Quality Engineered Flexible Metal Piping Products
2018 Annual Report
The life blood of any manufacturing company is new products.
b y t h e n u m b e r s
Manufacturer of flexible metal hose and gas piping products
Dear Shareholders –
April 26, 2019
I am fortunate to have this opportunity to speak to you directly about your investment in OmegaFlex,
and I am especially fortunate that I have been able to provide you with good news for many years. The year
2018 was especially noteworthy because the company again set records with over $108 million in net sales
and over $20 million in net income. But the people at OmegaFlex are not content in breaking records – we
are looking to significantly expand our business and we have taken an important step in 2018 with the
launching of our new MediTrac® flexible medical gas piping business.
Designed to replace traditional copper pipe, MediTrac® revolutionizes medical gas distribution by
providing faster, safer, and easier installations. MediTrac® is sold in long continuous-length rolls. Simply
roll out the desired length of pipe, bend it to fit the facility space as needed, and connect the source and
distribution points using quick-assembly fittings – all of which significantly reduces installation times and
labor costs. MediTrac® is the ideal solution for new, renovated and retrofitted healthcare installations
including: medical, dental, ambulatory, rehabilitation, clinic, veterinary and long-term care facilities. We are
very proud that MediTrac® is the only flexible medical gas piping recognized by the national Health Care
Facilities Code (NFPA 99).
In addition, a new UL listing for our DoubleTrac® double containment piping has been published to
authorize uses of DoubleTrac® piping for above ground and well as underground. This will significantly
expand the opportunities to use DoubleTrac® piping inside buildings for fueling back-up generation and
commercial heating applications, and supplements our underground applications for petroleum fueling
systems, wastewater treatment plants, marinas, and remote back-up generation.
The mantra we live by is “The lifeblood of a manufacturing company is new products.” This is our
strategic direction and the MediTrac® and DoubleTrac® products are the most recent examples of that
strategic vision in action. We invite you to read more about our company and our business, and thank you for
investing in OmegaFlex.
Sincerely,
Kevin R. Hoben
Chairman & CEO
Products pictured above: 2 is MediTrac® ; 0 is PSII; 1 is DoubleTrac®; 8 is TracPipe® CounterStrike®
OMEGA FLEX, Inc., Corporate Office, 213 Court Street, Suite 1001, Middletown, CT 06457 Tel: 860-704-6820 • Fax: 860-704-6830
b y t h e n u m b e r s
Manufacturer of flexible metal hose and gas piping products
Dear Shareholders –
April 26, 2019
I am fortunate to have this opportunity to speak to you directly about your investment in OmegaFlex,
and I am especially fortunate that I have been able to provide you with good news for many years. The year
2018 was especially noteworthy because the company again set records with over $108 million in net sales
and over $20 million in net income. But the people at OmegaFlex are not content in breaking records – we
are looking to significantly expand our business and we have taken an important step in 2018 with the
launching of our new MediTrac® flexible medical gas piping business.
Designed to replace traditional copper pipe, MediTrac® revolutionizes medical gas distribution by
providing faster, safer, and easier installations. MediTrac® is sold in long continuous-length rolls. Simply
roll out the desired length of pipe, bend it to fit the facility space as needed, and connect the source and
distribution points using quick-assembly fittings – all of which significantly reduces installation times and
labor costs. MediTrac® is the ideal solution for new, renovated and retrofitted healthcare installations
including: medical, dental, ambulatory, rehabilitation, clinic, veterinary and long-term care facilities. We are
very proud that MediTrac® is the only flexible medical gas piping recognized by the national Health Care
Facilities Code (NFPA 99).
In addition, a new UL listing for our DoubleTrac® double containment piping has been published to
authorize uses of DoubleTrac® piping for above ground and well as underground. This will significantly
expand the opportunities to use DoubleTrac® piping inside buildings for fueling back-up generation and
commercial heating applications, and supplements our underground applications for petroleum fueling
systems, wastewater treatment plants, marinas, and remote back-up generation.
The mantra we live by is “The lifeblood of a manufacturing company is new products.” This is our
strategic direction and the MediTrac® and DoubleTrac® products are the most recent examples of that
strategic vision in action. We invite you to read more about our company and our business, and thank you for
investing in OmegaFlex.
Sincerely,
Kevin R. Hoben
Chairman & CEO
Products pictured above: 2 is MediTrac® ; 0 is PSII; 1 is DoubleTrac®; 8 is TracPipe® CounterStrike®
OMEGA FLEX, Inc., Corporate Office, 213 Court Street, Suite 1001, Middletown, CT 06457 Tel: 860-704-6820 • Fax: 860-704-6830
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act Yes [ ] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ]
No [X]
The aggregate market value of voting and non-voting common shares held by non-affiliates of the registrant as of June 30, 2018, the last business
day of the second quarter of 2018, was $228,182,748.
The number of shares of common stock outstanding as of March 1, 2019 was 10,091,822.
DOCUMENTS INCORPORATED BY REFERENCE
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 2019 annual meeting of shareholders to be held on June 11, 2019.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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)
23-1948942
(I.R.S. Employer
Identification No.)
19341
(Zip Code)
Registrant’s telephone number, including area code
610-524-7272
Securities registered pursuant to Section 12(b) of the Act:
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]
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company
or an emerging growth company. See the definitions of “large accelerated filer,” and “accelerated filer”, “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ] Emerging Growth Company [ ]
-1-
-2-
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act Yes [ ] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ]
No [X]
The aggregate market value of voting and non-voting common shares held by non-affiliates of the registrant as of June 30, 2018, the last business
day of the second quarter of 2018, was $228,182,748.
The number of shares of common stock outstanding as of March 1, 2019 was 10,091,822.
DOCUMENTS INCORPORATED BY REFERENCE
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 2019 annual meeting of shareholders to be held on June 11, 2019.
SECURITIES AND EXCHANGE COMMISSION
UNITED STATES
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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)
23-1948942
(I.R.S. Employer
Identification No.)
19341
(Zip Code)
Registrant’s telephone number, including area code
610-524-7272
Securities registered pursuant to Section 12(b) of the Act:
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]
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company
or an emerging growth company. See the definitions of “large accelerated filer,” and “accelerated filer”, “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ] Emerging Growth Company [ ]
-1-
-2-
Omega Flex, Inc.
TABLE OF CONTENTS
PART I
Page
Item 1 - BUSINESS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for Registrant’s Common Equity, and Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risks
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Controls and Procedures
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management
Certain Relationships and Related Party Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15.
Item 16.
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART IV
4
11
17
17
17
18
18
20
20
31
32
56
56
57
57
57
58
58
58
58
61
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 the 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
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.
statements.
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 primarily 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, commercial, and institutional 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, double containment piping for conveying diesel fuel
and gasoline from a storage tank to a dispenser or back-up generator. The Company utilizes corrugated copper
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Omega Flex, Inc.
TABLE OF CONTENTS
PART I
Page
Item 1 - BUSINESS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Item 6.
Item 7.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 5.
Market for Registrant’s Common Equity, and Related Stockholder Matters and Issuer Purchases of
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risks
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Equity Securities
Selected Financial Data
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management
Certain Relationships and Related Party Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15.
Item 16.
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART I
PART II
PART III
PART IV
4
11
17
17
17
18
18
20
20
31
32
56
56
57
57
57
58
58
58
58
61
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 the 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 primarily 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, commercial, and institutional 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, double containment piping for conveying diesel fuel
and gasoline from a storage tank to a dispenser or back-up generator. The Company utilizes corrugated copper
-3-
-4-
tubing for medical gases in medical care facilities, including hospitals, clinics, dental and veterinary offices and
long-term care facilities. 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
Original Equipment Manufacturers (OEM) market, as well as the maintenance and repair market.
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 believe that 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 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 believes it 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
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 generated from Omega Flex, Inc., and
concentrated in North America, but the Company also has two foreign 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
applications.
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TracPipe® CounterStrike®, which came to market in 2004. Partnered with the development of our AutoFlare® and
AutoSnap® patented fittings and accessories, both have enjoyed wide acceptance due to their reliability and
durability. Within the residential construction 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, primarily because 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
tubing for medical gases in medical care facilities, including hospitals, clinics, dental and veterinary offices and
long-term care facilities. 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
Original Equipment Manufacturers (OEM) market, as well as the maintenance and repair market.
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 believe that 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 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 believes it 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
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 generated from Omega Flex, Inc., and
concentrated in North America, but the Company also has two foreign 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® and
AutoSnap® patented fittings and accessories, both have enjoyed wide acceptance due to their reliability and
durability. Within the residential construction 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, primarily because 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.
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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
advantageous 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.
In January 2018, the Company announced its new product launch for MediTrac® corrugated medical
tubing (“CMT”). Developed for the healthcare industry, the product can be used in hospitals, ambulatory care
centers, dental, physician and veterinary clinics, laboratories, and any facility that uses medical gas. Made from a
copper alloy with an exterior fire-retardant jacket, corrugated MediTrac CMT is made and sold in long continuous-
length rolls.This flexibility and long lengths allows the product to be installed in health care facilities much more
easily and quickly than traditional medical grade rigid copper pipe, which comes in 20 foot long sections. The
MediTrac CMT can be unrolled from a spool and installed in a medical facility in one long continuous length, and
can be bent by hand when a change in direction is needed. The long lengths and ability to change direction easily
eliminates labor that would otherwise be need to braze connections to connect straight sections of copper pipe or
elbows or tees for changes in direction. Easy to assemble axial swaged brass fittings connect with all K, L and
DWV medical tubing that is sized from ½” to 2” in diameter, and provides a leak-tight seal using ordinary hand
tools. The patent-pending fitting also prevents tampering or disassembly through the use of a tamper-proof sleeve
that is required by the Health Care Facilities Code (NFPA 99 – 2018 edition). The use of long continuous lengths
and assembly of factory-made fittings eliminates most brazing work that is typically needed for installing traditional
rigid copper pipe, increasing installation efficiency and operational safety. Rated for 185 psig, MediTrac® can
deliver the necessary volume of gas wherever its needed across long distances of a large facility. A recent case
study comparing the installation of rigid copper pipe and MediTrac® CMT showed that MediTrac® increases
installation efficiency by a factor of five (i.e., a 500% increase in efficiency). Because the tubing is supplied cleaned
and capped, MediTrac also reduces possible contamination into the medical gas system. MediTrac® hs additional
benefits of eliminating the costs for installation materials like brazing rods and purge gases, easier transportation of
rolls of pipe as compared to 20 foot long lengths of rigid copper pipe, and reduced fire risk from reduced number of
brazed connections. MediTrac is currently listed to UL 1365 and has an ASTM E84 rating of 25/50, and meets all
2018 requirements of the Health Care Facilities Code (NFPA 99 – 2018). We have completed several beta sites
2018, and full commercialization will commence in 2019.
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 characteristics of the flexible hose in terms of its flexibility, and its
ability to absorb vibration and thermal expansion and contraction, have substantial 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, unique industrial applications requiring the ability
to withstand wide variations in temperature and vibration, or copper alloyed CMT for medical facilities, 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 significant 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® CounterStrike® flexible gas piping and DoubleTrac®
double containment piping, as well as a copper alloy for our MediTrac® CMT. We also purchase all of our
proprietary fittings for use with the TracPipe® and CounterStrike® flexible gas piping, DoubleTrac® double
containment piping, and MediTrac® CMT. Although we have multiple sources qualified for all of our major raw
materials and components, we have historically used only 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 2018,
the commodity prices of nickel increased compared to the prior year, while copper was reasonably flat. The
Company experienced increases in most of its core components, as our vendors sought to recoup pricing and
production burdens. 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 and our MediTrac® CMT. Fortunately, the
Company was able to maintain reasonably stable margins during 2018. This was accomplished by implementing
our own pricing actions to help offset the upward movements in our material costs. The supply of our main raw
materials appears to be sufficient with ample volume. We believe that with our purchase commitments for stainless
steel, polyethylene and for our proprietary fittings, 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. We believe that the supply sufficiency 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.
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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
advantageous 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.
In January 2018, the Company announced its new product launch for MediTrac® corrugated medical
tubing (“CMT”). Developed for the healthcare industry, the product can be used in hospitals, ambulatory care
centers, dental, physician and veterinary clinics, laboratories, and any facility that uses medical gas. Made from a
copper alloy with an exterior fire-retardant jacket, corrugated MediTrac CMT is made and sold in long continuous-
length rolls.This flexibility and long lengths allows the product to be installed in health care facilities much more
easily and quickly than traditional medical grade rigid copper pipe, which comes in 20 foot long sections. The
MediTrac CMT can be unrolled from a spool and installed in a medical facility in one long continuous length, and
can be bent by hand when a change in direction is needed. The long lengths and ability to change direction easily
eliminates labor that would otherwise be need to braze connections to connect straight sections of copper pipe or
elbows or tees for changes in direction. Easy to assemble axial swaged brass fittings connect with all K, L and
DWV medical tubing that is sized from ½” to 2” in diameter, and provides a leak-tight seal using ordinary hand
tools. The patent-pending fitting also prevents tampering or disassembly through the use of a tamper-proof sleeve
that is required by the Health Care Facilities Code (NFPA 99 – 2018 edition). The use of long continuous lengths
and assembly of factory-made fittings eliminates most brazing work that is typically needed for installing traditional
rigid copper pipe, increasing installation efficiency and operational safety. Rated for 185 psig, MediTrac® can
deliver the necessary volume of gas wherever its needed across long distances of a large facility. A recent case
study comparing the installation of rigid copper pipe and MediTrac® CMT showed that MediTrac® increases
installation efficiency by a factor of five (i.e., a 500% increase in efficiency). Because the tubing is supplied cleaned
and capped, MediTrac also reduces possible contamination into the medical gas system. MediTrac® hs additional
benefits of eliminating the costs for installation materials like brazing rods and purge gases, easier transportation of
rolls of pipe as compared to 20 foot long lengths of rigid copper pipe, and reduced fire risk from reduced number of
brazed connections. MediTrac is currently listed to UL 1365 and has an ASTM E84 rating of 25/50, and meets all
2018 requirements of the Health Care Facilities Code (NFPA 99 – 2018). We have completed several beta sites
2018, and full commercialization will commence in 2019.
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 characteristics of the flexible hose in terms of its flexibility, and its
ability to absorb vibration and thermal expansion and contraction, have substantial 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, unique industrial applications requiring the ability
to withstand wide variations in temperature and vibration, or copper alloyed CMT for medical facilities, 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 significant 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® CounterStrike® flexible gas piping and DoubleTrac®
double containment piping, as well as a copper alloy for our MediTrac® CMT. We also purchase all of our
proprietary fittings for use with the TracPipe® and CounterStrike® flexible gas piping, DoubleTrac® double
containment piping, and MediTrac® CMT. Although we have multiple sources qualified for all of our major raw
materials and components, we have historically used only 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 2018,
the commodity prices of nickel increased compared to the prior year, while copper was reasonably flat. The
Company experienced increases in most of its core components, as our vendors sought to recoup pricing and
production burdens. 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 and our MediTrac® CMT. Fortunately, the
Company was able to maintain reasonably stable margins during 2018. This was accomplished by implementing
our own pricing actions to help offset the upward movements in our material costs. The supply of our main raw
materials appears to be sufficient with ample volume. We believe that with our purchase commitments for stainless
steel, polyethylene and for our proprietary fittings, 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. We believe that the supply sufficiency 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.
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Business Seasonality
The demand for our flexible piping products that are related to construction activity including TracPipe®,
Counterstrike®, DoubleTrac® and MediTrac®, may be affected by the construction industry’s demand, which
generally tightens during the winter 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 over 9,000 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, Ferguson Enterprises, whose various
branches had sales in the range of 13% to 15% of total sales during the period of 2016 to 2018, and was in the range
of 19% to 22% of our accounts receivable balance over the last two years. 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, which is the case regarding the Company’s largest
customer noted above, 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 were in the range of 10%
to 11% of our total sales during the last three years, 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.
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 a
modest increase in the number of residential housing starts in 2018, 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. For medical tubing applications, the main competitor is medical grade
(Type K or Type L) rigid copper pipe. MediTrac® is the only corrugated medical tubing in the United States that is
approved to the stringent requirements of UL 1365. The general industrial markets within Europe are very mature
and tend to offer opportunities that 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 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.
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.
Backlog
Intellectual Property
We have a comprehensive portfolio of intellectual property, including approximately 240 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 and CMT fittings. 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. We have filed patent applications for the MediTrac fittings to cover the
unique requirements in the United States for fittings that permanently affix the fitting to the CMT system, and
provides a tamper-proof connection to the CMT system. The expiration dates for the several patents covering our
AutoFlare® fittings will be expiring through 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”
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The demand for our flexible piping products that are related to construction activity including TracPipe®,
Counterstrike®, DoubleTrac® and MediTrac®, may be affected by the construction industry’s demand, which
generally tightens during the winter months of each year due to cold and inclement weather. Accordingly, sales are
usually higher in the spring, summer and fall.
Business Seasonality
Customers
We sell our products to customers scattered across a wide and diverse set of industries ranging from
construction to pharmaceutical with over 9,000 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, Ferguson Enterprises, whose various
branches had sales in the range of 13% to 15% of total sales during the period of 2016 to 2018, and was in the range
of 19% to 22% of our accounts receivable balance over the last two years. 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, which is the case regarding the Company’s largest
customer noted above, 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 were in the range of 10%
to 11% of our total sales during the last three years, 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.
Distribution of Sales
Competition
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.
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 a
modest increase in the number of residential housing starts in 2018, 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. For medical tubing applications, the main competitor is medical grade
(Type K or Type L) rigid copper pipe. MediTrac® is the only corrugated medical tubing in the United States that is
approved to the stringent requirements of UL 1365. The general industrial markets within Europe are very mature
and tend to offer opportunities that 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 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.
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 240 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 and CMT fittings. 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. We have filed patent applications for the MediTrac fittings to cover the
unique requirements in the United States for fittings that permanently affix the fitting to the CMT system, and
provides a tamper-proof connection to the CMT system. The expiration dates for the several patents covering our
AutoFlare® fittings will be expiring through 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”
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under Pennsylvania law, and is entitled to protection against unauthorized disclosure or misappropriation.
Employees
As of December 31, 2018, the Company had 151 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 party to a collective
bargaining agreement. A small amount of employees work at our facility in Houston, Texas. We also maintain an
office in Middletown, Connecticut where certain management, sales and administrative 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.
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.
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, which maintains a website
at www.sec.gov that contains reports, proxy and information statements. 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. In addition, we have made available on our
website under the heading “Compliance Policies” the charters for the Audit, Compensation and
Nominating/Governance Committees of our Board of Directors and our Code of Business Ethics. We intend to
make available on our website any future amendments or waivers to our Code of Business Ethics. The information
on our website is not part of this report.
Item 1A – RISK FACTORS
You should carefully consider the following risk factors and all the other information contained in this
annual report and our other filings in evaluating our business and investment in our common stock. We have not
disclosed general risk factors that may be applicable to any for-profit organization, such as general economic
conditions, interest rates, labor supply and technological changes. Investors are cautioned to take into consideration
the specific risk factors we have disclosed below and general risk factors before making an investment decision.
Risk Relating to Our Business
We are primarily dependent on one product line for most of our sales.
Most of the Company’s sales are derived from the sale of TracPipe® and CounterStrike® flexible gas piping
systems, including Autoflare® and AutoSnap® fittings and a variety of accessories. Sales of our flexible metal hose
for other applications represent a small portion of our overall sales and income. Any event or circumstance that
adversely affects our TracPipe® or CounterStrike® flexible gas piping could have a greater impact on our business
and financial results than if our business were more evenly distributed across several different product lines. The
effects of such an adverse event or circumstance would be magnified in terms of our Company as a whole as
compared to one or more competitors whose product lines may be more diversified, or who are not as reliant on the
sales generated by their respective flexible gas piping products. Therefore, risks relating to our TracPipe® and
CounterStrike® flexible gas piping business – in particular loss of distributors or sales channels, technological
changes, changes in applicable code requirements, loss of our key personnel involved in the flexible gas piping
product line, increases in commodity prices, particularly in stainless steel and polyethylene – could pose a
significant risk to our competitive position, results of operations or financial condition.
Our manufacturing plant(s) may be damaged or destroyed.
The majority of the company’s manufacturing capacity is currently located in Exton, Pennsylvania, where
we own two manufacturing facilities which are in close proximity to each other, and in Banbury, United Kingdom
where we rent a manufacturing facility. On a smaller scale the Company also manufactures product in Houston,
Texas. We do not have any operational manufacturing capacity for flexible metal hose outside of these locations.
We cannot replicate our manufacturing methods at a supplier’s facility due to the confidential and proprietary nature
of our manufacturing process. If one of the manufacturing facilities were destroyed or damaged in a significant
manner, we would likely experience a delay or some interruption of our flexible metal hose operations. This could
lead to a reduction in sales volume if customers were to purchase their requirements from our competitors, claims
for breach of contract by certain customers with contracts for delivery of flexible metal hose by a certain date, and
costs to replace our destroyed or damaged manufacturing capacity. The fittings and accessories for the flexible metal
hose are manufactured for us by suppliers not located in Exton, Pennsylvania, and the company also has outside
warehouses which contain finished goods inventory. Disruption of or damage to our supply of these items could
damage our business, competitive position, results of operations or financial condition.
We are dependent on certain raw materials and supplies that could be subject to volatile price escalation.
As a manufacturer of flexible metal hose, we must use certain raw materials in the manufacture of the
hose. The primary raw material is stainless steel that is used in the forming of the hose, and various other steel
products used in the wire braid overlay over some flexible metal hoses for additional strength and durability, as
well as copper alloy for MediTrac® CMT. We also use polyethylene in pellet form for the forming and extrusion of
a polyethylene jacket over CSST for use in fuel gas applications, underground installations, and other installations
that require that the metal hose be isolated from the environment. Finally, we also purchase our proprietary brass
fittings used with the flexible metal hose that provide a mechanical means of attaching the hose to an assembly or
junction. We attempt to limit the effects of volatile raw material prices, and to ensure adequate and timely supply of
material, by committing to annual purchase contracts for the bulk of our steel and polyethylene requirements, and
for our fitting requirements. The contracts typically represent a significant portion of the Company’s annual
planned usage, and are set at a designated fixed price or a 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
in excess of the pre-arranged commitments are conducted at current market prices at the Company’s discretion.
The Company has identified multiple qualified vendors to produce or manufacture our critical purchase
requirements. The Company does however tend to rely on one or two sources for each or our primary components
to leverage the relationship and pricing. Therefore, there is no assurance that the Company would be able to
eliminate all or most of the adverse effects of a sudden increase in the cost of materials or key components, or that
the loss of one or more of our key sources would not lead to higher costs or a disruption in our business.
Susceptibility of litigation and significant legal costs or settlements.
In the ordinary and normal conduct of the Company’s business, it is subject to periodic lawsuits,
investigations and claims (collectively, the “Claims”). The Company has continued to receive repeat pattern Claims
relating to our flexible gas piping products, although the pace of the new Claims has declined. While the Company
does not believe the Claims have legal merit, and has successfully defended itself vigorously against such Claims,
there is no guarantee that the pace of claims will not increase or subside. Any significant increase in the number of
Claims, the financial magnitude of Claims brought against the Company, the costs of defending the Claims,
particularly under higher retentions of the Company’s current product liability insurance policies, could have a
detrimental impact on the Company’s business, competitive position, results of operations or financial condition,
perhaps materially.
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under Pennsylvania law, and is entitled to protection against unauthorized disclosure or misappropriation.
As of December 31, 2018, the Company had 151 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 party to a collective
bargaining agreement. A small amount of employees work at our facility in Houston, Texas. We also maintain an
office in Middletown, Connecticut where certain management, sales and administrative 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.
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.
Employees
Environmental
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, which maintains a website
at www.sec.gov that contains reports, proxy and information statements. 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. In addition, we have made available on our
website under the heading “Compliance Policies” the charters for the Audit, Compensation and
Nominating/Governance Committees of our Board of Directors and our Code of Business Ethics. We intend to
make available on our website any future amendments or waivers to our Code of Business Ethics. The information
on our website is not part of this report.
Item 1A – RISK FACTORS
You should carefully consider the following risk factors and all the other information contained in this
annual report and our other filings in evaluating our business and investment in our common stock. We have not
disclosed general risk factors that may be applicable to any for-profit organization, such as general economic
conditions, interest rates, labor supply and technological changes. Investors are cautioned to take into consideration
the specific risk factors we have disclosed below and general risk factors before making an investment decision.
