UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________________________ to ______________________
Commission
File Number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code
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.
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange. (Check one):
| Large accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting Company |
Emerging Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act Yes ☐ No ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of The Exchange Act). Yes ☐
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 12 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the courts.
The number of shares of the registrant’s common stock outstanding as of March 31, 2022 was .
OMEGA FLEX, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2022
INDEX
| -2- |
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
OMEGA FLEX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, except Common Stock par value)
March 31, 2022 | December 31, 2021 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and Cash Equivalents | $ | $ | ||||||
| Accounts Receivable - less allowances of $ | ||||||||
| Inventories - Net | ||||||||
| Other Current Assets | ||||||||
| Total Current Assets | ||||||||
| Right-Of-Use Assets - Operating | ||||||||
| Property and Equipment - Net | ||||||||
| Goodwill - Net | ||||||||
| Deferred Taxes | ||||||||
| Other Long Term Assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable | $ | $ | ||||||
| Accrued Compensation | ||||||||
| Accrued Commissions and Sales Incentives | ||||||||
| Dividends Payable | - | |||||||
| Taxes Payable | ||||||||
| Lease Liability - Operating | ||||||||
| Other Liabilities | ||||||||
| Total Current Liabilities | ||||||||
| Lease Liability - Operating, net of current portion | ||||||||
| Deferred Taxes | ||||||||
| Tax Payable Long Term | ||||||||
| Other Long Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 5) | ||||||||
| Shareholders’ Equity: | ||||||||
| Omega Flex, Inc. Shareholders’ Equity: | ||||||||
| Common Stock – par value $ share: authorized shares: shares issued at March 31, 2022 and December 31, 2021, respectively, and outstanding at March 31, 2022 and December 31, 2021, respectively | ||||||||
| Treasury Stock | ( | ) | ( | ) | ||||
| Paid-in Capital | ||||||||
| Retained Earnings | ||||||||
| Accumulated Other Comprehensive Loss | ( | ) | ( | ) | ||||
| Total Omega Flex, Inc. Shareholders’ Equity | ||||||||
| Noncontrolling Interest | ||||||||
| Total Shareholders’ Equity | ||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||||
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
| -3- |
OMEGA FLEX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, except per Common Share data)
| For the three-months | ||||||||
| ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| (unaudited) | ||||||||
| Net Sales | $ | $ | ||||||
| Cost of Goods Sold | ||||||||
| Gross Profit | ||||||||
| Selling Expense | ||||||||
| General and Administrative Expense | ||||||||
| Engineering Expense | ||||||||
| Operating Profit | ||||||||
| Interest Income | ||||||||
| Other (Loss) Income | ( | ) | ||||||
| Income Before Income Taxes | ||||||||
| Income Tax Expense | ||||||||
| Net Income | ||||||||
| Less: Net Income attributable to the Noncontrolling Interest | ( | ) | ( | ) | ||||
| Net Income attributable to Omega Flex, Inc. | $ | $ | ||||||
| Basic and Diluted Earnings per Common Share | $ | $ | ||||||
| Cash Dividends Declared per Common Share | $ | $ | ||||||
| Basic and Diluted Weighted-Average Shares Outstanding | ||||||||
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
| -4- |
OMEGA FLEX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
| For the three-months | ||||||||
| ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| (unaudited) | ||||||||
| Net Income | $ | $ | ||||||
| Other Comprehensive Income (Loss): | ||||||||
| Foreign Currency Translation Adjustment | ( | ) | ||||||
| Other Comprehensive Income (Loss) | ( | ) | ||||||
| Comprehensive Income | ||||||||
| Less: Comprehensive Income Attributable to the Noncontrolling Interest | ( | ) | ( | ) | ||||
| Total Comprehensive Income | $ | $ | ||||||
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
| -5- |
OMEGA FLEX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in Thousands, Except Share Amounts)
(unaudited)
| Common Stock Outstanding | Common Stock | Treasury Stock | Paid In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interest | Shareholders’ Equity | ||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||
| January 1, 2022 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||
| Net Income | |||||||||||||||||||||||||
| Cumulative Translation Adjustment | ( | ) | ( | ) | ( | ) | |||||||||||||||||||
| Dividends Declared | ( | ) | ( | ) | |||||||||||||||||||||
| March 31, 2022 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||
| Common Stock Outstanding | Common Stock | Treasury Stock | Paid In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interest | Shareholders’ Equity | ||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||
| January 1, 2021 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||
| Net Income | |||||||||||||||||||||||||
| Cumulative Translation Adjustment | |||||||||||||||||||||||||
| Dividends Declared | ( | ) | ( | ) | |||||||||||||||||||||
| March 31, 2021 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
| -6- |
OMEGA FLEX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(unaudited)
| For the three-months | ||||||||
| ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| (unaudited) | ||||||||
| Cash Flows from Operating Activities: | ||||||||
| Net Income | $ | $ | ||||||
| Adjustments to Reconcile Net Income to | ||||||||
| Net Cash (Used In) Provided by Operating Activities: | ||||||||
| Non-Cash Compensation | ||||||||
| Depreciation and Amortization | ||||||||
| Provision for Losses on Accounts Receivable, net of write-offs and recoveries | ( | ) | ||||||
| Deferred Taxes | ( | ) | ||||||
| Provision for Inventory Reserves | ||||||||
| Changes in Assets and Liabilities: | ||||||||
| Accounts Receivable | ||||||||
| Inventories | ( | ) | ( | ) | ||||
| Right-Of-Use Assets | ||||||||
| Other Assets | ||||||||
| Accounts Payable | ( | ) | ( | ) | ||||
| Accrued Compensation | ( | ) | ( | ) | ||||
| Accrued Commissions and Sales Incentives | ( | ) | ( | ) | ||||
| Lease Liabilities | ( | ) | ( | ) | ||||
| Other Liabilities | ( | ) | ( | ) | ||||
| Net Cash (Used In) Provided by Operating Activities | ( | ) | ||||||
| Cash Flows from Investing Activities: | ||||||||
| Capital Expenditures | ( | ) | ( | ) | ||||
| Net Cash Used in Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Dividends Paid | - | ( | ) | |||||
| Net Cash Used in Financing Activities | - | ( | ) | |||||
| Net Decrease in Cash and Cash Equivalents | ( | ) | ( | ) | ||||
| Translation effect on cash | ||||||||
| Cash and Cash Equivalents – Beginning of Period | ||||||||
| Cash and Cash Equivalents – End of Period | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Cash paid for Income Taxes | $ | $ | ||||||
| Declared Dividends | $ | $ | ||||||
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
| -7- |
OMEGA FLEX, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Omega Flex, Inc. (Omega) and its subsidiaries (collectively the “Company”). The Company’s condensed consolidated financial statements for the quarter ended March 31, 2022 have been prepared in accordance with accounting principles generally accepted in the United States (GAAP), and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest shareholders’ annual report (Form 10-K). All material inter-company accounts and transactions have been eliminated in consolidation. It is Management’s opinion that all adjustments necessary for a fair statement of the results for the interim periods have been made, and that all adjustments are of a normal recurring nature, or a description is provided for any adjustments that are not of a normal recurring nature.
