OmegaFlex, Inc.
Annual Report 2015

Plain-text annual report

Quality-engineered Flexible Metal Piping Products 2015 Annual Report “All things being equal, best products win.” “Best Products = Winning Results” Net Sales ($000) Net Sales per Employee Manufacturer of flexible metal hose and gas piping products Dear Shareholders, April 28, 2016 In 2015 we celebrated our 40th anniversary of being in business, and as one can see from our annual report, Omega Flex, Inc. has not slowed down in its middle age. Last year was a momentous year because the company again set historical records for sales and profits; net sales were $93 million in 2015 as compared to $85 million in 2014, and net income increased to $15 million from $13 million in 2014. Among 171 companies in the industrial sector, OmegaFlex ranks first in return on investment and return on assets, and is also in the top ten for growth in earnings per share. Our success comes from creating and executing winning strategies that introduces best-in-class products, and our corporate mantra remains “All things being equal, best products win.” Combined with our unique proprietary technologies and processes, our product sales yield the record bottom line results that are hard to duplicate. These financial results are the result of years of hard work and remaining true to our guiding principles that new products are the lifeblood of a manufacturing company, with the best products ultimately prevailing. The management team at OmegaFlex has been indoctrinated into this philosophy and the company is always envisioning the needs of the market and developing new products using our core proprietary technology to deliver those new products that meet the real and urgent needs of our customers. Our record of product innovation includes: • AutoFlare® – the first self-flaring fitting in the CSST industry that could be assembled without special tools • Commercial sizes – CSST piping in sizes over 1” for commercial applications • Underground – CSST piping that can be buried underground or under slab • CounterStrike® – the CSST that solved the lightning issue, and provides contractors with a rugged and durable pipe design • DoubleTrac® – the double containment piping for fueling and other applications, that combines flexibility, strength and zero permeation to solve the problems for those industries • AutoSnap® – the newest innovation, a fully assembled fitting that makes installation a snap. We are now into another year and we will continue to deliver superior results through our ceaseless dedication to product innovation. We invite you to read more about our company and our business and thank you for investing in OmegaFlex. Sincerely, Kevin R. Hoben President & C.E.O. Working Capital ($000) Stock Price (at December 31) OMEGA FLEX, Inc., Corporate Office, 213 Court Street, Suite 1001, Middletown, CT 06457 Tel: 860-704-6820 • Fax: 860-704-6830 “Best Products = Winning Results” Net Sales ($000) Net Sales per Employee ® Manufacturer of flexible metal hose and gas piping products Dear Shareholders, April 28, 2016 In 2015 we celebrated our 40th anniversary of being in business, and as one can see from our annual report, Omega Flex, Inc. has not slowed down in its middle age. Last year was a momentous year because the company again set historical records for sales and profits; net sales were $93 million in 2015 as compared to $85 million in 2014, and net income increased to $15 million from $13 million in 2014. Among 171 companies in the industrial sector, OmegaFlex ranks first in return on investment and return on assets, and is also in the top ten for growth in earnings per share. Our success comes from creating and executing winning strategies that introduces best-in-class products, and our corporate mantra remains “All things being equal, best products win.” Combined with our unique proprietary technologies and processes, our product sales yield the record bottom line results that are hard to duplicate. These financial results are the result of years of hard work and remaining true to our guiding principles that new products are the lifeblood of a manufacturing company, with the best products ultimately prevailing. The management team at OmegaFlex has been indoctrinated into this philosophy and the company is always envisioning the needs of the market and developing new products using our core proprietary technology to deliver those new products that meet the real and urgent needs of our customers. Our record of product innovation includes: • AutoFlare® – the first self-flaring fitting in the CSST industry that could be assembled without special tools • Commercial sizes – CSST piping in sizes over 1” for commercial applications • Underground – CSST piping that can be buried underground or under slab • CounterStrike® – the CSST that solved the lightning issue, and provides contractors with a rugged and durable pipe design • DoubleTrac® – the double containment piping for fueling and other applications, that combines flexibility, strength and zero permeation to solve the problems for those industries • AutoSnap® – the newest innovation, a fully assembled fitting that makes installation a snap. We are now into another year and we will continue to deliver superior results through our ceaseless dedication to product innovation. We invite you to read more about our company and our business and thank you for investing in OmegaFlex. Sincerely, Kevin R. Hoben President & C.E.O. Working Capital ($000) Stock Price (at December 31) OMEGA FLEX, Inc., Corporate Office, 213 Court Street, Suite 1001, Middletown, CT 06457 Tel: 860-704-6820 • Fax: 860-704-6830 UNITED STATES OF AMERICA SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K The aggregate market value of voting and non-voting common shares held by non-affiliates of the registrant as of June 30, 2015, the last business day of the most recently completed second quarter of 2015 was $108,751,648. The number of shares of common stock outstanding as of March 1, 2016 was 10,091,822. DOCUMENTS INCORPORATED BY REFERENCE (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 The information required by Part III (Items 10, 11, 12, 13, and 14) is incorporated by reference from the registrant's definitive proxy statement (to be filed pursuant to Regulation 14A) for the 2016 annual meeting of shareholders to be held on June 7, 2016. For the fiscal year ended December 31, 2015 Or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________________ to ______________________ Commission File Number 000-51372 Omega Flex, Inc. (Exact name of registrant as specified in its charter) Pennsylvania (State or other jurisdiction of incorporation or organization) 451 Creamery Way, Exton, PA (Address of principal executive offices) Registrant’s telephone number, including area code Securities registered pursuant to Section 12(b) of the Act: 23-1948942 (I.R.S. Employer Identification No.) 19341 (Zip Code) 610-524-7272 Title of each class Common Name of each exchange on which registered NASDAQ Global Market Securities registered pursuant to section 12(g) of the Act: Not applicable (Title of class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X] Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). X] No [ ] Yes [ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one): Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ] Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] -1- -2- UNITED STATES OF AMERICA SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K The aggregate market value of voting and non-voting common shares held by non-affiliates of the registrant as of June 30, 2015, the last business day of the most recently completed second quarter of 2015 was $108,751,648. The number of shares of common stock outstanding as of March 1, 2016 was 10,091,822. DOCUMENTS INCORPORATED BY REFERENCE (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 The information required by Part III (Items 10, 11, 12, 13, and 14) is incorporated by reference from the registrant's definitive proxy statement (to be filed pursuant to Regulation 14A) for the 2016 annual meeting of shareholders to be held on June 7, 2016. For the fiscal year ended December 31, 2015 Or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________________ to ______________________ Commission File Number 000-51372 Omega Flex, Inc. (Exact name of registrant as specified in its charter) Pennsylvania (State or other jurisdiction of incorporation or organization) 451 Creamery Way, Exton, PA (Address of principal executive offices) Registrant’s telephone number, including area code Securities registered pursuant to Section 12(b) of the Act: 23-1948942 (I.R.S. Employer Identification No.) 19341 (Zip Code) 610-524-7272 Title of each class Common Name of each exchange on which registered NASDAQ Global Market Securities registered pursuant to section 12(g) of the Act: Not applicable (Title of class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X] Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections. past 90 days. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the Yes [X] No [ ] Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one): Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ] Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] -1- -2- INDEX Item 1 - BUSINESS PART I Reports of Independent Registered Public Accounting Firm Financial Statements: (a)(1) Consolidated Balance Sheets as of December 31, 2015 and 2014 Consolidated Statements of Operations For the Years Ended December 31, 2015 and 2014 Consolidated Statements of Comprehensive Income For the Years Ended December 31, 2015 and 2014 Consolidated Statements of Shareholders’ Equity For the Years Ended December 31, 2015 and 2014 Consolidated Statements of Cash Flows For the Years Ended December 31, 2015 and 2014 Pages of this report Page 22 Page 24 Page 25 Page 26 Page 27 Page 28 Notes to the Consolidated Financial Statements Pages 29 through 40 (a)(2) Financial Statement Schedules No other financial statement schedules are required by Regulation S-X. (a)(3) Exhibits The Exhibit Index is set forth on Pages 44 and 45. No annual report to security holders as of December 31, 2015 has been sent to security holders and no proxy statement, form of proxy or other proxy soliciting material has been sent by the registrant to more than ten of the registrant’s security holders with respect to any annual or other meeting of security holders held or to be held in 2016. Such annual report to security holders, proxy statement or form of proxy will be furnished to security holders subsequent to the filing of this Annual Report on Form 10-K. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Annual Report on Form 10-K that are not historical facts -- but rather reflect our current expectations concerning future results and events -- constitute forward-looking statements. The words “believes,” “expects,” “intends,” “plans,” “anticipates,” “intend,” “estimate,” “potential,” “continue,” “hopes,” “likely,” “will,” and similar expressions, or the negative of these terms, identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements of Omega Flex, Inc., or industry results, to differ materially from future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s view only as of the date of this annual report statement. We undertake no obligation to update the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, conditions or circumstances. GENERAL Overview of the Company DESCRIPTION OF OUR BUSINESS Omega Flex, Inc. (Omega Flex) is a leading manufacturer of flexible metal hose, and is currently engaged in a number of different markets, including construction, manufacturing, transportation, petrochemical, pharmaceutical and other industries. The Company’s business is managed as a single operating segment that consists of the manufacture and sale of flexible metal hose and accessories. The Company’s products are concentrated in residential and commercial construction, and general industrial markets, with a comprehensive portfolio of intellectual property and patents issued in various countries around the world. The Company’s primary product, flexible gas piping, is used for gas piping within residential and commercial buildings. Through its flexibility and ease of use, the Company’s TracPipe® and TracPipe® CounterStrike® flexible gas piping, along with its fittings distributed under the trademarks AutoSnap® and AutoFlare®, allows users to substantially cut the time required to install gas piping, as compared to traditional methods. The Company’s products are manufactured at its Exton, Pennsylvania facilities in the United States, and in Banbury, Oxfordshire in the United Kingdom. A majority of the Company’s sales across all industries are generated through independent outside sales organizations such as sales representatives, wholesalers and distributors, or a combination of both. The Company has a broad distribution network in North America and to a lesser extent in other global markets. Industry Overview The flexible metal hose industry is highly fragmented and diverse, with over 10 companies producing flexible metal hose in the United States, and at least that many in Europe and Asia. Because of its simple and ubiquitous nature, flexible metal hose can be applied and has been applied to a number of different applications across a broad range of industries. The major market categories for flexible metallic hose include (1) automotive, (2) aerospace, (3) residential and commercial construction, and (4) general industrial. Omega Flex participates in the latter two markets for flexible metallic hose. The residential and commercial construction markets utilize corrugated stainless steel tubing (CSST) primarily for flexible gas piping and gas appliance connectors, and secondarily as pump connectors and seismic loops to isolate vibration in mechanical piping systems in commercial buildings. The general industrial market includes all of the processing industries, the most important of which include primary steel, petrochemical, pharmaceutical, and specialty applications for the transfer of fluids at both extremely low and high temperatures, (such as the conveying of cryogenic liquids) and a highly fragmented OEM market, as well as the maintenance and repair market. -3- -4- INDEX Item 1 - BUSINESS PART I Reports of Independent Registered Public Accounting Firm Financial Statements: (a)(1) Consolidated Balance Sheets as of December 31, 2015 and 2014 Consolidated Statements of Operations For the Years Ended December 31, 2015 and 2014 Consolidated Statements of Comprehensive Income For the Years Ended December 31, 2015 and 2014 Consolidated Statements of Shareholders’ Equity For the Years Ended December 31, 2015 and 2014 Consolidated Statements of Cash Flows For the Years Ended December 31, 2015 and 2014 Pages of this report Page 22 Page 24 Page 25 Page 26 Page 27 Page 28 Notes to the Consolidated Financial Statements Pages 29 through 40 (a)(2) Financial Statement Schedules No other financial statement schedules are required by Regulation S-X. (a)(3) Exhibits The Exhibit Index is set forth on Pages 44 and 45. No annual report to security holders as of December 31, 2015 has been sent to security holders and no proxy statement, form of proxy or other proxy soliciting material has been sent by the registrant to more than ten of the registrant’s security holders with respect to any annual or other meeting of security holders held or to be held in 2016. Such annual report to security holders, proxy statement or form of proxy will be furnished to security holders subsequent to the filing of this Annual Report on Form 10-K. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Annual Report on Form 10-K that are not historical facts -- but rather reflect our current expectations concerning future results and events -- constitute forward-looking statements. The words “believes,” “expects,” “intends,” “plans,” “anticipates,” “intend,” “estimate,” “potential,” “continue,” “hopes,” “likely,” “will,” and similar expressions, or the negative of these terms, identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements of Omega Flex, Inc., or industry results, to differ materially from future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s view only as of the date of this annual report statement. We undertake no obligation to update the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, conditions or circumstances. GENERAL Overview of the Company DESCRIPTION OF OUR BUSINESS Omega Flex, Inc. (Omega Flex) is a leading manufacturer of flexible metal hose, and is currently engaged in a number of different markets, including construction, manufacturing, transportation, petrochemical, pharmaceutical and other industries. The Company’s business is managed as a single operating segment that consists of the manufacture and sale of flexible metal hose and accessories. The Company’s products are concentrated in residential and commercial construction, and general industrial markets, with a comprehensive portfolio of intellectual property and patents issued in various countries around the world. The Company’s primary product, flexible gas piping, is used for gas piping within residential and commercial buildings. Through its flexibility and ease of use, the Company’s TracPipe® and TracPipe® CounterStrike® flexible gas piping, along with its fittings distributed under the trademarks AutoSnap® and AutoFlare®, allows users to substantially cut the time required to install gas piping, as compared to traditional methods. The Company’s products are manufactured at its Exton, Pennsylvania facilities in the United States, and in Banbury, Oxfordshire in the United Kingdom. A majority of the Company’s sales across all industries are generated through independent outside sales organizations such as sales representatives, wholesalers and distributors, or a combination of both. The Company has a broad distribution network in North America and to a lesser extent in other global markets. Industry Overview The flexible metal hose industry is highly fragmented and diverse, with over 10 companies producing flexible metal hose in the United States, and at least that many in Europe and Asia. Because of its simple and ubiquitous nature, flexible metal hose can be applied and has been applied to a number of different applications across a broad range of industries. The major market categories for flexible metallic hose include (1) automotive, (2) aerospace, (3) residential and commercial construction, and (4) general industrial. Omega Flex participates in the latter two markets for flexible metallic hose. The residential and commercial construction markets utilize corrugated stainless steel tubing (CSST) primarily for flexible gas piping and gas appliance connectors, and secondarily as pump connectors and seismic loops to isolate vibration in mechanical piping systems in commercial buildings. The general industrial market includes all of the processing industries, the most important of which include primary steel, petrochemical, pharmaceutical, and specialty applications for the transfer of fluids at both extremely low and high temperatures, (such as the conveying of cryogenic liquids) and a highly fragmented OEM market, as well as the maintenance and repair market. -3- -4- None of our competitors appear to be dominant in more than one market. We are a leading supplier of flexible metal hose the ends of the black iron pipe, apply an adhesive to the threads, and then screw on the fitting, all of which is labor intensive and in each of the markets in which we participate. Our assessment of our overall competitive position is based on several factors. The flexible gas piping market in the U.S. is currently concentrated in the residential housing market. Based on the reports issued by the national trade groups on housing construction, the level of acceptance of flexible gas piping in the construction market, and the average usage of flexible gas piping in a residential building, we are able to estimate with a reasonable level of accuracy the size of the total gas piping market. In addition, the Company is a member of an industry trade group comprised of the four largest manufacturers of CSST in the United States, which compiles and distributes sales volume statistics for its members relative to flexible gas piping. Based on our sales and the statistics described above, the Company can estimate its position within that market. For other applications, industry trade groups collect and report data related to these markets, and we can then compare and estimate our status within that group as a whole. In addition, the customer base for the products that we sell, and the identity of the manufacturers aligned with those customers is fairly well known, which again allows the Company to extract information and estimate its market position. Lastly, the term “leading” implies a host of factors other than sales volume and market share position. It includes the range and capability of the product line, history of product development and new product launches, all of which information is in the public domain. Based on all of this information, the Company is reasonably confident that it is indeed a leader in the major market segments in which it participates. Development of Business The Company celebrated its 40th anniversary during 2015. Incorporated in 1975 under the name of Tofle America, Inc., the Company was originally established as the subsidiary of a Japanese manufacturer of flexible metal hose. For a number of years, we were a manufacturer of flexible metal hose that was sold primarily to customers using the hose for incorporation into finished assemblies for industrial applications. We later changed our name to Omega Flex, Inc., and in 1996, we were acquired by Mestek, Inc. (Mestek). In January 2005, Mestek announced its intention to distribute its equity ownership in our common stock to the Mestek shareholders. A registration statement for the Omega Flex common stock was filed with the Securities and Exchange Commission and the registration statement was declared effective on July 22, 2005. We also listed our common stock on the NASDAQ National Market (now the NASDAQ Global Market) under the stock symbol “OFLX”, and began public trading of our common stock on August 1, 2005. All Mestek shareholders as of the record date for the distribution received one share of Omega Flex common stock for each share of Mestek common stock owned as of the record date. We are now a totally separate company from Mestek, and we do not use or share any material assets or services of Mestek in conducting our business. Over the years, most of the Company’s business has been derived from Omega Flex, Inc., and concentrated in North America, but the Company also has two subsidiaries located in the United Kingdom, which are largely focused on European and other international markets. The Company also has a local subsidiary which owns the Company’s Exton, Pennsylvania real estate. Overview of Current Business Products The Company’s business is managed as a single operating segment that consists of the manufacture and sale of flexible metal hose and accessories. The Company has had the most success within the residential construction industry with its flexible gas piping products, TracPipe®, which was introduced in 1997, and its more robust counterpart TracPipe® CounterStrike®, which came to market in 2004. Partnered with the development of our AutoFlare® patented fittings and accessories, both have enjoyed wide acceptance due to their reliability and durability. Within that industry, the flexible gas piping products that we offer and similar products offered by our competitors have sought to overcome the use of black iron pipe that has traditionally been used by the construction industry in the United States and Canada for the piping of fuel gases within a building. Prior to the introduction of the first CSST system in 1989, nearly all construction in the United States and Canada used traditional black iron pipe for gas piping. However, the advantages of CSST in areas subject to high incidence and likelihood of seismic events had been first demonstrated in Japan. In seismic testing, the CSST was shown to withstand the stresses on a piping system created by the shifting and movement of an earthquake better than rigid pipe. The advantages of CSST over the traditional black iron pipe also include lower overall installation costs because it can be installed in long uninterrupted lines within the building. The flexibility of the tube allows it to be bent by hand without any tools when a change in direction in the line is required. In contrast, black iron pipe requires that each bend in the pipe have a separate fitting attached. This requires the installer to thread -5- costly, including testing and rework if the work is not done properly. As a result of these advantages, the Company estimates that CSST now commands slightly over one-half of the market for fuel gas piping in new and remodeled residential construction in the United States, and the use of rigid iron pipe, and to a lesser degree copper tubing, accounts for the remainder of the market. The Company plans to continue its growth trend by demonstrating its advantages against other technologies, in both the residential and commercial markets, in both the United States and overseas in geographic areas that have access to natural gas distribution systems. In 2004, we introduced a new brand of flexible gas piping sold under the registered trademark “CounterStrike®”. CounterStrike® is designed to be more resistant to damage from transient electrical arcing. This feature is particularly desirable in areas that are subject to high levels of lightning strikes, such as the Southeast and Ohio Valley sections of the United States. In a lightning strike, the electrical energy of the lightning can energize all metal systems and components in a building. This electrical energy, in attempting to reach ground, may arc between metal systems that have different electrical resistance, and arcing can cause damage to the metal systems. In standard CSST systems, an electrical bond between the CSST and the building’s grounding electrode would address this issue, but lightning is an extremely powerful and unpredictable force. CounterStrike® CSST is designed to be electrically conductive and therefore disperse the energy of any electrical charge over the entire surface of the CounterStrike® line. In 2007, we introduced a new version of CounterStrike® CSST that was tested to be even more resistant to damage from electrical arcing than the original version, and substantially more effective than standard CSST products. As a result of its robust performance, the new version of CounterStrike® has been widely accepted in the market, and thus during 2011, the Company made the decision to sell exclusively CounterStrike® within the United States. This move demonstrated the Company’s commitment to innovation and safety, and further enhanced our leadership in the marketplace. In 2008, the Company introduced its first double containment piping product – DoubleTrac®. DoubleTrac® double containment piping has earned stringent industry certifications for its ability to safely contain and convey automotive fuels. DoubleTrac® received certification from Underwriters Laboratory, the testing and approval agency, that our product is fully compliant with UL971A, which is the product standard in the United States for metallic underground fuel piping, as well as approvals from other relevant state agencies that have more stringent testing procedures for the product. Similar to our flexible gas piping, DoubleTrac® provides advantages over older rigid pipe technologies. DoubleTrac® is made and can be installed in long continuous runs, eliminating the need for manually assembling rigid pipe junctions at the end of a pipe or at a turn in direction. In addition, DoubleTrac® has superior performance in terms of its ability to safely convey fuel from the storage tank to the dispenser to the extent that DoubleTrac® is essentially a zero permeation piping system, far exceeding the most stringent government regulations. Originally designed for applications involving automotive fueling stations running from the storage tank to the fuel dispenser, the ability of DoubleTrac® to handle a variety of installation challenges has broadened its applications to include refueling at marinas, fuel lines for back-up generators, and corrosive liquids at waste treatment plants. In short, in applications where double containment piping is required to handle potentially contaminating fluids or corrosive fluids, DoubleTrac® is engineered to handle those demanding applications. DEF-Trac®, a complementary product which is very similar to DoubleTrac®, was brought to the marketplace in 2011. DEF-Trac® piping is specifically engineered to handle the demanding requirements for diesel emissions fluid (DEF). Recent federal regulations require all diesel engines to use DEF to reduce the particulate contaminants from the diesel combustion process. However, DEF is highly corrosive and cannot be pre-mixed with the diesel fuel. This requires that new diesel trucks and automobiles must have separate tanks built into the vehicle so that the diesel emissions fluid can be injected into the catalytic converter after the point of combustion. Similarly, a large portion of fueling stations carrying diesel fuel are now also selling DEF through a separate dispenser. In addition to being highly corrosive, DEF also has a high freezing temperature, requiring a heat trace in the piping in applications in northern areas of the United States. DEF-Trac® flexible piping is uniquely suited to handle all of these challenges, as the stainless steel inner core is corrosion resistant, and DEF-Trac® also comes with options for heat trace that is extruded directly into the wall of the product. In summary, DEF-Trac® provides a complete solution to the demanding requirements of this unique application, as such, DEF-Trac® has been met with enormous acceptance from the industry that was searching for a solution to the new environmental requirement. The unique market position of DEF-Trac® has leveraged the penetration of DoubleTrac® into the broader market for automotive fueling applications. In September 2013, the Company announced that it would be releasing a newly developed fitting, AutoSnap®, as part of its flexible gas piping product line. After successfully completing all required testing by independent testing agencies, as well as extensive field trials across the United States by trained TracPipe® CounterStrike® installers, AutoSnap® was officially introduced to the market in January 2014 to wide acceptance. With its patent-pending design, the product simplified the installation process, and addressed installer preferences for both speed and ease of installation. -6- None of our competitors appear to be dominant in more than one market. We are a leading supplier of flexible metal hose in each of the markets in which we participate. Our assessment of our overall competitive position is based on several factors. The flexible gas piping market in the U.S. is currently concentrated in the residential housing market. Based on the reports issued by the national trade groups on housing construction, the level of acceptance of flexible gas piping in the construction market, and the average usage of flexible gas piping in a residential building, we are able to estimate with a reasonable level of accuracy the size of the total gas piping market. In addition, the Company is a member of an industry trade group comprised of the four largest manufacturers of CSST in the United States, which compiles and distributes sales volume statistics for its members relative to flexible gas piping. Based on our sales and the statistics described above, the Company can estimate its position within that market. For other applications, industry trade groups collect and report data related to these markets, and we can then compare and estimate our status within that group as a whole. In addition, the customer base for the products that we sell, and the identity of the manufacturers aligned with those customers is fairly well known, which again allows the Company to extract information and estimate its market position. Lastly, the term “leading” implies a host of factors other than sales volume and market share position. It includes the range and capability of the product line, history of product development and new product launches, all of which information is in the public domain. Based on all of this information, the Company is reasonably confident that it is indeed a leader in the major market segments in which it participates. Development of Business The Company celebrated its 40th anniversary during 2015. Incorporated in 1975 under the name of Tofle America, Inc., the Company was originally established as the subsidiary of a Japanese manufacturer of flexible metal hose. For a number of years, we were a manufacturer of flexible metal hose that was sold primarily to customers using the hose for incorporation into finished assemblies for industrial applications. We later changed our name to Omega Flex, Inc., and in 1996, we were acquired by Mestek, Inc. (Mestek). In January 2005, Mestek announced its intention to distribute its equity ownership in our common stock to the Mestek shareholders. A registration statement for the Omega Flex common stock was filed with the Securities and Exchange Commission and the registration statement was declared effective on July 22, 2005. We also listed our common stock on the NASDAQ National Market (now the NASDAQ Global Market) under the stock symbol “OFLX”, and began public trading of our common stock on August 1, 2005. All Mestek shareholders as of the record date for the distribution received one share of Omega Flex common stock for each share of Mestek common stock owned as of the record date. We are now a totally separate company from Mestek, and we do not use or share any material assets or services of Mestek in conducting our business. Over the years, most of the Company’s business has been derived from Omega Flex, Inc., and concentrated in North America, but the Company also has two subsidiaries located in the United Kingdom, which are largely focused on European and other international markets. The Company also has a local subsidiary which owns the Company’s Exton, Pennsylvania real estate. Overview of Current Business Products metal hose and accessories. The Company’s business is managed as a single operating segment that consists of the manufacture and sale of flexible The Company has had the most success within the residential construction industry with its flexible gas piping products, TracPipe®, which was introduced in 1997, and its more robust counterpart TracPipe® CounterStrike®, which came to market in 2004. Partnered with the development of our AutoFlare® patented fittings and accessories, both have enjoyed wide acceptance due to their reliability and durability. Within that industry, the flexible gas piping products that we offer and similar products offered by our competitors have sought to overcome the