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OFLX > SEC Filings for OFLX > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for OMEGA FLEX, INC.

Form 10-Q for OMEGA FLEX, INC.


9-May-2014

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 AutoFlare®, AutoSnap®, TracPipe® and TracPipe® CounterStrike® 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 facilities 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 Company's cash balance of $6,899,000 at March 31, 2014, decreased $1,358,000 (16.4%) from the $8,257,000 balance at December 31, 2013. Consistent with prior years, the Company paid a significant amount of cash during the first quarter for items that were accrued as of the end of the preceding year, such as sales promotions programs and incentive compensation.

The Accounts Receivable balance was $11,241,000 at March 31, 2014, compared to $12,968,000 at December 31, 2013, decreasing $1,727,000 (13.3%) during the quarter. Sales for the last two months of the first quarter of 2014 were similarly lower than the last two months of 2013, which therefore created the reduction in the Accounts Receivable balance.

Accrued Compensation was $818,000 at March 31, 2014, compared to $3,114,000 at December 31, 2013, decreasing $2,296,000 (73.7%). A significant portion of the liability that existed at year end related to incentive compensation earned in 2013. As customary, the liability was then paid during the first quarter of the following year, or 2014, thus diminishing the balance. The liability now represents amounts earned during the current year.

Accrued Commissions and Sales Incentives decreased $2,223,000 (56.5%), being $1,711,000 at March 31, 2014, compared to $3,934,000 at December 31, 2013. The decrease mostly pertained to the payment of annual sales incentive programs earned in 2013 and paid during the first quarter of 2014, offset partially by the recording of the new 2014 program obligations. Historically, 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 $2,457,000 at March 31, 2014, compared to $3,575,000 at December 31, 2013, reducing by $1,118,000 (31.3%) due to the payment of a variety of items that were accrued at December 31, 2013, such as profit sharing, non-executive bonus and legal.

                             RESULTS OF OPERATIONS

              Three-months ended March 31, 2014 vs. March 31, 2013

The Company reported comparative results from continuing operations for the
three-month period ended March 31, 2014 and 2013 as follows:

                    Three-months ended March 31,
                           (in thousands)

                  2014      2014     2013     2013
                 ($000)      %      ($000)     %
Net Sales        $         100.0%   $        100.0%
                  16,589            16,382
Gross Profit     $          55.9%   $         52.5%
                   9,279             8,600
Operating Profit $          19.7%   $         15.0%
                   3,265             2,463

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Net Sales. The Company's 2014 first quarter sales of $16,589,000 were narrowly better than sales during the first quarter of 2013 of $16,382,000.

The 1.3% increase in Net Sales happened despite the harsh weather conditions which stalled construction projects across a large portion of the United States.
Fortunately, the Company did see encouraging signs with its international operations. The Company was also able to implement modest price enhancements, which includes improvements in promotional incentives and sales discounts, thus helping Net Sales to stay on par with the previous year.

Gross Profit. The Company's gross profit margins have increased to 55.9% from 52.5% for the three-months ended March 31, 2014 and 2013, respectively. The Company experienced a decrease in manufacturing expenses primarily attributed to a dip in unit volume and also due to various factory related efficiencies.
Additionally, the Company was able to gain margin through the previously mentioned price enhancements.

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 $3,123,000 and $3,048,000 for the three-months ended March 31, 2014 and 2013, respectively, representing an increase of $75,000, associated with various insignificant items. Sales expense was largely in-line as a percent of net sales compared to last year, being 18.8% for the three-months ended March 31, 2014, and 18.6% for the three-months ended March 31, 2013.

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 $2,187,000 and $2,371,000 for the three-months ended March 31, 2014 and 2013, respectively.
The $184,000 decrease between periods largely resulted from a $441,000 decrease in legal and product liability related defense costs, partially offset by an increase in incentive compensation associated with increased profits, and other smaller items. As a percentage of sales, general and administrative expenses decreased to 13.2% for the three months ended March 31, 2014 from 14.5% for the three months ended March 31, 2013.

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 $704,000 and $718,000 for the three months ended March 31, 2014 and 2013, respectively, decreasing $14,000. Engineering expenses as a percentage of sales were similar, being 4.2% for the three months ended March 31, 2014, and 4.4% for the same period in 2013.

Operating Profits. Reflecting all of the factors mentioned above, Operating Profits were $802,000 or 32.6% superior to last year, being $3,265,000 at March 31, 2014 and $2,463,000 at March 31, 2013.

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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 first quarter interest income (expense) was nominal for both 2014 and 2013. 2014 earned a modest amount of interest income associated with cash and cash equivalents, while there was a small amount of interest expense in the prior year due to the line of credit balance that existed at that time.

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. There was an expense of $8,000 recorded during the first quarter of 2014, versus expense of $84,000 during the same quarter last year. The British Pound had been fairly stable during the first quarter of 2014, but was temporarily weakened during the first quarter of 2013, thus accounting for the change between periods.

Income Tax Expense. Income Tax Expense was $1,041,000 for the first three months of 2014, compared to $794,000 for the same period in 2013. The $247,000 change in the tax expense was largely the result of the increase in income before taxes. The Company's effective tax rate in 2014 approximates the 2013 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 include 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:

·

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

·

Delivery has occurred or services rendered.

·

The sales price to the customer is fixed or determinable.

·

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 whom 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, 2013. This analysis did not indicate any impairment of goodwill. There are no circumstances that indicate that Goodwill might be impaired at March 31, 2014.

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.

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Currency Translation

Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at 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, 2014 or at December 31, 2013. Also, in accordance with FASB ASC Topic 740 (formerly FIN 48), the Company had reserves on the books for uncertainties in tax positions of $105,000 at March 31, 2014, and $100,000 at December 31, 2013.
These reserves are reviewed each quarter.

Other Comprehensive Income

For the quarter ended March 31, 2014 and 2013, respectively, the sole component of Other Comprehensive Income 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, 2014, the Company had a cash balance of $6,899,000.
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, 2014. At December 31, 2013, the Company had a cash balance of $8,257,000, with no borrowings against the line of credit.

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Operating Activities

Cash provided by (Used In) 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 first three months of 2014, the Company used cash from operating activities of $1,341,000, while the first quarter of 2013 experienced cash generation from operating activities of $186,000, therefore diminishing by $1,527,000 between periods. The increase in cash in 2013 was largely related to paying most of the executive incentive compensation for 2012 in December of the same year, whereas it is usually paid during the first quarter of the following year. The first three months of 2014 had an incentive compensation payment of $2,684,000 compared to $166,000 paid in the same period of 2013.

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 2014 and 2013 was $25,000 and $92,000, respectively, reflecting a $67,000 decrease in cash used between periods. All investing activities 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.

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, 2014.

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 2013 year-end Form 10-K under the caption "Off-Balance Sheet Obligations or Arrangements".

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