Omega Flex, Inc. FY2021 Form 10-K Summary
Business context and reporting period
Omega Flex manufactures and sells flexible metal hose, proprietary fittings and accessories through distributors, wholesalers, independent sales organizations, OEMs and direct channels. Its principal markets are residential and commercial construction, general industrial applications, fuel-gas piping, double-containment fuel piping and medical-gas tubing. The company operates as one segment, with manufacturing in Exton and Houston, Pennsylvania and Texas, and Banbury, United Kingdom.
This filing is an annual report for the fiscal year ended December 31, 2021, filed March 14, 2022. It is not a quarterly filing, although the request identifies the period as 2021 Q4.
Financial performance and position
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $130.011 million | $105.796 million | +22.9% |
| Gross profit | $81.531 million | $66.550 million | +22.5% |
| Gross margin | 62.7% | 62.9% | Down 0.2 percentage points |
| Operating profit | $35.062 million | $26.653 million | +31.6% |
| Operating margin | 27.0% | 25.2% | Up 1.8 percentage points |
| Net income attributable to Omega Flex | $26.195 million | $19.910 million | +31.6% |
| Basic and diluted EPS | $2.60 | $1.97 | +32.0% |
| Cash flow from operations | $25.149 million | $19.310 million | +30.2% |
| Capital expenditures | $0.971 million | $0.564 million | +$0.407 million |
| Dividends paid | $14.867 million | $11.306 million | +31.5% |
Cash and cash equivalents were $32.913 million at December 31, 2021, up from $23.633 million. Total assets were $88.915 million and total shareholders’ equity was $60.541 million. The company had no outstanding borrowings under its $15.0 million unsecured revolving credit facility and reported compliance with its debt covenants. The facility matured on December 1, 2022.
Inventory increased 35.2% to $15.565 million, primarily to support anticipated demand and mitigate supply-chain risks. Accrued commissions and sales incentives increased 65.2% to $7.183 million. The effective tax rate was approximately 25%, with income tax expense of $8.862 million.
Material changes versus the prior comparable period
- Sales growth reflected higher unit volume, partly recovering from COVID-19-affected 2020 activity, and pricing actions to offset higher material costs.
- Gross margin remained broadly stable despite higher nickel and copper prices, as pricing actions substantially offset commodity inflation.
- Operating margin improved because operating expenses grew more slowly than gross profit. General and administrative expense declined to 16.5% of sales from 18.1%, while selling expense remained 15.7% of sales.
- Selling expense increased 23.2%, driven by higher commissions and freight, additional sales personnel in France, and the return of advertising, trade shows and travel toward normal levels.
- Engineering expense increased 9.8% to $4.610 million, primarily because of increased staffing and certification and qualification costs.
- Cash flow benefited from higher earnings and increased accrued commissions and incentives, partially offset by a $4.185 million increase in inventories.
- Regular dividends increased to $1.18 per share declared in 2021 from $1.12 in 2020. The company stated that regular quarterly dividends are expected to continue, but future dividends remain subject to Board discretion.
Guidance, outlook, risks and unusual items
The filing does not provide quantitative revenue, earnings or margin guidance. Management expects existing cash and borrowing capacity to satisfy anticipated cash needs for at least the next twelve months, subject to growth, capital spending, acquisitions, expansion and COVID-19-related developments.
- Management reported sporadic 2021 supply-chain issues and reliance on one or two suppliers for certain key materials and components. Purchase obligations due within twelve months totaled approximately $31.292 million, and total contractual cash obligations were $31.846 million.
- The business is concentrated in TracPipe and CounterStrike flexible gas-piping products. One customer represented 13% to 14% of sales in each year from 2019 through 2021. North America generated approximately 89% to 93% of sales over the last three years; sales outside the United States were 7% in 2021.
- Construction-related demand is seasonal and sensitive to housing activity, weather, interest rates and broader economic conditions. Potential restrictions on natural-gas and propane use could reduce demand for the company’s principal products.
- Risks include competition, retention of independent sales organizations, commodity-price volatility, supply interruptions, manufacturing-site concentration, Brexit and currency exposure, geopolitical disruptions, cybersecurity, COVID-19 effects and intellectual-property protection.
- The company remains subject to product-liability claims, primarily involving alleged lightning damage to flexible gas-piping products. The accrued product-liability reserve was $262,000 at December 31, 2021, while aggregate maximum exposure for current open claims was estimated not to exceed $9.1 million. The ultimate liability cannot be estimated with certainty.
- A U.K. legal dispute was substantially resolved; an additional £110,000 payment made January 5, 2022 had been accrued at year-end. A previously disclosed Missouri class action was dismissed and the appeal was resolved.
- Phantom-stock liabilities totaled $2.427 million at year-end, including $1.156 million expected to be paid in 2022. Unrecognized phantom-stock compensation cost was $669,000.
- RSM US LLP issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021.
Most important facts for investors to verify
- Confirm the annual-period results and reconcile sales growth, operating-margin expansion and cash-flow generation to the audited financial statements.
- Assess whether pricing actions can continue to offset nickel, copper, stainless-steel and other input-cost inflation without weakening demand or margins.
- Monitor inventory growth, customer incentives and the company’s ability to convert higher earnings into cash.
- Evaluate customer and product concentration, especially the dependence on flexible gas piping and the largest distributor customer.
- Review the $9.1 million maximum exposure for open product-liability claims and changes in reserves, insurance retentions and legal costs.
- Verify the sustainability of regular dividends against operating cash flow, contractual purchase obligations and future capital requirements.
- Review the revolving credit facility’s maturity, LIBOR-to-SOFR transition provisions and available liquidity after December 31, 2021.
- Track regulatory and market developments affecting natural-gas use, construction activity, international trade and the company’s U.K. operations.