use of black iron pipe that has traditionally been used by the construction industry in the United States and Canada for the piping of fuel gases within a building. Prior to the introduction of the first CSST system in 1989, nearly all construction in the United States and Canada used traditional black iron pipe for gas piping. However, the advantages of CSST in areas subject to high incidence and likelihood of seismic events had been first demonstrated in Japan. In seismic testing, the CSST was shown to withstand the stresses on a piping system created by the shifting and movement of an earthquake better than rigid pipe. The advantages of CSST over the traditional black iron pipe also include lower overall installation costs because it can be installed in long uninterrupted lines within the building. The flexibility of the tube allows it to be bent by hand without any tools when a change in direction in the line is required. In contrast, black iron pipe requires that each bend in the pipe have a separate fitting attached. This requires the installer to thread the ends of the black iron pipe, apply an adhesive to the threads, and then screw on the fitting, all of which is labor intensive and costly, including testing and rework if the work is not done properly. As a result of these advantages, the Company estimates that CSST now commands slightly over one-half of the market for fuel gas piping in new and remodeled residential construction in the United States, and the use of rigid iron pipe, and to a lesser degree copper tubing, accounts for the remainder of the market. The Company plans to continue its growth trend by demonstrating its advantages against other technologies, in both the residential and commercial markets, in both the United States and overseas in geographic areas that have access to natural gas distribution systems. In 2004, we introduced a new brand of flexible gas piping sold under the registered trademark “CounterStrike®”. CounterStrike® is designed to be more resistant to damage from transient electrical arcing. This feature is particularly desirable in areas that are subject to high levels of lightning strikes, such as the Southeast and Ohio Valley sections of the United States. In a lightning strike, the electrical energy of the lightning can energize all metal systems and components in a building. This electrical energy, in attempting to reach ground, may arc between metal systems that have different electrical resistance, and arcing can cause damage to the metal systems. In standard CSST systems, an electrical bond between the CSST and the building’s grounding electrode would address this issue, but lightning is an extremely powerful and unpredictable force. CounterStrike® CSST is designed to be electrically conductive and therefore disperse the energy of any electrical charge over the entire surface of the CounterStrike® line. In 2007, we introduced a new version of CounterStrike® CSST that was tested to be even more resistant to damage from electrical arcing than the original version, and substantially more effective than standard CSST products. As a result of its robust performance, the new version of CounterStrike® has been widely accepted in the market, and thus during 2011, the Company made the decision to sell exclusively CounterStrike® within the United States. This move demonstrated the Company’s commitment to innovation and safety, and further enhanced our leadership in the marketplace. In 2008, the Company introduced its first double containment piping product – DoubleTrac®. DoubleTrac® double containment piping has earned stringent industry certifications for its ability to safely contain and convey automotive fuels. DoubleTrac® received certification from Underwriters Laboratory, the testing and approval agency, that our product is fully compliant with UL971A, which is the product standard in the United States for metallic underground fuel piping, as well as approvals from other relevant state agencies that have more stringent testing procedures for the product. Similar to our flexible gas piping, DoubleTrac® provides advantages over older rigid pipe technologies. DoubleTrac® is made and can be installed in long continuous runs, eliminating the need for manually assembling rigid pipe junctions at the end of a pipe or at a turn in direction. In addition, DoubleTrac® has superior performance in terms of its ability to safely convey fuel from the storage tank to the dispenser to the extent that DoubleTrac® is essentially a zero permeation piping system, far exceeding the most stringent government regulations. Originally designed for applications involving automotive fueling stations running from the storage tank to the fuel dispenser, the ability of DoubleTrac® to handle a variety of installation challenges has broadened its applications to include refueling at marinas, fuel lines for back-up generators, and corrosive liquids at waste treatment plants. In short, in applications where double containment piping is required to handle potentially contaminating fluids or corrosive fluids, DoubleTrac® is engineered to handle those demanding applications. DEF-Trac®, a complementary product which is very similar to DoubleTrac®, was brought to the marketplace in 2011. DEF-Trac® piping is specifically engineered to handle the demanding requirements for diesel emissions fluid (DEF). Recent federal regulations require all diesel engines to use DEF to reduce the particulate contaminants from the diesel combustion process. However, DEF is highly corrosive and cannot be pre-mixed with the diesel fuel. This requires that new diesel trucks and automobiles must have separate tanks built into the vehicle so that the diesel emissions fluid can be injected into the catalytic converter after the point of combustion. Similarly, a large portion of fueling stations carrying diesel fuel are now also selling DEF through a separate dispenser. In addition to being highly corrosive, DEF also has a high freezing temperature, requiring a heat trace in the piping in applications in northern areas of the United States. DEF-Trac® flexible piping is uniquely suited to handle all of these challenges, as the stainless steel inner core is corrosion resistant, and DEF-Trac® also comes with options for heat trace that is extruded directly into the wall of the product. In summary, DEF-Trac® provides a complete solution to the demanding requirements of this unique application, as such, DEF-Trac® has been met with enormous acceptance from the industry that was searching for a solution to the new environmental requirement. The unique market position of DEF-Trac® has leveraged the penetration of DoubleTrac® into the broader market for automotive fueling applications. In September 2013, the Company announced that it would be releasing a newly developed fitting, AutoSnap®, as part of its flexible gas piping product line. After successfully completing all required testing by independent testing agencies, as well as extensive field trials across the United States by trained TracPipe® CounterStrike® installers, AutoSnap® was officially introduced to the market in January 2014 to wide acceptance. With its patent-pending design, the product simplified the installation process, and addressed installer preferences for both speed and ease of installation. -5- -6- In addition to the flexible gas piping and other previously described markets, our flexible metal hose is used in a wide variety of other applications. Our involvement in these markets is important because just as the flexible gas piping applications have sprung from our expertise in manufacturing annular metal hose, other applications may also evolve from our participation in the industry. Flexible metal hose is used in a wide variety of industrial and processing applications where the unique characteristics of the flexible hose in terms of its flexibility, and its ability to absorb vibration and thermal expansion and contraction, has unique benefits over rigid piping. For example, in certain pharmaceutical processing applications, the process of developing the specific pharmaceutical may require rapid freezing of various compounds through the use of liquefied gases, such as liquefied nitrogen, helium or Freon. The use of flexible metal tubing is particularly appropriate in these types of applications. Flexible metal hose can accommodate the thermal expansion caused by the liquefied gases carried through the hose, and the total length of the hose will not significantly vary. In contrast, fixed or rigid metal pipe would expand and contract along its length as the liquid gases passed through it, causing stresses on the pipe junctions that would over time cause fatigue and failure. Alternatively, within certain industrial or commercial applications using steam, either as a heat source or in the industrial process itself, the pumps used to transfer the liquid or steam within the system are subject to varying degrees of vibration. Additionally, flexible metal hoses can also be used as connections between the pump and the intake of the fluids being transferred to eliminate the vibration effects of the pumps on the piping transfer system. All of these areas provide opportunities for the flexible metal hose arena, and thus the Company continues to participate in these markets, as it seeks new innovative solutions which will generate additional revenue streams for the future. Manufacturing In each instance, whether the application is for CSST for fuel gases, flexible metal hose for handling specialty chemicals or gases, flexible double containment piping, or unique industrial applications requiring ability to withstand wide variations in temperature and vibration, all of our success rests on our metal hose. Most of our flexible metal hoses range in diameter from 1/4” to 2” while certain applications require diameters of up to 16”. All of our smaller diameter pipe (2” inner diameter and smaller) is made by a proprietary process that is known as the rotary process. The proprietary process that we use to manufacture our annular hose is the result of a long-term development effort begun in 1995. Through continuous improvement over the years, we have developed and fine-tuned the process so that we can manufacture annular flexible metal hose on a high speed, continuous process. We believe that our own rotary process for manufacturing annular corrugated metal hose is the most cost efficient method in the industry, and that our rotary process provides us with a unique advantage in many of the industries in which we participate. As a result, we are able to provide our product on a demand basis. Over the years, the Company has had great success in achieving on- time delivery performance to the scheduled ship date. The quick inventory turnover reduces our costs for in-process inventory, and further contributes to our gross margin levels. We have also improved our productivity on a historical basis. Raw Materials We use various materials in the manufacture of our products, primarily stainless steel for our flexible metal hose and plastics for our jacketing material on TracPipe® and CounterStrike® flexible gas piping. We also purchase all of our proprietary AutoFlare® and AutoSnap® brass fittings for use with the TracPipe® and CounterStrike® flexible gas piping. Although we have multiple sources qualified for all of our major raw materials and components, we have historically used one or two sources of supply for such raw materials and components. Our current orders for stainless steel and fittings are each placed with one or two suppliers. If any one of these sources of supply were interrupted for any reason, then we would have to devote additional time and expense in obtaining the same volume of supply from our other qualified sources. This potential transition, if it were to occur, could affect our operations and financial results during the period of such transition. During 2015, despite a decrease in the price of nickel, the cost of the stainless steel metal had increased slightly compared to the prior year. Copper commodity prices were similar to the prior year. Nickel is a prime material in stainless steel, which the Company utilizes to manufacture CSST, and copper is a key component of the Company’s brass fittings. The supply of our main raw materials appears to be stable with ample volume. We believe that with our purchase commitments for stainless steel, polyethylene and for our proprietary fittings, that we have adequate sources of supply for these raw materials and components. We have not had difficulty in obtaining the raw materials, component parts or finished goods from our suppliers in prior years. We believe that an ample supply of stainless steel will continue until there is a reduction in global capacity, such as mine closures, which would then cause a constriction. Volatility in the commodities marketplace and competitive conditions in the sale of our products could potentially restrict us from passing along raw materials or component part price increases to our customers. Business Seasonality The demand for our flexible piping products that are related to construction activity including TracPipe®, Counterstrike®, DoubleTrac® and SolarTrac®, may be affected by the construction industry’s demand, which generally tightens during the winter -7- months of each year due to cold and inclement weather. Accordingly, sales are usually higher in the spring, summer and fall. Customers We sell our products to customers scattered across a wide and diverse set of industries ranging from construction to pharmaceutical with approximately 7,600 customers on record. These sales channels include sales through independent sales representatives, distributors, original equipment manufacturers, direct sales, and sales through our website on the internet. We utilize various distribution companies in the sale of our TracPipe® and Counterstrike® flexible gas piping, and these distribution customers in the aggregate represent a significant portion of our business. In particular, the Company has one significant customer, (Customer A), whereby its various branches, represented approximately 16% of our sales in 2015 and 15% in 2014, and also accounted for approximately 25% and 21% of our accounts receivable balance at December 31, 2015 and 2014, respectively. All of this business is done on a purchase order basis for immediate resale commitments or stocking, and there are no long-term purchase commitments. In the event we were to lose an account, we would not expect any long-term reduction in our sales due to the broad end-user acceptance of our products. We would anticipate that in the event of a loss of any one or more distributors, that after an initial transition period, the sale of our products would resume at or near their historical levels. Furthermore, in the case of certain national distribution chains like Customer A and other distributors, it is possible that there would continue to be purchasing activity from one or more regional or branch distribution customers. We sell our products within North America, primarily in the United States and Canada, and we also sell our products internationally, primarily in Europe through our manufacturing facility located in Banbury, England. Our sales outside of North America represent approximately 12% of our total sales during 2015 and 2014, with most of the sales occurring in the United Kingdom and elsewhere in Europe. We do not have a material portion of our long-lived assets located outside of the United States, and due to its small size, the foreign operations do not carry any significant additional risk from being located outside of the United States. Distribution of Sales As mentioned previously, we sell our products primarily through independent outside sales organizations, including independent sales representatives, distributors, fabricating distributors, wholesalers, and original equipment manufacturers (OEMs). We have a limited internal sales function that sells our products to key accounts, including OEMs and distributors of bulk hose. We believe that within each geographic market in which the independent sales representative, distributor or wholesaler is located that our outside sales organizations are the first or second most successful outside sales organization for the particular product line within that geographic area. Competition There are approximately ten manufacturers of flexible metal hose in the United States, and approximately that number in Europe and Asia. The U. S. manufacturers include Titeflex Corporation, Ward Manufacturing, Microflex, U. S. Hose, Hose Master, and several smaller privately held companies. No one manufacturer, as a general rule, participates in more than two of the major market categories, automotive, aerospace, residential and commercial construction, and general industrial, with most concentrating in just one. We estimate that we are at or near the top position of the two major categories in which we participate in regards to market share. In the flexible gas piping market, the U.S. market is currently concentrated in the residential housing market. Based on the reports issued by the national trade groups on housing construction, the level of acceptance of flexible gas piping in the construction market, and the average usage of flexible gas piping in a residential building, as well as through our sales position within that market, we are able to estimate with a high level of accuracy the size of the total gas piping market. In addition, the Company is a member of an industry trade group, which compiles and distributes sales statistics for its members relative to flexible gas piping. For other applications, industry trade groups collect and report on the size of the relevant market, and we can estimate our percentage of the relevant market based on our sales as compared to the market as a whole. The larger of our two markets, the construction industry, has seen an increase in the number of residential housing starts in 2015, as compared to the previous year. As discussed elsewhere, black iron pipe or copper tubing was historically used by all builders of commercial and residential buildings until the advent of flexible gas piping and changes in the relevant building codes. Since that time, flexible gas piping has taken an increasing share of the total amount of fuel gas piping used in construction. Due to the number of applications in which flexible metal hose may be used, and the number of companies engaged in the manufacture and sale of flexible metal hose, the general industrial market is very fragmented, and we estimate that no one company has a predominant market share of the business over other competitors. In the market for double containment piping, we compete primarily against rigid pipe systems that are more costly to install than DoubleTrac® double containment piping. The general industrial markets within Europe are very mature and tend to offer opportunities, which are interesting to us in niche markets or during periods in which a weak dollar increases the demand for our products on a competitive basis. Such has been the -8- In addition to the flexible gas piping and other previously described markets, our flexible metal hose is used in a wide months of each year due to cold and inclement weather. Accordingly, sales are usually higher in the spring, summer and fall. variety of other applications. Our involvement in these markets is important because just as the flexible gas piping applications have sprung from our expertise in manufacturing annular metal hose, other applications may also evolve from our participation in the industry. Flexible metal hose is used in a wide variety of industrial and processing applications where the unique characteristics of the flexible hose in terms of its flexibility, and its ability to absorb vibration and thermal expansion and contraction, has unique benefits over rigid piping. For example, in certain pharmaceutical processing applications, the process of developing the specific pharmaceutical may require rapid freezing of various compounds through the use of liquefied gases, such as liquefied nitrogen, helium or Freon. The use of flexible metal tubing is particularly appropriate in these types of applications. Flexible metal hose can accommodate the thermal expansion caused by the liquefied gases carried through the hose, and the total length of the hose will not significantly vary. In contrast, fixed or rigid metal pipe would expand and contract along its length as the liquid gases passed through it, causing stresses on the pipe junctions that would over time cause fatigue and failure. Alternatively, within certain industrial or commercial applications using steam, either as a heat source or in the industrial process itself, the pumps used to transfer the liquid or steam within the system are subject to varying degrees of vibration. Additionally, flexible metal hoses can also be used as connections between the pump and the intake of the fluids being transferred to eliminate the vibration effects of the pumps on the piping transfer system. All of these areas provide opportunities for the flexible metal hose arena, and thus the Company continues to participate in these markets, as it seeks new innovative solutions which will generate additional revenue streams for the future. In each instance, whether the application is for CSST for fuel gases, flexible metal hose for handling specialty chemicals or gases, flexible double containment piping, or unique industrial applications requiring ability to withstand wide variations in temperature and vibration, all of our success rests on our metal hose. Most of our flexible metal hoses range in diameter from 1/4” to 2” while certain applications require diameters of up to 16”. All of our smaller diameter pipe (2” inner diameter and smaller) is made by a proprietary process that is known as the rotary process. The proprietary process that we use to manufacture our annular hose is the result of a long-term development effort begun in 1995. Through continuous improvement over the years, we have developed and fine-tuned the process so that we can manufacture annular flexible metal hose on a high speed, continuous process. We believe that our own rotary process for manufacturing annular corrugated metal hose is the most cost efficient method in the industry, and that our rotary process provides us with a unique advantage in many of the industries in which we participate. As a result, we are able to provide our product on a demand basis. Over the years, the Company has had great success in achieving on- time delivery performance to the scheduled ship date. The quick inventory turnover reduces our costs for in-process inventory, and further contributes to our gross margin levels. We have also improved our productivity on a historical basis. Manufacturing Raw Materials We use various materials in the manufacture of our products, primarily stainless steel for our flexible metal hose and plastics for our jacketing material on TracPipe® and CounterStrike® flexible gas piping. We also purchase all of our proprietary AutoFlare® and AutoSnap® brass fittings for use with the TracPipe® and CounterStrike® flexible gas piping. Although we have multiple sources qualified for all of our major raw materials and components, we have historically used one or two sources of supply for such raw materials and components. Our current orders for stainless steel and fittings are each placed with one or two suppliers. If any one of these sources of supply were interrupted for any reason, then we would have to devote additional time and expense in obtaining the same volume of supply from our other qualified sources. This potential transition, if it were to occur, could affect our operations and financial results during the period of such transition. During 2015, despite a decrease in the price of nickel, the cost of the stainless steel metal had increased slightly compared to the prior year. Copper commodity prices were similar to the prior year. Nickel is a prime material in stainless steel, which the Company utilizes to manufacture CSST, and copper is a key component of the Company’s brass fittings. The supply of our main raw materials appears to be stable with ample volume. We believe that with our purchase commitments for stainless steel, polyethylene and for our proprietary fittings, that we have adequate sources of supply for these raw materials and components. We have not had difficulty in obtaining the raw materials, component parts or finished goods from our suppliers in prior years. We believe that an ample supply of stainless steel will continue until there is a reduction in global capacity, such as mine closures, which would then cause a constriction. Volatility in the commodities marketplace and competitive conditions in the sale of our products could potentially restrict us from passing along raw materials or component part price increases to our customers. Business Seasonality The demand for our flexible piping products that are related to construction activity including TracPipe®, Counterstrike®, DoubleTrac® and SolarTrac®, may be affected by the construction industry’s demand, which generally tightens during the winter -7- Customers We sell our products to customers scattered across a wide and diverse set of industries ranging from construction to pharmaceutical with approximately 7,600 customers on record. These sales channels include sales through independent sales representatives, distributors, original equipment manufacturers, direct sales, and sales through our website on the internet. We utilize various distribution companies in the sale of our TracPipe® and Counterstrike® flexible gas piping, and these distribution customers in the aggregate represent a significant portion of our business. In particular, the Company has one significant customer, (Customer A), whereby its various branches, represented approximately 16% of our sales in 2015 and 15% in 2014, and also accounted for approximately 25% and 21% of our accounts receivable balance at December 31, 2015 and 2014, respectively. All of this business is done on a purchase order basis for immediate resale commitments or stocking, and there are no long-term purchase commitments. In the event we were to lose an account, we would not expect any long-term reduction in our sales due to the broad end-user acceptance of our products. We would anticipate that in the event of a loss of any one or more distributors, that after an initial transition period, the sale of our products would resume at or near their historical levels. Furthermore, in the case of certain national distribution chains like Customer A and other distributors, it is possible that there would continue to be purchasing activity from one or more regional or branch distribution customers. We sell our products within North America, primarily in the United States and Canada, and we also sell our products internationally, primarily in Europe through our manufacturing facility located in Banbury, England. Our sales outside of North America represent approximately 12% of our total sales during 2015 and 2014, with most of the sales occurring in the United Kingdom and elsewhere in Europe. We do not have a material portion of our long-lived assets located outside of the United States, and due to its small size, the foreign operations do not carry any significant additional risk from being located outside of the United States. Distribution of Sales As mentioned previously, we sell our products primarily through independent outside sales organizations, including independent sales representatives, distributors, fabricating distributors, wholesalers, and original equipment manufacturers (OEMs). We have a limited internal sales function that sells our products to key accounts, including OEMs and distributors of bulk hose. We believe that within each geographic market in which the independent sales representative, distributor or wholesaler is located that our outside sales organizations are the first or second most successful outside sales organization for the particular product line within that geographic area. Competition There are approximately ten manufacturers of flexible metal hose in the United States, and approximately that number in Europe and Asia. The U. S. manufacturers include Titeflex Corporation, Ward Manufacturing, Microflex, U. S. Hose, Hose Master, and several smaller privately held companies. No one manufacturer, as a general rule, participates in more than two of the major market categories, automotive, aerospace, residential and commercial construction, and general industrial, with most concentrating in just one. We estimate that we are at or near the top position of the two major categories in which we participate in regards to market share. In the flexible gas piping market, the U.S. market is currently concentrated in the residential housing market. Based on the reports issued by the national trade groups on housing construction, the level of acceptance of flexible gas piping in the construction market, and the average usage of flexible gas piping in a residential building, as well as through our sales position within that market, we are able to estimate with a high level of accuracy the size of the total gas piping market. In addition, the Company is a member of an industry trade group, which compiles and distributes sales statistics for its members relative to flexible gas piping. For other applications, industry trade groups collect and report on the size of the relevant market, and we can estimate our percentage of the relevant market based on our sales as compared to the market as a whole. The larger of our two markets, the construction industry, has seen an increase in the number of residential housing starts in 2015, as compared to the previous year. As discussed elsewhere, black iron pipe or copper tubing was historically used by all builders of commercial and residential buildings until the advent of flexible gas piping and changes in the relevant building codes. Since that time, flexible gas piping has taken an increasing share of the total amount of fuel gas piping used in construction. Due to the number of applications in which flexible metal hose may be used, and the number of companies engaged in the manufacture and sale of flexible metal hose, the general industrial market is very fragmented, and we estimate that no one company has a predominant market share of the business over other competitors. In the market for double containment piping, we compete primarily against rigid pipe systems that are more costly to install than DoubleTrac® double containment piping. The general industrial markets within Europe are very mature and tend to offer opportunities, which are interesting to us in niche markets or during periods in which a weak dollar increases the demand for our products on a competitive basis. Such has been the -8- case for several years and has created new relationships for us. Currently, we are not heavily engaged in the manufacture of flexible metal hose for the aerospace or automotive markets, but we continue to review opportunities in all markets for our products to determine appropriate applications that will provide growth potential and high margins. In some cases, where the product offering is considered a commodity, price is the overriding competing factor. In other cases, a proprietary product offering or superior performance will be the major factors with pricing being secondary and in some cases, a non-factor. The majority of our sales are to distributors and wholesalers, and our relationships with these customers are on an arms-length basis in that neither we, nor the customers are so dependent on the other to yield any significant business advantage. From our perspective, we are able to maintain a steady demand for our products due to the broad acceptance of our products by end users, regardless of which distributor or wholesaler sells the product. Environmental facilities for our manufacturing facility. Internet Website Our manufacturing processes do not require the use of significant quantities of hazardous substances or materials, and therefore we are able to operate our Exton facility as a “small quantity generator” under the Resource Conservation and Recovery Act, 42 U.S.C. §§ 321 et seq. As a result, compliance with federal, state and local environmental laws do not pose a material burden on our business, and we are not required to expend any material amounts on capital expenditures for environmental control Backlog Management does not believe that backlog figures are material to an understanding of our business because most products are shipped promptly after the receipt of orders. Intellectual Property We have a comprehensive portfolio of intellectual property, including approximately 230 patents issued in various countries around the world. The patents cover (a) the fittings used by the flexible gas piping to join the piping to a junction or assembly, (b) pre-sleeved CSST for use in underground applications, (c) an electrically conductive jacket for flexible gas piping that we sell under the trademark CounterStrike®, and (d) a tubing containment system for our DoubleTrac® double containment piping. In combination, our AutoFlare® and AutoSnap® fittings are the leading products used with flexible gas piping because they offer a metal-to-metal seal between the fitting and the tubing, and because of their robustness and ease of use. The metal-to-metal contact provides for a longer lasting and more reliable seal than fittings which use gaskets or sealing compounds that can deteriorate over time. In applications involving fuel gases in a building, the ability to maintain the seal and prevent the leaking of such gases over long periods of time is valued by our customers. In addition, the AutoSnap® fitting provides the installer with greater ease of use by preassembling all the securing elements inside the body of the fitting. We also have received a patent for the composition of the polyethylene jacket used in our CounterStrike® flexible gas piping product, which has increased ability to dissipate electrical energy in the event of a nearby lightning strike. The tubing containment system of our DoubleTrac® double containment piping, which is also patented in the U.S. and in other countries, allows for the monitoring and collection of any liquids that may leak from the stainless steel containment layer. The expiration dates for the several patents covering our AutoFlare® fittings will expire between 2016 and 2020 and the Counterstrike® patent will expire in 2025. We currently have several patent applications pending in the United States and internationally covering improvements to our AutoFlare® fittings and our CounterStrike® polyethylene jacket, and also have a patent pending on our new AutoSnap® fitting. Finally, and as mentioned above, our unique rotary process for manufacturing flexible metal hose has been developed over the last ten years, and constitutes a valuable trade secret. In 2007, a Pennsylvania court issued a ruling that confirms our proprietary rotary manufacturing process does constitute a “trade