatives or potential customer activities at this time. In January of 2016, the DOD disclosed that the Air Force had made a lot 12 AFSAT order of 19 million for an additional 21 unmanned aerial drone systems to be delivered under Kratos existing source AFSAT based contract. We currently expect 2016 Kratos asset deliveries to exceed 2015s and 2017 is currently looking very solid as well based on preliminary customer input. Kratos was recently awarded a $37 million from fixed price contract also for the AFSAT program for unique spares, logistic support and unmanned system repairs. We also expect to be entering into contract negotiations in the next few weeks with the new international customer on an approximate $50 million initial order for Kratos high performance unmanned aerial target drone systems. And as you know typically once Kratos obtains the customer for a high performance unmanned target drone aircraft, the relationship is multiyear and decade in nature with significant and recurring follow on orders due impart to the capital and infrastructure investment acquired by the user. In the fourth quarter, we continue to provide products and support for the QF'16 full scale unmanned aerial target system, which is now in production with this program expected to be a multiyear effort. In Q4 we remained under contract and continued to support certain government customers related to unmanned aerial drone system swarming. With both offense and defense related program objectives, this program is also expected to continue for many years in the future. We again pursued two new tactical high performance unmanned aerial system opportunities. Both of which solicitations came out in Q4 and there is – and as soon as we can we will be providing update on each of these. These opportunities if we are successful could be a major new multiyear platform or programs for Kratos with the potential of one day being some of the largest programs in our company. We also recently received positive information on an additional new high capability unmanned aerial system platform, which we are pursuing and if successful, we hope to be under contract on later this year. We understand that this new UAF opportunity has tens of millions of dollars of funding in the 2017 budget request. We are currently in pursue of certain new and potentially large unmanned grounds systems opportunities, which are schedule for contract award later on '16 and we now expect a large sole source contractor award later on in '16 for unmanned vehicle command control systems. We believe that this award will be valued at multi tens of millions of dollars. In February 2016, a U.S. government customer released a source of thought for a new advanced sub scaled aerial platform target that we will be aggressively pursuing. We announced today that Steve Fendley is the new Chief Technology Officer and GM for Kratos' Unmanned Systems Division CEi Business Unit. Steve is a founder of 5-D Systems, a specialized government contractor focused on unmanned systems. Kratos has had a formal strategic relationship with 5-D for several years now and considers this alliance a critical element in Kratos tactical unmanned combat aerial system initiative including our new aircraft and technology and the recent successes we have had in the tactical unmanned area. For FY16 we expect Kratos unmanned systems business to generate year-over-year organic revenue and adjusted EBITDA growth above 2015 excluding any potential FY16 contributions from our UTAB-22 initiative and excluding any potential revenue and investments related to the successful award of the certain new tactical program or pursuing. In the fourth quarter, Kratos satellite technology training and cyber business unit performance was particularly strong and we had several orders scheduled for Q1 delivery pulled in to Q4 by customers. We believe this demand is impart being driven by the recent increases and funding for U.S. national space assets security initiatives, the growing global demand for space related bandwidth and the protection of that bandwidth. Additionally, Kratos training systems business recently received a number of large new contract awards and strengthens and Kratos Cybersecurity also contributed to this business unit strong fourth quarter performance. We expect Kratos' satellite technology training and cyber business to generate sequential revenue growth for 2016 over 2015 with Q2 '16 forward currently looking particularly strong. Kratos' Microwave