Quality Engineered Flexible Metal Piping Products
“ However beautiful the strategy,
you should occasionally look at the results.”
— Winston Churchill
2020 Annual Report
2020 Historical Results: 2011 to 2020
Net Sales
Net Income
18%
20%
10%
9%
0.8%
8%
6%
3%
-5%
48%
46%
34%
17%
-9%
9%
28%
-14%
15%
CARG 7%
64.0
54.2
85.2
77.1
93.3
94.1
101.8
108.3
111.4
105.8
CARG 16%
$20.1
$19.9
$17.3
$15.8
$15.7
$14.4
$13.5
$10.0
$6.9
$4.6
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Revenue per Employee
$(’000)
Gross Margin
0.4%
25.6%
3.4%
16.1%
-7.6%
9.6%
0.2%
2.7%
-12.0%
0.6%
5.6%
8.1%
4.4%
0.3%
-1.3%
0.5%
3.8%
5.1%
CARG 3%
$707
$653
$589
$609
$467
$469
$716
$717
$737
CARG 2.1%
$645
58.7%
54.3%
51.1%
51.4%
61.3%
61.5%
60.7%
61.0%
63.3%
62.9%
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
YOY GROWTH
2020 Manufacturer of flexible metal hose and gas piping products
April 28, 2021
Dear Shareholders,
Certainly no one could have predicted the challenges presented in 2020 with the Covid-19
pandemic. In the fourth quarter of the preceding year (which in this case would’ve been 2019), the
company conducted an extensive analysis of its business position, strategies, and objectives to compile a
business plan to which we operate throughout the following year. Typically, these plans are reviewed
quarterly to ensure that strategies are being properly implemented and objectives are being met. When
the impact and import of the pandemic was felt with full force in the March and April 2020 timeframe,
we quickly began to re-evaluate our business plan laid with so much care the prior year. It called to mind
a famous quote of Winston Churchill, “However beautiful the strategy, you should occasionally look at
the results.”
Yes, our business strategy for 2020 looked beautiful in October 2019, but as we confronted the
reality of the pandemic, we along with most of the world felt as though we were on the Titanic sailing
toward an iceberg. We navigated our way through March and April 2020 by exercising extreme controls
over the business, such as preserving cash and dramatically reducing labor hours in our factories.
Fortunately, OmegaFlex was designated an essential business, allowing us to operate without closing, but
with new restrictions in our factories and offices to protect the health and safety of our employees and
customers. Incoming orders began recovering dramatically in May and soon we were tracking at or above
our original plan levels. We took extraordinary steps to protect our employees requiring most of the office
personnel to work from home. The factory was sanitized twice daily to minimize risk of spreading the
virus. The employees exceeded all of our expectations as product demand necessitated that we go to
double shifts six days a week, a schedule that we have maintained throughout 2020 and now in to 2021.
By mid-2020, all divisions of OmegaFlex, including our UK subsidiary, were operating significant at or
close to plan levels. Our newest product and division, MediTrac® was given a significant boost by the
pandemic. Working in conjunction with the US Army Corps of Engineers, MediTrac® was selected for
a number of field hospitals for its ease of use and speed of installation. Most notably MediTrac® was
installed in the New York City Central Park field hospital as well as the improvised hospital in the Javits
Center. These installations demonstrated the safety and utility of MediTrac®, as well as enabling the
Army Corps of Engineers to get these hospitals operational in record time.
As most of you have seen the financial results for the year, we did not quite achieve the original
sales goals in the plan but actually exceeded our plan for earnings. We did avoid the iceberg and learned
many valuable lessons throughout the course of 2020, which have helped make a OmegaFlex a stronger
and more resilient company. In bringing a close to the year 2020, I salute our incredible, dedicated
employees who without there extraordinary commitment we could not have succeeded.
Sincerely,
Kevin R. Hoben
Chairman & CEO
OMEGA FLEX, Inc., Corporate Office, 213 Court Street, Suite 1001, Middletown, CT 06457 Tel: 860-704-6820 • Fax: 860-704-6830
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, 2020
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________________ to ______________________
Commission File Number
000-51372
Omega Flex, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of
incorporation or organization)
451 Creamery Way, Exton, PA
(Address of principal executive offices)
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common
Trading Symbol
OFLX
Securities registered pursuant to section 12(g) of the Act:
Not applicable
(Title of class)
23-1948942
(I.R.S. Employer
Identification No.)
19341
(Zip Code)
610-524-7272
Name of each exchange on which registered
NASDAQ Global Market
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 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 [ ]
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 [ ]
-1-
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C 7262(b)) by the registered public accounting
firm that prepared or issued its audit report [X]
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, 2020, the last business
day of the second quarter of 2020, was $304,424,053.
The number of shares of common stock outstanding as of March 1, 2021 was 10,094,322.
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 no later than 120 days after the year ended December 31, 2020, or April 30, 2021) for the 2021 annual
meeting of shareholders.
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Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Omega Flex, Inc.
TABLE OF CONTENTS
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
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Item 1 - BUSINESS
PART I
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
The Company’s business is controlled as a single operating segment that consists of the manufacture and
sale of flexible metal hose (also described as corrugated tubing), as well as the sale of the Company’s related
proprietary fittings and a vast array of accessories.
The Company is a leading manufacturer of flexible metal hose, which is used in a variety of ways to carry
gases and liquids within their particular applications. Some of the more prominent uses include:
•
•
•
•
carrying fuel gases within residential and commercial buildings;
carrying gasoline and diesel gasoline products (both above and below the ground) in a double containment
piping to contain any possible leaks, which is used in automotive and marina refueling, and fueling for
back-up generation;
using copper-alloy corrugated piping in medical or health care facilities to carry medical gases (oxygen,
nitrogen, vacuum) or pure gases for pharmaceutical applications; and
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, and Houston, Texas
in the United States (U.S.), and in Banbury, Oxfordshire in the United Kingdom (U.K.), and primarily sells its
products through distributors, wholesalers and to original equipment manufacturers (“OEMs”) throughout North
America and Europe, and to a lesser extent other global markets.
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Industry Overview
The flexible metal hose industry is highly fragmented and diverse, with more than 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
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
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 U.S., 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.
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 foreign subsidiaries located in the U.K., 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.
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Overview of Current Business
Strategy
The Company’s strategy has been and continues to be focused on its core strengths in the development,
manufacture, and sale of flexible metal hose for use in a variety of applications. The Company is uniquely situated
to exploit its capabilities in this area due to its long experience in engineering and bringing new products to market,
and its proprietary rotary process, which permits the Company to manufacture flexible metal hose with superior
quality and efficiency as compared to its competitors. The Company’s strategy is to develop flexible metal products
in new and developing markets that would recognize and compensate for the value-added propositions that each
product brings to that industry. Typically, this would involve a new flexible metal hose that replaces traditional
rigid products, and thereby improve the quality of the installed product, increase installation efficiency, and provide
an overall cost and time savings. Examples of such new products would be our flexible gas piping sold under the
TracPipe ® CounterStrike® trademarks, our new MediTrac® corrugated medical gas tubing, and our DoubleTrac®
double-containment piping. In each instance, the products we bring to market offers customers superior quality,
expanded applications due to the product’s flexibility, and reduced total costs. The Company seeks to protect its
investments in product develop by seeking and obtaining patent protection for new and unique features of its
products.
Products
The Company’s business is managed as a single operating segment that consists of the manufacture and
sale of flexible metal hose, fittings 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.
As previously mentioned, in 2004, the Company 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 U.S. 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
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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, the Company 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 U.S.. 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 liquid 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 U.S. for metallic
underground fuel piping, ULc S667 which is the product standard in Canada 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.
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). 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 U.S.. 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 U.S. 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. The AutoSnap® fitting now commands a significant portion of the Company’s fittings
demand.
In 2019, the Company commercialized MediTrac®, corrugated medical tubing (“CMT”), following its 2018
launch with several beta sites. 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
gases (oxygen, nitrogen, carbon dioxide, etc.). Made from a copper alloy with an exterior fire-retardant jacket,
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MediTrac® is made and sold in long continuous-length rolls. MediTrac’s flexible nature and storage in rolls allows
it to be transported to and installed in health care facilities much more easily and quickly than traditional medical
grade rigid copper pipe, which comes in 20 foot long sections. MediTrac® is unrolled from a spool and installed in a
medical facility in one long continuous length, and is bent by hand when a change in direction is needed. The long
lengths and ability to change direction with ease eliminates labor that would otherwise be needed to braze
connections to straight sections of copper pipe or elbows or tees for changes in direction, while increasing
installation efficiency and operational safety and minimizing downtime for healthcare facilities. 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). Rated for 185 psig, MediTrac® can deliver the necessary volume of gas wherever it is needed across
a facility. A recent case study comparing the installation of rigid copper pipe and MediTrac® showed that
MediTrac® increases installation efficiency by a factor of five (i.e., a 500% increase in efficiency). By reducing the
number of joints and brazed connections, MediTrac® also reduces possible contamination into the medical gas
system along with the fire risk associated with brazing. 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).
In 2020, the MediTrac® product line experienced significant growth in use and acceptance in the
marketplace resulting from its ability to be quickly and safely installed to meet the unprecedented crisis caused by
the COVID-19 pandemic. Numerous medical institutions and emergency medical centers used MediTrac® CMT to
quickly install medical gas lines in tent hospitals or in converted facilities to handle the surging demand. For
example, MediTrac® medical gas piping was installed in a NYC temporary hospital located in Central Park and in
the Cleveland Clinic for patients with COVID-19 infections and in need of supplemental oxygen treatments. On
September 25, 2020, the Centers for Medicare & Medicaid Services (CMS) issued a waiver allowing the use of
CMT in new and existing healthcare facilities based on the provisions in NFPA 99 – 2018, allowing MediTrac®
to be installed in all facilities in the U.S.