secret” under Pennsylvania law, and is entitled to protection against unauthorized disclosure or misappropriation. Research and Development Expense Research and development expenses are charged to operations as incurred. Such charges aggregated $876,000, and $904,000, for the years ended December 31, 2015 and 2014, respectively, and are included in engineering expense in the accompanying consolidated statements of operations. Employees As of December 31, 2015, the Company had 132 employees. Most of our employees are located in our manufacturing facilities in Exton, Pennsylvania, which contain our factory personnel, engineering, finance, human resources and most of our sales staff. Our factory workforce in Exton, Pennsylvania, is not represented by a collective bargaining agent. We also maintain an office in Middletown, Connecticut where management and certain other sales personnel reside. A number of individual sales personnel are also scattered across the United States. We also maintain a manufacturing facility in Banbury, England, which contains employees of similar functions to those in the U.S., but on a much smaller scale. The sales personnel in England handle all sales and service for our products in Europe, most notably the United Kingdom, and the majority of our transactions with other international territories. You may learn more about our company by visiting our website at www.omegaflexcorp.com. Among other things, you can access our filings with the Securities and Exchange Commission. These filings include proxy statements, annual reports (Form 10-K), quarterly reports (Form 10-Q), and current reports (Form 8-K), as well as Section 16 reports filed by our officers and directors (Forms 3, 4 and 5). All of these reports will be available on the website as soon as reasonably practicable after we file the reports with the SEC. You may also view on our website the following important corporate governance documents: • Code of Business Ethics • Corporate Governance Guidelines • Charters for each of the Board committees • Policy on receiving complaints regarding account or internal control issues Item 1B – UNRESOLVED STAFF COMMENTS We do not have any unresolved comments from the staff of the Securities and Exchange Commission. Item 2 - PROPERTIES The Company owns its main facility, which is located in Exton, Pennsylvania about one hour west of Philadelphia and contains about 83,000 square feet of manufacturing and office space. The Company also leases another 30,000 square foot manufacturing facility in Exton, nearby the main facility. The majority of the manufacturing of our flexible metal hose is done at the Exton facilities. During 2014, the Company consummated a new lease on a stocking and sales facility in Houston, Texas. In the United Kingdom, the Company rents a facility in Banbury, England, which manufactures products and serves sales, warehousing and operational functions as well. The corporate office of Omega Flex, Inc., is located in Middletown, Connecticut, and is leased. Item 3 - LEGAL PROCEEDINGS In the ordinary and normal conduct of the Company’s business, it is subject to periodic lawsuits, investigations and claims (collectively, the “Claims”). Several years ago, the Company experienced a spike in Claims mostly related to lightning subrogation, which increased legal and product liability related expenses. The Company did not believe the Claims had legal merit, and therefore commenced a vigorous defense in response to the Claims. Due to the Company’s success over the years in defending itself in all such court proceedings that went to trial, the pace of new Claims has softened over the last couple of years. Although the pace has slowed, expenses during 2015 have increased due to the Company’s heightened and vigorous defense of certain cases, which may occur from time to time. To reiterate, the Company does not believe that the Claims have legal merit, and is therefore vigorously defending against those Claims. In 2013, the Company won two of the Claims at two separate trials, both of which were held in U.S. District Court; one in St. Louis, Missouri and the other in Bridgeport, Connecticut. In both cases, the jury unanimously found that the Company was not negligent in designing its TracPipe® product, and that the TracPipe® product was not defective or unreasonably dangerous. In 2010, the Company took its first Claim to trial in Pennsylvania, and the jury returned a verdict that the Company was not negligent in designing and selling the TracPipe product, but also returned a verdict for plaintiff on strict liability. The Company has appealed that portion of the verdict, and in December 2014, the Supreme Court of Pennsylvania ruled in favor of the Company, and returned the case to the trial court for further hearings. The Company has in place commercial general liability insurance policies that cover the Claims, which are subject to deductibles or retentions, ranging primarily from $25,000 to $250,000 per claim (depending on the terms of the policy and the applicable policy year), up to an aggregate amount. Litigation is subject to many uncertainties and management is unable to predict -9- -10- case for several years and has created new relationships for us. Currently, we are not heavily engaged in the manufacture of flexible metal hose for the aerospace or automotive markets, but we continue to review opportunities in all markets for our products to determine appropriate applications that will provide growth potential and high margins. In some cases, where the product offering is considered a commodity, price is the overriding competing factor. In other cases, a proprietary product offering or superior performance will be the major factors with pricing being secondary and in some cases, a non-factor. The majority of our sales are to distributors and wholesalers, and our relationships with these customers are on an arms-length basis in that neither we, nor the customers are so dependent on the other to yield any significant business advantage. From our perspective, we are able to maintain a steady demand for our products due to the broad acceptance of our products by end users, regardless of which Environmental Our manufacturing processes do not require the use of significant quantities of hazardous substances or materials, and therefore we are able to operate our Exton facility as a “small quantity generator” under the Resource Conservation and Recovery Act, 42 U.S.C. §§ 321 et seq. As a result, compliance with federal, state and local environmental laws do not pose a material burden on our business, and we are not required to expend any material amounts on capital expenditures for environmental control facilities for our manufacturing facility. distributor or wholesaler sells the product. Backlog are shipped promptly after the receipt of orders. Intellectual Property Management does not believe that backlog figures are material to an understanding of our business because most products We have a comprehensive portfolio of intellectual property, including approximately 230 patents issued in various countries around the world. The patents cover (a) the fittings used by the flexible gas piping to join the piping to a junction or assembly, (b) pre-sleeved CSST for use in underground applications, (c) an electrically conductive jacket for flexible gas piping that we sell under the trademark CounterStrike®, and (d) a tubing containment system for our DoubleTrac® double containment piping. In combination, our AutoFlare® and AutoSnap® fittings are the leading products used with flexible gas piping because they offer a metal-to-metal seal between the fitting and the tubing, and because of their robustness and ease of use. The metal-to-metal contact provides for a longer lasting and more reliable seal than fittings which use gaskets or sealing compounds that can deteriorate over time. In applications involving fuel gases in a building, the ability to maintain the seal and prevent the leaking of such gases over long periods of time is valued by our customers. In addition, the AutoSnap® fitting provides the installer with greater ease of use by preassembling all the securing elements inside the body of the fitting. We also have received a patent for the composition of the polyethylene jacket used in our CounterStrike® flexible gas piping product, which has increased ability to dissipate electrical energy in the event of a nearby lightning strike. The tubing containment system of our DoubleTrac® double containment piping, which is also patented in the U.S. and in other countries, allows for the monitoring and collection of any liquids that may leak from the stainless steel containment layer. The expiration dates for the several patents covering our AutoFlare® fittings will expire between 2016 and 2020 and the Counterstrike® patent will expire in 2025. We currently have several patent applications pending in the United States and internationally covering improvements to our AutoFlare® fittings and our CounterStrike® polyethylene jacket, and also have a patent pending on our new AutoSnap® fitting. Finally, and as mentioned above, our unique rotary process for manufacturing flexible metal hose has been developed over the last ten years, and constitutes a valuable trade secret. In 2007, a Pennsylvania court issued a ruling that confirms our proprietary rotary manufacturing process does constitute a “trade secret” under Pennsylvania law, and is entitled to protection against unauthorized disclosure or misappropriation. Research and Development Expense Employees Research and development expenses are charged to operations as incurred. Such charges aggregated $876,000, and $904,000, for the years ended December 31, 2015 and 2014, respectively, and are included in engineering expense in the accompanying consolidated statements of operations. As of December 31, 2015, the Company had 132 employees. Most of our employees are located in our manufacturing facilities in Exton, Pennsylvania, which contain our factory personnel, engineering, finance, human resources and most of our sales staff. Our factory workforce in Exton, Pennsylvania, is not represented by a collective bargaining agent. We also maintain an office in Middletown, Connecticut where management and certain other sales personnel reside. A number of individual sales personnel are also scattered across the United States. We also maintain a manufacturing facility in Banbury, England, which contains employees of similar functions to those in the U.S., but on a much smaller scale. The sales personnel in England handle all sales and service for our products in Europe, most notably the United Kingdom, and the majority of our transactions with other international territories. Internet Website You may learn more about our company by visiting our website at www.omegaflexcorp.com. Among other things, you can access our filings with the Securities and Exchange Commission. These filings include proxy statements, annual reports (Form 10-K), quarterly reports (Form 10-Q), and current reports (Form 8-K), as well as Section 16 reports filed by our officers and directors (Forms 3, 4 and 5). All of these reports will be available on the website as soon as reasonably practicable after we file the reports with the SEC. You may also view on our website the following important corporate governance documents: • Code of Business Ethics • Corporate Governance Guidelines • Charters for each of the Board committees • Policy on receiving complaints regarding account or internal control issues Item 1B – UNRESOLVED STAFF COMMENTS We do not have any unresolved comments from the staff of the Securities and Exchange Commission. Item 2 - PROPERTIES The Company owns its main facility, which is located in Exton, Pennsylvania about one hour west of Philadelphia and contains about 83,000 square feet of manufacturing and office space. The Company also leases another 30,000 square foot manufacturing facility in Exton, nearby the main facility. The majority of the manufacturing of our flexible metal hose is done at the Exton facilities. During 2014, the Company consummated a new lease on a stocking and sales facility in Houston, Texas. In the United Kingdom, the Company rents a facility in Banbury, England, which manufactures products and serves sales, warehousing and operational functions as well. The corporate office of Omega Flex, Inc., is located in Middletown, Connecticut, and is leased. Item 3 - LEGAL PROCEEDINGS In the ordinary and normal conduct of the Company’s business, it is subject to periodic lawsuits, investigations and claims (collectively, the “Claims”). Several years ago, the Company experienced a spike in Claims mostly related to lightning subrogation, which increased legal and product liability related expenses. The Company did not believe the Claims had legal merit, and therefore commenced a vigorous defense in response to the Claims. Due to the Company’s success over the years in defending itself in all such court proceedings that went to trial, the pace of new Claims has softened over the last couple of years. Although the pace has slowed, expenses during 2015 have increased due to the Company’s heightened and vigorous defense of certain cases, which may occur from time to time. To reiterate, the Company does not believe that the Claims have legal merit, and is therefore vigorously defending against those Claims. In 2013, the Company won two of the Claims at two separate trials, both of which were held in U.S. District Court; one in St. Louis, Missouri and the other in Bridgeport, Connecticut. In both cases, the jury unanimously found that the Company was not negligent in designing its TracPipe® product, and that the TracPipe® product was not defective or unreasonably dangerous. In 2010, the Company took its first Claim to trial in Pennsylvania, and the jury returned a verdict that the Company was not negligent in designing and selling the TracPipe product, but also returned a verdict for plaintiff on strict liability. The Company has appealed that portion of the verdict, and in December 2014, the Supreme Court of Pennsylvania ruled in favor of the Company, and returned the case to the trial court for further hearings. The Company has in place commercial general liability insurance policies that cover the Claims, which are subject to deductibles or retentions, ranging primarily from $25,000 to $250,000 per claim (depending on the terms of the policy and the applicable policy year), up to an aggregate amount. Litigation is subject to many uncertainties and management is unable to predict -9- -10- the outcome of the pending suits and claims. The potential liability for a given claim could range from zero to a maximum of $250,000, depending upon the circumstances, and insurance deductible or retention in place for the respective claim year. The aggregate maximum exposure for all current open Claims is estimated to not exceed approximately $4,000,000, which represents the potential costs that may be incurred over time for the Claims within the applicable insurance policy deductibles or retentions. It is possible that the results of operations or liquidity of the Company, as well as the Company’s ability to procure reasonably priced insurance, could be adversely affected by the pending litigation, potentially materially. The Company is currently unable to estimate the ultimate liability, if any, that may result from the pending litigation, or potential litigation from future claims or claims that have not yet come to our attention, and accordingly, the liability in the consolidated financial statements primarily represents an accrual for legal costs for services previously rendered and outstanding settlements for existing claims. The liabilities recorded on the Company’s books at December 31, 2015 and December 31, 2014 were $249,000 and $582,000, respectively, and are included in Other Liabilities. Additionally, two putative class action cases have been filed against the Company; one in U.S. District Court for the Middle District of Florida titled Hall v. Omega Flex, Inc. and one in U.S. District Court for the Southern District of Ohio titled Schoelwer v. Omega Flex, Inc. In both cases, the lead plaintiffs claimed that they are exposed to an increased likelihood of harm if one of the plaintiffs’ houses that contain TracPipe CSST is struck by lightning, that could damage the CSST causing a release of fuel gas in the house and causing a fire. In 2014, the judges in both cases granted the Company’s motion to dismiss all of the plaintiff’s claims due primarily to a lack of jurisdiction because there is no actual case or controversy posed by these claims. Finally, in February of 2012, the Company was made aware of a fraud perpetrated by an outside party involving insurance related premiums that the Company had prepaid for umbrella coverage. The assets are currently secured by a governmental agency which investigated the case, and held in a custodial account. In June of 2015, utilizing the secured funds, the court has approved restitution to all victims including the Company. It is not clear however at this point what amount will eventually be received by the Company. The value of the assets on the books amount to $213,000 at December 31, 2015 and December 31, 2014, and are included in Other Long Term Assets. It is possible that not all of those funds will be returned to the Company, or the Company may need to incur additional costs to procure collection. The Company is currently pursuing all avenues in an effort to bring closure to the event, and reclaim the assets, and has since replaced the aforementioned insurance coverage. Item 4 – MINE SAFETY DISCLOSURES – Not Applicable PART II Item 5 - MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Common Stock Our common stock is listed on the NASDAQ Global Market, under the symbol OFLX. The number of shareholders of record as of December 31, 2015, based on inquiries of the registrant’s transfer agent, was 422. For this purpose, shareholders whose shares are held by brokers on behalf of such shareholders (shares held in “street name”) are not separately counted or included in that total. We do not have any other securities, other than common stock, listed on a stock exchange or are publicly traded. Dividends $8,578,000. On December 10, 2015, the Board of Directors “the Board” declared a special dividend of $0.85 per share to all shareholders of record as of December 21, 2015, which was paid to shareholders on January 6, 2015, in the total amount of On December 10, 2014, the Board declared a special dividend of $0.49 per share to all shareholders of record as of December 22, 2014, which was paid to shareholders on January 5, 2015, in the total amount of $4,945,000. Additionally, on January 2, 2014, an amount of $4,289,000 was paid to shareholders related to $0.425 per share dividend declared by the Board on December 9, 2013. The Board, in its sole discretion, has a general policy of reviewing the cash needs of the Company from time to time, and based on results of operations, financial condition and capital expenditure plans, as well as other factors that the Board may consider relevant, to determine on a quarterly basis whether to declare a dividend. Item 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains forward-looking statements, which are subject to inherent uncertainties. These uncertainties include, but are not limited to, variations in weather, changes in the regulatory environment, customer preferences, general economic conditions, increased competition, the outcome of outstanding litigation, and future developments affecting environmental matters. All of these are difficult to predict, and many are beyond the ability of the Company to control. Certain statements in this Annual Report on Form 10-K that are not historical facts, but rather reflect the Company’s current expectations concerning future results and events, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believes”, “expects”, “intends”, “plans”, “anticipates”, “hopes”, “likely”, “will”, and similar expressions identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s view only as of the date of this Form 10-K. The Company undertakes no obligation to update the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, conditions or circumstances. OVERVIEW The following table sets forth, for the periods indicated, the high and low closing sale prices for our common stock as reported by the NASDAQ Global Market. The Company is a leading manufacturer of flexible metal hose, and is currently engaged in a number of different markets, including construction, manufacturing, transportation, petrochemical, pharmaceutical and other industries. 2015 2014 high low high low PRICE RANGE First Quarter Second Quarter Third Quarter Fourth Quarter $ $ $ $ 35.74 38.24 38.99 43.07 $ $ $ $ 25.15 25.64 27.69 32.41 $ $ $ $ 24.19 21.50 19.92 37.94 $ $ $ $ 19.60 18.65 16.94 19.03 -11- The Company’s business is managed as a single operating segment that consists of the manufacture and sale of flexible metal hose and accessories. The Company’s products are concentrated in residential and commercial construction, and general industrial markets, with a comprehensive portfolio of intellectual property and patents issued in various countries around the world. The Company’s primary product, flexible gas piping, is used for gas piping within residential and commercial buildings. Through its flexibility and ease of use, the Company’s TracPipe® and TracPipe® CounterStrike® flexible gas piping, along with its fittings distributed under the trademarks AutoSnap® and AutoFlare®, allows users to substantially cut the time required to install gas piping, as compared to traditional methods. The Company’s products are manufactured at its Exton, Pennsylvania facilities in the United States, and in Banbury, Oxfordshire in the United Kingdom. A majority of the Company’s sales across all industries are generated through independent outside sales organizations such as sales representatives, wholesalers and distributors, or a combination of both. The Company has a broad distribution network in North America and to a lesser extent in other global markets. -12- the outcome of the pending suits and claims. The potential liability for a given claim could range from zero to a maximum of $250,000, depending upon the circumstances, and insurance deductible or retention in place for the respective claim year. The aggregate maximum exposure for all current open Claims is estimated to not exceed approximately $4,000,000, which represents the potential costs that may be incurred over time for the Claims within the applicable insurance policy deductibles or retentions. It is possible that the results of operations or liquidity of the Company, as well as the Company’s ability to procure reasonably priced insurance, could be adversely affected by the pending litigation, potentially materially. The Company is currently unable to estimate the ultimate liability, if any, that may result from the pending litigation, or potential litigation from future claims or claims that have not yet come to our attention, and accordingly, the liability in the consolidated financial statements primarily represents an accrual for legal costs for services previously rendered and outstanding settlements for existing claims. The liabilities recorded on the Company’s books at December 31, 2015 and December 31, 2014 were $249,000 and $582,000, respectively, and are included in Other Liabilities. Additionally, two putative class action cases have been filed against the Company; one in U.S. District Court for the Middle District of Florida titled Hall v. Omega Flex, Inc. and one in U.S. District Court for the Southern District of Ohio titled Schoelwer v. Omega Flex, Inc. In both cases, the lead plaintiffs claimed that they are exposed to an increased likelihood of harm if one of the plaintiffs’ houses that contain TracPipe CSST is struck by lightning, that could damage the CSST causing a release of fuel gas in the house and causing a fire. In 2014, the judges in both cases granted the Company’s motion to dismiss all of the plaintiff’s claims due primarily to a lack of jurisdiction because there is no actual case or controversy posed by these claims. Finally, in February of 2012, the Company was made aware of a fraud perpetrated by an outside party involving insurance related premiums that the Company had prepaid for umbrella coverage. The assets are currently secured by a governmental agency which investigated the case, and held in a custodial account. In June of 2015, utilizing the secured funds, the court has approved restitution to all victims including the Company. It is not clear however at this point what amount will eventually be received by the Company. The value of the assets on the books amount to $213,000 at December 31, 2015 and December 31, 2014, and are included in Other Long Term Assets. It is possible that not all of those funds will be returned to the Company, or the Company may need to incur additional costs to procure collection. The Company is currently pursuing all avenues in an effort to bring closure to the event, and reclaim the assets, and has since replaced the aforementioned insurance coverage. Item 4 – MINE SAFETY DISCLOSURES – Not Applicable PART II Item 5 - MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Common Stock included in that total. Our common stock is listed on the NASDAQ Global Market, under the symbol OFLX. The number of shareholders of record as of December 31, 2015, based on inquiries of the registrant’s transfer agent, was 422. For this purpose, shareholders whose shares are held by brokers on behalf of such shareholders (shares held in “street name”) are not separately counted or We do not have any other securities, other than common stock, listed on a stock exchange or are publicly traded. Dividends On December 10, 2015, the Board of Directors “the Board” declared a special dividend of $0.85 per share to all shareholders of record as of December 21, 2015, which was paid to shareholders on January 6, 2015, in the total amount of $8,578,000. On December 10, 2014, the Board declared a special dividend of $0.49 per share to all shareholders of record as of December 22, 2014, which was paid to shareholders on January 5, 2015, in the total amount of $4,945,000. Additionally, on January 2, 2014, an amount of $4,289,000 was paid to shareholders related to $0.425 per share dividend declared by the Board on December 9, 2013. The Board, in its sole discretion, has a general policy of reviewing the cash needs of the Company from time to time, and based on results of operations, financial condition and capital expenditure plans, as well as other factors that the Board may consider relevant, to determine on a quarterly basis whether to declare a dividend. Item 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains forward-looking statements, which are subject to inherent uncertainties. These uncertainties include, but are not limited to, variations in weather, changes in the regulatory environment, customer preferences, general economic conditions, increased competition, the outcome of outstanding litigation, and future developments affecting environmental matters. All of these are difficult to predict, and many are beyond the ability of the Company to control. Certain statements in this Annual Report on Form 10-K that are not historical facts, but rather reflect the Company’s current expectations concerning future results and events, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believes”, “expects”, “intends”, “plans”, “anticipates”, “hopes”, “likely”, “will”, and similar expressions identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s view only as of the date of this Form 10-K. The Company undertakes no obligation to update the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, conditions or circumstances. OVERVIEW The following table sets forth, for the periods indicated, the high and low closing sale prices for our common stock as reported by the NASDAQ Global Market. The Company is a leading manufacturer of flexible metal hose, and is currently engaged in a number of different markets, including construction, manufacturing, transportation, petrochemical, pharmaceutical and other industries. 2015 2014 high low high low PRICE RANGE First Quarter Second Quarter Third Quarter Fourth Quarter $ $ $ $ 35.74 38.24 38.99 43.07 $ $ $ $ 25.15 25.64 27.69 32.41 $ $ $ $ 24.19 21.50 19.92 37.94 $ $ $ $ 19.60 18.65 16.94 19.03 The Company’s business is managed as a single operating segment that consists of the manufacture and sale of flexible metal hose and accessories. The Company’s products are concentrated in residential and commercial construction, and general industrial markets, with a comprehensive portfolio of intellectual property and patents issued in various countries around the world. The Company’s primary product, flexible gas piping, is used for gas piping within residential and commercial buildings. Through its flexibility and ease of use, the Company’s TracPipe® and TracPipe® CounterStrike® flexible gas piping, along with its fittings distributed under the trademarks AutoSnap® and AutoFlare®, allows users to substantially cut the time required to install gas piping, as compared to traditional methods. The Company’s products are manufactured at its Exton, Pennsylvania facilities in the United States, and in Banbury, Oxfordshire in the United Kingdom. A majority of the Company’s sales across all industries are generated through independent outside sales organizations such as sales representatives, wholesalers and distributors, or a combination of both. The Company has a broad distribution network in North America and to a lesser extent in other global markets. -11- -12- CHANGES IN FINANCIAL CONDITION The Cash balance was $30,152,000 at December 31, 2015, compared to $22,585,000 at December 31, 2014, increasing $7,567,000 (33.5%) during the twelve months. The majority of the increase came from general operations, as the Company had Net Income attributable to Omega Flex, Inc. of $15,788,000 during 2015. This was partially offset by a dividend of $4,945,000 paid during the first quarter of 2015, an increase in inventory purchases largely due to opportunity buys on volume, and other less significant outflows. Accounts Receivable was $16,605,000 at December 31, 2015, compared with $13,723,000 at December 31, 2014, thus increasing $2,882,000 (21.0%). The change between the periods primarily relates to growth in sales, which impacts customer balances and the eventual collection of cash to be paid with terms. There are currently no indicators that there has been any deterioration in the financial stability or liquidity of the customer base. Accrued Commissions and Sales Incentives increased $1,584,000 (57.6%), being $4,333,000 at December 31, 2015, compared to $2,749,000 at December 31, 2014. The increase mostly pertained to sales incentive programs. During 2014, the first quarter was very weak due to extremely harsh weather conditions which stalled many construction projects, and while the market did largely recover through the remainder of 2014, the level of output did not rise enough to provide significant rewards to our customers with regards to promotional sales incentives. There were no such anomalies during 2015, and due to the exceptional sales level, in general customers were able to achieve growth tiers and therefore earn higher payouts. Dividends Payable was $8,578,000 and $4,945,000 at December 31, 2015 and 2014, respectively. During both years, a special dividend was declared by the Board in December and paid in January of the following year, as stated in detail in Note 6, Shareholders’ Equity. Three-months ended December 31, 2015 vs. December 31, 2014 RESULTS OF OPERATIONS The Company reported comparative results from continuing operations for the three-month period ended December 31, 2015 and 2014 as follows: Net Sales Gross Profit Operating Profit Three-months ended December 31, (in thousands) 2015 ($000) $ 26,113 $ 16,132 $ 7,035 2015 100.0% 61.8% 26.9% 2014 ($000) $ 24,921 $ 14,977 $ 6,990 2014 100.0% 60.1% 28.1% Net Sales. The Company’s 2015 fourth quarter sales reached $26,113,000, which represented the highest sales quarter in the Company’s history. Compared to the fourth quarter of 2014, which had sales of $24,921,000, sales increased $1,192,000 or 4.8%. The growth in Net Sales for the quarter was mostly driven by an increase in unit volume. Gross Profit. The Company’s gross profit margins have improved between the two periods, being 61.8% and 60.1% as a percent of Net Sales for the three-months ended December 31, 2015 and 2014, respectively. This was largely the result of the higher sales described above, and the Company’s ability to find various manufacturing related efficiencies. Selling Expenses. Selling expenses consist primarily of employee salaries and associated overhead costs, commissions, and the cost of marketing programs such as advertising, trade shows and related communication costs, and freight. Selling expense was $3,653,000 and $3,852,000 for the three-months ended December 31, 2015 and 2014, respectively, representing a decrease of $199,000. The reduction was largely the result of less staffing related expenses. Sales expense as a percent of Net Sales also decreased, being 14.0% for the three-months ended December 31, 2015, compared to 15.5% for the three-months ended December 31, 2014. General and Administrative Expenses. General and administrative expenses consist primarily of employee salaries, benefits for administrative, executive and finance personnel, legal and accounting, insurance, and corporate general and administrative services. General and administrative expenses were $4,801,000 and $3,340,000 for the three-months ended December 31, 2015 and 2014, respectively, increasing $1,461,000 between periods. The Company recognized an increase in legal and insurance related expenses of $834,000 primarily attributable to product liability claims and coverage. There was also an increase in staffing related expenses, mostly incentive compensation earned in association with the strong profits generated during the quarter. As a percentage of sales, general and administrative expenses increased to 18.4% for the three months ended December 31, 2015 from 13.4% for the three months ended December 31, 2014. Engineering Expense. Engineering expenses consist of costs associated with the development of new products, and costs related to enhancements of existing products and manufacturing processes. Engineering expenses decreased $152,000 for the quarter. They were $643,000 and $795,000 for the three months ended December 31, 2015 and 2014, respectively. Engineering expenses as a percentage of sales were 2.5% and 3.2% for the three months ended December 31, 2015, and 2014, respectively, showing an improvement between periods. Operating Profit. Reflecting all of the factors mentioned above, Operating Profits ended largely flat compared to the same quarter last year. The Company had a profit of $7,035,000 in the three-month period ended December 31, 2015, versus a profit of $6,990,000 in the three-months ended December 31, 