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OFFON

OMEGA FLEX, INC.

(OFLX)
  Report
Delayed Quote. Delayed Nasdaq - 10/22 04:00:00 pm
139.56 USD   -2.95%
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OMEGA FLEX : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/06/2021 | 11:03am EDT

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.



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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.



                         CHANGES IN FINANCIAL CONDITION



            For the period ended June 30, 2021 vs. December 31, 2020


Accrued Compensation was $3,609,000 at June 30, 2021, compared to $5,429,000 at December 31, 2020, decreasing $1,820,000 (33.5%). A significant portion of the liability that existed at the previous year end related to incentive compensation earned in 2020. As is customary, the liability was then paid during the first quarter of the following year, or 2021, thus diminishing the balance. The liability primarily represents amounts earned during the current year.



                             RESULTS OF OPERATIONS



               Three months ended June 30, 2021 vs. June 30, 2020


The Company reported comparative results from continuing operations for the three months ended June 30, 2021 and 2020 as follows:



                            Three months ended June 30,
                                  (in thousands)
                     2021        2021         2020        2020
                    ($000)         %         ($000)         %
Net Sales          $ 31,966       100.0 %   $ 21,818       100.0 %
Gross Profit       $ 19,698        61.6 %   $ 13,262        60.8 %
Operating Profit   $  8,419        26.3 %   $  4,886        22.4 %



Net Sales. The Company's 2021 second quarter sales of $31,966,000 increased $10,148,000 or 46.5% compared to the second quarter of 2020, which generated sales of $21,818,000. The increase in sales was two-fold, resulting primarily from an increase in unit volume, and partially due to pricing actions which the Company took to offset material cost pressure and to protect margins. The previous year was also significantly lower compared to prior quarters due to the impact of the COVID-19 pandemic.



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Gross Profit. The Company's gross profit margins were 61.6% and 60.8% for the three months ended June 30, 2021 and 2020, respectively. The Company experienced a decrease in production during the first six months of 2020 mainly the result of the COVID-19 pandemic, which diminished labor and overhead absorption, and resulted in lower gross profit.

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 $4,928,000 and $3,503,000 for the three months ended June 30, 2021 and 2020, respectively, representing an increase of $1,425,000 or 40.7%. The increase was primarily related to higher commissions and freight expenses, which move in relation to sales. Other less significant increases were noted in staffing, as resources were added, and also advertising. Selling expenses as a percent of net sales were 15.4% and 16.0% for the three months ended June 30, 2021 and 2020, respectively.

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 $5,139,000 and $3,852,000 for the three months ended June 30, 2021 and 2020, respectively, thus increasing by $1,287,000 or 33.4%. The most notable increase related to legal and product liability related defense costs, which were $689,000 above last year. To a lesser extent, staffing expenses increased mostly due to an increase in incentive compensation associated with higher profitability, partially offset by a decrease in the phantom stock component, driven by the change in the Company's stock price between periods, as discussed in detail in Note 6, Stock Based Plans, to the condensed consolidated financial statements included in this report. Accounting fees also increased. As a percentage of sales, general and administrative expenses decreased to 16.1% for the three months ended June 30, 2021 from 17.7% for the three months ended June 30, 2020.

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 $1,212,000 and $1,021,000 for the three months ended June 30, 2021 and 2020, respectively, increasing by $191,000 or 18.7%, partially associated with an increase in development and certification related costs required for the progression of various promising applications. Engineering expenses decreased as a percentage of sales, being 3.8% for the three months ended June 30, 2021, and 4.7% for the same period in 2020.

Operating Profits. Reflecting all of the factors mentioned above, operating profits were $8,419,000 and $4,886,000 for the quarters ended June 30, 2021 and 2020, respectively, increasing by $3,533,000 or 72.3%. As a percentage of sales, operating profits increased, being 26.3% and 22.4% for the three months ended June 30, 2021 and 2020, respectively.



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Interest Income (Expense). 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 $8,000 of interest income and $97,000 of interest expense for the quarters ended June 30, 2021 and 2020, respectively. The Company had borrowed $15,000,000 on its line of credit for a portion of the second quarter of 2020 to ensure liquidity during the COVID-19 crisis, which created the interest expense during that period.

Other Income (Expense). Other Income (Expense) 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 income of $7,000 and expense of $23,000 recorded for the quarters ended June 30, 2021 and 2020, respectively.

Income Tax Expense. Income Tax Expense was $2,232,000 for the second quarter of 2021, compared to $1,196,000 for the same period in 2020, increasing $1,036,000 or 86.6%, mostly the result of the increase in income before taxes.



                Six months ended June 30, 2021 vs. June 30, 2020


The Company reported comparative results from operations for the six month periods ended June 30, 2021 and 2020 as follows:



                             Six months ended June 30,
                                  (in thousands)
                     2021        2021         2020        2020
                    ($000)         %         ($000)         %
Net Sales          $ 62,829       100.0 %   $ 47,084       100.0 %
Gross Profit       $ 39,257        62.5 %   $ 29,031        61.7 %
Operating Profit   $ 16,738        26.6 %   $ 10,731        22.8 %



Net Sales. The Company's 2021 sales for the first six months of 2021 of $62,829,000 increased $15,745,000 or 33.4% compared to the first six months of 2020, which generated sales of $47,084,000. The increase in sales was two-fold, resulting primarily from an increase in unit volume, and to a lesser extent by pricing actions which the Company took to offset material cost pressure and to protect margins. Sales during the first six months of 2020 were partially impeded by the COVID-19 pandemic.