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
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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 profit 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 2020,
the commodity prices of nickel and copper were higher compared to last year. Nickel is a prime material in stainless
steel which the Company utilizes to manufacture CSST, and copper is a key component of the Company’s brass
fittings and our MediTrac® CMT. Fortunately, the Company was able to maintain reasonably stable margins during
2020. This was partially accomplished by implementing our own pricing actions to help offset the upward
movements in the respective material markets. 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.
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 close to 9,800 customers on record. These sales channels include sales through
independent sales representatives, distributors, OEM, 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, whose various branches had sales in the range of 13% to 14% of total sales during the
periods of 2018 to 2020, and was in the range of 18% to 24% of the Company’s 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
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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 U.S. and Canada, and we also sell our products
internationally, primarily in Europe through our manufacturing facility located in Banbury, U.K. 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 U.K. and elsewhere in Europe. We do not have a material portion of our long-lived assets
located outside of the U.S.
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 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 10 manufacturers of flexible metal hose in the U.S., and approximately that
number in Europe and Asia. The U.S. manufacturers include Titeflex Corporation, Ward Manufacturing, Microflex,
United Flexible, 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 2020, 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 U.S. 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
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due to 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 217 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®, (d) a tubing containment
system for our DoubleTrac® double containment piping, and (e) fittings for use with our MediTrac® corrugated
medical tubing. Our AutoSnap® fitting is a prominently used product with flexible gas piping because it offers a
metal-to-metal seal between the fitting and the tubing, and because of its 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 U.S. 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 patent covering the
Counterstrike® patent will expire in 2025. We currently have several patent applications pending in the U.S. and
internationally covering improvements to our AutoFlare® fittings and our CounterStrike® polyethylene jacket, and
also have a patent pending on our MediTrac® fitting. Finally, and as mentioned above, our unique rotary process for
manufacturing flexible metal hose has been developed over a number of years, and constitutes a valuable trade
secret. In 2007, a Pennsylvania court issued a ruling that confirms our proprietary rotary manufacturing process
does constitute a “trade secret” under Pennsylvania law, and is entitled to protection against unauthorized disclosure
or misappropriation.
Government Regulations including Environmental
The Company believes that its businesses and operations, including its manufacturing plants and
equipment, are in substantial compliance with all applicable government laws and regulations, including those
related to environmental, consumer protection, international trade, labor and employment, human rights, tax, anti-
bribery and competition matters. Any additional measures to maintain compliance are not expected to materially
affect the Company's capital expenditures (including expenditures for environmental control facilities), competitive
position, financial position or results of operations.
Various legislative and administrative regulations applicable to the Company in the matters noted above
have become effective or are under consideration in many parts of the world. To date, such developments have not
had a substantial adverse impact on the Company. However, if new or amended laws or regulations impose
significant operational restrictions and compliance requirements upon the Company or its products, the Company's
business, capital expenditures, results of operations, financial condition and competitive position could be negatively
impacted. Refer to Item 1A. Risk Factors for further information.
Human Capital
We believe that our employees are the foundation of the innovative ideas necessary for the advancement of
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our products, and success of our Company. Our employees are the conduits to successful relationships with our
customers, vendors and various business partners, as well as the custodians of a safe and efficient operation of our
assets ending with a highly satisfied customer. The Company fosters a collaborative, inclusive, and safety-minded
work environment, with a focus on ingenuity. We seek to identify the most highly qualified talent for our organization,
enabling us to execute on our strategic objectives of providing the most innovative and technologically advanced
flexible metal hose products in the market. To attract and retain employees, the Company offers competitive wages
across all levels, and maintains a superior package of employee benefits, including medical insurance, life insurance,
and retirement and savings programs, for all employees, as well as executive compensation plans as described in our
proxy statement.
As of December 31, 2020, the Company had 164 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 number of employees work at our facility in Houston, Texas. We also maintain an
office in Middletown, Connecticut where certain management, sales and administrative personnel are assigned. A
number of individual sales personnel are also scattered across the U.S.. We also maintain a manufacturing facility in
Banbury, U.K., which contains employees of similar functions to those in the U.S., but on a much smaller scale,
including a small presence in France. The sales personnel in England and France handle all sales and service for our
products in Europe, most notably the U.K., and the majority of our transactions with other international territories.
We are committed to fostering a work environment in which all employees treat each other with dignity
and respect. This commitment extends to providing equal employment and advancement opportunities based on
merit and experience. We continually strive to attract a diverse workforce by partnering with local organizations to
identify potential candidates to advance and strengthen our human capital management program.
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 the Company’s various 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 – Sales and Competition
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
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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, loss of our key personnel involved in the flexible gas piping product line, increases in commodity prices,
particularly in stainless steel and polyethylene – could damage our business, competitive position, results of
operations or financial condition.
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 U.S., 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.
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. 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 U.S. 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.
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
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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.
Our business may be subject to the impact of Brexit.
The Company’s main operating subsidiary, Omega Flex Limited, is headquartered in Banbury, England in
the U.K. The result of the referendum held by the U.K. to withdraw from the European Union (“Brexit”) had
created a level of uncertainty regarding the final terms of that withdrawal for a number of years, until an agreement
was reached on December 24, 2020 by the U.K. and the European Union. While an agreement was reached,
uncertainty still exists, and adherence to the new rules regarding border and customs controls could increase costs on
materials imported into the U.K. and finished goods exported from the U.K. 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 U.K., into the European Union,
Africa, and the Near East. Most of the business of Omega Flex Limited is domestic, and should therefore not be
unduly disrupted. However, the macroeconomic effects of Brexit on the economies of the U.K. and the European
Union remain partially 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 gross profits, as most of the raw materials and supplies used to manufacture our products are sourced
domestically in the U.S.. 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.
Risk Relating to Our Business – Manufacturing and Operations
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, England in the
U.K. 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.
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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
and stainless steel 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, which could damage our business, competitive position, results of operations or financial
condition.
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.
Risk Relating to Our Business – Legal
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 generally declined over the last
several years. 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.
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.
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In the past, the Company has needed to protect itself and resort to legal action, in one instance regarding a
trade secret, and other instances where we sued flexible gas pipe competitors for infringement on one or more of
our U.S. patents covering our various piping and/or fitting products. In each instance, 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, which would damage our business, competitive position, results of
operations or financial condition.
Risk Relating to Our Business – General and Macroeconomic
Our business may be subject to the supply and availability of fuel gas supplies and infrastructure.
With increasing debate on the effect of human activities on climate change, there has been a focus on
transitioning energy and heating in buildings away from fossil fuels, such as natural gas and liquid propane. Several
municipalities in the U.S. have announced policy decisions to move away from fossil fuel applications in the future,
including prohibiting the new installation of appliances fueled by natural gas or liquid propane. Although there are
significant technical and economic hurdles, it is possible that a large scale movement, in individual cities and states
or on a federal level, away from fossil fuels may increase in the future. Such moves could reduce the demand for
our flexible gas piping products that carry natural gas or liquid propane from the building’s meter to the gas-fired
appliance, which represent a major part of the company's sales and net profits. As a result, it is possible in the future
that proposals to limit or eliminate the use of fossil fuels could adversely impact the financial results of the
company, perhaps materially.
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 U.S. 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 limited to
those areas that have natural gas transmission lines available for use in residences and commercial buildings.
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, Line of Credit, to the Consolidated Financial Statements included in this
report. 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 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. The U.K.’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. Currently, the Federal Reserve Bank is considering options and
transitioning away from LIBOR, and as such, has formed the Alternative Rates Committee (ARRC). The ARRC
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selected the Secured Overnight Financing Rate (SOFR) as an appropriate replacement. SOFR is based on
transactions in the overnight repurchase markets, which reflects a transaction-based rate on a large number of
transactions, better reflecting current financing costs. If LIBOR ceases to exist or if the methods of calculating
LIBOR change from their current form, or if new methods are implemented such as SOFR, 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.
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 are currently low, there is no guarantee that will
remain the case in the future. 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, which could damage our business, competitive position, results of operations
or financial condition.
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 U.S. or abroad, the demand for our products in such applications may decrease as well,
which could damage our business, competitive position, results of operations or financial condition.
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 U.S. 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 could impact its market price.
At December 31, 2020, 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
presides as Vice Chairman. Mr. Hoben and Mr. Albino also serve on the Board of Directors, with Mr. Hoben being
the Chairman of the Board, and both are officers of the Company. This concentration of ownership may have the
effect of reducing the volume of trading of the common stock on the NASDAQ. A decrease in trading volume 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, or inversely could drive the common stock price higher when demand
exceeds supply.
-17-
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.
Our business may be subject to the impact of currency volatility.
The Company has operations in the U.K., and does business transactions elsewhere in the world outside of
the U.S.. While the magnitude of these transactions outside of the U.S. have thus far not been significant, and
typically not in currencies of high volatility, it is possible that they could be material. Events such as Brexit, as
described below, or other instances of political and economic turmoil or uncertainty, could create a weakened
British Pound (“BP”) in comparison to other currencies. A weakened BP would in turn have a direct negative
impact on the Company’s financial statements, as we would experience losses when settling transactions in other
currencies, and experience unfavorable results due to the translation of financial statements with a lower exchange
rate. During 2019 and 2020 there was not any notable impact due to currency volatility on the financial statements,
but going forward, it is possible that the BP, other currencies that we engage in, or even the U.S. Dollar may
weaken, and materially impact the financial position, operations and liquidity of the Company.
A cyber attack or other computer system breach could harm us.
