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Synergetics 3Q Reports Mixed

Zacks Equity Research

Synergetics U.S.A. Inc. (SURG), 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.


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). 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.


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). Synergetics performed lower than expected for the quarter. The stock currently retains a Zacks #4 Rank, which translates into a short-term Sell.

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