Electronics business also had a strong fourth quarter and here we also had several orders scheduled for Q1 '16 shipment pulled in the Q4 by our customers. In Microwave Electronics we are beginning 2016 with a near record backlog and a large bidding proposal pipeline. In Microwave Electronics we’re seeing particular strength in the missile systems related Radar, Electronic Warfare and C4ISR areas with a number of new contracts we have recently received underway in production and scheduled for initial deliveries beginning in Q3 of 16. Kratos is currently designed in on several large new opportunities in the Microwave area and if these new programs commence full rate production over the next year or so, we can potentially see a small growth step function with this business. We currently expect Kratos' Microwave Electronics business to generate sequential revenue growth for FY16 over FY15 excluding these potential step function upside opportunities. In Q4, Kratos' public safety and security business had improved financial performance and growth including a large security and communication systems product element. Our reorganized PSS sales organization has identified numerous, new, near, high margin opportunities, and year-to-date in 2016, K-PSS bookings have an indicated gross margin of approximately 29%. The organizational changes, regional consolidations, and cost cuts we initiated in Q4 of 2015 have continued into Q1 of 2016. As we want to ensure this business is sustained profitability beginning in Q2 of 2016 and going forward on the lower expected revenue base driven by our strategy change for this business late last year, where we are now focusing on smaller, higher margin deployments. Accordingly, we currently expect Kratos' public safety and security system integration business to generate sequential revenue and EBITDA growth for fiscal 2016 over 2015, commencing in Q2, once our sales force enhancement, organizational changes, and cost cutting efforts are completed in the first quarter, with adjusted EBITDA being stronger in the second half of the year has two large lower margin legacy security system deployments, we are working on now, wind down and conclude in the middle of 2016. Kratos' Defense and Rocket Support and services business in Q4 came in slightly below forecast, with continued protest activity and LPDA contract awards adversely impacting the business, and we continue to experience delays on certain expected solo source Rocket Support and missile defense related product and hardware contract awards. One of these delayed Rocket Support contracts was recently awarded to Kratos, and we just received customer approval to formerly disclose the award which we plan on doing in the near future. We anticipate no major re-competes in this business in 2016, and we have a solid core business supporting the electromagnetic railgun, high power and directed energy laser systems, ballistic missile defense targets, hypersonic vehicles, and certain combat systems. We expect our services business revenue which has declined significantly over the past several years due to the defense industry budget, to be flat in 2016. And we expect some growth in the Rocket Support, missile defense, and other agency hardware business in 2016 over 2015. Kratos' modular systems businesses came in substantially below our Q4 forecast, caused primarily by continued order delays, U.S. DOD and national security related, as well as international. Accordingly, in Q1 of 2016, we executed a significant restructuring of the business, including certain manufacturing facility consolidations which we announced a few weeks ago, and which is aimed at reducing certain excess fixed overhead cost elements, and increasing EBITDA margin and cash flow on an expected lower future business base. As a result, in Q1 of 2016, we expect to report restructuring and excess capacity charges with higher margins expected beginning in Q2 of 2016 as a result of these actions. In modular systems, we are seeing strength in missile system, radar, missile defense, and certain combat interiors, where we are currently working on certain long term national security related programs. However, potential new contract awards, both domestic and international, continue to be delayed. Accordingly, we have significantly reduced our forecast for near term new contract awards in our modular systems business, and we currently expect MSD's fiscal 2016 revenue to be down substantially from fiscal 2015. Deanna?

