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OFLX > SEC Filings for OFLX > Form 10-Q on 10-May-2013All Recent SEC Filings

Show all filings for OMEGA FLEX, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for OMEGA FLEX, INC.


10-May-2013

Quarterly Report


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 and accessories. The Company's products are concentrated in residential and commercial construction, and general industrial markets. 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 with patented fittings distributed under the trademark AutoFlareŽ, TracPipeŽ and TracPipeŽ CounterStrikeŽ flexible gas piping allows users to substantially cut the time required to install gas piping, as compared to traditional methods. Most of the Company's products are manufactured at the Company's Exton, Pennsylvania facility with a minor amount of manufacturing performed in the United Kingdom. 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.

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CHANGES IN FINANCIAL CONDITION

The Accounts Receivable balance was $10,204,000 at March 31, 2013, compared to $12,134,000 at December 31, 2012, decreasing $1,930,000 (15.9%) during the quarter. Sales for the last two months of the first quarter of 2013 were approximately 15% lower than the last two months of 2012, which therefore created a similar reduction in the Accounts Receivable balance.

Accounts Payable has decreased $685,000 (25%), ending at $2,052,000 at March 31, 2013, from a balance of $2,737,000 at December 31, 2012. The majority of the change is timing related, with less payments due to vendors outstanding at the quarter end then experienced at December 31, 2012.

Accrued Commissions and Sales Incentives decreased $1,768,000 (48.2%), being $1,903,000 at March 31, 2013, compared to $3,671,000 at December 31, 2012. The decrease mostly pertained to the payment of annual sales incentive programs earned in 2012 and paid during the first quarter of 2013, offset partially by the recording of the new 2013 program obligations. Customarily, annual programs represent a significant portion of the overall sales incentive payment structure, and therefore the balance at the end of a year is typically more significant than during a particular quarter.

Other Liabilities were $2,729,000 at March 31, 2013, compared to $4,214,000 at December 31, 2012, reducing by $1,485,000 (35.2%). As disclosed previously in Note 5, Commitments and Contingencies, the Company's subsidiary, OFL, had been sued regarding the installation of TracPipe product in an apartment complex in England. The Company had reached a settlement of approximately $1,300,000 regarding this issue in March of 2013, and subsequently recorded the amount in Other Liabilities as of December 31, 2012. OFL then paid $1,300,000 during March of 2013 and thus diminished the balance of the liability accordingly, which accounts for a majority of the change between periods.

                             RESULTS OF OPERATIONS

              Three-months ended March 31, 2013 vs. March 31, 2012

The Company reported comparative results from continuing operations for the
three-month period ended March 31, 2013 and 2012 as follows:

                     Three-months ended March 31,
                            (in thousands)

                   2013      2013      2012      2012
                  ($000)      %       ($000)      %
Net Sales         $16,382   100.0%    $14,548   100.0%
Gross Profit      $ 8,600    52.5%    $ 7,455    51.2%
Operating Profit $  2,463    15.0%   $  5,998    41.2%

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The Company's 2013 first quarter sales increased $1,834,000 (12.6%) over the same period in 2012, ending at $16,382,000 for the three months ended March 31, 2013, compared to $14,548,000 for the same three months in 2012.

Increases in Net Sales are largely attributable to continued growth in the residential sector, as well as increased demand for the Company's double-containment piping. Volume, or units sold, accounts for the majority of the increase compared to the prior year quarter, and there was also a slight rise in pricing.

The Company's gross profit margins have increased to 52.5% from 51.2% for the three-months ended March 31, 2013 and 2012, 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 $3,048,000 and $2,956,000 for the three-months ended March 31, 2013 and 2012, respectively, representing an increase of $92,000. The increase was primarily associated with additional costs for Commissions and Freight resulting from the increase in sales volume. Those increases were however softened by a drop in advertising costs. Sales expense was lower as a percent of net sales compared to last year, being 18.6% for the three-months ended March 31, 2013, and 20.3% for the three-months ended March 31, 2012.