Description of Business
The Company’s business is controlled as a single operating segment that consists of the manufacture and sale of flexible metal hose (also described as corrugated tubing), as well as the sale of the Company’s related proprietary fittings and a vast array of accessories.
The Company is a leading manufacturer of flexible metal hose, which is used in a variety of ways to carry gases and liquids within their particular applications. Some of the more prominent uses include:
| ● | carrying fuel gases within residential and commercial buildings; | |
| ● | carrying gasoline and diesel gasoline products (both above and below the ground) in a double containment piping to contain any possible leaks, which is used in automotive and marina refueling, and fueling for back-up generation; | |
| ● | using copper-alloy corrugated piping in medical or health care facilities to carry medical gases (oxygen, nitrogen, vacuum) or pure gases for pharmaceutical applications; and | |
| ● | industrial applications where the customer requires the piping to have both a degree of flexibility and/or an ability to carry corrosive compounds or mixtures, or to carry at both very high and very low (cryogenic) temperatures. |
| -8- |
The Company manufactures flexible metal hose at its facilities in Exton, Pennsylvania, and Houston, Texas in the United States (U.S.), and in Banbury, Oxfordshire in the United Kingdom (U.K.), and primarily sells its products through distributors, wholesalers and to original equipment manufacturers (“OEMs”) throughout North America and Europe, and to a lesser extent other global markets.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management develops, and changes periodically, these estimates and assumptions based on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual amounts could differ significantly from these estimates.
Revenue Recognition
The Company applies the requirements of Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). The standard requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services.
The principle of Topic 606 was achieved through applying the following five-step approach:
| ● | Identification of the contract, or contracts, with a customer — a contract with a customer exists when the Company enters into an enforceable contract with a customer, typically a purchase order initiated by the customer, that defines each party’s rights regarding the goods to be transferred and identifies the payment terms related to these goods. | |
| ● | Identification of the performance obligations in the contract — performance obligations promised in a contract are identified based on the goods that will be transferred to the customer that are distinct, whereby the customer can benefit from the goods on their own or together with other resources that are readily available from third parties or from us. Persuasive evidence of an arrangement for the sale of product must exist. The Company ships product in accordance with the purchase order and standard terms as reflected within the Company’s order acknowledgments and sales invoices. |
| -9- |
| ● | Determination of the transaction price —the transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods to the customer. This would be the agreed upon quantity and price per product type in accordance with the customer purchase order, which is aligned with the Company’s internally approved pricing guidelines. | |
| ● | Allocation of the transaction price to the performance obligations in the contract — if the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. This applies to the Company as there is only one performance obligation to ship the goods. | |
| ● | Recognition of revenue when, or as, the Company satisfies a performance obligation — the Company satisfies performance obligations at a point in time when control of the goods transfers to the customer. Determining the point in time when control transfers requires judgment. Indicators considered in determining whether the customer has obtained control of a good include: |
| ■ | The Company has a present right to payment | |
| ■ | The customer has legal title to the goods | |
| ■ | The Company has transferred physical possession of the goods | |
| ■ | The customer has the significant risks and rewards of ownership of the goods | |
| ■ | The customer has accepted the goods |
It is important to note that the indicators are not a set of conditions that must be met before the Company can conclude that control of the goods has transferred to the customer. The indicators are a list of factors that are often present if a customer has control of the goods.
The Company has typical, unmodified FOB shipping point terms. As the seller, the Company can determine that the shipped goods meet the agreed-upon specifications in the contract or customer purchase order (e.g. items, quantities, and prices) with the buyer, so customer acceptance would be deemed a formality, as noted in ASC 606-10-55-86. As a result, the Company has a legal right to payment upon shipment of the goods.
Based upon the above, the Company has concluded that control substantively transfers to the customer upon shipment.
