We are happy to close another year with good organic growth and strong operational results.
We acquired two great companies during the year, Medi Prosthetic and Touch Bionics. Medi Prosthetics brings a full line of products allowing us to offer a complete lower extremity portfolio to our customers and the addition of Touch Bionics allows us to add cutting edge upper extremity prosthetics to our range of products. On the bracing and supports side we had an exciting year of new product launches including our newest OA brace, the Unloader® Hip
Sales amounted to USD 521 million compared to USD 483 million in 2015, corresponding to 9% growth and 4% organic growth, both measured in local currency.
Due mainly to the depreciation of the GBP against the USD and appreciation of the ISK against the USD, currency movements in 2016 compared to 2015 impacted the operating results negatively; sales by USD 7 million and EBITDA by USD 5 million.
|USD m||2016||% of sales||Sales growth USD||Sales growth LCY||Organic sales growth LCY|
|USD m||2016||% of sales||Sales growth USD||Sales growth LCY||Organic sales growth LCY|
|Bracing and supports||280||54%||1%||2%||2%|
Bracing and supports sales amounted to USD 280 million compared to USD 278 in 2015, corresponding to 2% growth measured in local currency. There was growth in all regions with ongoing positive impact from high end and newly launched products. We launched 37 products during the year that has further strengthened our product offering throughout the entire product portfolio. Growth in EMEA was in line with the market throughout the year. Performance in Americas was good but was negatively impacted by discontinued sales of a specific product line.
Prosthetics sales amounted to USD 240 million compared to USD 204 million 2015, corresponding to 19% growth and 7% organic, both measured in local currency. During Q2 of 2016 we launched our latest version of our RHEO KNEE®, the RHEO KNEE® 3 XC, which has been well received during the year. Both EMEA and Americas showed strong growth throughout the year with bionics and newly launched products driving growth. Sales in APAC were impacted negatively throughout the year due to change in sales model in China.
In Q3 of 2015 Medicare contractors announced a draft of a proposal to change certain elements of the reimbursement framework for lower-limb prosthetics. The draft met heavy resistance from the industry. In Q4 of 2015 Medicare announced that it was not adopting the draft which means that, in the short term, there are no changes pending in the reimbursement system. However, Medicare has formed a workgroup to draft a proposal describing current best practices in prosthetic care and identifying research evidence gaps. As of now, no new information has been made public regarding this matter since Medicare announced that it was not adopting the draft.
Gross profit amounted to USD 328 million and 63% of sales, compared to USD 303 million or 63% of sales in 2015.
The main factors affecting the gross profit margin are product mix, currency movements, acquisitions, and productivity in manufacturing.
Within the bracing and supports segment there continues to be strong growth in high end innovative products, which has a positive impact on the gross profit margin in the segment. However this is offset by price pressure in the lower end of the portfolio. Prosthetics margins increased during the year driven by sales of bionic products and newly launched innovative products resulting in overall positive impact on gross profit margin. Currency movements impacted the gross profit margin negatively by about 30 basis points. The recently acquired companies and productivity in manufacturing contributed positively. The net results on the gross profit margin were therefore an approximate 30 basis point improvement compared to the previous year.
EBITDA amounted to USD 94 million compared to USD 97 million in 2015. EBITDA in 2016 was affected by special items amounting to USD 4.6 million. These special items are costs of USD 2.3 million in relations to the Touch Bionics acquisition, approximately USD 1.5 million in relation to the finance shared service center in Poland, and the remaining amount relates to M&A costs and a provision relating to legal disputes with one of our competitors regarding product design. Adjusting for special items EBITDA amounted to USD 98 million or 19% of sales and grew by 6% measured in local currency.
The EBITDA margin was impacted negatively by currency movements by about 80 basis points compared to 2015 and about 40 basis points by recent acquisitions. Synergies are expected to materialize fully for the Medi Prosthetics acquisition in the second half of 2017 and for the Touch Bionics acquisition in 2018, where both businesses are expected to contribute at a similar margin as the pre-acquisition Össur business.
Growth in operating expenses exceeded organic sales growth for the year, although more in line with sales growth during the latter half of the year as previously communicated. Investment in process improvements and other projects with focus on future improvements and growth were the main reasons for the aforementioned growth.
Net financial expenses amounted to USD 2 million compared to USD 8 million in 2015. As previously mentioned, due to major operating currencies depreciating less against the USD in 2016 compared to 2015 the net exchange rate differences are positive by USD 0.3 million in 2016 compared to negative USD 4.9 million in 2015. Net interest bearing debt increased during the year as a result of two acquisitions and share buybacks. At year end net interest bearing debt amounted to USD 119 million or 1.2x EBITDA adjusted to special items. Income tax amounted to USD 17 million, corresponding to a 25% effective tax rate, compared to USD 17 million and 25% effective tax rate in 2015. Net profit amounted to USD 51 million or 10% of sales, compared to USD 51 million or 11% of sales in 2015. Diluted earnings per share amounted to 11.6 US cents, compared to 11.5 US cents in 2015.
