this article - Electro Optic Systems

EOS
Company Update
29 May 2013
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EOS
Proprietary
Disclaimer
This presentation and any related communication may contain statements
that are forward looking with regard to the business and future performance
of Electro Optic Systems Holdings Limited [“EOS”] and its subsidiaries.
These statements reflect EOS’ current views, assumptions and projections
based on, but not limited to, currently available information with regard to its
existing and potential customers, markets and the prevailing economic
conditions.
These statements may involve risks and uncertainties which may cause EOS
actual financial performance to differ materially from those inferred from any
forward-looking statements.
Such statements, therefore, should not be regarded as an expressed or
implied forecast of the future financial performance of EOS. You are
cautioned not to put undue reliance on this presentation.
Copyright EOS
1. Review of 2012 Results
2. Current Status and Outlook:
–
Space
–
Remote Weapon Systems
3. Summary
Copyright EOS
Financial Results 2012
1. Revenue
Revenue fell 33% to $21.9 million, a 5-year low.
2. Profit/Loss
A loss of $10.2 million was made after costs associated
200
200
with restructuring the company for new market
6
7
conditions.
3. Cash
Net cash provided by operating activities for the 2012
year was $3.8m (2011: net cash used $3.8m).
Cash available for operating activities was A$6.7m at 31
December 2012 (2011: A$4.9m).
Copyright EOS
Rationale for 2012 Restructure
 Research indicated demand would fall thru 2014 and would also be
sporadic. This requires a responsive production model with high efficiency
at all levels of demand, from zero to maximum output. Scalable
production is an advanced technology in its own right.
 EOS production was vertically integrated and scaled to be profitable from
$30m upwards, for smooth demand. Production scale was tightly linked to
working capital available, and significant costs incurred if plant was idle.
 EOS did not have the capital or the production technology to transform all
of its own capacity to the new requirements. Nor did EOS have the capital
to sustain idle capacity. Fixed costs were high while revenue was falling.
 In 2004 EOS had no choice but to vertically integrate all production. By
2011 over 50% of EOS products could be produced in new facilities
developed by major technology companies for other purposes.
EOS decided to transfer at least 50% of all EOS plant capacity to selected
partners, chosen for their superior production technology and supply chain
management. This was announced on 5 December 2011.
Copyright EOS
Allocation of $10.2m funds
1. $3.5m
Cost of production transfer to partners
2. $1.3m
Impairment of material held for production
3. $2.6m
Depreciation of assets
4. $0.8m
Marketing for diversification to growth markets
5. $1.9m
Development costs for new turret product
These were not simply defensive outlays to simply reduce costs. We
have cut costs and improved every competitive aspect of our business.
These investments position EOS as a more competitive, sustainable
and resilient company in its business sectors.
Copyright EOS
Result of Restructure
1. By early 2013 EOS had achieved all of its objectives:
 New Capacity. In 18 months EOS achieved 65% outsourcing to partners
with strong market reputations and access. EOS products are now made
by Northrop Grumman [USA] and Hyundai [Korea]. The new capacity is
scalable and can quickly surge past previous EOS capacity limits.
 Competitiveness. Outsourcing is improving cost, quality and
responsiveness. This improves the position of EOS in an increasingly
competitive market.
 Cost reduction. EOS’ fixed costs have fallen $5m to around $16m annually
and its break-even revenue to $25m, matching likely near-term revenue.
 Working capital. Reducing internal production by 65% also reduces by
65% the working capital requirements to fund growth as markets recover.
EOS will in future be less constrained by working capital as customer
budgets recover.
 Growth. EOS maintained investments in marketing and new technology
Copyright EOS
Remote Weapons Systems Sector:
Status and Outlook
Copyright EOS
Key Developments
1.
Global Weapon System Market and CROWS
Market growth slowed further thru 2012 as many governments cut budgets to
control deficits. This trend is likely to continue in Europe and the US thru 2014.
US Army CROWS was awarded to competitor in August 2012, but US reductions in
defence spending have severely impacted this program.
3.