Other considerations of Topic 606 include the following:
| ● | Contract Costs - costs to obtain a contract (e.g. customer purchase order) include sales commissions. Under Topic 606, these costs may be expensed as incurred for contracts with a duration of one year or less. The majority of the Company’s customer purchase orders are fulfilled (e.g. goods are shipped) within two days of receipt. | |
| ● | Warranties - the Company does not offer a warranty as a separate component for customers to purchase. A warranty is generally included with each purchase, providing assurance that the goods comply with agreed-upon specifications, and the cost is therefore accrued accordingly, but contracts do not include any requirement for additional distinct services. Therefore, there is not a separate performance obligation, and there is no impact of warranties under Topic 606 upon the financial reporting of the Company. |
| -10- |
| ● | Returned Goods - from time to time, the Company provides authorization to customers to return goods. If deemed to be material, the Company would record a “right of return” asset for the cost of the returned goods which would reduce cost of sales. | |
| ● | Volume Rebates (Promotional Incentives) - volume rebates are variable (dependent upon the volume of goods purchased by our eligible customers) and, under Topic 606, must be estimated and recognized as a reduction of revenue as performance obligations are satisfied (e.g. upon shipment of goods). Also under Topic 606, to ensure that the related revenue recognized would not be probable of a significant reversal, the four following factors are considered: |
| ■ | The amount of consideration is highly susceptible to factors outside the Company’s influence. | |
| ■ | The uncertainty about the amount of consideration is not expected to be resolved for a long period of time. | |
| ■ | The Company’s experience with similar types of contracts is limited. | |
| ■ | The contract has a large number and broad range of possible consideration amounts. |
If it was concluded that the above factors were in place for the Company, it would support the probability of a significant reversal of revenue. However, as none of the four factors apply to the Company, promotional incentives are recorded as a reduction of revenue based upon estimates of the eligible products expected to be sold.
Regarding disaggregated revenue disclosures, as previously noted, the Company’s business is controlled as a single operating segment that consists of the manufacture and sale of flexible metal hose. Most of the Company’s transactions are very similar in nature, contract, terms, timing, and transfer of control of goods. As indicated within Note 2, Significant Accounting Policies, in these condensed consolidated financial statements, under the caption “Significant Concentration”, the majority of the Company’s sales were geographically contained within North America, with the remainder scattered internationally. All performance assessments and resource allocations are generally based upon the review of the results of the Company as a whole.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of purchase to be cash equivalents. Cash equivalents include investments in an institutional money market fund, which invests in U.S. Treasury bills, notes, and bonds, and/or repurchase agreements, backed by such obligations. Carrying value approximates fair value. Cash and cash equivalents are deposited at various area banks, which at times may exceed federally insured limits. The Company monitors the viability of the banking institutions carrying its assets on a regular basis and has the ability to transfer cash to various institutions during times of risk. The Company has not experienced any losses related to these cash balances and believes its credit risk to be minimal.
| -11- |
Accounts Receivable and Provision for Credit Losses
All accounts receivables are stated at amortized cost, net of allowances for credit losses, and adjusted for any write-offs. The Company maintains allowances for credit losses, which represent an estimate of expected losses over the remaining contractual life of its receivables considering current market conditions and estimates for supportable forecasts when appropriate. The estimate is a result of the Company’s ongoing assessments and evaluations of collectability, historical loss experience, and future expectations in estimating credit losses in its receivable portfolio. For accounts receivables, the Company uses historical loss experience rates and applies them to a related aging analysis while also considering customer and/or economic risk where appropriate. Determination of the proper amount of allowances requires management to exercise judgment about the timing, frequency and severity of credit losses that could materially affect the provision for credit losses and, as a result, net earnings. The allowances consider numerous quantitative and qualitative factors that include receivable type, historical loss experience, delinquency trends, collection experience, current economic conditions, estimates for supportable forecasts, when appropriate, and credit risk characteristics.
The
reserve for credit losses, which include future credits, discounts, and doubtful accounts, was $
Inventories
Inventories are valued at the lower of cost or net realizable value. The cost of inventories is determined by the first-in, first-out (FIFO) method. The Company generally considers inventory quantities beyond two-years usage, measured on a historical usage basis, to be excess inventory and reduces the carrying value of inventory accordingly.
Property and Equipment
Property and equipment are initially recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or, for leasehold improvements, the life of the lease, if shorter. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in other income or expense for the period. The cost of maintenance and repairs is expensed as incurred; significant improvements are capitalized.
Goodwill
In accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 350, Intangibles – Goodwill and Other (ASU 2017-04), using the simplified method as adopted, the Company performed an annual impairment test as of December 31, 2021. This analysis did not indicate any impairment of goodwill.
| -12- |
In 2006, the Company adopted a Phantom Stock Plan (the “Plan”), which allows the Company to grant phantom stock units (“Units”) to certain key employees, officers, or directors. The Units each represent a contractual right to payment of compensation in the future based upon the market value of the Company’s common stock and are accordingly recorded as liabilities. The Units follow a vesting schedule of three years from the grant date and are then paid upon maturity. In accordance with FASB ASC Topic 718, Compensation - Stock Compensation (“Topic 718”), the Company uses the Black-Scholes option pricing model as its method for determining the fair value of the Units. The liabilities for the Units are adjusted to market value over time from the grant dates to the related maturity dates. The Company recognizes the reversal of any previously recognized compensation expense on forfeited nonvested Units in the period the Units are forfeited. Further details of the Plan are provided in Note 6, Stock-Based Compensation Plans, to the condensed consolidated financial statements included in this report.
Product Liability Reserves
Product
liability reserves represent the estimated unpaid amounts under the Company’s insurance policies with respect to existing claims.
The Company uses the most current available data to estimate claims. As explained more fully under Note 5, Commitments and Contingencies,
to the condensed consolidated financial statements included in this report, for various product liability claims covered under the Company’s
general liability insurance policies, the Company must pay certain defense and settlement costs within its deductible or self-insured
retention limits, ranging primarily from $
Leases
The Company applies the requirements of FASB ASU 2016-02, Leases (Topic 842) which defines a lease as any contract that conveys the right to use a specific asset for a period of time in exchange for consideration. Leases are classified as a finance lease, formerly called a capital lease, if any of the following criteria are met:
| 1. | The lease transfers ownership of the underlying asset to the lessee by the end of the lease term. | |
| 2. | The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise. | |
| 3. | The lease term is for the major part of the remaining economic life of the underlying asset. | |
| 4. | The present value of the sum of lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset. | |
| 5. | The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. |
| -13- |
For any leases that do not meet the criteria identified above for finance leases, the Company treats such leases as operating leases. As of March 31, 2022 and December 31, 2021, each of the Company’s leases are classified as operating leases.