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 $2,371,000 and $2,566,000 for the three-months ended March 31, 2013 and 2012, respectively.
The $195,000 decrease between periods largely resulted from two contrasting items. There was a $656,000 decrease in incentive compensation, as the first quarter of 2012 had a larger bonus obligation associated increased profits generated from the Insurance Legal Recovery. There was however a $412,000 increase in legal and product liability related defense costs. As a percentage of sales, general and administrative expenses decreased to 14.5% for the three months ended March 31, 2013 from 17.6% for the three months ended March 31, 2012.

Insurance Legal Recovery. As previously disclosed in a Form 8-K/A filed with the Securities and Exchange Commission on March 15, 2012, the Company agreed to settle a legal dispute relating to insurance coverage and received $4,700,000 as part of the settlement during that same month. This receipt was all recorded as income during the first quarter of 2012. There was no comparable event during the first quarter of 2013, and thus the change between periods is $4,700,000.
This event also impacted incentive compensation, which is included in the General and Administrative Expenses, and Income Tax Expenses, increasing both significantly compared to this year.

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 increased $83,000. They were

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$718,000 and $635,000 for the three months ended March 31, 2013 and 2012, respectively. Engineering expenses as a percentage of sales were consistent at 4.4% for the three months ended March 31, 2013, and 2012.

Operating Profits. Reflecting all of the factors mentioned above, Operating Profits were $3,535,000 or 58.9% less than last year, being $2,463,000 at March 31, 2013 and $5,998,000 at March 31, 2012. It should be noted however that Excluding the Insurance Legal Recovery and its auxiliary costs noted above, operating profits increased by nearly 14% over the prior year.

Interest Income (Expense)-Net. 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 interest income (expense) was nominal for the first quarter of 2013 and 2012.

Other Income (Expense)-Net. Other Income (Expense)-net primarily consists of foreign currency exchange gains (losses) on transactions with Omega Flex Limited, our U.K. subsidiary. The British Pound has weakened compared to last year, and was therefore largely responsible for a decline in other income (expense) between quarters of $143,000. There was an expense recorded during the first quarter of 2013, versus income during the same quarter last year.

Income Tax Expense. Income Tax Expense was $794,000 for the first three months of 2013, compared to $2,137,000 for the same period in 2012. The $1,343,000 change in the tax expense was largely the result of the receipt of the Insurance Legal Recovery in 2012. The Company's effective tax rate in 2013 does however approximate the 2012 rate and does not differ materially from expected statutory rates.

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 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 following is a brief discussion of the Company's more significant accounting policies.

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 at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to revenue recognition and related sales incentives, accounts receivable valuations, inventory valuations, goodwill valuation, product liability reserve and accounting for income taxes. Actual amounts could differ significantly from these estimates.

Our critical accounting policies and significant estimates and assumptions are described in more detail as follows:

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Revenue Recognition

The Company's revenue recognition activities relate almost entirely to the manufacture and sale of flexible metal hose and pipe. Under GAAP, revenues are considered to have been earned when the Company has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. The following criteria represent preconditions to the recognition of revenue:

ˇ

Persuasive evidence of an arrangement for the sale of product or services must exist.

ˇ

Delivery has occurred or services rendered.

ˇ

The sales price to the customer is fixed or determinable.

ˇ

Collection is reasonably assured.

The Company recognizes revenue upon shipment in accordance with the above principles.

Gross sales are reduced for all consideration paid to customers for which no identifiable benefit is received by the Company. This includes promotional incentives, which includes various programs including year-end rebates and discounts. The amounts of certain incentives are known with reasonable certainty at the time of sale, while others are projected based upon the most reliable information available at the reporting date.

Commissions, for which the Company receives an identifiable benefit, are accounted for as a sales expense.

Accounts Receivable

Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on specific analysis of accounts in the receivable portfolio and historical write-off experience. While management believes the allowance to be adequate, if the financial condition of the Company's customers were to deteriorate, resulting in their inability to make payments, additional allowances may be required.

