Ossur Third Quarter Report for 2005
Sales in the third quarter of 2005 amounted to USD 44.6 million, as compared to USD 30.7 million in the preceding year.
Sales increased by 45% as calculated in USD. In connection mainly with the acquisition of Royce Medical Holding Inc. 5.7 million USD of unusual expenses was recorded in third quarter Profit for the third quarter was USD 812 thousand. Net of unusual expenses, profit amounted to USD 4 million. Earnings per share (EPS) came to 0.26 US cents, as compared to 1.47 US cents in the third quarter of 2004. Taking account of unusual expenses, earnings per share amounted to 1.26 US cents per share. The Ossur hf. interim Consolidated Financial Statements for the third quarter of 2005 were approved at a meeting of the Board of Directors on 25 October. The quarterly statement, prepared in compliance with International Financial Reporting Standards (IFRS), has been reviewed by the Company auditors and endorsed without comment. Third Quarter Operations Royce Medical Holding Inc. is included in the operation of the Ossur consolidation as of 11 August 2005. In other respects, the principal feature of Ossur's operations in the third quarter is the favourable sales, particularly in North America and international markets. The sales represent the greatest single-quarter sales ever, breaking the record set in the second quarter of this year. Ossur sales net of Royce sales amounted to USD 34.7 million, while sales of Royce products came to USD 9.8 million, representing a total of USK 44.6 million. In comparison, Ossur sales in the third quarter of 2004 amounted to USD 30.7 million. The increase is over 45%. Excluding the increase in sales resulting from the acquisition of Royce Medical Holding, sales increased by 16% in USD and by the same proportion in local currencies. If discontinued operating units are included in sales 2004, sales increased by 14%. The division of sales between prosthetics and orthopedics was as follows: Thousand USD Q3 2005 Q3 2004 Change in USD % Prosthetics 27,935 22,855 22% Orthopedics 16,510 7,051 134% Other 122 768 -84% Total 44,567 30,674 45% A total of USD 6.7 million was expensed as unusual expenses, while USD 1 million was recognised as unusual income. Earnings before interest, tax, depreciation and amortization (EBITDA) were reduced by USK 5.7 million as a result. Net of income tax, net profit was reduced by USD 3.2 million. The largest single unusual expense is the estimated cost of restructuring and integration of the Royce Medical operations, at USD 4.1 million. As revealed earlier, the restructuring is projected to reduce annual operating expenses by USD 3 - 3.5 million as of 2007. Looking past unusual expenses, all principal operating ratios were positive. Gross profit amounted to just short of 62% of sales, operating profit was 17%, EBITDA was 23% and net profit was 9%. The ratio of operating expenses to sales was similar to recent quarters. Assessment of net profit ratio must take account of the fact that the Company has been financed in excess of its needs for the acquisition of Royce Medical and therefore possesses surplus capital which has not yet been invested in acquisition or other development and is therefore not yielding full returns. Principal Third-Quarter Results The following are the principal operating results of the third quarter, divided into traditional Ossur operations on the one hand and Royce Medical Holdings on the other hand. A separate account is given of the impact of unusual expenses. Consolidated Income Statement Q3 2005 (USD thousand) Ossur 1/7-30/9 % Royce 11/8-30/9 % Total net of unusual exp. % Unusual exp. Total % Net sales 34,741 100% 9,826 100% 44,567 100% 44,567 100% Cost of goods sold -13,278 -38% -3,707 -38% -16,985 -38% -2,622 -19,607 -44% Gross profit 21,463 62% 6,119 62% 27,582 62% -2,622 24,960 56% Other income 7 0% 0 0% 7 0% 1,000 1,007 2% Sales and marketing expenses -7,487 -22% -3,100 -32% -10,587 -24% 0 -10,587 -24% Research & development expenses -2,354 -7% -795 -8% -3,149 -7% 0 -3,149 -7% General & administrative expenses -5,243 -15% -1,187 -12% -6,430 -14% 0 -6,430 -14% Restructuring expenses 0 0% 0 0% 0 0% -4,115 -4,115 -9% Profit from operations 6,386 18% 1,037 11% 7,423 17% -5,737 1,686 4% Financial income /(expenses) -1,861 -5% 0 0% -1,861 -4% 0 -1,861 -4% Net profit before tax 4,525 13% 1,037 11% 5,562 12% -5,737 -175 0% Income tax -1,167 -3% -412 -4% -1,579 -4% 2,566 987 2% Profit for the period 3,358 10% 625 6% 3,983 9% -3,171 812 2% Earnings per outstanding share (US cents) 1.26 0.26 EBITDA 7,752 22% 2,595 26% 10,347 23% -5,737 4,610 10% Profound and significant changes were made to the Ossur consolidation with the acquisition of Royce Medical Holdings which, as mentioned earlier, are included in the operations as of 11 August. On the other hand, two operating units, Mauch and Ossur's retail operation in Iceland, have been sold out of the consolidation. Net sale of these discontinued units amounted to USD 686 thousand in the third quarter of 2004. Key operating results, January through September Income Statement (USD '000) Ossur 1/1-30/9 % Royce 11/8-30/9 % Total net of unusual exp. % Unusual exp. Total % Net sales 101,313 100% 9,826 100% 111,139 100% 111,139 100% Cost of goods sold -39,642 -39% -3,707 -38% -43,349 -39% -2,622 -45,971 -41% Gross profit 61,671 61% 6,119 62% 67,790 61% -2,622 65,168 59% Other income 593 1% 0 0% 593 1% 1,000 1,593 1% Sales and marketing expenses -21,482 -21% -3,100 -32% -24,582 -22% 0 -24,582 -22% Research & development expenses -7,556 -7% -795 -8% -8,351 -8% 0 -8,351 -8% General & administrative expenses -15,939 -16% -1,187 -12% -17,126 -15% 0 -17,126 -15% Restructuring expenses 0 0% 0 0% 0 0% -4,115 -4,115 -4% Profit from operations 17,287 17% 1,037 11% 18,324 16% -5,737 12,587 11% Financial income /(expenses) -2,543 -3% 0 0% -2,543 -2% 0 -2,543 -2% Net profit before tax 14,744 15% 1,037 11% 15,781 14% -5,737 10,044 9% Income tax -3,598 -4% -412 -4% -4,010 -4% 2,566 -1,444 -1% Profit for the period 11,146 11% 625 6% 11,771 11% -3,171 8,600 8% Earnings per share 3.73 2.73 EBITDA 21,043 21% 2,595 26% 23,638 21% -5,737 17,901 16% Balance Sheets at End of September Consolidated Balance Sheets (USD '000) 30.9.2005 31.12.2004 Change Fixed assets 297,020 67,944 337% Current assets 99,434 40,971 143% Total assets 396,454 108,915 264% Stockholders' Equity 66,062 54,720 21% Long-term liabilities 217,441 35,622 510% Current liabilities 112,951 18,573 508% Total equity and liabilities 396,454 108,915 264% The consolidated balance sheet underwent significant change as a result of the acquisition of Royce Medical and the associated financing. In a share offering taking place 23 - 29 September, shareholders and managers subscribed to 66,499,447 shares at the price of ISK 81 per share. The increase in share capital was due and officially registered as of 4 October. The proceeds will be used almost entirely for the repayment of a bridge loan in the amount of USD 80 million, which was entered under current liabilities at the end of September. The equity ratio at the end of September was 17%, with the increase in equity in October and payment of the bridge loan the ratio stands at 37%. Cash Flow January - September Cash Flow 2005 (USD '000) Jan-Sept 2005 Jan-Sept 2004 Working capital provided by operating activities 13,519 17,925 Cash generated by operating activities, excl. interest 16,581 13,667 Net cash used in investing activities -222,690 -5,107 Net cash provided (used) from financing activities 247,276 -6,631 Net change in cash and cash equivalents 37,431 -833 Net cash from operating activities amounted to USD 16.6 million, as compared to 13.7 million in 2004. The increase corresponds to 21%. Financial Ratios Financial Ratios 2005 2004 Earnings per share (EPS) over past 12 months (US cents) 3.82 3.42 P/E ratio 36.7 37.7 Return on common equity 20% 22% Current ratio 0.9 2.1 Equity ratio 17% 50% Market value of stock (million USD) 441 410 Sales trends by market regions Thousand USD Q3 2005 Q3 2004 Change in USD % Increase in local currency % North America 26,768 15,955 68% 68% Europe 9,318 7,938 17% 17% The Nordic countries 3,987 4,018 -1% 0% Other markets 