Risk Relating to Our Business
We are primarily dependent on one product line for most of our sales.
Most of the Company’s sales are derived from the sale of TracPipe® and CounterStrike® flexible gas piping
systems, including Autoflare® and AutoSnap® fittings and a variety of accessories. Sales of our flexible metal hose
for other applications represent a small portion of our overall sales and income. Any event or circumstance that
adversely affects our TracPipe® or CounterStrike® flexible gas piping could have a greater impact on our business
and financial results than if our business were more evenly distributed across several different product lines. The
effects of such an adverse event or circumstance would be magnified in terms of our Company as a whole as
compared to one or more competitors whose product lines may be more diversified, or who are not as reliant on the
sales generated by their respective flexible gas piping products. Therefore, risks relating to our TracPipe® and
CounterStrike® flexible gas piping business – in particular loss of distributors or sales channels, technological
changes, changes in applicable code requirements, loss of our key personnel involved in the flexible gas piping
product line, increases in commodity prices, particularly in stainless steel and polyethylene – could pose a
significant risk to our competitive position, results of operations or financial condition.
Our manufacturing plant(s) may be damaged or destroyed.
The majority of the company’s manufacturing capacity is currently located in Exton, Pennsylvania, where
we own two manufacturing facilities which are in close proximity to each other, and in Banbury, United Kingdom
where we rent a manufacturing facility. On a smaller scale the Company also manufactures product in Houston,
Texas. We do not have any operational manufacturing capacity for flexible metal hose outside of these locations.
We cannot replicate our manufacturing methods at a supplier’s facility due to the confidential and proprietary nature
of our manufacturing process. If one of the manufacturing facilities were destroyed or damaged in a significant
manner, we would likely experience a delay or some interruption of our flexible metal hose operations. This could
lead to a reduction in sales volume if customers were to purchase their requirements from our competitors, claims
for breach of contract by certain customers with contracts for delivery of flexible metal hose by a certain date, and
costs to replace our destroyed or damaged manufacturing capacity. The fittings and accessories for the flexible metal
hose are manufactured for us by suppliers not located in Exton, Pennsylvania, and the company also has outside
warehouses which contain finished goods inventory. Disruption of or damage to our supply of these items could
damage our business, competitive position, results of operations or financial condition.
We are dependent on certain raw materials and supplies that could be subject to volatile price escalation.
As a manufacturer of flexible metal hose, we must use certain raw materials in the manufacture of the
hose. The primary raw material is stainless steel that is used in the forming of the hose, and various other steel
products used in the wire braid overlay over some flexible metal hoses for additional strength and durability, as
well as copper alloy for MediTrac® CMT. We also use polyethylene in pellet form for the forming and extrusion of
a polyethylene jacket over CSST for use in fuel gas applications, underground installations, and other installations
that require that the metal hose be isolated from the environment. Finally, we also purchase our proprietary brass
fittings used with the flexible metal hose that provide a mechanical means of attaching the hose to an assembly or
junction. We attempt to limit the effects of volatile raw material prices, and to ensure adequate and timely supply of
material, by committing to annual purchase contracts for the bulk of our steel and polyethylene requirements, and
for our fitting requirements. The contracts typically represent a significant portion of the Company’s annual
planned usage, and are set at a designated fixed price or a 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
in excess of the pre-arranged commitments are conducted at current market prices at the Company’s discretion.
The Company has identified multiple qualified vendors to produce or manufacture our critical purchase
requirements. The Company does however tend to rely on one or two sources for each or our primary components
to leverage the relationship and pricing. Therefore, there is no assurance that the Company would be able to
eliminate all or most of the adverse effects of a sudden increase in the cost of materials or key components, or that
the loss of one or more of our key sources would not lead to higher costs or a disruption in our business.
Susceptibility of litigation and significant legal costs or settlements.
In the ordinary and normal conduct of the Company’s business, it is subject to periodic lawsuits,
investigations and claims (collectively, the “Claims”). The Company has continued to receive repeat pattern Claims
relating to our flexible gas piping products, although the pace of the new Claims has declined. While the Company
does not believe the Claims have legal merit, and has successfully defended itself vigorously against such Claims,
there is no guarantee that the pace of claims will not increase or subside. Any significant increase in the number of
Claims, the financial magnitude of Claims brought against the Company, the costs of defending the Claims,
particularly under higher retentions of the Company’s current product liability insurance policies, could have a
detrimental impact on the Company’s business, competitive position, results of operations or financial condition,
perhaps materially.
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We face intense competition in all of our markets.
The markets for flexible metal hose are intensely competitive. There are a number of competitors in all
markets in which we operate, and generally none of these markets have one dominant competitor – rather a large
number of competitors exist, each having a proportion of the total market. One or more of our competitors may
develop technologies and products that are more effective or which may cost less than our current or future products,
or could potentially render our products noncompetitive or obsolete. Our prior success has been due to our ability to
develop new products and product improvements, and establish and maintain an effective distribution network
which to some extent came at the expense of several competing manufacturers. Our business, competitive position,
results of operations or financial condition could be negatively impacted if we are unable to maintain and develop
our competitive products.
We may not retain our independent sales organizations.
Almost all of the Company’s products and product lines are sold by outside sales organizations. These
independent sales organizations or sales representatives are geographically dispersed in certain territorial markets
across the United States, Canada and elsewhere. These outside sales organizations are independent of us, and are
typically owned by the individual principals of such firms. We enter into agreements with such outside sales
organizations for the exclusive representation or distribution of our products, but such agreements are generally for
terms of one year or less. At the expiration of the agreement, the agent or distributor may elect to represent a
different manufacturer. As a result, we have no ability to control which flexible metal hose manufacturer any such
sales organization may represent or carry. The competition to retain quality outside sales organizations is also
intense between manufacturers of flexible metal hose since it is these sales organizations that generally can direct
the sales volume to distributors and, ultimately, contractors and installers in important markets across the country,
and in other countries in which we operate. The failure to obtain the best outside sales organization within a
particular geographic market can limit our ability to generate sales of our products. While we currently have a fully
developed sales and distribution network of superior outside sales organizations, there can be no assurance that any
one or more of the outside sales organizations will elect to remain with us, or that our competitors will not be able to
disrupt our distribution network by causing one or more of our sales representatives to drop our product lines. Our
business, competitive position, results of operation or financial condition could be negatively impacted if we cannot
maintain adequate sales and distribution networks.
We are dependent on certain sales channels for a significant portion of our business.
Certain of our competitors may have greater resources, or they may acquire greater resources.
Of the various sales channels that we use to sell our products, a significant portion of such sales are made
through our wholesale stocking distributors that include Ferguson Enterprises and several other distributors. These
and other distributors purchase our products, and stock the goods in warehouses for resale, either to their own local
branches or to end-users. Because of the breadth and penetration of the distribution networks, and the range of
complementary products they offer for sale, these wholesale distributors are able to sell large amounts of our
products to end users across the United States and Canada. The decision by a major wholesaler distributor to stop
distributing our products such as TracPipe® and CounterStrike® flexible gas piping, and to distribute a competitive
flexible gas piping product, could significantly affect our business, competitive position, results of operations or
financial condition.
Our business may be subject to the supply and availability of fuel gas supplies and infrastructure.
Our TracPipe® and CounterStrike® flexible gas piping products are used to convey fuel gas, primarily
natural gas, but also propane, within a building from the exterior wall of the building to any gas-fired appliances
within the building. Because those products are used in the transmission of fuel gas, the applications are limited to
geographic areas where such fuel gas is available. Certain geographic areas of the United States and other countries
do not have the infrastructure to make natural gas available. Other types of fuel gas may be used in areas where
there are no natural gas pipelines, but these alternate fuel gas sources have other distribution issues that may
constrict their availability. Our prospects for future growth of the TracPipe® and CounterStrike® products are largely
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limited to those areas that have natural gas transmission lines available for use in residences and commercial
buildings.
If we are not able to protect our intellectual property rights, we may not be able to compete as effectively.
We possess a wide array of intellectual property rights, including patents, trademarks, copyrights, and
applications for the above, as well as trade secrets, manufacturing know-how, and other proprietary information.
Certain of these intellectual property rights form the basis of our competitive advantage in the market place through
a superior product design, a superior business process, superior manufacturing methods or other features that
provide an advantage over our competitors. The intellectual property rights are sometimes subject to infringement or
misappropriation by other organizations, and failing an amiable resolution, we may be forced to resort to legal
proceedings to protect our rights in such intellectual property.
In the past, the Company has needed to protect itself and resort to legal action, in one instance regarding a
trade secret, and in another where we sued a flexible gas pipe competitor for infringement on one or more of our
U.S. patents covering our AutoFlare® fittings. In both instances, the Company received favorable rulings, thus
solidifying the validity of our intellectual property. Although the Company has had past success, the results we
may obtain from resorting to any such legal proceedings are never assured, and it is possible that an adverse
decision may be delivered in any particular proceeding. As a result, we may not be able to retain the exclusive
rights to utilize and practice such intellectual property rights, and one or more of our competitors could utilize and
practice such intellectual property rights. This development may lessen our competitive advantage vis-à-vis one or
more competitors, and lead to a reduction in sales volume in one or more product lines, a reduction in profit margin
in such product lines, or both.
business strategy
If we were to lose the services of one or more of our senior management team, we may not be able to execute our
Our future success depends in a large part upon the continued service of key members of our senior
management team. The senior executives are critical to the development of our products and our strategic direction,
and have a keen knowledge of business operations and processes. Their unique abilities, experience and expertise
cannot be easily duplicated or replaced. As much as possible, senior executives strive to educate and develop other
layers of staff and succession planning, but the loss of any of our senior management could seriously harm our
business.
Some of our competitors have substantially more resources than are available to us as a stand-alone
company. For example, in the CSST market, two of our competitors are divisions of large corporations with
revenues measured in the billions of dollars. These competitors may be able to devote substantially greater
resources to the development, manufacture, distribution and sale of their products than would be available to us as
a stand-alone company. One or more competitors may acquire several other competitors, or may be acquired by a
larger entity, and through a combination of resources be able to devote additional resources to their businesses.
These additional resources could be devoted to product development, reduced costs in an effort to obtain market
share, greater flexibility in terms of profit margin as part of a larger business organization, increased investment in
plant, machinery, distribution and sales concessions. As a stand-alone company, the resources that may be devoted
by us to meet any potential developments by larger, well-financed competitors may be limited.
We may substantially increase our debt in the future, or be restricted from accessing funds.
We are currently not carrying any long-term debt, although the Company has a line of credit facility
available for use as described in Note 5 of the financial statements. We may consider borrowing funds for purposes
of working capital, capital purchases, research and development, potential acquisitions and business development.
If we do use credit facilities, interest costs associated with any such borrowings and the terms of the loan could
potentially adversely affect our profitability. Additionally, the current line of credit has debt covenants associated
with it which may restrict the level of borrowing the Company may take on. Lack of access to financing, or
limited to those areas that have natural gas transmission lines available for use in residences and commercial
buildings.
If we are not able to protect our intellectual property rights, we may not be able to compete as effectively.
We possess a wide array of intellectual property rights, including patents, trademarks, copyrights, and
applications for the above, as well as trade secrets, manufacturing know-how, and other proprietary information.
Certain of these intellectual property rights form the basis of our competitive advantage in the market place through
a superior product design, a superior business process, superior manufacturing methods or other features that
provide an advantage over our competitors. The intellectual property rights are sometimes subject to infringement or
misappropriation by other organizations, and failing an amiable resolution, we may be forced to resort to legal
proceedings to protect our rights in such intellectual property.
In the past, the Company has needed to protect itself and resort to legal action, in one instance regarding a
trade secret, and in another where we sued a flexible gas pipe competitor for infringement on one or more of our
U.S. patents covering our AutoFlare® fittings. In both instances, the Company received favorable rulings, thus
solidifying the validity of our intellectual property. Although the Company has had past success, the results we
may obtain from resorting to any such legal proceedings are never assured, and it is possible that an adverse
decision may be delivered in any particular proceeding. As a result, we may not be able to retain the exclusive
rights to utilize and practice such intellectual property rights, and one or more of our competitors could utilize and
practice such intellectual property rights. This development may lessen our competitive advantage vis-à-vis one or
more competitors, and lead to a reduction in sales volume in one or more product lines, a reduction in profit margin
in such product lines, or both.
If we were to lose the services of one or more of our senior management team, we may not be able to execute our
business strategy
Our future success depends in a large part upon the continued service of key members of our senior
management team. The senior executives are critical to the development of our products and our strategic direction,
and have a keen knowledge of business operations and processes. Their unique abilities, experience and expertise
cannot be easily duplicated or replaced. As much as possible, senior executives strive to educate and develop other
layers of staff and succession planning, but the loss of any of our senior management could seriously harm our
business.
We are dependent on certain sales channels for a significant portion of our business.
Certain of our competitors may have greater resources, or they may acquire greater resources.
Some of our competitors have substantially more resources than are available to us as a stand-alone
company. For example, in the CSST market, two of our competitors are divisions of large corporations with
revenues measured in the billions of dollars. These competitors may be able to devote substantially greater
resources to the development, manufacture, distribution and sale of their products than would be available to us as
a stand-alone company. One or more competitors may acquire several other competitors, or may be acquired by a
larger entity, and through a combination of resources be able to devote additional resources to their businesses.
These additional resources could be devoted to product development, reduced costs in an effort to obtain market
share, greater flexibility in terms of profit margin as part of a larger business organization, increased investment in
plant, machinery, distribution and sales concessions. As a stand-alone company, the resources that may be devoted
by us to meet any potential developments by larger, well-financed competitors may be limited.
We may substantially increase our debt in the future, or be restricted from accessing funds.
We are currently not carrying any long-term debt, although the Company has a line of credit facility
available for use as described in Note 5 of the financial statements. We may consider borrowing funds for purposes
of working capital, capital purchases, research and development, potential acquisitions and business development.
If we do use credit facilities, interest costs associated with any such borrowings and the terms of the loan could
potentially adversely affect our profitability. Additionally, the current line of credit has debt covenants associated
with it which may restrict the level of borrowing the Company may take on. Lack of access to financing, or
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We face intense competition in all of our markets.
The markets for flexible metal hose are intensely competitive. There are a number of competitors in all
markets in which we operate, and generally none of these markets have one dominant competitor – rather a large
number of competitors exist, each having a proportion of the total market. One or more of our competitors may
develop technologies and products that are more effective or which may cost less than our current or future products,
or could potentially render our products noncompetitive or obsolete. Our prior success has been due to our ability to
develop new products and product improvements, and establish and maintain an effective distribution network
which to some extent came at the expense of several competing manufacturers. Our business, competitive position,
results of operations or financial condition could be negatively impacted if we are unable to maintain and develop
our competitive products.
We may not retain our independent sales organizations.
Almost all of the Company’s products and product lines are sold by outside sales organizations. These
independent sales organizations or sales representatives are geographically dispersed in certain territorial markets
across the United States, Canada and elsewhere. These outside sales organizations are independent of us, and are
typically owned by the individual principals of such firms. We enter into agreements with such outside sales
organizations for the exclusive representation or distribution of our products, but such agreements are generally for
terms of one year or less. At the expiration of the agreement, the agent or distributor may elect to represent a
different manufacturer. As a result, we have no ability to control which flexible metal hose manufacturer any such
sales organization may represent or carry. The competition to retain quality outside sales organizations is also
intense between manufacturers of flexible metal hose since it is these sales organizations that generally can direct
the sales volume to distributors and, ultimately, contractors and installers in important markets across the country,
and in other countries in which we operate. The failure to obtain the best outside sales organization within a
particular geographic market can limit our ability to generate sales of our products. While we currently have a fully
developed sales and distribution network of superior outside sales organizations, there can be no assurance that any
one or more of the outside sales organizations will elect to remain with us, or that our competitors will not be able to
disrupt our distribution network by causing one or more of our sales representatives to drop our product lines. Our
business, competitive position, results of operation or financial condition could be negatively impacted if we cannot
maintain adequate sales and distribution networks.
Of the various sales channels that we use to sell our products, a significant portion of such sales are made
through our wholesale stocking distributors that include Ferguson Enterprises and several other distributors. These
and other distributors purchase our products, and stock the goods in warehouses for resale, either to their own local
branches or to end-users. Because of the breadth and penetration of the distribution networks, and the range of
complementary products they offer for sale, these wholesale distributors are able to sell large amounts of our
products to end users across the United States and Canada. The decision by a major wholesaler distributor to stop
distributing our products such as TracPipe® and CounterStrike® flexible gas piping, and to distribute a competitive
flexible gas piping product, could significantly affect our business, competitive position, results of operations or
financial condition.
Our business may be subject to the supply and availability of fuel gas supplies and infrastructure.
Our TracPipe® and CounterStrike® flexible gas piping products are used to convey fuel gas, primarily
natural gas, but also propane, within a building from the exterior wall of the building to any gas-fired appliances
within the building. Because those products are used in the transmission of fuel gas, the applications are limited to
geographic areas where such fuel gas is available. Certain geographic areas of the United States and other countries
do not have the infrastructure to make natural gas available. Other types of fuel gas may be used in areas where
there are no natural gas pipelines, but these alternate fuel gas sources have other distribution issues that may
constrict their availability. Our prospects for future growth of the TracPipe® and CounterStrike® products are largely
desirable terms or at all, could damage our business, competitive position, results of operations or financial
condition.
Changes in the method pursuant to which the LIBOR rates are determined and potential phasing out of LIBOR
after 2021 may affect our financial results.
Borrowings under our line of credit facility bear interest at variable rates based on LIBOR. LIBOR and
certain other interest “benchmarks” may be subject to regulatory guidance and/or reform that could cause interest
rates under our current or future debt agreements to perform differently than in the past or cause other unanticipated
consequences. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has announced that it
intends to stop encouraging or requiring banks to submit rates for the calculation of LIBOR rates after 2021, and it is
unclear if LIBOR will cease to exist or if new methods of calculating LIBOR will evolve. If LIBOR ceases to exist
or if the methods of calculating LIBOR change from their current form, interest rates on our current or future debt
obligations may be adversely affected.
Our business may be subject to varying demands based on market interest rates.
The impact of currency volatility.
Our TracPipe® and CounterStrike® flexible gas piping products are used in the construction industry, both in
residential, commercial and industrial segments, for the piping of fuel gas within a building. The demand for new or
remodeled construction in the construction industry – and in particular the residential construction industry – is
susceptible to fluctuations in interest rates charged by banks and other financial institutions as well as consumer
demand. The purchasers of new or remodeled construction generally finance the construction or acquisition of the
residential, commercial or industrial buildings, and any increase in the interest rates on such financing will raise the
acquisition cost of the potential purchaser. While interest rates have been reasonably low over the recent past, they
have increased slightly over the last year. If costs increase significantly, a higher amount of potential buyers may
not be able to support the level of financing under a higher interest rate environment. Increased acquisition costs
may lead to a decline in the demand for new or remodeled construction, and as a result may also lead to a reduced
demand for our products used in construction industry.
Our business may be subject to cyclical demands.
Cybersecurity.
The demand for our products may be subject to cyclical demands in the markets in which we operate. Our
customers who use our products in industrial and commercial applications are generally manufacturing capital
equipment for their customers. Similarly, our TracPipe® and CounterStrike® flexible gas piping products are used
primarily in residential construction, both in single-family buildings, and in larger multi-unit buildings. Should there
be any change in factors that affect the rate of new residential construction, our growth rate would likely be
impacted. To the extent that interest rates increase, in conjunction with an economic cycle or as part of the general
economic conditions in the United States or abroad, the demand for our products in such applications may decrease
as well.
Our business may be subject to seasonal or weather related factors.
The demand for our products may be affected by factors relating to seasonal demand for the product, or a
decline in demand due to inclement weather. Our TracPipe® and CounterStrike® flexible gas piping products are
installed in new or remodeled buildings, including homes, apartment buildings, office buildings, warehouses, and
other commercial or industrial buildings. Generally, the rate of new or remodeled buildings in the United States and
in the other geographic markets in which we are present decline in the winter months due to the inability to dig
foundations, problems at the job site relating to snow, or generally due to low temperatures and stormy weather. As
the rate of construction activity declines during the winter, the demand for our corrugated stainless steel tubing may
also decrease or remain static.
The concentration of ownership of our common stock may depress its market price.
Approximately 71% of the issued and outstanding common stock is owned or controlled by inside affiliated
parties to the Company, with the largest being: The Estate of John E. Reed, Stewart B. Reed, Kevin R. Hoben and
Mark F. Albino. Stewart B. Reed currently serves on the Board of Directors, where he presided as Chairman until
December 2018, and Mr. Hoben and Mr. Albino also serve on the Board of Directors, and are officers of the
Company. Mr. Hoben was elevated to Chairman in December 2018. This concentration of ownership may have the
effect of reducing the volume of trading of the common stock on the NASDAQ, which could result in lower prices
for the common stock because there is not a sufficient supply of shares to create a vibrant market for our shares on
the NASDAQ.
The concentration of ownership of common stock could exert significant influence over matters requiring
shareholder approval, including takeover attempts.
Because of their significant ownership of our common stock, our officer and directors and their respective
affiliates may, as a practical matter, be able to exert influence over matters requiring approval by our shareholders,
including the election of directors and the approval of mergers or other business combinations. This concentration
also could have the effect of delaying or preventing a change in control of the Company.
The Company has operations in the United Kingdom, and does business transactions elsewhere in the
world outside of the United States. While the magnitude of these transactions outside of the United States have thus
far not been significant, and typically not in currencies of high volatility, it is possible that they could be material.
In June 2016, the United Kingdom made the decision to leave the European Union, an event commonly known as
Brexit. As a result of Brexit, and the political and economical uncertainty that ensued, the British Pound weakened
in comparison to other currencies. This in turn had a direct negative impact on the Company’s financial statements
and results, as we experienced losses when settling transactions in other currencies, and experienced unfavorable
results due to the translation of financial statements with a lower exchange rate. During 2017 and 2018 the impact
of currency volatility on the financial statements was not as severe, but going forward, it is possible that the British
Pound, other currencies that we engage in, or even the US Dollar may weaken, and materially impact the financial
position, operations and liquidity of the Company.
In recent years, the topic of cybersecurity, or the lack thereof, has been an issue of high concern. The
Company currently maintains a robust firewall and other safeguards to either prevent or detect against nefarious
actors looking to breach or infiltrate our data, and has backup systems in place. The Company’s website is housed
and maintained by a third party who maintain their own controls. The Company currently has a very low volume of
sales coming through the internet, and processes very few credit card transactions. While it currently appears that
the Company has a low level of risk related to cybercrime, the vulnerability still exists and could affect the
Company negatively.
Brexit.
The Company’s main operating subsidiary, Omega Flex Limited, is headquartered in Banbury, England.
The result of the referendum held by the United Kingdom to withdraw from the European Union (“Brexit”) has
created a level of uncertainty regarding the final terms of that withdrawal that has not yet been agreed upon by the
United Kingdom and the European Union. If there are no negotiated terms of withdrawal reached by the parties by
March 29, 2019 (the Brexit deadline), then one possible result of that impasse could be the re-imposition of border
and customs controls on the movement of people and goods between the United Kingdom and European Union, and
the rest of the world. These border and customs controls could increase costs on materials imported into the United
Kingdom and finished goods exported from the United Kingdom. In addition, it is possible that logistical delays
created by those controls could delay shipments of materials and supplies into the Banbury manufacturing plant, and
could also affect our ability to ship goods to customers outside of the UK, into the European Union, Africa, and the
Near East. Omega Flex Limited has stockpiled materials and supplies for its manufacturing operations in Banbury
ahead of the Brexit deadline, and are positioned to stage some finished goods inventory in warehouses in the
European Union, in an attempt to cushion the possible impact of the re-imposition of boarder and customs’ controls.
Most of the business of Omega Flex Limited is domestic, and should therefore not be unduly disrupted. However,
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desirable terms or at all, could damage our business, competitive position, results of operations or financial
condition.
Changes in the method pursuant to which the LIBOR rates are determined and potential phasing out of LIBOR
after 2021 may affect our financial results.
