What do you do when you lose nearly $100 million in only six months? Re-evaluate everything. That’s exactly what defence, space and communications company Electro Optic Systems (ASX: EOS) is doing as it expresses disappointment in its first half result, losing $98.9 million in six months ending June 30, 2022. The loss is even more significant when compared with 1H 2021 when the Company lost $11.7 million.
EOS attributed over $54 million of the loss to the impairment of assets and onerous contracts held in SpaceLink Corporation, its satellite telecommunications arm. Additionally, revenues from ordinary activities, like customer delays, of $53.7 million represented a 45% reduction on the prior corresponding period ($97.8 million). EBITDA (excluding impairment) was a loss of $34 million.
No doubt, this year left a gaping hole in the Company’s wallet, which is why it is changing things up. For one, the Company announced that it is entering into a financing agreement with a major shareholder, Washington H. Soul Pattinson and Company Limited (WHSP). WHSP has refinanced an existing $35 million loan (on a short term basis) and provided an additional $20 million working capital facility to support the restructure of the Company’s core Defence and Space business.
On a foundational level, it is rehashing its leadership team to include managers with deep defence and commercial experience. The business model will be simplified to focus on the core defence and space tech businesses.
Its restructure will allow the Company to prioritise businesses that are already profitable and respond to customer procurement activity rather than anticipating requirements through customer planning documents. These changes, including reductions in workforce and a simplified business plan, are expected to bring in at least $20 million of savings.
Though the Company has not lost any customer contracts in the year, awarding of new contracts has been slower than expected in these months. In a bid to save money, EOS will be shutting down some of its facilities in Australia and the US and will reduce the HQ facility size by 50%. The Company expects these closures to save $1.5 million per year.
It is also reviewing its R&D spending, turning the attention to commercial investment criteria. It will also improve its sales and marketing campaigns in Asia, Europe and the US.
EOS is also prioritising capital into the Defence and Space businesses so as to improve the commercialisation of SpaceLink. It continues to explore potential strategic and funding partners and investors who understand the specialised nature of the sector and its risk profile.
With regard to supply chain problems plaguing nearly every business right now, the Company expects these constraints to continue into H2, which may cause some revenue recognition to be delayed from H2 2022 into H1 2023.
The coming months will reveal whether the Company’s string of bad luck ends, and its new strategy proves effective.
Alinda is a Business Reporter for The Sentiment
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