4,494 2,077 116% 116% Total continuing operations 44,567 29,988 49% 49% Discontinued operations 686 Total 44,567 30,674 45% 45% Excluding the growth resulting from the acquisition of Royce Medical, total organic growth amounted to fully 16% in the third quarter, whether sales are measured in US dollars or local currencies. Sales continued to grow significantly in the North American market, with sales up by 14% between years, excluding the increase resulting from Royce. Organic growth in Europe was rather poorer than in the second quarter. The increase between years was 7 - 8%. The Nordic market, where sales have been good this year, remained stable. Sales in other international markets performed well, increasing by over 100% between years. Looking past the unusual expenses, excellent results were achieved in the Company's operations. Gross profit remained robust in the third quarter, at 62%, as compared to 61% in the corresponding period of last year. The average purchasing power of the dollar against the ISK was 11% lower in the third quarter of 2005 than the third quarter of 2004. The same was true in the first and second quarter, when the average purchasing power was 12% below that of the preceding year. This cuts into the Company's gross profit, as revealed earlier. Since the average price of the euro remained the same against the dollar as last year, the strong euro did not help the Company's gross profit this quarter. The strength of the krona against the dollar not only increases the manufacturing costs of the Company, but also exerts upward pressure on research and development and general and administrative expenses, since both the largest development unit and the Company headquarters are located in Iceland. The ratio of operating expenses to sales was similar to past quarters. Marketing and sales expenses were rather higher, while general and administrative expenses were rather lower. As before, all R&D expenses are expensed in the income statement. Net of unusual expenses, operating profit amounted to 17% of sales, net profit came to 9% and EBITDA was 23%. Increased depreciation resulting from the amortization of intangible assets valued on the acquisition of Royce and entered in the income statement serve to increase operating costs and reduce operating profit, but have no impact on EBITDA. Unusual expenses Following the acquisition of Royce Medical, all the assets of that company existing at the time of the sale have been assessed by experts, including intangible assets such as trade marks, customer relationships, patents etc. These intangible assets will be amortised in the income statement in the same way as tangible assets over the coming years. The remainder of the acquisition price constitutes goodwill, which will be subjected to impairment test rather than regular amortization. Inventory held by Royce at the time of the acquisition is adjusted up to sale price. This means that normal mark-up is not recognised as income in the income statement for the purchased initial inventory. The effect of this on the income statement of the third quarter is that the cost of goods sold is USD 2.6 million higher and gross profit lower by the same margin than otherwise would have been the case. In the fourth quarter an additional amount of USD 650 thousand will be expensed under the same item. Also expensed in the third quarter is the estimated cost of restructuring and integration of the Royce Medical operations with Ossur's operations, at USD 4.1 million. This is a projected amount based on the budgets prepared for the changes in operation. The largest individual expense items result from the merger of financial departments, changes in production units and adaptation of the European sales activities to the sale of orthopedic products. The amount of USD 1 million is entered in the income statement as other income. This represents a re-adjustment of a liability which was adjusted upwards in connection with an acquisition in 2000. According to the deal, part of the acquisition price was an earn out payment. Since the agreed results were not