Omega Flex, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2021; filed November 5, 2021. The financial statements are unaudited and prepared under U.S. GAAP. Omega Flex operates as one segment, manufacturing and selling flexible metal hose, fittings and accessories in North America, Europe and other markets.
Financial Performance and Position
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $31.725 million | $27.087 million | $94.554 million | $74.171 million |
| Gross profit | $20.039 million | $17.266 million | $59.296 million | $46.297 million |
| Gross margin | 63.2% | 63.7% | 62.7% | 62.4% |
| Operating profit | $8.326 million | $6.379 million | $25.064 million | $17.110 million |
| Operating margin | 26.2% | 23.6% | 26.5% | 23.1% |
| Net income attributable to Omega Flex | $6.148 million | $4.817 million | $18.599 million | $12.732 million |
| Diluted EPS | $0.61 | $0.48 | $1.84 | $1.26 |
Third-quarter sales increased 17.1%, operating profit increased 30.5%, and attributable net income increased approximately 27.6% year over year. Nine-month sales increased 27.5%, operating profit increased 46.5%, and attributable net income increased approximately 46.1%. The nine-month comparison benefited partly from lower sales in the prior-year period due to COVID-19 impacts.
As of September 30, 2021, cash and cash equivalents were $27.245 million, up from $23.633 million at December 31, 2020. Total assets were $82.852 million and total liabilities were $26.890 million. Shareholders’ equity was $55.962 million. Accounts receivable were $22.115 million and inventories were $12.841 million.
The company had no borrowings outstanding under its unsecured $15.0 million revolving credit facility and was in compliance with its debt covenants. Operating lease liabilities totaled $3.462 million, including $404,000 classified as current. No off-balance-sheet arrangements were reported.
For the first nine months, operating activities generated $13.164 million of cash, compared with $11.341 million in the prior-year period. Capital expenditures were $720,000, and dividends paid were $8.809 million. Cash increased by $3.635 million before a $23,000 foreign-currency translation effect. The company paid $7.455 million of income taxes during the period.
Material Changes Versus the Prior Comparable Period
- Q3 sales growth was driven primarily by pricing actions intended to offset higher material costs and protect margins.
- Nine-month sales growth reflected higher unit volume as well as pricing actions; the 2020 period was affected by the COVID-19 pandemic.
- Q3 gross margin declined modestly to 63.2% from 63.7% as higher material prices were largely offset by pricing.
- Nine-month gross margin improved to 62.7% from 62.4%.
- Selling expense increased 22.2% in Q3 and 21.4% for the nine-month period, primarily due to staffing, freight and commissions.
- General and administrative expense decreased 3.8% in Q3 but increased 15.8% for nine months. Results were affected by incentive compensation, legal and product-liability defense costs, director fees and lower phantom-stock expense.
- Phantom-stock compensation expense was $579,000 for the nine months, compared with $1.406 million in 2020. The related liability was $2.500 million at September 30, 2021.
- Right-of-use assets and lease liabilities increased substantially following a new 15-year Banbury, U.K. lease that commenced in April 2021. The company recorded $3.261 million of additions to right-of-use assets from new operating lease liabilities.
- Regular dividends declared increased to $0.30 per share in the second and third quarters of 2021 from $0.28 per share in comparable 2020 quarters.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific quantitative revenue, earnings or margin guidance. Management stated that available cash and borrowing capacity are expected to be sufficient to meet anticipated cash needs for at least the next twelve months, subject to revenue growth, expansion or acquisition decisions, capacity investments and the COVID-19 pandemic.
Key risks include higher material costs, customer demand and preferences, general economic conditions, competition, regulatory developments, weather, foreign-currency exposure and litigation. One customer represented more than 10% of accounts receivable and more than 10% of sales in each presented period. Sales are geographically concentrated in the United States.
The company faces product-liability claims, generally involving alleged lightning damage to flexible gas piping products. Insurance applies subject to deductibles or retentions ranging primarily from $25,000 to $2.0 million per claim. The estimated aggregate maximum exposure for current open claims was approximately $7.3 million, while recorded liabilities were $709,000 at September 30, 2021. Management cannot estimate the ultimate liability, if any.
The company reported no additional risk factors attributable to the quarter, no material subsequent events, and no market-risk hedging positions. A previously disclosed Missouri class action was dismissed and the plaintiffs’ appeal was resolved. A U.K. legal dispute was substantially resolved, with only a nominal remaining liability.
Investor Verification Items
- Verify whether pricing actions continue to offset raw-material inflation without materially reducing demand or gross margin.
- Monitor customer concentration and the effect of construction, industrial and post-pandemic demand trends on volume.
- Review product-liability claims, insurance deductibles, recorded reserves and the stated approximately $7.3 million aggregate maximum exposure.
- Assess cash generation after regular dividends, capital expenditures and lease obligations.
- Track utilization, covenant requirements and the December 2022 maturity of the $15.0 million revolving credit facility, including the transition from LIBOR to an alternative rate.
- Evaluate the effect of phantom-stock liabilities and stock-price changes on future general and administrative expense and cash payments.