Omega Flex, Inc. — FY2017 Form 10-K Summary
Business context and reporting period
Omega Flex manufactures and sells flexible metal hose, flexible gas piping and related fittings and accessories through a single operating segment. Its principal products include TracPipe, CounterStrike, AutoFlare and AutoSnap, serving residential and commercial construction and general industrial markets. Manufacturing is conducted in Exton, Pennsylvania, and Banbury, United Kingdom. The filing covers the fiscal year ended December 31, 2017; fourth-quarter results are included in the annual financial statements.
North America represented approximately 89% of sales, and sales outside North America represented approximately 11%. Ferguson Enterprises accounted for approximately 15% of 2017 sales and 19% of accounts receivable at year-end.
Financial performance and condition
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $101.799 million | $94.051 million | +8.2% |
| Gross profit | $61.766 million | $57.884 million | +6.7% |
| Gross margin | 60.7% | 61.5% | Down 0.8 percentage points |
| Operating profit | $24.217 million | $21.897 million | +10.6% |
| Operating margin | 23.8% | 23.3% | Up 0.5 percentage points |
| Net income attributable to Omega Flex | $15.662 million | $14.377 million | +9.0% |
| Basic and diluted EPS | $1.55 | $1.42 | +9.2% |
| Cash flow from operations | $18.048 million | $14.758 million | +$3.290 million |
| Capital expenditures | $3.093 million | $0.233 million | Increase primarily from facility purchase |
| Dividends paid | $13.018 million | $8.578 million | Increase |
Fourth-quarter 2017 net sales were $27.464 million, gross profit was $17.081 million and net income attributable to Omega Flex was $4.476 million, compared with $25.643 million, $15.926 million and $4.133 million, respectively, in the fourth quarter of 2016.
At December 31, 2017, cash and cash equivalents were $37.938 million, working capital was $45.372 million, total assets were $77.091 million and shareholders’ equity was $56.069 million. The Company had no borrowings under its credit facility and reported no off-balance-sheet arrangements. Its unsecured revolving credit facility provides up to $15 million through December 1, 2022.
Material changes versus the prior comparable period
- Sales growth reflected higher unit volume and pricing actions taken to offset higher material costs.
- Nickel and copper prices increased, but management stated that pricing actions helped maintain reasonably stable margins. Gross margin nevertheless declined from 61.5% to 60.7%.
- Operating profit improved as selling, general and administrative, and engineering expenses grew more slowly than sales. Legal and product-liability defense costs declined, partly offsetting higher incentive compensation, insurance and phantom-stock expense.
- Foreign-currency expense declined to $38,000 from $474,000 as the British pound stabilized following the 2016 Brexit-related weakness.
- Income tax expense increased to $8.450 million from $6.975 million, including an approximately $827,000 tax charge related to deemed repatriation of unremitted foreign earnings; management also recorded a $118,000 deferred-tax benefit from the federal rate reduction.
- The Company purchased a previously leased 30,000-square-foot Exton facility for approximately $2.5 million, increasing net property and equipment by 59% to $6.998 million.
- The Board established a regular quarterly dividend policy in 2017 and declared quarterly dividends of $0.22 per share. Total dividends declared were $6.660 million, compared with the $8.578 million special dividend declared in 2016.
Outlook, risks, contingencies and unusual items
Management expects existing cash and cash equivalents to satisfy anticipated cash needs for at least the next twelve months. No specific revenue or earnings guidance was provided. The Company plans to launch MediTrac medical gas tubing commercially in the latter part of 2018 after beta installations and additional testing.
- Demand is sensitive to residential and commercial construction activity, interest rates, economic cycles, weather and seasonality; construction-related demand is generally lower during winter.
- The business is concentrated in TracPipe and CounterStrike flexible gas piping and relies heavily on distributors, independent sales organizations and a significant customer.
- Stainless steel, nickel, copper, polyethylene and brass fittings are key inputs. The Company often relies on one or two suppliers for major materials and components, creating price and supply-disruption risks.
- Manufacturing capacity is concentrated in Exton and Banbury. Damage or interruption at either location could materially affect sales and operations.
- The Company faces ongoing product-liability and lightning-related claims, including a putative class action re-filed in Missouri in March 2017. Recorded liabilities for legal costs and settlements were $175,000 at December 31, 2017. Management estimated aggregate potential exposure within applicable insurance deductibles or retentions at approximately $2.7 million, but stated that ultimate liability cannot be estimated.
- In February 2018, an appeals court vacated a prior strict-liability verdict and remanded the matter for a new trial. The Company expects the related $1.6 million cash bond to be returned.
- The phantom-stock liability increased to $2.238 million at year-end 2017, including $776,000 expected to be paid within the following year.
- The Company plans to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method and expects no material ongoing impact. Lease accounting changes are planned for January 1, 2019; the potential balance-sheet impact had not been quantified.
RSM US LLP issued unqualified opinions on the consolidated financial statements and the effectiveness of internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth and pricing actions can offset future stainless steel, nickel, copper and other input-cost inflation.
- The durability of distributor relationships, particularly Ferguson Enterprises, and the retention of independent sales organizations.
- The outcome and cash cost of pending lightning-related product-liability litigation, including the Missouri class action and the expected return of the $1.6 million bond.
- The timing, regulatory approvals and commercial adoption of MediTrac and other new products.
- The sustainability of quarterly dividends relative to operating cash flow, capital expenditures and potential acquisition or expansion needs.
- The impact of future currency movements, construction activity, interest rates and the adoption of new accounting standards.