2014, increasing $45,000 or approximately 1%. Interest Income (Expense). Interest income is recorded on cash investments, and interest expense is recorded at times when the Company has debt amounts outstanding on its line of credit. The Company had a nominal amount of interest income for the final quarter of both 2015 and 2014. Other Income (Expense). Other Income (Expense) primarily consists of foreign currency exchange gains (losses) related to transactions generated from Omega Flex Limited, our U.K. subsidiary. For the fourth quarter of 2015 and 2014, the Company recognized expense of $4,000 and $56,000, respectively. Income Tax Expense. Income Tax Expense was $2,265,000 for the fourth quarter of 2015, compared to $2,564,000 for the same period in 2014. The approximate $300,000 decrease was primarily due to the impact on US taxes in 2014 of the foreign dividend paid in the fourth quarter of 2014 by the UK affiliate. The Company’s effective tax rate for the fourth quarter in 2015 was approximately 32% of pretax income compared to 37% for the same period in 2014. The rates for both periods do not differ materially from expected statutory rates. Twelve months ended December 31, 2015 vs. December 31, 2014 The Company reported comparative results from continuing operations for the twelve-month period ended December 31, 2015 and 2014 as follows: Net Sales Gross Profit Operating Profit Twelve-months ended December 31, (in thousands) 2015 ($000) $ 93,278 $ 57,146 $ 23,503 2015 100.0% 61.3% 25.2% 2014 ($000) $ 85,219 $ 50,026 $ 20,645 2014 100.0% 58.7% 24.2% Net Sales. The Company’s sales for the full year of 2015 were $93,278,000, representing the largest sales output in the Company’s history. Sales for 2015 ended $8,059,000 (9.5%) above 2014 sales of $85,219,000. The increase in Net Sales between periods was the mostly the result of an increase in unit volume. Net Sales during 2015 were also aided by a small increase in selling prices implemented in late 2014 to combat an anticipated rise in raw material costs from the Company’s vendors. Conversely, the Company experienced a deflation in Net Sales due to an increase in sales deductions, largely related to promotional incentives, as customers were able to achieve higher growth tiers. -13- -14- CHANGES IN FINANCIAL CONDITION The Cash balance was $30,152,000 at December 31, 2015, compared to $22,585,000 at December 31, 2014, increasing $7,567,000 (33.5%) during the twelve months. The majority of the increase came from general operations, as the Company had Net Income attributable to Omega Flex, Inc. of $15,788,000 during 2015. This was partially offset by a dividend of $4,945,000 paid during the first quarter of 2015, an increase in inventory purchases largely due to opportunity buys on volume, and other less significant outflows. Accounts Receivable was $16,605,000 at December 31, 2015, compared with $13,723,000 at December 31, 2014, thus increasing $2,882,000 (21.0%). The change between the periods primarily relates to growth in sales, which impacts customer balances and the eventual collection of cash to be paid with terms. There are currently no indicators that there has been any deterioration in the financial stability or liquidity of the customer base. Accrued Commissions and Sales Incentives increased $1,584,000 (57.6%), being $4,333,000 at December 31, 2015, compared to $2,749,000 at December 31, 2014. The increase mostly pertained to sales incentive programs. During 2014, the first quarter was very weak due to extremely harsh weather conditions which stalled many construction projects, and while the market did largely recover through the remainder of 2014, the level of output did not rise enough to provide significant rewards to our customers with regards to promotional sales incentives. There were no such anomalies during 2015, and due to the exceptional sales level, in general customers were able to achieve growth tiers and therefore earn higher payouts. Dividends Payable was $8,578,000 and $4,945,000 at December 31, 2015 and 2014, respectively. During both years, a special dividend was declared by the Board in December and paid in January of the following year, as stated in detail in Note 6, Shareholders’ Equity. Three-months ended December 31, 2015 vs. December 31, 2014 RESULTS OF OPERATIONS The Company reported comparative results from continuing operations for the three-month period ended December 31, 2015 and 2014 as follows: Net Sales Gross Profit Operating Profit Three-months ended December 31, (in thousands) 2015 ($000) $ 26,113 $ 16,132 $ 7,035 2015 100.0% 61.8% 26.9% 2014 ($000) $ 24,921 $ 14,977 $ 6,990 2014 100.0% 60.1% 28.1% Net Sales. The Company’s 2015 fourth quarter sales reached $26,113,000, which represented the highest sales quarter in the Company’s history. Compared to the fourth quarter of 2014, which had sales of $24,921,000, sales increased $1,192,000 or 4.8%. The growth in Net Sales for the quarter was mostly driven by an increase in unit volume. Gross Profit. The Company’s gross profit margins have improved between the two periods, being 61.8% and 60.1% as a percent of Net Sales for the three-months ended December 31, 2015 and 2014, respectively. This was largely the result of the higher sales described above, and the Company’s ability to find various manufacturing related efficiencies. Selling Expenses. Selling expenses consist primarily of employee salaries and associated overhead costs, commissions, and the cost of marketing programs such as advertising, trade shows and related communication costs, and freight. Selling expense was $3,653,000 and $3,852,000 for the three-months ended December 31, 2015 and 2014, respectively, representing a decrease of $199,000. The reduction was largely the result of less staffing related expenses. Sales expense as a percent of Net Sales also decreased, being 14.0% for the three-months ended December 31, 2015, compared to 15.5% for the three-months ended December 31, 2014. General and Administrative Expenses. General and administrative expenses consist primarily of employee salaries, benefits for administrative, executive and finance personnel, legal and accounting, insurance, and corporate general and administrative services. General and administrative expenses were $4,801,000 and $3,340,000 for the three-months ended December 31, 2015 and 2014, respectively, increasing $1,461,000 between periods. The Company recognized an increase in legal and insurance related expenses of $834,000 primarily attributable to product liability claims and coverage. There was also an increase in staffing related expenses, mostly incentive compensation earned in association with the strong profits generated during the quarter. As a percentage of sales, general and administrative expenses increased to 18.4% for the three months ended December 31, 2015 from 13.4% for the three months ended December 31, 2014. Engineering Expense. Engineering expenses consist of costs associated with the development of new products, and costs related to enhancements of existing products and manufacturing processes. Engineering expenses decreased $152,000 for the quarter. They were $643,000 and $795,000 for the three months ended December 31, 2015 and 2014, respectively. Engineering expenses as a percentage of sales were 2.5% and 3.2% for the three months ended December 31, 2015, and 2014, respectively, showing an improvement between periods. Operating Profit. Reflecting all of the factors mentioned above, Operating Profits ended largely flat compared to the same quarter last year. The Company had a profit of $7,035,000 in the three-month period ended December 31, 2015, versus a profit of $6,990,000 in the three-months ended December 31, 2014, increasing $45,000 or approximately 1%. Interest Income (Expense). Interest income is recorded on cash investments, and interest expense is recorded at times when the Company has debt amounts outstanding on its line of credit. The Company had a nominal amount of interest income for the final quarter of both 2015 and 2014. Other Income (Expense). Other Income (Expense) primarily consists of foreign currency exchange gains (losses) related to transactions generated from Omega Flex Limited, our U.K. subsidiary. For the fourth quarter of 2015 and 2014, the Company recognized expense of $4,000 and $56,000, respectively. Income Tax Expense. Income Tax Expense was $2,265,000 for the fourth quarter of 2015, compared to $2,564,000 for the same period in 2014. The approximate $300,000 decrease was primarily due to the impact on US taxes in 2014 of the foreign dividend paid in the fourth quarter of 2014 by the UK affiliate. The Company’s effective tax rate for the fourth quarter in 2015 was approximately 32% of pretax income compared to 37% for the same period in 2014. The rates for both periods do not differ materially from expected statutory rates. Twelve months ended December 31, 2015 vs. December 31, 2014 The Company reported comparative results from continuing operations for the twelve-month period ended December 31, 2015 and 2014 as follows: Net Sales Gross Profit Operating Profit Twelve-months ended December 31, (in thousands) 2015 ($000) $ 93,278 $ 57,146 $ 23,503 2015 100.0% 61.3% 25.2% 2014 ($000) $ 85,219 $ 50,026 $ 20,645 2014 100.0% 58.7% 24.2% Net Sales. The Company’s sales for the full year of 2015 were $93,278,000, representing the largest sales output in the Company’s history. Sales for 2015 ended $8,059,000 (9.5%) above 2014 sales of $85,219,000. The increase in Net Sales between periods was the mostly the result of an increase in unit volume. Net Sales during 2015 were also aided by a small increase in selling prices implemented in late 2014 to combat an anticipated rise in raw material costs from the Company’s vendors. Conversely, the Company experienced a deflation in Net Sales due to an increase in sales deductions, largely related to promotional incentives, as customers were able to achieve higher growth tiers. -13- -14- Gross Profit. The Company’s gross profit margins have increased between the two periods, being 61.3% and 58.7% for the twelve-months ended December 31, 2015 and 2014, respectively. The improvement resulted from the Company’s ability to find various manufacturing related efficiencies, along with the sales price actions noted above to supersede an anticipated increase in the Company’s core raw material costs. Selling Expenses. Selling expenses consist primarily of employee salaries and associated overhead costs, commissions, and the cost of marketing programs such as advertising, trade shows and related communication costs, and freight. Selling expense was $15,252,000 and $14,109,000 for the twelve-months ended December 31, 2015 and 2014, respectively, representing an increase of $1,143,000. Although no particular item was the main contributor or represented a significant increase on its own, there were a few components that were higher than others and make up the majority of the difference. Commissions and freight increased compared to last year, largely in relation with the increase in sales. Advertising costs increased due to various campaigns, and the annual sales meeting was more expensive largely due to the increased size of the event associated with Company’s 40th anniversary. Selling expense as a percent of Net Sales was mostly in-line with the prior year, being 16.4% for 2015, and 16.6% in 2014. General and Administrative Expenses. General and administrative expenses consist primarily of employee salaries, benefits for administrative, executive and finance personnel, legal and accounting, insurance, and corporate general and administrative services. General and administrative expenses were $15,707,000 and $12,351,000 for 2015 and 2014, respectively, increasing $3,356,000 between periods. The majority of the change pertained to a $2,639,000 increase in legal and insurance related expenses primarily associated with product liability claims and coverage. While the overall pace of claims has softened, there were a few claims that required a heightened defense, which inflated the expense for the year. Staffing related expenses also increased, mostly related to incentive compensation earned in connection with the strong profits generated during the year. As a percentage of sales, general and administrative expenses increased, being 16.8% in 2015 and 14.5% in 2014. Engineering Expense. Engineering expenses consist of costs associated with the development of new products, and costs related to enhancements of existing products and manufacturing processes. Engineering expenses have decreased $237,000 between periods, as they were $2,684,000 and $2,921,000 for the twelve-months ended December 31, 2015 and 2014, respectively. Engineering expenses as a percentage of sales were 2.9% in 2015 and 3.4% in 2014. Operating Profit. Reflecting all of the factors mentioned above, Operating Profits increased $2,858,000 or 13.8%, ending with a profit of $23,503,000 for 2015, compared to $20,645,000 in 2014. Interest Income (Expense). Interest income is earned on cash investments, and interest expense is incurred at times when the Company has debt amounts outstanding on its line of credit. There was $73,000 and $36,000 of interest income recorded during 2015 and 2014. Other Income (Expense). Other Income (Expense) primarily consists of foreign currency exchange gains (losses) on transactions with Omega Flex Limited, our U.K. subsidiary. For the year, there was expense of $12,000 in 2015, and $82,000 in 2014, both largely the result of a weakened British Pound. Income Tax Expense. Income Tax Expense was $7,603,000 in 2015, compared to $6,994,000 for the same period in 2014, increasing by $609,000 largely in correlation with the change in income before taxes. The Company’s effective tax rate in 2015 was approximately 32% of pretax income compared to 34% in 2014. The rates in both years do not differ materially from expected statutory rates, based upon the jurisdictions in which the income was earned. COMMITMENTS AND CONTINGENCIES See Note 11 to the Company’s financial statements for a detailed description of Commitments and Contingencies. FUTURE IMPACT OF KNOWN TRENDS OR UNCERTAINTIES The Company’s operations are sensitive to a number of market and extrinsic factors, any one of which could materially adversely affect its results of operations in any given year: Construction Activity—The Company is directly impacted by the level of single family and multi-family residential housing starts and, to a lesser extent, commercial construction starts. The construction industry can be cyclical, shifting upwards and downwards depending on a variety of factors. After a few years of significant building, the United States construction industry appeared to hit a peak in 2006. Low interest rates and easy availability of credit, contributed to a high level of construction activity. However, following that period, the industry experienced a significant deterioration in demand for residential, commercial and institutional construction. Some of the factors that influenced the decline include: • • • construction, and the crisis in the financial markets reduced the availability of financing for new construction, especially large projects foreclosures had increased the inventory of available residential housing, thereby decreasing the demand for new consumer demand and confidence declined as a result of reduced economic activity and increased unemployment. During 2014 and 2015, the construction activity appeared to reflect a recovery, and has shown upward mobility. Projections published by the National Association of Home Builders predicts housing starts will continue to increase during 2016. However, any significant decrease in residential construction activity may materially adversely affect the Company’s financial condition. Technological Changes—Although the HVAC industry has historically been impacted by technology changes in a relatively incremental manner, it cannot be discounted that radical changes might impact the use of natural gas, which could materially adversely affect the Company’s results of operations and/or financial position in the future, but at this time it does not appear that there are any known technologies that could negatively impact the market materially. Weather Conditions—The Company’s flagship TracPipe® and CounterStrike ® products are used in residential and commercial heating applications. As such, the demand for its products is impacted by weather as it affects the level of construction. Furthermore, severe climatic changes, such as those suggested by the “global climate change” phenomenon, could over time adversely affect the demand for fossil fuel heating products and adversely affect the Company’s results of operations and financial position. Purchasing Practices—It has been the Company’s policy in recent years to aggregate purchase volumes for high value commodities with fewer vendors to achieve maximum volume related cost reductions while maintaining quality and service. This policy has been effective in reducing costs, but has introduced additional risk which could potentially result in short-term supply disruptions or cost increases from time to time in the future if one of the Company’s key vendors experiences any catastrophic event, such as bankruptcy. Legal Costs —The Company is subject to lawsuits mostly relating to claims of product liability. The Company has in place insurance policies to cover the defense of most of these cases, and any amounts payable with respect thereto, which are typically subject to deductibles or self-insured retention amounts that vary depending on the policy year. In 2013, the Company won two cases at two separate trials. In both cases, the jury unanimously found that the Company was not negligent in designing its TracPipe® product, and that the TracPipe® product was not defective or unreasonably dangerous. In 2014, the Company won an appeal at the Supreme Court of Pennsylvania from a portion of an adverse jury verdict from an earlier trial. As a result of that decision, the Pennsylvania Supreme Court rewrote the law in Pennsylvania regarding product liability. That case has been returned to the trial court for further hearings. Finally, the Company was successful in obtaining the dismissal of two attempted class action cases that were filed against the Company. In both cases the lead plaintiffs did not allege any actual harm had occurred, and the courts dismissed both those actions. However, continued litigation and the defense costs associated therewith, in addition to any other payments made, could affect the Company's results of operations, perhaps materially, and could potentially affect the Company’s ability to obtain insurance through mainstream markets at an affordable price. Supply Disruptions and Commodity Risks—The Company uses a variety of materials in the manufacture of its products, including stainless steel for its CSST, polyethylene which is used as a jacket for the CSST, as well as its previously documented electrical dispersion properties, and brass for its fittings. In connection with the purchase of commodities, principally stainless steel for manufacturing requirements, the Company occasionally enters into one-year purchase commitments which include a designated fixed price or range of prices. These agreements sometimes require the Company to accept delivery of the commodity in the quantities committed, at the agreed upon prices. Transactions required for these commodities in excess of the one year commitments are conducted at current market prices at the Company’s discretion. Currently, the Company does not have any -15- -16- Gross Profit. The Company’s gross profit margins have increased between the two periods, being 61.3% and 58.7% for the twelve-months ended December 31, 2015 and 2014, respectively. The improvement resulted from the Company’s ability to find various manufacturing related efficiencies, along with the sales price actions noted above to supersede an anticipated increase in the Company’s core raw material costs. Selling Expenses. Selling expenses consist primarily of employee salaries and associated overhead costs, commissions, and the cost of marketing programs such as advertising, trade shows and related communication costs, and freight. Selling expense was $15,252,000 and $14,109,000 for the twelve-months ended December 31, 2015 and 2014, respectively, representing an increase of $1,143,000. Although no particular item was the main contributor or represented a significant increase on its own, there were a few components that were higher than others and make up the majority of the difference. Commissions and freight increased compared to last year, largely in relation with the increase in sales. Advertising costs increased due to various campaigns, and the annual sales meeting was more expensive largely due to the increased size of the event associated with Company’s 40th anniversary. Selling expense as a percent of Net Sales was mostly in-line with the prior year, being 16.4% for 2015, and 16.6% in 2014. General and Administrative Expenses. General and administrative expenses consist primarily of employee salaries, benefits for administrative, executive and finance personnel, legal and accounting, insurance, and corporate general and administrative services. General and administrative expenses were $15,707,000 and $12,351,000 for 2015 and 2014, respectively, increasing $3,356,000 between periods. The majority of the change pertained to a $2,639,000 increase in legal and insurance related expenses primarily associated with product liability claims and coverage. While the overall pace of claims has softened, there were a few claims that required a heightened defense, which inflated the expense for the year. Staffing related expenses also increased, mostly related to incentive compensation earned in connection with the strong profits generated during the year. As a percentage of sales, general and administrative expenses increased, being 16.8% in 2015 and 14.5% in 2014. Engineering Expense. Engineering expenses consist of costs associated with the development of new products, and costs related to enhancements of existing products and manufacturing processes. Engineering expenses have decreased $237,000 between periods, as they were $2,684,000 and $2,921,000 for the twelve-months ended December 31, 2015 and 2014, respectively. Engineering expenses as a percentage of sales were 2.9% in 2015 and 3.4% in 2014. Operating Profit. Reflecting all of the factors mentioned above, Operating Profits increased $2,858,000 or 13.8%, ending with a profit of $23,503,000 for 2015, compared to $20,645,000 in 2014. Interest Income (Expense). Interest income is earned on cash investments, and interest expense is incurred at times when the Company has debt amounts outstanding on its line of credit. There was $73,000 and $36,000 of interest income recorded during 2015 and 2014. Other Income (Expense). Other Income (Expense) primarily consists of foreign currency exchange gains (losses) on transactions with Omega Flex Limited, our U.K. subsidiary. For the year, there was expense of $12,000 in 2015, and $82,000 in 2014, both largely the result of a weakened British Pound. Income Tax Expense. Income Tax Expense was $7,603,000 in 2015, compared to $6,994,000 for the same period in 2014, increasing by $609,000 largely in correlation with the change in income before taxes. The Company’s effective tax rate in 2015 was approximately 32% of pretax income compared to 34% in 2014. The rates in both years do not differ materially from expected statutory rates, based upon the jurisdictions in which the income was earned. COMMITMENTS AND CONTINGENCIES See Note 11 to the Company’s financial statements for a detailed description of Commitments and Contingencies. FUTURE IMPACT OF KNOWN TRENDS OR UNCERTAINTIES The Company’s operations are sensitive to a number of market and extrinsic factors, any one of which could materially adversely affect its results of operations in any given year: Construction Activity—The Company is directly impacted by the level of single family and multi-family residential housing starts and, to a lesser extent, commercial construction starts. The construction industry can be cyclical, shifting upwards and downwards depending on a variety of factors. After a few years of significant building, the United States construction industry appeared to hit a peak in 2006. Low interest rates and easy availability of credit, contributed to a high level of construction activity. However, following that period, the industry experienced a significant deterioration in demand for residential, commercial and institutional construction. Some of the factors that influenced the decline include: • • • the crisis in the financial markets reduced the availability of financing for new construction, especially large projects foreclosures had increased the inventory of available residential housing, thereby decreasing the demand for new construction, and consumer demand and confidence declined as a result of reduced economic activity and increased unemployment. During 2014 and 2015, the construction activity appeared to reflect a recovery, and has shown upward mobility. Projections published by the National Association of Home Builders predicts housing starts will continue to increase during 2016. However, any significant decrease in residential construction activity may materially adversely affect the Company’s financial condition. Technological Changes—Although the HVAC industry has historically been impacted by technology changes in a relatively incremental manner, it cannot be discounted that radical changes might impact the use of natural gas, which could materially adversely affect the Company’s results of operations and/or financial position in the future, but at this time it does not appear that there are any known technologies that could negatively impact the market materially. Weather Conditions—The Company’s flagship TracPipe® and CounterStrike ® products are used in residential and commercial heating applications. As such, the demand for its products is impacted by weather as it affects the level of construction. Furthermore, severe climatic changes, such as those suggested by the “global climate change” phenomenon, could over time adversely affect the demand for fossil fuel heating products and adversely affect the Company’s results of operations and financial position. Purchasing Practices—It has been the Company’s policy in recent years to aggregate purchase volumes for high value commodities with fewer vendors to achieve maximum volume related cost reductions while maintaining quality and service. This policy has been effective in reducing costs, but has introduced additional risk which could potentially result in short-term supply disruptions or cost increases from time to time in the future if one of the Company’s key vendors experiences any catastrophic event, such as bankruptcy. Legal Costs —The Company is subject to lawsuits mostly relating to claims of product liability. The Company has in place insurance policies to cover the defense of most of these cases, and any amounts payable with respect thereto, which are typically subject to deductibles or self-insured retention amounts that vary depending on the policy year. In 2013, the Company won two cases at two separate trials. In both cases, the jury unanimously found that the Company was not negligent in designing its TracPipe® product, and that the TracPipe® product was not defective or unreasonably dangerous. In 2014, the Company won an appeal at the Supreme Court of Pennsylvania from a portion of an adverse jury verdict from an earlier trial. As a result of that decision, the Pennsylvania Supreme Court rewrote the law in Pennsylvania regarding product liability. That case has been returned to the trial court for further hearings. Finally, the Company was successful in obtaining the dismissal of two attempted class action cases that were filed against the Company. In both cases the lead plaintiffs did not allege any actual harm had occurred, and the courts dismissed both those actions. However, continued litigation and the defense costs associated therewith, in addition to any other payments made, could affect the Company's results of operations, perhaps materially, and could potentially affect the Company’s ability to obtain insurance through mainstream markets at an affordable price. Supply Disruptions and Commodity Risks—The Company uses a variety of materials in the manufacture of its products, including stainless steel for its CSST, polyethylene which is used as a jacket for the CSST, as well as its previously documented electrical dispersion properties, and brass for its fittings. In connection with the purchase of commodities, principally stainless steel for manufacturing requirements, the Company occasionally enters into one-year purchase commitments which include a designated fixed price or range of prices. These agreements sometimes require the Company to accept delivery of the commodity in the quantities committed, at the agreed upon prices. Transactions required for these commodities in excess of the one year commitments are conducted at current market prices at the Company’s discretion. Currently, the Company does not have any -15- -16- fixed purchase commitment contracts, but may enter into such transactions in the future. Management believes at present that it has adequate sources of supply for its raw materials and components (subject to the risks described above under Purchasing Practices) and has historically not had significant difficulty in obtaining the raw materials, component parts or finished goods from its suppliers. The Company is not dependent for any commodity on a single supplier, the loss of which would have a material adverse effect on its business. Interest Rate Sensitivity - The Company currently has access to a $15,000,000 unsecured line of credit (LOC) with Santander Bank, formerly Sovereign Bank, NA (Sovereign), and as of December 31, 2015, has no outstanding amounts due on the line. When the Company borrows against the LOC, all amounts must be paid back with interest, using an interest rate range of LIBOR plus 1.00% to LIBOR plus 1.35% or the Prime rate up to Prime plus 0.10%, depending upon the Company’s then existing financial ratios. The Company may elect to use either the LIBOR or PRIME rates. As of December 31, 2015, the actual rate to borrow was at approximately 1.61%. Interest rates are also significant to the Company as a participant in the residential construction industry, since interest rates can be a determinant factor on whether or not borrowing funds for building will be affordable to our customers. (See Construction Activity, above). Currently, interest rates are currently reasonably low, but any dramatic change to interest rates could have a detrimental effect on the business. Retention of Qualified Personnel – The Company does not operate with multiple levels of management. It is relatively “flat” organizationally, which does subject the Company to the risks associated with the loss of critical managers. From time to time, there may be a shortage of skilled labor, which may make it more difficult and expensive for the Company to attract and retain qualified employees. The Company is dependent upon the relatively unique talents and managerial skills of a small number of key executives. The Company utilizes a phantom stock program as a retention tool targeted at such key executives and employees, as outlined in Note 12 of the consolidated financial statements. CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES Stock Based Compensation Plans Financial Reporting Release No. 60, released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 2 of the Notes to the Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. The following is a brief discussion of the Company’s more significant accounting policies. The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to revenue recognition, accounts receivable allowances, inventory valuations, goodwill valuation, product liability costs, phantom stock and accounting for income taxes. Actual amounts could differ significantly from these estimates. Our critical accounting policies and significant estimates and assumptions are described in more detail as follows: Revenue Recognition The Company’s revenue recognition activities relat e almost entirely to the manufacture and sale of flexible metal hose and pipe. Under GAAP, revenues are considered to have been earned when the Company has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. The following criteria represent preconditions to the recognition of revenue: • Persuasive evidence of an arrangement for the sale of product or services must exist. • Delivery has occurred or services rendered. • The sales price to the customer is fixed or determinable. • Collection is reasonably assured. The Company recognizes revenue upon shipment in accordance with the above principles. Gross sales are reduced for all consideration paid to customers for which no identifiable benefit is received by the Company. This includes promotional incentives, which includes various programs including year-end rebates, and payment term discounts. The amounts of certain incentives are known with reasonable certainty at the time of sale, while others are projected based upon the most reliable information available at the reporting date. Commissions are accounted for as a selling expense. Accounts Receivable and Provision for Doubtful Accounts Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on specific analysis of accounts in the receivable portfolio and historical write-off experience. While management believes the allowance to be adequate, if the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make payments, additional allowances may be required. Inventories are valued at the lower of cost or market. The cost of inventories is determined by the first-in, first-out (FIFO) method. The Company generally considers inventory quantities beyond two years of non-usage, measured on a historical usage basis, to be excess inventory and reduces the gross carrying value of inventory accordingly. Inventories Goodwill In accordance with Financial Accounting Standards Board (FASB) ASC Topic 350, Intangibles – Goodwill and Other, the Company performed an annual impairment test in accordance with this guidance as of December 31, 2015 and also at December 31, 2014. These analyses did not indicate any impairment of goodwill at the end of either period. In 2006, the Company adopted a Phantom Stock Plan (the “Plan”), which allows the Company to grant phantom stock units (Units) to certain key employees, officers or directors. The Units each represent a contractual right to payment of compensation in the future based upon the market value of the Company’s common stock. The Units follow a vesting schedule of three years from the grant date, and are then paid upon maturity. In accordance with FASB ASC Topic 718, Stock Compensation, the Company uses the Black-Scholes option pricing model as its method for determining the fair value of the Units. Further details of the Plan are provided in Note 12. Product Liability