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.
The COVID-19 pandemic has begun to affect and may continue to affect the business.
The ongoing global outbreak of coronavirus, which was declared a pandemic by the World Health
Organization on March 11, 2020 and a national emergency by the President of the United States on March 13, 2020,
has caused and is continuing to cause business slowdowns and shutdowns and turmoil in the financial markets both
in the United States and abroad. The Company is monitoring the impact of the COVID-19 pandemic on its business,
including how it has impacted and will impact the Company’s employees, customers, suppliers and distribution
channels. The COVID-19 pandemic, as well as the quarantines and other governmental and non-governmental
restrictions that have been imposed throughout the world in an effort to contain or mitigate the spread of the
coronavirus, has created significant volatility, uncertainty and economic disruption which has begun to affect and
may continue to affect the Company’s business. For example, governmental authorities in several jurisdictions have
ordered the cessation of all business activity that is deemed non-essential and, although the Company’s business has
to date been deemed essential in many affected markets, there is a risk that these shutdown orders will be extended
or expanded or that similar shutdown orders will be implemented in other regions.
The Company is currently navigating through this unprecedented crisis without any government support
from the U.S. Small Business Administration’s Paycheck Protection Program (“PPP”), and the nature and magnitude
of the COVID-19 pandemic’s ultimate impact on the Company will depend on numerous evolving factors, future
developments and cascading effects of the coronavirus pandemic that the Company is not able to predict, including:
the duration and severity of the COVID-19 pandemic and the international actions and business restrictions that are
being undertaken and implemented as a result of it; governmental, business and other responses to the COVID-19
pandemic, including the promotion of “social distancing,” the issuance of shelter in place orders and restrictions on
the Company’s operations, and the possibility that government officials may mandate that the Company provide
products or services; potential disruptions in the Company’s supply chain; the impact of the COVID-19 pandemic
-18-
on the Company’s ability to execute its short-term and long-term business strategies and initiatives; the extent to
which forced remote working arrangements reduce the Company’s ability to manage its business effectively; the
extent to which staffing shortages due to members of the Company’s workforce being quarantined or exposed to the
coronavirus may be detrimental to the Company’s operations; and the Company’s ability to maintain current levels
of skilled headcount without the proceeds of a loan under the PPP (a “PPP Loan”) as a source of additional liquidity.
Furthermore, while the Company timely returned the proceeds of a PPP Loan that it initially received out of an
abundance of caution in reliance on U.S. Treasury Department and Small Business Administration guidance that
companies were able to do so without penalty, as the COVID-19 pandemic unfolds, federal or state governments
(including government agencies such as the Treasury Department, the Small Business Administration or the
Securities and Exchange Commission) could promulgate new statutes, regulations, guidance or relief measures, or
rescind or modify existing statutes, regulations, guidance or relief measures, in a way that is detrimental to the
Company or its business, including as a result of the Company’s prior application for a loan under the PPP.
In addition, while the Company cannot predict the magnitude of the impact that the COVID-19 pandemic
will have on its customers and suppliers or their financial conditions, any material effect on the Company’s
customers or suppliers could adversely impact the Company. For example, the Company’s customers or suppliers
may themselves assert, or attempt to terminate various agreements and arrangements with us on the basis of,
contractual force majeure provisions, and any termination of a significant commercial agreement may adversely
harm our operations. Additionally, the COVID-19 pandemic and related travel restrictions and other containment
efforts have had a significant impact on the travel industry, which may result in reduced demand for products. The
impact of the COVID-19 pandemic may also exacerbate other risk factors in this Item 1A, any of which could have
a material effect on the Company. For example, the risks associated with potential cybersecurity threats may be
magnified given the increase in the number of Company employees working remotely using personal electronic
devices and home internet connections.
The extent of the impact of the COVID-19 pandemic on the Company’s business is highly uncertain and
difficult to predict, as information is rapidly evolving with respect to the duration and severity of the COVID-19
pandemic. At this point, the Company cannot reasonably estimate the duration and severity of the COVID-19
pandemic or its overall impact on the Company’s business.
Various other general and macroeconomic issues may impact the business
Conflicts, wars, natural disasters, infectious disease outbreaks (see Pandemic above) or terrorist acts could
also cause significant damage or disruption to our operations, employees, facilities, systems, suppliers, supply chain,
distributors, resellers or customers in the U.S. and internationally for extended periods of time and could also affect
demand for our products.
Item 1B – UNRESOLVED STAFF COMMENTS
None.
Item 2 - PROPERTIES
The Company utilizes two facilities in Exton, Pennsylvania, which is located approximately 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 majority of the manufacturing of our flexible metal hose is performed at the Exton
facilities. Also within the U.S., 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 U.K., the Company
rents a facility in Banbury, England, which manufactures products and serves sales, warehousing and operational
functions as well.
-19-
Item 3 - LEGAL PROCEEDINGS
See legal proceedings disclosure in Note 10, Commitments and Contingencies, to the Consolidated
Financial Statements included in this report.
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, 2020, based on inquiries of the registrant’s transfer agent, was 332. 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 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, 2015, and shows the cumulative changes over the last five years, ended on December 31, 2020. The
graph assumes $100 was invested on December 31, in each of the three alternatives, and that all dividends have been
reinvested.
-20-
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Omega Flex, Inc., the S&P 500 Index
and the S&P Building Products Index
$600
$500
$400
$300
$200
$100
$0
12/15
12/16
12/17
12/18
12/19
12/20
Omega Flex, Inc.
S&P 500
S&P Building Products
*$100 invested on 12/31/15 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2021 Standard & Poor's, a division of S&P Global. All rights reserved.
Company / Index
Omega Flex, Inc.
S&P 500
S&P Building Products
Dividends
Base
Period
12/31/15
Indexed Returns – Year Ending
12/15
12/16
12/17
12/18
12/19
12/20
100.00
100.00
100.00
117.46
111.96
107.35
221.72
136.40
119.61
170.36
130.42
90.45
352.69
171.49
134.15
484.50
203.04
170.27
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 December 2019 and
January 2017. Further details regarding dividends are contained in Note 6, Shareholders’ Equity to the Consolidated
Financial Statements included in this report.
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.
-21-
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,
2020
2019
2018
(dollars in thousands except per share data)
2017
2016
Total Assets
Working Capital
Total Shareholders’ Equity
Cash Dividends Declared per Common Share
$71,571
$35,486
$46,377
$1.12
$60,984
$25,836
$37,576
$4.58
$86,836
$55,217
$66,321
$0.94
$77,091
$45,372
$56,069
$0.66
$70,562
$36,941
$46,061
$0.85
SUMMARY OF OPERATIONS - for the years ended December 31,
2020
2019
2018
(dollars in thousands except per share data)
2017
2016
Net Sales
Net Income attributable to Omega Flex, Inc. (1)
Basic and Diluted Earnings per Common Share
$105,796
$19,910
$1.97
$111,360
$17,286
$1.71
$108,313
$20,139
$2.00
$101,799
$15,662
$1.55
$94,051
$14,377
$1.42
(1) Total Net Income for these periods was $19,967, $17,425, $20,277, $15,846, and $14,546,
respectively. The difference is attributable to the Net Income - Noncontrolling Interest.
Item 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements, which are subject to inherent uncertainties. These
uncertainties include, but are not limited to, variations in weather, changes in the regulatory environment, customer
preferences, general economic conditions, increased competition, the outcome of outstanding litigation, and future
developments affecting environmental matters. All of these are difficult to predict, and many are beyond the ability
of the Company to control.
Certain statements in this Annual Report on Form 10-K that are not historical facts, but rather reflect the
Company’s current expectations concerning future results and events, constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. The words “believes”, “expects”, “intends”,
“plans”, “anticipates”, “hopes”, “likely”, “will”, and similar expressions identify such forward-looking
statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important
factors that could cause the actual results, performance or achievements of the Company, or industry results, to
differ materially from future results, performance or achievements expressed or implied by such forward-looking
statements.
Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect
management’s view only as of the date of this Form 10-K. The Company undertakes no obligation to update the
result of any revisions to these forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events, conditions or circumstances.
OVERVIEW
The 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.
-22-
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 and Houston, Texas facilities in the U.S., and in
Banbury, Oxfordshire in the UK. 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 $23,633,000 at December 31, 2020 increased $7,535,000 (46.8%) from a
$16,098,000 balance at December 31, 2019. The primary reason for the increase in cash related to income generated
from operations during 2020. This was partially offset by dividend payments during 2020 totaling $11,306,000, as
detailed in Note 6, Shareholders’ Equity, to the Consolidated Financial Statements included in this report. Further,
the Company used funds for the purchase of inventory in anticipation of stronger customer demand. See the
Company’s Consolidated Cash Flow Statement for further details regarding the change in cash.
Accounts receivable were $20,077,000 and $17,047,000 as of December 31, 2020 and December 31, 2019,
respectively, increasing $3,030,000 or 17.8%. The increase was largely related to the increase in sales over the last
several months of 2020 in comparison to 2019, thus increasing the amounts to be collected within terms.
Retained earnings were $35,769,000 and $27,165,000 at December 31, 2020 and December 31, 2019,
respectively, increasing $8,604,000 or 31.7%. The increase was primarily due to an increase in net income during
the year, as provided on the Company’s Consolidated Statement of Operations, partially offset by dividend
payments made during 2020, as discussed in detail in Note 6, Shareholders’ Equity, to the Consolidated Financial
Statements included in this report.