Thank you, Eric. Good afternoon. Our fourth quarter 2015 revenues were $177.5 million with sequential growth of 9.8% from our third quarter revenues of $161.7 million. The strong bookings in the third and previous quarters of 2015 resulted in sequential, organic growth of 41.8% in our microwave product business, 16% in our Modular Systems business, 9.6% in our satellite communications business, 4% in our defense and Rocket Support business, and 16.6% in our public safety business, offset partially by reduced shipments in our unmanned systems business of 20%. On a year-over-year basis, revenues decreased from $192.1 million in the fourth quarter of 2014 to $177.5 million in the fourth quarter of 2015, due to reduced revenues of $7 million in our KGS segment, which were result of reduced shipments of hardened mobile tactical facilities for a certain U.S. Government agency customer in our modular systems business of $11.4 million, offset partially by aggregate increased revenues primarily in our microwave products and satellite communications business of approximately $4.4 million. In addition, reduced revenues of $2.5 million in our PSS segment resulting from the change in strategic focus in PSS, to emphasize higher margin, smaller size projects, impacting overall sales volume, and a reduction in our unmanned systems division revenues of $5.1 million as a result of the timing of awards and shipments in 2015 which impacted our Q4 revenues. Our adjusted EBITDA of $13.4 million which was impacted by a favorable mix of products with the fourth quarter is from continuing operations, and excludes the following charges which have been reflected as adjustments, consistent with our prior presentations since we either believed the items are non-operational, or non-recurring in nature. Restructuring related items and other of $3.6 million which includes the following, $2.2 million of cost and expenses related to investments in our UTAP-22 aircraft which Eric discussed earlier. We completed the successful flight demonstrations of this aircraft in the fourth quarter, achieving the performance objectives that we established in conjunction with a government agency. As a reminder, we have made this discretionary non-recurring investment in the UTAP aircraft over the past 2.5 years to develop IP for our new unmanned combat aerial system platform. The cost incurred in the fourth quarter should represent the substantial completion of this development initiative. Excess capacity and restructuring cost of $1 million, reflecting $400,000 of employee termination cost and $600,000 of unabsorbed manufacturing overhead cost due to reduced sales volumes resulting from the delays and anticipated contract awards in our unmanned systems business, and $400,000 of transaction related cost. Also included in our reconciliation to compute adjusted EBITDA are $3.9 million of contract cost related to the retrofits required on one of our new development high performance target platforms in our unmanned systems business. As Eric, mentioned earlier, we had several successful flight demonstrations during the fourth quarter across a number of our unmanned aircraft platforms. The performance characteristics demonstrated in these slides specifically on our SSAT 177 platform completed the design and configuration of the 177 development platform which resulted in contract cost accruals of $3.8 million necessary to implement the final design and configuration to deliver to one of our customers. We view this as a positive milestone to the success in future of what we believe will be a long lived platform. We are also excluding a net credit to profit of $2.3 million of an unused office space accrual benefit, which resulted from the execution of a sublease arrangement related to the Company’s leased facility in Maryland. The credit represents the extension of sublease income through 2020, the end of the lease term on one of the Company’s largest lease commitments that we assumed in 2011, in conjunction with the Integral Systems acquisitions. The extension of the lease term now covers the entire term of the lease commitment through March of 2020, and encompasses the entire facility. Due to the extension of the lease term and expansion of the lease premises, we expect our net cash flows to improve approximately $2 million to $2.5 million per year, for an estimated aggregate improvement of over $11 million for the remaining term of the lease commitment through 2020. The net credit recorded in the fourth quarter, represents a net present value of the net financial benefit of the lease expansion. On a GAAP basis, net loss for the fourth quarter of 2015 was $4 million, which included net income from discontinued operations of $3 million, reflecting the final working capital adjustment, and net cash position of sale of the companies of U.S. and U.K. electronics products business. $2.9 million of expense related to amortization of intangible assets, non-cash stock compensation expense of 600,000 and 100,000 tax provision. Moving to the balance sheet and liquidity. Our cash balance was $28.5 million at December 27 plus $700,000 in restricted cash. Kratos also had zero amounts outstanding on our bank line of credit at December 27, 2015. Cash flow from continuing ops for the fourth quarter was a use of $6.4 million which includes a semi-annual interest payment of $15.8 million on the senior notes in November. Capital expenditures for the quarter were $3.2 million. As you know, in 2015 Kratos made a significant paydown on our debt which will result in 2016 cash paid for interest being reduced by approximately $10 million compared to 2015 which will improve the company's overall cash flow. DSOs decreased 4 days from 110 days at the end of the third quarter to 106 days at the end of the fourth quarter. DSOs continue to be impacted by milestone payments on long-term delivery projects where we are unable to contractually invoice for amounts until the completion of certain milestones and/or the final delivery of products or the demonstration of certain flight parameters specifically in our unmanned system segment. Our contract mix for the year was 83% of revenues from fixed price contracts, 11% from cost plus fixed fee contracts and 6% from time and material contracts. Revenues generated from contracts with the Federal government were approximately 63% including revenues generated from contracts with the DOD and non-DOD federal government agencies. We also generated 8% of revenues from state and local governments, 18% from commercial customers and 11% from foreign customers with our aggregate non-DOD revenues comprising 37% of our total revenues. Backlog at quarter end was $914 million with $529 million funded and $385 million unfunded. Our book-to-bill ratio was 0.7 to 1 for the fourth quarter and for the last 12 months was 0.8 to 1. For the full year, revenues decreased from $763 million to $657 million with the primary drivers resulting from the change in strategic focus in our PSS business to focus on smaller size, higher margin businesses and to only selectively bid on larger size typically lower margin projects resulting in a decrease of $51.7 million and a reduction in volume in our modular systems business of $39 million primarily reflecting the impact of a large hard and security shelter project for a government agency which we shift $37.3 million in 2014 at gross profit rates averaging over 25%. We would let to believe that similar volume of these hard and security shelters would be shift in 2015, however there was a change in the customers' priorities. To a lesser degree, reduced volumes in our unmanned systems division of $15.2 million was the result of delay in timing of new international awards. Lastly, reductions in our legacy government service business of $14.7 million reflecting the impact of continued commoditization in this business were offset by increases in our training business. Eric?