Reserves Product liability reserves represent the estimated unpaid amounts under the Company’s insurance policies with respect to existing claims. The Company uses the most current available data to estimate claims. As explained more fully under Note 11, Commitments and Contingencies, for various product liability claims covered under the Company’s general liability insurance policies, the Company must pay certain defense and settlement costs within its deductible or self-insured retention limits, ranging primarily from $25,000 to $250,000 per claim, depending on the terms of the policy in the applicable policy year, up to an aggregate amount. The Company is vigorously defending against all known claims. Fair Value of Financial and Nonfinancial Instruments The Company measures financial instruments in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures. The accounting standard defines fair value, establishes a framework for measuring fair value under GAAP, and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard creates a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. The Company relies on its actively traded share value – a level 1 input – in determining the fair value of the -17- -18- fixed purchase commitment contracts, but may enter into such transactions in the future. Management believes at present that it has adequate sources of supply for its raw materials and components (subject to the risks described above under Purchasing Practices) and has historically not had significant difficulty in obtaining the raw materials, component parts or finished goods from its suppliers. The Company is not dependent for any commodity on a single supplier, the loss of which would have a material adverse effect on its business. Interest Rate Sensitivity - The Company currently has access to a $15,000,000 unsecured line of credit (LOC) with Santander Bank, formerly Sovereign Bank, NA (Sovereign), and as of December 31, 2015, has no outstanding amounts due on the line. When the Company borrows against the LOC, all amounts must be paid back with interest, using an interest rate range of LIBOR plus 1.00% to LIBOR plus 1.35% or the Prime rate up to Prime plus 0.10%, depending upon the Company’s then existing financial ratios. The Company may elect to use either the LIBOR or PRIME rates. As of December 31, 2015, the actual rate to borrow was at approximately 1.61%. Interest rates are also significant to the Company as a participant in the residential construction industry, since interest rates can be a determinant factor on whether or not borrowing funds for building will be affordable to our customers. (See Construction Activity, above). Currently, interest rates are currently reasonably low, but any dramatic change to interest rates could have a detrimental effect on the business. Retention of Qualified Personnel – The Company does not operate with multiple levels of management. It is relatively “flat” organizationally, which does subject the Company to the risks associated with the loss of critical managers. From time to time, there may be a shortage of skilled labor, which may make it more difficult and expensive for the Company to attract and retain qualified employees. The Company is dependent upon the relatively unique talents and managerial skills of a small number of key executives. The Company utilizes a phantom stock program as a retention tool targeted at such key executives and employees, as outlined in Note 12 of the consolidated financial statements. Financial Reporting Release No. 60, released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 2 of the Notes to the Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. The following is a brief discussion of the Company’s more significant accounting policies. The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to revenue recognition, accounts receivable allowances, inventory valuations, goodwill valuation, product liability costs, phantom stock and accounting for income taxes. Actual amounts could differ significantly from these estimates. Our critical accounting policies and significant estimates and assumptions are described in more detail as follows: Revenue Recognition of revenue: The Company’s revenue recognition activities relat e almost entirely to the manufacture and sale of flexible metal hose and pipe. Under GAAP, revenues are considered to have been earned when the Company has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. The following criteria represent preconditions to the recognition • Persuasive evidence of an arrangement for the sale of product or services must exist. • Delivery has occurred or services rendered. • The sales price to the customer is fixed or determinable. • Collection is reasonably assured. The Company recognizes revenue upon shipment in accordance with the above principles. Gross sales are reduced for all consideration paid to customers for which no identifiable benefit is received by the Company. This includes promotional incentives, which includes various programs including year-end rebates, and payment term discounts. The amounts of certain incentives are known with reasonable certainty at the time of sale, while others are projected based upon the most reliable information available at the reporting date. Commissions are accounted for as a selling expense. Accounts Receivable and Provision for Doubtful Accounts Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on specific analysis of accounts in the receivable portfolio and historical write-off experience. While management believes the allowance to be adequate, if the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make payments, additional allowances may be required. Inventories Inventories are valued at the lower of cost or market. The cost of inventories is determined by the first-in, first-out (FIFO) method. The Company generally considers inventory quantities beyond two years of non-usage, measured on a historical usage basis, to be excess inventory and reduces the gross carrying value of inventory accordingly. Goodwill In accordance with Financial Accounting Standards Board (FASB) ASC Topic 350, Intangibles – Goodwill and Other, the Company performed an annual impairment test in accordance with this guidance as of December 31, 2015 and also at December 31, 2014. These analyses did not indicate any impairment of goodwill at the end of either period. CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES Stock Based Compensation Plans In 2006, the Company adopted a Phantom Stock Plan (the “Plan”), which allows the Company to grant phantom stock units (Units) to certain key employees, officers or directors. The Units each represent a contractual right to payment of compensation in the future based upon the market value of the Company’s common stock. The Units follow a vesting schedule of three years from the grant date, and are then paid upon maturity. In accordance with FASB ASC Topic 718, Stock Compensation, the Company uses the Black-Scholes option pricing model as its method for determining the fair value of the Units. Further details of the Plan are provided in Note 12. Product Liability Reserves Product liability reserves represent the estimated unpaid amounts under the Company’s insurance policies with respect to existing claims. The Company uses the most current available data to estimate claims. As explained more fully under Note 11, Commitments and Contingencies, for various product liability claims covered under the Company’s general liability insurance policies, the Company must pay certain defense and settlement costs within its deductible or self-insured retention limits, ranging primarily from $25,000 to $250,000 per claim, depending on the terms of the policy in the applicable policy year, up to an aggregate amount. The Company is vigorously defending against all known claims. Fair Value of Financial and Nonfinancial Instruments The Company measures financial instruments in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures. The accounting standard defines fair value, establishes a framework for measuring fair value under GAAP, and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard creates a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. The Company relies on its actively traded share value – a level 1 input – in determining the fair value of the -17- -18- reporting unit in its annual impairment test as described in the FASB ASC Topic 350, Intangibles - Goodwill and Other. Investing Activities Earnings per Common Share Basic earnings per share have been computed using the weighted-average number of common shares outstanding. For the periods presented, there are no dilutive securities. Consequently, basic and dilutive earnings per share are the same. Currency Translation Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates prevailing on the balance sheet dates. The Statements of Operations are translated into U.S. dollars at average exchange rates for the period. Adjustments resulting from the translation of financial statements are excluded from the determination of income and are accumulated in a separate component of shareholders’ equity. Exchange gains and losses resulting from foreign currency transactions are included in the Statements of Operations (other income (expense)) in the period in which they occur. Income Taxes The Company accounts for tax liabilities in accordance with ASC Topic 740, Income Taxes. Under this method the Company recorded tax expense, related deferred taxes and tax benefits, and uncertainties in tax positions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize the benefit, or that future deductibility is uncertain. No valuation allowance was deemed necessary at December 31, 2015 or 2014. Also, in accordance with FASB ASC Topic 740, the Company had a reserve for uncertainties in tax positions of $110,000 at December 31, 2015, and $105,000 at December 31, 2014. These reserves are reviewed each quarter. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company’s primary cash needs have been related to working capital items, which the Company has largely funded through cash generated from operations. With regards to liquidity and capital resources, the Company had a cash balance of $30,152,000 at December 31, 2015, and also has the full use of a $15,000,000 line of credit available with Santander Bank, as discussed in detail in Note 5. At December 31, 2014, the Company had cash of $22,585,000. Operating Activities Cash provided by operating activities is net income adjusted for certain non-cash items and changes in certain assets and liabilities, such as those included in working capital. For 2015, the Company’s cash provided from operating activities was $13,250,000, compared to $14,840,000 of cash provided during 2014, thus decreasing by $1,590,000 between periods. While no item was particularly significant with regards to creating the reduction in cash, it was recognized that the timing of accounts receivable cash collections, higher inventory purchases, and an increase in amounts paid related to product liability claims in 2015 contributed to the decrease. As a general trend, the Company tends to deplete cash early in the year, as significant payments are typically made for accrued promotional incentives, incentive compensation, and taxes. Cash has then historically shown a tendency to be restored and accumulated during the latter portion of the year. -19- Cash used in investing activities during 2015 and 2014 was $620,000 and $215,000, respectively, increasing $405,000. This was all related to capital expenditures for both periods. As anticipated and disclosed in the 2014 Form 10-K, the Company proceeded with extensive renovations at its Exton, Pennsylvania facilities during 2015, including additional machinery and leasehold improvements, which required a greater outlay of cash than in the previous year. We believe our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend upon many factors including our rate of revenue growth, the timing and extent of any expansion efforts, and the potential for investments in, or the acquisition of any complementary products, businesses or supplementary facilities for additional capacity. The Company does not currently have any known material commitments for capital expenditures. Financing Activities 2014. Omega Flex, Inc. declared a dividend during December of 2014 of $4,945,000, as outlined in Note 6, which was subsequently paid in January of 2015. One of the Company’s subsidiaries paid a dividend of $145,000 during 2014, which is reflected as a cash deduction during that year. The Company had no borrowings or payments on its line of credit during 2015 or RECENT ACCOUNTING PRONOUNCEMENTS In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. The updated standard becomes effective for the Company in the first quarter of fiscal year 2018. Early adoption is permitted beginning in the first quarter of the Company’s 2017 fiscal year. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the consolidated financial statements. In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330). Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. The Company is evaluating the provisions of this statement, including which period to adopt, and has not determined what impact the adoption of ASU 2015-11 will have on the Company's financial position or results of operations. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under this ASU, lessees are required to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases. By definition, a short-term lease is one in which: (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which right-of-use assets and lease liabilities are not recognized and lease payments are generally recognized as expense over the lease term on a straight-line basis. This change will result in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under the legacy lease accounting guidance. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the provisions of this statement, including which period to adopt, and has not determined what impact the adoption of ASU 2016-02 will have on the Company's financial position or results of operations. Off-Balance Sheet Obligations or Arrangements The Company has off-balance sheet obligations or arrangements at December 31, 2015 that relate to purchase commitments for the following year, and also operating lease obligations, which in total equal $18,891,000. The total amount of these obligations at December 31, 2014 was $22,388,000. -20- reporting unit in its annual impairment test as described in the FASB ASC Topic 350, Intangibles - Goodwill and Other. Investing Activities Basic earnings per share have been computed using the weighted-average number of common shares outstanding. For the periods presented, there are no dilutive securities. Consequently, basic and dilutive earnings per share are the same. Earnings per Common Share Currency Translation Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates prevailing on the balance sheet dates. The Statements of Operations are translated into U.S. dollars at average exchange rates for the period. Adjustments resulting from the translation of financial statements are excluded from the determination of income and are accumulated in a separate component of shareholders’ equity. Exchange gains and losses resulting from foreign currency transactions are included in the Statements of Operations (other income (expense)) in the period in which they occur. Income Taxes The Company accounts for tax liabilities in accordance with ASC Topic 740, Income Taxes. Under this method the Company recorded tax expense, related deferred taxes and tax benefits, and uncertainties in tax positions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize the benefit, or that future deductibility is uncertain. No valuation allowance was deemed necessary at December 31, 2015 or 2014. Also, in accordance with FASB ASC Topic 740, the Company had a reserve for uncertainties in tax positions of $110,000 at December 31, 2015, and $105,000 at December 31, 2014. These reserves are reviewed each quarter. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company’s primary cash needs have been related to working capital items, which the Company has largely funded through cash generated from operations. With regards to liquidity and capital resources, the Company had a cash balance of $30,152,000 at December 31, 2015, and also has the full use of a $15,000,000 line of credit available with Santander Bank, as discussed in detail in Note 5. At December 31, 2014, the Company had cash of $22,585,000. Operating Activities Cash provided by operating activities is net income adjusted for certain non-cash items and changes in certain assets and liabilities, such as those included in working capital. For 2015, the Company’s cash provided from operating activities was $13,250,000, compared to $14,840,000 of cash provided during 2014, thus decreasing by $1,590,000 between periods. While no item was particularly significant with regards to creating the reduction in cash, it was recognized that the timing of accounts receivable cash collections, higher inventory purchases, and an increase in amounts paid related to product liability claims in 2015 contributed to the decrease. As a general trend, the Company tends to deplete cash early in the year, as significant payments are typically made for accrued promotional incentives, incentive compensation, and taxes. Cash has then historically shown a tendency to be restored and accumulated during the latter portion of the year. Cash used in investing activities during 2015 and 2014 was $620,000 and $215,000, respectively, increasing $405,000. This was all related to capital expenditures for both periods. As anticipated and disclosed in the 2014 Form 10-K, the Company proceeded with extensive renovations at its Exton, Pennsylvania facilities during 2015, including additional machinery and leasehold improvements, which required a greater outlay of cash than in the previous year. We believe our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend upon many factors including our rate of revenue growth, the timing and extent of any expansion efforts, and the potential for investments in, or the acquisition of any complementary products, businesses or supplementary facilities for additional capacity. The Company does not currently have any known material commitments for capital expenditures. Financing Activities Omega Flex, Inc. declared a dividend during December of 2014 of $4,945,000, as outlined in Note 6, which was subsequently paid in January of 2015. One of the Company’s subsidiaries paid a dividend of $145,000 during 2014, which is reflected as a cash deduction during that year. The Company had no borrowings or payments on its line of credit during 2015 or 2014. RECENT ACCOUNTING PRONOUNCEMENTS In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. The updated standard becomes effective for the Company in the first quarter of fiscal year 2018. Early adoption is permitted beginning in the first quarter of the Company’s 2017 fiscal year. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the consolidated financial statements. In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330). Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. The Company is evaluating the provisions of this statement, including which period to adopt, and has not determined what impact the adoption of ASU 2015-11 will have on the Company's financial position or results of operations. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under this ASU, lessees are required to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases. By definition, a short-term lease is one in which: (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which right-of-use assets and lease liabilities are not recognized and lease payments are generally recognized as expense over the lease term on a straight-line basis. This change will result in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under the legacy lease accounting guidance. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the provisions of this statement, including which period to adopt, and has not determined what impact the adoption of ASU 2016-02 will have on the Company's financial position or results of operations. Off-Balance Sheet Obligations or Arrangements The Company has off-balance sheet obligations or arrangements at December 31, 2015 that relate to purchase commitments for the following year, and also operating lease obligations, which in total equal $18,891,000. The total amount of these obligations at December 31, 2014 was $22,388,000. -19- -20- Item 7A - QUANTITATATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company does not engage in the purchase or trading of market risk sensitive instruments. The Company does not presently have any positions with respect to hedge transactions such as forward contracts relating to currency fluctuations. No market risk sensitive instruments are held for speculative or trading purposes. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Omega Flex, Inc. We have audited the accompanying consolidated balance sheets of Omega Flex, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Omega Flex, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Omega Flex, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 4, 2016 expressed an unqualified opinion on the effectiveness of Omega Flex, Inc.’s internal control over financial reporting. /s/ RSM US LLP Blue Bell, Pennsylvania March 4, 2016 -21- -22- Item 7A - QUANTITATATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company does not engage in the purchase or trading of market risk sensitive instruments. The Company does not presently have any positions with respect to hedge transactions such as forward contracts relating to currency fluctuations. No market risk sensitive instruments are held for speculative or trading purposes. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Omega Flex, Inc. We have audited the accompanying consolidated balance sheets of Omega Flex, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Omega Flex, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Omega Flex, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 4, 2016 expressed an unqualified opinion on the effectiveness of Omega Flex, Inc.’s internal control over financial reporting. /s/ RSM US LLP Blue Bell, Pennsylvania March 4, 2016 -21- -22- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Omega Flex, Inc. We have audited Omega Flex, Inc.'s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Omega Flex Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Omega Flex, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2015 consolidated financial statements of Omega Flex, Inc. and our report dated March 4, 2016 expressed an unqualified opinion. /s/ RSM US LLP Blue Bell, Pennsylvania March 4, 2016 OMEGA FLEX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, (Dollars in Thousands, except Common Stock par value) ASSETS Current Assets: Cash and Cash Equivalents Accounts Receivable - less allowances of $882 and $710, respectively Inventories-Net Deferred Taxes Other Current Assets Total Current Assets Property and Equipment - Net Goodwill-Net Deferred Taxes Other Long Term Assets Total Assets Current Liabilities: Accounts Payable Accrued Compensation Dividends Payable Taxes Payable Other Liabilities Total Current Liabilities Deferred Taxes Other Long Term Liabilities Total Liabilities LIABILITIES AND SHAREHOLDERS' EQUITY Accrued Commissions and Sales Incentives Commitments and Contingencies (Note 11) Shareholders’ Equity: Omega Flex, Inc. Shareholders’ Equity: Common Stock – par value $0.01 Shares: authorized 20,000,000, issued 10,153,633 and outstanding 10,091,822 at both December 31, 2015 and 2014 Treasury Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Omega Flex, Inc. Shareholders’ Equity Noncontrolling Interest Total Shareholders’ Equity 2015 2014 $ 30,152 $ 22,585 114 - $ 66,274 $ 55,138 $ $ 4,945 25,120 21,169 16,605 8,287 - 1,647 56,691 4,638 3,526 1,305 2,489 4,669 4,333 8,578 433 3,050 23,552 368 1,200 102 (1) 10,808 30,656 (683) 40,882 272 41,154 13,723 7,364 625 1,468 45,765 4,483 3,526 1,364 2,352 4,184 2,749 1,216 3,572 19,018 926 1,225 102 (1) 10,808 23,446 (497) 33,858 111 33,969 -23- -24- Total Liabilities and Shareholders’ Equity $ 66,274 $ 55,138 See accompanying Notes which are an integral part of the Consolidated Financial Statements. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Omega Flex, Inc. We have audited Omega Flex, Inc.'s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Omega Flex Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Omega Flex, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2015 consolidated financial statements of Omega Flex, Inc. and our report dated March 4, 2016 expressed an unqualified opinion. /s/ RSM US LLP Blue Bell, Pennsylvania March 4, 2016 OMEGA FLEX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, (Dollars in Thousands, except Common Stock par value) ASSETS Current Assets: Cash and Cash Equivalents Accounts Receivable - less allowances of $882 and $710, respectively Inventories-Net Deferred Taxes Other Current Assets Total Current Assets Property and Equipment - Net Goodwill-Net Deferred Taxes Other Long Term Assets Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts Payable Accrued Compensation Accrued Commissions and Sales Incentives Dividends Payable Taxes Payable Other Liabilities Total Current Liabilities Deferred Taxes Other Long Term Liabilities Total Liabilities Commitments and Contingencies (Note 11) Shareholders’ Equity: Omega Flex, Inc. Shareholders’ Equity: Common Stock – par value $0.01 Shares: authorized 20,000,000, issued 10,153,633 and outstanding 10,091,822 at both December 31, 2015 and 2014 Treasury Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Omega Flex, Inc. Shareholders’ Equity Noncontrolling Interest Total Shareholders’ Equity 2015 2014 $ 30,152 $ 22,585 16,605 8,287 - 1,647 56,691 4,638 3,526 114 1,305 13,723 7,364 625 1,468 45,765 4,483 3,526 - 1,364 $ 66,274 $ 55,138 $ 2,489 4,669 4,333 8,578 433 3,050 23,552 368 1,200 $ 2,352 4,184 2,749 4,945 1,216 3,572 19,018 926 1,225 25,120 21,169 102 (1) 10,808 30,656 (683) 40,882 272 41,154 102 (1) 10,808 23,446 (497) 33,858 111 33,969 -23- -24- Total Liabilities and Shareholders’ Equity $ 66,274 $ 55,138 See accompanying Notes which are an integral part of the Consolidated Financial Statements. OMEGA FLEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, (Amounts in thousands, except earnings per common shares) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME OMEGA FLEX, INC. For the years ended December 31, (Dollars in Thousands) Net Sales Cost of Goods Sold Gross Profit Selling Expense General and Administrative Expense Engineering Expense Operating Profit Interest Income Other Expense 2015 2014 $ 93,278 $ 85,219 36,132 35,193 57,146 50,026 15,252 15,707 2,684 14,109 12,351 2,921 23,503 20,645 73 (12) 36 (82) Income Before Income Taxes 23,564 20,599 Income Tax Provision Net Income 7,603 6,994 15,961 13,605 Less: Net Income – Noncontrolling Interest (173) (143) Net Income attributable to Omega Flex, Inc. $ 15,788 $ 13,462 Basic and Diluted Earnings per Common Share $ 1.56 $ 1.33 Basic and Diluted Weighted Average Shares Outstanding 10,092 10,092 See accompanying Notes which are an integral part of the Consolidated Financial Statements. Net Income Other Comprehensive Income (Loss), Net of Tax: Foreign Currency Translation Adjustment, Net of Taxes Other Comprehensive Income (Loss) 2015 2014 $15,961 $13,605 (198) (198) (177) (177) Comprehensive Income 15,763 13,428 Less: Comprehensive Income Attributable to the Noncontrolling Interest, Net of Taxes (161) (134) Total Other Comprehensive Income $ 15,602 $ 13,294 See accompanying Notes which are an integral part of the Consolidated Financial Statements. -25- -26- OMEGA FLEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, (Amounts in thousands, except earnings per common shares) OMEGA FLEX, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31, (Dollars in Thousands) General and Administrative Expense Engineering Expense Net Sales Cost of Goods Sold Gross Profit Selling Expense Operating Profit Interest Income Other Expense Income Tax Provision Net Income 2015 2014 $ 93,278 $ 85,219 36,132 35,193 57,146 50,026 15,252 15,707 2,684 14,109 12,351 2,921 23,503 20,645 73 (12) 36 (82) 7,603 6,994 15,961 13,605 Income Before Income Taxes 23,564 20,599 Less: Net Income – Noncontrolling Interest (173) (143) Net Income attributable to Omega Flex, Inc. $ 15,788 $ 13,462 Basic and Diluted Earnings per Common Share $ 1.56 $ 1.33 Basic and Diluted Weighted Average Shares Outstanding 10,092 10,092 See accompanying Notes which are an integral part of the Consolidated Financial Statements. Net Income Other Comprehensive Income (Loss), Net of Tax: Foreign Currency Translation Adjustment, Net of Taxes Other Comprehensive Income (Loss) 2015 2014 $15,961 $13,605 (198) (198) (177) (177) Comprehensive Income 15,763 13,428 Less: Comprehensive Income Attributable to the Noncontrolling Interest, Net of Taxes (161) (134) Total Other Comprehensive Income $ 15,602 $ 13,294 See accompanying Notes which are an integral part of the Consolidated Financial Statements. -25- -26- OMEGA FLEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the years ended December 31, 2015 and 2014 (Dollars in Thousands) Common Stock Outstanding Common Stock Treasury Stock Paid In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interest Shareholders’ Equity Balance - December 31, 2013 10,091,822 $ 102 ($1) $ 10,808 $ 14,929 ($329) $ 122 $ 25,631 Net Income Cumulative Translation Adjustment Dividends Declared Dividends Paid 13,462 (4,945) (168) 143 (9) 13,605 (177) (145) (4,945) (145) Balance - December 31, 2014 10,091,822 $ 102 ($1) $ 10,808 $ 23,446 ($497) $ 111 $ 33,969 Net Income Cumulative Translation Adjustment Dividends Declared 15,788 (8,578) (186) 173 (12) 15,961 (198) (8,578) Balance - December 31, 2015 10,091,822 $ 102 ($1) $ 10,808 $30,656 ($683) $ 272 $ 41,154 See accompanying Notes which are an integral part of the Consolidated Financial Statements. OMEGA FLEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, (Dollars in Thousands) Cash Flows from Operating Activities: Net Income Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Non-Cash Compensation Expense Depreciation and Amortization Provision for Losses on Accounts Receivable, net of write-offs and recoveries Deferred Taxes Provision for Inventory Reserves Changes in Assets and Liabilities: Accounts Receivable Inventories Other Assets Accounts Payable Accrued Compensation Accrued Commissions and Sales Incentives Other Liabilities Net Cash Provided by Operating Activities 2015 2014 $ 15,961 $ 13,605 177 460 169 (638) 58 (3,167) (1,036) (119) 158 502 1,590 (865) 13,250 634 486 (16) 140 (173) (861) (525) 183 585 1,070 (1,183) 895 14,840 Cash Flows from Investing Activities: Capital Expenditures (620) (215) Net Cash Used In Investing Activities (620) (215) Cash Flows from Financing Activities: Dividends Paid (4,945) (145) Net Cash Used In Financing Activities (4,945) (145) Translation effect on cash Cash and Cash Equivalents - Beginning of Year (118) 22,585 (152) 8,257 Cash and Cash Equivalents - End of Year $ 30,152 $ 22,585 Supplemental Disclosure of Cash Flow Information Cash paid for Income Taxes $ 8,442 $ 5,743 Cash paid for Interest $ - $ - See accompanying Notes which are an integral part of the Consolidated Financial Statements. Net Increase in Cash and Cash Equivalents 7,686 14,480 -27- -28- OMEGA FLEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the years ended December 31, 2015 and 2014 (Dollars in Thousands) Common Stock Common Treasury Outstanding Stock Stock Paid In Capital Retained Earnings Comprehensive Noncontrolling Shareholders’ Income (Loss) Interest Equity Accumulated Other Balance - December 31, 2013 10,091,822 $ 102 ($1) $ 10,808 $ 14,929 ($329) $ 122 $ 25,631 Net Income Cumulative Translation Adjustment Dividends Declared Dividends Paid Net Income Cumulative Translation Adjustment Dividends Declared 13,462 (4,945) 15,788 (8,578) (168) 143 (9) 13,605 (177) (4,945) (145) (145) 173 (186) (12) 15,961 (198) (8,578) Balance - December 31, 2014 10,091,822 $ 102 ($1) $ 10,808 $ 23,446 ($497) $ 111 $ 33,969 Balance - December 31, 2015 10,091,822 $ 102 ($1) $ 10,808 $30,656 ($683) $ 272 $ 41,154 See accompanying Notes which are an integral part of the Consolidated Financial Statements. OMEGA FLEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, (Dollars in Thousands) Cash Flows from Operating Activities: Net Income Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Non-Cash Compensation Expense Depreciation and Amortization Provision for Losses on Accounts Receivable, net of write-offs and recoveries Deferred Taxes Provision for Inventory Reserves Changes in Assets and Liabilities: Accounts Receivable Inventories Other Assets Accounts Payable Accrued Compensation Accrued Commissions and Sales Incentives Other Liabilities Net Cash Provided by Operating Activities 2015 2014 $ 15,961 $ 13,605 177 460 169 (638) 58 (3,167) (1,036) (119) 158 502 1,590 (865) 13,250 634 486 (16) 140 (173) (861) (525) 183 585 1,070 (1,183) 895 14,840 Cash Flows from Investing Activities: Capital Expenditures (620) (215) Net Cash Used In Investing Activities (620) (215) Cash Flows from Financing Activities: Dividends Paid (4,945) (145) Net Cash Used In Financing Activities (4,945) (145) Net Increase in Cash and Cash Equivalents 7,686 14,480 Translation effect on cash Cash and Cash Equivalents - Beginning of Year (118) 22,585 (152) 8,257 Cash and Cash Equivalents - End of Year $ 30,152 $ 22,585 Supplemental Disclosure of Cash Flow Information Cash paid for Income Taxes $ 8,442 $ 5,743 Cash paid for Interest $ - $ - See accompanying Notes which are an integral part of the Consolidated Financial Statements. -27- -28-  The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of purchase to be cash equivalents. Cash equivalents include investments in an institutional money market fund, which invests in U.S. Treasury bills, notes and bonds, and/or repurchase agreements, backed by such obligations. Carrying value approximates fair value. Cash and cash equivalents are deposited at various area banks, which at times may exceed federally insured limits. The Company monitors the viability of the banking institutions carrying its assets on a regular basis, and has the ability to transfer cash to various institutions during times of risk. The Company has not experienced any losses related to these cash balances, and believes its credit risk to be minimal. Accounts Receivable and Provision for Doubtful Accounts Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on specific analysis of accounts in the receivable portfolio and historical write-off experience. While management believes the allowance to be adequate, if the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make payments, additional allowances may be required. The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on any known collection issues, historical experience, and other currently available evidence. The reserve for future credits, discounts, and doubtful accounts was $882,000 and $710,000 as of December 31, 2015 and 2014, respectively. In regards to identifying uncollectible accounts, the Company reviews an aging report on a consistent basis to determine past due accounts, and utilizes a well established credit rating agency. The Company charges off those accounts that are deemed uncollectible once all collection efforts have been exhausted. OMEGA FLEX, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Cash Equivalents 1. BASIS OF PRESENTATION AND CONSOLIDATION Description of Business The accompanying consolidated financial statements include the accounts of Omega Flex, Inc. (Omega) and its subsidiaries (collectively the “Company”). The Company’s audited consolidated financial statements for the year ended December 31, 2015 and 2014 have been prepared in accordance with accounting standards set by the Financial Accounting Standards Board (FASB), and with the instructions of Form 10-K and Article 8 of Regulation S-X. All material inter-company accounts and transactions have been eliminated in consolidation. The Company is a leading manufacturer of flexible metal hose, which is used in a variety of applications to carry gases and liquids within their particular applications. The Company’s business is controlled as a single operating segment that consists of the manufacture and sale of flexible metal hose and accessories. These applications include carrying liquefied gases in certain processing applications, fuel gases within residential and commercial buildings and vibration absorbers in high vibration applications. The Company’s flexible metal piping is also used to carry other types of gases and fluids in a number of industrial applications where the customer requires the piping to have both a degree of flexibility and/or an ability to carry corrosive compounds or mixtures, or to carry at both very high and very low (cryogenic) temperatures. The Company manufactures flexible metal hose at its facilities in Exton, Pennsylvania, in the United States, and in Banbury, Oxfordshire in the United Kingdom, and sells its products through distributors, wholesalers and to original equipment manufacturers (“OEMs”) throughout North America, and in certain European markets. Inventories 2. SIGNIFICANT ACCOUNTING POLICIES Use of Estimates Inventories are valued at the lower of cost or market . The cost of inventories is determined by the first-in, first-out (FIFO) method. The Company generally considers inventory quantities beyond two years of non-usage, measured on a historical usage basis, to be excess inventory and reduces the carrying value of inventory accordingly. The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to revenue recognition, accounts receivable allowances, inventory valuations, goodwill valuation, product liability costs, phantom stock and accounting for income taxes. Actual amounts could differ significantly from these estimates. Revenue Recognition The Company’s revenue recognition activities relate almost entirely to the manufacture and sale of flexible metal hose and pipe. Under GAAP, revenues are considered to have been earned when the Company has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. The following criteria represent preconditions to the recognition of revenue: • Persuasive evidence of an arrangement for the sale of product or services must exist. • Delivery has occurred or services rendered. • The sales price to the customer is fixed or determinable. • Collection is reasonably assured. The Company recognizes revenue upon shipment in accordance with the above principles. Gross sales are reduced for all consideration paid to customers for which no identifiable benefit is received by the Company. This includes promotional incentives, which includes various programs including year-end rebates, and payment term discounts. The amounts of certain incentives are known with reasonable certainty at the time of sale, while others are projected based upon the most reliable information available at the reporting date. Commissions are accounted for as a selling expense. Property and Equipment improvements are capitalized. Goodwill Stock-Based Compensation Plans Property and equipment are carried at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or, for leasehold improvements, the life of the lease, if shorter. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in other income or expense for the period. The cost of maintenance and repairs is expensed as incurred; significant In accordance with Financial Accounting Standards Board (FASB) ASC Topic 350, Intangibles – Goodwill and Other, the Company performed an annual impairment test in accordance with this guidance as of December 31, 2015 and also at December 31, 2014. These analyses did not indicate any impairment of goodwill at the end of either period. In 2006, the Company adopted a Phantom Stock Plan (the “Plan”), which allows the Company to grant phantom stock units (Units) to certain key employees, officers or directors. The Units each represent a contractual right to payment of compensation in the future based upon the market value of the Company’s common stock. The Units follow a vesting schedule of three years from the grant date, and are then paid upon maturity. In accordance with FASB ASC Topic 718, Stock Compensation, the Company uses the Black-Scholes option pricing model as its method for determining the fair value of the Units. Further details of the Plan are provided in Note 12. -29- -30- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OMEGA FLEX, INC. Cash Equivalents 1. BASIS OF PRESENTATION AND CONSOLIDATION Description of Business The accompanying consolidated financial statements include the accounts of Omega Flex, Inc. (Omega) and its subsidiaries (collectively the “Company”). The Company’s audited consolidated financial statements for the year ended December 31, 2015 and 2014 have been prepared in accordance with accounting standards set by the Financial Accounting Standards Board (FASB), and with the instructions of Form 10-K and Article 8 of Regulation S-X. All material inter-company accounts and transactions have been eliminated in consolidation. The Company is a leading manufacturer of flexible metal hose, which is used in a variety of applications to carry gases and liquids within their particular applications. The Company’s business is controlled as a single operating segment that consists of the manufacture and sale of flexible metal hose and accessories. These applications include carrying liquefied gases in certain processing applications, fuel gases within residential and commercial buildings and vibration absorbers in high vibration applications. The Company’s flexible metal piping is also used to carry other types of gases and fluids in a number of industrial applications where the customer requires the piping to have both a degree of flexibility and/or an ability to carry corrosive compounds or mixtures, or to carry at both very high and very low (cryogenic) temperatures. The Company manufactures flexible metal hose at its facilities in Exton, Pennsylvania, in the United States, and in Banbury, Oxfordshire in the United Kingdom, and sells its products through distributors, wholesalers and to original equipment manufacturers (“OEMs”) throughout North America, and in certain European markets. 2. SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to revenue recognition, accounts receivable allowances, inventory valuations, goodwill valuation, product liability costs, phantom stock and accounting for income taxes. Actual amounts could differ significantly from these estimates. Revenue Recognition of revenue: The Company’s revenue recognition activities relate almost entirely to the manufacture and sale of flexible metal hose and pipe. Under GAAP, revenues are considered to have been earned when the Company has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. The following criteria represent preconditions to the recognition • Persuasive evidence of an arrangement for the sale of product or services must exist. • Delivery has occurred or services rendered. • The sales price to the customer is fixed or determinable. • Collection is reasonably assured. The Company recognizes revenue upon shipment in accordance with the above principles. Gross sales are reduced for all consideration paid to customers for which no identifiable benefit is received by the Company. This includes promotional incentives, which includes various programs including year-end rebates, and payment term discounts. The amounts of certain incentives are known with reasonable certainty at the time of sale, while others are projected based upon the most reliable information available at the reporting date. Commissions are accounted for as a selling expense. The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of purchase to be cash equivalents. Cash equivalents include investments in an institutional money market fund, which invests in U.S. Treasury bills, notes and bonds, and/or repurchase agreements, backed by such obligations. Carrying value approximates fair value. Cash and cash equivalents are deposited at various area banks, which at times may exceed federally insured limits. The Company monitors the viability of the banking institutions carrying its assets on a regular basis, and has the ability to transfer cash to various institutions during times of risk. The Company has not experienced any losses related to these cash balances, and believes its credit risk to be minimal. Accounts Receivable and Provision for Doubtful Accounts Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on specific analysis of accounts in the receivable portfolio and historical write-off experience. While management believes the allowance to be adequate, if the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make payments, additional allowances may be required. The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on any known collection issues, historical experience, and other currently available evidence. The reserve for future credits, discounts, and doubtful accounts was $882,000 and $710,000 as of December 31, 2015 and 2014, respectively. In regards to identifying uncollectible accounts, the Company reviews an aging report on a consistent basis to determine past due accounts, and utilizes a well established credit rating agency. The Company charges off those accounts that are deemed uncollectible once all collection efforts have been exhausted. Inventories Inventories are valued at the lower of cost or market . The cost of inventories is determined by the first-in, first-out (FIFO) method. The Company generally considers inventory quantities beyond two years of non-usage, measured on a historical usage basis, to be excess inventory and reduces the carrying value of inventory accordingly. Property and Equipment Property and equipment are carried at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or, for leasehold improvements, the life of the lease, if shorter. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in other income or expense for the period. The cost of maintenance and repairs is expensed as incurred; significant improvements are capitalized. Goodwill In accordance with Financial Accounting Standards Board (FASB) ASC Topic 350, Intangibles – Goodwill and Other, the Company performed an annual impairment test in accordance with this guidance as of December 31, 2015 and also at December 31, 2014. These analyses did not indicate any impairment of goodwill at the end of either period. Stock-Based Compensation Plans In 2006, the Company adopted a Phantom Stock Plan (the “Plan”), which allows the Company to grant phantom stock units (Units) to certain key employees, officers or directors. The Units each represent a contractual right to payment of compensation in the future based upon the market value of the Company’s common stock. The Units follow a vesting schedule of three years from the grant date, and are then paid upon maturity. In accordance with FASB ASC Topic 718, Stock Compensation, the Company uses the Black-Scholes option pricing model as its method for determining the fair value of the Units. Further details of the Plan are provided in Note 12. -29- -30- Product Liability Reserves Income Taxes Product liability reserves represent the estimated unpaid amounts under the Company’s insurance policies with respect to existing claims. The Company uses the most current available data to estimate claims. As explained more fully under Note 11, Commitments and Contingencies, for various product liability claims covered under the Company’s general liability insurance policies, the Company must pay certain defense and settlement costs within its deductible or self-insured retention limits, ranging primarily from $25,000 to $250,000 per claim, depending on the terms of the policy in the applicable policy year, up to an aggregate amount. The Company is vigorously defending against all known claims. Fair Value of Financial and Nonfinancial Instruments The Company measures financial instruments in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures. The accounting standard defines fair value, establishes a framework for measuring fair value under GAAP, and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard creates a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. The Company relies on its actively traded share value – a level 1 input – in determining the fair value of the reporting unit in its annual impairment test as described in the FASB ASC Topic 350, Intangibles - Goodwill and Other. Advertising Expense Advertising costs are charged to operations as incurred and are included in selling expenses in the accompanying consolidated Statement of Operations. Such charges aggregated $1,062,000 and $848,000, for the years ended December 31, 2015, and 2014, respectively. Research and Development Expense Research and development expenses are charged to operations as incurred. Such charges totaled $876,000, and $904,000, for the years ended December 31, 2015 and 2014, respectively and are included in engineering expense in the accompanying consolidated statements of operations. Shipping Costs Shipping costs are included in selling expense on the consolidated statements of operations. The expense relating to shipping was $2,429,000 and $2,280,000 for the years ended December 31, 2015 and 2014, respectively. Earnings per Common Share The Company accounts for tax liabilities in accordance with the FASB ASC Topic 740, Income Taxes. Under this method the Company recorded tax expense, related deferred taxes and tax benefits, and uncertainties in tax positions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize the benefit, or that future deductibility is uncertain. The FASB ASC Topic 740, Income Taxes, clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. This guidance prescribes a recognition threshold of more-likely than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. The Company follows the provisions of ASC 740-10 relative to accounting for uncertainties in tax positions. These provisions provide guidance on the recognition, de-recognition and measurement of potential tax benefits associated with tax positions. The Company elected to recognize interest and penalties related to income tax matters as a component of the income tax provision in the consolidated statements of income. For additional information regarding ASC 740-10, see Note 8. The FASB ASU 2015-17 eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments of ASU 2015-17 apply to all organizations that present a classified balance sheet. For public companies, the amendments are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted and the Company adopted this ASU prospectively in calendar year ended December 31, 2015. As a result, the Company has presented all deferred tax assets and liabilities as noncurrent on its consolidated balance sheet as of December 31, 2015, but the Company has not reclassified deferred tax assets and liabilities on its consolidated balance sheet as of December 31, 2014. There was no impact on operations as a result of adoption of FASB ASU 2015-17. Other Comprehensive Income solely of foreign currency translation adjustments. Significant Concentration For the years ended December 31, 2015 and 2014, respectively, the components of other comprehensive income consisted One customer accounted for approximately 16% of sales in 2015 and 15% in 2014. That same customer accounted for 25% and 21% of Accounts Receivable at December 31, 2015 and 2014, respectively. No other customer represented more that 10% of Accounts Receivable or Sales. Also, during 2015 and 2014, approximately 88% of sales occurred in North America, with the remaining 12% portion scattered among other countries, but mostly pertaining to the United Kingdom. Basic earnings per share have been computed using the weighted-average number of common shares outstanding. For the periods presented, there are no dilutive securities. Consequently, basic and dilutive earnings per share are the same. Subsequent Events Currency Translation Assets and liabilities denominated in foreign currencies, most of which relate to our United Kingdom subsidiary whose functional currency is British pound sterling, are translated into U.S. dollars at exchange rates prevailing on the balance sheet dates. The statements of operations are translated into U.S. dollars at average exchange rates for the period. Adjustments resulting from the translation of financial statements are excluded from the determination of income and are accumulated in a separate component of shareholders’ equity. For the years ended December 31, 2015 and 2014, exchange gains and losses resulting from foreign currency transactions were not significant and are included in the statements of operations (other income (expense)) in the period in which they occur. The Company evaluates all events or transactions through the date of the related filing that may have a material impact on its consolidated financial statements. Refer to Note 13 of the consolidated financial statements. Recent Accounting Pronouncements In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. The updated standard becomes -31- -32- Product Liability Reserves Income Taxes Product liability reserves represent the estimated unpaid amounts under the Company’s insurance policies with respect to existing claims. The Company uses the most current available data to estimate claims. As explained more fully under Note 11, Commitments and Contingencies, for various product liability claims covered under the Company’s general liability insurance policies, the Company must pay certain defense and settlement costs within its deductible or self-insured retention limits, ranging primarily from $25,000 to $250,000 per claim, depending on the terms of the policy in the applicable policy year, up to an aggregate amount. The Company is vigorously defending against all known claims. Fair Value of Financial and Nonfinancial Instruments The Company measures financial instruments in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures. The accounting standard defines fair value, establishes a framework for measuring fair value under GAAP, and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard creates a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. The Company relies on its actively traded share value – a level 1 input – in determining the fair value of the reporting unit in its annual impairment test as described in the FASB ASC Topic 350, Intangibles - Goodwill and Other. Advertising costs are charged to operations as incurred and are included in selling expenses in the accompanying consolidated Statement of Operations. Such charges aggregated $1,062,000 and $848,000, for the years ended December 31, The Company accounts for tax liabilities in accordance with the FASB ASC Topic 740, Income Taxes. Under this method the Company recorded tax expense, related deferred taxes and tax benefits, and uncertainties in tax positions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize the benefit, or that future deductibility is uncertain. The FASB ASC Topic 740, Income Taxes, clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. This guidance prescribes a recognition threshold of more-likely than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. The Company follows the provisions of ASC 740-10 relative to accounting for uncertainties in tax positions. These provisions provide guidance on the recognition, de-recognition and measurement of potential tax benefits associated with tax positions. The Company elected to recognize interest and penalties related to income tax matters as a component of the income tax provision in the consolidated statements of income. For additional information regarding ASC 740-10, see Note 8. The FASB ASU 2015-17 eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments of ASU 2015-17 apply to all organizations that present a classified balance sheet. For public companies, the amendments are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted and the Company adopted this ASU prospectively in calendar year ended December 31, 2015. As a result, the Company has presented all deferred tax assets and liabilities as noncurrent on its consolidated balance sheet as of December 31, 2015, but the Company has not reclassified deferred tax assets and liabilities on its consolidated balance sheet as of December 31, 2014. There was no impact on operations as a result of adoption of FASB ASU 2015-17. Research and development expenses are charged to operations as incurred. Such charges totaled $876,000, and $904,000, for the years ended December 31, 2015 and 2014, respectively and are included in engineering expense in the accompanying Other Comprehensive Income Shipping costs are included in selling expense on the consolidated statements of operations. The expense relating to shipping was $2,429,000 and $2,280,000 for the years ended December 31, 2015 and 2014, respectively. For the years ended December 31, 2015 and 2014, respectively, the components of other comprehensive income consisted solely of foreign currency translation adjustments. Significant Concentration One customer accounted for approximately 16% of sales in 2015 and 15% in 2014. That same customer accounted for 25% and 21% of Accounts Receivable at December 31, 2015 and 2014, respectively. No other customer represented more that 10% of Accounts Receivable or Sales. Also, during 2015 and 2014, approximately 88% of sales occurred in North America, with the remaining 12% portion scattered among other countries, but mostly pertaining to the United Kingdom. Basic earnings per share have been computed using the weighted-average number of common shares outstanding. For the periods presented, there are no dilutive securities. Consequently, basic and dilutive earnings per share are the same. Subsequent Events Assets and liabilities denominated in foreign currencies, most of which relate to our United Kingdom subsidiary whose functional currency is British pound sterling, are translated into U.S. dollars at exchange rates prevailing on the balance sheet dates. The statements of operations are translated into U.S. dollars at average exchange rates for the period. Adjustments resulting from the translation of financial statements are excluded from the determination of income and are accumulated in a separate component of shareholders’ equity. For the years ended December 31, 2015 and 2014, exchange gains and losses resulting from foreign currency transactions were not significant and are included in the statements of operations (other income (expense)) in the period in which they occur. The Company evaluates all events or transactions through the date of the related filing that may have a material impact on its consolidated financial statements. Refer to Note 13 of the consolidated financial statements. Recent Accounting Pronouncements In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. The updated standard becomes -31- -32- Advertising Expense 2015, and 2014, respectively. Research and Development Expense consolidated statements of operations. Shipping Costs Earnings per Common Share Currency Translation effective for the Company in the first quarter of fiscal year 2018. Early adoption is permitted beginning in the first quarter of the Company’s 2017 fiscal year. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the consolidated financial statements. In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330). Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. The Company is evaluating the provisions of this statement, including which period to adopt, and has not determined what impact the adoption of ASU 2015-11 will have on the Company's financial position or results of operations. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under this ASU, lessees are required to recognize range, which would be a rate of 1.61%. Under the terms of the agreement, the Company is required to pay on a quarterly basis an right-of-use assets and lease liabilities for all leases not considered short-term leases. By definition, a short-term lease is one in which: (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which right-of-use assets and lease liabilities are not recognized and lease payments are generally recognized as expense over the lease term on a straight-line basis. This change will result in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under the legacy lease accounting guidance. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the provisions of this statement, including which period to adopt, and has not determined what impact the adoption of ASU 2016-02 will have on the Company's financial position or results of operations. 3. INVENTORIES Inventories, net of reserves of $969,000 and $921,000, respectively, consisted of the following at December 31: Finished Goods Raw Materials Total Inventory-Net 2015 2014 (in thousands) $ 6,082 2,205 $ 5,122 2,242 $ 8,287 $ 7,364 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31: 2015 2014 (in thousands) Depreciation and Amortization Est. Useful Lives Land Buildings Leasehold Improvements Equipment Accumulated Depreciation Property and Equipment - Net $ 538 4,407 426 9,543 14,914 (10,276) $ 4,638 $ 538 4,141 352 9,323 14,354 (9,871) $ 4,483 39 Years 3-10 Years (Lesser of Life or Lease) 3-10 Years The above amounts include approximately $93,000 of capital related items at December 31, 2015 and $188,000 at December 31, 2014 that had not yet been placed in service by the Company, and therefore no depreciation was recorded in the -33- -34- related periods for those assets. Depreciation and amortization expense was approximately $460,000 and $486,000 for the years ended December 31, 2015 and 2014, respectively. 5. LINE OF CREDIT On December 29, 2014, the Company entered into to an Amended and Restated Committed Revolving Line of Credit Note (“the Line”) and a Second Amendment to the Loan Agreement with Santander Bank, N.A. (“Santander”). The Company renewed and increased the Line facility in the maximum amount of $15,000,000, for a five year term maturing on December 31, 2019, with funds available for working capital purposes and to fund dividends. This Line facility supersedes the expiring $10,000,000 line of credit the Company previously had in place with Santander since 2010. The Line is unsecured. The Line provides for the payment of any borrowings at an interest rate of either LIBOR plus 1.00% to plus 1.35% (for borrowings with a fixed term of 30, 60, or 90 days), or Prime from 0.00% to plus 0.10%, depending upon the Company’s then existing financial ratios. At December 31, 2015, the Company’s financial ratios would allow for the most favorable rate under the agreement’s unused facility fee equal to 10 basis points of the average unused balance of the total Line commitment. As of December 31, 2015 and December 31, 2014, the Company had no outstanding borrowings on its line of credit, and was in compliance with all debt covenants. 6. SHAREHOLDERS’ EQUITY As of December 31, 2015 and December 31, 2014, the Company had authorized 20,000,000 common stock shares with par value of $0.01 per share. At both dates, the number of shares issued was 10,153,633, and the total number of outstanding shares was 10,091,822, with the 61,811 variance representing shares held in Treasury. On December 10, 2015, the Board declared a special dividend of $0.85 per share to all Shareholders of record as of December 21, 2015, and payable on or before January 6, 2016. The Company paid its transfer agent $8,578,000 on January 5, 2016, and the transfer agent paid the shareholders on January 6, 2016. On December 10, 2014, the Board declared a special dividend of $0.49 per share to all Shareholders of record as of December 22, 2014, which was paid on January 5, 2015, in the amount of $4,945,000. Additionally, there was a dividend that was paid during 2014 by the Company’s UK subsidiary, which amounted to an outlay of cash of $145,000 to the subsidiary’s noncontrolling interest. On December 9, 2013, the Board declared a special dividend of $0.425 per share to all Shareholders of record as of December 19, 2013, and payable on or before January 2, 2014. The Company paid its transfer agent $4,289,000 on December 31, 2013, and the transfer agent paid the shareholders on January 2, 2014. On April 4, 2014, the Company’s Board of Directors authorized an extension of its stock repurchase program without expiration, up to a maximum amount of $1,000,000. The original program established in December of 2007 authorized the purchase of up to $5,000,000 of its common stock. The purchases may be made from time-to-time in the open market or in privately negotiated transactions, depending on market and business conditions. The Board retained the right to cancel, extend, or expand the share buyback program, at any time and from time-to-time. Since inception, the Company has purchased a total of 61,811 shares for approximately $932,000, or approximately $15 per share. The Company did not make any stock repurchases during the year ended December 31, 2015 or 2014. 7. NONCONTROLLING INTERESTS The Company owns 100% of all subsidiaries, except for a small portion of one, which is owned by a Noncontrolling Interest. At December 31, 2014, total Shareholders’ Equity was $33,969,000, and the Noncontrolling Interest was $111,000. During 2014, the subsidiary made a distribution of $145,000 to the Noncontrolling Interest. For the twelve month period ended December 31, 2015, the Noncontrolling Interest’s portion of Net Income was approximately $173,000, and their portion of Other Comprehensive Income was a loss of $12,000. At December 31, 2015, total Shareholders’ Equity was $41,154,000, of which the Noncontrolling Interest held a value of $272,000. effective for the Company in the first quarter of fiscal year 2018. Early adoption is permitted beginning in the first quarter of the Company’s 2017 fiscal year. The Company has not yet selected a transition method and is currently evaluating the effect that the related periods for those assets. Depreciation and amortization expense was approximately $460,000 and $486,000 for the years ended December 31, 2015 and 2014, respectively. updated standard will have on the consolidated financial statements. In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330). Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. The Company is evaluating the provisions of this statement, including which period to adopt, and has not determined what impact the adoption of ASU 2015-11 will have on the Company's financial position or results of operations. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under this ASU, lessees are required to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases. By definition, a short-term lease is one in which: (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which right-of-use assets and lease liabilities are not recognized and lease payments are generally recognized as expense over the lease term on a straight-line basis. This change will result in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under the legacy lease accounting guidance. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the provisions of this statement, including which period to adopt, and has not determined what impact the adoption of ASU 2016-02 will have on the Company's financial position or results of operations. 3. INVENTORIES Inventories, net of reserves of $969,000 and $921,000, respectively, consisted of the following at December 31: Finished Goods Raw Materials Total Inventory-Net 2015 2014 (in thousands) $ 6,082 2,205 $ 5,122 2,242 $ 8,287 $ 7,364 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31: 2015 2014 (in thousands) Depreciation and Amortization Est. Useful Lives Land Buildings Equipment Leasehold Improvements Accumulated Depreciation Property and Equipment - Net $ 538 4,407 426 9,543 14,914 (10,276) $ 4,638 $ 538 4,141 352 9,323 14,354 (9,871) $ 4,483 3-10 Years (Lesser of Life or Lease) 39 Years 3-10 Years The above amounts include approximately $93,000 of capital related items at December 31, 2015 and $188,000 at December 31, 2014 that had not yet been placed in service by the Company, and therefore no depreciation was recorded in the 5. LINE OF CREDIT On December 29, 2014, the Company entered into to an Amended and Restated Committed Revolving Line of Credit Note (“the Line”) and a Second Amendment to the Loan Agreement with Santander Bank, N.A. (“Santander”). The Company renewed and increased the Line facility in the maximum amount of $15,000,000, for a five year term maturing on December 31, 2019, with funds available for working capital purposes and to fund dividends. This Line facility supersedes the expiring $10,000,000 line of credit the Company previously had in place with Santander since 2010. The Line is unsecured. The Line provides for the payment of any borrowings at an interest rate of either LIBOR plus 1.00% to plus 1.35% (for borrowings with a fixed term of 30, 60, or 90 days), or Prime from 0.00% to plus 0.10%, depending upon the Company’s then existing financial ratios. At December 31, 2015, the Company’s financial ratios would allow for the most favorable rate under the agreement’s range, which would be a rate of 1.61%. Under the terms of the agreement, the Company is required to pay on a quarterly basis an unused facility fee equal to 10 basis points of the average unused balance of the total Line commitment. As of December 31, 2015 and December 31, 2014, the Company had no outstanding borrowings on its line of credit, and was in compliance with all debt covenants. 