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- Electro Optic Systems’ (EOS) March quarterly activities travelled as expected until COVID-19 caused significant changes to the company’s plans for the future
- The space and defence company entered the year with big plans and ready to top 2019’s revenue and EBIT by 70 per cent
- EOS had over $250 million of defence products ready to be delivered across the year
- Unfortunately, before formal deliveries began, COVID-19 caused a national lockdown, forcing staff to flee Australia and go into quarantine
- Production facilities were closed, along with military bases, which were a point of delivery
- Delivery is now expected to commence around September
- Since then, EOS has raised $134 million to fill the financial losses
- After these unexpected events, EOS has had to drop its 2020 guidance from a 70 per cent growth to 25 per cent
- EOS is down 4.21 per cent and shares are trading for $4.55 each
Electro Optic Systems’ (EOS) activities for the March quarter travelled as expected however final events caused significant changes to its future plans.
EOS is an Australian technology company who operates in the space and defence markets.
The company entered 2020 with a new business structure ready to support a wider range of activities in the U.S. space, space communications and missile defence sectors. This included the acquisition of Audacy Corporation, a U.S.-based space communications company.
Last year was a successful year for EOS as it ended the year holding firm orders for over $180 million of defence products. However, it expected a 70 per cent growth in revenue and EBIT for 2020 as a result of evenly distributed orders valued at an extra $70 million.
The company assessed that 70 per cent growth could be managed if the entire 2020 effort was evenly distributed across all four quarters to smooth plant demand and reduce production risk.
In November 2019, EOS raised roughly $80 million to allow production in the first quarter of 2020 of products for inventory, which would be delivered and invoiced from the June (current) quarter.
Delivery takes time, even up to six weeks, as there are many steps to the process. The delivery chain also requires a lot of hands on deck — even up to 35 staff members.
The foundations EOS had laid for a successful 2020 and 2021 were quickly overshadowed by a drastic turn of events in the last seven days of March.
COVID-19
One week before formal deliveries could commence, the delivery chain was broken in multiple places due to a national lockdown and the impact of COVID-19.
A total of five essential EOS technical staff from Australia had to leave the country within 24 hours or be stranded due to airport closures and quarantine.
All accessible airports were closed to normal commercial passengers and freight. The EOS production facility, located in a secure industrial zone, was locked down by military police, along with all other defence plants.
Approximately 50 per cent of EOS local staff were forced into quarantine. The military test facility required for live firing was closed and the designated delivery points within military bases were cut off by military base closures.
Subsequent events
By April 10, EOS realised the recovery of the entire delivery chain would take 60 days after reasonable access and mobility was restored. Since access isn’t expected to be opened until July, the earliest date for deliveries to commence would be September. Therefore, this pushes cash payments to the December 2020 quarter.
A silver lining is that there aren’t contractual issues or obligations arising from delivery delays.
A few days after, EOS chose to suspend production of products it couldn’t deliver. The suspended production can resume as soon as the delivery chain is restored and inventory is reduced to normal levels, which are likely to occur in 2021.
To fund liquidity and growth, EOS raised $134 million through a fully underwritten institutional placement. Out of the $134 million, $55 million will go towards further expanding inventory until July 2020 when production capacity can be switched to other contracts.
Following this whirlwind of unexpected events, EOS has reduced its 2020 guidance from a 70 per cent growth from 2019 to a 25 per cent growth.
EOS is down 4.21 per cent and shares are trading for $4.55 each at 1:05 pm AEST.
