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.  


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