6. SHAREHOLDERS’ EQUITY As of December 31, 2015 and December 31, 2014, the Company had authorized 20,000,000 common stock shares with par value of $0.01 per share. At both dates, the number of shares issued was 10,153,633, and the total number of outstanding shares was 10,091,822, with the 61,811 variance representing shares held in Treasury. On December 10, 2015, the Board declared a special dividend of $0.85 per share to all Shareholders of record as of December 21, 2015, and payable on or before January 6, 2016. The Company paid its transfer agent $8,578,000 on January 5, 2016, and the transfer agent paid the shareholders on January 6, 2016. On December 10, 2014, the Board declared a special dividend of $0.49 per share to all Shareholders of record as of December 22, 2014, which was paid on January 5, 2015, in the amount of $4,945,000. Additionally, there was a dividend that was paid during 2014 by the Company’s UK subsidiary, which amounted to an outlay of cash of $145,000 to the subsidiary’s noncontrolling interest. On December 9, 2013, the Board declared a special dividend of $0.425 per share to all Shareholders of record as of December 19, 2013, and payable on or before January 2, 2014. The Company paid its transfer agent $4,289,000 on December 31, 2013, and the transfer agent paid the shareholders on January 2, 2014. On April 4, 2014, the Company’s Board of Directors authorized an extension of its stock repurchase program without expiration, up to a maximum amount of $1,000,000. The original program established in December of 2007 authorized the purchase of up to $5,000,000 of its common stock. The purchases may be made from time-to-time in the open market or in privately negotiated transactions, depending on market and business conditions. The Board retained the right to cancel, extend, or expand the share buyback program, at any time and from time-to-time. Since inception, the Company has purchased a total of 61,811 shares for approximately $932,000, or approximately $15 per share. The Company did not make any stock repurchases during the year ended December 31, 2015 or 2014. 7. NONCONTROLLING INTERESTS The Company owns 100% of all subsidiaries, except for a small portion of one, which is owned by a Noncontrolling Interest. At December 31, 2014, total Shareholders’ Equity was $33,969,000, and the Noncontrolling Interest was $111,000. During 2014, the subsidiary made a distribution of $145,000 to the Noncontrolling Interest. For the twelve month period ended December 31, 2015, the Noncontrolling Interest’s portion of Net Income was approximately $173,000, and their portion of Other Comprehensive Income was a loss of $12,000. At December 31, 2015, total Shareholders’ Equity was $41,154,000, of which the Noncontrolling Interest held a value of $272,000. -33- -34- 8. INCOME TAXES Income tax expense consisted of the following: Federal Income Tax: Current Deferred State Income Tax: Current Deferred Foreign Income Tax: Current Deferred Income Tax Expense December 31, 2015 2014 (in thousands) $ 6,155 31 $ 5,674 (9) 601 2 550 4 797 17 $ 7,603 625 150 $ 6,994 Pre-tax income included foreign income of $4,117,000 and $3,474,000 in 2015 and 2014, respectively. During 2014, the Company paid a dividend out of its U.K. subsidiary, resulting in incremental U.S. taxes of $296,000. As of December 31, 2015, the Company has $4,561,000 of unremitted earnings at its foreign subsidiaries. The Company has not provided deferred taxes on these amounts, as the Company considers these balances to be indefinitely invested in the operations of the foreign subsidiary. The incremental U.S. tax that would be paid if these earnings were remitted is $738,000. Total income tax expense differed from statutory income tax expense, computed by applying the U.S. federal income tax The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for the year: rate of 35% to earnings before income tax, as follows: Computed Statutory Income Tax Expense State Income Tax, Net of Federal Tax Benefit Foreign Tax Rate Differential Manufacturing Deduction Impact of Foreign Dividend Increase/(Reduction) in Tax Uncertainties Other - Net Income Tax Expense December 31, 2015 2014 (in thousands) $ 8,193 360 (607) (423) --- 3 77 $ 7,603 $ 7,159 318 (469) (381) 296 3 68 $ 6,994 A deferred income tax (expense) benefit results from temporary timing differences in the recognition of income and expense for income tax and financial reporting purposes. The components of and changes in the net deferred tax assets (liabilities) which give rise to this deferred income tax (expense) benefit for the years ended December 31, 2015 and 2014 are as follows: Deferred Tax Assets: Compensation Assets Inventory Valuation Accounts Receivable Valuation Deferred Litigation Costs Foreign Net Operating Losses Other December 31, 2015 2014 (in thousands) $ 133 490 325 44 87 207 $ 124 453 261 51 --- 301 -35- -36- Compensation Liabilities Total Deferred Assets Deferred Tax Liabilities: Prepaid Expenses Depreciation and Amortization Total Deferred Liabilities 522 $ 1,808 (527) (1,535) ($2,062) 537 $ 1,727 (527) (1,501) ($2,028) Total Deferred Tax Liability ($254) ($301) Management believes it is more likely than not that the Company will have sufficient taxable income when these timing differences reverse and that the deferred tax assets will be realized and, accordingly, no valuation allowance is deemed necessary. The Company is currently subject to audit by the Internal Revenue Service for the calendar years ended 2012 through 2014. The Company and its Subsidiaries’ state income tax returns are subject to audit for the calendar years ended 2011 through 2014. As of December 31, 2015, the Company had provided a liability of $110,000 for unrecognized tax benefits related to various federal and state income tax matters, which is included in Other Long Term Liabilities. Of this amount, the amount that would impact the Company’s effective tax rate, if recognized, was $71,000. The liability for unrecognized tax benefits at December 31, 2014 was $105,000. Of this amount, the amount that would impact the Company’s effective tax rate, if recognized, was $68,000. The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective tax rate consists of items that are offset by the federal tax benefits of state income tax items of $39,000 and $37,000 for 2015 and 2014, respectively. Beginning Unrecognized Tax Benefits – Current Year – Increases Current Year – Decreases Current Year – Interest/Penalties Expired Statutes Ending Unrecognized Tax Benefits – 9. LEASES December 31, 2015 2014 $ 105 --- --- 5 --- $ 110 $ 100 --- --- 5 --- $ 105 In the United States, the Company owns its main operating facility located at 451 Creamery Way in Exton, PA, but the Company does however also lease additional manufacturing, warehousing and distribution space in Exton, which is under contract through January of 2018. During 2014, the Company obtained a new five year lease on a warehousing and distribution center in Houston, Texas. Additionally, the Company leases its corporate office space in Middletown, CT. In the United Kingdom, the Company leases a facility in Banbury, England, which serves sales, warehousing and operational functions. The lease in Banbury was effective April 1, 2006 and has a 15-year term ending in March 2021. There is an option to terminate the lease in December of 2017. Termination in 2017 requires a penalty of 2 months rentals, or approximately $40,000. The Company’s current intention is to utilize the facility for the 15 years. In addition to property rentals, the Company also leases several automobiles, which are included in the rent expense and in the operating lease details below. 2014, respectively. Rent expense for operating leases was approximately $504,000 and $475,000 for the years ended December 31, 2015, and 8. INCOME TAXES Income tax expense consisted of the following: Federal Income Tax: Current Deferred State Income Tax: Current Deferred Foreign Income Tax: Current Deferred Income Tax Expense December 31, 2015 2014 (in thousands) $ 6,155 31 $ 5,674 (9) 601 2 550 4 797 17 $ 7,603 625 150 $ 6,994 December 31, 2015 2014 (in thousands) $ 8,193 360 (607) (423) --- 3 77 $ 7,603 $ 7,159 318 (469) (381) 296 3 68 $ 6,994 December 31, 2015 2014 (in thousands) $ 133 490 325 44 207 87 $ 124 453 261 51 --- 301 Pre-tax income included foreign income of $4,117,000 and $3,474,000 in 2015 and 2014, respectively. During 2014, the Company paid a dividend out of its U.K. subsidiary, resulting in incremental U.S. taxes of $296,000. As of December 31, 2015, the Company has $4,561,000 of unremitted earnings at its foreign subsidiaries. The Company has not provided deferred taxes on these amounts, as the Company considers these balances to be indefinitely invested in the operations of the foreign subsidiary. The incremental U.S. tax that would be paid if these earnings were remitted is $738,000. A deferred income tax (expense) benefit results from temporary timing differences in the recognition of income and expense for income tax and financial reporting purposes. The components of and changes in the net deferred tax assets (liabilities) which give rise to this deferred income tax (expense) benefit for the years ended December 31, 2015 and 2014 are as follows: Computed Statutory Income Tax Expense State Income Tax, Net of Federal Tax Benefit Foreign Tax Rate Differential Manufacturing Deduction Impact of Foreign Dividend Increase/(Reduction) in Tax Uncertainties Other - Net Income Tax Expense Deferred Tax Assets: Compensation Assets Inventory Valuation Accounts Receivable Valuation Deferred Litigation Costs Foreign Net Operating Losses Other Compensation Liabilities Total Deferred Assets Deferred Tax Liabilities: Prepaid Expenses Depreciation and Amortization Total Deferred Liabilities 522 1,808 $ (527) (1,535) ($2,062) 537 $ 1,727 (527) (1,501) ($2,028) Total Deferred Tax Liability ($254) ($301) Management believes it is more likely than not that the Company will have sufficient taxable income when these timing differences reverse and that the deferred tax assets will be realized and, accordingly, no valuation allowance is deemed necessary. The Company is currently subject to audit by the Internal Revenue Service for the calendar years ended 2012 through 2014. The Company and its Subsidiaries’ state income tax returns are subject to audit for the calendar years ended 2011 through 2014. As of December 31, 2015, the Company had provided a liability of $110,000 for unrecognized tax benefits related to various federal and state income tax matters, which is included in Other Long Term Liabilities. Of this amount, the amount that would impact the Company’s effective tax rate, if recognized, was $71,000. The liability for unrecognized tax benefits at December 31, 2014 was $105,000. Of this amount, the amount that would impact the Company’s effective tax rate, if recognized, was $68,000. The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective tax rate consists of items that are offset by the federal tax benefits of state income tax items of $39,000 and $37,000 for 2015 and 2014, respectively. Total income tax expense differed from statutory income tax expense, computed by applying the U.S. federal income tax The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for the year: rate of 35% to earnings before income tax, as follows: Beginning Unrecognized Tax Benefits – Current Year – Increases Current Year – Decreases Current Year – Interest/Penalties Expired Statutes Ending Unrecognized Tax Benefits – 9. LEASES December 31, 2015 2014 $ 105 --- --- 5 --- $ 110 $ 100 --- --- 5 --- $ 105 In the United States, the Company owns its main operating facility located at 451 Creamery Way in Exton, PA, but the Company does however also lease additional manufacturing, warehousing and distribution space in Exton, which is under contract through January of 2018. During 2014, the Company obtained a new five year lease on a warehousing and distribution center in Houston, Texas. Additionally, the Company leases its corporate office space in Middletown, CT. In the United Kingdom, the Company leases a facility in Banbury, England, which serves sales, warehousing and operational functions. The lease in Banbury was effective April 1, 2006 and has a 15-year term ending in March 2021. There is an option to terminate the lease in December of 2017. Termination in 2017 requires a penalty of 2 months rentals, or approximately $40,000. The Company’s current intention is to utilize the facility for the 15 years. In addition to property rentals, the Company also leases several automobiles, which are included in the rent expense and in the operating lease details below. Rent expense for operating leases was approximately $504,000 and $475,000 for the years ended December 31, 2015, and 2014, respectively. -35- -36- Future minimum lease payments under non-cancelable leases as of December 31, 2015 is as follows: previously noted who is now receiving benefit payments. The December 31, 2014 liability of $501,000, had $489,000 reported in Year Ending December 31, 2016 2017 2018 2019 2020 Thereafter Operating Leases (in thousands) $ 605 515 303 265 213 53 Total Minimum Lease Payments $ 1,954 10. EMPLOYEE BENEFIT PLANS Defined Contribution and 401(K) Plans The Company maintains a qualified non-contributory profit-sharing plan (the “Plan”) covering all eligible employees. There were $307,000 and $286,000 of contributions accrued for the Plan in 2015 and 2014 respectively, which were charged to expense in those respective years. Contributions to the Plan are defined as three percent (3%) of gross wages up to the current Old Age, Survivors, and Disability (OASDI) limit and six percent (6%) of the excess over the OASDI limit, subject to the maximum allowed under the Employee Retirement Income Security Act (ERISA). Participants vest over six years. The Company also maintains a savings and retirement plan qualified under Internal Revenue Code Section 401(k) for all employees. Employees are eligible to participate in the Plan the first day of the month following date of hire. Participants may elect to have up to fifty percent (50%) of their compensation withheld, up to the maximum allowed by the Internal Revenue Code. After completing one year of service, the Company contributes an additional amount equal to 25% of all employee contributions, up to a maximum of 6% of an employee’s gross wages. Contributions are funded on a current basis. Contributions to the Plan charged to expense for the years ended December 31, 2015 and 2014 were $93,000 and $90,000, respectively. The participant’s Company contribution vests ratably over six years. There were no significant changes made to the Plan which became effective during 2015 or 2014. 11. COMMITMENTS AND CONTINGENCIES Commitments: Under a number of indemnity agreements between the Company and each of its officers and directors, the Company has agreed to indemnify each of its officers and directors against any liability asserted against them in their capacity as an officer or director, or both. The Company’s indemnity obligations under the indemnity agreements are subject to certain conditions and limitations set forth in each of the agreements. Under the terms of the Agreement, the Company is contingently liable for costs which may be incurred by the officers and directors in connection with claims arising by reason of these individuals’ roles as officers and directors. The Company has obtained directors’ and officers’ insurance policies to fund certain obligations under the indemnity agreements. The Company has salary continuation agreements with one current employee, and one former employee who retired at the end of 2010. These agreements provide for monthly payments to each of the employees or their designated beneficiary upon the employee’s retirement or death. The payment benefits range from $1,000 per month to $3,000 per month with the term of such payments limited to 15 years after the employee’s retirement at age 65. The agreements also provide for survivorship benefits if the employee dies before attaining age 65, and severance payments if the employee is terminated without cause; the amount of which is dependent on the length of company service at the date of termination. The net present value of the retirement payments associated with these agreements is $508,000 at December 31, 2015, of which $496,000 is included in Other Long Term Liabilities, and the remaining current portion of $12,000 is included in Other Liabilities, associated with the retired employee Other Long Term Liabilities, and a current portion of $12,000 in Other Liabilities. The Company has obtained and is the beneficiary of three whole life insurance policies with respect to the two employees discussed above, and one other employee policy. The cash surrender value of such policies (included in Other Long Term Assets) amounts to $1,091,000 at December 31, 2015 and $1,033,000 at December 31, 2014. As disclosed in detail in Note 9, under the caption “Leases”, the Company has several lease obligations in place that will be paid out over time. Most notably, the Company leases facilities in Banbury, England, and Exton, Pennsylvania in the United States that both serve the manufacturing, warehousing and distribution functions. Contingencies: In the ordinary and normal conduct of the Company’s business, it is subject to periodic lawsuits, investigations and claims (collectively, the “Claims”). Several years ago, the Company experienced a spike in Claims mostly related to lightning subrogation, which increased legal and product liability related expenses. The Company did not believe the Claims had legal merit, and therefore commenced a vigorous defense in response to the Claims. Due to the Company’s success over the years in defending itself in all such court proceedings that went to trial, the pace of new Claims has softened over the last couple of years. Although the pace has slowed, expenses during 2015 have increased due to the Company’s heightened and vigorous defense of certain cases, which may occur from time to time. To reiterate, the Company does not believe that the Claims have legal merit, and is therefore vigorously defending against those Claims. In 2013, the Company won two of the Claims at two separate trials, both of which were held in U.S. District Court; one in St. Louis, Missouri and the other in Bridgeport, Connecticut. In both cases, the jury unanimously found that the Company was not negligent in designing its TracPipe® product, and that the TracPipe® product was not defective or unreasonably dangerous. In 2010, the Company took its first Claim to trial in Pennsylvania, and the jury returned a verdict that the Company was not negligent in designing and selling the TracPipe product, but also returned a verdict for plaintiff on strict liability. The Company has appealed that portion of the verdict, and in December 2014, the Supreme Court of Pennsylvania ruled in favor of the Company, and returned the case to the trial court for further hearings. The Company has in place commercial general liability insurance policies that cover the Claims, which are subject to deductibles or retentions, ranging primarily from $25,000 to $250,000 per claim (depending on the terms of the policy and the applicable policy year), up to an aggregate amount. Litigation is subject to many uncertainties and management is unable to predict the outcome of the pending suits and claims. The potential liability for a given claim could range from zero to a maximum of $250,000, depending upon the circumstances, and insurance deductible or retention in place for the respective claim year. The aggregate maximum exposure for all current open Claims is estimated to not exceed approximately $4,000,000, which represents the potential costs that may be incurred over time for the Claims within the applicable insurance policy deductibles or retentions. It is possible that the results of operations or liquidity of the Company, as well as the Company’s ability to procure reasonably priced insurance, could be adversely affected by the pending litigation, potentially materially. The Company is currently unable to estimate the ultimate liability, if any, that may result from the pending litigation, or potential litigation from future claims or claims that have not yet come to our attention, and accordingly, the liability in the consolidated financial statements primarily represents an accrual for legal costs for services previously rendered and outstanding settlements for existing claims. The liabilities recorded on the Company’s books at December 31, 2015 and December 31, 2014 were $249,000 and $582,000, respectively, and are included in Other Liabilities. Additionally, two putative class action cases have been filed against the Company; one in U.S. District Court for the Middle District of Florida titled Hall v. Omega Flex, Inc. and one in U.S. District Court for the Southern District of Ohio titled Schoelwer v. Omega Flex, Inc. In both cases, the lead plaintiffs claimed that they are exposed to an increased likelihood of harm if one of the plaintiffs’ houses that contain TracPipe CSST is struck by lightning, that could damage the CSST causing a release of fuel gas in the house and causing a fire. In 2014, the judges in both cases granted the Company’s motion to dismiss all of the plaintiff’s claims due primarily to a lack of jurisdiction because there is no actual case or controversy posed by these claims. Finally, in February of 2012, the Company was made aware of a fraud perpetrated by an outside party involving insurance related premiums that the Company had prepaid for umbrella coverage. The assets are currently secured by a governmental agency which investigated the case, and held in a custodial account. In June of 2015, utilizing the secured funds, the court has approved restitution to all victims including the Company. It is not clear however at this point what amount will eventually be received by the Company. The value of the assets on the books amount to $213,000 at December 31, 2015 and December 31, 2014, and are included in Other Long Term Assets. It is possible that not all of those funds will be returned to the Company, or the Company may need to incur additional costs to procure collection. The Company is currently pursuing all avenues in an effort to bring -37- -38- Future minimum lease payments under non-cancelable leases as of December 31, 2015 is as follows: Year Ending December 31, 2016 2017 2018 2019 2020 Operating Leases (in thousands) $ 605 515 303 265 213 53 10. EMPLOYEE BENEFIT PLANS Defined Contribution and 401(K) Plans The Company maintains a qualified non-contributory profit-sharing plan (the “Plan”) covering all eligible employees. There were $307,000 and $286,000 of contributions accrued for the Plan in 2015 and 2014 respectively, which were charged to expense in those respective years. Contributions to the Plan are defined as three percent (3%) of gross wages up to the current Old Age, Survivors, and Disability (OASDI) limit and six percent (6%) of the excess over the OASDI limit, subject to the maximum allowed under the Employee Retirement Income Security Act (ERISA). Participants vest over six years. The Company also maintains a savings and retirement plan qualified under Internal Revenue Code Section 401(k) for all employees. Employees are eligible to participate in the Plan the first day of the month following date of hire. Participants may elect to have up to fifty percent (50%) of their compensation withheld, up to the maximum allowed by the Internal Revenue Code. After completing one year of service, the Company contributes an additional amount equal to 25% of all employee contributions, up to a maximum of 6% of an employee’s gross wages. Contributions are funded on a current basis. Contributions to the Plan charged to expense for the years ended December 31, 2015 and 2014 were $93,000 and $90,000, respectively. The participant’s Company contribution vests ratably over six years. There were no significant changes made to the Plan which became effective during 2015 or 2014. Commitments: 11. COMMITMENTS AND CONTINGENCIES Under a number of indemnity agreements between the Company and each of its officers and directors, the Company has agreed to indemnify each of its officers and directors against any liability asserted against them in their capacity as an officer or director, or both. The Company’s indemnity obligations under the indemnity agreements are subject to certain conditions and limitations set forth in each of the agreements. Under the terms of the Agreement, the Company is contingently liable for costs which may be incurred by the officers and directors in connection with claims arising by reason of these individuals’ roles as officers and directors. The Company has obtained directors’ and officers’ insurance policies to fund certain obligations under the indemnity agreements. The Company has salary continuation agreements with one current employee, and one former employee who retired at the end of 2010. These agreements provide for monthly payments to each of the employees or their designated beneficiary upon the employee’s retirement or death. The payment benefits range from $1,000 per month to $3,000 per month with the term of such payments limited to 15 years after the employee’s retirement at age 65. The agreements also provide for survivorship benefits if the employee dies before attaining age 65, and severance payments if the employee is terminated without cause; the amount of which is dependent on the length of company service at the date of termination. The net present value of the retirement payments associated with these agreements is $508,000 at December 31, 2015, of which $496,000 is included in Other Long Term Liabilities, and the remaining current portion of $12,000 is included in Other Liabilities, associated with the retired employee Thereafter Total Minimum Lease Payments $ 1,954 Contingencies: previously noted who is now receiving benefit payments. The December 31, 2014 liability of $501,000, had $489,000 reported in Other Long Term Liabilities, and a current portion of $12,000 in Other Liabilities. The Company has obtained and is the beneficiary of three whole life insurance policies with respect to the two employees discussed above, and one other employee policy. The cash surrender value of such policies (included in Other Long Term Assets) amounts to $1,091,000 at December 31, 2015 and $1,033,000 at December 31, 2014. As disclosed in detail in Note 9, under the caption “Leases”, the Company has several lease obligations in place that will be paid out over time. Most notably, the Company leases facilities in Banbury, England, and Exton, Pennsylvania in the United States that both serve the manufacturing, warehousing and distribution functions. In the ordinary and normal conduct of the Company’s business, it is subject to periodic lawsuits, investigations and claims (collectively, the “Claims”). Several years ago, the Company experienced a spike in Claims mostly related to lightning subrogation, which increased legal and product liability related expenses. The Company did not believe the Claims had legal merit, and therefore commenced a vigorous defense in response to the Claims. Due to the Company’s success over the years in defending itself in all such court proceedings that went to trial, the pace of new Claims has softened over the last couple of years. Although the pace has slowed, expenses during 2015 have increased due to the Company’s heightened and vigorous defense of certain cases, which may occur from time to time. To reiterate, the Company does not believe that the Claims have legal merit, and is therefore vigorously defending against those Claims. In 2013, the Company won two of the Claims at two separate trials, both of which were held in U.S. District Court; one in St. Louis, Missouri and the other in Bridgeport, Connecticut. In both cases, the jury unanimously found that the Company was not negligent in designing its TracPipe® product, and that the TracPipe® product was not defective or unreasonably dangerous. In 2010, the Company took its first Claim to trial in Pennsylvania, and the jury returned a verdict that the Company was not negligent in designing and selling the TracPipe product, but also returned a verdict for plaintiff on strict liability. The Company has appealed that portion of the verdict, and in December 2014, the Supreme Court of Pennsylvania ruled in favor of the Company, and returned the case to the trial court for further hearings. The Company has in place commercial general liability insurance policies that cover the Claims, which are subject to deductibles or retentions, ranging primarily from $25,000 to $250,000 per claim (depending on the terms of the policy and the applicable policy year), up to an aggregate amount. Litigation is subject to many uncertainties and management is unable to predict the outcome of the pending suits and claims. The potential liability for a given claim could range from zero to a maximum of $250,000, depending upon the circumstances, and insurance deductible or retention in place for the respective claim year. The aggregate maximum exposure for all current open Claims is estimated to not exceed approximately $4,000,000, which represents the potential costs that may be incurred over time for the Claims within the applicable insurance policy deductibles or retentions. It is possible that the results of operations or liquidity of the Company, as well as the Company’s ability to procure reasonably priced insurance, could be adversely affected by the pending litigation, potentially materially. The Company is currently unable to estimate the ultimate liability, if any, that may result from the pending litigation, or potential litigation from future claims or claims that have not yet come to our attention, and accordingly, the liability in the consolidated financial statements primarily represents an accrual for legal costs for services previously rendered and outstanding settlements for existing claims. The liabilities recorded on the Company’s books at December 31, 2015 and December 31, 2014 were $249,000 and $582,000, respectively, and are included in Other Liabilities. Additionally, two putative class action cases have been filed against the Company; one in U.S. District Court for the Middle District of Florida titled Hall v. Omega Flex, Inc. and one in U.S. District Court for the Southern District of Ohio titled Schoelwer v. Omega Flex, Inc. In both cases, the lead plaintiffs claimed that they are exposed to an increased likelihood of harm if one of the plaintiffs’ houses that contain TracPipe CSST is struck by lightning, that could damage the CSST causing a release of fuel gas in the house and causing a fire. In 2014, the judges in both cases granted the Company’s motion to dismiss all of the plaintiff’s claims due primarily to a lack of jurisdiction because there is no actual case or controversy posed by these claims. Finally, in February of 2012, the Company was made aware of a fraud perpetrated by an outside party involving insurance related premiums that the Company had prepaid for umbrella coverage. The assets are currently secured by a governmental agency which investigated the case, and held in a custodial account. In June of 2015, utilizing the secured funds, the court has approved restitution to all victims including the Company. It is not clear however at this point what amount will eventually be received by the Company. The value of the assets on the books amount to $213,000 at December 31, 2015 and December 31, 2014, and are included in Other Long Term Assets. It is possible that not all of those funds will be returned to the Company, or the Company may need to incur additional costs to procure collection. The Company is currently pursuing all avenues in an effort to bring -37- -38- closure to the event, and reclaim the assets, and has since replaced the aforementioned insurance coverage. awards ultimately to vest. 12. STOCK – BASED COMPENSATION PLANS Phantom Stock Plan Plan Description. On April 1, 2006, the Company adopted the Omega Flex, Inc. 2006 Phantom Stock Plan (the “Plan”). The Plan authorizes the grant of up to 1 million units of phantom stock to employees, officers or directors of the Company and of any of its subsidiaries. The phantom stock units ("Units") each represent a contractual right to payment of compensation in the future based on the market value of the Company’s common stock. The Units are not shares of the Company’s common stock, and a recipient of the Units does not receive any of the following:    ownership interest in the Company shareholder voting rights other incidents of ownership to the Company’s common stock The Units are granted to participants upon the recommendation of the Company’s CEO, and the approval of the Compensation Committee. Each of the Units that are granted to a participant will be initially valued by the Compensation Committee, at an amount equal to the closing price of the Company’s common stock on the grant date, but are recorded at fair value using the Black-Sholes method as described below. The Units follow a vesting schedule, with a maximum vesting of 3 years after the grant date. Upon vesting, the Units represent a contractual right of payment for the value of the Unit. The Units will be paid on their maturity date, one year after all of the Units granted in a particular award have fully vested, unless an acceptable event occurs under the terms of the Plan prior to one year, which would allow for earlier payment. The amount to be paid to the participant on the maturity date is dependent on the type of Unit granted to the participant. The Units may be Full Value, in which the value of each Unit at the maturity date, will equal the closing price of the Company’s common stock as of the maturity date; or Appreciation Only, in which the value of each Unit at the maturity date will be equal to the closing price of the Company’s common stock at the maturity date minus the closing price of the Company’s common stock at the grant date. On December 9, 2009, the Board of Directors authorized an amendment to the Plan to pay an amount equal to the value of any cash or stock dividend declared by the Company on its common stock to be accrued to the phantom stock units outstanding as of the record date of the common stock dividend. The dividend equivalent will be paid at the same time the underlying phantom stock units are paid to the participant. In certain circumstances, the Units may be immediately vested upon the participant’s death or disability. All Units granted to a participant are forfeited if the participant is terminated from his relationship with the Company or its subsidiary for “cause,” which is defined under the Plan. If a participant’s employment or relationship with the Company is terminated for reasons other than for “cause,” then any vested Units will be paid to the participant upon termination. However, Units granted to certain “specified employees” as defined in Section 409A of the Internal Revenue Code will be paid approximately 181 days after termination. Grants of Phantom Stock Units. As of December 31, 2014, the Company had 19,156 unvested units outstanding, all of which were granted at Full Value. On February 16, 2015, the Company granted an additional 10,460 Full Value Units with a fair value of $28.90 per unit on grant date, using historical volatility. In March 2015, the Company paid $257,000 for the 8,100 fully vested and matured units that were granted on March 3, 2011, including their respective earned dividend values. As of December 31, 2015, the Company had 20,335 unvested units outstanding. The Company uses the Black-Scholes option pricing model as its method for determining fair value of the Units. The Company uses the straight-line method of attributing the value of the stock-based compensation expense relating to the Units. The compensation expense (including adjustment of the liability to its fair value) from the Units is recognized over the vesting period of each grant or award. The FASB ASC Topic 718, Stock Compensation, requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates in order to derive the Company’s best estimate of Forfeitures represent only the unvested portion of a surrendered Unit and are typically estimated based on historical experience. Based on an analysis of the Company’s historical data, which has limited experience related to any stock-based plan forfeitures, the Company applied a 0% forfeiture rate to Plan Units outstanding in determining its Plan Unit compensation expense as of December 31, 2015. The total Phantom Stock related liability as of December 31, 2015 was $905,000 of which $310,000 is included in other liabilities, as it is expected to be paid in March 2016, and the balance of $595,000 is included in other long term liabilities. At December 31, 2014, there was a Phantom Stock liability of $952,000, of which $321,000 was classified in Other Liabilities, and $631,000 in Other Long Term Liabilities. In accordance with FASB ASC Topic 718, Stock Compensation, the Company recorded compensation expense of approximately $177,000 and $634,000 related to the Phantom Stock Plan for the years ended December 31, 2015 and 2014, respectively. The following table summarizes information about the Company’s nonvested phantom stock Units at December 31, 2015: Number of Phantom Stock Unit Awards: Nonvested at December 31, 2014 Granted Vested Forfeited Canceled Nonvested at December 31, 2015 Phantom Stock Unit Awards Expected to Vest Units 19,156 10,460 (9,281) --- --- 20,335 20,335 Weighted Average Grant Date Fair Value $15.67 $28.90 $15.09 --- --- $22.74 $22.74 The total unrecognized compensation costs calculated at December 31, 2015 are $381,000 which will be recognized through February of 2018. The Company will recognize the related expense over the weighted average period of 1.2 years. 