Twelve-months ended December 31, 2020 vs. twelve months ended December 31, 2019
RESULTS OF OPERATIONS
The Company reported comparative results from operations for the twelve-month periods ended December
31, 2020 and 2019 as follows:
Net Sales
Gross Profit
Operating Profit
Twelve-months ended December 31,
(dollars in thousands)
2020
2020
2019
2019
$ 105,796
66,550
$
26,653
$
100.0%
62.9%
25.2%
$ 111,360
$ 70,487
$ 21,922
100.0%
63.3%
19.7%
-23-
Net Sales. The Company’s sales for the full year of 2020 were $105,796,000, reflecting a decrease of
$5,564,000, or 5.0%, compared to $111,360,000 in 2019. The decrease in sales resulted mostly from a decrease in
unit volume, which was in some measure impacted by the COVID-19 pandemic, partially offset by a mild increase
to selling prices that was necessary to help offset a rise in material commodity costs.
Gross Profit. The Company’s gross profit margins were 62.9% and 63.3% for the twelve-months ended
December 31, 2020 and 2019, respectively. The Company was able to maintain margins similar to prior year levels
despite COVID-19 disruptions, such as increased costs to sanitize the factory and equipment, inefficiencies from
staggered work shifts and overtime costs due to employees being quarantined, as well as unabsorbed overhead.
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 $16,580,000 and $19,032,000 for 2020 and 2019, respectively, representing a
decrease of $2,452,000, or 12.9%. The most significant reduction relates to atypical consulting costs identified
during 2019, attributable to the Company’s new product, MediTrac® flexible medical gas piping. The Company
also experienced decreases in travel and advertising during 2020, mostly related to restrictions stemming from the
pandemic. Commissions were also down due to the decrease in sales. Conversely, the Company expanded its sales
related staffing resources. For the same periods, selling expense as a percentage of net sales was 15.7% and 17.1%,
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 $19,117,000 and $24,818,000 for the
years ended December 31, 2020 and 2019, respectively, decreasing $5,701,000, or 23% between periods. Legal and
product liability defense costs decreased $5,158,000, associated primarily with one class action case which was
dismissed during 2020, as explained in detail in Note 10, Commitments and Contingencies, of the Consolidated
Financial Statements to this report. Professional fees and director related fees were also lower. Those items were
softened by an increase to incentive compensation, which although not significant in total, was derived from two
notable yet mostly offsetting components. There was an increase in the incentive compensation component which is
aligned with profitability; however, there was a reduction in expense pertaining to equity awards which move in
relation to the Company’s stock price, as detailed in Note 11, Stock Based Compensation Plans. As a percentage of
net sales, general and administrative expenses were 18.1% and 22.3% for the twelve-months ended December 31,
2020 and 2019, 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 decreased $515,000 or 10.9% between periods, being $4,200,000 and $4,715,000 for the years
ended December 31, 2020 and 2019, respectively. The decrease was primarily attributable to a reduction in
experimental materials that diminished after the work was completed on various promising applications during
2019, and to a lesser extent travel. As a percentage of net sales for the year, engineering expenses were 4.0% in
2020 and 4.2% in 2019.
Operating Profit. Reflecting all of the factors mentioned above, operating profits increased $4,731,000, or
21.6%, between periods, reflecting a profit of $26,653,000 in 2020, as compared to $21,922,000 in 2019.
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. The Company recorded interest expense of
$39,000 for 2020, compared to interest income of $876,000 for 2019. The reduction in interest income was largely
due to the lower cash balance and thus reduced investment, mostly resulting from the $35,330,000 special dividend
paid in December 2019. Additionally, the Company had borrowed $15,000,000 on its line of credit for a portion of
the second quarter of 2020 to ensure liquidity during the COVID-19 crisis. Earning potential on short-term liquid
investments has also diminished in comparison to this time last year.
-24-
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 $53,000 during 2020 and other income
of $56,000 during 2019.
Income Tax Expense. Income tax expense was $6,594,000 for 2020, compared to $5,429,000 for 2019.
The $1,165,000 or 21.5% increase in tax expense was largely the result of the increase in income before taxes. The
effective tax rate for both periods was similar at approximately 24% to 25% of income before taxes.
Twelve-months ended December 31, 2019 vs. twelve months ended December 31, 2018
The Company reported comparative results from operations for the twelve-month periods ended December
31, 2019 and 2018 as follows:
Net Sales
Gross Profit
Operating Profit
Twelve-months ended December 31,
(dollars in thousands)
2019
2019
2018
2018
$ 111,360
70,487
$
21,922
$
100.0%
63.3%
19.7%
$ 108,313
$ 66,096
$ 26,366
100.0%
61.0%
24.3%
Net Sales. The Company’s sales for the full year of 2019 were $111,360,000, reflecting an increase of
$3,047,000, or 2.8%, over $108,313,000 in 2018. The increase in sales resulted mostly from an increase in selling
prices necessary to help offset a rise in the Company’s material costs.
Gross Profit. The Company’s gross profit margins increased between the two periods, at 63.3% and 61.0%
for the twelve-months ended December 31, 2019 and 2018, 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 $19,032,000 and $17,117,000 for 2019 and 2018, respectively, representing a year
over year increase of $1,915,000, or 11.2%. A majority of the additional expense relates to atypical consulting costs
attributable to the Company’s new product, MediTrac® flexible medical gas piping, increasing $977,000 over last
year. The Company has also expanded its sales related staffing resources, and recognized an increase in
commissions during the year, largely driven by the increase in sales. Travel expenses, partially associated with the
increase in staffing, were also higher. For the same periods, selling expense as a percentage of net sales was 17.1%
and 15.8%, 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 $24,818,000 and $17,800,000 for the
years ended December 31, 2019 and 2018, respectively, increasing $7,018,000, or 39.4% between periods. Legal
and product liability defense costs increased $4,659,000, associated primarily with one class action case which was
dismissed during 2020, as explained in detail in Note 10, Commitments and Contingencies, of the Consolidated
Financial Statements to this report. There was also a $1,390,000 increase in incentive compensation. The increase
was primarily created by an increase in the value of prior equity awards driven by the surge in the Company’s stock
price during 2019; however, the impact of the equity awards was partially offset by a decrease in the incentive
compensation component which is aligned with profitability. Other professional fees also expanded by $780,000.
As a percentage of net sales, general and administrative expenses were 22.3% and 16.4% for the twelve-months
ended December 31, 2019 and 2018, respectively.
-25-
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 decreased $98,000 or 2.0% between periods, being $4,715,000 and $4,813,000 for the years
ended December 31, 2019 and 2018, respectively. The Company had ramped up spending on experimental
materials during 2018, a majority of which related to the new MediTrac® products, as well as increases in
certification and qualification costs. During 2019, the Company had additional staffing and consulting related
charges. As a percentage of net sales for the year, engineering expenses were 4.2% in 2019 and 4.4% in 2018.
Operating Profit. Reflecting all of the factors mentioned above, operating profits decreased $4,444,000, or
16.9%, between periods, reflecting a profit of $21,922,000 in 2019, as compared to $26,366,000 in 2018.
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 $876,000 of interest income
recorded during 2019 and $488,000 in 2018.
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 income of $56,000 during 2019 and other expense
of $126,000 during 2018.
Income Tax Expense. Income tax expense was $5,429,000 for 2019, compared to $6,451,000 for 2018.
The $1,022,000 or 15.8% decrease in tax expense was largely the result of the decrease in income before taxes. A
lower rate was in effect during both 2019 and 2018 attributable to the Tax Cuts and Jobs Act enacted at the end of
2017. The Act reduced the U.S. federal 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 provisions, and changes effecting the deductibility of certain executive compensation.
COMMITMENTS AND CONTINGENCIES
See Note 10, to the Consolidated Financial Statements included in this report 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, Significant Accounting Policies, to the Consolidated Financial Statements included in this report,
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 and related sales incentives, accounts receivable allowances, investment
valuations, inventory valuations, goodwill valuation, product liability reserve, phantom stock and accounting for
income taxes. Actual amounts could differ significantly from these estimates.
-26-
Our critical accounting policies and significant estimates and assumptions are described in more detail as follows:
Revenue Recognition
With regard to revenue recognition, the Company applies the requirements of Accounting Standards
Update 2014-09, Revenue from Contracts with Customers (Topic 606). The standard 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 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.
-27-
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.
• 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, Significant Accounting Policies, to the Consolidated Financial Statements included in this report, 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
All accounts receivables are stated at amortized cost, net of allowances for credit losses, and adjusted for any
write-offs. The Company maintains allowances for credit losses, which represent an estimate of expected losses over
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the remaining contractual life of its receivables considering current market conditions and estimates for supportable
forecasts when appropriate. The estimate is a result of the Company’s ongoing assessments and evaluations of
collectability, historical loss experience, and future expectations in estimating credit losses in its receivable portfolio.
For accounts receivables, the Company uses historical loss experience rates and applies them to a related aging
analysis while also considering customer and/or economic risk where appropriate. Determination of the proper amount
of allowances requires management to exercise judgment about the timing, frequency and severity of credit losses that
could materially affect the provision for credit losses and, as a result, net earnings. The allowances consider numerous
quantitative and qualitative factors that include receivable type, historical loss experience, delinquency trends,
collection experience, current economic conditions, estimates for supportable forecasts, when appropriate, and credit
risk characteristics.
The reserve for credit losses, which include future credits, discounts, and doubtful accounts, was
$1,124,000 and $1,433,000 as of December 31, 2020 and 2019, respectively.
Investments
The Company invests excess funds in liquid interest earning instruments including U.S. Treasury bills and
bank time deposits, with maturities typically of one year or less. These investments are stated at fair value, which
approximates amortized cost, and are classified as available-for-sale in accordance with ASC Topic 320,
Investments – Debt and Equity Securities. The Company did not have any investments as of December 31, 2020 and
2019.