Cash flow from operations was strong, amounting to USD 88 million or 17% of sales, compared to USD 84 million or 17% of sales in 2015. Capital expenditure amounted to USD 25 million or 5% of sales, compared to USD 24 million or 5% of sales in 2015. During 2015 and 2016 capital expenditures were above the historical average. Going forward we expect to return to the historical average or around 3.5% to 4.0% of sales.
The main reasons for higher capital expenditure in 2016 were; a move to new office facilities and warehouse in EMEA, new datacenter, and investments in new manufacturing capabilities and machinery in our Mexico manufacturing facility. Free cash flow continues to be strong. Free cash flow amounted to USD 42 million in 2016 compared to USD 42 million in 2015. Össur has since 2013, which was the first year of dividend payments, returned over USD 100 million to shareholders through cash dividends and share buybacks.
|Year||Free Cash Flow||NIBD||Total Payout||Total Payout Ratio|
Össur’s Capital Structure and Dividend policy was updated in February 2017 by the Board of Directors. The only change in the policy is a change in the desired level of net interest bearing debt to EBITDA from 0.5-1.5x to 1-2x.
Össur’s policy is to maintain a healthy balance sheet and a level of net interest bearing debt of 1-2x to EBITDA. Excess capital is returned to shareholders via annual cash dividends and/or purchase of own shares. Össur’s policy is to distribute a relatively stable cash dividend. The cash dividends will be decided annually in DKK per share. Return of capital to shareholders is based on objectives of maintaining a solid financial position, operational outlook and investment requirements.
In December 2015, Össur initiated a “Safe Harbor” share buyback program on Nasdaq Copenhagen. The program was carried out in accordance with the provisions of the European Commission’s Regulation No. 2273/2003. The purpose of the program was to reduce the Company’s share capital and adjust the capital structure by distributing capital to shareholders in line with the Company’s Capital Structure and Dividend Policy. The program ended on 30 November 2016 and the Company purchased 1,981,334 shares for approximately DKK 49 million (USD 7 million) through this program. (124,915 shares were purchased under the program in 2015.)
On 1 December 2016, Össur initiated a new share buy-back program on NASDAQ Copenhagen. The program will be carried out in accordance with Regulation No. 596/2014 of the European Parliament and of the Council on market abuse (“MAR”), and the Commission’s delegated regulation 2016/1052. At yearend 2016, Össur had purchased 140,714shares through the new program for approximately DKK 3 million (USD 0.5 million).
In 2016, Össur purchased 7,853,968 shares through both the “Safe Harbor” programs on Nasdaq Copenhagen and block trades on both Nasdaq Copenhagen and Nasdaq Iceland for approximately DKK 193 million (USD 30 million).At year end, Össur held 5,837,832 of own shares.
The Board of Directors will propose to the Annual General Meeting in 2017 to reduce the share capital by ISK 5,837,832 by way of canceling 5,837,832 of the Company’s own shares of ISK 1 nominal value each, lowering the share capital to 437,162,725 shares.
The Board of Directors will propose to the Annual General Meeting in 2017 that the Company pays a cash dividend of DKK 0.12 per share for 2016, equivalent to 15% of net profit in 2016. The amount of the cash dividend is in line with previous years.
In September of 2016 Össur acquired Medi Prosthetics from Medi. Medi Prosthetics is a global provider of mechanical lower limb prosthetic components, located in Bayreuth, Germany. In 2015 total sales amounted to EUR 15 million (USD 17 million).This acquisition enabled Össur to take another step to complete its prosthetics offering and further strengthen its global market position. Medi Prosthetics offers a well-respected mechanical product line with strongholds in the knee and liner segment.
The integration of the Medi Prosthetics business is going as planned. Synergies between the operations of Össur and Medi Prosthetics are expected to be fully achieved in the second half of 2017, increasing the EBITDA margin of Medi Prosthetics to a similar level as the pre-acquisition Össur business.
In April of 2016 Össur acquired Touch Bionics for GBP 27.5 million (USD 40 million) on debt and cash free basis. Touch Bionics is a leading global provider of innovative upper limb prosthesis and supporting services. The acquisition was financed through existing loan facilities. Touch Bionics has over 120 employees with operations in Scotland, Germany, and the United States. In 2015, total sales amounted to GBP 15 million (USD 21 million) with an adjusted EBITDA of GBP 0.9 million (USD 1.3 million).
With the acquisition Össur entered into the upper limb prosthetic market enabling the Company to offer a complete bionic product portfolio to customers in the prosthetic industry. Together, both companies are well positioned to further strengthen their worldwide market position in both lower and upper limb prosthetics. The acquisition of Touch Bionics is a further display of Össur’s commitment to upgrading prosthetic technology resulting in effective clinical outcomes and improved quality of life.
The integration is going as planned and synergies between the operations of Össur and Touch Bionics are expected to be fully achieved in 2018, ultimately increasing the EBITDA margin of Touch Bionics to a similar level as the pre-acquisition Össur business.