Both finance and operating leases are reflected on the balance sheet as lease or “right-of-use” assets and lease liabilities.
There are some exceptions, which the Company has elected in its accounting policies. For leases with terms of twelve months or less, or below the Company’s general capitalization policy threshold, the Company has elected an accounting policy to not recognize lease assets and lease liabilities for all asset classes. The Company recognizes lease expense for such leases generally on a straight-line basis over the lease term.
The Company determines if a contract is a lease at the inception of the arrangement. The Company reviews all options to extend, terminate, or purchase its right-of-use assets at the inception of the lease and accounts for these options when they are reasonably certain to be exercised. Certain leases contain non-lease components, such as common area maintenance, which are generally accounted for separately. In general, the Company will assess if non-lease components are fixed and determinable, or variable, when determining if the component should be included in the lease liability. For purposes of calculating the present value of the lease obligations, the Company utilizes the implicit interest rate within the lease agreement when known and/or determinable, and otherwise utilizes its incremental borrowing rate at the time of the lease agreement.
Fair Value of Financial and Nonfinancial Instruments
The Company measures financial instruments in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures. The accounting standard defines fair value, establishes a framework for measuring fair value under GAAP, and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard creates a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. The Company relies upon Level 1 inputs in determining the fair value of the Company’s reporting unit in its annual impairment test as described in the FASB ASC Topic 350, Intangibles - Goodwill and Other.
Basic earnings per share have been computed using the weighted-average number of common shares outstanding. For the periods presented, there are no dilutive securities. Consequently, basic, and dilutive earnings per share are the same.
| -14- |
Currency Translation
Assets and liabilities denominated in foreign currencies, most of which relate to the Company’s U.K. subsidiary whose functional currency is the British Pound, are translated into U.S. dollars at exchange rates prevailing on the balance sheet dates. The condensed consolidated statements of income are translated into U.S. dollars at average exchange rates for the period. Adjustments resulting from the translation of financial statements are excluded from the determination of income and are accumulated in a separate component of shareholders’ equity. Exchange gains and losses resulting from foreign currency transactions are included in the condensed consolidated statements of income in the period in which they occur.
Income Taxes
The Company accounts for tax liabilities in accordance with the FASB ASC Topic 740, Income Taxes. Under this method the Company records tax expense, related deferred taxes and tax benefits, and uncertainties in tax positions.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize the benefit, or that future deductibility is uncertain.
The FASB ASC Topic 740, Income Taxes, clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. This guidance prescribes a recognition threshold of more-likely than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements.
The Company follows the provisions of ASC 740-10 relative to accounting for uncertainties in tax positions. These provisions provide guidance on the recognition, de-recognition and measurement of potential tax benefits associated with tax positions.
Other Comprehensive Income
For the quarters ended March 31, 2022 and 2021, respectively, the components of other comprehensive income consisted solely of foreign currency translation adjustments.
Significant Concentrations
| -15- |
Subsequent Events
The Company evaluates all events or transactions through the date of the related filing that may have a material impact on its condensed consolidated financial statements. Refer to Note 10 of the condensed consolidated financial statements.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU applies to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the ASU do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The impact of the adoption of ASU 2020-04 did not have a material impact on the Company’s condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The guidance removes certain exceptions for recognizing deferred taxes for equity method investments, performing intraperiod allocation, and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group, among others. The amendments in ASU 2019-12 are effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods therein. The Company adopted this new guidance in 2021, and it did not have a material impact on its condensed consolidated financial statements.
| -16- |
3. INVENTORIES
Inventories,
net of reserves of $
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (in thousands) | ||||||||
| Finished Goods | $ | $ | ||||||
| Raw Materials | ||||||||
| Inventories - Net | $ | $ | ||||||
4. LINE OF CREDIT AND OTHER BORROWINGS
On
December 1, 2017, the Company agreed to a new Amended and Restated Revolving Line of Credit Note (the “Line”) and Third Amendment
to the Loan Agreement with Santander Bank, N.A. (the “Bank”). The Company established a line of credit facility in the maximum
amount of $
As of March 31, 2022 and December 31, 2021, the Company had no outstanding borrowings on its line of credit and was in compliance with all debt covenants.
As stated above, borrowings under our line of credit facility bear interest at variable rates based on LIBOR. Currently, the Federal Reserve Bank is considering options and transitioning away from LIBOR, and as such, has formed the Alternative Rates Committee (ARRC). The ARRC selected the Secured Overnight Financing Rate (SOFR) as an appropriate replacement. SOFR is based on transactions in the overnight repurchase markets, which reflects a transaction-based rate on a large number of transactions, better reflecting current financing costs. Discussions are ongoing with the Bank with regards to transitioning the rate for the Line from LIBOR to another appropriate rate such as SOFR.
| -17- |
5. COMMITMENTS AND CONTINGENCIES
Commitments:
Under a number of indemnity agreements between the Company and each of its officers and directors, the Company has agreed to indemnify each of its officers and directors against any liability asserted against them in their capacity as an officer or director, or both. The Company’s indemnity obligations under the indemnity agreements are subject to certain conditions and limitations set forth in each of the agreements. Under the terms of the Agreement, the Company is contingently liable for costs which may be incurred by the officers and directors in connection with claims arising by reason of these individuals’ roles as officers and directors. The Company has obtained directors’ and officers’ insurance policies to fund certain obligations under the indemnity agreements.