Borrowings under our line of credit facility bear interest at variable rates based on LIBOR. LIBOR and
certain other interest “benchmarks” may be subject to regulatory guidance and/or reform that could cause interest
rates under our current or future debt agreements to perform differently than in the past or cause other unanticipated
consequences. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has announced that it
intends to stop encouraging or requiring banks to submit rates for the calculation of LIBOR rates after 2021, and it is
unclear if LIBOR will cease to exist or if new methods of calculating LIBOR will evolve. If LIBOR ceases to exist
or if the methods of calculating LIBOR change from their current form, interest rates on our current or future debt
obligations may be adversely affected.
Our TracPipe® and CounterStrike® flexible gas piping products are used in the construction industry, both in
residential, commercial and industrial segments, for the piping of fuel gas within a building. The demand for new or
remodeled construction in the construction industry – and in particular the residential construction industry – is
susceptible to fluctuations in interest rates charged by banks and other financial institutions as well as consumer
demand. The purchasers of new or remodeled construction generally finance the construction or acquisition of the
residential, commercial or industrial buildings, and any increase in the interest rates on such financing will raise the
acquisition cost of the potential purchaser. While interest rates have been reasonably low over the recent past, they
have increased slightly over the last year. If costs increase significantly, a higher amount of potential buyers may
not be able to support the level of financing under a higher interest rate environment. Increased acquisition costs
may lead to a decline in the demand for new or remodeled construction, and as a result may also lead to a reduced
demand for our products used in construction industry.
Our business may be subject to cyclical demands.
The demand for our products may be subject to cyclical demands in the markets in which we operate. Our
customers who use our products in industrial and commercial applications are generally manufacturing capital
equipment for their customers. Similarly, our TracPipe® and CounterStrike® flexible gas piping products are used
primarily in residential construction, both in single-family buildings, and in larger multi-unit buildings. Should there
be any change in factors that affect the rate of new residential construction, our growth rate would likely be
impacted. To the extent that interest rates increase, in conjunction with an economic cycle or as part of the general
economic conditions in the United States or abroad, the demand for our products in such applications may decrease
as well.
Our business may be subject to seasonal or weather related factors.
The demand for our products may be affected by factors relating to seasonal demand for the product, or a
decline in demand due to inclement weather. Our TracPipe® and CounterStrike® flexible gas piping products are
installed in new or remodeled buildings, including homes, apartment buildings, office buildings, warehouses, and
other commercial or industrial buildings. Generally, the rate of new or remodeled buildings in the United States and
in the other geographic markets in which we are present decline in the winter months due to the inability to dig
foundations, problems at the job site relating to snow, or generally due to low temperatures and stormy weather. As
the rate of construction activity declines during the winter, the demand for our corrugated stainless steel tubing may
also decrease or remain static.
The concentration of ownership of our common stock may depress its market price.
Approximately 71% of the issued and outstanding common stock is owned or controlled by inside affiliated
parties to the Company, with the largest being: The Estate of John E. Reed, Stewart B. Reed, Kevin R. Hoben and
Our business may be subject to varying demands based on market interest rates.
The impact of currency volatility.
Mark F. Albino. Stewart B. Reed currently serves on the Board of Directors, where he presided as Chairman until
December 2018, and Mr. Hoben and Mr. Albino also serve on the Board of Directors, and are officers of the
Company. Mr. Hoben was elevated to Chairman in December 2018. This concentration of ownership may have the
effect of reducing the volume of trading of the common stock on the NASDAQ, which could result in lower prices
for the common stock because there is not a sufficient supply of shares to create a vibrant market for our shares on
the NASDAQ.
The concentration of ownership of common stock could exert significant influence over matters requiring
shareholder approval, including takeover attempts.
Because of their significant ownership of our common stock, our officer and directors and their respective
affiliates may, as a practical matter, be able to exert influence over matters requiring approval by our shareholders,
including the election of directors and the approval of mergers or other business combinations. This concentration
also could have the effect of delaying or preventing a change in control of the Company.
The Company has operations in the United Kingdom, and does business transactions elsewhere in the
world outside of the United States. While the magnitude of these transactions outside of the United States have thus
far not been significant, and typically not in currencies of high volatility, it is possible that they could be material.
In June 2016, the United Kingdom made the decision to leave the European Union, an event commonly known as
Brexit. As a result of Brexit, and the political and economical uncertainty that ensued, the British Pound weakened
in comparison to other currencies. This in turn had a direct negative impact on the Company’s financial statements
and results, as we experienced losses when settling transactions in other currencies, and experienced unfavorable
results due to the translation of financial statements with a lower exchange rate. During 2017 and 2018 the impact
of currency volatility on the financial statements was not as severe, but going forward, it is possible that the British
Pound, other currencies that we engage in, or even the US Dollar may weaken, and materially impact the financial
position, operations and liquidity of the Company.
Cybersecurity.
In recent years, the topic of cybersecurity, or the lack thereof, has been an issue of high concern. The
Company currently maintains a robust firewall and other safeguards to either prevent or detect against nefarious
actors looking to breach or infiltrate our data, and has backup systems in place. The Company’s website is housed
and maintained by a third party who maintain their own controls. The Company currently has a very low volume of
sales coming through the internet, and processes very few credit card transactions. While it currently appears that
the Company has a low level of risk related to cybercrime, the vulnerability still exists and could affect the
Company negatively.
Brexit.
The Company’s main operating subsidiary, Omega Flex Limited, is headquartered in Banbury, England.
The result of the referendum held by the United Kingdom to withdraw from the European Union (“Brexit”) has
created a level of uncertainty regarding the final terms of that withdrawal that has not yet been agreed upon by the
United Kingdom and the European Union. If there are no negotiated terms of withdrawal reached by the parties by
March 29, 2019 (the Brexit deadline), then one possible result of that impasse could be the re-imposition of border
and customs controls on the movement of people and goods between the United Kingdom and European Union, and
the rest of the world. These border and customs controls could increase costs on materials imported into the United
Kingdom and finished goods exported from the United Kingdom. In addition, it is possible that logistical delays
created by those controls could delay shipments of materials and supplies into the Banbury manufacturing plant, and
could also affect our ability to ship goods to customers outside of the UK, into the European Union, Africa, and the
Near East. Omega Flex Limited has stockpiled materials and supplies for its manufacturing operations in Banbury
ahead of the Brexit deadline, and are positioned to stage some finished goods inventory in warehouses in the
European Union, in an attempt to cushion the possible impact of the re-imposition of boarder and customs’ controls.
Most of the business of Omega Flex Limited is domestic, and should therefore not be unduly disrupted. However,
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the macroeconomic effects of Brexit on the economies of the United Kingdom and the European Union are
unknown, and those effects could dampen economic activity and the overall demand for the Company’s products in
those markets. However, it is not expected that increased costs, logistical delays, nor possible economic declines in
those markets would be material to the Company.
Our business may be subject to macroeconomic effects caused by increased trade tariffs and reduced
international trade.
Recent events have caused various governments around the world to impose increased trade tariffs on
imported goods. These increased tariffs may cause the cost of materials to rise and may add additional expense on
exported goods. However, the company does not believe that increased tariffs will materially affect the company’s
sales or operating margins, as most of the raw materials and supplies used to manufacture our products are sourced
domestically in the United States. Further, exports of our flexible gas piping products from our Exton, Pennsylvania
facility are primarily to Canada, which recently agreed to a revised North American trade treaty, and to a lesser
extent to the Caribbean and South America. Sales to Europe, Asia and Africa are primarily handled from our
Banbury, England facility, which are not affected by U.S. trade tariffs and retaliatory tariffs, but may be subject to
other constraints as discussed in the Brexit risk factor, above.
Item 1B – UNRESOLVED STAFF COMMENTS
None.
Item 2 - PROPERTIES
The Company utilizes two facilities in Exton, Pennsylvania, which is located about one hour west of
Philadelphia. One facility which is owned by the Company, contains about 83,000 square feet of manufacturing and
office space. The other facility which is located nearby provides another 30,000 square feet of space, mostly used
for manufacturing. The Company previously had a rental agreement running through January 2018 for this facility,
but in early 2017 consummated an agreement to purchase the land and structure for cash. The majority of the
manufacturing of our flexible metal hose is performed at the Exton facilities. Also within the US, the Company
leases a facility in Houston, Texas, which contains manufacturing, stocking and sales operations, and a corporate
office located in Middletown, Connecticut. In the United Kingdom, the Company rents a facility in Banbury,
England, which manufactures products and serves sales, warehousing and operational functions as well.
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”). Most of the Claims, including a putative class-action claim,
relate to potential lightning damage to our flexible gas piping products, which impact legal and product liability
related expenses. The Company does not believe the Claims have legal merit, and therefore has commenced a
vigorous defense in response to the Claims. It is possible that the Company may incur increased litigation costs in
the future due to a variety of factors, including a higher numbers of Claims, higher legal costs, and higher insurance
deductibles or retentions.
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 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 cash
bond of $1,600,000, which was previously included in Other Long Term Assets and posted as security for a
subsequent appeal, was returned to the Company in May 2018. This case was finally settled and closed on August
7, 2018.
In March 2017, a putative class action case was re-filed against the Company and other parties in Missouri
state court after the predecessor case was dismissed without prejudice by the federal court. The Company
successfully removed the case to federal court and is currently vigorously defending the case.
The Company has in place commercial general liability insurance policies that cover most Claims, which
are subject to deductibles or retentions, ranging primarily from $25,000 to $1,000,000 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 $1,000,000, 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 as of December 31, 2018 is estimated to not exceed approximately $1,700,000, which
represents the potential costs that may be incurred over time for the Claims within the applicable insurance policy
deductibles or retentions. From time to time, depending upon the nature of a particular case, the Company may
decide to spend in excess of a deductible or retention to enable more discretion regarding the defense, although this
is not common. 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 or anticipated settlements for Claims. The liabilities recorded on the
Company’s books at December 31, 2018 and December 31, 2017 were $150,000 and $175,000, respectively, and are
included in Other Liabilities.
Item 4 – MINE SAFETY DISCLOSURES
The Company does not have any disclosures applicable to mine safety.
PART II
Item 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, AND RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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, 2018, based on inquiries of the registrant’s transfer agent, was 354. 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.
Shareholder Return Performance Presentation
The Shareholder Return Performance Presentation shall not be deemed to be “soliciting material” or
subject to Regulations 14A or 14C of the Securities and Exchange Commission or to the liabilities of Section 18 of
the Securities and Exchange Act of 1934 (the “Exchange Act”) and shall not be deemed incorporated by reference
by any general statement incorporating by reference this annual report into any filing under the Securities Act of
1933 or under the Exchange Act, and shall not otherwise be deemed filed under such Acts.
The following graph shows the changes on a cumulative basis in the total shareholder return on the Omega Flex
common stock, and compares those changes in shareholder return with the total return on the S&P 500 Index and the
total return on the S&P 500 Building Products Index. The graph begins with a base value of $100 on December 31,
2013, and shows the cumulative changes over the last five years, ending on December 31, 2018. The graph assumes
$100 was invested on December 31, in each of the three alternatives, and that all dividends have been reinvested.
-17-
-18-
the macroeconomic effects of Brexit on the economies of the United Kingdom and the European Union are
unknown, and those effects could dampen economic activity and the overall demand for the Company’s products in
those markets. However, it is not expected that increased costs, logistical delays, nor possible economic declines in
those markets would be material to the Company.
Our business may be subject to macroeconomic effects caused by increased trade tariffs and reduced
international trade.
Recent events have caused various governments around the world to impose increased trade tariffs on
imported goods. These increased tariffs may cause the cost of materials to rise and may add additional expense on
exported goods. However, the company does not believe that increased tariffs will materially affect the company’s
sales or operating margins, as most of the raw materials and supplies used to manufacture our products are sourced
domestically in the United States. Further, exports of our flexible gas piping products from our Exton, Pennsylvania
facility are primarily to Canada, which recently agreed to a revised North American trade treaty, and to a lesser
extent to the Caribbean and South America. Sales to Europe, Asia and Africa are primarily handled from our
Banbury, England facility, which are not affected by U.S. trade tariffs and retaliatory tariffs, but may be subject to
other constraints as discussed in the Brexit risk factor, above.
Item 1B – UNRESOLVED STAFF COMMENTS
None.
Item 2 - PROPERTIES
The Company utilizes two facilities in Exton, Pennsylvania, which is located about one hour west of
Philadelphia. One facility which is owned by the Company, contains about 83,000 square feet of manufacturing and
office space. The other facility which is located nearby provides another 30,000 square feet of space, mostly used
for manufacturing. The Company previously had a rental agreement running through January 2018 for this facility,
but in early 2017 consummated an agreement to purchase the land and structure for cash. The majority of the
manufacturing of our flexible metal hose is performed at the Exton facilities. Also within the US, the Company
leases a facility in Houston, Texas, which contains manufacturing, stocking and sales operations, and a corporate
office located in Middletown, Connecticut. In the United Kingdom, the Company rents a facility in Banbury,
England, which manufactures products and serves sales, warehousing and operational functions as well.
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”). Most of the Claims, including a putative class-action claim,
relate to potential lightning damage to our flexible gas piping products, which impact legal and product liability
related expenses. The Company does not believe the Claims have legal merit, and therefore has commenced a
vigorous defense in response to the Claims. It is possible that the Company may incur increased litigation costs in
the future due to a variety of factors, including a higher numbers of Claims, higher legal costs, and higher insurance
deductibles or retentions.
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 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 cash
bond of $1,600,000, which was previously included in Other Long Term Assets and posted as security for a
subsequent appeal, was returned to the Company in May 2018. This case was finally settled and closed on August
7, 2018.
In March 2017, a putative class action case was re-filed against the Company and other parties in Missouri
state court after the predecessor case was dismissed without prejudice by the federal court. The Company
successfully removed the case to federal court and is currently vigorously defending the case.
The Company has in place commercial general liability insurance policies that cover most Claims, which
are subject to deductibles or retentions, ranging primarily from $25,000 to $1,000,000 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 $1,000,000, 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 as of December 31, 2018 is estimated to not exceed approximately $1,700,000, which
represents the potential costs that may be incurred over time for the Claims within the applicable insurance policy
deductibles or retentions. From time to time, depending upon the nature of a particular case, the Company may
decide to spend in excess of a deductible or retention to enable more discretion regarding the defense, although this
is not common. 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 or anticipated settlements for Claims. The liabilities recorded on the
Company’s books at December 31, 2018 and December 31, 2017 were $150,000 and $175,000, respectively, and are
included in Other Liabilities.
Item 4 – MINE SAFETY DISCLOSURES
The Company does not have any disclosures applicable to mine safety.
PART II
Item 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, AND RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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, 2018, based on inquiries of the registrant’s transfer agent, was 354. 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.
Shareholder Return Performance Presentation
The Shareholder Return Performance Presentation shall not be deemed to be “soliciting material” or
subject to Regulations 14A or 14C of the Securities and Exchange Commission or to the liabilities of Section 18 of
the Securities and Exchange Act of 1934 (the “Exchange Act”) and shall not be deemed incorporated by reference
by any general statement incorporating by reference this annual report into any filing under the Securities Act of
1933 or under the Exchange Act, and shall not otherwise be deemed filed under such Acts.
The following graph shows the changes on a cumulative basis in the total shareholder return on the Omega Flex
common stock, and compares those changes in shareholder return with the total return on the S&P 500 Index and the
total return on the S&P 500 Building Products Index. The graph begins with a base value of $100 on December 31,
2013, and shows the cumulative changes over the last five years, ending on December 31, 2018. The graph assumes
$100 was invested on December 31, in each of the three alternatives, and that all dividends have been reinvested.
-17-
-18-
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Omega Flex, Inc., the S&P 500 Index
and the S&P Building Products Index
$400
$350
$300
$250
$200
$150
$100
$50
$0
12/13
12/14
12/15
12/16
12/17
12/18
Omega Flex, Inc.
S&P 500
S&P Building Products
*$100 invested on 12/31/13 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2019 Standard & Poor's, a division of S&P Global. All rights reserved.
Item 6 - SELECTED FINANCIAL DATA
Selected financial data for the Company for each of the last five years is shown in the following table,
which is derived from and should be read in conjunction with the Consolidated Financial Statements included
elsewhere in this report.
SUMMARY OF FINANCIAL POSITION - as of December 31,
Total assets
Working capital
Shareholders’ equity
Dividends declared per share
SUMMARY OF OPERATIONS - for the years ended December 31,
2018
2017
2016
2015
2014
(dollars in thousands except per share data)
$86,836
$55,217
$66,321
$77,091
$45,372
$56,069
$70,562
$36,941
$46,061
$66,274
$33,139
$41,154
$55,138
$26,747
$33,969
$0.94
$0.66
$0.85
$0.85
$0.49
2018
2017
2016
2015
2014
(dollars in thousands except per share data)
Net Sales
Net Income attributable to Omega Flex, Inc.(1)
Basic and Diluted Earnings per Common Share
$108,313
$20,139
$2.00
$101,799
$15,662
$1.55
$94,051
$14,377
$1.42
$93,278
$15,788
$1.56
$85,219
$13,462
$1.33
(1) Total Net Income for these periods was $20,277, $15,846, $14,546, $15,961 and $13,605, respectively.
The difference is attributable to the Net Income - Noncontrolling Interest.
Company / Index
Base
Period
12/31/13
Indexed Returns – Year Ending
RESULTS OF OPERATIONS
Item 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
12/13
12/14
12/15
12/16
12/17
12/18
Omega Flex, Inc.
S&P 500
S&P Building Products
100.00
100.00
100.00
187.70
113.69
116.93
167.44
115.26
146.65
287.09
129.05
157.28
371.24
157.22
175.41
285.24
150.33
132.65
Dividends
The Company currently has a policy of paying regular quarterly dividends, which is expected to continue.
In addition, the Company may pay special dividends from time to time, as we did during January 2017.
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, possible
acquisitions, as well as other factors that the Board may consider relevant, determining on a quarterly basis whether
to declare a regular quarterly dividend, or a special dividend.
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.
-19-
-20-
$400
$350
$300
$250
$200
$150
$100
$50
$0
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Omega Flex, Inc., the S&P 500 Index
and the S&P Building Products Index
Item 6 - SELECTED FINANCIAL DATA
Selected financial data for the Company for each of the last five years is shown in the following table,
which is derived from and should be read in conjunction with the Consolidated Financial Statements included
elsewhere in this report.
SUMMARY OF FINANCIAL POSITION - as of December 31,
2018
2017
2016
(dollars in thousands except per share data)
2015
2014
Total assets
Working capital
Shareholders’ equity
Dividends declared per share
$86,836
$55,217
$66,321
$0.94
$77,091
$45,372
$56,069
$0.66
$70,562
$36,941
$46,061
$0.85
$66,274
$33,139
$41,154
$0.85
$55,138
$26,747
$33,969
$0.49
SUMMARY OF OPERATIONS - for the years ended December 31,
12/13
12/14
12/15
12/16
12/17
12/18
2018
2017
2016
(dollars in thousands except per share data)
2015
2014
Omega Flex, Inc.
S&P 500
S&P Building Products
*$100 invested on 12/31/13 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2019 Standard & Poor's, a division of S&P Global. All rights reserved.
Net Sales
Net Income attributable to Omega Flex, Inc.(1)
Basic and Diluted Earnings per Common Share
$108,313
$20,139
$2.00
$101,799
$15,662
$1.55
$94,051
$14,377
$1.42
$93,278
$15,788
$1.56
$85,219
$13,462
$1.33
(1) Total Net Income for these periods was $20,277, $15,846, $14,546, $15,961 and $13,605, respectively.
The difference is attributable to the Net Income - Noncontrolling Interest.
Base
Period
12/31/13
Company / Index
Indexed Returns – Year Ending
12/13
12/14
12/15
12/16
12/17
12/18
Omega Flex, Inc.
S&P 500
S&P Building Products
100.00
100.00
100.00
187.70
113.69
116.93
167.44
115.26
146.65
287.09
129.05
157.28
371.24
157.22
175.41
285.24
150.33
132.65
Dividends
The Company currently has a policy of paying regular quarterly dividends, which is expected to continue.
In addition, the Company may pay special dividends from time to time, as we did during January 2017.
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, possible
acquisitions, as well as other factors that the Board may consider relevant, determining on a quarterly basis whether
to declare a regular quarterly dividend, or a special 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.
-19-
-20-
OVERVIEW
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.
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 newest product line MediTrac® corrugated medical tubing is used for piping
medical gases (oxygen, nitrogen, nitrous oxide, carbon dioxide, and medical vacuum) in health care facilities.
Building on the recognized strengths and strategies employed in the flexible gas piping market, MediTrac® can be
used in place of rigid copper pipe, and due to its long continuous lengths and flexibility, it can be installed
approximately five times faster than rigid copper pipe, saving on installation labor and construction schedules. 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.
CHANGES IN FINANCIAL CONDITION
The Company’s cash balance of $32,392,000 at December 31, 2018, decreased $5,546,000 (14.6%) from
the $37,938,000 balance at December 31, 2017. The primary reasons for the decrease were that the Company used
cash to purchase short-term investments of $35,099,000, net of proceeds from sale of $20,155,000, for a balance of
$14,944,000 as of the end of 2018, with the purpose of earning a higher level of investment income while
maintaining a minimal level of risk, and the Company also paid dividends during 2018 totaling $9,284,000, as
detailed in Note 6, “Shareholders’ Equity”. Lastly, the Company used funds for various capital projects, including
those designated for the new MediTrac products. Those cash outflows were partially offset by income generated
from operations during 2018, as well as the receipt of the $1,600,000 cash bond described below.
Other Long Term Assets were $1,307,000 and $3,079,000 at December 31, 2018 and December 31, 2017,
respectively, decreasing $1,772,000 (57.6%). During May 2018, the Company received back the cash bond of
approximately $1,600,000, which was previously held as security during an appeals process as detailed in Note 10,
Commitments and Contingencies.
Twelve-months ended December 31, 2018 vs. December 31, 2017
RESULTS OF OPERATIONS
The Company reported comparative results from operations for the twelve-month period ended December
31, 2018 and 2017 as follows:
Net Sales
Gross Profit
Operating Profit
Twelve-months ended December 31,
(dollars in thousands)
2018
2018
2017
2017
$ 108,313
$
$
66,096
26,366
100.0%
61.0%
24.3%
$ 101,799
$
$
61,766
24,217
100.0%
60.7%
23.8%
Net Sales. The Company’s sales for the full year of 2018 were $108,313,000, reflecting an increase of
$6,514,000, or 6.4%, over $101,799,000 in 2017. The increase in sales resulted from an increase in unit volume,
combined with higher sales prices that were necessary to help offset a rise in the Company’s material costs.
Gross Profit. The Company’s gross profit margins increased slightly between the two periods, at 61.0%
and 60.7% for the twelve-months ended December 31, 2018 and 2017, respectively.
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 $17,117,000 and $16,359,000 for 2018 and 2017, respectively, representing a year
over year increase of $758,000, or 4.6%. The increase was primarily attributable to an increase in freight and
commissions, which change in conjunction with sales unit volume. For the same periods, selling expense as a
percentage of net sales was 15.8% and 16.1%, respectively.
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 $17,800,000 and $17,897,000 for the
years ended December 31, 2018 and 2017, respectively, decreasing $97,000, or 0.5% between periods. As a
percentage of net sales, general and administrative expenses were 16.4% and 17.6% for the twelve-months ended
December 31, 2018 and 2017, respectively.
Engineering Expenses. Engineering expenses consist of development expenses associated with the
development of new products, and costs related to enhancements of existing products and manufacturing processes.
Engineering expenses increased $1,520,000 or 46.2% between periods, being $4,813,000 and $3,293,000 for the
years ended December 31, 2018 and 2017, respectively. The Company had ramped up spend on experimental
materials during 2018, a majority of which related to the new MediTrac products. The Company also had additional
staffing and consulting related charges. As a percentage of net sales for the year, engineering expenses were 4.4%
in 2018 and 3.2% in 2017.
Operating Profit. Reflecting all of the factors mentioned above, operating profits increased $2,149,000, or
8.9%, between periods, ending with a profit of $26,366,000 in 2018, compared to $24,217,000 in 2017.
Interest Income. 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. Interest rates in general have improved in the
market, and the Company has therefore been able to purchase short-term investments during 2018 which resulted in
an increase of interest income in excess of those generated from last year. There was $488,000 of interest income
recorded during 2018 and $117,000 in 2017.
