<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 27, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-21838
INDUSTRIAL SCIENTIFIC CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1481281
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 Oakdale Road, Oakdale, PA 15071
(Address of principal executive offices)
412-788-4353
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class - Common Stock, par value $.01
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No
As of September 6, 1996, there were 3,375,087 shares of Common Stock, par value
$.01 per share of the Registrant's common stock outstanding.
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION AND SUBSIDIARIES
INDEX
-----
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheet -
July 27, 1996 and January 27, 1996. 3
Condensed Consolidated Statement of Income -
Three months ended July 27, 1996 and July 29, 1995. 4
Condensed Consolidated Statement of Cash Flows -
Three months ended July 27, 1996 and July 29, 1995. 5
Notes to Condensed Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition. 8
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 11
2
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INDUSTRIAL SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
<TABLE>
<CAPTION>
July 27, January 27,
1996 1996
---------- -----------
(Unaudited) **
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $5,244 $7,485
Short-term investments 7,076 7,816
---------- -----------
12,320 15,301
Accounts receivable, net 4,670 4,395
Inventories 3,505 3,504
Prepaid expenses and other assets 373 311
Deferred income taxes 285 252
---------- -----------
Total current assets 21,153 23,763
Long-term investments 5,393 929
Property, plant, and equipment, at cost 13,207 12,943
Less accumulated depreciation and amortization 5,508 4,745
---------- -----------
7,699 8,198
Land 390 390
Intangible assets, net 2,247 2,199
---------- -----------
Total assets $36,882 $35,479
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,404 $1,260
Accrued payroll and related items 722 711
Accrued warranty expenses 307 299
Income taxes payable 167 304
Current portion of term debt 378 613
---------- -----------
Total current liabilities 2,978 3,187
Term debt 4,230 4,512
Deferred income taxes 189 209
---------- -----------
Total liabilities 7,397 7,908
Shareholders' equity:
Preferred stock, without par value; authorized
1,000,000 shares; none issued -- --
Common stock, $.01 par value; authorized 15,000,000
shares; issued and outstanding 3,375,087 shares
at 7/27/96 and at 1/27/96 34 34
Additional paid-in capital 5,471 5,471
Retained earnings 23,980 22,066
---------- -----------
Total shareholders' equity 29,485 27,571
---------- -----------
Total liabilities and shareholders' equity $36,882 $35,479
========== ===========
</TABLE>
** - Summarized from audited January 27, 1996 balance sheet.
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited, in thousands except share data)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
July 27, July 29, July 27, July 29,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $9,072 $8,205 $18,433 $17,063
Cost of goods sold 4,312 3,867 8,598 8,009
-------- -------- --------- --------
Gross profit 4,760 4,338 9,835 9,054
Operating expenses:
Selling 1,929 1,536 3,751 3,194
Research, development and
engineering 982 672 1,885 1,271
Administrative 791 892 1,570 1,718
-------- -------- --------- --------
Total operating expenses 3,702 3,100 7,206 6,183
-------- -------- --------- --------
Operating profit 1,058 1,238 2,629 2,871
Interest income 199 201 389 420
Other expense, net (54) (65) (118) (126)
-------- -------- --------- --------
Income before income taxes 1,203 1,374 2,900 3,165
Provision for income taxes 408 464 985 1,114
-------- -------- --------- --------
Net income $795 $910 $1,915 $2,051
======== ======== ========= ========
Net income per common share $0.24 $0.27 $0.57 $0.61
======== ======== ========= ========
Weighted average number of
common and common
equivalent shares
outstanding 3,380,000 3,382,000 3,378,000 3,383,000
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
For the six months ended
July 27, July 29,
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,915 $2,051
Depreciation, amortization and other
non-cash items 982 649
Changes in operating assets and liabilities (365) (1,705)
--------- ---------
Net cash provided by operating activities 2,532 995
Cash flows from investing activities:
Purchase of short-term investments (6,066) (9,835)
Purchase of long-term investments (4,464) (446)
Acquisition of Monitor Group -- (2,500)
Proceeds from maturities of short-term investments 6,805 8,935
Capital expenditures (264) (533)
Investment in joint venture (267) --
--------- ---------
Net cash used in investing activities (4,256) (4,379)
Cash flows from financing activities:
Principal payments on debt (517) (524)
--------- ---------
Net cash used in financing activities (517) (524)
Net decrease in cash and cash equivalents (2,241) (3,908)
Cash and cash equivalents at beginning of period 7,485 8,118
--------- ---------
Cash and cash equivalents at end of period $5,244 $4,210
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Management's Discussion and Analysis of Results of Operations and
Financial Condition which follows these notes contains additional
information on the results of operations and the financial position of
the Company. These comments should be read in conjunction with the
notes.