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 (ASU 2017-04), using the simplified method as adopted, the Company performed an annual
impairment test as of December 31, 2020. This analysis did not indicate any impairment of goodwill.
However, the duration and severity of the COVID-19 pandemic could result in future goodwill impairment
charges. While we have concluded that a triggering event did not occur during 2020, a prolonged pandemic could
impact the Company’s results of operations in a manner significant enough to trigger an impairment test.
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, Stock-Based
Compensation Plans, to the Consolidated Financial Statements included in this report.
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, to the Consolidated Financial Statements included in
-29-
this report 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 $2,000,000 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.
Leases
Effective January 1, 2019, the Company adopted the requirements of FASB ASU 2016-02, Leases (Topic
842) which defines a lease as any contract that conveys the right to use a specific asset for a period of time in exchange
for consideration. Leases are classified as a finance lease, formerly called a capital lease, if any of the following
criteria are met:
1. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
2. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably
certain to exercise.
3. The lease term is for the major part of the remaining economic life of the underlying asset.
4. The present value of the sum of lease payments and any residual value guaranteed by the lessee equals
or exceeds substantially all of the fair value of the underlying asset.
5. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the
lessor at the end of the lease term.
For any leases that do not meet the criteria identified above for finance leases, the Company treats such
leases as operating leases. As of December 31, 2020, each of the Company’s leases are classified as operating
leases.
Both finance and operating leases are reflected on the balance sheet as lease or “right-of-use” assets and
lease liabilities.
There are some exceptions, which the Company has elected in its accounting policies. For leases with
terms of twelve months or less, or below the Company’s general capitalization policy threshold, the Company has
elected an accounting policy to not recognize lease assets and lease liabilities for all asset classes. The Company
recognizes lease expense for such leases generally on a straight-line basis over the lease term.
The Company determines if a contract is a lease at the inception of the arrangement. The Company
reviews all options to extend, terminate, or purchase its right-of-use assets at the inception of the lease and accounts
for these options when they are reasonably certain to be exercised. Certain leases contain non-lease components,
such as common area maintenance, which are generally accounted for separately. In general, the Company will
assess if non-lease components are fixed and determinable, or variable, when determining if the component should
be included in the lease liability. For purposes of calculating the present value of the lease obligations, the Company
utilizes the implicit interest rate within the lease agreement when known and/or determinable, and otherwise utilizes
its incremental borrowing rate at the time of the lease agreement.
As permitted under ASU 2018-11, the Company elected the optional transition method to adopt the new
leases standard. Under this new transition method, the Company initially applied the new leases standard at the
adoption date of January 1, 2019 and would have recognized a cumulative-effect adjustment, if appropriate, to the
opening balance of retained earnings in the period of adoption. No cumulative-effect adjustment was recognized.
The impact of the adoption of this new standard resulted in an increase to the Company’s operating lease
assets and liabilities on January 1, 2019 of approximately $800,000. The implementation did not have a material
impact on our consolidated statements of income and statements of cash flows.
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
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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, most of which relate to the Company’s U.K.
subsidiary whose functional currency is the British Pound, 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 income (other 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 financial
statements. This included the change in the US corporate tax rate from 35% to 21% and a provision related to
previously deferred taxes on earnings of the Company’s foreign subsidiary. The Company’s tax provision also
-31-
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.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company’s primary cash needs have been related to working capital items, which the
Company has largely funded through cash generated from operations.
As of December 31, 2020, the Company had a cash balance of $23,633,000. Additionally, the Company
has a $15,000,000 line of credit available, as discussed in detail in Note 5, which had no borrowings outstanding
against it as of December 31, 2020. At December 31, 2019, the Company had a cash balance of $16,098,000, with
no borrowings against the line of credit.
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 2020, the Company’s cash provided from operating activities was $19,310,000, compared to
$16,041,000 of cash provided during 2019, and $21,058,000 of cash provided during 2018. This illustrates an
increase of $3,269,000 during 2020, versus a decrease during 2019 of $5,017,000. 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 40.
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. However, as described
previously, during December 2019, the Company liquidated its investments to support the payment of a special
dividend to shareholders totaling $35,330,000, as outlined in Note 6, Shareholders’ Equity, to the Consolidated
Financial Statements included in this report.
Investing Activities
Cash used in investing activities during 2020 was $564,000, all related to various capital expenditure
projects.
Cash provided by investing activities during 2019 was $13,719,000, with most of the transactions related to
the purchase and/or sale of short-term investments. During December 2019, the Company liquidated its all of its
existing short-term investments to support the payment of a special dividend to shareholders. In total, cash proceeds
from the sale of short-term investments during 2019 was $70,882,000. Inversely, cash used for the purchase of the
short-term investments during 2019 was $55,938,000. Cash was also used to purchase capital expenditures of
$1,225,000, mostly related to the new MediTrac® products.
During 2018, the Company used $16,868,000 of cash for investing activities. A majority of the cash was
used for the purchase of short-term investments. During 2018, the Company purchased $35,099,000 of short-term
investments, and inversely received $20,155,000 of cash from net proceeds from the sale of short-term investments.
The Company also used $1,924,000 of cash for capital expenditures during 2018, mainly related to capital projects
designated for the new MediTrac® products.
Financing Activities
All financing activities relate to dividend payments, which are detailed in Note 6, Shareholders’ Equity.
Dividend payments for 2020, 2019, and 2018 amounted to $11,306,000, $46,028,000 and $9,775,000, respectively.
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2019 included the payment of a special dividend, which is primarily why the cash outflow in that year is higher.
Each of these dividends are outlined in Note 6, Shareholders’ Equity, to the Consolidated Financial Statements
included in this report. Also, see Note 5, Line of Credit and Other Borrowings, for a description of borrowings and
repayments during the second quarter of 2020. The Company had no borrowings or payments on its line of credit
during 2019 or 2018.
Liquidity
We believe our existing cash and cash equivalents, along with our borrowing capacity, 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, the potential
for investments in, or the acquisition of any complementary products, businesses or supplementary facilities for
additional capacity, and the COVID-19 pandemic.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of
the Effects of Reference Rate Reform on Financial Reporting. The ASU applies to all entities that have contracts,
hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be
discontinued because of reference rate reform. The ASU provides optional expedients and exceptions for applying
GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria
are met. The expedients and exceptions provided by the ASU do not apply to contract modifications made and
hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as
of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end
of the hedging relationship. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022.
The impact of the adoption of ASU 2020-04 did not have a material impact on the Company's Consolidated
Financial Statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting
for Income Taxes. The guidance removes certain exceptions for recognizing deferred taxes for equity method
investments, performing intraperiod allocation, and calculating income taxes in interim periods. The ASU also adds
guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating
taxes to members of a consolidated group, among others. The amendments in ASU 2019-12 are effective for public
business entities for fiscal years beginning after December 15, 2020, including interim periods therein. Early
adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements
have not yet been issued. The Company is currently evaluating the impact of adopting this new guidance on its
Consolidated Financial Statements and does not expect the impact to be significant.
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, 2020 are summarized in the following
table and are more fully explained in Notes to the Consolidated Financial Statements.
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Payments Due by Period
(in thousands)
Contractual Obligations
Operating Lease Obligations
Purchase Obligations
Other Long-Term Liabilities
Total Contractual Cash Obligations
Total
$499
25,539
600
$26,638
======
Less than
1-year
1 -3
years
4 -5
years
After 5
year
$247
25,539
63
$25,849
======
$209
0
96
$305
====
$43
0
96
$139
====
$ --
0
345
$345
====
As explained in Note 11, Stock Based Compensation Plans, to the Consolidated Financial Statements
included in this report, 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, 2020 was $3,331,000, of which $1,378,000 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.
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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
Financial Statements:
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018
Page
36
38
39
40
41
42
43
Notes to the Consolidated Financial Statements
44 to 60
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2020 and 2019, 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, 2020, 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,
2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2020, 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, 2020, 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 8, 2021 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relates to
accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective or complex judgments. The communication of the critical audit matter does not alter in any way our
opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter
below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
-36-
Product liability claims
As described in Notes 2 and 10 of the financial statements, the Company is subject to periodic lawsuits,
investigations and claims, primarily relating to potential lightning damage to its flexible gas piping products (the
“Claims”). The Company accrues an estimated product liability reserve related to the resolution cost of the Claims
for which management believes a loss is probable of occurring, and the amount of the loss is reasonably estimable,
and discloses the aggregate maximum exposure for all open Claims. As of December 31, 2020, the Company
accrued a product liability reserve of $642,000, and disclosed that the aggregate maximum exposure for all current
open claims is estimated not to exceed $6,227,000. Due to the uncertainty of potential costs to be incurred related to
the Claims, and the uncertainty of the ultimate outcome of each Claim, management applies significant judgements
and estimates in determining the probability that a loss has been incurred and the amount to accrue for such loss.
We identified the accrual and disclosure of the Claims as a critical audit matter due to the significant judgments
made by management when assessing the probability of a loss as well as the ultimate resolution costs of the Claims.
Auditing management’s estimates and assumptions required a high degree of auditor judgment and increased audit
effort due to the impact these assumptions have on the accrued product liability reserves and disclosures.
Our audit procedures related to the Claims included the following, among others:
• We obtained an understanding of the relevant controls related to management’s evaluation of the Claims for
accrual and disclosure and tested such controls for design and operating effectiveness, including controls
around management’s evaluation of the probability that a loss has been incurred and management’s estimate
of the amount of the loss.
• We tested the accuracy and completeness of the underlying data that served as the basis for management’s
estimates of the probability that a loss has been incurred and the amount of the loss, including payment
activity, relevant insurance coverage, lawsuit or claim status, and any settlement activity.