The
Company has salary continuation agreements with current and/or past employees. These agreements provide for monthly payments to each
of the employees or their designated beneficiary upon the employee’s retirement or death. . The agreements
also provide for survivorship benefits if the employee dies before attaining age 65, and severance payments if the employee is terminated
without cause; the amount of which is dependent on the length of company service at the date of termination. The net present value of
the retirement payments associated with these agreements is $
The
Company has obtained and is the beneficiary of life insurance policies with respect to current and/or past employees. The cash surrender
value of such policies (included in Other Long Term Assets) amounts to $
In addition to the above, the Company has other contractual employment and or change of control agreements in place with key employees, as previously disclosed and noted in the Exhibit Index to the Company’s December 31, 2021 Form 10-K. Obligations related to these arrangements are currently indeterminable due to the variable nature and timing of possible events required to incur such obligations.
As disclosed in detail in Note 7, Leases, to the condensed consolidated financial statements included in this report, the Company has several lease obligations in place that will be paid out over time. Most notably, the Company leases a facility in Banbury, England that serves the manufacturing, warehousing, and distribution functions.
Lastly, as provided in Item 7 under “Liquidity and Capital Resources”, of the Company’s December 31, 2021 Form 10-K, the Company has numerous purchase obligations in place for the forthcoming year, largely related to the Company’s core material inventory components.
| -18- |
Contingencies:
In the ordinary and normal conduct of the Company’s business, it is subject to periodic lawsuits, investigations, and claims (collectively, the “Claims”). The Claims generally relate to potential lightning damage to our flexible gas piping products, which impact legal and product liability related expenses. The Company does not believe the Claims have legal merit, and therefore has commenced a vigorous defense in response to the Claims. It is possible that the Company may incur increased litigation costs in the future due to a variety of factors, including a higher number of Claims, higher legal costs, and higher insurance deductibles or retentions.
The
Company was made aware of a potential legal liability regarding a legal dispute in the U.K., in which the Company’s subsidiary,
Omega Flex Limited (“OFL”), was the claimant. After withdrawing the claim, the court determined that OFL was responsible
for the defendant’s costs (including a portion of its attorneys’ fees). The Company reached an initial agreement during the
fourth quarter of 2020 and made a payment of £
The
Company has in place commercial general liability insurance policies that cover most Claims, which are subject to deductibles or retentions,
ranging primarily from $
| -19- |
Phantom Stock Plan
Plan Description. . The Units are not shares of the Company’s common stock, and a recipient of the Units does not receive any of the following:
| ■ | ownership interest in the Company | |
| ■ | shareholder voting rights | |
| ■ | other incidents of ownership to the Company’s common stock |
. The Units will be paid on their maturity date, one year after all of the Units granted in a particular award have fully vested, unless an acceptable event occurs under the terms of the Plan prior to one year, which would allow for earlier payment. The amount to be paid to the participant on the maturity date is dependent on the type of Unit granted to the participant.
The Units may be Full Value, in which the value of each Unit at the maturity date, will equal the closing price of the Company’s common stock as of the maturity date; or Appreciation Only, in which the value of each Unit at the maturity date will be equal to the closing price of the Company’s common stock at the maturity date minus the closing price of the Company’s common stock at the grant date.
On December 9, 2009, the Board of Directors authorized an amendment to the Plan to pay an amount equal to the value of any cash or stock dividend declared by the Company on its common stock to be accrued to the phantom stock units outstanding as of the record date of the common stock dividend. The dividend equivalent will be paid at the same time the underlying phantom stock units are paid to the participant.
In certain circumstances, the Units may be immediately vested upon the participant’s death or disability. All Units granted to a participant are forfeited if the participant is terminated from their relationship with the Company or its subsidiary for “cause,” which is defined under the Plan. If a participant’s employment or relationship with the Company is terminated for reasons other than for “cause,” then any vested Units will be paid to the participant upon termination. However, Units granted to certain “specified employees” as defined in Section 409A of the Internal Revenue Code will be paid approximately 181 days after termination.
| -20- |
Grants
of Phantom Stock Units. As of December 31, 2021, the Company had
The Company uses the Black-Scholes option pricing model as its method for determining fair value of the Units. The Company uses the straight-line method of attributing the value of the stock based compensation expense relating to the Units. The compensation expense (including adjustment of the liability to its fair value) from the Units is recognized over the vesting period of each grant or award.
The FASB ASC Topic 718, Compensation - Stock Compensation, requires forfeitures either to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates to derive an estimate of awards ultimately to vest or to recognize the effect of any forfeited awards for which the requisite vesting period is not completed in the period that the award is forfeited.
The Company recognizes the reversal of any previously recognized compensation expense on forfeited awards in the period that the award is forfeited. During the three months ended March 31, 2022 and 2021, no awards were forfeited.
The total Phantom Stock related liability as of March 31, 2022 was $ of which $ is included in Other Liabilities, as it is expected to be paid within the next twelve months, and the balance of $ is included in Other Long Term Liabilities. The total Phantom Stock related liability as of December 31, 2021 was $ of which $ was included in Other Liabilities, and the balance of $ was included in Other Long Term Liabilities.
Related to the Phantom Stock Plan, in accordance with FASB ASC Topic 718, Compensation - Stock Compensation, the Company recorded compensation expense of approximately $ and $ for the three months ended March 31, 2022 and 2021, respectively. Compensation expense for a given period largely depends upon fluctuations in the Company’s stock price.
| -21- |
| Units | Weighted Average Grant Date Fair Value | |||||||
| Number of Phantom Stock Unit Awards: | ||||||||
| Nonvested on December 31, 2021 | $ | |||||||
| Granted | $ | |||||||
| Vested | ( | ) | $ | |||||
| Forfeited | ||||||||
| Canceled | ||||||||
| Nonvested on March 31, 2022 | $ | |||||||
| Phantom Stock Unit Awards Expected to Vest | $ | |||||||
The total unrecognized compensation costs calculated on March 31, 2022 are $ which will be recognized through February of 2025. The Company will recognize the related expense over the weighted average period of years.
