Kratos Defense and Security Solutions Inc (KTOS) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Kratos Defense & 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 your 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 & 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 would like everyone to please take note of a Safe Harbor paragraph that included at the end of today's press release. This paragraph emphasizes 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 bipartisan spending agreement, the 2016 budget agreement, and the President's 2017 DOD budget submission for growth to begin in 2016. In the fourth quarter, Kratos saw sequential growth across all of our businesses which Deanna will discuss in her remarks.

In Q4, we successfully completed another flight of Kratos' SSAT 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 remain on track in our unmanned business to begin LRIP on a separate confidential program later on 2016 or early 2017, 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 SSAT sales opportunities we believe will materialize once we successfully achieve US Navy 177 operating capability.

In Q4, we successfully completed our planned series of demonstration flights at China Lake with Kratos' unmanned combat aerial system, our UTAP-22 achieving 100% of our objectives. Kratos' UTAP-22 is it a low-cost unmanned combat aerial system, capable of Mach .96, with manned fighter-like performance, which can perform its mission in an A2AD environment that 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 over the past two 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 UTAP-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 prognosis 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 sole source AFSAT base contract. We currently expect 2016 Kratos AFSAT deliveries to exceed 2015's, and 2017 is currently looking very solid as well based on preliminary customer input.

Kratos was recently awarded a $37 million firm fixed-price contract, also for the AFSAT program for unique spares, logistics support, and unmanned system repairs. We also expect to be entering into contract negotiations in the next few weeks with a new international customer on an approximate $15 million initial order for Kratos' high performance unmanned aerial target drone systems.

And as you know, typically once Kratos obtains customer for our high performance unmanned target drone aircraft, the relationship is multi-year and decade in nature, with significant and recurring follow-on orders due in part to the capital and infrastructure investment acquired by the user. In the fourth quarter, we continued 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 multi-year effort.

In Q4, we remained under contract and continued to support certain government customers related to unmanned aerial drone system swarming, both offensive and defensive related program objectives. This program is also expected to continue for many years in the future.

We are in pursuit of two new tactical high performance unmanned aerial system opportunities, both of which solicitations came out in Q4; and as soon as we can, we will be providing updates on each of these. These opportunities, if we are successful could be a major new multi-year platform for programs for Kratos, and 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 UAS opportunity has tens of millions of dollars of funding in the 2017 budget request.

We are currently in pursuit of certain new and potentially large unmanned ground system opportunities which are scheduled for contract award later in 2016, and we can now expect a large sole source contract award later on in 2016 for unmanned vehicle command and control systems. We believe that this award will be valued at multi-tens of millions of dollars. In February, 2016 a US government customer released a sources sought for a new advanced sub scale 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 5D Systems, a specialized government contractor focused on unmanned systems. Kratos has had a formal strategic relationship with 5D 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 FY2016, we expect Kratos' unmanned systems business to generate year-over-year organic revenue and adjusted EBITDA growth above 2015. Excluding any potential FY2016 contributions from our UTAP-22 initiative and excluding any potential revenue and investments related to the successful award of a certain new tactical program we are 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 into Q4 by customers. We believe this demand is in part being driven by the recent increases in funding for US national space asset 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 strength in Kratos' cybersecurity business also contributed to this business unit's strong fourth quarter performance. We expect Kratos' satellite technology training and cyber business to generate sequential revenue growth for 2016 over 2015, with Q2 2016 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 2016 shipment pulled into 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 are seeing particular strength in the missile system, related radar, electronic warfare, and C4ISR areas with a number enough contracts we have recently received underway, in production and scheduled for initial deliveries beginning in Q3 of 2016. 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 could potentially see a small growth step function with this business. We currently expect Kratos' microwave electronics business to generate sequential revenue growth or FY2016 over FY2015, 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 communications systems product element. Our reorganized PSS sales organization has identified numerous new near high margin opportunities; and year-to-date in 2016, KPSS 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 as 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 LPTA contract awards adversely impacting the business, and we continue to experience delays on certain expected sole-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 formally disclose the award, which we plan on doing in the near future. We anticipate no major recompetes in this business in 2016, and we have a solid core business supporting the electromagnetic rail gun, 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 business came in substantially below our Q4 forecast caused primarily by continued order delays, USDOD 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 margins and cash flow on an expected lower future business base. As a result, in Q1 of 2016, we expect to record 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 combatant areas 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 products 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 a result of reduced shipments of hardened mobile tactical facilities for a certain US 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, small-sized projects impacting overall sales volume, and a reduction of our unmanned systems division revenues of $5.1 million as a result of the timing of the 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 for 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 believe 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 costs and expenses related to investments in our UTAP-22 aircraft, which Eric discussed earlier. We completed the success 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 these discretionary non-recurring investments in the UTAP aircraft over the past two-and-a-half years to develop IP, or our new unmanned combat aerial system platform. The costs incurred in the fourth quarter should represent the substantial completion of this development initiative.