(2) In the opinion of management, all adjustments, (consisting only of
normal and recurring adjustments), necessary for a fair presentation of
the results of the operations of these interim periods have been
included.
(3) The Company's investments are in investment grade debt securities that
it has the positive intent and ability to hold to maturity and are
carried at amortized cost. These investments in debt securities
exceeded market value by approximately $37,000 and $25,000 at July 27,
1996 and July 29, 1995, respectively.
(4) Inventories consisted of:
<TABLE>
<CAPTION>
July 27, January 27,
1996 1996
(in thousands)
_______ ________
<S> <C> <C>
At standard costs, which approximate
first-in, first-out cost:
Raw materials $2,751 $2,952
Work in process 483 367
Finished goods 401 315
------ ------
3,635 3,634
Less LIFO reserves 130 130
------ ------
Inventories at LIFO value $3,505 $3,504
====== ======
</TABLE>
continued
6
<PAGE>
(5) The effective tax rate of 33.9% for the six months ended July 27, 1996
is based upon an estimate of the effective rate for the year ended
January 25, 1997. The principal difference between the effective tax
rate and the federal statutory rate is the effect of foreign sales
corporation benefits and non-taxable interest benefits, offset by the
effect of state and local income taxes.
(6) Effective January 28, 1996, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of" which had
no material effect on the Company's financial statements.
7
<PAGE>
Part 1. FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with the attached
unaudited condensed consolidated financial statements and notes thereto for the
periods ended July 27, 1996 and July 29, 1995 and with the Company's audited
financial statements and notes thereto for the fiscal year ended January 27,
1996.
Results of Operations
Quarter ended July 27, 1996 Compared to Quarter Ended July 29, 1995
Net sales for the quarter ended July 27, 1996 ("second quarter 1996") were $9.1
million, an increase of $867,000 or 10.6% compared to net sales of $8.2 million
for the quarter ended July 29, 1995 ("second quarter 1995"). This increase was
due to increased international shipments, primarily to the Middle East,
resulting from the Company's continuing marketing efforts outside North America.
Sales within North America declined slightly, as a result of intense competitive
pressure and relatively stable demand for the Company's products.
Gross profit increased 9.7% or $422,000 to $4.8 million for the second quarter
1996, compared to $4.3 million for the second quarter 1995. As a percent of net
sales, gross profit declined slightly to 52.5% for the second quarter 1996
compared to 52.9% for the second quarter 1995. This slight decline is due to a
substantial portion of international sales made under a negotiated long-term
supply agreement, at a lower than average gross profit margin, and selective
price discounting in competitive situations. These two negative factors were
partially offset by improved manufacturing efficiencies relating to higher sales
volume.
Total operating expenses increased $602,000 or 19.4% to $3.7 million for the
second quarter 1996 compared to $3.1 million for the second quarter 1995.
Selling expense increased $393,000 or 25.6% due to continuing costs incurred to
establish and maintain an international sales and distribution network.
Research, development and engineering expense increased $310,000 or 46.1% due to
substantial costs incurred in the continuing commercial development of the
MG2100 portable mass spectrometer. The second quarter 1996 includes three months
of expenses relating to development of the mass spectrometer
8
<PAGE>
while the second quarter 1995 only includes one month since the Company
completed the acquisition of the assets of Monitor Group at the end of June
1995. Administrative expense declined $101,000 or 11.3% primarily due to a
reduction in the provision for the Company contribution to the profit sharing
plan.
Interest income was basically unchanged for the second quarter 1996 compared to
the second quarter 1995, while other expenses, consisting principally of
interest expense, declined due to lower outstanding debt because of principal
repayments during the intervening periods.
The effective tax rate for the second quarter 1996 was 33.9%, substantially
level with the effective rate of 33.8% for the second quarter 1995.
