Omega Flex, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Omega Flex manufactures and sells flexible metal hose, corrugated tubing, proprietary fittings, and related accessories for residential, commercial, industrial, healthcare, and other applications. Operations are conducted in the United States and United Kingdom, with sales primarily through distributors, wholesalers, and OEMs in North America and Europe. The company reports one operating segment.
This unaudited filing covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. The company had 10,091,822 common shares outstanding at March 31, 2019.
Financial Performance and Position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $26.788 million | $25.397 million | Up 5.5% |
| Gross profit | $16.946 million | $15.033 million | Up 12.7% |
| Gross margin | 63.3% | 59.2% | Up 4.1 percentage points |
| Operating profit | $5.591 million | $5.500 million | Up 1.7% |
| Operating margin | 20.9% | 21.7% | Down 0.8 percentage points |
| Net income | $4.431 million | $4.203 million | Up 5.4% |
| Net income attributable to Omega Flex | $4.382 million | $4.163 million | Up 5.3% |
| Basic and diluted EPS | $0.43 | $0.41 | Up $0.02 |
Interest income increased to $220,000 from $51,000 as the company held more interest-bearing investments. Income tax expense was $1.418 million versus $1.384 million, reflecting higher pretax income and the continuing effects of the Tax Cuts and Jobs Act.
- Cash and cash equivalents were $20.951 million at March 31, 2019, compared with $32.392 million at December 31, 2018.
- Short-term investments were $22.760 million, up from $14.944 million at year-end. These investments primarily consisted of liquid instruments, including U.S. Treasury bills, with maturities of six months or less from purchase.
- Total assets were $85.087 million and total shareholders’ equity was $70.840 million at March 31, 2019.
- Cash used in operating activities was $956,000, compared with $107,000 used in Q1 2018.
- Cash used in investing activities was $8.115 million, including $22.816 million of investment purchases, partially offset by $15.000 million of investment-sale proceeds and $299,000 of capital expenditures.
- Cash used in financing activities was $2.422 million for the January payment of the quarterly dividend.
- The company had no borrowings under its unsecured $15.000 million revolving credit facility and was in compliance with its debt covenants.
- Operating lease right-of-use assets were $666,000 and lease liabilities were $686,000 following adoption of the new lease standard on January 1, 2019.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected increased unit volume and pricing actions intended to offset material-cost pressure and protect margins.
- Gross margin improved materially to 63.3% from 59.2%, while operating margin declined because operating expenses increased faster than sales.
- General and administrative expense rose 34.6% to $5.504 million. The increase primarily reflected higher phantom-stock compensation associated with the company’s higher stock price and $592,000 of additional legal and product-liability defense costs.
- Engineering expense increased 30.2% to $1.341 million, partly due to development of the MediTrac medical tubing product and additional DoubleTrac applications.
- Phantom-stock compensation was $746,000 of expense in Q1 2019 compared with $63,000 of compensation income in Q1 2018. The company paid $746,000 for fully vested and matured units during February 2019.
- Accrued compensation declined $3.999 million from year-end as prior-year incentive compensation was paid. Dividends payable declined $2.422 million to zero after the January dividend payment.
- The company adopted ASC Topic 842 for leases using the optional transition method. The adoption increased operating lease assets and liabilities by approximately $800,000 at adoption, with no material impact on income or cash flow.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management stated that existing cash and cash equivalents are expected to be sufficient to meet anticipated cash needs for at least the next twelve months. The filing does not provide numerical revenue, earnings, or margin guidance. Future capital requirements may depend on revenue growth, expansion, investments, acquisitions, and additional capacity needs.
- The company faces ongoing lawsuits and product-liability claims, including a putative class action concerning potential lightning damage to its flexible gas-piping products. Management believes the claims lack merit and is vigorously defending them.
- Insurance generally covers most claims, subject to deductibles or retentions ranging primarily from $25,000 to $1.000 million per claim. Management estimated aggregate maximum exposure for current open claims at approximately $2.400 million, but stated that ultimate liability cannot currently be estimated.
- Recorded liabilities for the claims were $180,000 at March 31, 2019, compared with $150,000 at December 31, 2018.
- One customer represented more than 10% of accounts receivable and more than 10% of total sales in both Q1 2019 and Q1 2018, creating customer-concentration risk.
- Forward-looking results may be affected by weather, regulatory changes, customer preferences, economic conditions, competition, litigation outcomes, and environmental matters.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether pricing actions and volume growth can be sustained without weakening demand or margins.
- The drivers and future volatility of phantom-stock compensation expense.
- The status, defense costs, insurance coverage, and potential exposure associated with the Missouri class-action and other product-liability claims.
- Customer concentration and the effect of any change in the major customer’s purchasing patterns or creditworthiness.
- Operating cash conversion, including the impact of annual incentive-compensation and dividend payments.
- Progress, commercialization prospects, and required investment for MediTrac, DoubleTrac, and other product-development initiatives.
- Availability and covenant terms of the $15.000 million revolving credit facility and the company’s allocation of excess cash to short-term investments and dividends.