Gross Profit. The Company's gross profit margins were 62.5% and 61.7% for the six-months ended June 30, 2021 and 2020, respectively.

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 $9,749,000 and $8,054,000 for the six months ended June 30, 2021 and 2020, respectively, representing an increase of $1,695,000 or 21.1%. The increases primarily related to freight and commissions, which are variable costs and thus increased in relation to sales volume. Other less significant increases were noted in staffing, as resources were added, and also advertising. Inversely, travel, tradeshow and sales meeting expenses all decreased primarily due to restrictions imposed by the COVID-19 pandemic. Selling expenses decreased as a percent of net sales compared to last year, being 15.5% for the six months ended June 30, 2021, and 17.1% for the six months ended June 30, 2020.



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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 $10,557,000 and $8,105,000 for the six months ended June 30, 2021 and 2020, respectively, thus increasing by $2,452,000 or 30.3%. Incentive compensation increased $1,494,000 over last year. This was primarily due to higher net profits as well as an increase of $335,000 in the phantom stock portion of incentive compensation expense between years, driven by the change in the Company's stock price between periods, as discussed in detail in Note 6, Stock Based Plans, to the condensed consolidated financial statements included in this report. Additional higher items include legal and product liability related defense costs and also director fees due to a revised arrangement resulting from an independent study performed to align board compensation with comparable peers. As a percentage of sales, general and administrative expenses decreased to 16.8% for the six months ended June 30, 2021 from 17.2% for the six months ended June 30, 2020.

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 $2,213,000 and $2,141,000 for the six months ended June 30, 2021 and 2020, respectively, increasing by $72,000 or 3.4%. Engineering expenses decreased as a percentage of sales, being 3.5% for the six months ended June 30, 2021, and 4.6% for the same period in 2020.

Operating Profits. Reflecting all of the factors mentioned above, operating profits were $16,738,000 and $10,731,000 for the six months ended June 30, 2021 and 2020, respectively, increasing by $6,007,000 or 56.0%.

Interest Income (Expense). 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 $17,000 of interest income and $52,000 of interest expense during the first six months of 2021 and 2020, respectively. The Company had borrowed $15,000,000 on its line of credit for a portion of the second quarter of 2020 to ensure liquidity during the COVID-19 crisis, which created the interest expense during that period.

Other Income (Expense). Other Income (Expense) 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 income of $25,000 recorded during the first six months of 2021, but expense of $131,000 during the first six months of 2020. The British Pound had weakened in 2020 as a result of the pandemic impacting the economy.



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Income Tax Expense. Income Tax Expense was $4,281,000 for the first six months of 2021, compared to $2,612,000 for the same period in 2020, increasing $1,669,000 or 63.9%, mostly the result of the increase in income before taxes.

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 June 30, 2021, the Company had a cash balance of $28,463,000. 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 at June 30, 2021. At December 31, 2020, the Company had a cash balance of $23,633,000, with no borrowings against the line of credit.



Operating Activities


Cash provided 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 six months ended June 30, 2021, the Company's operating activities provided cash of $10,980,000, compared to the six months ended June 30, 2020 which provided cash of $9,303,000, a difference of $1,677,000. For details of the operating cash flows refer to the unaudited condensed consolidated statements of cash flows in Part I - Financial Information on page eight.

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, incentive compensation, and taxes. Cash has then historically shown a tendency to be restored and accumulated during the latter portion of the year.



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Investing Activities



Cash used in investing activities during the six months ended June 30, 2021 and 2020 was $517,000 and $187,000, respectively for capital expenditures.



Financing Activities


All financing activities relate to dividend payments, which are detailed in Note 8, Shareholders' Equity. Dividend payments through the first six months of 2021 and 2020, amounted to $5,653,000 for both periods. See Note 4, Line of Credit and Other Borrowings, for a description of borrowings and repayments during the second quarter of 2020.



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, the potential for investments in, or the acquisition of any complementary products, businesses or supplementary facilities for additional capacity, and the COVID-19 pandemic.

CONTINGENT LIABILITIES AND GUARANTEES

See Note 5 to the Company's condensed consolidated financial statements.

OFF-BALANCE SHEET ARRANGEMENTS

None

© Edgar Online, source Glimpses

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Financials (USD)
Sales 2020 106 M - -
Net income 2020 19,9 M - -
Net cash 2020 23,1 M - -
P/E ratio 2020 74,0x
Yield 2020 0,77%
Capitalization 1 409 M 1 409 M -
EV / Sales 2019 9,59x
EV / Sales 2020 13,7x
Nbr of Employees 164
Free-Float 30,3%
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Kevin Ralph Hoben Chairman & Chief Executive Officer
Mark Francis Albino President, Chief Operating Officer & Director
Matthew F. Unger Director-Finance & Chief Accounting Officer
David K. Evans Independent Director
Bruce C. Klink Independent Director
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