• We evaluated the methods and assumptions used by management to develop the estimate of the probability
a loss has been incurred on individual product liability claims and the amount of such loss through
consideration of historical claim and loss experience as well as current claim status.
• We performed confirmation procedures with the Company’s external legal counsel to corroborate
management’s assertions regarding claim information, claim status, the probability the Company has incurred
a loss, and the estimated amount of any potential loss. These confirmation procedures were also used to test
the completeness and accuracy of the underlying source data that served as the basis of management’s
estimates.
• We tested claim and settlement payment activity occurring subsequent to year end to assess the
reasonableness of management’s estimates and disclosures.
/s/ RSM US LLP
We have served as the Company's auditor since 2010.
Blue Bell, Pennsylvania
March 8, 2021
-37-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Omega Flex, Inc.
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,
2020, 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, 2020, 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 2020 consolidated financial statements of the Company and our report dated March 8, 2021
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 8, 2021
-38-
OMEGA FLEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollars in Thousands, except Common Stock par value)
ASSETS
Current Assets:
Cash and Cash Equivalents
Accounts Receivable - less allowances of
$1,124 and $1,433, respectively
Inventories - Net
Other Current Assets
Total Current Assets
Right-Of-Use Assets - Operating
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
Lease Liability - Operating
Other Liabilities
Total Current Liabilities
Lease Liability - Operating, net of current portion
Deferred Taxes
Tax Payable Long Term
Other Long Term Liabilities
Total Liabilities
Commitments and Contingencies (Note 10)
Shareholders’ Equity:
Omega Flex, Inc. Shareholders’ Equity:
Common Stock – par value $0.01 share: authorized 20,000,000 shares:
10,153,633 shares issued at December 31, 2020 and 2019, respectively, and
10,094,322 outstanding at December 31, 2020 and 2019, respectively
Treasury Stock
Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Total Omega Flex, Inc. Shareholders’ Equity
Noncontrolling Interest
Total Shareholders’ Equity
2020
2019
$
23,633
$
16,098
20,077
11,510
2,137
57,357
493
8,599
3,526
5
1,591
17,047
11,078
2,097
46,320
771
8,909
3,526
4
1,454
$
71,571
$
60,984
$
2,471
5,429
4,348
2,826
979
247
5,571
$
2,383
4,618
4,461
2,826
423
369
5,404
21,871
20,484
252
121
559
2,391
25,194
418
331
-
2,175
23,408
102
(1)
11,025
35,769
(778)
46,117
260
46,377
102
(1)
11,025
27,165
(909)
37,382
194
37,576
Total Liabilities and Shareholders’ Equity
$
71,571
$
60,984
See accompanying Notes which are an integral part of the Consolidated Financial Statements.
-39-
OMEGA FLEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
(Amounts in thousands, except earnings per common shares)
Net Sales
Cost of Goods Sold
Gross Profit
Selling Expense
General and Administrative Expense
Engineering Expense
2020
2019
2018
$105,796
$111,360
$108,313
39,246
40,873
42,217
66,550
70,487
66,096
16,580
19,117
4,200
19,032
24,818
4,715
17,117
17,800
4,813
Operating Profit
26,653
21,922
26,366
Interest (Expense) Income
Other (Expense) Income
(39)
(53)
876
56
488
(126)
Income Before Income Taxes
26,561
22,854
26,728
Income Tax Expense
Net Income
6,594
5,429
6,451
19,967
17,425
20,277
Less: Net Income – Noncontrolling Interest
(57)
(139)
(138)
Net Income attributable to Omega Flex, Inc.
$ 19,910
$ 17,286
$ 20,139
Basic and Diluted Earnings per Common Share
$
1.97
$
1.71
$
2.00
Cash Dividends Declared per Common Share
$ 1.12
$ 4.58
$ 0.94
Basic and Diluted Weighted Average Shares Outstanding
10,094
10,093
10,092
See accompanying Notes which are an integral part of the Consolidated Financial Statements.
-40-
OMEGA FLEX, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31,
(Dollars in Thousands)
2020
2019
2018
Net Income
$19,967
$17,425
$20,277
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustment
Other Comprehensive Income (Loss)
140
140
46
46
(48)
(48)
Comprehensive Income
20,107
17,471
20,229
Less: Comprehensive Income Attributable to the Noncontrolling Interest
(66)
(144)
(132)
Total Other Comprehensive Income
$20,041
$17,327
$20,097
See accompanying Notes which are an integral part of the Consolidated Financial Statements.
-41-
OMEGA FLEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the years ended December 31, 2020, 2019 and 2018
(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, 2017
10,091,822
$ 102
($1)
$ 10,808
$45,457
($ 908)
$
611
$ 56,069
Net Income
Cumulative Translation Adjustment
20,139
138
20,277
(42)
(6)
(48)
Dividends Declared
(9,486)
(491)
(9,977)
Balance - December 31, 2018
10,091,822
$ 102
($1)
$ 10,808
$56,110
($ 950)
$
252
$ 66,321
Net Income
Cumulative Translation Adjustment
Shares Reissued From Treasury Pursuant
To Restricted Stock Unit Awards
Dividends Declared
2,500
217
(46,231)
217
(202)
(46,433)
17,286
139
41
5
17,425
46
Balance - December 31, 2019
10,094,322
$ 102
($1)
$ 11,025
$27,165
($ 909)
$
194
$ 37,576
Net Income
Cumulative Translation Adjustment
19,910
57
131
9
19,967
140
Dividends Declared
(11,306)
(11,306)
Balance - December 31, 2020
10,094,322
$ 102
($1)
$ 11,025
$35,769
($ 778)
$
260
$ 46,377
See accompanying Notes which are an integral part of the Consolidated Financial Statements.
-42-
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
Right-Of-Use Assets
Other Assets
Accounts Payable
Accrued Compensation
Accrued Commissions and Sales Incentives
Lease Liabilities
Other Liabilities
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities:
Purchase of Investments
Net Proceeds from Sale of Investments
Capital Expenditures
2020
2019
2018
$ 19,967
$ 17,425
$ 20,277
1,453
870
2,472
719
118
543
(299)
(212)
45
748
(236)
(15)
57
366
(105)
(2,683)
(440)
278
(176)
79
804
(110)
(287)
21
19,310
(1,282)
(3,025)
(761)
(383)
(401)
(693)
190
777
506
16,041
(979)
61
-
1,804
205
468
(11)
-
(1,746)
21,058
-
-
(564)
(55,938)
70,882
(1,225)
(35,099)
20,155
(1,924)
Net Cash (Used In) Provided by Investing Activities
(564)
13,719
(16,868)
Cash Flows from Financing Activities:
Dividends Paid
(11,306)
(46,028)
(9,775)
Net Cash Used In Financing Activities
(11,306)
(46,028)
(9,775)
Net Increase (Decrease) in Cash and Cash Equivalents
7,440
(16,268)
(5,585)
Translation effect on cash
Cash and Cash Equivalents - Beginning of Year
95
16,098
(26)
32,392
39
37,938
Cash and Cash Equivalents - End of Year
$ 23,633
$ 16,098
$ 32,392
Supplemental Disclosure of Cash Flow Information
Cash paid for Income Taxes
Cash paid for Interest
Declared Dividend
$ 6,436
$ 5,431
$ 112
$ -
$ 7,310
310
$ -
$ 2,826
$ 2,826
$ 2,422
See accompanying Notes which are an integral part of the Consolidated Financial Statements.
-43-
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, 2020, 2019 and 2018 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 5 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 and Houston, Texas,
in the U.S., and in Banbury, Oxfordshire in the UK, and sells its products through distributors, wholesalers and to
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 and related sales incentives, accounts receivable allowances, investment
valuations, inventory valuations, goodwill valuation, product liability reserves, phantom stock and accounting for
income taxes. Actual amounts could differ significantly from these estimates.
Revenue Recognition
With regard to revenue recognition, the Company applies the requirements of Accounting Standards
Update 2014-09, Revenue from Contracts with Customers (Topic 606). The standard 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 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
-44-
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.
• 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:
-45-
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, Significant Accounting Policies, in these Consolidated Financial Statements, 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
All accounts receivables are stated at amortized cost, net of allowances for credit losses, and adjusted for any
write-offs. The Company maintains allowances for credit losses, which represent an estimate of expected losses over
the remaining contractual life of its receivables considering current market conditions and estimates for supportable
forecasts when appropriate. The estimate is a result of the Company’s ongoing assessments and evaluations of
collectability, historical loss experience, and future expectations in estimating credit losses in its receivable portfolio.
For accounts receivables, the Company uses historical loss experience rates and applies them to a related aging
analysis while also considering customer and/or economic risk where appropriate. Determination of the proper amount
of allowances requires management to exercise judgment about the timing, frequency and severity of credit losses that
could materially affect the provision for credit losses and, as a result, net earnings. The allowances consider numerous
quantitative and qualitative factors that include receivable type, historical loss experience, delinquency trends,
collection experience, current economic conditions, estimates for supportable forecasts, when appropriate, and credit
risk characteristics.
The reserve for credit losses, which include future credits, discounts, and doubtful accounts, was
$1,124,000 and $1,433,000 as of December 31, 2020 and 2019, respectively.
Investments
The Company invests excess funds in liquid interest earning instruments including U.S. Treasury bills and
bank time deposits, with maturities typically of one year or less. These investments are stated at fair value, which
approximates amortized cost, and are classified as available-for-sale in accordance with ASC 320, Investments –
Debt and Equity Securities. The Company did not have any investments as of December 31, 2020 or 2019.
-46-
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.
