Omega Flex, Inc. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
Omega Flex manufactures and sells flexible metal hose, corrugated tubing, proprietary fittings and accessories through distributors, wholesalers, independent sales organizations and OEMs. Its primary markets are residential and commercial construction and general industrial applications. Products include TracPipe and CounterStrike flexible gas piping, DoubleTrac and DEF-Trac containment piping, and MediTrac medical gas tubing. The company operates as one reporting segment, with manufacturing in Pennsylvania, Texas and the United Kingdom.
This filing covers the fiscal year ended December 31, 2020, filed March 8, 2021. The filing also provides unaudited quarterly information for 2020 and 2019.
Financial performance and position
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $105.8 million | $111.4 million | Down 5.0% |
| Gross profit | $66.6 million | $70.5 million | Down 5.6% |
| Gross margin | 62.9% | 63.3% | Down 40 basis points |
| Operating profit | $26.7 million | $21.9 million | Up 21.6% |
| Operating margin | 25.2% | 19.7% | Up 550 basis points |
| Net income attributable to Omega Flex | $19.9 million | $17.3 million | Up 15.2% |
| Basic and diluted EPS | $1.97 | $1.71 | Up 15.2% |
| Cash provided by operations | $19.3 million | $16.0 million | Up $3.3 million |
| Capital expenditures | $0.6 million | $1.2 million | Down $0.7 million |
Year-end cash and cash equivalents were $23.6 million, up from $16.1 million. Working capital was $35.5 million, total assets were $71.6 million and shareholders’ equity was $46.4 million. Accounts receivable increased to $20.1 million from $17.0 million, while inventory increased modestly to $11.5 million from $11.1 million.
The company had no outstanding debt at December 31, 2020. It maintained an unsecured $15.0 million revolving credit facility maturing December 1, 2022. The company briefly drew the full facility during the second quarter to preserve liquidity during the COVID-19 crisis and repaid it before quarter-end. It also received and repaid a $2.5 million PPP loan by May 7, 2020.
Dividends paid totaled $11.3 million in 2020, compared with $46.0 million in 2019, which included a $35.3 million special dividend. Regular quarterly dividends were $0.28 per share during 2020. Management stated that existing cash and borrowing capacity should meet anticipated needs for at least the next twelve months.
Material changes versus the prior comparable period
- Sales declined primarily because of lower unit volume associated in part with the COVID-19 pandemic; modest price increases partially offset higher material costs.
- Gross margin remained broadly stable despite factory sanitation costs, staggered shifts, employee quarantines, overtime and unabsorbed overhead.
- Operating profit increased because selling expenses declined 12.9%, general and administrative expenses declined 23.0%, and engineering expense declined 10.9%.
- General and administrative expense benefited from a $5.2 million reduction in legal and product-liability defense costs, primarily because a class action was dismissed in 2020. Selling expense also benefited from lower consulting, travel and advertising costs.
- MediTrac experienced significant growth as healthcare facilities used the product for temporary hospitals and converted facilities during the COVID-19 response. CMS issued a September 2020 waiver allowing corrugated medical tubing under applicable NFPA 99 provisions in U.S. healthcare facilities.
- Nickel and copper prices were higher than in 2019, but management reported that pricing actions helped maintain reasonably stable margins.
- Quarterly sales were $25.3 million, $21.8 million, $27.1 million and $31.6 million in the first through fourth quarters of 2020, respectively. Fourth-quarter attributable net income was $7.2 million, compared with $5.6 million in the fourth quarter of 2019.
Outlook, risks, contingencies and unusual items
The filing does not provide specific revenue, earnings or margin guidance. Management expects cash and available borrowing capacity to support anticipated requirements for at least the next twelve months, but notes that future capital needs depend on growth, expansion, acquisitions, capacity investments and the continuing effects of COVID-19.
- COVID-19 could continue to affect employees, customers, suppliers, distribution channels, operating restrictions, staffing, demand and supply-chain continuity. Management stated that the duration and severity of the pandemic and its overall impact cannot reasonably be estimated.
- The company remains highly dependent on TracPipe and CounterStrike flexible gas piping, making it vulnerable to product-specific, distributor, competitive and commodity-price risks.
- One customer represented 13% to 14% of annual sales from 2018 through 2020 and approximately 18% to 24% of accounts receivable during the last two years.
- Construction-related demand is seasonal and cyclical, with typically lower activity during winter months. Higher interest rates, reduced housing activity or adverse economic conditions could reduce demand.
- Potential long-term restrictions on natural gas or propane use could materially reduce demand for the company’s principal gas-piping products.
- Raw-material supply and pricing remain risks, particularly for stainless steel, nickel, copper, polyethylene and proprietary fittings. The company generally relies on one or two suppliers for major components.
- Brexit-related customs controls, logistics delays, currency movements and economic weakness in the United Kingdom and Europe could increase costs or reduce demand, although management did not expect the effects to be material at filing.
- Product-liability claims, primarily involving alleged lightning damage to flexible gas piping, remain outstanding. The company accrued $642,000 at year-end, while estimated aggregate maximum exposure for current open claims was approximately $6.2 million. A putative class action was dismissed in 2020.
- Contractual cash obligations totaled $26.6 million, including $25.5 million of purchase obligations, $0.5 million of operating lease obligations and $0.6 million of other long-term liabilities.
- The company recorded no goodwill impairment in 2020, but warned that a prolonged pandemic could trigger future impairment testing and charges.
Most important facts for investors to verify
- Whether sales volume and demand recover after the pandemic, particularly in construction and general industrial markets.
- The sustainability of the 25.2% operating margin after unusually lower legal, consulting, travel and advertising expenses in 2020.
- The extent to which MediTrac growth can diversify the company beyond its dominant flexible gas-piping products.
- Future nickel, copper, stainless-steel and other input-cost trends and the company’s ability to pass increases through to customers.
- Developments in product-liability claims, insurance retentions and the adequacy of the $642,000 reserve relative to the approximately $6.2 million estimated aggregate exposure.
- Customer concentration, distributor retention and the financial condition of the customer representing 13% to 14% of annual sales.
- The continuation of regular dividends and the board’s future decisions regarding special dividends, capital expenditures and acquisitions.
- Transition arrangements for LIBOR-based borrowings and the terms of any future use of the $15.0 million credit facility.
- RSM US LLP’s unqualified audit opinion and its conclusion that internal control over financial reporting was effective as of December 31, 2020.