Net income for the second quarter 1996 totaled $795,000 or $0.24 per share down
12.6% compared to second quarter 1995 net income of $910,000 or $0.27 per share.
Results of Operations
Six Months Ended July 27, 1996 Compared to Six Months Ended July 29, 1995
Net sales for the six months ended July 27, 1996 ("first half 1996") totaled
$18.4 million, an increase of $1.4 million or 8.0% compared to net sales of
$17.1 million for the six months ended July 29, 1995 ("first half 1995").
Increased international sales, principally to the Middle East, resulting from
the Company's continuing marketing efforts outside North America account for the
increase. Sales within North America declined slightly due to increased
competition and generally flat demand for the Company's products.
Gross profit increased to $9.8 million for the first half 1996, an increase of
8.6% compared to gross profit of $9.1 million for the first half 1995. As a
percent of net sales, gross profit increased slightly to 53.4% for the first
half 1996 compared to 53.1% for the first half 1995. Higher sales volume
resulting in increased manufacturing efficiencies and increased sales of
replacement parts which yield a higher gross profit percentage, were partially
offset by selective price discounting in competitive situations and increased
international sales at lower gross margins.
Operating expenses increased $1.0 million or 16.5% to $7.2 million for the first
half 1996, compared to $6.2 million for the first half 1995. Selling expenses
increased $557,000 or 17.4% due to the Company's continuing efforts to establish
and maintain an international distribution and service network. Research,
development and engineering expense increased $614,000 or 48.3% primarily due to
substantial costs incurred in the continuing commercial development of the
MG2100 portable mass spectrometer. The first half 1996 includes six months
expenses relating to the development of the mass spectrometer while the first
half 1995 only includes one month since the Company completed the acquisition of
the assets of Monitor Group Inc. as of the end of June 1995. Administrative
expenses declined $149,000, or 8.7% as modest increases in most expense
categories were offset by a reduced provision for the Company contribution to
the profit sharing plan.
9
<PAGE>
Interest income declined for the first half 1996 as a greater portion of the
Company's investments were in tax free instruments which yield a higher after
tax return, but generally earn a lower coupon rate of return. Other expense
declined as less interest expense was incurred due to reduced outstanding debt
relating to continuing principal repayments.
The effective tax rate for the first half 1996 was 34.0% compared to 35.2% for
the first half 1995. A greater portion of non-taxable interest income, and
increased utilization of foreign tax credits principally account for this
decrease.
Net income for the first half 1996 totaled $1.9 million or $0.57 per share, a
decrease of 6.6% from $2.1 million or $0.61 per share for the first half 1995.
Liquidity and Capital Resources
Cash flow from operations totaled $2.5 million in the first half 1996 compared
to $1.0 million for the first half 1995. Higher depreciation and amortization
and reduced net use of cash for operating assets and liabilities, partially
offset by lower net income account for this increase.
Capital expenditures totaled $264,000 in the first half of 1996. The Company
also invested $267,000 in Industrial Scientific Arabia Ltd., a joint venture
with a Saudi Arabian partner.
During the first half 1995 the Company acquired the assets of Monitor Group
Inc., a developer of portable mass spectrometers for $2.5 million in cash.
Approximately $2.4 million of the purchase price related to identifiable
intangible assets and goodwill which are being amortized over their estimated
useful lives which range from three to seventeen years.
Working capital totaled $18.2 million as of July 27, 1996 compared to $20.6
million as of January 27, 1996. The Company believes that its cash flow and
capital structure provide adequate flexibility for the growth of its operations
and the funding of capital spending programs.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Nothing to report under this item.
ITEM 2. CHANGES IN SECURITIES
Nothing to report under this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Nothing to report under this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Nothing to report under this item.
ITEM 5. OTHER INFORMATION
Nothing to report under this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.0 Financial Data Schedule Filed herewith.
99.01 Press release regarding second quarter
earnings dated August 15, 1996. Filed herewith.
(b) Reports on Form 8-K.
None.