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 (ASU 2017-04), using the simplified method as adopted, the Company performed an annual
impairment test as of December 31, 2020. This analysis did not indicate any impairment of goodwill.
However, the duration and severity of the COVID-19 pandemic could result in future goodwill impairment
charges. While we have concluded that a triggering event did not occur during 2020, a prolonged pandemic could
impact the Company’s results of operations in a manner significant enough to trigger an impairment test.
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, Stock-Based
Compensation Plans, to the Consolidated Financial Statements included in this report.
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, to the Consolidated Financial Statements included in
this report 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 $2,000,000 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.
Leases
Effective January 1, 2019, the Company adopted the requirements of FASB ASU 2016-02, Leases (Topic
842) which defines a lease as any contract that conveys the right to use a specific asset for a period of time in exchange
for consideration. Leases are classified as a finance lease, formerly called a capital lease, if any of the following
criteria are met:
1. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
-47-
2. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably
certain to exercise.
3. The lease term is for the major part of the remaining economic life of the underlying asset.
4. The present value of the sum of lease payments and any residual value guaranteed by the lessee equals
or exceeds substantially all of the fair value of the underlying asset.
5. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the
lessor at the end of the lease term.
For any leases that do not meet the criteria identified above for finance leases, the Company treats such
leases as operating leases. As of December 31, 2020, each of the Company’s leases are classified as operating
leases.
Both finance and operating leases are reflected on the balance sheet as lease or “right-of-use” assets and
lease liabilities.
There are some exceptions, which the Company has elected in its accounting policies. For leases with
terms of twelve months or less, or below the Company’s general capitalization policy threshold, the Company has
elected an accounting policy to not recognize lease assets and lease liabilities for all asset classes. The Company
recognizes lease expense for such leases generally on a straight-line basis over the lease term.
The Company determines if a contract is a lease at the inception of the arrangement. The Company
reviews all options to extend, terminate, or purchase its right-of-use assets at the inception of the lease and accounts
for these options when they are reasonably certain to be exercised. Certain leases contain non-lease components,
such as common area maintenance, which are generally accounted for separately. In general, the Company will
assess if non-lease components are fixed and determinable, or variable, when determining if the component should
be included in the lease liability. For purposes of calculating the present value of the lease obligations, the Company
utilizes the implicit interest rate within the lease agreement when known and/or determinable, and otherwise utilizes
its incremental borrowing rate at the time of the lease agreement.
As permitted under ASU 2018-11, the Company elected the optional transition method to adopt the new
leases standard. Under this new transition method, the Company initially applied the new leases standard at the
adoption date of January 1, 2019 and would have recognized a cumulative-effect adjustment, if appropriate, to the
opening balance of retained earnings in the period of adoption. No cumulative-effect adjustment was recognized.
The impact of the adoption of this new standard resulted in an increase to the Company’s operating lease
assets and liabilities on January 1, 2019 of approximately $800,000. The implementation did not have a material
impact on our consolidated statements of income and statements of cash flows.
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.
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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 $691,000, $1,056,000 and
$1,037,000 for the years ended December 31, 2020, 2019, and 2018, respectively.
Research and Development Expense
Research and development expenses are charged to operations as incurred. Such charges totaled $831,000,
$1,191,000 and $1,531,000 for the years ended December 31, 2020, 2019 and 2018, 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 $2,801,000, $2,862,000 and $2,973,000 for the years ended December 31, 2020, 2019 and
2018, 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, most of which relate to the Company’s U.K.
subsidiary whose functional currency is the British Pound, are translated into U.S. dollars at exchange rates
prevailing on the balance sheet dates. The statements of income 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 income (other 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.
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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 financial
statements. This included the change in the U.S. corporate tax rate from 35% to 21% and a provision related to
previously deferred taxes on earnings of the Company’s foreign subsidiary. 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, 2020, 2019 and 2018, respectively, the components of other
comprehensive income consisted solely of foreign currency translation adjustments.
Significant Concentrations
One customer represented 13% to 14% of sales during each of the fiscal years in the period from 2018 to
2020, and that same customer accounted for approximately 18% to 24% of the Accounts Receivable balance over
the last two 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 U.K. 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.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of
the Effects of Reference Rate Reform on Financial Reporting. The ASU applies to all entities that have contracts,
hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be
discontinued because of reference rate reform. The ASU provides optional expedients and exceptions for applying
GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria
are met. The expedients and exceptions provided by the ASU do not apply to contract modifications made and
hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as
of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end
of the hedging relationship. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022.
The impact of the adoption of ASU 2020-04 did not have a material impact on the Company's Consolidated
Financial Statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting
for Income Taxes. The guidance removes certain exceptions for recognizing deferred taxes for equity method
investments, performing intraperiod allocation, and calculating income taxes in interim periods. The ASU also adds
guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating
taxes to members of a consolidated group, among others. The amendments in ASU 2019-12 are effective for public
business entities for fiscal years beginning after December 15, 2020, including interim periods therein. Early
adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements
have not yet been issued. The Company is currently evaluating the impact of adopting this new guidance on its
Consolidated Financial Statements and does not expect the impact to be significant.
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3. INVENTORIES
Inventories, net of reserves of $407,000 and $355,000, respectively, were as follows at December 31:
Finished Goods
Raw Materials
Total Inventories - Net
4. PROPERTY AND EQUIPMENT
2020
2019
(in thousands)
$ 5,068
6,442
$ 5,409
5,669
$ 11,510
$ 11,078
Property and equipment consisted of the following at December 31:
2020
2019
(in thousands)
Depreciation and Amortization Est.
Useful Lives
Land
Buildings
Leasehold Improvements
Equipment
Accumulated Depreciation
Property and Equipment - Net
$ 1,205
6,630
413
13,655
21,903
(13,304)
$ 8,599
$ 1,205
6,630
409
13,064
21,308
(12,399)
$ 8,909
39 Years
3-10 Years (Lesser of Life or Lease)
3-10 Years
The above amounts include capital related items of $234,000 and $199,000 as of December 31, 2020 and
2019, respectively, which 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 $870,000,
$719,000 and $543,000 for the years ended December 31, 2020, 2019 and 2018, respectively.
5. LINE OF CREDIT AND OTHER BORROWINGS
On December 1, 2017, the Company agreed to a new Amended and Restated Revolving Line of Credit
Note (the “Line”) 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 0.89%. 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.
During the quarter ended June 30, 2020, in an effort to ensure liquidity and secure all available resources
during the COVID-19 pandemic, the Company borrowed the full amount of its capacity on the line of $15,000,000
at the prime rate of 3.25%. The Company repaid this amount in full prior to the end of such quarter, and as of
December 31, 2020, had no borrowings on its line of credit. As of December 31, 2019, the Company had no
outstanding borrowings on its line of credit.
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The Company was in compliance with all debt covenants as of December 31, 2020 and 2019.
The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted on March 27, 2020
in the U.S.. On April 7, 2020, the Company received a loan from the U.S. Small Business Administration (“SBA”)
to fund the Company’s request for a loan under the SBA’s Paycheck Protection Program (“PPP” and “PPP Loan”)
created as part of the recently enacted CARES Act administered by the SBA. In connection with the PPP Loan, the
Company entered into a promissory note filed as Exhibit 10.2 attached to Form 10-Q for the quarter ended March
31, 2020. Pursuant to the terms of the PPP Loan, the Company received total proceeds of $2,453,000 from the Bank
at an interest rate of just below 1% per annum. After the issuance of the PPP Loan, the U.S. Treasury Department
issued new guidance on the PPP program, and advised that publicly traded companies that had access to other
sources of financing may not be appropriate candidates for the PPP Loans, and provided a grace period until May 7,
2020 for such companies to repay the previously issued PPP Loans. Accordingly, in light of this guidance, the
Company repaid the PPP Loan by May 7, 2020.
Lastly, as stated above, borrowings under our line of credit facility bear interest at variable rates based on
LIBOR. Currently, the Federal Reserve Bank is considering options and transitioning away from LIBOR, and as
such, has formed the Alternative Rates Committee (ARRC). The ARRC selected the Secured Overnight Financing
Rate (SOFR) as an appropriate replacement. SOFR is based on transactions in the overnight repurchase markets,
which reflects a transaction-based rate on a large number of transactions, better reflecting current financing costs.
Discussions are ongoing with the Bank with regards to transitioning the rate for the Line from LIBOR to another
appropriate rate such as SOFR.
6. SHAREHOLDERS’ EQUITY
As of December 31, 2020 and December 31, 2019, the Company had authorized 20,000,000 common stock
shares with par value of $0.01 per share. For both periods, the total number of outstanding shares was 10,094,322,
shares held in Treasury was 59,311, and total shares issued was 10,153,633.
During 2020 and 2019, upon approval of the Board of Directors (the “Board”) the Company has declared
and paid regular quarterly dividends, as well as special dividends, as set forth in the following table:
Dividend Declared
Date
December 11, 2020
September 23, 2020
June 24, 2020
March 31, 2020
December 16, 2019 (S)
December 14, 2019
September 6, 2019
June 13, 2019
April 9, 2019
December 13, 2018
Price Per Share
$0.28
$0.28
$0.28
$0.28
$3.50
$0.28
$0.28
$0.28
$0.24
$0.24
Dividend Paid
Date
Amount
January 5, 2021*
October 13, 2020*
July 13, 2020*
April 17, 2020*
December 30, 2019*
January 3, 2020*
October 2, 2019*
July 2, 2019*
April 29, 2019**
January 3, 2019**
$2,826,000
$2,827,000
$2,826,000
$2,827,000
$35,330,000
$2,826,000
$2,827,000
$2,827,000
$2,422,000
$2,422,000
The number of shares outstanding on the dividend payment date was *10,094,322 and **10,091,822.