Thank you Deanna. Budget Control Act of 2011. The last several years have been extremely difficult for many small and mid-cap defense companies including Kratos. Specifically, over the past several years we have seen our government services business contract from approximately $300 million in revenue at its peak to less than $100 million today with the services business decreased being by far the primary cause for Kratos' declining revenues over the past several years. We believe that our government services business has now stabilize at its current revenue level. With the 2011 BCA, we assess the company's options and made the decision to stay independent and execute a longer term plan where we would focus on certain areas of the DOD market which we believe would provide the best opportunity for long-term future growth based on the quadrennial defense review and once DOD spending began to increase. Our focus areas included unmanned systems, satellite communications and the microwave electronics area. Areas where Kratos owns significant intellectual property and proprietary products. As mentioned previously, each of these businesses generated solid sequential growth in the fourth quarter and we expect each of these businesses to generate year-over-year organic revenue growth for '16 over '15 and to continue that growth into the future. In the unmanned systems area, we have made very significant discretionary internally funded investments over the past few years and hope the penetrating the tactical unmanned aerial systems market. These discretionary investments have included approximately 5 million to 8 million annually in IR&D, NRE and other business capital related costs and an additional 4 million to 8 million in capital expenditures all of which have reduced our recent EBITDA and cash flow. I believe that over the next few months these discretionary investments are going to prove out to have been well worth it, including success with Kratos' UTAP-22 and with certain new tactical unmanned systems opportunities and a successful we will reposition Kratos relative to this technologically focused growth stage area. If we are unsuccessful, we will reduce the cost structure and return on unmanned systems business back to being focused primarily on high performance unmanned target drone systems which has historically been one of the most profitable businesses in the company and where we have two major new programs entering production later this year which will add significant incremental revenue and cash flow to our company. Accordingly, we have a detailed plan that we will be executing over 2016 which one way or the other will be a transition year for Kratos, as our future unmanned systems position us determined and which will lead to certain significant strategic decisions for our company. So taking all of what we discussed today into consideration, we believe that Kratos will return to organic revenue growth in 2016 over 2015. However, for our initial 2016 directional guidance for as you know we have not previously provided any '16 forecast. We will currently be guiding to what we are calling Kratos base case for '16 with '16 revenue in adjusted EBITDA to be approximately the same as '15 and having the same quarterly trajectory as '15 with Q1 being the lowest due to our maintaining our tactical unmanned development team in place as we await two new potential opportunities along with overall Q1 revenue and mix dynamics. We are also currently guiding 2016 free cash flow to be greater or better than 2015 and we currently expect to have zero borrowings outstanding on our bank line of credit in '16. Kratos base case does not include any revenue, cost or investment related to a certain very large and strategic tactical unmanned systems opportunity we are pursuing and it does not include any revenue related to Kratos' UTAP-22 initiative. Additionally our base case does not include any cost reductions right sizing or reorganization that we would execute if we are unsuccessful in the tactical UAS area. We will update you on these important business matters as soon as we can and address our 2016 guidance direction related to these accordingly. With that I'll turn it over to the moderator for questions.