11
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Industrial Scientific Corporation
(Registrant)
Date: September 9, 1996
By /s/ James P. Hart
---------------------------------
James P. Hart
Vice-President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer and an authorized signatory)
12
<PAGE>
EXHIBIT INDEX
-------------
Sequential Page Number
Exhibit No. or Reference
----------- ------------
27.0 Financial Statement Data. Filed herewith at page 14.
99.01 Press release regarding second quarter
earnings dated August 15, 1996. Filed herewith at page 15.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1996
6 MONTHS FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-25-1997
<PERIOD-START> JAN-28-1996
<PERIOD-END> JUL-27-1996
<CASH> 5,244,460
<SECURITIES> 7,076,311
<RECEIVABLES> 4,972,801
<ALLOWANCES> 52,990
<INVENTORY> 3,504,610
<CURRENT-ASSETS> 21,153,125
<PP&E> 13,597,313
<DEPRECIATION> 5,508,329
<TOTAL-ASSETS> 36,882,284
<CURRENT-LIABILITIES> 2,978,077
<BONDS> 2,900,000
0
0
<COMMON> 33,751
<OTHER-SE> 29,451,841
<TOTAL-LIABILITY-AND-EQUITY> 36,882,284
<SALES> 18,433,389
<TOTAL-REVENUES> 18,433,389
<CGS> 8,598,606
<TOTAL-COSTS> 15,804,012
<OTHER-EXPENSES> 17,150
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 101,588
<INCOME-PRETAX> 2,899,622
<INCOME-TAX> 985,000
<INCOME-CONTINUING> 1,914,622
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,914,622
<EPS-PRIMARY> .57
<EPS-DILUTED> .57
</TABLE>
<PAGE>
NEWS RELEASE
INDUSTRIAL SCIENTIFIC
- --------------------------------------------------------------------------------
CORPORATION
Date: August 15, 1996 101 Oakdale Road
Oakdale, PA 15071-1500
Release: Immediately USA
(412) 788-4353
Contact: James P. Hart, Vice President Finance 1-800-DETECTS (338-3287)
Chief Financial Officer FAX (412) 788-8353
412-788-4353
INDUSTRIAL SCIENTIFIC CORPORATION
ANNOUNCES FISCAL YEAR 1996 SECOND QUARTER RESULTS
PITTSBURGH, PA-- August 15, 1996 -- Industrial Scientific Corporation
(NASDAQ/NMS symbol: ISCX) today reported results for the second quarter ended
July 27, 1996.
Net sales for the second quarter were $9,072,000, up 10.6% from $8,205,000
recorded in the second quarter of 1995. Net income totaled $795,000 or $0.24
per share compared to $910,000 or $0.27 per share for the second quarter last
year.
Net sales for the six-months ended July 27, 1996 increased 8.0% to $18,433,000
compared to $17,063,000 for the six months ended July 29,1995. Net income
totaled $1,915,000 or $0.57 per share for the current six month period compared
to $2,051,000 or $0.61 for the prior year period.
Kent D. McElhattan, President and CEO, stated, "Increased sales resulted
primarily from initiatives begun in late 1994 to penetrate international
markets. At this stage in Industrial Scientific's development, it is critical
that we demonstrate effectiveness in two areas: first, competing outside the
North American marketplace and, secondly, expanding manufactured product lines.
Year to date results reflect successes achieved thus far toward our goal of
expanding internationally, especially into Middle Eastern and Pacific Rim
countries. We are pleased that gross profit margins remain strong, virtually
unchanged from prior years. Operating profit and net income reflect higher
operating expenses associated with this international expansion as well as
continued aggressive new product development commitments, including the MG2100
Portable Mass Spectrometer scheduled for full market release late this year. I
am confident that these investments to expand our worldwide market presence and
diversify product offerings will result in increased shareholder value."
Headquartered in Oakdale, Pennsylvania, Industrial Scientific Corporation
designs, manufactures and sells portable gas monitoring instruments and other
technical products for the preservation of life and property.
Except for historical information contained herein, some matters discussed in
this news release constitute forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
projected.
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Operations
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
7/27/96 7/29/95 7/27/96 7/29/95
<S> <C> <C> <C> <C>
Net Sales $9,072 $8,205 $18,433 $17,063
Gross profit 4,760 4,338 9,835 9,054
Operating profit 1,058 1,238 2,629 2,871
Net income 795 910 1,915 2,051
Net income per common share $0.24 $0.27 $0.57 $0.61
Weighted average number of
common and common equivalent
shares outstanding 3,380 3,382 3,378 3,383
</TABLE>