13. SUBSEQUENT EVENTS The Company is not currently aware of any subsequent event that would require disclosure or any adjustment to the consolidated financial statements as stated at December 31, 2015. -39- -40- closure to the event, and reclaim the assets, and has since replaced the aforementioned insurance coverage. awards ultimately to vest. Forfeitures represent only the unvested portion of a surrendered Unit and are typically estimated based on historical experience. Based on an analysis of the Company’s historical data, which has limited experience related to any stock-based plan forfeitures, the Company applied a 0% forfeiture rate to Plan Units outstanding in determining its Plan Unit compensation expense as of December 31, 2015. The total Phantom Stock related liability as of December 31, 2015 was $905,000 of which $310,000 is included in other liabilities, as it is expected to be paid in March 2016, and the balance of $595,000 is included in other long term liabilities. At December 31, 2014, there was a Phantom Stock liability of $952,000, of which $321,000 was classified in Other Liabilities, and $631,000 in Other Long Term Liabilities. In accordance with FASB ASC Topic 718, Stock Compensation, the Company recorded compensation expense of approximately $177,000 and $634,000 related to the Phantom Stock Plan for the years ended December 31, 2015 and 2014, respectively. The following table summarizes information about the Company’s nonvested phantom stock Units at December 31, 2015: Number of Phantom Stock Unit Awards: Nonvested at December 31, 2014 Granted Vested Forfeited Canceled Nonvested at December 31, 2015 Phantom Stock Unit Awards Expected to Vest Units 19,156 10,460 (9,281) --- --- 20,335 20,335 Weighted Average Grant Date Fair Value $15.67 $28.90 $15.09 --- --- $22.74 $22.74 The total unrecognized compensation costs calculated at December 31, 2015 are $381,000 which will be recognized through February of 2018. The Company will recognize the related expense over the weighted average period of 1.2 years. 13. SUBSEQUENT EVENTS The Company is not currently aware of any subsequent event that would require disclosure or any adjustment to the consolidated financial statements as stated at December 31, 2015. 12. STOCK – BASED COMPENSATION PLANS Phantom Stock Plan Plan Description. On April 1, 2006, the Company adopted the Omega Flex, Inc. 2006 Phantom Stock Plan (the “Plan”). The Plan authorizes the grant of up to 1 million units of phantom stock to employees, officers or directors of the Company and of any of its subsidiaries. The phantom stock units ("Units") each represent a contractual right to payment of compensation in the future based on the market value of the Company’s common stock. The Units are not shares of the Company’s common stock, and a recipient of the Units does not receive any of the following: ownership interest in the Company shareholder voting rights    other incidents of ownership to the Company’s common stock The Units are granted to participants upon the recommendation of the Company’s CEO, and the approval of the Compensation Committee. Each of the Units that are granted to a participant will be initially valued by the Compensation Committee, at an amount equal to the closing price of the Company’s common stock on the grant date, but are recorded at fair value using the Black-Sholes method as described below. The Units follow a vesting schedule, with a maximum vesting of 3 years after the grant date. Upon vesting, the Units represent a contractual right of payment for the value of the Unit. The Units will be paid on their maturity date, one year after all of the Units granted in a particular award have fully vested, unless an acceptable event occurs under the terms of the Plan prior to one year, which would allow for earlier payment. The amount to be paid to the participant on the maturity date is dependent on the type of Unit granted to the participant. The Units may be Full Value, in which the value of each Unit at the maturity date, will equal the closing price of the Company’s common stock as of the maturity date; or Appreciation Only, in which the value of each Unit at the maturity date will be equal to the closing price of the Company’s common stock at the maturity date minus the closing price of the Company’s common stock at the grant date. On December 9, 2009, the Board of Directors authorized an amendment to the Plan to pay an amount equal to the value of any cash or stock dividend declared by the Company on its common stock to be accrued to the phantom stock units outstanding as of the record date of the common stock dividend. The dividend equivalent will be paid at the same time the underlying phantom stock units are paid to the participant. In certain circumstances, the Units may be immediately vested upon the participant’s death or disability. All Units granted to a participant are forfeited if the participant is terminated from his relationship with the Company or its subsidiary for “cause,” which is defined under the Plan. If a participant’s employment or relationship with the Company is terminated for reasons other than for “cause,” then any vested Units will be paid to the participant upon termination. However, Units granted to certain “specified employees” as defined in Section 409A of the Internal Revenue Code will be paid approximately 181 days after termination. Grants of Phantom Stock Units. As of December 31, 2014, the Company had 19,156 unvested units outstanding, all of which were granted at Full Value. On February 16, 2015, the Company granted an additional 10,460 Full Value Units with a fair value of $28.90 per unit on grant date, using historical volatility. In March 2015, the Company paid $257,000 for the 8,100 fully vested and matured units that were granted on March 3, 2011, including their respective earned dividend values. As of December 31, 2015, the Company had 20,335 unvested units outstanding. The Company uses the Black-Scholes option pricing model as its method for determining fair value of the Units. The Company uses the straight-line method of attributing the value of the stock-based compensation expense relating to the Units. The compensation expense (including adjustment of the liability to its fair value) from the Units is recognized over the vesting period of each grant or award. The FASB ASC Topic 718, Stock Compensation, requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates in order to derive the Company’s best estimate of -39- -40- Item 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES (d) Changes in Internal Control over Financial Reporting. None Item 9A – CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. We evaluated, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (“Exchange Act”), as amended as of December 31, 2015, the end of the period covered by this report on Form 10K. Based on this evaluation, our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) have concluded that our disclosure controls and procedures were effective as of December 31, 2015. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. (b) Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act and is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: • Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; • Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of our management and directors; and • Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations (COSO) in Internal Control-Integrated Framework (2013). Based on the assessment, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2015 based on criteria in the Internal Control-Integrated Framework (2013) issued by COSO. There were no changes on our internal control over financial reporting during the most recent quarter ended December 31, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B – OTHER INFORMATION All matters required to be disclosed on Form 8-K during our fiscal 2015 fourth quarter have been previously disclosed on a Form 8-K filed with the Securities and Exchange Commission. PART III With respect to items 10 through 14, the Company will file with the Securities and Exchange Commission, within 120 days of the close of its fiscal year, a definitive proxy statement pursuant to Regulation 14A. Item 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information regarding directors of the Company will be set forth in the Company’s proxy statement relating to the annual meeting of shareholders to be held June 7, 2016, under the caption “Current Directors and Nominees for Election – Background Information”, and to the extent required and except as set forth therein, is incorporated herein by reference. Information regarding executive officers of the Company will be set forth under the caption “Executive Officers” in the Company’s proxy statement, and to the extent required and except as set forth therein, incorporated herein by reference. Information regarding the Company’s Audit Committee and its “Audit Committee Financial Expert” will be set forth in the Company’s proxy statement also, under the caption “Board Committees”, incorporated herein by reference. Information concerning section 16(a) Beneficial Ownership Reporting Compliance will be set forth in the Company’s proxy statement also, under the Caption “Compliance with Section 16(a) of the Securities Exchange Act” incorporated herein by reference. The Company has adopted a Code of Business Ethics (“Code”) applicable to its principal executive officer and principal financial officer, its directors and all other employees generally. A copy of the Code will be set forth as an appendix in the Company’s Proxy Statement and also may be found at the Company’s website www.omegaflex.com. Any changes to or waivers from this Code will be disclosed on the Company’s website as well as in appropriate filings with the Securities and Exchange Commission. Item 11 - EXECUTIVE COMPENSATION Information regarding executive compensation will be set forth in the Company’s proxy statement relating to the annual meeting of shareholders to be held June 7, 2016, and under the caption “Executive Compensation” to the extent required and except as set forth therein, is incorporated herein by reference. The report of the Compensation Committee of the Board of Directors of the Company shall not be deemed incorporated by reference by any general statement incorporating by reference the proxy statement into any filing under the Securities Exchange Act of 1934, and shall not otherwise be deemed filed under such Act. Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management as well as information regarding equity compensation plans and individual equity contracts or arrangements will be set forth in the Company’s proxy statement relating to the annual meeting of shareholders to be held on June 7, 2016, under the caption “Security Ownership of Certain Beneficial Owners and Management”, and to the extent required and except as set forth therein, is incorporated herein by The Company’s independent registered public accounting firm, RSM US LLP, audited the effectiveness of the reference. Company’s internal control over financial reporting as of December 31, 2015. RSM US LLP’s report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015 is included herein on page 23. -41- -42- Item 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL (d) Changes in Internal Control over Financial Reporting. DISCLOSURES None Item 9A – CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. We evaluated, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (“Exchange Act”), as amended as of December 31, 2015, the end of the period covered by this report on Form 10K. Based on this evaluation, our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) have concluded that our disclosure controls and procedures were effective as of December 31, 2015. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. (b) Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act and is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: • Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; • Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of our management and directors; and • Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations (COSO) in Internal Control-Integrated Framework (2013). Based on the assessment, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2015 based on criteria in the Internal Control-Integrated Framework (2013) issued by COSO. The Company’s independent registered public accounting firm, RSM US LLP, audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. RSM US LLP’s report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015 is included herein on page 23. There were no changes on our internal control over financial reporting during the most recent quarter ended December 31, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B – OTHER INFORMATION All matters required to be disclosed on Form 8-K during our fiscal 2015 fourth quarter have been previously disclosed on a Form 8-K filed with the Securities and Exchange Commission. PART III With respect to items 10 through 14, the Company will file with the Securities and Exchange Commission, within 120 days of the close of its fiscal year, a definitive proxy statement pursuant to Regulation 14A. Item 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information regarding directors of the Company will be set forth in the Company’s proxy statement relating to the annual meeting of shareholders to be held June 7, 2016, under the caption “Current Directors and Nominees for Election – Background Information”, and to the extent required and except as set forth therein, is incorporated herein by reference. Information regarding executive officers of the Company will be set forth under the caption “Executive Officers” in the Company’s proxy statement, and to the extent required and except as set forth therein, incorporated herein by reference. Information regarding the Company’s Audit Committee and its “Audit Committee Financial Expert” will be set forth in the Company’s proxy statement also, under the caption “Board Committees”, incorporated herein by reference. Information concerning section 16(a) Beneficial Ownership Reporting Compliance will be set forth in the Company’s proxy statement also, under the Caption “Compliance with Section 16(a) of the Securities Exchange Act” incorporated herein by reference. The Company has adopted a Code of Business Ethics (“Code”) applicable to its principal executive officer and principal financial officer, its directors and all other employees generally. A copy of the Code will be set forth as an appendix in the Company’s Proxy Statement and also may be found at the Company’s website www.omegaflex.com. Any changes to or waivers from this Code will be disclosed on the Company’s website as well as in appropriate filings with the Securities and Exchange Commission. Item 11 - EXECUTIVE COMPENSATION Information regarding executive compensation will be set forth in the Company’s proxy statement relating to the annual meeting of shareholders to be held June 7, 2016, and under the caption “Executive Compensation” to the extent required and except as set forth therein, is incorporated herein by reference. The report of the Compensation Committee of the Board of Directors of the Company shall not be deemed incorporated by reference by any general statement incorporating by reference the proxy statement into any filing under the Securities Exchange Act of 1934, and shall not otherwise be deemed filed under such Act. Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management as well as information regarding equity compensation plans and individual equity contracts or arrangements will be set forth in the Company’s proxy statement relating to the annual meeting of shareholders to be held on June 7, 2016, under the caption “Security Ownership of Certain Beneficial Owners and Management”, and to the extent required and except as set forth therein, is incorporated herein by reference. -41- -42- Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE EXHIBIT INDEX Information regarding certain relationships and related transactions will be set forth in the Company’s proxy statement relating to the annual meeting of shareholders to be held on June 7, 2016, under the caption “Certain Relationships and Related Transactions” and to the extent required and except as set forth therein, is incorporated herein by reference. Item 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES Information regarding financial accounting fees and services will be set forth in the Company’s proxy statement relating to the annual meeting of shareholders to be held on June 7, 2016, under the caption “Principal Accounting Fees and Services”, and to the extent required, and except as set forth therein, is incorporated herein by reference. Item 15 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K PART IV (a) The following documents are filed as part of this Form 10-K: 1. 2. 3. All financial statements. See Index to Consolidated Financial Statements on page 3 of this Form 10-K. None Required Exhibits. See Index to Exhibits. Those documents followed by a parenthetical notation are incorporated herein by reference to previous filings with the Securities and Exchange Commission as set forth below. Exhibit No. ********** Description ********** Reference Key ********** 3.1 3.2 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.9 10.10 10.11 Articles of Incorporation of Omega Flex, Inc., as amended Amended and Restated By-laws of Omega Flex, Inc. Indemnity and Insurance Matters Agreement dated July 29, 2005 between Omega Flex, Inc. and Mestek, Inc. Form of Indemnification Agreements entered into between Omega Flex, Inc. and its Directors and Officers and the Directors of its wholly-owned subsidiaries. Schedule of Directors/Officers with Indemnification Agreement * Employment Agreement dated December 15, 2008 between Omega Flex, Inc. and Kevin R. Hoben * Amendment No. 1 to the Employment Agreement dated January 1, 2014 between Omega Flex, Inc. and Kevin R. Hoben * Employment Agreement dated December 15, 2008 between Omega Flex, Inc. and Mark F. Albino * Amendment No. 1 to the Employment Agreement dated January 1, 2014 between Omega Flex, Inc. and Mark F. Albino Amended and Restated Committed Revolving Line of Credit Note dated 10.8 December 29, 2014 by Omega Flex, Inc. to Santander Bank, N.A. in the principal amount of $15,000,000. Loan and Security Agreement dated December 17, 2009 between Omega Flex, Inc. and Sovereign Bank, N.A. First Amendment dated December 30, 2010 to the Loan and Security Agreement between Omega Flex, Inc. and Sovereign Bank, N.A Second Amendment dated December 29, 2014 to the Loan and Security Agreement between Omega Flex, Inc. and Santander Bank, N.A 10.12 * Executive Salary Continuation Agreement 10.13 * Phantom Stock Plan dated December 11, 2006. (A) (A) (A) (A) (A) (C) (H) (C) (H) (I) (E) (F) (I) (B) (D) -43- -44- Information regarding certain relationships and related transactions will be set forth in the Company’s proxy statement relating to the annual meeting of shareholders to be held on June 7, 2016, under the caption “Certain Relationships and Related Transactions” and to the extent required and except as set forth therein, is incorporated herein by reference. Item 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES Information regarding financial accounting fees and services will be set forth in the Company’s proxy statement relating to the annual meeting of shareholders to be held on June 7, 2016, under the caption “Principal Accounting Fees and Services”, and to the extent required, and except as set forth therein, is incorporated herein by reference. Item 15 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K PART IV (a) The following documents are filed as part of this Form 10-K: All financial statements. See Index to Consolidated Financial Statements on page 3 of this Form 10-K. 1. 2. 3. None Required Exhibits. See Index to Exhibits. Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE EXHIBIT INDEX Those documents followed by a parenthetical notation are incorporated herein by reference to previous filings with the Securities and Exchange Commission as set forth below. Exhibit No. ********** 3.1 3.2 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 Description ********** Articles of Incorporation of Omega Flex, Inc., as amended Amended and Restated By-laws of Omega Flex, Inc. Indemnity and Insurance Matters Agreement dated July 29, 2005 between Omega Flex, Inc. and Mestek, Inc. Form of Indemnification Agreements entered into between Omega Flex, Inc. and its Directors and Officers and the Directors of its wholly-owned subsidiaries. Schedule of Directors/Officers with Indemnification Agreement * Employment Agreement dated December 15, 2008 between Omega Flex, Inc. and Kevin R. Hoben * Amendment No. 1 to the Employment Agreement dated January 1, 2014 between Omega Flex, Inc. and Kevin R. Hoben * Employment Agreement dated December 15, 2008 between Omega Flex, Inc. and Mark F. Albino * Amendment No. 1 to the Employment Agreement dated January 1, 2014 between Omega Flex, Inc. and Mark F. Albino Amended and Restated Committed Revolving Line of Credit Note dated December 29, 2014 by Omega Flex, Inc. to Santander Bank, N.A. in the principal amount of $15,000,000. Loan and Security Agreement dated December 17, 2009 between Omega Flex, Inc. and Sovereign Bank, N.A. First Amendment dated December 30, 2010 to the Loan and Security Agreement between Omega Flex, Inc. and Sovereign Bank, N.A Second Amendment dated December 29, 2014 to the Loan and Security Agreement between Omega Flex, Inc. and Santander Bank, N.A 10.12 * Executive Salary Continuation Agreement 10.13 * Phantom Stock Plan dated December 11, 2006. Reference Key ********** (A) (A) (A) (A) (A) (C) (H) (C) (H) (I) (E) (F) (I) (B) (D) -43- -44- 10.14 * First Amendment to the Omega Flex, Inc. 2006 Phantom Stock Plan 10.15 10.16 * Form of Phantom Stock Agreement entered into between Omega Flex, Inc. and its directors, officers and employees, except as set forth in the attached schedule. * Schedule of Phantom Stock Agreements between Omega Flex, Inc. and its directors and executive officers as of December 31, 2015. 10.17 Omega Flex Limited Settlement Agreement dated March 15, 2013 14.1 21.1 23.1 31.1 31.2 32.1 99.1 99.2 Code of Business Ethics List of Subsidiaries Consent of RSM US LLP CEO Certification CFO Certification 906 CEO and CFO Certifications Information Statement Corporate Governance Guidelines * Management contract, compensatory plan or arrangement Reference Key (E) (D) (G) (A) (A) (A) (A) (A) (B) (C) (D) (E) (F) (G) (H) (I) Filed as an Exhibit to the Registration Statement on Form 10-12G filed on June 22, 2005. Filed as an Exhibit to the Annual Report on Form 10-K filed March 31, 2006. Filed as an Exhibit to the Annual Report on Form 10-K filed March 18, 2009. Date: March 4, 2016 By: /S/ Derek W. Glanvill Derek W. Glanvill, Director Filed as an Exhibit to the Annual Report on Form 10-K filed April 2, 2007. Filed as an Exhibit to the Annual Report on Form 10-K filed March 17, 2010. Filed as an Exhibit to the Annual Report on Form 10-K filed March 10, 2011. Filed as an Exhibit to the Annual Report on Form 10-K filed March 27, 2013. Filed as an Exhibit to the Current Report on Form 8-K/A filed July 24, 2014. Filed as an Exhibit to the Current Report on Form 8-K filed December 29, 2014. -45- -46- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 4, 2016 By: /S/ Kevin R. Hoben OMEGA FLEX, INC. Date: March 4, 2016 By: /S/ Paul J. Kane Kevin R. Hoben, President and Chief Executive Officer Paul J. Kane, Vice President Finance, Chief Financial Officer Date: March 4, 2016 By: /S/ Matthew F. Unger Matthew F. Unger Financial Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 4, 2016 By: /S/ Mark F. Albino Mark F. Albino, Director Date: March 4, 2016 By: /S/ David K. Evans David K. Evans, Director Date: March 4, 2016 By: /S/ J. Nicholas Filler J. Nicholas Filler, Director Date: March 4, 2016 By: /S/ Bruce C. Klink Bruce C. Klink, Director Date: March 4, 2016 By: /S/ Stewart B. Reed Stewart B. Reed, Director * Form of Phantom Stock Agreement entered into between Omega Flex, Inc. and 10.15 its directors, officers and employees, except as set forth in the attached schedule. 10.16 * Schedule of Phantom Stock Agreements between Omega Flex, Inc. and its directors and executive officers as of December 31, 2015. 10.17 Omega Flex Limited Settlement Agreement dated March 15, 2013 Code of Business Ethics List of Subsidiaries Consent of RSM US LLP CEO Certification CFO Certification 906 CEO and CFO Certifications Information Statement Corporate Governance Guidelines (E) (D) (G) (A) (A) (A) (A) 14.1 21.1 23.1 31.1 31.2 32.1 99.1 99.2 (A) (B) (C) (D) (E) (F) (G) (H) (I) 10.14 * First Amendment to the Omega Flex, Inc. 2006 Phantom Stock Plan SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report be signed on its behalf by the undersigned, thereunto duly authorized. OMEGA FLEX, INC. Date: March 4, 2016 By: Date: March 4, 2016 By: /S/ Kevin R. Hoben Kevin R. Hoben, President and Chief Executive Officer /S/ Paul J. Kane Paul J. Kane, Vice President Finance, Chief Financial Officer Date: March 4, 2016 By: /S/ Matthew F. Unger Matthew F. Unger Financial Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. * Management contract, compensatory plan or arrangement Reference Key Filed as an Exhibit to the Registration Statement on Form 10-12G filed on June 22, 2005. Filed as an Exhibit to the Annual Report on Form 10-K filed March 31, 2006. Date: March 4, 2016 Date: March 4, 2016 Date: March 4, 2016 Filed as an Exhibit to the Annual Report on Form 10-K filed March 18, 2009. Date: March 4, 2016 Filed as an Exhibit to the Annual Report on Form 10-K filed April 2, 2007. Filed as an Exhibit to the Annual Report on Form 10-K filed March 17, 2010. Filed as an Exhibit to the Annual Report on Form 10-K filed March 10, 2011. Filed as an Exhibit to the Annual Report on Form 10-K filed March 27, 2013. Filed as an Exhibit to the Current Report on Form 8-K/A filed July 24, 2014. Filed as an Exhibit to the Current Report on Form 8-K filed December 29, 2014. Date: March 4, 2016 Date: March 4, 2016 By: By: By: By: By: By: /S/ Mark F. Albino Mark F. Albino, Director /S/ David K. Evans David K. Evans, Director /S/ J. Nicholas Filler J. Nicholas Filler, Director /S/ Derek W. Glanvill Derek W. Glanvill, Director /S/ Bruce C. Klink Bruce C. Klink, Director /S/ Stewart B. Reed Stewart B. Reed, Director -45- -46- EXHIBIT 23.1 We consent to the incorporation by reference in Registration Statement (No. 333-135515) on Form S-8 of Omega Flex, Inc. of our report dated March 4, 2016, relating to our audits of the consolidated financial statements and our audit of internal control over financial reporting, which appear in this Annual Report on Form 10-K of Omega Flex, Inc. for the year ended December 31, 2015. /s/ RSM US LLP Blue Bell, Pennsylvania March 4, 2016 OMEGA FLEX, INC. Phantom Stock Agreements Schedule of Directors and Officers As of December 31, 2015 EXHIBIT 10.16 Director/Officer Type Number Grant Date Grant Price Maturity Date Vesting Schedule CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Dean W. Rivest Paul J. Kane Edwin B. Moran Steven A. Treichel Timothy P. Scanlan Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Steven Hockenberry Full Full Full Full 1,500 1,500 1,800 1,800 1,500 1,500 1,800 1,800 1,500 1,500 1,800 1,800 2,100 2,100 2,550 2,550 1,500 1,500 1,800 1,800 590 590 710 710 02/16/2012 04/03/2013 02/19/2014 02/16/2015 02/16/2012 04/03/2013 02/19/2014 02/16/2015 02/16/2012 04/03/2013 02/19/2014 02/16/2015 02/16/2012 04/03/2013 02/19/2014 02/16/2015 02/16/2012 04/03/2013 02/19/2014 02/16/2015 02/16/2012 04/03/2013 02/19/2014 02/16/2015 $16.68 $15.01 $20.20 $31.26 $16.68 $15.01 $20.20 $31.26 $16.68 $15.01 $20.20 $31.26 $16.68 $15.01 $20.20 $31.26 $16.68 $15.01 $20.20 $31.26 $16.68 $15.01 $20.20 $31.26 02/16/2016 03/03/2017 02/19/2018 02/16/2019 02/16/2016 03/03/2017 02/19/2018 02/16/2019 02/16/2016 03/03/2017 02/19/2018 02/16/2019 02/16/2016 03/03/2017 02/19/2018 02/16/2019 02/16/2016 03/03/2017 02/19/2018 02/16/2019 02/16/2016 03/03/2017 02/19/2018 02/16/2019 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years Director/Officer Type Number Grant Date Grant Price Maturity Date Vesting Schedule CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EXHIBIT 23.1 We consent to the incorporation by reference in Registration Statement (No. 333-135515) on Form S-8 of Omega Flex, Inc. of our report dated March 4, 2016, relating to our audits of the consolidated financial statements and our audit of internal control over financial reporting, which appear in this Annual Report on Form 10-K of Omega Flex, Inc. for the year ended December 31, 2015. /s/ RSM US LLP Blue Bell, Pennsylvania March 4, 2016 OMEGA FLEX, INC. Phantom Stock Agreements Schedule of Directors and Officers As of December 31, 2015 EXHIBIT 10.16 Dean W. Rivest Paul J. Kane Edwin B. Moran Steven A. Treichel Timothy P. Scanlan Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full Full 1,500 1,500 1,800 1,800 02/16/2012 04/03/2013 02/19/2014 02/16/2015 1,500 02/16/2012 1,500 1,800 1,800 04/03/2013 02/19/2014 02/16/2015 1,500 1,500 1,800 1,800 2,100 2,100 2,550 2,550 02/16/2012 04/03/2013 02/19/2014 02/16/2015 02/16/2012 04/03/2013 02/19/2014 02/16/2015 1,500 02/16/2012 1,500 1,800 1,800 04/03/2013 02/19/2014 02/16/2015 590 590 710 710 02/16/2012 04/03/2013 02/19/2014 02/16/2015 $16.68 $15.01 $20.20 $31.26 $16.68 $15.01 $20.20 $31.26 $16.68 $15.01 $20.20 $31.26 $16.68 $15.01 $20.20 $31.26 $16.68 $15.01 $20.20 $31.26 $16.68 $15.01 $20.20 $31.26 02/16/2016 03/03/2017 02/19/2018 02/16/2019 02/16/2016 03/03/2017 02/19/2018 02/16/2019 02/16/2016 03/03/2017 02/19/2018 02/16/2019 02/16/2016 03/03/2017 02/19/2018 02/16/2019 02/16/2016 03/03/2017 02/19/2018 02/16/2019 02/16/2016 03/03/2017 02/19/2018 02/16/2019 Steven Hockenberry Full 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years 3 years Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 EXHIBIT 31.1 EXHIBIT 31.2 I, Paul J. Kane, certify that: Flex, Inc. (the “registrant”); I, Kevin R. Hoben, certify that: 1. I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2015, of Omega 1. I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2015, of Omega Flex, Inc. (the “registrant”); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. role in the registrant's internal control over financial reporting. Date: March 4, 2016 /s/ Kevin R. Hoben__________________________ Kevin R. Hoben Chief Executive Officer Date: March 4, 2016 /s/ Paul J. Kane Paul J. Kane Chief Financial Officer I, Kevin R. Hoben, certify that: Flex, Inc. (the “registrant”); Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 EXHIBIT 31.1 EXHIBIT 31.2 I, Paul J. Kane, certify that: 1. I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2015, of Omega 1. I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2015, of Omega Flex, Inc. (the “registrant”); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. role in the registrant's internal control over financial reporting. /s/ Kevin R. Hoben__________________________ Date: March 4, 2016 Kevin R. Hoben Chief Executive Officer Date: March 4, 2016 /s/ Paul J. Kane Paul J. Kane Chief Financial Officer EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Each of the undersigned hereby certifies, for the purposes of 18 U.S.C. Section 1350, in his capacity as an officer of Omega Flex, Inc. (the “Company”), that, to his knowledge: (a) the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2015, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 4, 2016 /s/ Kevin R. Hoben Kevin R. Hoben Chief Executive Officer /s/ Paul J. Kane Paul J. Kane Chief Financial Officer This certification is not deemed to be “filed” for purposes of section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. This certification is not deemed to be incorporated by reference into any filing under the Securities Act of 1933 or Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference. EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Each of the undersigned hereby certifies, for the purposes of 18 U.S.C. Section 1350, in his capacity as an officer of Omega Flex, Inc. (the “Company”), that, to his knowledge: (a) the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2015, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 4, 2016 /s/ Kevin R. Hoben Kevin R. Hoben Chief Executive Officer /s/ Paul J. Kane Paul J. Kane Chief Financial Officer This certification is not deemed to be “filed” for purposes of section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. This certification is not deemed to be incorporated by reference into any filing under the Securities Act of 1933 or Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference. 

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