[Operator Instructions] And our first question comes from the line of Mike Crawford with B. Riley and Company. Your line is now open.

Thank you. Regarding the UTAP-22, when would you need to receive an order if you were to deliver some units to be used in the large by annual fleet exercise?

And with the fleet exercise Mike or a different branch exercise be a '16 exercise or be first half '17 exercise.

I believe there is a large rim pack '16 exercise scheduled for the June time frame this year.

Yes, so. If we were to participate in that, we would have to receive the order imminently or immediately. For potential other exercises in the second half of '16 or in '17 over the next few months.

And Eric, when you were talking about talking to potential customers and related entities regarding features of that system. I think were you referring primarily to be slowed you did those demonstrations or after both?

Both, for the last two, two and half years we have been interacting with the user community, regarding what their gaps are, their needs are and I'll use the word requirements. So that has a special word terminology in the industry as you know. And we designed the airplane and the demonstration flights around the inputs we've received over the last two, two and half years from those users. Then we have the successful flights in Q4. In the last two months, since those successful flights, we have reengaged - they have reengaged with us or we have reengaged with them regarding the next step for the aircraft in this trajectory. So it's both and it's been very heavy in the last 60 days.

And just more broadly ahead of the administration's budget request release there was a lot of talk from Secretary Carter and others regarding things like swarm - unmanned swarms and then things that they have really highlighting that we're coming inspite of this third offset yet then when you actually see the budget request itself. Those you can't find the word swarm anywhere in there, what do you make of that?

There are some new offices that have been stood up. In '99 for all naval unmanned aerial systems DUIX out of Silicon Valley which is trying to be an interface between the DOD and the Silicon Valley venture capital which as you know we have on our Board of Directors. There is another one that the Secretary of Defense just recently talked about which is the - which previously was classified office the SCO the Strategic Capabilities Office. Those are just some areas where there is money for the swarming capabilities and technologies that you've talked about. In addition to that, there are two others that I'm just not sure if I should be talking about them, where they have flexibility in some of their PE their Program Element lines to address swarming capabilities.

Okay, thank you. And then maybe I'll just end with one other question. You talked about asset deliveries exceeding 2015. What were they in 2015 and also can maybe just more broadly can you talk about what you have enhanced asset versus there is a lots of celebrity 13 production.

Right, okay. So on the first part of your question Mike, at the end of '14 we had a continuing resolution which significantly delayed the execution of our production years '11, '12 and '13 on AFSAT. So we didn't start delivering targets in '15 until approximately midyear. And so '15 was a down year because of that. And so we're delivering a lot of 11 now and we're going to begin delivering lot 12 this year. And so fiscal '16 will have a full year's delivery as compared to '15 which only had a partial years delivery because of the budgetary environment at that time. It's going to be up approximately $10 million 8 to 10 aircraft in '16 over '15. Okay, now to the second part of your question what we have in hand. We have a base contract and right now we are under contract for lots 11, lots 12 and lots 13. We believe that we are going to be entering negotiations in the next several months on lots 14, 15 and 16 the next three production years. And it is possible that that could be a five year lot which we had previously. So it could be '14 through '18 or '19.

Okay, thank you.

Thank you. And our next question comes from the line of Mark Jordan with Nobel Financials. Your line is now open.

Good afternoon. Question on accounting. As you startup the production of SSAT 3, also the one classified program. From an accounting standpoint, are you accounting through those new platforms on percent completion basis or on a shipment basis because the shipments in '17 and in your estimates for the year what are - what have you assumed for the accounting of those two programs?

Mark, this is Deanna. So on the accounting we still need to discuss with our external auditors on the proper accounting. It could either be the units of delivery, rise of shift or cost over cost percentage of completion. We believe it's probably going to be percentage of solutions cost over cost but we still need to have those discussions with our accountings. As far as the classified, it's confidential program that is expected to be on a cost plus fixed fee.

Okay. The AFSAT articles where they are talking that the Navy is running short on targets to practice with, is there a possibility for acceleration from LRIP into full volume production there and then secondly what is the benefits derived from sort of light fire training versus stimulation.