7. LEASES
In the U.S., the Company owns its two main operating facilities located in Exton, Pennsylvania. In addition to the owned facilities, the Company also has operations in other locations that are leased, as well as other leased assets. In conjunction with the guidance for leases, as defined by the FASB with ASU 2016-02, Leases (Topic 842), the Company has described the existing leases, which are all classified as operating leases, pursuant to the below.
In
the U.S., the Company leases a facility in Houston, Texas, which currently provides manufacturing, stocking, and sales operations, with
the
In addition to property rentals, the Company also has lease agreements in place for various fleet vehicles and equipment with various lease terms.
On
March 31, 2022, the Company has recorded right-of-use assets of $
| -22- |
Rent
expense for the operating leases was approximately $
Future minimum lease payments, inclusive of interest, under non-cancelable leases as of March 31, 2022 is as follows:
Twelve Months Ending March 31, | Operating Leases | |||
| (in thousands) | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total Minimum Lease Payments | $ | |||
8. SHAREHOLDERS’ EQUITY
As of March 31, 2022 and December 31, 2021, the Company had authorized common stock shares with par value of $ per share. For both periods, the total number of outstanding shares was , shares held in Treasury was , and total shares issued was .
During 2022 and 2021, upon approval of the Board of Directors (the “Board”) the Company has declared and paid dividends, as set forth in the following table:
| Dividend Declared | Dividend Paid | |||||||||
| Date | Price Per Share | Date | Amount | |||||||
| March 29, 2022 | $ | April 25, 2022 | $ | |||||||
| December 9, 2021 | $ | December 30, 2021 | $ | |||||||
| September 15, 2021 | $ | October 4, 2021 | $ | |||||||
| June 9, 2021 | $ | July 6, 2021 | $ | |||||||
| March 24, 2021 | $ | April 14, 2021 | $ | |||||||
| December 11, 2020 | $ | January 5, 2021 | $ | |||||||
In
addition to the above dividend amounts, there were dividends approved by the Company’s foreign subsidiary during September 2021,
which amounted to an outlay of cash of $
It should be noted that from time to time, the Board may elect to pay special dividends, in addition to or in lieu of the regular quarterly dividends, depending upon the financial condition of the Company.
| -23- |
On
April 4, 2014, the Board authorized an extension of its stock repurchase program without expiration, up to a maximum amount of $
9. RELATED PARTY TRANSACTIONS
From
time to time the Company may have related party transactions (“RPTs”). In short, RPTs represent any transaction between the
Company and any Company employee, director or officer, or any related entity, or relative, etc. The Company performs a review of transactions
each year to determine if any RPTs exist, and if so, determines if the related parties act independently of each other in a fair transaction.
Through this investigation the Company noted a limited number of RPTs which are disclosed hereto. First, legal and accounting fees of
$
10. SUBSEQUENT EVENTS
The Company evaluated all events or transactions that occurred through the date of this filing. During this period, no events came to the Company’s attention that would impact the condensed consolidated financial statements for the period ended March 31, 2022.
| -24- |
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report contains forward-looking statements, which are subject to inherent uncertainties. These uncertainties include, but are not limited to, variations in weather, changes in the regulatory environment, customer preferences, general economic conditions, increased competition, the outcome of outstanding litigation, and future developments affecting environmental matters. All of these are difficult to predict, and many are beyond the ability of the Company to control.
Certain statements in this Quarterly Report on Form 10-Q that are not historical facts, but rather reflect the Company’s current expectations concerning future results and events, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believes”, “expects”, “intends”, “plans”, “anticipates”, “hopes”, “likely”, “will”, and similar expressions identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from future results, performance or achievements expressed or implied by such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s view only as of the date of this Form 10-Q. The Company undertakes no obligation to update the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, conditions, or circumstances.
OVERVIEW
The Company is a leading manufacturer of flexible metal hose and is currently engaged in a number of different markets, including construction, manufacturing, transportation, petrochemical, pharmaceutical and other industries.
The Company’s business is managed as a single operating segment that consists of the manufacture and sale of flexible metal hose, fittings, and accessories. The Company’s products are concentrated in residential and commercial construction, and general industrial markets, with a comprehensive portfolio of intellectual property and patents issued in various countries around the world. The Company’s primary product, flexible gas piping, is used for gas piping within residential and commercial buildings. Through its flexibility and ease of use, the Company’s TracPipe® and TracPipe® CounterStrike® flexible gas piping, along with its fittings distributed under the trademarks AutoSnap® and AutoFlare®, allows users to substantially cut the time required to install gas piping, as compared to traditional methods. The Company’s newest product line MediTrac® corrugated medical tubing is used for piping medical gases (oxygen, nitrogen, nitrous oxide, carbon dioxide, and medical vacuum) in health care facilities. Building on the recognized strengths and strategies employed in the flexible gas piping market, MediTrac® can be used in place of rigid copper pipe, and due to its long continuous lengths and flexibility, it can be installed approximately five times faster than rigid copper pipe, saving on installation labor and construction schedules. The Company’s products are manufactured at its Exton, Pennsylvania and Houston, Texas facilities in the U.S., and in Banbury, Oxfordshire in the U.K. A majority of the Company’s sales across all industries are generated through independent outside sales organizations such as sales representatives, wholesalers and distributors, or a combination of both. The Company has a broad distribution network in North America and to a lesser extent in other global markets.
| -25- |
CHANGES IN FINANCIAL CONDITION
For the period ended March 31, 2022 vs. December 31, 2021
The Company’s cash balance of $28,971,000 on March 31, 2022 decreased $3,942,000 (12.0%) from a $32,913,000 balance at December 31, 2021. Consistent with prior years, the Company paid a significant amount of cash during the first quarter for obligations that were accrued as of the end of the preceding year, such as various incentive related compensation and sales promotional incentive programs. The Company also purchased additional raw materials because of the challenging supply chain environment. Those cash outflows were partially offset by income generated from operations, net cash collections from accounts receivables, and an increase in taxes payable. See the Company’s Condensed Consolidated Cash Flow Statements for further details regarding the change in cash.
