Synergetics U.S.A. Inc. ( SURG - Snapshot Report ) , a manufacturer of microsurgical devices for ophthalmic and neurosurgical applications, reported its third quarter fiscal 2012 adjusted earnings of 5 cents per share, only a penny ahead of the Zacks Consensus Estimate. This compared unfavorably with the year-ago earnings of 7 cents. Adjusted earnings exclude the inventory write-down expense of 1 cent a share.

Profit for the quarter declined 40% year over year to $1.0 million on a GAAP basis (or 4 cents a share) as operating expenses and costs of sale edged up.

Revenue

Revenues decreased 0.7% year over year to $14.6 million, missing the Zacks Consensus Estimate of $15 million. However, revenues increased 0.6% year over year barring the unfavorable currency translation impact of approximately $0.2 million in the reported quarter. Healthy growth across the company’s Original Equipment Manufacturer (OEM) category was largely offset by the decline in Ophthalmic sales.

On a geographic basis, revenues in the domestic market grew 9.0% year over year to $10.8 million, backed by robust OEM sales in the quarter. On an international level, revenues fell 21.1% (down 17.1% in terms of constant currency) to $3.7 million from the year-ago period. Though Germany posted low double-digit growth, sluggish organic growth in the rest of Europe due to macroeconomic conditions and Canada hampered the company’s performance.

Segment Analysis

Revenues from the Ophthalmic category -- a Synergetics mainstay -- dropped 8.8% year over year to $8.4 million in the reported quarter. Sales increased by 1.3% in the U.S. while international sales declined 18.9% from the year-ago period. The domestic market sales benefited from robust sales of disposable products, especially VersaPACK kits.

OEM sales jumped 17.0% year over year to $6 million, including the sales to marketing partners. Growth was backed by strong sales of disposable products to Stryker Corporation ( SYK - Analyst Report ) . Synergetics' partnership with Mobius Therapeutics also boosted the OEM sales performance. This was partially offset by production and ordering delays.

Synergetics Disposable products sales grew 2.5% year over year to $12.1 million in the reported quarter of 2012. Capital Equipment sales dipped 16.9% from the year-ago quarter to $2.1 million.

Margins

Gross margin was 53.7% versus 58.6% in the year-ago period. The decline in gross margin is attributed to the inventory write-down expenses of more than $0.3 million, shift in product mix and unfavorable currency translation.

Adjusted operating margin decreased to 12.2% compared to 17.2% during the year-ago quarter. The rise in operating expense and increased cost of goods sold, coupled with reduced sales negatively affected the operating margin.

Selling and marketing expenses as a percentage of sales came in at 19.7% compared to 18.9% in the year-ago period. General and administrative expenses as a percentage of sales came in at 18.0% compared to 16.5% of the previous year. Research and development (R&D) expense (as a percentage of sales) fell slightly to 6.3% from 6.0% in the year-ago quarter.

Balance Sheet

Synergetics exited third quarter of fiscal 2012 with cash and cash equivalents of $12.8 million, 24.4% lower than the previous year. The company had no long-term debt for the reported quarter.

The company faces a tough competitive landscape, which includes competitors like Covidien Plc. ( COV - Analyst Report ) . Synergetics performed lower than expected for the quarter. The stock currently retains a Zacks #4 Rank, which translates into a short-term Sell.