Very interesting Mark you bring that up. We won't specifically allowed to talk about that publically until recently because popular mechanics in the last month or so ran an article on the Navy target program where R177 which is going into production is replacing the legacy 34s, and legacy 74s. And the article talks about the quantities are diminishing quickly and the Navy has having to do some very interesting things to certain of the remaining aircraft to keep them flying. I believe it is very possible, very possible that LRIP quantities could be increased above what were currently expecting that’s based on communications with the customer and that will be determined over the next few months because as you indicated the Navy's opt tempo needs to be maintained and the number of aircrafts they have and inventory on the 34s and 74s is coming down.

Second part of that question was stimulation versus light fire training is - how does the Navy view this - necessity of the light fire versus stimulation?

I can only tell you on the programs that we're on and the programs that we’re on there is no substitute for light fire versus stimulation. And that was proven out historically tragically in the Vietnam War prior to that where a significant amount of the training prior to that was done in stimulation and then when the real thing happened it became apparent that there was - that stimulation was not a substitute for the real thing. And so I don’t see any adverse potential impact at all relative to 177 program, our 167 program with the Air Force, our 178 program with the certain government customer which is expanding very quickly now, I don’t see any threat at all from stimulation.

Okay. U-class program which was a carrier based UAB, I have seen talk about that shifting to a concept of using that platform as a tanker. If the Navy gives up on that high cost attack project is there anything out there now that is flying, that has performance envelope similar UTAP-22 now that the U-class seems to be shifting in focus.

We are aware of nothing out there that is anywhere close to the aircraft we have for the ones that are coming.

Okay. Final question for me, the public RFPs out the widely advertised the Air Force research lab and all those initiative on Glam 1, specifically do you think what might be the timing where you believe that those two organizations might make public what their intentions are?

I really shouldn’t say anything at this time Mark.

Okay, thank you.

Thank you. And our next question comes from the line of Michael Ciarmoli with KeyBanc Capital Markets. Your line is now open.

Good evening guys. Thanks for taking my questions. So Eric just on the '16 guidance, you kind of gave us a view almost like your different end markets and everything grown organically, I guess the one headwind appears to be on the modular side, is that the only product line that's creating the headwind to drive the flat revenue growth next year?

Yes it is.

Can you size that for us? And maybe the amount of the headwind?

So Michael as you pointed out as I went through, I went through each area and I indicated growth, I also said I believe that the business is going to grow but I said that our base case guidance was something less than that. So let’s say that we’re trying to be – we’re trying to be on the cautious side here with the guidance that we’re giving. That is what we are trying to do.

Okay.

As a size on that Michael, I would say it could be 15 to 30.

Okay. The headwind?

Revenue headwind 15, 16.

Got it, that's helpful.

It could be. We have basically included little to nothing up for new bookings.

Okay. And then what about even - in this market I think EBITDA generation cash flow, it sounds like you’re going to get anywhere from $10 million to $16 million of pickup just on the ending of the R&D for unmanned and the associated CapEx, can you give us a little more color I mean should we expect to see some meaningful EBITDA growth year-over-year. I mean I know you said cash flow would improve, are we expecting a reasonably positive number on cash flow and anything also you can provide there or elaborate on?

Yes, so Michael the reason we’re not being more specific right now is because there is a lot that is going to happen in the next few months. So for example. Let’s say that we are unsuccessful across the board in our tactical stuff and let’s see that we’re unsuccessful and we make that decision by June 30 unsuccessful. You know the numbers that we’ve been investing and as I indicated in my prepared remarks, we’ve been maintaining the development team. If we’re unsuccessful, let’s say we’re unsuccessful make that decision by June 30, we make a significant cost cut and we make infrastructure cuts and we make infrastructure consolidations and over the balance of the year that could be $10 million.

Okay.

And it could be into 17 even more.

Okay.

Just straight to the bottom line if we are unsuccessful. If we are successful and God willing we are going to be, let’s say UTAP-22 the substantial development that we internally funded is complete. If we are successful there, that should be revenue and EBITDA generating because it’s under contract or it funds that could be a positive, we have included - we have not included any of that in our forecast. On one of the opportunities that we’re chasing, the way that it is structured, it could be revenue and it could be EBITDA generating. On another opportunity that we’re chasing it could have a different answer relative to intellectual property which is you know is very important to us and so we got a lot of things going on here. I’m very confident, we will know before June 30 and we will be able to sort this through.