Inventory

Inventories are valued at the lower of cost or market. 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 gross carrying value of inventory accordingly.

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Goodwill

In accordance with FASB ASC Topic 350, Intangibles - Goodwill and Other, the Company performed an annual impairment test in accordance with this guidance as of December 31, 2012. This analysis did not indicate any impairment of goodwill. There are no circumstances that indicate that Goodwill might be impaired at March 31, 2013.

Product Liability Reserves

Product liability reserves represent the unpaid amounts under the Company's insurance policies with respect to claims that have been resolved. The Company uses the most current available data to estimate claims. As explained more fully under Contingencies, for various product liability claims covered under the Company's general liability insurance policies, the Company must pay certain defense costs within its deductible or self-insured retention limits, ranging primarily from $25,000 to $250,000 per claim, depending on the terms of the policy in the applicable policy year, up to an aggregate amount. The Company is vigorously defending against all known claims.

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 on its actively traded share value - a level 1 input - in determining the fair value of the reporting unit in its annual impairment test as described in the FASB ASC Topic 350.

Earnings per Common Share

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.

Currency Translation

Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at

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exchange rates prevailing on the balance sheet dates. The 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 operations (other (income) expense) in the period in which they occur.

Income Taxes

The Company accounts for taxes in accordance with the FASB ASC Topic 740, Income Taxes. Under this method the Company records income tax expense and the related deferred taxes and tax benefits.

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 in which the rate is enacted. 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. No valuation reserve was deemed necessary at March 31, 2013 or at December 31, 2012. Also, in accordance with FASB ASC Topic 740 (formerly FIN 48), the Company had reserves on the books for uncertainties in tax positions of $121,000 at March 31, 2013, and $119,000 at December 31, 2012.
These reserves are reviewed each quarter.

Other Comprehensive Income (Loss)

For the quarter ended March 31, 2013 and 2012, respectively, the sole component of Other Comprehensive Income (Loss) was a foreign currency translation adjustment.

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, 2013, the Company had a cash balance of $658,000. Additionally, the Company has a $10,000,000 line of credit available with Sovereign Bank, as discussed in detail in Note 4, which had no borrowings outstanding upon it at March 31, 2013. At December 31, 2012, the Company had cash of $939,000, and borrowings against the line of credit of $324,000.

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.

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For the first three months of 2013, the Company's cash from operating activities was $186,000. The first quarter of 2012 experienced cash from operating activities of $5,018,000. The significant increase in 2012 was largely related to the ILR discussed in Note 5, Commitments and Contingencies, which enhanced cash from operations by approximately $3,900,000 after considering the deduction for auxiliary costs. Inversely, the Company paid approximately $1,300,000 during the first quarter of 2013 related to the settlement in England, also discussed in Note 5. Those two isolated events, along with various other less significant items account for the $4,832,000 decrease in cash from operating activities between periods.

As a general trend, the Company tends to deplete 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.

Investing Activities

Cash used in investing activities for the three months of 2013 and 2012 was $92,000 and $38,000, respectively, all related to capital expenditures for both periods.

We believe our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for at least the next 12 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. Regarding any known material commitments for capital expenditures, the Company does anticipate an increase in capital spending in 2013 related to the expansion of our current manufacturing capabilities, as well as space, as the Company has opened another manufacturing facility located largely adjacent to the existing main manufacturing facility in Exton, PA. Total capital spending for the coming year could approach $1,800,000.

Financing Activities

At December 31, 2012, the line of credit balance was $324,000. During the first quarter of 2013 the Company paid off the line of credit balance, and therefore had no outstanding borrowings on its line of credit as of March 31, 2013.

CONTINGENT LIABILITIES AND GUARANTEES

See Note 5 to the Company's financial statements.

OFF-BALANCE SHEET ARRANGEMENTS

Refer to Item 7 of the Company's 2012 year-end Form 10-K under the caption "Off-Balance Sheet Obligations or Arrangements".

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