-21-
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OVERVIEW
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.
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 newest product line MediTrac® corrugated medical tubing is used for piping
medical gases (oxygen, nitrogen, nitrous oxide, carbon dioxide, and medical vacuum) in health care facilities.
Building on the recognized strengths and strategies employed in the flexible gas piping market, MediTrac® can be
used in place of rigid copper pipe, and due to its long continuous lengths and flexibility, it can be installed
approximately five times faster than rigid copper pipe, saving on installation labor and construction schedules. 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.
CHANGES IN FINANCIAL CONDITION
The Company’s cash balance of $32,392,000 at December 31, 2018, decreased $5,546,000 (14.6%) from
the $37,938,000 balance at December 31, 2017. The primary reasons for the decrease were that the Company used
cash to purchase short-term investments of $35,099,000, net of proceeds from sale of $20,155,000, for a balance of
$14,944,000 as of the end of 2018, with the purpose of earning a higher level of investment income while
maintaining a minimal level of risk, and the Company also paid dividends during 2018 totaling $9,284,000, as
detailed in Note 6, “Shareholders’ Equity”. Lastly, the Company used funds for various capital projects, including
those designated for the new MediTrac products. Those cash outflows were partially offset by income generated
from operations during 2018, as well as the receipt of the $1,600,000 cash bond described below.
Other Long Term Assets were $1,307,000 and $3,079,000 at December 31, 2018 and December 31, 2017,
respectively, decreasing $1,772,000 (57.6%). During May 2018, the Company received back the cash bond of
approximately $1,600,000, which was previously held as security during an appeals process as detailed in Note 10,
Commitments and Contingencies.
Twelve-months ended December 31, 2018 vs. December 31, 2017
RESULTS OF OPERATIONS
The Company reported comparative results from operations for the twelve-month period ended December
31, 2018 and 2017 as follows:
Net Sales
Gross Profit
Operating Profit
Twelve-months ended December 31,
(dollars in thousands)
2018
2018
2017
2017
$ 108,313
66,096
$
26,366
$
100.0%
61.0%
24.3%
$ 101,799
61,766
$
24,217
$
100.0%
60.7%
23.8%
Net Sales. The Company’s sales for the full year of 2018 were $108,313,000, reflecting an increase of
$6,514,000, or 6.4%, over $101,799,000 in 2017. The increase in sales resulted from an increase in unit volume,
combined with higher sales prices that were necessary to help offset a rise in the Company’s material costs.
Gross Profit. The Company’s gross profit margins increased slightly between the two periods, at 61.0%
and 60.7% for the twelve-months ended December 31, 2018 and 2017, respectively.
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 $17,117,000 and $16,359,000 for 2018 and 2017, respectively, representing a year
over year increase of $758,000, or 4.6%. The increase was primarily attributable to an increase in freight and
commissions, which change in conjunction with sales unit volume. For the same periods, selling expense as a
percentage of net sales was 15.8% and 16.1%, respectively.
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 $17,800,000 and $17,897,000 for the
years ended December 31, 2018 and 2017, respectively, decreasing $97,000, or 0.5% between periods. As a
percentage of net sales, general and administrative expenses were 16.4% and 17.6% for the twelve-months ended
December 31, 2018 and 2017, respectively.
Engineering Expenses. Engineering expenses consist of development expenses associated with the
development of new products, and costs related to enhancements of existing products and manufacturing processes.
Engineering expenses increased $1,520,000 or 46.2% between periods, being $4,813,000 and $3,293,000 for the
years ended December 31, 2018 and 2017, respectively. The Company had ramped up spend on experimental
materials during 2018, a majority of which related to the new MediTrac products. The Company also had additional
staffing and consulting related charges. As a percentage of net sales for the year, engineering expenses were 4.4%
in 2018 and 3.2% in 2017.
Operating Profit. Reflecting all of the factors mentioned above, operating profits increased $2,149,000, or
8.9%, between periods, ending with a profit of $26,366,000 in 2018, compared to $24,217,000 in 2017.
Interest Income. 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. Interest rates in general have improved in the
market, and the Company has therefore been able to purchase short-term investments during 2018 which resulted in
an increase of interest income in excess of those generated from last year. There was $488,000 of interest income
recorded during 2018 and $117,000 in 2017.
-21-
-22-
Other Income (Expense). Other income (expense) primarily consists of foreign currency exchange gains
(losses) on transactions within our foreign subsidiaries, and therefore tends to fluctuate with the strengthening and or
weakening of the British Pound. The Company recognized other expense of $126,000 and $38,000 during 2018 and
2017, respectively.
Income Tax Expense. Income tax expense was $6,451,000 during 2018, compared to $8,450,000 in 2017,
decreasing by $1,999,000, or 23.7%. The Company recognized a one-time tax charge of $709,000 during the fourth
quarter of 2017 primarily related to unremitted foreign earnings resulting from the change in the tax code during the
end of 2017, described as the “Act”, which is outlined in Note 7, “Income Taxes”. There was also a lower tax rate
in effect during 2018 attributable to the Act, which reduced the U.S. corporate tax rate from 35% to 21%, effective
for the Company’s 2018 tax year. The Company’s tax provision also reflects other changes as a result of the Act,
including the impact of GILTI provisions, and changes affecting the deductibility of certain executive compensation.
The decrease in taxes attributable to the Act, was partially offset by higher taxes associated with an increase in
income before taxes.
Twelve-months ended December 31, 2017 vs. December 31, 2016
The Company reported comparative results from operations for the twelve-month period ended December
only recognized a loss of $38,000 during the year.
31, 2017 and 2016 as follows:
Net Sales
Gross Profit
Operating Profit
Twelve-months ended December 31,
(dollars in thousands)
2017
2017
2016
2016
$ 101,799
$ 61,766
$ 24,217
100.0%
60.7%
23.8%
$ 94,051
$ 57,884
$ 21,897
100.0%
61.5%
23.3%
Net Sales. The Company’s sales for the full year of 2017 were $101,799,000, reflecting an increase of
$7,748,000, or 8.2%, over $94,051,000 in 2016. The majority of the increase was related to an increase in unit
volume, combined with higher sales prices that were necessary to help offset a rise in the Company’s material costs.
Gross Profit. The Company’s gross profit margins decreased slightly between the two periods, at 60.7%
and 61.5% for the twelve-months ended December 31, 2017 and 2016, respectively.
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 $16,359,000 and $15,694,000 for 2017 and 2016, respectively, representing a year
over year increase of $665,000, or 4.2%. The increase was primarily attributable to an increase in freight and
commissions, which change in conjunction with sales unit volume. For the same periods, selling expense as a
percentage of net sales was 16.1% and 16.7%, respectively.
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 $17,897,000 and $17,108,000 for the
years ended December 31, 2017 and 2016, respectively, increasing $789,000, or 4.6% between periods. This
included an increase in incentive compensation partially due to the increase in profits, and also related to the
Company’s phantom stock plan, mainly resulting from an increase in the Company’s stock price. There was also an
increase in insurance costs. The impact of these costs were however tempered by a decrease in legal and product
liability related defense costs. As a percentage of net sales, general and administrative expenses were 17.6% and
18.2% for the twelve-months ended December 31, 2017 and 2016, respectively.
Engineering Expenses. Engineering expenses consist of development expenses associated with the
development of new products, and costs related to enhancements of existing products and manufacturing processes.
Engineering expenses increased $108,000, or 3.4%, between periods, at $3,293,000 and $3,185,000 for the years
ended December 31, 2017 and 2016, respectively. The change was primarily related to an increase in staffing. As a
percentage of net sales for the year, engineering expenses were 3.2% in 2017 and 3.4% in 2016.
Operating Profit. Reflecting all of the factors mentioned above, operating profits increased $2,320,000, or
10.6%, between periods, ending with a profit of $24,217,000 in 2017, compared to $21,897,000 in 2016.
Interest Income. 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. There was $117,000 of interest income
recorded during 2017 and $98,000 in 2016.
Other Expense. Other income (expense) primarily consists of foreign currency exchange gains (losses) on
transactions with Omega Flex Limited, our United Kingdom (“UK”) subsidiary. During 2016, the British Pound
weakened, largely as a result of the UK’s vote to exit the European Union. As a result, the Company recognized
currency related losses of $474,000 for 2016. The British Pound stabilized during 2017, and therefore the Company
Income Tax Expense. Income tax expense was $8,450,000 for the full year 2017, compared to $6,975,000
for the same period in 2016, increasing by $1,475,000 (21.1%). As outlined in Note 7, “Income Taxes”, the
Company recognized a one-time tax charge of $709,000 during the fourth quarter of 2017 primarily related to
unremitted foreign earnings resulting from the recent change in the tax code. The remainder of the increase was
largely in correlation with the change in income before taxes. Excluding the previously described one-time tax
charge, the Company’s effective tax rate in 2017 approximates the 2016 rate and does not differ materially from
expected statutory rates.
COMMITMENTS AND CONTINGENCIES
See Note 10 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 the Company’s business, competitive position, results of operations or financial
condition in any given year. See Item 1A, Risk Factors, for a detailed description.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
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 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, investment valuations, inventory
valuations, goodwill valuation, product liability costs, phantom stock and accounting for income taxes. Actual
amounts could differ significantly from these estimates.
-23-
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Other Income (Expense). Other income (expense) primarily consists of foreign currency exchange gains
(losses) on transactions within our foreign subsidiaries, and therefore tends to fluctuate with the strengthening and or
weakening of the British Pound. The Company recognized other expense of $126,000 and $38,000 during 2018 and
2017, respectively.
Income Tax Expense. Income tax expense was $6,451,000 during 2018, compared to $8,450,000 in 2017,
decreasing by $1,999,000, or 23.7%. The Company recognized a one-time tax charge of $709,000 during the fourth
quarter of 2017 primarily related to unremitted foreign earnings resulting from the change in the tax code during the
end of 2017, described as the “Act”, which is outlined in Note 7, “Income Taxes”. There was also a lower tax rate
in effect during 2018 attributable to the Act, which reduced the U.S. corporate tax rate from 35% to 21%, effective
for the Company’s 2018 tax year. The Company’s tax provision also reflects other changes as a result of the Act,
including the impact of GILTI provisions, and changes affecting the deductibility of certain executive compensation.
The decrease in taxes attributable to the Act, was partially offset by higher taxes associated with an increase in
income before taxes.
Twelve-months ended December 31, 2017 vs. December 31, 2016
The Company reported comparative results from operations for the twelve-month period ended December
31, 2017 and 2016 as follows:
Net Sales
Gross Profit
Operating Profit
Twelve-months ended December 31,
(dollars in thousands)
2017
2017
2016
2016
$ 101,799
$ 61,766
$ 24,217
100.0%
60.7%
23.8%
$ 94,051
$ 57,884
$ 21,897
100.0%
61.5%
23.3%
Net Sales. The Company’s sales for the full year of 2017 were $101,799,000, reflecting an increase of
$7,748,000, or 8.2%, over $94,051,000 in 2016. The majority of the increase was related to an increase in unit
volume, combined with higher sales prices that were necessary to help offset a rise in the Company’s material costs.
Gross Profit. The Company’s gross profit margins decreased slightly between the two periods, at 60.7%
and 61.5% for the twelve-months ended December 31, 2017 and 2016, respectively.
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 $16,359,000 and $15,694,000 for 2017 and 2016, respectively, representing a year
over year increase of $665,000, or 4.2%. The increase was primarily attributable to an increase in freight and
commissions, which change in conjunction with sales unit volume. For the same periods, selling expense as a
percentage of net sales was 16.1% and 16.7%, respectively.
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 $17,897,000 and $17,108,000 for the
years ended December 31, 2017 and 2016, respectively, increasing $789,000, or 4.6% between periods. This
included an increase in incentive compensation partially due to the increase in profits, and also related to the
Company’s phantom stock plan, mainly resulting from an increase in the Company’s stock price. There was also an
increase in insurance costs. The impact of these costs were however tempered by a decrease in legal and product
liability related defense costs. As a percentage of net sales, general and administrative expenses were 17.6% and
18.2% for the twelve-months ended December 31, 2017 and 2016, respectively.
Engineering Expenses. Engineering expenses consist of development expenses associated with the
development of new products, and costs related to enhancements of existing products and manufacturing processes.
Engineering expenses increased $108,000, or 3.4%, between periods, at $3,293,000 and $3,185,000 for the years
ended December 31, 2017 and 2016, respectively. The change was primarily related to an increase in staffing. As a
percentage of net sales for the year, engineering expenses were 3.2% in 2017 and 3.4% in 2016.
Operating Profit. Reflecting all of the factors mentioned above, operating profits increased $2,320,000, or
10.6%, between periods, ending with a profit of $24,217,000 in 2017, compared to $21,897,000 in 2016.
Interest Income. 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. There was $117,000 of interest income
recorded during 2017 and $98,000 in 2016.
Other Expense. Other income (expense) primarily consists of foreign currency exchange gains (losses) on
transactions with Omega Flex Limited, our United Kingdom (“UK”) subsidiary. During 2016, the British Pound
weakened, largely as a result of the UK’s vote to exit the European Union. As a result, the Company recognized
currency related losses of $474,000 for 2016. The British Pound stabilized during 2017, and therefore the Company
only recognized a loss of $38,000 during the year.
Income Tax Expense. Income tax expense was $8,450,000 for the full year 2017, compared to $6,975,000
for the same period in 2016, increasing by $1,475,000 (21.1%). As outlined in Note 7, “Income Taxes”, the
Company recognized a one-time tax charge of $709,000 during the fourth quarter of 2017 primarily related to
unremitted foreign earnings resulting from the recent change in the tax code. The remainder of the increase was
largely in correlation with the change in income before taxes. Excluding the previously described one-time tax
charge, the Company’s effective tax rate in 2017 approximates the 2016 rate and does not differ materially from
expected statutory rates.
COMMITMENTS AND CONTINGENCIES
See Note 10 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 the Company’s business, competitive position, results of operations or financial
condition in any given year. See Item 1A, Risk Factors, for a detailed description.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
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 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, investment valuations, inventory
valuations, goodwill valuation, product liability costs, phantom stock and accounting for income taxes. Actual
amounts could differ significantly from these estimates.
-23-
-24-
Our critical accounting policies and significant estimates and assumptions are described in more detail as follows:
deemed a formality, as noted in ASC 606-10-55-86. As a result, the Company has a legal right to
Revenue Recognition
Effective January 1, 2018, the Company adopted the requirements of Accounting Standards Update 2014-
09, Revenue from Contracts with Customers (Topic 606). The standard is a comprehensive new revenue recognition
model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at
an amount that reflects the consideration expected to be received in exchange for those goods or services.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented
(full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance
recognized at the date of initial application (the modified retrospective approach). The Company selected the
modified retrospective approach however there was no material impact which required a cumulative effect
adjustment.
The principle of Topic 606 was achieved through applying the following five-step approach:
•
•
Identification of the contract, or contracts, with a customer — a contract with a customer exists when
the Company enters into an enforceable contract with a customer, typically a purchase order initiated
by the customer, that defines each party’s rights regarding the goods to be transferred and identifies the
payment terms related to these goods.
Identification of the performance obligations in the contract — performance obligations promised in a
contract are identified based on the goods that will be transferred to the customer that are distinct,
whereby the customer can benefit from the goods on their own or together with other resources that are
readily available from third parties or from us. Persuasive evidence of an arrangement for the sale of
product must exist. The Company ships product in accordance with the purchase order and standard
terms as reflected within the Company’s order acknowledgments and sales invoices.
• Determination of the transaction price —the transaction price is determined based on the consideration
to which the Company will be entitled in exchange for transferring goods to the customer. This would
be the agreed upon quantity and price per product type in accordance with the customer purchase
order, which is aligned with the Company’s internally approved pricing guidelines.
•
•
Allocation of the transaction price to the performance obligations in the contract — if the contract
contains a single performance obligation, the entire transaction price is allocated to the single
performance obligation. This applies to the Company as there is only one performance obligation to
ship the goods.
Recognition of revenue when, or as, the Company satisfies a performance obligation — the Company
satisfies performance obligations at a point in time when control of the goods transfers to the customer.
Determining the point in time when control transfers requires judgment. Indicators considered in
determining whether the customer has obtained control of a good include:
The Company has a present right to payment
The customer has legal title to the goods
The Company has transferred physical possession of the goods
The customer has the significant risks and rewards of ownership of the goods
The customer has accepted the goods
It is important to note that the indicators are not a set of conditions that must be met before the
Company can conclude that control of the goods has transferred to the customer. The indicators are a
list of factors that are often present if a customer has control of the goods.
The Company has typical, unmodified FOB shipping point terms. As the seller, the Company
can determine that the shipped goods meet the agreed-upon specifications in the contract or customer
purchase order (e.g. items, quantities, and prices) with the buyer, so customer acceptance would be
-25-
payment upon shipment of the goods.
transfers to the customer upon shipment.
Other considerations of Topic 606 include the following:
Based upon the above, the Company has concluded that transfer of control substantively
•
Contract Costs - costs to obtain a contract (e.g. customer purchase order) include sales commissions.
Under Topic 606, these costs may be expensed as incurred for contracts with a duration of one year or
less. The majority of the Company’s customer purchase orders are fulfilled (e.g. goods are shipped)
within two days of receipt.
• Warranties - the Company does not offer customers to purchase a warranty separately. Therefore there
is not a separate performance obligation. The Company does account for warranties as a cost accrual
and the warranties do not include any additional distinct services other than the assurance that the goods
comply with agreed-upon specifications. There is no impact of warranties under Topic 606 upon the
financial reporting of the Company.
•
Returned Goods - from time to time, the Company provides authorization to customers to return goods.
If deemed to be material, the Company would record a “right of return” asset for the cost of the returned
goods which would reduce cost of sales. Upon adoption of Topic 606, the Company will monitor
pending authorized returns of goods and, if deemed appropriate, record the right of return asset
accordingly.
of time.
•
Volume Rebates (Promotional Incentives) - volume rebates are variable (dependent upon the volume of
goods purchased by our eligible customers) and, under Topic 606, must be estimated and recognized as
a reduction of revenue as performance obligations are satisfied (e.g. upon shipment of goods). Also
under Topic 606, to ensure that revenue recognized would not be probable of a significant reversal, the
four following factors are considered:
The amount of consideration is highly susceptible to factors outside the Company’s influence.
The uncertainty about the amount of consideration is not expected to be resolved for a long period
The Company’s experience with similar types of contracts is limited.
The contract has a large number and broad range of possible consideration amounts.
If it was concluded that the above factors were in place for the Company, it would support the
probability of a significant reversal of revenue. However, as none of the four factors apply to the
Company, promotional incentives are recorded as a reduction of revenue based upon estimates of the
eligible products expected to be sold.
Regarding disaggregated revenue disclosures, as previously noted, the Company’s business is controlled as
a single operating segment that consists of the manufacture and sale of flexible metal hose. Most of the Company’s
transactions are very similar in nature, contract, terms, timing, and transfer of control of goods. As indicated within
Note 2, under the caption “Significant Concentration”, the majority of the Company’s sales were geographically
contained within North America, with the remainder scattered internationally. All performance assessments and
resource allocations are generally based upon the review of the results of the Company as a whole.
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.
-26-
Our critical accounting policies and significant estimates and assumptions are described in more detail as follows:
Revenue Recognition
Effective January 1, 2018, the Company adopted the requirements of Accounting Standards Update 2014-
09, Revenue from Contracts with Customers (Topic 606). The standard is a comprehensive new revenue recognition
model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at
an amount that reflects the consideration expected to be received in exchange for those goods or services.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented
(full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance
recognized at the date of initial application (the modified retrospective approach). The Company selected the
modified retrospective approach however there was no material impact which required a cumulative effect
adjustment.
The principle of Topic 606 was achieved through applying the following five-step approach:
•
Identification of the contract, or contracts, with a customer — a contract with a customer exists when
the Company enters into an enforceable contract with a customer, typically a purchase order initiated
by the customer, that defines each party’s rights regarding the goods to be transferred and identifies the
payment terms related to these goods.
•
Identification of the performance obligations in the contract — performance obligations promised in a
contract are identified based on the goods that will be transferred to the customer that are distinct,
whereby the customer can benefit from the goods on their own or together with other resources that are
readily available from third parties or from us. Persuasive evidence of an arrangement for the sale of
product must exist. The Company ships product in accordance with the purchase order and standard
terms as reflected within the Company’s order acknowledgments and sales invoices.
• Determination of the transaction price —the transaction price is determined based on the consideration
to which the Company will be entitled in exchange for transferring goods to the customer. This would
be the agreed upon quantity and price per product type in accordance with the customer purchase
order, which is aligned with the Company’s internally approved pricing guidelines.
•
Allocation of the transaction price to the performance obligations in the contract — if the contract
contains a single performance obligation, the entire transaction price is allocated to the single
performance obligation. This applies to the Company as there is only one performance obligation to
ship the goods.
•
Recognition of revenue when, or as, the Company satisfies a performance obligation — the Company
satisfies performance obligations at a point in time when control of the goods transfers to the customer.
Determining the point in time when control transfers requires judgment. Indicators considered in
determining whether the customer has obtained control of a good include:
The Company has a present right to payment
The customer has legal title to the goods
The Company has transferred physical possession of the goods
The customer has the significant risks and rewards of ownership of the goods
The customer has accepted the goods
It is important to note that the indicators are not a set of conditions that must be met before the
Company can conclude that control of the goods has transferred to the customer. The indicators are a
list of factors that are often present if a customer has control of the goods.
The Company has typical, unmodified FOB shipping point terms. As the seller, the Company
can determine that the shipped goods meet the agreed-upon specifications in the contract or customer
purchase order (e.g. items, quantities, and prices) with the buyer, so customer acceptance would be
-25-
deemed a formality, as noted in ASC 606-10-55-86. As a result, the Company has a legal right to
payment upon shipment of the goods.
Based upon the above, the Company has concluded that transfer of control substantively
transfers to the customer upon shipment.
Other considerations of Topic 606 include the following:
•
Contract Costs - costs to obtain a contract (e.g. customer purchase order) include sales commissions.
Under Topic 606, these costs may be expensed as incurred for contracts with a duration of one year or
less. The majority of the Company’s customer purchase orders are fulfilled (e.g. goods are shipped)
within two days of receipt.
• Warranties - the Company does not offer customers to purchase a warranty separately. Therefore there
is not a separate performance obligation. The Company does account for warranties as a cost accrual
and the warranties do not include any additional distinct services other than the assurance that the goods
comply with agreed-upon specifications. There is no impact of warranties under Topic 606 upon the
financial reporting of the Company.
•
•
Returned Goods - from time to time, the Company provides authorization to customers to return goods.
If deemed to be material, the Company would record a “right of return” asset for the cost of the returned
goods which would reduce cost of sales. Upon adoption of Topic 606, the Company will monitor
pending authorized returns of goods and, if deemed appropriate, record the right of return asset
accordingly.
Volume Rebates (Promotional Incentives) - volume rebates are variable (dependent upon the volume of
goods purchased by our eligible customers) and, under Topic 606, must be estimated and recognized as
a reduction of revenue as performance obligations are satisfied (e.g. upon shipment of goods). Also
under Topic 606, to ensure that revenue recognized would not be probable of a significant reversal, the
four following factors are considered:
The amount of consideration is highly susceptible to factors outside the Company’s influence.
The uncertainty about the amount of consideration is not expected to be resolved for a long period
of time.
The Company’s experience with similar types of contracts is limited.
The contract has a large number and broad range of possible consideration amounts.
If it was concluded that the above factors were in place for the Company, it would support the
probability of a significant reversal of revenue. However, as none of the four factors apply to the
Company, promotional incentives are recorded as a reduction of revenue based upon estimates of the
eligible products expected to be sold.
Regarding disaggregated revenue disclosures, as previously noted, the Company’s business is controlled as
a single operating segment that consists of the manufacture and sale of flexible metal hose. Most of the Company’s
transactions are very similar in nature, contract, terms, timing, and transfer of control of goods. As indicated within
Note 2, under the caption “Significant Concentration”, the majority of the Company’s sales were geographically
contained within North America, with the remainder scattered internationally. All performance assessments and
resource allocations are generally based upon the review of the results of the Company as a whole.
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.