achieved, no payment is due. In total, unusual expenses amounted to USD 6.7 million in the third quarter, while unusual income amounted to USD 1 million. The impact of this on EBITDA is therefore negative by USD 5.7 million. Net of income tax, these expenses reduced earnings by USD 3.2 million. Five-year comparison Q3 2005 Q3 2004 Q3 2003 Q3 2002 Q3 2001 Net sales 44,567 30,674 22,398 21,391 18,108 Profit from operations 1,686 5,511 2,942 4,690 3,795 Financial income / (expenses) -1,861 210 -114 -150 10 Profit before tax -175 5,721 2,828 4,542 3,821 Net profit 812 4,678 2,266 3,650 2,501 Stockholders' Equity 66,062 54,236 46,900 36,967 27.870 Total assets 396,454 107,977 101,731 69,642 57.606 Working capital provided by operating activities 13,519 17,925 9,424 10,623 8,119 Net cash provided by operating activities 12,845 10,905 8,729 5,092 7,908 Return on common equity (based on operation in the preceding 12 months) 20% 22% 20% 31% 30% Current ratio 0.9 2.1 2.2 2.3 1.7 Equity ratio 17% 50% 46% 53% 48% Earnings per share (EPS) over past 12 months 3.82 3.42 2.59 3.11 2.34 Price per share at the end of the quarter 85.5 91.5 53.5 50.5 41.5 Market value in USD millions 441 410 231 195 134 Partnerships In late September Ossur signed an agreement with the Icelandic Foreign Ministry on continued work in Bosnia-Herzegovina. Work will continue over the next 6-12 months, but in fact Ossur has been involved in co-operation with the Foreign Ministry on projects in Bosnia since 1996. In September Ossur reaffirmed its commitment to a partnership agreement with the Canadian development company Vichtom Human Bionics. Under the terms of the agreement the two companies will work together on the development and design of a new range of bionic products. The agreement will speed up work on the new product range, which will enable Ossur to market a comprehensive product line based on bionic technology. Ossur has entered into an agreement with the Sahlgrenska University Hospital in Gothenburg to investigate the use of bionic knees on Osseo integrated amputees. The co-operation is scheduled to begin in the fourth quarter and continue throughout the year 2006. Products A new brace, the Unloader LP, was launched in the US market in September. The brace is used in the treatment of osteoarthritis and specially designed for women. The principal advantage of the brace is that it is extremely light and unobtrusive and easier to use under clothing. Awards In August Frost & Sullivan presented Ossur with the 2005 Technology of the year Award for the Rheo Knee, the most technically advanced prosthetic knee on the market today. In this quarter Ossur was presented by the US Medical Market Association with the 2005 Gold International Award of Excellence for the best branding/corporate identity development of the year. Operating Prospects Operating prospects for the fourth quarter are fair, but investors should note that the short-term operating risk is somewhat heightened owing to the integration of Royce Medical with Ossur's operations, as the acquisition expanded the Company by approximately 50%. Investor meetings On Thursday, 27 October, Ossur will host briefings for investors. At 08:15 a.m., local time, an open meeting will be held with the Company's management in IÐU Húsid on Laekjargata 2a in Reykjavík (2nd floor; the entrance is on the left side of the main entrance to IÐA). At the meeting, Jón Sigurdsson, President & CEO, and Hjorleifur Palsson, CFO, will discuss the operations of the quarter. A telephone conference in English will be held at 12:00, local time, 14:00 CET. The telephone conference can be heard on the Ossur website: www.ossur.com. Please call the following telephone numbers to participate in the conference: Telephone number for Europe: +44 (0) 20 7162 0025 Telephone number for the United States: +1 334 323 6201 Queries can also be sent to the meeting held in English by e-mail to investormeeting@ossur.com. Ossur press releases by e-mail If you wish to receive Ossur press releases by e-mail please register on the following web-site: http://www.ossur.com/investormailings