Business Model and Resilience
The transfer of 65% of production to partners is improving competitiveness in a
difficult market that may yet deteriorate further . Substantial cost reduction and
efficiency improvements appear to be keeping pace with the erosion of revenue
and margin as the weapon systems market undergoes strong correction.
4.
New Product s and Markets
Markets will recover and some regions are already growing in demand. New
technology, products , partners and marketing efforts are all required.
Copyright EOS
Weapon System Market
1.
RWS programs in Europe/NATO have been further deferred to beyond
2015 due to Eurozone finance problems.
2.
US funding for CROWS production did not survive defence budget cuts
and a new CROWS program seems likely to emerge in 2014.
3.
Demand in Middle East and Asia is strong. The EOS pivot to Asia that
commenced in 2007 was extended to the Middle East in 2011.
4.
Australian programs are unlikely to fully recover till 2015 but initial
funding for those requirements will resume in late 2013.
5.
There is initial evidence that the GFC is causing some customers to
adapt their business models to higher local participation.
Demand in the western hemisphere remains weak. In the eastern hemisphere
ongoing military tensions underpin demand for advanced defence technology.
Copyright EOS
New Products and Markets
 The weapon systems market will recover. Promising new business is already
emerging, but with different product, technology and regional emphasis.
 Market recovery will be led by Asian and Middle East markets which place
very strong emphasis on new technology, product quality, and a consistent
and persistent market presence.
 New technology, improved quality and sustained marketing are difficult to
fund during a market downturn. The ranks of credible providers will thin.
 EOS has funded new technology for its current products, as well as a new
turret product which is on schedule for production in 2014. This expanded
and upgraded product range is marketed to customers in growth markets.
 EOS usually enters new markets with a local partner. Although partner
selection initially slows progress, this model has proven sustainable under a
wide range of market conditions.
EOS is relatively well positioned for recovery of the weapon systems market.
Copyright EOS
Space Sector:
Status and Outlook
EOS Proprietary
Key Space Sector Developments
1.
2.
3.
4.
5.
6.
7.
All current EOS space data contracts are performing well. Revenue for
space data and technical demonstrations will exceed $5m in 2013 and this
business sector will be profitable.
Space debris problems are now expanding as predicted by EOS. The critical
threshold for mandatory action is approaching.
Defence requirements have strong public commitments by government
[e.g. AUSMIN 2012] but no major funding has been committed.
EOS capabilities have expanded and matured. We are one of a few entities
globally that can rapidly predict collisions among 30,000 debris objects.
Key reliability milestones are near, with EOS laser and tracking equipment
approaching 10 years of continuous automated operation without defect.
Funded programs [contracts from data users] to demonstrate commercial
service levels for space operations are on schedule for completion in 2013.
Funding delays are now impacting all space programs.
Copyright EOS
Commercial Space Operations
 All current tracking contracts
are achieving required
performance.
 Current funding for space
tracking is strong but funding
beyond 2013 is not certain.
 Demonstrations of expanded
capabilities are on schedule for
completion by 2014.
 Commercial operations could
commence from 2014 provided
new infrastructure can be
funded.
Copyright EOS
Significant Space Project Delays
1.
2.
The Giant Magellan Telescope : EOS tenders for this major project will be
delayed to 2014 due to deferred contributions from foreign project partners.
EOS tenders for space hardware for a new satellite mission have been
delayed by 12 months due to funding delays.
Copyright GMTO
These are typical of delays for government-funded programs globally.
EOS
Summary and Outlook
EOS Proprietary
Business Outlook for 2013
1.
Remote Weapon Systems. After re-positioning in 2012 this
sector is positioned to recover with the weapon system market.
EOS expects a modest recovery in 2013 to consolidate thru
2014, principally thru new technology, products and markets.
2.
Space Systems. Although EOS technology and data products
perform well, and customers now fund increasingly larger trials,
there is no long-term funding in place for operations.
3.
Revenue and Profit. On existing contracts revenue will recover
around 30% leading to a small operating loss in 2013.
Copyright EOS