-26-
Investments
The Company invests excess funds in liquid interest earning instruments including U.S. Treasury bills and
bank time deposits. These investments are stated at fair value, which approximates amortized cost, and are classified
as available-for-sale in accordance with Accounting Standards Codification 320, Investments – Debt and Equity
Securities (or “ASC 320”). Investments were $14,944,000 and $0 as of December 31, 2018 and 2017, respectively.
Maturities, from the date of purchase, were six months or less.
Inventories
Inventories are valued at the lower of cost or net realizable value. 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,
2018 and also at December 31, 2017. 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 11, to the
Company’s financial statements.
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 10, 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 $1,000,000 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
-27-
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 upon Level 1 inputs in determining the fair value of
investments and the fair value of the Company’s reporting unit in its annual impairment test as described in the
FASB ASC Topic 350, Intangibles - Goodwill and Other.
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
Earnings per Common Share
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
tax positions.
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
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 reflected the effects of the Tax Cuts and Jobs Act (the “Act”), in its 2017 financial
statements. This included the effects of the change in the US corporate tax rate from 35% to 21% on deferred tax
assets and liabilities, and a provision related to previously deferred taxes on earnings of the Company’s foreign
subsidiary. The Company’s tax expense for the period ended December 31, 2018 includes the continuing effect of
the reduction in the US corporate tax rate from 35% to 21%, effective for the Company’s 2018 tax year. The
Company’s tax provision also reflects other changes as a result of the Act, including the impact of the Global
Intangible Low Taxed Income (“GILTI”) provisions, and changes affecting the deductibility of certain executive
compensation.
-28-
The Company invests excess funds in liquid interest earning instruments including U.S. Treasury bills and
bank time deposits. These investments are stated at fair value, which approximates amortized cost, and are classified
as available-for-sale in accordance with Accounting Standards Codification 320, Investments – Debt and Equity
Securities (or “ASC 320”). Investments were $14,944,000 and $0 as of December 31, 2018 and 2017, respectively.
Maturities, from the date of purchase, were six months or less.
Inventories are valued at the lower of cost or net realizable value. 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
Investments
Inventories
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,
2018 and also at December 31, 2017. 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 11, to the
Company’s financial statements.
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 10, 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 $1,000,000 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 upon Level 1 inputs in determining the fair value of
investments and the fair value of the Company’s reporting unit in its annual impairment test as described in the
FASB ASC Topic 350, Intangibles - Goodwill and Other.
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 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 reflected the effects of the Tax Cuts and Jobs Act (the “Act”), in its 2017 financial
statements. This included the effects of the change in the US corporate tax rate from 35% to 21% on deferred tax
assets and liabilities, and a provision related to previously deferred taxes on earnings of the Company’s foreign
subsidiary. The Company’s tax expense for the period ended December 31, 2018 includes the continuing effect of
the reduction in the US corporate tax rate from 35% to 21%, effective for the Company’s 2018 tax year. The
Company’s tax provision also reflects other changes as a result of the Act, including the impact of the Global
Intangible Low Taxed Income (“GILTI”) provisions, and changes affecting the deductibility of certain executive
compensation.
-27-
-28-
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
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 $32,392,000 and short-
term investments of $14,944,000 at December 31, 2018, 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 to the Company’s financial statements. At
December 31, 2017, the Company had cash of $37,938,000 and did not hold any short-term investments.
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 2018, the Company’s cash provided from operating activities was $21,058,000, compared to
$18,048,000 of cash provided during 2017, thus increasing by $3,010,000 between periods. For 2017, the
Company’s cash provided from operating activities was $18,048,000, compared to $14,758,000 of cash provided
during 2016, thus increasing by $3,290,000 between periods. For details of the operating cash flows refer to the
consolidated statements of cash flows in Item 8. Financial Statements and Supplementary Data on page 39.
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.
Investing Activities
Cash used in investing activities during 2018 and 2017 was $16,868,000 and $3,093,000, respectively.
During 2018, cash was used to purchase short-term investments of $35,099,000 and for capital expenditures of
$1,924,000, which was partially offset by cash received from net proceeds from the sale of short-term investments
of $20,155,000. Capital expenditures during 2018 mainly related to capital projects designated for the new
MediTrac products. During 2017, cash was used solely for capital expenditures mainly related to the purchase of a
30,000 square foot facility in Exton, Pennsylvania, which required a cash outlay of approximately $2,500,000. This
facility was previously under lease through January 2018. During 2016, cash used in investing activities of
$233,000 was solely used for capital expenditures which mainly related to information technology and machinery.
Financing Activities
Omega Flex, Inc. declared regular quarterly dividends in the aggregate amount of $2,220,000 in April, and
$2,422,000 each in June, September and December 2018, which were subsequently paid in April 2018, July 2018,
October 2018, and January 2019, respectively. Additionally, there was a dividend that was paid in April 2018 by the
Company’s foreign subsidiary, which amounted to an outlay of cash of $491,000 to the foreign subsidiary’s
noncontrolling interest. Also, the Company declared regular quarterly dividends during June, September and
December 2017 in the aggregate amount of $2,220,000 each, which were subsequently paid in July 2017, October
2017, and January 2018, respectively.
Finally, the Company declared a special dividend in December 2016 in the aggregate amount of
$8,578,000, which was subsequently paid in January 2017. The variance between the 2018 and 2017 years was
therefore $3,243,000. Each of these dividends are outlined in Note 6 of the Consolidated Financial Statements. The
Company had no borrowings or payments on its line of credit during 2018 or 2017.
We believe our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for
at least the next twelve 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.
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 replaced most existing revenue recognition guidance in US
GAAP once it became effective and permitted the use of either a full retrospective or retrospective with cumulative
effect transition method. The updated standard became effective for the Company in the first quarter of fiscal year
2018. The Company completed its review of its customer contracts and its analysis of the impact of the disclosure
requirements of ASU 2014-09 during 2017. The Company has adopted the revenue guidance effective January 1,
2018, using the modified retrospective approach. The adoption of ASU 2014-09 did not have a material impact on
the Company’s financial statements, and is not expected to have any material impact on an ongoing basis. Although
there is no material impact on the financial statements our accounting policy for revenue recognition has been
updated as described previously in Note 1 of the consolidated financial statements.
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. 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 will adopt the lease standard effective January 1,
2019 using the allowable option to apply the transition provisions of the new guidance at its adoption date instead of
at the earliest comparative period presented in our financial statements. This will require us to disclose lease
information relating to earlier periods using the currently existing guidance.
The new standard provides a number of optional practical expedients throughout the transition. The
Company elected the “package of practical expedients,” which permits the Company to not reassess under the new
standard the Company’s prior conclusions about lease identification, lease classification, and initial direct costs. The
new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-
term lease recognition exemption for all leases that qualify as pursuant to the above definition. This means, for those
leases that qualify, the Company will not recognize right-of-use assets or lease liabilities, and this includes not
recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition.
The impact of adoption is expected to be an increase to the Company’s operating lease assets and liabilities
on January 1, 2019 of approximately $800,000. The guidance will not have a material impact on our consolidated
statements of operations and statements of cash flows.
In January 2017, the FASB amended ASC Topic 350, Intangibles – Goodwill and Other (issued under
ASU 2017-04, “Simplifying the Test for Goodwill Impairment”). This amendment simplifies the test for goodwill
impairment by only requiring an entity to perform an annual or interim goodwill impairment test by comparing the
fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount that the
carrying amount exceeds the reporting unit’s fair value. Any loss recognized should not exceed the total amount of
goodwill allocated to that reporting unit. The amendment requires adoption on January 1, 2020. The Company does
not expect that the adoption of ASU 2017-04 will have a material impact on its consolidated financial statements.
-29-
-30-
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
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 $32,392,000 and short-
term investments of $14,944,000 at December 31, 2018, 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 to the Company’s financial statements. At
December 31, 2017, the Company had cash of $37,938,000 and did not hold any short-term investments.
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 2018, the Company’s cash provided from operating activities was $21,058,000, compared to
$18,048,000 of cash provided during 2017, thus increasing by $3,010,000 between periods. For 2017, the
Company’s cash provided from operating activities was $18,048,000, compared to $14,758,000 of cash provided
during 2016, thus increasing by $3,290,000 between periods. For details of the operating cash flows refer to the
consolidated statements of cash flows in Item 8. Financial Statements and Supplementary Data on page 39.
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 2018 and 2017 was $16,868,000 and $3,093,000, respectively.
During 2018, cash was used to purchase short-term investments of $35,099,000 and for capital expenditures of
$1,924,000, which was partially offset by cash received from net proceeds from the sale of short-term investments
of $20,155,000. Capital expenditures during 2018 mainly related to capital projects designated for the new
MediTrac products. During 2017, cash was used solely for capital expenditures mainly related to the purchase of a
30,000 square foot facility in Exton, Pennsylvania, which required a cash outlay of approximately $2,500,000. This
facility was previously under lease through January 2018. During 2016, cash used in investing activities of
$233,000 was solely used for capital expenditures which mainly related to information technology and machinery.
Investing Activities
Financing Activities
Omega Flex, Inc. declared regular quarterly dividends in the aggregate amount of $2,220,000 in April, and
$2,422,000 each in June, September and December 2018, which were subsequently paid in April 2018, July 2018,
October 2018, and January 2019, respectively. Additionally, there was a dividend that was paid in April 2018 by the
Company’s foreign subsidiary, which amounted to an outlay of cash of $491,000 to the foreign subsidiary’s
noncontrolling interest. Also, the Company declared regular quarterly dividends during June, September and
December 2017 in the aggregate amount of $2,220,000 each, which were subsequently paid in July 2017, October
2017, and January 2018, respectively.
Finally, the Company declared a special dividend in December 2016 in the aggregate amount of
$8,578,000, which was subsequently paid in January 2017. The variance between the 2018 and 2017 years was
therefore $3,243,000. Each of these dividends are outlined in Note 6 of the Consolidated Financial Statements. The
Company had no borrowings or payments on its line of credit during 2018 or 2017.
We believe our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for
at least the next twelve 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.
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 replaced most existing revenue recognition guidance in US
GAAP once it became effective and permitted the use of either a full retrospective or retrospective with cumulative
effect transition method. The updated standard became effective for the Company in the first quarter of fiscal year
2018. The Company completed its review of its customer contracts and its analysis of the impact of the disclosure
requirements of ASU 2014-09 during 2017. The Company has adopted the revenue guidance effective January 1,
2018, using the modified retrospective approach. The adoption of ASU 2014-09 did not have a material impact on
the Company’s financial statements, and is not expected to have any material impact on an ongoing basis. Although
there is no material impact on the financial statements our accounting policy for revenue recognition has been
updated as described previously in Note 1 of the consolidated financial statements.
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. 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 will adopt the lease standard effective January 1,
2019 using the allowable option to apply the transition provisions of the new guidance at its adoption date instead of
at the earliest comparative period presented in our financial statements. This will require us to disclose lease
information relating to earlier periods using the currently existing guidance.
The new standard provides a number of optional practical expedients throughout the transition. The
Company elected the “package of practical expedients,” which permits the Company to not reassess under the new
standard the Company’s prior conclusions about lease identification, lease classification, and initial direct costs. The
new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-
term lease recognition exemption for all leases that qualify as pursuant to the above definition. This means, for those
leases that qualify, the Company will not recognize right-of-use assets or lease liabilities, and this includes not
recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition.
The impact of adoption is expected to be an increase to the Company’s operating lease assets and liabilities
on January 1, 2019 of approximately $800,000. The guidance will not have a material impact on our consolidated
statements of operations and statements of cash flows.
In January 2017, the FASB amended ASC Topic 350, Intangibles – Goodwill and Other (issued under
ASU 2017-04, “Simplifying the Test for Goodwill Impairment”). This amendment simplifies the test for goodwill
impairment by only requiring an entity to perform an annual or interim goodwill impairment test by comparing the
fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount that the
carrying amount exceeds the reporting unit’s fair value. Any loss recognized should not exceed the total amount of
goodwill allocated to that reporting unit. The amendment requires adoption on January 1, 2020. The Company does
not expect that the adoption of ASU 2017-04 will have a material impact on its consolidated financial statements.
-29-
-30-
Off-Balance Sheet Obligations or Arrangements
None.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET
ARRANGEMENTS
Contractual Obligation and Commercial Commitments
The Company’s primary contractual obligations as of December 31, 2018 are summarized in the following
table and are more fully explained in Notes to the Consolidated Financial Statements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Omega Flex, Inc.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm – Financial Statements
Report of Independent Registered Public Accounting Firm – Internal Control over Financial Reporting
Payments Due by Period
(in thousands)
Financial Statements:
Consolidated Balance Sheets as of December 31, 2018 and 2017
Contractual Obligations
Operating Lease Obligations
Purchase Obligations
Other Long-Term Liabilities
Total Contractual Cash Obligations
Total
$879
29,409
84
$30,372
======
Less than
1-year
1 -3
years
4 -5
years
After 5
year
$412
29,409
12
$29,833
======
$434
0
24
$458
====
$33
0
24
$57
====
$---
0
24
$24
====
The Company is obligated to make payments related to a deferred compensation plan, as detailed in Note
10, Commitments and Contingencies, to the Company’s financial statements. The timing of all of these payments
are currently not known as it is contingent upon the retirement of the applicable employee(s), and therefore are not
included in the above table. The total net present value of the amount of deferred compensation which is not
expressed in the above table is $390,000 at December 31, 2018, which would be paid over a period of 15 years.
Additionally, as explained in Note 11, Stock Based Compensation Plans, the Company is obligated to make
payments to plan participants. Due to the uncertain nature of the payments, due to numerous variables, including the
potential change in stock price, and employment status of participants and any applicable forfeitures, the amounts
are not disclosed in the above table. The liability associated with this Plan as of December 31, 2018 was
$1,692,000, of which $599,000 is anticipated to be paid within the next year, and the remainder thereafter.
Item 7A - QUANTITATATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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.
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to the Consolidated Financial Statements
Page
33
34
35
36
37
38
39
40 to 55
-31-
-32-
Off-Balance Sheet Obligations or Arrangements
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
None.
ARRANGEMENTS
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET
Contractual Obligation and Commercial Commitments
The Company’s primary contractual obligations as of December 31, 2018 are summarized in the following
table and are more fully explained in Notes to the Consolidated Financial Statements.
Omega Flex, Inc.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm – Financial Statements
Report of Independent Registered Public Accounting Firm – Internal Control over Financial Reporting
Payments Due by Period
(in thousands)
Financial Statements:
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to the Consolidated Financial Statements
Page
33
34
35
36
37
38
39
40 to 55
Contractual Obligations
Operating Lease Obligations
Purchase Obligations
Other Long-Term Liabilities
Total Contractual Cash Obligations
Total
$879
29,409
84
$30,372
======
Less than
1-year
1 -3
years
4 -5
years
After 5
year
$412
29,409
12
$29,833
======
$434
0
24
$458
====
$33
0
24
$57
====
$---
0
24
$24
====
The Company is obligated to make payments related to a deferred compensation plan, as detailed in Note
10, Commitments and Contingencies, to the Company’s financial statements. The timing of all of these payments
are currently not known as it is contingent upon the retirement of the applicable employee(s), and therefore are not
included in the above table. The total net present value of the amount of deferred compensation which is not
expressed in the above table is $390,000 at December 31, 2018, which would be paid over a period of 15 years.
Additionally, as explained in Note 11, Stock Based Compensation Plans, the Company is obligated to make
payments to plan participants. Due to the uncertain nature of the payments, due to numerous variables, including the
potential change in stock price, and employment status of participants and any applicable forfeitures, the amounts
are not disclosed in the above table. The liability associated with this Plan as of December 31, 2018 was
$1,692,000, of which $599,000 is anticipated to be paid within the next year, and the remainder thereafter.
Item 7A - QUANTITATATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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.
-31-
-32-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Omega Flex, Inc.
To the Shareholders and the Board of Directors of Omega Flex, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Omega Flex, Inc. and its subsidiaries (the
Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive
income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and
the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, 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 11, 2019 expressed an unqualified
opinion on the effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/ RSM US LLP
We have served as the Company's auditor since 2010.
Blue Bell, Pennsylvania
March 11, 2019
Opinion on the Internal Control Over Financial Reporting
We have audited Omega Flex, Inc.'s (the Company) internal control over financial reporting as of December 31,
2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2018, 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) (PCAOB), the 2018 consolidated financial statements of the Company and our report dated March 11, 2019
expressed an unqualified opinion.
Basis for Opinion
The Company’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 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 are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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 (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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.
/s/ RSM US LLP
Blue Bell, Pennsylvania
March 11, 2019
-33-
-34-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Omega Flex, Inc.
To the Shareholders and the Board of Directors of Omega Flex, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Omega Flex, Inc. and its subsidiaries (the
Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive
income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and
the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, 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 11, 2019 expressed an unqualified
opinion on the effectiveness of the Company's internal control over financial reporting.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
Basis for Opinion
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/ RSM US LLP
Blue Bell, Pennsylvania
March 11, 2019
We have served as the Company's auditor since 2010.
Opinion on the Internal Control Over Financial Reporting
We have audited Omega Flex, Inc.'s (the Company) internal control over financial reporting as of December 31,
2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2018, 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) (PCAOB), the 2018 consolidated financial statements of the Company and our report dated March 11, 2019
expressed an unqualified opinion.
Basis for Opinion
The Company’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 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 are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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 (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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.
/s/ RSM US LLP
Blue Bell, Pennsylvania
March 11, 2019
-33-
-34-
OMEGA FLEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollars in Thousands, except Common Stock par value)
OMEGA FLEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
(Amounts in thousands, except earnings per common shares)
ASSETS
Current Assets:
Cash and Cash Equivalents
Accounts Receivable - less allowances of
$985 and $920, respectively
Investments
Inventories - Net
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
Long Term Taxes Payable
Other Long Term Liabilities
Total Liabilities
Commitments and Contingencies (Note 10)
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, 2018 and 2017
Treasury Stock
Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Total Omega Flex, Inc. Shareholders’ Equity
Noncontrolling Interest
Total Shareholders’ Equity
2018
2017
$ 32,392
$ 37,938
16,451
14,944
7,976
1,859
73,622
8,378
3,526
3
1,307
15,636
-
8,007
1,895
63,476
6,998
3,526
12
3,079
$ 86,836
$ 77,091
$
2,775
5,295
4,264
2,422
58
3,591
18,405
566
-
1,544
20,515
$
2,598
4,851
4,284
2,220
568
3,583
18,104
209
761
1,948
21,022
102
(1)
10,808
56,110
(950)
66,069
252
66,321
102
(1)
10,808
45,457
(908)
55,458
611
56,069
Net Sales
Cost of Goods Sold
Gross Profit
Selling Expense
Operating Profit
Interest Income
Other Expense
General and Administrative Expense
Engineering Expense
Income Before Income Taxes
Income Tax Expense
Net Income
2018
2017
2016
$108,313
$101,799
$ 94,051
42,217
66,096
17,117
17,800
4,813
26,366
488
(126)
26,728
6,451
20,277
40,033
61,766
16,359
17,897
3,293
24,217
117
(38)
36,167
57,884
15,694
17,108
3,185
21,897
98
(474)
24,296
21,521
8,450
6,975
15,846
14,546
Less: Net Income – Noncontrolling Interest
(138)
(184)
(169)
Net Income attributable to Omega Flex, Inc.
$ 20,139
$ 15,662
$ 14,377
Basic and Diluted Earnings per Common Share
$
2.00
$
1.55
$
1.42
Cash Dividends Declared per Common Share
$ 0.94
$ 0.66
$ 0.85
Basic and Diluted Weighted Average Shares Outstanding
10,092
10,092
10,092
See accompanying Notes which are an integral part of the Consolidated Financial Statements.
Total Liabilities and Shareholders’ Equity
$ 86,836
$ 77,091
See accompanying Notes which are an integral part of the Consolidated Financial Statements.
-35-
-36-
OMEGA FLEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollars in Thousands, except Common Stock par value)
OMEGA FLEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
(Amounts in thousands, except earnings per common shares)
ASSETS
Current Assets:
Cash and Cash Equivalents
Accounts Receivable - less allowances of
$985 and $920, respectively
Investments
Inventories - Net
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
Long Term Taxes Payable
Other Long Term Liabilities
Total Liabilities
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued Commissions and Sales Incentives
Commitments and Contingencies (Note 10)
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, 2018 and 2017
Treasury Stock
Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Total Omega Flex, Inc. Shareholders’ Equity
Noncontrolling Interest
Total Shareholders’ Equity
2018
2017
$ 32,392
$ 37,938
16,451
14,944
15,636
-
3
12
$ 86,836
$ 77,091
7,976
1,859
73,622
8,378
3,526
1,307
$
2,775
5,295
4,264
2,422
58
3,591
18,405
566
-
1,544
20,515
8,007
1,895
63,476
6,998
3,526
3,079
$
2,598
4,851
4,284
2,220
568
3,583
18,104
209
761
1,948
21,022
102
(1)
10,808
56,110
(950)
66,069
252
66,321
102
(1)
10,808
45,457
(908)
55,458
611
56,069
Net Sales
Cost of Goods Sold
Gross Profit
Selling Expense
General and Administrative Expense
Engineering Expense
Operating Profit
Interest Income
Other Expense
Income Before Income Taxes
Income Tax Expense
Net Income
2018
2017
2016
$108,313
$101,799
$ 94,051
42,217
66,096
17,117
17,800
4,813
26,366
488
(126)
26,728
6,451
20,277
40,033
61,766
16,359
17,897
3,293
24,217
117
(38)
36,167
57,884
15,694
17,108
3,185
21,897
98
(474)
24,296
21,521
8,450
6,975
15,846
14,546
Less: Net Income – Noncontrolling Interest
(138)
(184)
(169)
Net Income attributable to Omega Flex, Inc.
$ 20,139
$ 15,662
$ 14,377
Basic and Diluted Earnings per Common Share
$
2.00
$
1.55
$
1.42
Cash Dividends Declared per Common Share
$ 0.94
$ 0.66
$ 0.85
Basic and Diluted Weighted Average Shares Outstanding
10,092
10,092
10,092
See accompanying Notes which are an integral part of the Consolidated Financial Statements.
Total Liabilities and Shareholders’ Equity
$ 86,836
$ 77,091
See accompanying Notes which are an integral part of the Consolidated Financial Statements.
-35-
-36-
OMEGA FLEX, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31,
(Dollars in Thousands)
2018
2017
2016
Net Income
$20,277
$15,846
$14,546
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustment
Other Comprehensive Income (Loss)
(48)
(48)
822
822
(1,061)
(1,061)
Comprehensive Income
20,229
16,668
13,485
Less: Comprehensive Income Attributable to the Noncontrolling Interest
(132)
(229)
(110)
Total Other Comprehensive Income
$20,097
$16,439
$13,375
See accompanying Notes which are an integral part of the Consolidated Financial Statements.
Balance - December 31, 2017
10,091,822
$ 102
($1)
$ 10,808
$45,457
($ 908)
$
611
$ 56,069
OMEGA FLEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the years ended December 31, 2018, 2017 and 2016
(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, 2015
10,091,822
$ 102
($1)
$ 10,808
$ 30,656
($ 683)
$
272
$ 41,154
Net Income
Cumulative Translation Adjustment
14,377
169
14,546
(1,002)
(59)
(1,061)
Dividends Declared
(8,578)
(8,578)
Balance - December 31, 2016
10,091,822
$ 102
($1)
$ 10,808
$ 36,455
($1,685)
$ 382
$ 46,061
Net Income
Cumulative Translation Adjustment
Dividends Declared
Net Income
Cumulative Translation Adjustment
Dividends Declared
15,662
(6,660)
777
184
45
15,846
822
(6,660)
20,139
138
(42)
(6)
20,277
(48)
(9,486)
(491)
(9,977)
Balance - December 31, 2018
10,091,822
$ 102
($1)
$ 10,808
$56,110
($ 950)
$
252
$ 66,321
See accompanying Notes which are an integral part of the Consolidated Financial Statements.
-37-
-38-
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
OMEGA FLEX, INC.
For the years ended December 31,
(Dollars in Thousands)
2018
2017
2016
Net Income
$20,277
$15,846
$14,546
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustment
Other Comprehensive Income (Loss)
(48)
(48)
822
822
(1,061)
(1,061)
Comprehensive Income
20,229
16,668
13,485
Less: Comprehensive Income Attributable to the Noncontrolling Interest
(132)
(229)
(110)
Total Other Comprehensive Income
$20,097
$16,439
$13,375
See accompanying Notes which are an integral part of the Consolidated Financial Statements.