Got it. And then just last from me, what percent of your backlog is shippable in 2016, thanks.

It’s roughly about 40% to 45%.

Thanks guys.

[Operator Instructions] And our next question comes from the line of Eric Selle with SunTrust. Your line is now open.

Hi, good afternoon. You guys changed your guidance last year around this time I believe it was and you guys stripped out a potential and protested activity and you introduced summary you guys gotten more conservative on guidance. And as I look at this year with modular being $15 to $20 million revenue topline, I got to imagine that's high decremental margins, the impact in the back half of last year was $10 million on EBITDA. So it’s sounds like - I mean it’s sounds like your guidance is somewhat conservative is that a true characterization?

That's correct Eric.

Okay, good. I like that. And then Deanna I got you, you said zero outstanding under the revolver, was there any LCs – what was the availability at the end of the year do you have that?

Yes, so the LCs were roughly $10 million to $11 million dollars and the availability was subject to the borrowing base and we had the reserve related to the least divestiture, it was roughly about $48 or $50 million.

Right. And you guys haven’t – obviously need that over the last couple of years?

No

So as I look out what are the risks to the guidance, I mean is there - I guess you stripped out protest contracts, the positive and negatives or may be winning those back, but what are the major risks to this? I mean it looks like, like we said its conservative, but what are you guys worried about this year?

In the public safety business orders don’t come through at the margins that we expect, as I mentioned in my prepared remarks, thus far this year with the bookings today have better than average growth margin of 29%. And I think we been reporting gross margin at 25% to 26% or something like that until those margins if can keep gone planned or executing, smaller jobs high margins that EBITDA should start lifting especially after the first quarter when we complete the reorganization and the cost cuts that we’re doing. So that's a risk. We don’t generate the volume in PSS at the margins that we hope to. In our unmanned systems division, I’m going to say 85% or 90% of that I feel real, real good about. We have one may be two international opportunities out there. We believe we won, it's been down selected, we believe we’re going to get but in today’s world things can get delay, they can get pushed so there is a probably a little bit there in the unmanned systems area that’s primarily international related that could impact us. On the cyber site, I’m not aware of any issues right now but we delivered cyber – some of our cyber businesses cyber products it’s cyber software and it is higher margin and if we're unfortunate we don’t book there, we don’t ship it there or get’s delayed there that could impact us but we need to put some cyber work as we do every year over the course of '16. So that’s a risk that we can't control. We can do the best we can, we can't control the ordering cycle. Those are the major ones that come to mind. I believe in modular systems we have haircut that significantly.

You have been conservative again in those risk or somewhat offset by the wining the unmanned UTAP potentially the verification projects – ends - there is a equal balance in the upside as well so I appreciate that and definitely good quarter year. What is – just real quick getting into the details. What is the cause of the sequential drop in backlog, was that seasonal or is there anything to worry about there?

No, we shift - obviously we had a big revenue for us, big sequential revenue in Q4. So we shipped a lot in Q4 that took them backlog as I went through and you can see our releases. We had some big bookings in Q1 and right now in the satellite communications area, they are looking very, very strong for Q2. So I don’t believe there is anything at all to worry about. The book of business looks stronger than it has in last several years.

That's great news. And then finically you guys I think have about $25 million remaining under the asset sale proceeds. Do you guys expect to come after bond or have you guys decided what you can do - I guess you had about six months decide, but if you guys come into a conclusion on that?

Actually it was roughly about $15 million Eric and is disclosed in our K that - I don’t know we filed already, I think it probably did cross the wire, but there is net proceeds that have not been reinvested yet $4 to $6 million, but we expect that those will be reinvested before the 365 days is up.

So you're doing that in the CapEx.

Correct.

Cool, solid quarter. Appreciate it. And I'll see you at the call.

Thank you. This concludes today's question-and-answer session. I would now like to turn the call back to Mr. Eric DeMarco for closing remarks.

Thank you very much. We look forward to speaking with you at the end of the first quarter unless events prior to then initiate us to have a separate phone call. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.