Accounts Receivable was $18,760,000 and $20,726,000 as of March 31, 2022 and December 31, 2021, respectively, decreasing $1,966,000 or 9.5%. This is mostly timing related, associated with greater cash collections resulting from higher sales during the fourth quarter of the year versus the first quarter.
Inventory was $17,820,000 and $15,565,000 as of March 31, 2022 and December 31, 2021, respectively, increasing $2,255,000 or 14.5%. The increase is mainly the result of the purchase of inventory to ensure enough materials on hand because of the challenging supply chain environment.
Accrued Compensation was $1,791,000 on March 31, 2022, compared to $7,008,000 on December 31, 2021, decreasing $5,217,000 or 74.4%. A significant portion of the liability that existed at the previous year end related to incentive compensation earned in 2021. As is customary, the liability was then paid during the first quarter of the following year, or 2022, thus diminishing the balance. The liability now represents amounts earned during the current year.
Accrued Commissions and Sales Incentives were $3,589,000 and $7,183,000 as of March 31, 2022 and December 31, 2021, respectively, decreasing $3,594,000 or 50.0%. A portion of the decrease relates to a customary trend of a lower level of sales during first quarter of the year in comparison to the fourth quarter, and the resulting commissions and sales incentives that are earned. Additionally, a portion of the sales incentives have an annual component which accumulates during the year and are then paid during the first quarter of the following year.
Taxes Payable were $1,873,000 on March 31, 2022, compared to $1,000 on December 31, 2021, increasing $1,872,000. The increase is mainly the result of the timing of the payment of taxes in April 2022 for taxable income recognized for the quarter ending March 31, 2022.
Retained earnings were $52,476,000 and $50,053,000 as of March 31, 2022 and December 31, 2021, respectively, increasing $2,423,000 or 4.8%. The increase was primarily due to net income during the quarter, as provided on the Company’s Condensed Consolidated Statements of Income, partially offset by dividends declared during 2022, as discussed in detail in Note 8, Shareholders’ Equity, to the condensed consolidated financial statements included in this report.
| -26- |
RESULTS OF OPERATIONS
Three months ended March 31, 2022 vs. March 31, 2021
The Company reported comparative results from operations for the three-month periods ended March 31, 2022 and 2021 as follows:
Three-months ended March 31, | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| 2022 | 2022 | 2021 | 2021 | |||||||||||||
| ($000) | % | ($000) | % | |||||||||||||
| Net Sales | $ | 31,293 | 100.0 | % | $ | 30,863 | 100.0 | % | ||||||||
| Gross Profit | $ | 19,115 | 61.1 | % | $ | 19,559 | 63.4 | % | ||||||||
| Operating Profit | $ | 7,366 | 23.5 | % | $ | 8,319 | 27.0 | % | ||||||||
Net Sales. The Company’s 2022 first quarter sales of $31,293,000 increased $430,000 or 1.4% compared to the first quarter of 2021, which generated sales of $30,863,000. The increase in sales resulted primarily from an increase in pricing actions which the Company took to offset material cost pressure and to protect margins.
Gross Profit. The Company’s gross profit margins were 61.1% and 63.4% for the three-months ended March 31, 2022 and 2021, respectively. The Company experienced higher material prices which largely have been offset by the pricing actions noted above.
Selling Expenses. Selling expenses consist primarily of employee salaries and associated overhead costs, commissions, and the cost of marketing programs such as advertising, trade shows and related communication costs, and freight. Selling expense was $5,783,000 and $4,821,000 for the three-months ended March 31, 2022 and 2021, respectively, representing an increase of $962,000 or 20.0%. The increases mostly related to commissions, freight, travel, trade shows, and sales meeting expenses. Commissions increased partly because of a shift of shipments from third party warehouses, whose shipments are subject to commission, compared to those directly from the manufacturing facilities, whose shipments are not subject to commission. Freight costs increased because of higher fuel costs and constrained availability. Travel, trade shows, and sales meeting expenses were much lower in the previous year because of COVID-19 pandemic restrictions. Selling expenses increased as a percent of net sales compared to last year, being 18.5% for the three-months ended March 31, 2022, and 15.6% for the three-months ended March 31, 2021.
| -27- |
General and Administrative Expenses. General and administrative expenses consist primarily of employee salaries, benefits for administrative, executive and finance personnel, legal and accounting, and corporate general and administrative services. General and administrative expenses were $4,750,000 and $5,418,000 for the three-months ended March 31, 2022 and 2021, respectively, thus decreasing by $668,000 or 12.3%. Lower items include legal and product liability related defense costs, incentive compensation, and director fees. Incentive compensation is derived from two notable components. There was a decrease in the incentive compensation component which is aligned with profitability; and there was a reduction in stock based compensation expense which moves in relation to the Company’s stock price, as detailed in Note 6, Stock Based Compensation Plans, to the condensed consolidated financial statements included in this report. Director fees were also lower due to a revised arrangement resulting from an independent study performed to align board compensation with comparable peers in the previous year. As a percentage of sales, general and administrative expenses decreased to 15.2% for the three months ended March 31, 2022 from 17.6% for the three-months ended March 31, 2021.
Engineering Expense. Engineering expenses consist of development expenses associated with the development of new products and enhancements to existing products, and manufacturing engineering costs. Engineering expenses were $1,216,000 and $1,001,000 for the three-months ended March 31, 2022 and 2021, respectively, increasing by $215,000 or 21.5%, mainly associated with increases in experimental materials, travel, and staffing related costs. Engineering expenses increased as a percentage of sales, being 3.9% for the three-months ended March 31, 2022, and 3.2% for the same period in 2021.
Operating Profits. Reflecting all of the factors mentioned above, operating profits were $7,366,000 and $8,319,000 for the quarters ending March 31, 2022 and 2021, respectively, decreasing by $953,000 or 11.5%.