OMEGA FLEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the years ended December 31, 2018, 2017 and 2016
(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, 2015
10,091,822
$ 102
($1)
$ 10,808
$ 30,656
($ 683)
$
272
$ 41,154
Net Income
Cumulative Translation Adjustment
14,377
169
14,546
(1,002)
(59)
(1,061)
Dividends Declared
(8,578)
(8,578)
Balance - December 31, 2016
10,091,822
$ 102
($1)
$ 10,808
$ 36,455
($1,685)
$ 382
$ 46,061
Net Income
Cumulative Translation Adjustment
Dividends Declared
15,662
(6,660)
777
184
45
15,846
822
(6,660)
Balance - December 31, 2017
10,091,822
$ 102
($1)
$ 10,808
$45,457
($ 908)
$
611
$ 56,069
Net Income
Cumulative Translation Adjustment
Dividends Declared
20,139
(42)
138
(6)
20,277
(48)
(9,486)
(491)
(9,977)
Balance - December 31, 2018
10,091,822
$ 102
($1)
$ 10,808
$56,110
($ 950)
$
252
$ 66,321
See accompanying Notes which are an integral part of the Consolidated Financial Statements.
-37-
-38-
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
Cash Flows from Investing Activities:
Purchase of Investments
Net Proceeds from Sale of Investments
Capital Expenditures
2018
2017
2016
$ 20,277
$ 15,846
$ 14,546
118
543
57
366
(105)
(979)
61
1,804
205
468
(11)
(1,746)
21,058
1,042
502
6
72
171
(463)
(699)
(40)
251
490
574
296
18,048
996
459
45
(139)
130
1,217
585
(1,987)
(108)
(272)
(614)
(100)
14,758
(35,099)
20,155
(1,924)
-
-
(3,093)
-
-
(233)
Net Cash Used In Investing Activities
(16,868)
(3,093)
(233)
Cash Flows from Financing Activities:
Dividends Paid
(9,775)
(13,018)
(8,578)
Net Cash Used In Financing Activities
(9,775)
(13,018)
(8,578)
Net (Decrease) Increase in Cash and Cash Equivalents
(5,585)
1,937
5,947
Translation effect on cash
Cash and Cash Equivalents - Beginning of Year
39
37,938
683
35,318
(781)
30,152
Cash and Cash Equivalents - End of Year
$ 32,392
$ 37,938
$ 35,318
Supplemental Disclosure of Cash Flow Information
Cash paid for Income Taxes
$ 7,310
$ 7,608
$ 7,060
Declared Dividend
$ 2,422
$
2,220
$ 8,578
adjustment.
See accompanying Notes which are an integral part of the Consolidated Financial Statements.
-39-
-40-
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
OMEGA FLEX, INC.
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
years ended December 31, 2018, 2017 and 2016 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, medical gases in health care facilities, 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, investment valuations, inventory
valuations, goodwill valuation, product liability costs, phantom stock and accounting for income taxes. Actual
amounts could differ significantly from these estimates.
Revenue Recognition
Effective January 1, 2018, the Company adopted the requirements of Accounting Standards Update 2014-
09, Revenue from Contracts with Customers (Topic 606). The standard is a comprehensive new revenue recognition
model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at
an amount that reflects the consideration expected to be received in exchange for those goods or services.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented
(full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance
recognized at the date of initial application (the modified retrospective approach). The Company selected the
modified retrospective approach however there was no material impact which required a cumulative effect
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
Cash Flows from Investing Activities:
Purchase of Investments
Net Proceeds from Sale of Investments
Capital Expenditures
2018
2017
2016
$ 20,277
$ 15,846
$ 14,546
118
543
57
366
(105)
(979)
61
1,804
205
468
(11)
(1,746)
21,058
1,042
502
6
72
171
(463)
(699)
(40)
490
574
296
18,048
251
996
459
45
(139)
130
1,217
585
(1,987)
(108)
(272)
(614)
(100)
14,758
(35,099)
20,155
(1,924)
-
-
(3,093)
-
-
(233)
Net Cash Used In Investing Activities
(16,868)
(3,093)
(233)
Cash Flows from Financing Activities:
Dividends Paid
(9,775)
(13,018)
(8,578)
Net Cash Used In Financing Activities
(9,775)
(13,018)
(8,578)
Translation effect on cash
Cash and Cash Equivalents - Beginning of Year
39
37,938
683
35,318
(781)
30,152
Cash and Cash Equivalents - End of Year
$ 32,392
$ 37,938
$ 35,318
Supplemental Disclosure of Cash Flow Information
Cash paid for Income Taxes
$ 7,310
$ 7,608
$ 7,060
Declared Dividend
$ 2,422
$
2,220
$ 8,578
OMEGA FLEX, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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
years ended December 31, 2018, 2017 and 2016 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, medical gases in health care facilities, 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, investment valuations, inventory
valuations, goodwill valuation, product liability costs, phantom stock and accounting for income taxes. Actual
amounts could differ significantly from these estimates.
Net (Decrease) Increase in Cash and Cash Equivalents
(5,585)
1,937
5,947
Revenue Recognition
Effective January 1, 2018, the Company adopted the requirements of Accounting Standards Update 2014-
09, Revenue from Contracts with Customers (Topic 606). The standard is a comprehensive new revenue recognition
model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at
an amount that reflects the consideration expected to be received in exchange for those goods or services.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented
(full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance
recognized at the date of initial application (the modified retrospective approach). The Company selected the
modified retrospective approach however there was no material impact which required a cumulative effect
adjustment.
See accompanying Notes which are an integral part of the Consolidated Financial Statements.
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The principle of Topic 606 was achieved through applying the following five-step approach:
comply with agreed-upon specifications. There is no impact of warranties under Topic 606 upon the
•
•
Identification of the contract, or contracts, with a customer — a contract with a customer exists when
the Company enters into an enforceable contract with a customer, typically a purchase order initiated
by the customer, that defines each party’s rights regarding the goods to be transferred and identifies the
payment terms related to these goods.
Identification of the performance obligations in the contract — performance obligations promised in a
contract are identified based on the goods that will be transferred to the customer that are distinct,
whereby the customer can benefit from the goods on their own or together with other resources that are
readily available from third parties or from us. Persuasive evidence of an arrangement for the sale of
product must exist. The Company ships product in accordance with the purchase order and standard
terms as reflected within the Company’s order acknowledgments and sales invoices.
• Determination of the transaction price —the transaction price is determined based on the consideration
to which the Company will be entitled in exchange for transferring goods to the customer. This would
be the agreed upon quantity and price per product type in accordance with the customer purchase
order, which is aligned with the Company’s internally approved pricing guidelines.
•
•
Allocation of the transaction price to the performance obligations in the contract — if the contract
contains a single performance obligation, the entire transaction price is allocated to the single
performance obligation. This applies to the Company as there is only one performance obligation to
ship the goods.
Recognition of revenue when, or as, the Company satisfies a performance obligation — the Company
satisfies performance obligations at a point in time when control of the goods transfers to the customer.
Determining the point in time when control transfers requires judgment. Indicators considered in
determining whether the customer has obtained control of a good include:
The Company has a present right to payment
The customer has legal title to the goods
The Company has transferred physical possession of the goods
The customer has the significant risks and rewards of ownership of the goods
The customer has accepted the goods
It is important to note that the indicators are not a set of conditions that must be met before the
Company can conclude that control of the goods has transferred to the customer. The indicators are a
list of factors that are often present if a customer has control of the goods.
The Company has typical, unmodified FOB shipping point terms. As the seller, the Company
can determine that the shipped goods meet the agreed-upon specifications in the contract or customer
purchase order (e.g. items, quantities, and prices) with the buyer, so customer acceptance would be
deemed a formality, as noted in ASC 606-10-55-86. As a result, the Company has a legal right to
payment upon shipment of the goods.
Based upon the above, the Company has concluded that transfer of control substantively
transfers to the customer upon shipment.
Other considerations of Topic 606 include the following:
•
Contract Costs - costs to obtain a contract (e.g. customer purchase order) include sales commissions.
Under Topic 606, these costs may be expensed as incurred for contracts with a duration of one year or
less. The majority of the Company’s customer purchase orders are fulfilled (e.g. goods are shipped)
within two days of receipt.
• Warranties - the Company does not offer customers to purchase a warranty separately. Therefore there
is not a separate performance obligation. The Company does account for warranties as a cost accrual
and the warranties do not include any additional distinct services other than the assurance that the goods
financial reporting of the Company.
•
Returned Goods - from time to time, the Company provides authorization to customers to return goods.
If deemed to be material, the Company would record a “right of return” asset for the cost of the returned
goods which would reduce cost of sales. Upon adoption of Topic 606, the Company will monitor
pending authorized returns of goods and, if deemed appropriate, record the right of return asset
accordingly.
of time.
•
Volume Rebates (Promotional Incentives) - volume rebates are variable (dependent upon the volume of
goods purchased by our eligible customers) and, under Topic 606, must be estimated and recognized as
a reduction of revenue as performance obligations are satisfied (e.g. upon shipment of goods). Also
under Topic 606, to ensure that revenue recognized would not be probable of a significant reversal, the
four following factors are considered:
The amount of consideration is highly susceptible to factors outside the Company’s influence.
The uncertainty about the amount of consideration is not expected to be resolved for a long period
The Company’s experience with similar types of contracts is limited.
The contract has a large number and broad range of possible consideration amounts.
If it was concluded that the above factors were in place for the Company, it would support the
probability of a significant reversal of revenue. However, as none of the four factors apply to the
Company, promotional incentives are recorded as a reduction of revenue based upon estimates of the
eligible products expected to be sold.
Regarding disaggregated revenue disclosures, as previously noted, the Company’s business is controlled as
a single operating segment that consists of the manufacture and sale of flexible metal hose. Most of the Company’s
transactions are very similar in nature, contract, terms, timing, and transfer of control of goods. As indicated within
Note 2, under the caption “Significant Concentration”, the majority of the Company’s sales were geographically
contained within North America, with the remainder scattered internationally. All performance assessments and
resource allocations are generally based upon the review of the results of the Company as a whole.
Cash Equivalents
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 $985,000 and $920,000 as of December 31, 2018 and 2017, 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
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The principle of Topic 606 was achieved through applying the following five-step approach:
•
Identification of the contract, or contracts, with a customer — a contract with a customer exists when
the Company enters into an enforceable contract with a customer, typically a purchase order initiated
by the customer, that defines each party’s rights regarding the goods to be transferred and identifies the
payment terms related to these goods.
•
Identification of the performance obligations in the contract — performance obligations promised in a
contract are identified based on the goods that will be transferred to the customer that are distinct,
whereby the customer can benefit from the goods on their own or together with other resources that are
readily available from third parties or from us. Persuasive evidence of an arrangement for the sale of
product must exist. The Company ships product in accordance with the purchase order and standard
terms as reflected within the Company’s order acknowledgments and sales invoices.
• Determination of the transaction price —the transaction price is determined based on the consideration
to which the Company will be entitled in exchange for transferring goods to the customer. This would
be the agreed upon quantity and price per product type in accordance with the customer purchase
order, which is aligned with the Company’s internally approved pricing guidelines.
•
Allocation of the transaction price to the performance obligations in the contract — if the contract
contains a single performance obligation, the entire transaction price is allocated to the single
performance obligation. This applies to the Company as there is only one performance obligation to
ship the goods.
•
Recognition of revenue when, or as, the Company satisfies a performance obligation — the Company
satisfies performance obligations at a point in time when control of the goods transfers to the customer.
Determining the point in time when control transfers requires judgment. Indicators considered in
determining whether the customer has obtained control of a good include:
The Company has a present right to payment
The customer has legal title to the goods
The Company has transferred physical possession of the goods
The customer has the significant risks and rewards of ownership of the goods
The customer has accepted the goods
It is important to note that the indicators are not a set of conditions that must be met before the
Company can conclude that control of the goods has transferred to the customer. The indicators are a
list of factors that are often present if a customer has control of the goods.
The Company has typical, unmodified FOB shipping point terms. As the seller, the Company
can determine that the shipped goods meet the agreed-upon specifications in the contract or customer
purchase order (e.g. items, quantities, and prices) with the buyer, so customer acceptance would be
deemed a formality, as noted in ASC 606-10-55-86. As a result, the Company has a legal right to
payment upon shipment of the goods.
Based upon the above, the Company has concluded that transfer of control substantively
transfers to the customer upon shipment.
Other considerations of Topic 606 include the following:
•
Contract Costs - costs to obtain a contract (e.g. customer purchase order) include sales commissions.
Under Topic 606, these costs may be expensed as incurred for contracts with a duration of one year or
less. The majority of the Company’s customer purchase orders are fulfilled (e.g. goods are shipped)
within two days of receipt.
• Warranties - the Company does not offer customers to purchase a warranty separately. Therefore there
is not a separate performance obligation. The Company does account for warranties as a cost accrual
and the warranties do not include any additional distinct services other than the assurance that the goods
•
•
comply with agreed-upon specifications. There is no impact of warranties under Topic 606 upon the
financial reporting of the Company.
Returned Goods - from time to time, the Company provides authorization to customers to return goods.
If deemed to be material, the Company would record a “right of return” asset for the cost of the returned
goods which would reduce cost of sales. Upon adoption of Topic 606, the Company will monitor
pending authorized returns of goods and, if deemed appropriate, record the right of return asset
accordingly.
Volume Rebates (Promotional Incentives) - volume rebates are variable (dependent upon the volume of
goods purchased by our eligible customers) and, under Topic 606, must be estimated and recognized as
a reduction of revenue as performance obligations are satisfied (e.g. upon shipment of goods). Also
under Topic 606, to ensure that revenue recognized would not be probable of a significant reversal, the
four following factors are considered:
The amount of consideration is highly susceptible to factors outside the Company’s influence.
The uncertainty about the amount of consideration is not expected to be resolved for a long period
of time.
The Company’s experience with similar types of contracts is limited.
The contract has a large number and broad range of possible consideration amounts.
If it was concluded that the above factors were in place for the Company, it would support the
probability of a significant reversal of revenue. However, as none of the four factors apply to the
Company, promotional incentives are recorded as a reduction of revenue based upon estimates of the
eligible products expected to be sold.
Regarding disaggregated revenue disclosures, as previously noted, the Company’s business is controlled as
a single operating segment that consists of the manufacture and sale of flexible metal hose. Most of the Company’s
transactions are very similar in nature, contract, terms, timing, and transfer of control of goods. As indicated within
Note 2, under the caption “Significant Concentration”, the majority of the Company’s sales were geographically
contained within North America, with the remainder scattered internationally. All performance assessments and
resource allocations are generally based upon the review of the results of the Company as a whole.
Cash Equivalents
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 $985,000 and $920,000 as of December 31, 2018 and 2017, 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
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well-established credit rating agency. The Company charges off those accounts that are deemed uncollectible once
all collection efforts have been exhausted.
Fair Value of Financial and Nonfinancial Instruments
Investments
The Company invests excess funds in liquid interest earning instruments including US Treasury bills and
bank time deposits. These investments are stated at fair value, which approximates amortized cost, and are classified
as available-for-sale in accordance with Accounting Standards Codification 320, Investments – Debt and Equity
Securities (or “ASC 320”). Investments were $14,944,000 and $0 as of December 31, 2018 and 2017, respectively.
Maturities, from the date of purchase, were six months or less.
Inventories
Inventories are valued at the lower of cost or net realizable value. 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,
2018 and also at December 31, 2017. 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 11.
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 10, 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 $1,000,000 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.
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 upon Level 1 inputs in determining the fair value of
investments and the fair value of the Company’s 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 $1,037,000, $1,075,000 and
$1,047,000 for the years ended December 31, 2018, 2017, and 2016, respectively.
Research and Development Expense
Research and development expenses are charged to operations as incurred. Such charges totaled
$1,531,000, $923,000 and $788,000 for the years ended December 31, 2018, 2017 and 2016, respectively and are
included in engineering expense in the accompanying consolidated statements of operations.
Shipping costs are included in selling expense on the consolidated statements of operations. The expense
relating to shipping was $2,973,000, $2,562,000 and $2,339,000 for the years ended December 31, 2018, 2017 and
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
Shipping Costs
2016, respectively.
Earnings per Common Share
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 the FASB ASC Topic 740, Income Taxes.
Under this method the Company recorded tax expense, related deferred taxes and tax benefits, and uncertainties in
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well-established credit rating agency. The Company charges off those accounts that are deemed uncollectible once
Fair Value of Financial and Nonfinancial Instruments
all collection efforts have been exhausted.
Investments
The Company invests excess funds in liquid interest earning instruments including US Treasury bills and
bank time deposits. These investments are stated at fair value, which approximates amortized cost, and are classified
as available-for-sale in accordance with Accounting Standards Codification 320, Investments – Debt and Equity
Securities (or “ASC 320”). Investments were $14,944,000 and $0 as of December 31, 2018 and 2017, respectively.
Maturities, from the date of purchase, were six months or less.
Inventories are valued at the lower of cost or net realizable value. 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
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.
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,
2018 and also at December 31, 2017. These analyses did not indicate any impairment of goodwill at the end of
Inventories
accordingly.
Property and Equipment
Goodwill
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 11.
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 10, 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 $1,000,000 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.
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 upon Level 1 inputs in determining the fair value of
investments and the fair value of the Company’s 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 $1,037,000, $1,075,000 and
$1,047,000 for the years ended December 31, 2018, 2017, and 2016, respectively.
Research and Development Expense
Research and development expenses are charged to operations as incurred. Such charges totaled
$1,531,000, $923,000 and $788,000 for the years ended December 31, 2018, 2017 and 2016, 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 $2,973,000, $2,562,000 and $2,339,000 for the years ended December 31, 2018, 2017 and
2016, respectively.
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 the FASB ASC Topic 740, Income Taxes.
Under this method the Company recorded tax expense, related deferred taxes and tax benefits, and uncertainties in
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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 reflected the effects of the Tax Cuts and Jobs Act (the “Act”), in its 2017 financial
statements. This included the effects of the change in the US corporate tax rate from 35% to 21% on deferred tax
assets and liabilities, and a provision related to previously deferred taxes on earnings of the Company’s foreign
subsidiary. The Company’s tax expense for the period ended December 31, 2018 includes the effect of the
reduction in the US corporate tax rate from 35% to 21%, effective for the Company’s 2018 tax year. The
Company’s tax provision also reflects other changes as a result of the Act, including the impact of the Global
Intangible Low Taxed Income (“GILTI”) provisions, and changes affecting the deductibility of certain executive
compensation.
Other Comprehensive Income
For the years ended December 31, 2018, 2017 and 2016, respectively, the components of other
comprehensive income consisted solely of foreign currency translation adjustments.
Significant Concentrations
One customer represented 13% to 15% of sales during the period from 2016 to 2018, and that same
customer accounted for approximately 19% to 22% of the Accounts Receivable balance over the last three years.
No other customer represented more that 10% of Accounts Receivable or Sales. Geographically, North America
accounted for approximately 90% of the Company’s sales during the last three years. The remaining portion of sales
for each respective year was scattered among other countries, with the United Kingdom being the Company’s most
dominant market outside North America.
Subsequent Events
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 replaced most existing revenue recognition guidance in U.S.
GAAP when it became effective and permitted the use of either a full retrospective or retrospective with cumulative
effect transition method. The updated standard became effective for the Company in the first quarter of fiscal year
2018. The Company has completed its review of its customer contracts and its analysis of the impact of the
disclosure requirements of ASU 2014-09. The Company adopted the revenue guidance effective January 1, 2018,
using the modified retrospective approach. The adoption of ASU 2014-09 did not have a material impact on our
financial statements on an on-going basis.
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. 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 will adopt the lease standard effective January 1,
2019 using the allowable option to apply the transition provisions of the new guidance at its adoption date instead of
at the earliest comparative period presented in our financial statements. This will require us to disclose lease
information relating to earlier periods using the currently existing guidance.
The new standard provides a number of optional practical expedients throughout the transition. The
Company elected the “package of practical expedients,” which permits the Company to not reassess under the new
standard the Company’s prior conclusions about lease identification, lease classification, and initial direct costs. The
new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-
term lease recognition exemption for all leases that qualify as pursuant to the above definition. This means, for those
leases that qualify, the Company will not recognize right-of-use assets or lease liabilities, and this includes not
recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition.
The impact of adoption is expected to be an increase to the Company’s operating lease assets and liabilities
on January 1, 2019 of approximately $800,000. The guidance will not have a material impact on our consolidated
statements of operations and statements of cash flows.
In January 2017, the FASB amended ASC Topic 350, Intangibles – Goodwill and Other (issued under
ASU 2017-04, “Simplifying the Test for Goodwill Impairment”). This amendment simplifies the test for goodwill
impairment by only requiring an entity to perform an annual or interim goodwill impairment test by comparing the
fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount that the
carrying amount exceeds the reporting unit’s fair value. Any loss recognized should not exceed the total amount of
goodwill allocated to that reporting unit. The amendment requires adoption on January 1, 2020. The Company does
not expect that the adoption of ASU 2017-04 will have a material impact on its consolidated financial statements.
Inventories, net of reserves of $363,000 and $479,000, respectively, consisted of the following at December
3. INVENTORIES
31:
Finished Goods
Raw Materials
Total Inventories - Net
2018
2017
(in thousands)
$ 4,756
3,220
$ 7,976
$ 5,461
2,546
$ 8,007
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-46-
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 reflected the effects of the Tax Cuts and Jobs Act (the “Act”), in its 2017 financial
statements. This included the effects of the change in the US corporate tax rate from 35% to 21% on deferred tax
assets and liabilities, and a provision related to previously deferred taxes on earnings of the Company’s foreign
subsidiary. The Company’s tax expense for the period ended December 31, 2018 includes the effect of the
reduction in the US corporate tax rate from 35% to 21%, effective for the Company’s 2018 tax year. The
Company’s tax provision also reflects other changes as a result of the Act, including the impact of the Global
Intangible Low Taxed Income (“GILTI”) provisions, and changes affecting the deductibility of certain executive
compensation.
Other Comprehensive Income
Significant Concentrations
dominant market outside North America.
Subsequent Events
Recent Accounting Pronouncements
For the years ended December 31, 2018, 2017 and 2016, respectively, the components of other
comprehensive income consisted solely of foreign currency translation adjustments.
One customer represented 13% to 15% of sales during the period from 2016 to 2018, and that same
customer accounted for approximately 19% to 22% of the Accounts Receivable balance over the last three years.
No other customer represented more that 10% of Accounts Receivable or Sales. Geographically, North America
accounted for approximately 90% of the Company’s sales during the last three years. The remaining portion of sales
for each respective year was scattered among other countries, with the United Kingdom being the Company’s most
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.
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 replaced most existing revenue recognition guidance in U.S.
GAAP when it became effective and permitted the use of either a full retrospective or retrospective with cumulative
effect transition method. The updated standard became effective for the Company in the first quarter of fiscal year
2018. The Company has completed its review of its customer contracts and its analysis of the impact of the
disclosure requirements of ASU 2014-09. The Company adopted the revenue guidance effective January 1, 2018,
using the modified retrospective approach. The adoption of ASU 2014-09 did not have a material impact on our
financial statements on an on-going basis.
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. 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 will adopt the lease standard effective January 1,
2019 using the allowable option to apply the transition provisions of the new guidance at its adoption date instead of
at the earliest comparative period presented in our financial statements. This will require us to disclose lease
information relating to earlier periods using the currently existing guidance.
The new standard provides a number of optional practical expedients throughout the transition. The
Company elected the “package of practical expedients,” which permits the Company to not reassess under the new
standard the Company’s prior conclusions about lease identification, lease classification, and initial direct costs. The
new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-
term lease recognition exemption for all leases that qualify as pursuant to the above definition. This means, for those
leases that qualify, the Company will not recognize right-of-use assets or lease liabilities, and this includes not
recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition.
The impact of adoption is expected to be an increase to the Company’s operating lease assets and liabilities
on January 1, 2019 of approximately $800,000. The guidance will not have a material impact on our consolidated
statements of operations and statements of cash flows.