Excess capacity and restructuring costs of $1 million, reflecting $400,000 of employee termination costs and $600,000 of unabsorbed manufacturing overhead costs due to reduced sales volumes resulting from the delays in anticipated contract awards in our unmanned systems business, and $400,000 of transaction-related costs. Also included in our reconciliation to compute adjusted EBITDA are $3.9 million of contract costs 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 flights, 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 and 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 acquisition.

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 the 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 on the sale of the Company's US and UK electronic products business. $2.9 million of expense related to amortization of intangible assets, non-cash stock compensation expense of $600,000 and 100K 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 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 four 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 slight parameters, specifically in our unmanned systems 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 .7 to 1 for the fourth quarter and for the last 12 months was .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-sized, higher margin businesses; and to only selectively bid on larger-sized 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 hardened security shelter project for a government agency which we shipped $37.3 million in 2014 at gross profit rates averaging over 25%.

We were led to believe that similar volume of these hardened security shelters would be shipped in 2015. However there was a change in the customer's priorities. To a lesser degree, reduced volumes in our unmanned systems division of $15.2 million were the result of the 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. (Inaudible) 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 decrease being by far the primary cause for Kratos' declining revenues over the past several years.

We believe that our government services business has now stabilized at its current revenue level. With the 2011 BCA, we assessed 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 include unmanned systems, satellite communications, and a 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 2016 over 2015 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 in the hope of 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 captured-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 if 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 our 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 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 is 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 2016 forecast. We will currently be guiding to what we are calling Kratos' Base Case for 2016, with 2016 revenue and adjusted EBITDA to be approximately the same as 2015, and having the same quarterly trajectory as 2015 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 2016. 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 re-organization 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 will turn it over to the moderator for questions.

(Operator Instructions). 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 biannual fleet exercise?

With the fleet exercise, Mike or a different branch exercise be a 2016 exercise or be first half 2017 exercise?

I believe there is a large impact 2016 exercise scheduled for the June time frame this year?

Yes, so 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 2016 or in 2017, over the next few months.

And Eric, when you were talking about talking to potential customers and related entities regarding features of the system, were you referring primarily to before you did those demonstrations or after or both?

Both. For the last two, two-and-a-half years we have been interacting with the user community regarding what their gaps are, their needs are; and I will use the word requirements although that has a special terminology in the industry as you know. And we design the airplane and the demonstration flights around the inputs we received over the last two, two-and-a-half years from those users. Then we had the successful flights in Q4.

In the last two months, since those successful flights, we have -- they have re-engaged with us, or we have re-engaged with them, regarding the next step for the aircraft and its trajectory. So it is both and it is been very heavy the last 60 days.

Just more broadly, ahead of the administration's budget request released, there was a lot of talk from Secretary Carter and others regarding things like swarm, unmanned swarms, and things that they were really highlighting that were coming as part of this third offset; yet then when you actually see the budget request itself, those -- you cannot find the word swarm anywhere in there. What do you make of that?

There are some new offices that have been stood up: N99 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 capitalists; 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 a 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 talked about.

In addition to that, there are two others, and I am 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 will just end with one other question. You talked about AFSAT deliveries exceeding 2015. What were they in 2015? And also maybe just more broadly, can you talk about what you have in hand for AFSAT versus these Lots 11 through 13 production.

Right. On the first part of your question, Mike, at the end of 2014, we had a continuing resolution which significantly delayed the execution of our production years 2011, 2012, and 2013 on AFSAT so we did not start delivering targets in 2015 until approximately midyear. And so 2015 was a down year because of that. And so we are delivering Lot 11 now and we are going to begin delivering Lot 12 this year.