Interest Income. Interest income is recorded on cash investments, and interest expense is recorded at times when the Company has debt amounts outstanding on its line of credit. The Company recorded $9,000 of interest income each during the first quarters of 2022 and 2021.
Other (Loss) Income. Other (loss) income primarily consists of foreign currency exchange gains (losses) on transactions settled in currencies other than the Company’s local currency, typically related to the Company’s foreign U.K. subsidiaries. There was a loss of $26,000 recorded during the first quarter 2022, but income of $18,000 during the first quarter of 2021. The British Pound had weakened during the first quarter of 2022.
Income Tax Expense. Income tax expense was $1,879,000 for the first three months of 2022, compared to $2,049,000 for the same period in 2021, decreasing $170,000 or 8.3%, mostly the result of the decrease in income before taxes.
| -28- |
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Financial Reporting Release No. 60, released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods and use of estimates used in the preparation of financial statements. Note 2 of the Notes to the condensed consolidated financial statements includes a summary of the significant accounting policies and methods used in the preparation of our condensed consolidated financial statements. The Company considers all of its significant accounting policies and estimates to be critical.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Management develops, and changes periodically, these estimates and assumptions based on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual amounts could differ significantly from these estimates.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company’s primary cash needs have been related to working capital items, which the Company has largely funded through cash generated from operations.
As of March 31, 2022, the Company had a cash balance of $28,971,000. Additionally, the Company has a $15,000,000 line of credit available, as discussed in detail in Note 4, which had no borrowings outstanding upon it on March 31, 2022. On December 31, 2021, the Company had a cash balance of $32,913,000, with no borrowings against the line of credit.
Operating Activities
Cash provided or used by operating activities is net income adjusted for certain non-cash items and changes in certain assets and liabilities, such as those included in working capital.
For the three months ended March 31, 2022, the Company’s operating activities used cash of $3,876,000, compared to the three months ended March 31, 2021 which provided cash of $2,207,000, a difference of $6,083,000. For details of the operating cash flows refer to the Condensed Consolidated Statements of Cash Flows in Part I – Financial Information on page seven.
As a general trend, the Company tends to deplete or generate lower amounts of cash early in the year, as significant payments are typically made for accrued promotional incentives and incentive compensation. Cash has then historically shown a tendency to be restored and accumulated during the latter portion of the year.
Investing Activities
Cash used in investing activities during the three months ended March 31, 2022 and 2021 was $79,000 and $362,000, respectively for capital expenditures.
| -29- |
Financing Activities
All financing activities relate to dividend payments, which are detailed in Note 8, Shareholders’ Equity. A dividend was declared in both December of 2021 and 2020, amounting to $3,029,000 and $2,826,000 each, with payment due and paid during December 2021 and January 2021, respectively. There were no dividend payments during the quarter ending March 31, 2022.
Liquidity
We believe our existing cash and cash equivalents, along with our borrowing capacity, will be sufficient to meet our anticipated cash needs for at least the next twelve months. Our future capital requirements will depend upon many factors including our rate of revenue growth, the timing and extent of any expansion efforts, and the potential for investments in, or the acquisition of any complementary products, businesses, or supplementary facilities for additional capacity.
CONTINGENT LIABILITIES AND GUARANTEES
See Note 5 to the Company’s condensed consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
None.
Item 3 – Quantitative and Qualitative Information about Market Risks
The Company does not engage in the purchase or trading of market risk sensitive instruments. The Company does not presently have any positions with respect to hedge transactions such as forward contracts relating to currency fluctuations. No market risk sensitive instruments are held for speculative or trading purposes.
Item 4 – Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
At the end of the fiscal first quarter of 2022, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures. The Company’s disclosure controls and procedures are designed to ensure that the Company records, processes, summarizes, and reports in a timely manner the information required to be disclosed in the periodic reports filed by the Company with the Securities and Exchange Commission. The Company’s management, including the chief executive officer and chief financial officer, have conducted an evaluation of the effectiveness of the design and operation of the Company’s Disclosure Controls and Procedures as defined in the Rule 13a-15(e) of Securities Exchange Act of 1934. Based on that evaluation, the chief executive officer and chief financial officer have concluded that, as of the date of this report, the Company’s disclosure controls and procedures are effective to provide reasonable assurance of achieving the purposes described in Rule 13a-15(e), and no changes are required at this time.
(b) Changes in Internal Controls.
There was no change in the Company’s “internal control over financial reporting” (as defined in rule 13a-15(f) of the Securities Exchange Act of 1934) identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934 that occurred during the three-month period covered by this Report on Form 10-Q that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting subsequent to the date the chief executive officer and chief financial officer completed their evaluation.
| -30- |
PART II - OTHER INFORMATION
Item 1 – Legal Proceedings
See legal proceedings disclosure in Note 5, Commitments and Contingencies, to the condensed consolidated financial statements included in this report.
Item 1A – Risk Factors
Risk factors are discussed in detail in the Company’s December 31, 2021 Form 10-K. There are no additional risks attributable to the quarter.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3 – Defaults Upon Senior Securities
None.
Item 4 – Mine Safety Disclosures
Not Applicable.
Item 5 – Other Information
None.
Item 6 - Exhibits
| Exhibit | ||
| No. | Description | |
| 31.1 | Certification of Chief Executive Officer of Omega Flex, Inc. pursuant to Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended. | |
| 31.2 | Certification of Chief Financial Officer of Omega Flex, Inc. pursuant to 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended. | |
| 32.1 | Certification of Chief Executive Officer and Chief Financial Officer of Omega Flex, Inc., pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| -31- |
SIGNATURES
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.
| OMEGA FLEX, INC. | ||
| (Registrant) | ||
| Date: May 5, 2022 | By: | /S/ Matthew F. Unger |
| Matthew F. Unger | ||
| Vice President – Finance | ||
| and Chief Financial Officer | ||
| -32- |