In January 2017, the FASB amended ASC Topic 350, Intangibles – Goodwill and Other (issued under
ASU 2017-04, “Simplifying the Test for Goodwill Impairment”). This amendment simplifies the test for goodwill
impairment by only requiring an entity to perform an annual or interim goodwill impairment test by comparing the
fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount that the
carrying amount exceeds the reporting unit’s fair value. Any loss recognized should not exceed the total amount of
goodwill allocated to that reporting unit. The amendment requires adoption on January 1, 2020. The Company does
not expect that the adoption of ASU 2017-04 will have a material impact on its consolidated financial statements.
3. INVENTORIES
Inventories, net of reserves of $363,000 and $479,000, respectively, consisted of the following at December
31:
Finished Goods
Raw Materials
Total Inventories - Net
2018
2017
(in thousands)
$ 4,756
3,220
$ 7,976
$ 5,461
2,546
$ 8,007
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4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
2018
2017
(in thousands)
Depreciation and Amortization Est.
Useful Lives
Land
Buildings
Leasehold Improvements
Equipment
Accumulated Depreciation
Property and Equipment - Net
$
1,205
6,452
403
11,960
20,020
(11,642)
$ 8,378
$
1,205
6,293
411
10,242
18,151
(11,153)
$ 6,698
39 Years
3-10 Years (Lesser of Life or Lease)
3-10 Years
The above amounts include capital related items of $511,000 and $0 as of December 31, 2018 and 2017
respectively that had not yet been placed in service by the Company, and therefore no depreciation was recorded in
the related periods for those assets. Depreciation and amortization expense was approximately $543,000, $502,000
and $459,000 for the years ended December 31, 2018, 2017 and 2016, respectively.
5. LINE OF CREDIT
On December 1, 2017, the Company agreed to a new Amended and Restated Revolving Line of Credit
Note and Third Amendment to the Loan Agreement with Santander Bank, N.A. (the “Bank”). The Company
established a line of credit facility in the maximum amount of $15,000,000, maturing on December 1, 2022, with
funds available for working capital purposes and other cash needs. The loan is unsecured. The loan agreement
provides for the payment of any borrowings under the agreement at an interest rate range of either LIBOR plus
0.75% to plus 1.75% (for borrowings with a fixed term of 30, 60, or 90 days), or, Prime Rate up to Prime Rate plus
0.50% (for borrowings with no fixed term other than the December 1, 2022 maturity date), depending upon the
Company’s then existing financial ratios. Currently, the Company’s ratio would allow for the most favorable rate
under the agreement’s range, which would be a rate of 3.5%. The Company is also required to pay on a quarterly
basis an unused facility fee of 10 basis points of the average unused balance of the note. The Company may
terminate the line at any time during the five year term, as long as there are no amounts outstanding. Prior to this,
the Company had been operating in adherence an agreement dated December 29, 2014, as discussed in detail in the
December 31, 2017 Form 10-K.
Also during 2018, the Board approved and granted a total of 2,000 restricted stock unit awards (the
“Awards”) to be allocated to the existing non-employee directors of the Company. The Awards must be approved
by the shareholders’ of the Company at the annual meeting scheduled for June 11, 2019, or the Awards will be
forfeited. A Form S-8 registration statement, and the restricted stock unit award agreements, were filed with the
SEC on December 13, 2018. No compensation cost has been recognized through December 31, 2018.
During 2017, the Board revised its dividend policy to allow for and establish a record of paying regular
quarterly dividends. In furtherance of this policy, during 2017 the Company announced in June, September, and
December that the Board had approved a quarterly dividend in the amount of $0.22 per share to all shareholders of
record, amounting to the respective dividend payments of $2,220,000 in July, October and January 2018.
On December 14, 2016, the Board declared a special dividend of $0.85 per share to all Shareholders of
record as of December 26, 2016, payable on or before January 6, 2017. The total payment to shareholders made in
January 2017 was $8,578,000.
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 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 has not made any stock repurchases since 2014.
7. INCOME TAXES
New Tax Legislation
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the
“Act”). This legislation makes significant changes in U.S. tax law including a reduction in the corporate tax rate to
21% starting in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred
foreign earnings of U.S. subsidiaries. The Act reduced the U.S. corporate tax rate from the previous rate of 35% to
21% for tax years beginning after December 31, 2017. The Company reported tax on unremitted foreign earnings in
the amount of $822,000 in its 2017 U.S. corporate income tax return. The rate of tax paid, after foreign tax credits,
is 8% of the foreign earnings. Although the Company experienced higher earnings in 2018, income taxes have
decreased which reflects the impact of the lower 21% tax rate in effect for 2018, and thereafter. The Act repealed
the manufacturing deduction for 2018 but added a foreign derived intangible income deduction (FDII Deduction).
The Act also taxes global intangible low taxes income (GILTI), but there is no net impact on the 2018 taxes after
foreign tax credits. As of December 31, 2018, the Company is indefinitely invested in amounts in the foreign
As of December 31, 2018 and 2017, the Company had no outstanding borrowings on its line of credit, and
subsidiary in excess of the amounts that have been previously taxed.
was in compliance with all debt covenants.
6. SHAREHOLDERS’ EQUITY
As of December 31, 2018 and 2017, the Company had authorized 20,000,000 common stock shares with
par value of $0.01 per share. At these 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.
During 2018, the Board of Directors (the “Board”) announced regular quarterly dividends per share of
$0.22 in April, and $0.24 in June, September and again in December, to all shareholders of record. The respective
2018 dividend payments were $2,220,000 in April, and $2,422,000 in July and October 2018, and January 2019.
Additionally, there was a dividend that was paid in April by the Company’s foreign subsidiary, which amounted to
an outlay of cash of $491,000 to the foreign subsidiary’s noncontrolling interest.
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4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
2018
2017
(in thousands)
Depreciation and Amortization Est.
Useful Lives
Land
Buildings
Equipment
Leasehold Improvements
Accumulated Depreciation
Property and Equipment - Net
$
1,205
6,452
403
11,960
20,020
(11,642)
$ 8,378
$
1,205
6,293
411
10,242
18,151
(11,153)
$ 6,698
3-10 Years (Lesser of Life or Lease)
39 Years
3-10 Years
The above amounts include capital related items of $511,000 and $0 as of December 31, 2018 and 2017
respectively that had not yet been placed in service by the Company, and therefore no depreciation was recorded in
the related periods for those assets. Depreciation and amortization expense was approximately $543,000, $502,000
and $459,000 for the years ended December 31, 2018, 2017 and 2016, respectively.
5. LINE OF CREDIT
On December 1, 2017, the Company agreed to a new Amended and Restated Revolving Line of Credit
Note and Third Amendment to the Loan Agreement with Santander Bank, N.A. (the “Bank”). The Company
established a line of credit facility in the maximum amount of $15,000,000, maturing on December 1, 2022, with
funds available for working capital purposes and other cash needs. The loan is unsecured. The loan agreement
provides for the payment of any borrowings under the agreement at an interest rate range of either LIBOR plus
0.75% to plus 1.75% (for borrowings with a fixed term of 30, 60, or 90 days), or, Prime Rate up to Prime Rate plus
0.50% (for borrowings with no fixed term other than the December 1, 2022 maturity date), depending upon the
Company’s then existing financial ratios. Currently, the Company’s ratio would allow for the most favorable rate
under the agreement’s range, which would be a rate of 3.5%. The Company is also required to pay on a quarterly
basis an unused facility fee of 10 basis points of the average unused balance of the note. The Company may
terminate the line at any time during the five year term, as long as there are no amounts outstanding. Prior to this,
the Company had been operating in adherence an agreement dated December 29, 2014, as discussed in detail in the
December 31, 2017 Form 10-K.
As of December 31, 2018 and 2017, 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, 2018 and 2017, the Company had authorized 20,000,000 common stock shares with
par value of $0.01 per share. At these 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.
During 2018, the Board of Directors (the “Board”) announced regular quarterly dividends per share of
$0.22 in April, and $0.24 in June, September and again in December, to all shareholders of record. The respective
2018 dividend payments were $2,220,000 in April, and $2,422,000 in July and October 2018, and January 2019.
Additionally, there was a dividend that was paid in April by the Company’s foreign subsidiary, which amounted to
an outlay of cash of $491,000 to the foreign subsidiary’s noncontrolling interest.
Also during 2018, the Board approved and granted a total of 2,000 restricted stock unit awards (the
“Awards”) to be allocated to the existing non-employee directors of the Company. The Awards must be approved
by the shareholders’ of the Company at the annual meeting scheduled for June 11, 2019, or the Awards will be
forfeited. A Form S-8 registration statement, and the restricted stock unit award agreements, were filed with the
SEC on December 13, 2018. No compensation cost has been recognized through December 31, 2018.
During 2017, the Board revised its dividend policy to allow for and establish a record of paying regular
quarterly dividends. In furtherance of this policy, during 2017 the Company announced in June, September, and
December that the Board had approved a quarterly dividend in the amount of $0.22 per share to all shareholders of
record, amounting to the respective dividend payments of $2,220,000 in July, October and January 2018.
On December 14, 2016, the Board declared a special dividend of $0.85 per share to all Shareholders of
record as of December 26, 2016, payable on or before January 6, 2017. The total payment to shareholders made in
January 2017 was $8,578,000.
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 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 has not made any stock repurchases since 2014.
7. INCOME TAXES
New Tax Legislation
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the
“Act”). This legislation makes significant changes in U.S. tax law including a reduction in the corporate tax rate to
21% starting in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred
foreign earnings of U.S. subsidiaries. The Act reduced the U.S. corporate tax rate from the previous rate of 35% to
21% for tax years beginning after December 31, 2017. The Company reported tax on unremitted foreign earnings in
the amount of $822,000 in its 2017 U.S. corporate income tax return. The rate of tax paid, after foreign tax credits,
is 8% of the foreign earnings. Although the Company experienced higher earnings in 2018, income taxes have
decreased which reflects the impact of the lower 21% tax rate in effect for 2018, and thereafter. The Act repealed
the manufacturing deduction for 2018 but added a foreign derived intangible income deduction (FDII Deduction).
The Act also taxes global intangible low taxes income (GILTI), but there is no net impact on the 2018 taxes after
foreign tax credits. As of December 31, 2018, the Company is indefinitely invested in amounts in the foreign
subsidiary in excess of the amounts that have been previously taxed.
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-48-
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
2018
December 31,
2017
(in thousands)
2016
$ 4,618
306
$ 6,848
48
$ 5,788
(311)
885
50
667
16
575
17
$ 6,451
863
8
$ 8,450
652
(23)
791
78
$ 6,975
Pre-tax income included foreign income of $3,123,000, $4,528,000 and $3,944,000 in 2018, 2017 and
2016, respectively. During 2017, the Company was deemed to have paid a dividend out of its U.K. subsidiary of all
of its unremitted earnings, resulting in incremental U.S. taxes of $822,000.
Total income tax expense differed from statutory income tax expense, computed by applying the U.S.
federal income tax rate of 21% (2018) and 35% (2017 and 2016) to earnings before income tax, as follows:
2018
December 31,
2017
(in thousands)
2016
Computed Statutory Income Tax Expense
State Income Tax, Net of Federal Tax Benefit
Foreign Tax Rate Differential
Impact of Deemed Repatriation due to Tax Reform
Manufacturing Deduction
Impact of Federal Tax Rate Reduction on Deferred Taxes
$ 8,440
447
(713)
827
(401)
(118)
$ 5,584
760
(63)
---
---
---
$ 7,475
386
(592)
---
---
(385)
Executive Compensation Limitation
Foreign Derived Intangible Income Deduction
Research Credit
Increase/(Reduction) in Tax Uncertainties
Valuation Allowance for Foreign Loss Carryover
Other - Net
Income Tax Expense
440
(100)
(143)
---
---
(27)
$ 6,451
---
---
(47)
---
---
15
$ 8,450
---
---
(33)
(70)
70
124
$ 6,975
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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, 2018 and 2017 are as follows:
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
December 31,
2018
2017
(in thousands)
$
103
164
232
12
70
71
510
$ 1,092
(409)
(1,246)
($1,655)
$ 98
195
215
24
70
78
648
$ 1,258
(417)
(1,038)
($1,455)
Valuation Allowance for Loss Carryover
(70)
(70)
Total Deferred Tax Liability
($563)
($197)
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 with the exception of a carryover of
foreign operating losses. Due to the uncertainty of future income in the foreign subsidiary, the Company has
recognized a valuation allowance related to the foreign operating losses carrying forward.
The Company is currently subject to audit by the Internal Revenue Service for the calendar years ended
2015 through 2017. The Company and its Subsidiaries’ state income tax returns are subject to audit for the calendar
As of December 31, 2018, the Company had no liability for unrecognized tax benefits related to various
years ended 2014 through 2017.
federal and state income tax matters.
8. LEASES
In the United States, the Company owns its main operating facility located at 451 Creamery Way in Exton,
PA, and in early 2017 consummated an agreement to purchase another facility at 427 Creamery Way in Exton,
which was previously under lease through January 2018. Both facilities provide manufacturing, warehousing and
distribution space. The Company also leases a warehousing and distribution center in Houston, Texas, which
currently provides manufacturing, stocking and sales operations. The Houston lease runs through October 2019.
Additionally, the Company leases its corporate office space in Middletown, CT, with the lease term expiring in
2022.
ending in March 2021.
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
In addition to property rentals, the Company also leases several automobiles and a small amount of
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
2018
2016
December 31,
2017
(in thousands)
$ 4,618
306
$ 6,848
48
$ 5,788
(311)
885
50
667
16
575
17
$ 6,451
863
8
$ 8,450
652
(23)
791
78
$ 6,975
Pre-tax income included foreign income of $3,123,000, $4,528,000 and $3,944,000 in 2018, 2017 and
2016, respectively. During 2017, the Company was deemed to have paid a dividend out of its U.K. subsidiary of all
of its unremitted earnings, resulting in incremental U.S. taxes of $822,000.
Total income tax expense differed from statutory income tax expense, computed by applying the U.S.
federal income tax rate of 21% (2018) and 35% (2017 and 2016) 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 Deemed Repatriation due to Tax Reform
---
827
Executive Compensation Limitation
440
---
---
Foreign Derived Intangible Income Deduction
(100)
---
---
Increase/(Reduction) in Tax Uncertainties
---
Valuation Allowance for Foreign Loss Carryover
Research Credit
Other - Net
Income Tax Expense
2018
$ 5,584
760
(63)
---
---
December 31,
2017
(in thousands)
$ 8,440
447
(713)
(401)
(118)
(143)
(47)
---
---
---
(27)
$ 6,451
15
$ 8,450
2016
$ 7,475
386
(592)
---
(385)
---
(33)
(70)
70
124
$ 6,975
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, 2018 and 2017 are as follows:
December 31,
2018
2017
(in thousands)
Deferred Tax Assets:
Compensation Assets
Inventory Valuation
Accounts Receivable Valuation
Deferred Litigation Costs
Foreign Net Operating Losses
Valuation Allowance for Loss Carryover
Other
Compensation Liabilities
Total Deferred Assets
Deferred Tax Liabilities:
Prepaid Expenses
Depreciation and Amortization
Total Deferred Liabilities
$
103
164
232
12
70
(70)
71
510
$ 1,092
(409)
(1,246)
($1,655)
$ 98
195
215
24
70
(70)
78
648
$ 1,258
(417)
(1,038)
($1,455)
Total Deferred Tax Liability
($563)
($197)
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 with the exception of a carryover of
foreign operating losses. Due to the uncertainty of future income in the foreign subsidiary, the Company has
recognized a valuation allowance related to the foreign operating losses carrying forward.
The Company is currently subject to audit by the Internal Revenue Service for the calendar years ended
2015 through 2017. The Company and its Subsidiaries’ state income tax returns are subject to audit for the calendar
years ended 2014 through 2017.
Impact of Federal Tax Rate Reduction on Deferred Taxes
As of December 31, 2018, the Company had no liability for unrecognized tax benefits related to various
federal and state income tax matters.
8. LEASES
In the United States, the Company owns its main operating facility located at 451 Creamery Way in Exton,
PA, and in early 2017 consummated an agreement to purchase another facility at 427 Creamery Way in Exton,
which was previously under lease through January 2018. Both facilities provide manufacturing, warehousing and
distribution space. The Company also leases a warehousing and distribution center in Houston, Texas, which
currently provides manufacturing, stocking and sales operations. The Houston lease runs through October 2019.
Additionally, the Company leases its corporate office space in Middletown, CT, with the lease term expiring in
2022.
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.
In addition to property rentals, the Company also leases several automobiles and a small amount of
-49-
-50-
equipment, which are included in the rent expense and in the operating lease details below.
Rent expense for operating leases was approximately $377,000, $393,000 and $486,000 for the years ended
December 31, 2018, 2017 and 2016, respectively. The decrease in rent expense between 2017 and 2016 largely
relates to the purchase of the facility at 427 Creamery Way during February 2017, which was previously rented.
Future minimum lease payments under non-cancelable leases as of December 31, 2018 is as follows:
Year Ending December 31,
Operating Leases
(in thousands)
2019
2020
2021
2022
2023
Thereafter
Total Minimum Lease Payments
$
$
412
319
115
33
---
---
879
9. 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 $361,000, $338,000 and $323,000 of contributions accrued for the Plan in 2018, 2017 and
2016 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 contributed an
additional amount equal to 50% 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, 2018, 2017 and 2016 were $256,000, $227,000 and $196,000, respectively. The participant’s
Company contribution vests ratably over six years.
10. 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
-51-
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. 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 $462,000 at December 31, 2018, of which $450,000 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
previously noted who is now receiving benefit payments. The December 31, 2017 liability of $496,000 had
$484,000 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 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 $1,296,000 at December 31, 2018 and $1,281,000 at December 31, 2017.
As disclosed in detail in Note 8, under the caption “Leases”, the Company has several lease obligations in
place that will be paid out over time. Most notably, the Company leases a facility in Banbury, England that serves
the manufacturing, warehousing and distribution functions. Additionally, the Company purchased the operating
facility at 427 Creamery Way in Exton, PA in February 2017, which was previously under lease through January
2018.
Contingencies:
In the ordinary and normal conduct of the Company’s business, it is subject to periodic lawsuits,
investigations and claims (collectively, the “Claims”). Most of the Claims, including a putative class-action claim,
relate to potential lightning damage to our flexible gas piping products, which impact legal and product liability
related expenses. The Company does not believe the Claims have legal merit, and therefore has commenced a
vigorous defense in response to the Claims. It is possible that the Company may incur increased litigation costs in
the future due to a variety of factors, including a higher numbers of Claims, higher legal costs, and higher insurance
deductibles or retentions.
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 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 cash
bond of $1,600,000, which was previously included in Other Long Term Assets and posted as security for a
subsequent appeal, was returned to the Company in May 2018. This case was finally settled and closed on August
7, 2018.
In March 2017, a putative class action case was re-filed against the Company and other parties in Missouri
state court after the predecessor case was dismissed without prejudice by the federal court. The Company
successfully removed the case to federal court and is currently vigorously defending the case.
The Company has in place commercial general liability insurance policies that cover most Claims, which
are subject to deductibles or retentions, ranging primarily from $25,000 to $1,000,000 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 $1,000,000, 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 as of December 31, 2018 is estimated to not exceed approximately $1,700,000, which
represents the potential costs that may be incurred over time for the Claims within the applicable insurance policy
deductibles or retentions. From time to time, depending upon the nature of a particular case, the Company may
decide to spend in excess of a deductible or retention to enable more discretion regarding the defense, although this
is not common. 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
-52-
equipment, which are included in the rent expense and in the operating lease details below.
Rent expense for operating leases was approximately $377,000, $393,000 and $486,000 for the years ended
December 31, 2018, 2017 and 2016, respectively. The decrease in rent expense between 2017 and 2016 largely
relates to the purchase of the facility at 427 Creamery Way during February 2017, which was previously rented.
Future minimum lease payments under non-cancelable leases as of December 31, 2018 is as follows:
Year Ending December 31,
Operating Leases
(in thousands)
Thereafter
Total Minimum Lease Payments
2019
2020
2021
2022
2023
$
$
412
319
115
33
---
---
879
9. 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 $361,000, $338,000 and $323,000 of contributions accrued for the Plan in 2018, 2017 and
2016 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 contributed an
additional amount equal to 50% 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, 2018, 2017 and 2016 were $256,000, $227,000 and $196,000, respectively. The participant’s
Company contribution vests ratably over six years.
10. 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
-51-
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. 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 $462,000 at December 31, 2018, of which $450,000 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
previously noted who is now receiving benefit payments. The December 31, 2017 liability of $496,000 had
$484,000 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 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 $1,296,000 at December 31, 2018 and $1,281,000 at December 31, 2017.
As disclosed in detail in Note 8, under the caption “Leases”, the Company has several lease obligations in
place that will be paid out over time. Most notably, the Company leases a facility in Banbury, England that serves
the manufacturing, warehousing and distribution functions. Additionally, the Company purchased the operating
facility at 427 Creamery Way in Exton, PA in February 2017, which was previously under lease through January
2018.
Contingencies:
In the ordinary and normal conduct of the Company’s business, it is subject to periodic lawsuits,
investigations and claims (collectively, the “Claims”). Most of the Claims, including a putative class-action claim,
relate to potential lightning damage to our flexible gas piping products, which impact legal and product liability
related expenses. The Company does not believe the Claims have legal merit, and therefore has commenced a
vigorous defense in response to the Claims. It is possible that the Company may incur increased litigation costs in
the future due to a variety of factors, including a higher numbers of Claims, higher legal costs, and higher insurance
deductibles or retentions.
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 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 cash
bond of $1,600,000, which was previously included in Other Long Term Assets and posted as security for a
subsequent appeal, was returned to the Company in May 2018. This case was finally settled and closed on August
7, 2018.
In March 2017, a putative class action case was re-filed against the Company and other parties in Missouri
state court after the predecessor case was dismissed without prejudice by the federal court. The Company
successfully removed the case to federal court and is currently vigorously defending the case.
The Company has in place commercial general liability insurance policies that cover most Claims, which
are subject to deductibles or retentions, ranging primarily from $25,000 to $1,000,000 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 $1,000,000, 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 as of December 31, 2018 is estimated to not exceed approximately $1,700,000, which
represents the potential costs that may be incurred over time for the Claims within the applicable insurance policy
deductibles or retentions. From time to time, depending upon the nature of a particular case, the Company may
decide to spend in excess of a deductible or retention to enable more discretion regarding the defense, although this
is not common. 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
-52-
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 or anticipated settlements for Claims. The liabilities recorded on the
Company’s books at December 31, 2018 and December 31, 2017 were $150,000 and $175,000, respectively, and are
included in Other Liabilities.
11. 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-Scholes method as described below. The Units follow a vesting
schedule, with a maximum vesting of three 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, 2017, the Company had 21,296 unvested units
outstanding, all of which were granted at Full Value. On February 12, 2018 and August 27, 2018, the Company
granted an additional 6,450 and 950 Full Value Units, respectively, with a fair value of $53.04 and $85.43 per unit
on grant date, again respectively, using historical volatility. In February 2018, the Company paid $664,000 for the
10,460 fully vested and matured units that were granted during 2014, including their respective earned dividend
values. As of December 31, 2018, the Company had 17,805 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 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, 2018.
The total Phantom Stock related liability as of December 31, 2018 was $1,692,000 of which $599,000 is
included in Other Liabilities, as it is expected to be paid in March 2019, and the balance of $1,093,000 is included in
Other Long Term Liabilities. At December 31, 2017, there was a Phantom Stock liability of $2,238,000, of which
$776,000 was classified in Other Liabilities, and $1,462,000 in Other Long Term Liabilities.
In accordance with FASB ASC Topic 718, Stock Compensation, the Company recorded compensation
expense of approximately $118,000, $1,042,000 and $996,000 related to the Phantom Stock Plan for the years ended
December 31, 2018, 2017 and 2016, respectively.
The following table summarizes information about the Company’s nonvested phantom stock Units at
December 31, 2018:
Units
21,296
7,400
(10,891)
---
---
17,805
17,805
Weighted Average
Grant Date Fair Value
$34.74
$57.20
$33.74
---
---
$46.08
$46.08
Number of Phantom Stock Unit Awards:
Nonvested at December 31, 2017
Granted
Vested
Forfeited
Canceled
Nonvested at December 31, 2018
Phantom Stock Unit Awards Expected to Vest
period of 1.0 years.
