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 accessories for construction, industrial, petrochemical, healthcare, and other applications. Operations are managed as one segment, with manufacturing in Pennsylvania and the United Kingdom and sales primarily through distributors, wholesalers, and OEMs in North America and Europe. This unaudited report covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
Financial Results and Key Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $27.199 million | $24.923 million | $79.443 million | $74.335 million |
| Gross profit | $16.547 million | $15.207 million | $47.794 million | $44.685 million |
| Gross margin | 60.8% | 61.0% | 60.2% | 60.1% |
| Operating profit | $6.676 million | $5.910 million | $18.534 million | $16.549 million |
| Operating margin | 24.6% | 23.7% | 23.3% | 22.3% |
| Net income attributable to Omega Flex | $5.176 million | $4.014 million | $14.115 million | $11.186 million |
| Basic and diluted EPS | $0.51 | $0.40 | $1.40 | $1.11 |
For the nine months, operating cash flow was $11.716 million versus $9.441 million in 2017. Investing cash outflow was $35.943 million, primarily reflecting $34.897 million of purchases of short-term investments and $1.046 million of capital expenditures. Financing cash outflow was $7.353 million for dividends.
At September 30, 2018, cash and cash equivalents were $6.445 million, short-term investments were $34.897 million, and total current assets were $68.853 million. Current liabilities were $16.593 million, implying current assets substantially exceeded current obligations. The company had no borrowings under its unsecured $15 million revolving credit facility and was in compliance with its debt covenants. Total liabilities were $18.647 million and total shareholders’ equity was $62.768 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 9.1%, primarily from unit growth and, to a lesser extent, higher selling prices. Nine-month sales increased 6.9%.
- Gross margins were broadly stable, while operating margins improved because of operating leverage, lower general and administrative costs, and lower phantom-stock compensation expense.
- Engineering expense increased 53.0% in the quarter and 36.2% for the nine months, driven by staffing, experimental materials, consulting, certification, and development of the MediTrac medical tubing product.
- Interest income increased to $275,000 for the nine months from $76,000, reflecting investment of excess cash in short-term instruments.
- Income tax expense declined 14.9% for the nine months, primarily due to the lower U.S. corporate tax rate under the Tax Cuts and Jobs Act, partially offset by higher pretax income and other tax effects.
- Cash declined from $37.938 million at December 31, 2017 to $6.445 million, largely because $34.897 million was shifted into short-term investments rather than consumed by operations.
- Cash dividends declared were $0.70 per share for the nine months, compared with $0.44 per share in the prior-year period.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide quantitative revenue, earnings, or margin guidance. Management states that existing cash, investments, operating cash generation, and available credit are expected to meet anticipated cash needs for at least the next twelve months. Future capital requirements may depend on revenue growth, expansion, acquisitions, and additional capacity.
- The company adopted ASC Topic 606 using the modified retrospective method effective January 1, 2018. Management reported no material adoption impact.
- The company plans to adopt the new lease standard, ASC Topic 842, effective January 1, 2019. It expects additional right-of-use assets and lease liabilities but had not quantified the amounts.
- A significant customer represented more than 10% of sales and accounts receivable. Sales are geographically concentrated in the United States and North America.
- The company faces product-liability and litigation claims, primarily related to alleged lightning damage involving flexible gas piping. A longstanding Pennsylvania case was settled and closed on August 7, 2018, with the company cleared of the allegations, and a previously restricted $1.6 million cash bond was returned in May 2018.
- A putative class-action matter re-filed in Missouri remains pending. The company is defending it and estimates aggregate maximum exposure for current open claims at approximately $2.5 million, although ultimate liability cannot be estimated. Recorded claim-related liabilities were $150,000 at September 30, 2018.
- Forward-looking results may be affected by weather, regulation, customer preferences, economic conditions, competition, litigation, environmental matters, and foreign-currency movements.
- Phantom-stock liabilities totaled $2.018 million at September 30, 2018, including $774,000 expected to be paid in February 2019. Unrecognized compensation cost was $863,000.
Important Facts for Investors to Verify
- Verify whether sales growth and operating-margin expansion continue after the reported third quarter, particularly in construction and industrial end markets.
- Monitor the MediTrac development program, increased engineering spending, product certification progress, and potential commercialization timing.
- Assess concentration risk from the customer exceeding 10% of sales and receivables.
- Review the status and potential financial impact of the pending Missouri class action and other product-liability claims.
- Confirm the composition, maturity, liquidity, and credit quality of the $34.897 million short-term investment portfolio.
- Evaluate the balance-sheet impact of adopting ASC Topic 842 in 2019.
- Verify dividend sustainability relative to operating cash flow, investment needs, litigation exposure, and available liquidity.