And so fiscal 2016 will have a full year's delivery as compared to 2015, which only had a partial year's delivery, because of the budgetary environment at that time. It is going to be up approximately $10 million, 8 to 10 aircraft in 2016 over 2015.

Now the second part of your question. What we have not had. We have a base contract and right now we are under contract for Lot 11, Lot 12 and Lot 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 have had previously so it could be 14 through 18 or 19.

Okay. Thank you.

You are welcome.

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

Good afternoon. A question on accounting. As you start up the production of SSAT, also the one classified program, from an accounting standpoint, are you accounting for those new platforms on percent completion basis or on a shipment basis because they ship them in 2017 and in your estimates for the year, you know, what have you assumed for the accounting of those two programs?

Yes, 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 as they are shipped or cost over cost percentage of completion. We believe probably going to be percentage of completion cost over cost, but we still need to have those discussions with our accountants. As far as the classified or the confidential program, that is expected to be on a cost plus fixed fee.

Okay. The SSAT, I have seen articles where they are talking that, you know, 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 live-fire training versus simulation?

Very interesting, Mark, you bring that up. We were not specifically allowed to talk about that publicly until recently; because of Popular Mechanics in the last month or so ran an article on the Navy target program, where our 177 which is going into production is replacing the Legacy 34s and the Legacy 74s. And the article talks about the quantities are diminishing quickly, and the Navy is 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 we are currently expecting. That is based on communications with the customer and that will be determined over the next few months, because as you indicated the Navy's OPTEMPO needs to be maintained, and the number of aircraft they have in inventory on the 34s and 74s is coming down.

Second part of that question was, simulation versus live fire training, how does the Navy view the necessity of live fire versus simulation.

I can only tell you on the programs that we are on. And the programs that we are on, there is no substitute for live fire versus simulation. 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 simulation and then when the real thing happened, it became apparent that simulation was not a substitute for the real thing.

And so I do not see any adverse potential impact at all relative to our 177 program, our 167 program, with the Air Force, our 178 program with a certain government customer which is expanding very quickly now. I do not see any threat at all from simulation.

Okay. The U-class program, which was a carrier-based UAB, I see talk of that shifting to a context 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 has -- that is flying that has a performance envelope similar to your UTAP-22 now that the UCAS seems to be shifting in focus?

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

Okay. Final question for me. There have been some public RFPs out that, you know, widely advertised the Air Force Research Lab and DARPA's initiative on Gremlins. Specifically, do you think that is -- what might be the timing where you believe that those two organizations might make public what their intentions are?

I really should not say anything at this time, Mark.

Okay. Well, thank you.

Thank you.

Thank you and our next question comes from the line of Michael Ciarmoli with KeyBanc Capital Markets.

Good evening, guys. Thanks for taking my questions. So Eric, just on the 2016 guidance, you kind of gave us a view almost by your different end markets and, you know, everything grown organically. I guess the one headwind appears to be, you know, on the modular side. You know, is that the only product line that is creating the headwind to drive the flat revenue growth next year?

Yes. It is. Absolutely.

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 us say that we are trying to be -- we are trying to be on the cautious side here with the guidance that we are giving. That is what we are trying to do.

Okay.

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

Okay. The headwind?

Revenue headwind, 2015/2016.

Got it. That is helpful.

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

Okay. Okay. And then what about even, you know, I mean in this market I think, you know, EBITDA generation, cash flow; it sounds like you are going to get, you know, 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. Can you -- are we expecting a, you know, reasonably positive number on cash flow? And anything, you know, else you can provide there or elaborate on?

Yes, so Michael, the reason why we are 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 us say that we are unsuccessful across the board in our tactical stuff, and let us say that we are unsuccessful and we make that decision by June 30, unsuccessful. You know the numbers that we have been investing and as I indicated in my prepared remarks, we have been maintaining the development team.

If we are unsuccessful, and let us say we are unsuccessful to make that decision by June 30, we make a significant cost cut and we make infrastructure cuts and infrastructure consolidations, and over the balance of the year that could be $10 million. And it could be into 2017, even more. Just straight to the bottom line, if we are unsuccessful.