12. RELATED PARTY TRANSACTIONS
The total unrecognized compensation costs calculated at December 31, 2018 are $521,000 which will be
recognized through August of 2021. The Company will recognize the related expense over the weighted average
From time to time the Company may have related party transactions (“RPTs”). In short, RPTs represent
any transaction between the Company and any Company employee, director or officer, or any related entity, or
relative, etc. The Company performs a review of transactions each year to determine if any RPTs exist. Through
this investigation, the Company is currently not aware of any RPTs between the Company and any of its current
directors or officers outside the scope of their normal business functions or expected contractual duties. The
Company does on occasion share a small amount of services with its former parent Mestek, Inc., mostly related to
board meeting expenses. Additionally, the Company is aware of transactions between a few service providers which
employ individuals indirectly associated to Omega Flex employees, but these have been determined to be
independent transactions with no indication that they are influenced by the related relationships. The Company
currently also has note agreement assets with related parties amounting to approximately $5,000 and $147,000 at
-53-
-54-
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 or anticipated settlements for Claims. The liabilities recorded on the
Company’s books at December 31, 2018 and December 31, 2017 were $150,000 and $175,000, respectively, and are
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.
included in Other Liabilities.
11. 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-Scholes method as described below. The Units follow a vesting
schedule, with a maximum vesting of three 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, 2017, the Company had 21,296 unvested units
outstanding, all of which were granted at Full Value. On February 12, 2018 and August 27, 2018, the Company
granted an additional 6,450 and 950 Full Value Units, respectively, with a fair value of $53.04 and $85.43 per unit
on grant date, again respectively, using historical volatility. In February 2018, the Company paid $664,000 for the
10,460 fully vested and matured units that were granted during 2014, including their respective earned dividend
values. As of December 31, 2018, the Company had 17,805 unvested units outstanding.
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 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, 2018.
The total Phantom Stock related liability as of December 31, 2018 was $1,692,000 of which $599,000 is
included in Other Liabilities, as it is expected to be paid in March 2019, and the balance of $1,093,000 is included in
Other Long Term Liabilities. At December 31, 2017, there was a Phantom Stock liability of $2,238,000, of which
$776,000 was classified in Other Liabilities, and $1,462,000 in Other Long Term Liabilities.
In accordance with FASB ASC Topic 718, Stock Compensation, the Company recorded compensation
expense of approximately $118,000, $1,042,000 and $996,000 related to the Phantom Stock Plan for the years ended
December 31, 2018, 2017 and 2016, respectively.
The following table summarizes information about the Company’s nonvested phantom stock Units at
December 31, 2018:
Number of Phantom Stock Unit Awards:
Nonvested at December 31, 2017
Granted
Vested
Forfeited
Canceled
Nonvested at December 31, 2018
Phantom Stock Unit Awards Expected to Vest
Units
21,296
7,400
(10,891)
---
---
17,805
17,805
Weighted Average
Grant Date Fair Value
$34.74
$57.20
$33.74
---
---
$46.08
$46.08
The total unrecognized compensation costs calculated at December 31, 2018 are $521,000 which will be
recognized through August of 2021. The Company will recognize the related expense over the weighted average
period of 1.0 years.
12. RELATED PARTY TRANSACTIONS
From time to time the Company may have related party transactions (“RPTs”). In short, RPTs represent
any transaction between the Company and any Company employee, director or officer, or any related entity, or
relative, etc. The Company performs a review of transactions each year to determine if any RPTs exist. Through
this investigation, the Company is currently not aware of any RPTs between the Company and any of its current
directors or officers outside the scope of their normal business functions or expected contractual duties. The
Company does on occasion share a small amount of services with its former parent Mestek, Inc., mostly related to
board meeting expenses. Additionally, the Company is aware of transactions between a few service providers which
employ individuals indirectly associated to Omega Flex employees, but these have been determined to be
independent transactions with no indication that they are influenced by the related relationships. The Company
currently also has note agreement assets with related parties amounting to approximately $5,000 and $147,000 at
-53-
-54-
First
Year
Fourth
Second
For the Year-Ended December 31, 2018
Third
(dollars in thousands except per share data)
December 31, 2018 and December 31, 2017, respectively, which are contractually secured by the Company. In
April 2018, a majority of the amounts due from related parties was collected.
Item 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
13. SUBSEQUENT EVENTS
The Company evaluated all events or transactions that occurred through the date of this filing. During this
period, the Company did not have any material subsequent events that impacted its consolidated financial
statements.
Item 9A – CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
FINANCIAL DISCLOSURES
None
14. QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The table below sets forth selected quarterly information for each quarter of 2018 and 2017.
Net Sales
Gross Profit
$25,397
$26,847
$27,199
$28,870
$108,313
$15,033
$16,214
$16,547
$18,302
$66,096
Net Income attributable to Omega Flex, Inc.
$4,163
$4,776
$5,176
$6,024
$20,139
(b) Management’s Report on Internal Control Over Financial Reporting.
Basic and Diluted Earnings per common share
$0.41
$0.47
$0.51
$0.60
$2.00
First
For the Year-Ended December 31, 2017
Third
(dollars in thousands except per share data)
Second
Fourth
Year
Net Sales
Gross Profit
$25,607
$23,805
$24,923
$27,464
$101,799
$15,336
$14,142
$15,207
$17,081
$61,766
Net Income attributable to Omega Flex, Inc.
$4,138
$3,034
$4,014
$4,476
$15,662
Basic and Diluted Earnings per common share
$0.41
$0.30
$0.40
$0.44
$1.55
-55-
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 Exchange Act of 1934
(“Exchange Act”), as amended, as of December 31, 2018, the end of the period covered by this report on
Form 10-K. 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, 2018. 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.
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, 2018. 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, 2018 based on criteria in the
Internal Control-Integrated Framework (2013) issued by COSO.
-56-
December 31, 2018 and December 31, 2017, respectively, which are contractually secured by the Company. In
April 2018, a majority of the amounts due from related parties was collected.
Item 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
13. SUBSEQUENT EVENTS
None
The Company evaluated all events or transactions that occurred through the date of this filing. During this
period, the Company did not have any material subsequent events that impacted its consolidated financial
statements.
Item 9A – CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Net Income attributable to Omega Flex, Inc.
$4,163
$4,776
$5,176
$6,024
$20,139
(b) Management’s Report on Internal Control Over Financial Reporting.
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 Exchange Act of 1934
(“Exchange Act”), as amended, as of December 31, 2018, the end of the period covered by this report on
Form 10-K. 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, 2018. 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.
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, 2018. 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, 2018 based on criteria in the
Internal Control-Integrated Framework (2013) issued by COSO.
-56-
14. QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The table below sets forth selected quarterly information for each quarter of 2018 and 2017.
Net Sales
Gross Profit
Net Sales
Gross Profit
For the Year-Ended December 31, 2018
First
Second
Third
Fourth
Year
(dollars in thousands except per share data)
$25,397
$26,847
$27,199
$28,870
$108,313
$15,033
$16,214
$16,547
$18,302
$66,096
For the Year-Ended December 31, 2017
First
Second
Third
Fourth
Year
(dollars in thousands except per share data)
$25,607
$23,805
$24,923
$27,464
$101,799
$15,336
$14,142
$15,207
$17,081
$61,766
Basic and Diluted Earnings per common share
$0.41
$0.47
$0.51
$0.60
$2.00
Net Income attributable to Omega Flex, Inc.
$4,138
$3,034
$4,014
$4,476
$15,662
Basic and Diluted Earnings per common share
$0.41
$0.30
$0.40
$0.44
$1.55
-55-
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, 2018. RSM
US LLP’s report on the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2018 is included herein on page 34.
(d) Changes in Internal Control over Financial Reporting.
There were no changes on our internal control over financial reporting during the most
recent quarter ended December 31, 2018, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B – OTHER INFORMATION
None.
PART III
With respect to items 10 through 14, the Company will file with the Securities and Exchange Commission,
within 120 days after December 31, 2018, a definitive proxy statement relating to the Company’s annual meeting of
shareholders to be held June 11, 2019 (the “2019 Proxy Statement”).
Item 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 15 – EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
Information regarding directors of the Company will be set forth in the 2019 Proxy Statement, 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 2019 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 2019 Proxy Statement, under the caption “Board Committees”, and 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 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 required by Item 11 will be set forth in the 2019 Proxy Statement, under the caption
“Executive Compensation” and 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 required by Item 12 will be set forth in the 2019 Proxy Statement, 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.
Item 13 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information required by Item 13 will be set forth in the 2019 Proxy Statement, under the caption “Certain
Relationships and Related Party 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 required by Item 14 will be set forth in the 2019 Proxy Statement, under the caption “Principal
Accounting Fees and Services”, and to the extent required, and except as set forth therein, is incorporated herein by
reference.
PART IV
(a)
The following documents are filed as part of this Form 10-K:
Exhibits. See Index to Exhibits on pages 58 through 61.
1.
2.
page 32.
Consolidated Financial Statements. See Index to Consolidated Financial Statements on
Those documents followed by a parenthetical notation are incorporated herein by reference to previous
filings with the Securities and Exchange Commission, under Commission File No. 000-51372, as set forth below.
EXHIBIT INDEX
Exhibit
No.
**********
Description
**********
3.1
3.2
10.1
10.2
10.3
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
Reference
Key
**********
(A)
(A)
(A)
(A)
(A)
-57-
-58-
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, 2018. RSM
US LLP’s report on the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2018 is included herein on page 34.
(d) Changes in Internal Control over Financial Reporting.
There were no changes on our internal control over financial reporting during the most
recent quarter ended December 31, 2018, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B – OTHER INFORMATION
None.
PART III
With respect to items 10 through 14, the Company will file with the Securities and Exchange Commission,
within 120 days after December 31, 2018, a definitive proxy statement relating to the Company’s annual meeting of
shareholders to be held June 11, 2019 (the “2019 Proxy Statement”).
Information regarding directors of the Company will be set forth in the 2019 Proxy Statement, 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 2019 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 2019 Proxy Statement, under the caption “Board Committees”, and 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 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 required by Item 11 will be set forth in the 2019 Proxy Statement, under the caption
“Executive Compensation” and 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 required by Item 12 will be set forth in the 2019 Proxy Statement, 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.
Item 13 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information required by Item 13 will be set forth in the 2019 Proxy Statement, under the caption “Certain
Relationships and Related Party 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 required by Item 14 will be set forth in the 2019 Proxy Statement, under the caption “Principal
Accounting Fees and Services”, and to the extent required, and except as set forth therein, is incorporated herein by
reference.
PART IV
Item 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 15 – EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a)
The following documents are filed as part of this Form 10-K:
1.
2.
Exhibits. See Index to Exhibits on pages 58 through 61.
Consolidated Financial Statements. See Index to Consolidated Financial Statements on
page 32.
Those documents followed by a parenthetical notation are incorporated herein by reference to previous
filings with the Securities and Exchange Commission, under Commission File No. 000-51372, as set forth below.
EXHIBIT INDEX
Exhibit
No.
**********
3.1
3.2
10.1
10.2
10.3
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
Reference
Key
**********
(A)
(A)
(A)
(A)
(A)
-57-
-58-
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
* 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 1, 2017 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., (as successor
in interest to Sovereign Bank, N.A.)
Third Amendment dated December 1, 2017 to the Loan and Security Agreement
between Omega Flex, Inc. and Santander Bank, N.A., (as successor in interest to
Sovereign Bank, N.A.)
* Executive Salary Continuation Agreement
*
*
*
*
*
Phantom Stock Plan dated December 11, 2006.
First Amendment to the Omega Flex, Inc. 2006 Phantom Stock Plan
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, 2018.
Form of Non-Employee Director Restricted Stock Unit Award Agreement
entered into between Omega Flex, Inc. and certain non-employee directors, as set
forth in the attached schedule.
(C)
(G)
(C)
(G)
(I)
(E)
(F)
(H)
(I)
(B)
(D)
(E)
(D)
**
(J)
*
Schedule of Non-Employee Director Restricted Stock Unit Award Agreements
10.19
between Omega Flex, Inc. and certain non-employee directors as of December
31, 2018.
List of Subsidiaries
Consent of RSM US LLP
Certification of Chief Executive Officer of Omega Flex, Inc. pursuant to Rule
15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended
Certification of Chief Financial Officer of Omega Flex, Inc. pursuant to Rule
15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended
Certification of Chief Executive Officer and Chief Financial Officer of Omega
Flex, Inc. pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906
***
of the Sarbanes-Oxley Act of 2002
101.1NS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Reference Key
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
(J)
**
**
**
**
(K)
(K)
(K)
(K)
(K)
(K)
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.
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 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.
Filed as an Exhibit to the Current Report on Form 8-K filed December 5, 2017.
Filed as an Exhibit to the Registration Statement on Form S-8 filed December 12, 2018.
21.1
23.1
31.1
31.2
32.1
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
(J)
-59-
-60-
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.13
10.14
10.15
10.16
10.17
* 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 1, 2017 by Omega Flex, Inc. to Santander Bank, N.A. in the principal
(I)
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.
10.11
Agreement between Omega Flex, Inc. and Santander Bank, N.A., (as successor
(H)
Second Amendment dated December 29, 2014 to the Loan and Security
in interest to Sovereign Bank, N.A.)
10.12
between Omega Flex, Inc. and Santander Bank, N.A., (as successor in interest to
(I)
Third Amendment dated December 1, 2017 to the Loan and Security Agreement
Sovereign Bank, N.A.)
* Executive Salary Continuation Agreement
Phantom Stock Plan dated December 11, 2006.
*
*
*
First Amendment to the Omega Flex, Inc. 2006 Phantom Stock Plan
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, 2018.
*
Form of Non-Employee Director Restricted Stock Unit Award Agreement
10.18
entered into between Omega Flex, Inc. and certain non-employee directors, as set
(J)
forth in the attached schedule.
(C)
(G)
(C)
(G)
(E)
(F)
(B)
(D)
(E)
(D)
**
10.19
21.1
23.1
31.1
31.2
32.1
*
Schedule of Non-Employee Director Restricted Stock Unit Award Agreements
between Omega Flex, Inc. and certain non-employee directors as of December
31, 2018.
List of Subsidiaries
Consent of RSM US LLP
Certification of Chief Executive Officer of Omega Flex, Inc. pursuant to Rule
15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended
Certification of Chief Financial Officer of Omega Flex, Inc. pursuant to Rule
15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended
Certification of Chief Executive Officer and Chief Financial Officer of Omega
Flex, Inc. pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
101.1NS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Reference Key
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
(J)
**
**
**
**
***
(K)
(K)
(K)
(K)
(K)
(K)
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
(J)
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.
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 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.
Filed as an Exhibit to the Current Report on Form 8-K filed December 5, 2017.
Filed as an Exhibit to the Registration Statement on Form S-8 filed December 12, 2018.
-59-
-60-
(K)
*
**
***
Attached as Exhibit 101 to this report are the following documents formatted in XBRL
(Extensible Business Reporting Language) as of and for the year ended December 31, 2018: (i)
the Consolidated Statement of Operations, (ii) the Consolidated Balance Sheet, (ii) the
Consolidated Statement of Comprehensive Income, (iv) the Consolidated Statement of
Shareholders’ Equity, (v) the Consolidated Statement of Cash Flows and (vi) Notes to the
Consolidated Financial Statements.
Management contract, compensatory plan or arrangement
Filed herewith
Furnished herewith
Item 16 – Form 10-K Summary
None.
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.
SIGNATURES
OMEGA FLEX, INC.
Date: March 11, 2019
By:
/S/ Kevin R. Hoben
Date: March 11, 2019
By:
/S/ Paul J. Kane
Kevin R. Hoben, Chairman and
Chief Executive Officer (Principal Executive Officer)
Paul J. Kane, Vice President Finance,
Chief Financial Officer (Principal Financial Officer)
Date: March 11, 2019
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 11, 2019
By:
/S/ Mark F. Albino
Date: March 11, 2019
By:
/S/ David K. Evans
Date: March 11, 2019
By:
/S/ J. Nicholas Filler
Date: March 11, 2019
By:
/S/ Derek W. Glanvill
Date: March 11, 2019
By:
/S/ Kevin R. Hoben
Date: March 11, 2019
By:
/S/ Bruce C. Klink
Date: March 11, 2019
By:
/S/ Stewart B. Reed
Mark F. Albino, Director
David K. Evans, Director
J. Nicholas Filler, Director
Derek W. Glanvill, Director
Kevin R. Hoben, Director
Bruce C. Klink, Director
Stewart B. Reed, Director
-61-
-62-
(K)
Attached as Exhibit 101 to this report are the following documents formatted in XBRL
SIGNATURES
(Extensible Business Reporting Language) as of and for the year ended December 31, 2018: (i)
the Consolidated Statement of Operations, (ii) the Consolidated Balance Sheet, (ii) the
Consolidated Statement of Comprehensive Income, (iv) the Consolidated Statement of
Shareholders’ Equity, (v) the Consolidated Statement of Cash Flows and (vi) Notes to the
Consolidated Financial Statements.
*
**
***
Filed herewith
Furnished herewith
Management contract, compensatory plan or arrangement
Item 16 – Form 10-K Summary
None.
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 11, 2019
Date: March 11, 2019
Date: March 11, 2019
By:
By:
By:
OMEGA FLEX, INC.
/S/ Kevin R. Hoben
Kevin R. Hoben, Chairman and
Chief Executive Officer (Principal Executive Officer)
/S/ Paul J. Kane
Paul J. Kane, Vice President Finance,
Chief Financial Officer (Principal Financial Officer)
/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 11, 2019
Date: March 11, 2019
Date: March 11, 2019
Date: March 11, 2019
Date: March 11, 2019
Date: March 11, 2019
Date: March 11, 2019
By:
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/ Kevin R. Hoben
Kevin R. Hoben, Director
/S/ Bruce C. Klink
Bruce C. Klink, Director
/S/ Stewart B. Reed
Stewart B. Reed, Director
-61-
-62-
Name
Sierra Omega, Inc.
Exton Ranch, LLC
Omega Flex Limited
Omega Flex Industrial Limited
EXHIBIT 21.1
Jurisdiction of
Formation
Delaware
Delaware
England
England
OMEGA FLEX, INC.
Phantom Stock Agreements
Schedule of Directors and Officers
As of December 31, 2018
EXHIBIT 10.17
Director/Officer
Type Number Grant Date Grant Price Maturity Date Vesting Schedule
LIST OF SUBSIDIARIES of OMEGA FLEX, INC.
Dean W. Rivest
Paul J. Kane
Edwin B. Moran
Steven A. Treichel
Timothy P. Scanlan
Steven Hockenberry
Robert Haines
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
1,800
1,800
1,200
1,000
1,800
1,800
1,200
1,000
1,800
1,800
1,200
1,000
2,550
2,550
2,000
1,500
1,800
1,800
1,200
1,000
710
710
475
475
475
475
02/16/2015
02/16/2016
02/14/2017
02/12/2018
02/16/2015
02/16/2016
02/14/2017
02/12/2018
02/16/2015
02/16/2016
02/14/2017
02/12/2018
02/16/2015
02/16/2016
02/14/2017
02/12/2018
02/16/2015
02/16/2016
02/14/2017
02/12/2018
02/16/2015
02/16/2016
02/14/2017
02/12/2018
02/14/2017
02/12/2018
$31.26
$33.02
$44.23
$55.60
$31.26
$33.02
$44.23
$55.60
$31.26
$33.02
$44.23
$55.60
$31.26
$33.02
$44.23
$55.60
$31.26
$33.02
$44.23
$55.60
$31.26
$33.02
$44.23
$55.60
$44.23
$55.60
02/16/2019
02/16/2020
02/14/2021
02/12/2022
02/16/2019
02/16/2020
02/14/2021
02/12/2022
02/16/2019
02/16/2020
02/14/2021
02/12/2022
02/16/2019
02/16/2020
02/14/2021
02/12/2022
02/16/2019
02/16/2020
02/14/2021
02/12/2022
02/16/2019
02/16/2020
02/14/2021
02/12/2022
02/14/2021
02/12/2022
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
3 years
3 years
OMEGA FLEX, INC.
Phantom Stock Agreements
Schedule of Directors and Officers
As of December 31, 2018
EXHIBIT 10.17
EXHIBIT 21.1
Director/Officer
Type Number Grant Date Grant Price Maturity Date Vesting Schedule
LIST OF SUBSIDIARIES of OMEGA FLEX, INC.
Name
Sierra Omega, Inc.
Exton Ranch, LLC
Omega Flex Limited
Omega Flex Industrial Limited
Jurisdiction of
Formation
Delaware
Delaware
England
England
Dean W. Rivest
Paul J. Kane
Edwin B. Moran
Steven A. Treichel
Timothy P. Scanlan
Steven Hockenberry
Robert Haines
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
Full
1,800
1,800
1,200
1,000
1,800
1,800
1,200
1,000
1,800
1,800
1,200
1,000
2,550
2,550
2,000
1,500
1,800
1,800
1,200
1,000
710
710
475
475
475
475
02/16/2015
02/16/2016
02/14/2017
02/12/2018
02/16/2015
02/16/2016
02/14/2017
02/12/2018
02/16/2015
02/16/2016
02/14/2017
02/12/2018
02/16/2015
02/16/2016
02/14/2017
02/12/2018
02/16/2015
02/16/2016
02/14/2017
02/12/2018
02/16/2015
02/16/2016
02/14/2017
02/12/2018
02/14/2017
02/12/2018
$31.26
$33.02
$44.23
$55.60
$31.26
$33.02
$44.23
$55.60
$31.26
$33.02
$44.23
$55.60
$31.26
$33.02
$44.23
$55.60
$31.26
$33.02
$44.23
$55.60
$31.26
$33.02
$44.23
$55.60
$44.23
$55.60
02/16/2019
02/16/2020
02/14/2021
02/12/2022
02/16/2019
02/16/2020
02/14/2021
02/12/2022
02/16/2019
02/16/2020
02/14/2021
02/12/2022
02/16/2019
02/16/2020
02/14/2021
02/12/2022
02/16/2019
02/16/2020
02/14/2021
02/12/2022
02/16/2019
02/16/2020
02/14/2021
02/12/2022
02/14/2021
02/12/2022
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
3 years
3 years
EXHIBIT 23.1
EXHIBIT 31.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement (No. 333-135515 and 333-228784) on
Form S-8 of Omega Flex, Inc. of our reports dated March 11, 2019, relating to the consolidated financial statements
of Omega Flex, Inc. and the effectiveness of internal control over financial reporting of Omega Flex, Inc., appearing
in the Annual Report on Form 10-K of Omega Flex, Inc. for the year ended December 31, 2018.
/s/ RSM US LLP
Blue Bell, Pennsylvania
March 11, 2019
Certification by the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Kevin R. Hoben, certify that:
Flex, Inc. (the “registrant”);
1.
I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2018, of Omega
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;
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;
(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
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
(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.
/s/ Kevin R. Hoben__________________________
Date: March 11, 2019
Kevin R. Hoben
Chief Executive Officer
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement (No. 333-135515 and 333-228784) on
Form S-8 of Omega Flex, Inc. of our reports dated March 11, 2019, relating to the consolidated financial statements
of Omega Flex, Inc. and the effectiveness of internal control over financial reporting of Omega Flex, Inc., appearing
in the Annual Report on Form 10-K of Omega Flex, Inc. for the year ended December 31, 2018.
/s/ RSM US LLP
Blue Bell, Pennsylvania
March 11, 2019
EXHIBIT 23.1
EXHIBIT 31.1
Certification by the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Kevin R. Hoben, certify that:
1.
I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2018, 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;
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:
(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
(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):
(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
role in the registrant's internal control over financial reporting.
Date: March 11, 2019
/s/ Kevin R. Hoben__________________________
Kevin R. Hoben
Chief Executive Officer
EXHIBIT 31.2
EXHIBIT 32.1
Certification by the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Paul J. Kane, certify that:
1.
I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2018, 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;
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:
(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
(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):
(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
role in the registrant's internal control over financial reporting.
Date: March 11, 2019
/s/ Paul J. Kane
Paul J. Kane
Chief Financial Officer
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, 2018, 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 11, 2019
/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 31.2
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, 2018, 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 11, 2019
/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.
Certification by the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Paul J. Kane, certify that:
Flex, Inc. (the “registrant”);
1.
I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2018, of Omega
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;
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;
(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
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
(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.
Date: March 11, 2019
/s/ Paul J. Kane
Paul J. Kane
Chief Financial Officer