If we -- if we are successful, and God willing we are going to be, let us say the 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 is under contract or expunged. That could be a positive. We have included none of that -- we have not included any of that in our forecast.

Okay.

Okay? On one of the opportunities that we are chasing, the way that it is structured, it could be revenue and it could be EBITDA-generating. On another opportunity that we are chasing, it could have a different answer relative to intellectual property, which as you know is very important to us. So we have got a lot of things going on here. I am very confident we will know before June 30 and we will be able to sort this through.

Got it. And then just last for me. What percent of your backlog is shippable in 2016?

It is roughly about 40% to 45%.

Thanks, guys.

Sure.

Thank you. (Operator Instructions). And our next question comes from the line of Eric Selle with SunTrust. Your line is now open.

Hey, good afternoon. You know, you guys changed your guidance last year around this time I believe it was; and you guys stripped out, you know, potential and protested activity and in summary you guys got more conservative on guidance. And as I look at this year, you know, with modular being $15 million to $20 million revenue top line, I have got to imagine that is a high decremental margins and the impact in the back half of last year was $10 million on EBITDA. It sounds like your guidance is somewhat conservative. Is that a true characterization?

That is correct, Eric.

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

Yes, Joe. The LCs were roughly $10 million to $11 million, and the availability was subject to the barium base, and we had the reserve related to the Hurley divestiture. It was roughly about $48 million or $50 million.

Right. And you guys have not obviously needed that over the last couple years?

No, no.

As I look out, what are the risks to the guidance? I mean is there any, I guess you stripped out protest contracts, the positive and negatives of maybe winning those back. What are the major risks to this? It looks like we said before it is conservative, but kind of what are you guys worried about this year?

In the public safety business, orders do not come through at the margins that we expect. As I mentioned in my prepared remarks, thus far this year, the bookings to date have been at an average gross margin of 29%. And I think we have been reporting a gross margin of 25% to 26% or something like that.

And so those margins, if we can keep going, plan that we are executing, smaller jobs, higher margins, that EBITDA should start lifting, especially after the first quarter when we complete the re-organization and the cost cuts that we are doing. So that is a risk. We do not generate the volume and PSS at the margins that we hope to.

In our unmanned systems division, I am going to say 85% or 90% of that I feel real, real good about. We have one, maybe two international opportunities out there. We believe we have won, it has been down selected. We believe we are going to get them, but in today's world, things can get delayed. They can get pushed. There is probably a little bit there in the unmanned systems area that is primarily international-related that could impact us.

On the cyber side, I am not aware of any issues right now, but we deliver some of our cyber businesses cyber products. It is cyber software. And it is higher margin. And if we are unfortunate and we do not book it there, we do not ship it there or it gets delayed there, that could impact us because we need to book some cyber work as we do every year over the course of 2016.

So that is a risk that we cannot control. We can do the best we can, but we cannot control the ordering cycle. Those are the major ones that come to mind. I believe in modular systems we have haircut that significantly.

Also, you know, you are being conservative again, and these risks are somewhat offset by winning the unmanned, the UTAP, you know, potentially the beautification project that is hitting modulars and, you know, I feel like there is equal balance in the upside as well. So I appreciate that and definitely good quarter here. Just real quick, just 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, no. We shipped -- obviously we had big revenue for us, big sequential revenue in Q4 so we shipped a lot in Q4. That took down backlog. As I went through, and you can see our releases, we have had some big bookings in Q1. We have had some big bookings in Q1. And right now, in the satellite communication area, they are looking very strong for Q2. Very, very strong for Q2. So no, I do not believe there is anything at all to worry about. The book of business looks stronger than it has in the last several years.

That is great news. And then finally, you guys I think have about $25 million remaining under the asset sale proceeds. Do you guys expect to come after bonds or have you decided what you are going to do? I guess you have about six months to decide, but have you guys kind of come to conclusion on that?

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

So that will go into CapEx?

Correct, correct.

Hey, cool. Solid quarter. Appreciate it and I will cede the call.

Thank you, sir.

Thanks, Eric.

Thank you. This concludes today's question-and-answer session. I would now like to turn the call back over 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.