(S) indicates special dividend
In addition to the above dividend amounts, there were dividends approved by the Company’s foreign
subsidiary during July and December of 2019, with the cash distribution to the noncontrolling interest of $137,000
and $65,000, respectively, paid during those respective months.
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It should be noted that from time to time, the Board may elect to pay special dividends, in addition to or in
lieu of the regular quarterly dividends, depending upon the financial condition of the Company. Special dividends
are indicated in the above schedule as (S).
The Board approved and granted a total of 2,500 restricted stock unit awards (the “Awards”) to be allocated
to the existing non-employee directors of the Company. The Awards were approved by the shareholders of the
Company at the annual meeting on June 11, 2019, and distributed on June 20, 2019. A Form S-8 registration
statement, and the restricted stock unit award agreements, were filed with the SEC on December 13, 2018 (2,000
units) and May 24, 2019 (500 units). The related director compensation cost of approximately $217,000 was
recognized during June 2019.
On April 4, 2014, the Board 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, which
were held as treasury shares. The Company has not made any stock repurchases since 2014; however, as stated
above, there were 2,500 shares distributed from treasury to non-employee directors during June 2019.
7. INCOME TAXES
Income tax expense consisted of the following:
Federal Income Tax:
Current
Deferred
State Income Tax:
Current
Deferred
Foreign Income Tax:
Current
Deferred
Income Tax Expense
2020
December 31,
2019
(in thousands)
2018
$ 5,617
(175)
$ 4,310
(216)
$ 4,618
306
923
(30)
748
(36)
885
50
266
(7)
$ 6,594
607
16
$ 5,429
575
17
$ 6,451
Pre-tax income included foreign income of $1,341,000, $3,330,000 and $3,123,000 in 2020, 2019 and
2018, respectively.
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Total income tax expense differed from statutory income tax expense, computed by applying the U.S.
federal income tax rate of 21% to earnings before income tax, as follows:
2020
December 31,
2019
(in thousands)
2018
Computed Statutory Income Tax Expense
State Income Tax, Net of Federal Tax Benefit
Foreign Tax Rate Differential
Executive Compensation Limitation
Foreign Derived Intangible Income Deduction
Research Credit
$ 5,566
759
(27)
503
(75)
(62)
$ 4,770
598
(67)
340
(76)
(141)
$ 5,584
760
(63)
440
(100)
(143)
Other - Net
Income Tax Expense
(70)
$ 6,594
5
$ 5,429
(27)
$ 6,451
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, 2020 and 2019 are as follows:
December 31,
2020
2019
(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
$
124
242
266
12
70
(70)
220
909
$ 1,773
(481)
(1,408)
($1,889)
$ 118
238
265
12
70
(70)
82
877
$ 1,592
(476)
(1,443)
($1,919)
Total Deferred Tax Liability
($116)
($327)
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
2017 through 2019. The Company and its Subsidiaries’ state income tax returns are subject to audit for the calendar
years ended 2016 through 2019.
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As of December 31, 2020, the Company had no liability for unrecognized tax benefits related to various
federal and state income tax matters.
8. LEASES
In the U.S., the Company owns its two main operating facilities located in Exton, Pennsylvania. In addition
to the owned facilities, the Company also has operations in other locations that are leased, as well as other leased
assets. In conjunction with the new guidance for leases, as defined by the FASB with ASU 2016-02, Leases (Topic
842), the Company has described the existing leases, which are all classified as operating leases, pursuant to the
below.
In the U.S., the Company leases a facility in Houston, Texas, which currently provides manufacturing,
stocking and sales operations, with the lease term running through October 2024. Additionally, the Company leases
its corporate office space in Middletown, Connecticut, with the lease term expiring in June 2022.
In the U.K., the Company leases a facility in Banbury, England, which serves manufacturing, warehousing,
and other operational functions. The lease in Banbury was effective April 1, 2006 and has a 15-year term ending in
March 2021, and currently being negotiated for renewal.
In addition to property rentals, the Company also has lease agreements in place for various fleet vehicles
and equipment with various lease terms.
In the December 31, 2020 consolidated balance sheet, the Company has recorded right-of-use assets of
$493,000, and a lease liability of $499,000, of which $247,000 is reported as a current liability. The respective
weighted average remaining lease term and discount rate are approximately 2.41 years and 2.81%.
Rent expense for operating leases was approximately $301,000, $298,000 and $377,000 for the years ended
December 31, 2020, 2019 and 2018, respectively.
Future minimum lease payments, inclusive of interest, under non-cancelable leases as of December 31,
2020 is as follows:
Year Ending December 31,
2021
2022
2023
2024
2025
Thereafter
Total Minimum Lease Payments
Operating Leases
(in thousands)
$
$
247
146
63
41
2
---
499
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 $430,000, $380,000 and $361,000 of contributions accrued for the Plan in 2020, 2019 and
2018 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.
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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, 2020, 2019 and 2018 were $295,000, $276,000 and $256,000, 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 current and/or past employees. These agreements
provide for monthly payments to each of the employees or their designated beneficiary upon the employee’s
retirement or death. The payment benefits range from $1,000 per month to $3,000 per month with the term of such
payments limited to 15 years after the employee’s retirement. 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 $499,000 at December 31, 2020, of which $436,000
is included in Other Long Term Liabilities, and the remaining current portion of $63,000 is included in Other
Liabilities, associated with the applicable retirement benefit payments over the next twelve months. The December
31, 2019 liability of $492,000 had $480,000 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 life insurance policies with respect to current and/or
past employees. The cash surrender value of such policies (included in Other Long Term Assets) amounts to
$1,556,000 at December 31, 2020 and $1,417,000 at December 31, 2019.
In addition to the above, the Company has other contractual employment and or change of control
agreements in place with key employees, as previously disclosed and noted in the Exhibit Index to this Form 10-K.
Obligations related to these arrangements are currently indeterminable due to the variable nature and timing of
possible events required to incur such obligations.
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.
Lastly, as provided earlier in Item 7 under the “Tabular Disclosure of Contractual Obligations and Off-
Balance Sheet Arrangements”, the Company has numerous purchase obligations in place for the forthcoming year,
largely related to the Company’s core material inventory components, totaling $25,539,000.
Contingencies:
In the ordinary and normal conduct of the Company’s business, it is subject to periodic lawsuits,
investigations and claims (collectively, the “Claims”). The Claims relate to potential lightning damage to our
flexible gas piping products, which impact legal and product liability related expenses. The Company does not
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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 number of Claims, higher legal costs, and higher insurance deductibles or retentions.
In September 2017, a putative class action case was filed against the Company and other parties in
Missouri state court. The Company successfully removed the case to federal court, and in August 2020, the court
granted the defendants’ joint summary judgement motion, and dismissed the case. The parties have fully resolved
the plaintiffs appeal of that decision, and the case has been dismissed by the plaintiffs, thus concluding the matter.
The Company was made aware of a potential legal liability regarding a legal dispute in the U.K., in which
the Company’s subsidiary, Omega Flex Limited (“OFL”), was the claimant. After withdrawing the claim, the court
determined that OFL was responsible for the defendant’s costs (including a portion of its attorneys’ fees). The
Company reached an initial agreement during the fourth quarter and made a payment of £320,000 accordingly. A
nominal liability remains at December 31, 2020 approximating any outstanding amounts that may potentially be due
as part of the final arrangement.
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 $2,000,000 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 $2,000,000, 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, 2020 is estimated to not exceed approximately $6,200,000, 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, 2020 and December 31, 2019 were $642,000 and $215,000, 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
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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, 2019, the Company had 15,493 unvested units
outstanding, all of which were granted at Full Value. On February 28, 2020, the Company granted an additional
4,875 Full Value Units with a fair value of $74.52 per unit on grant date, using historical volatility. In February
2020, the Company paid $968,000 for the 10,460 fully vested and matured units that were granted during February
2016, including their respective earned dividend values. In August 2020, the Company paid $356,000 for the 2,750
fully vested and matured units that were granted during August 2016, including their respective earned dividend
values. On August 24, 2020, the Company granted an additional 870 Full Value Units with a fair value of $134.19
per unit on grant date, using historical volatility. As of December 31, 2020, the Company had 13,252 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, 2020.
The total Phantom Stock related liability as of December 31, 2020 was $3,331,000 of which $1,378,000 is
included in Other Liabilities, as it is expected to be paid in February and August 2021, and the balance of
$1,953,000 is included in Other Long Term Liabilities. The total Phantom Stock related liability as of December 31,
2019 was $3,201,000 of which $1,508,000 is included in Other Liabilities, and the balance of $1,693,000 is included
in Other Long Term Liabilities.
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In accordance with FASB ASC Topic 718, Stock Compensation, the Company recorded compensation
expense of approximately $1,453,000, $2,255,000, and $118,000 related to the Phantom Stock Plan for the years
ended December 31, 2020, 2019 and 2018, respectively.
The following table summarizes information about the Company’s nonvested phantom stock Units at
December 31, 2020:
Number of Phantom Stock Unit Awards:
Nonvested at December 31, 2019
Granted
Vested
Nonvested at December 31, 2020
Phantom Stock Unit Awards Expected to Vest
Units
15,493
5,745
(7,986)
13,252
13,252
Weighted Average
Grant Date Fair Value
$59.65
$83.56
$55.35
$72.61
$72.61
The total unrecognized compensation costs calculated at December 31, 2020 are $1,124,000 which will be
recognized through August 2023. The Company will recognize the related expense over the weighted average
period of 1.1 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, and if so,
determines if the related parties act independently of each other in a fair transaction. Through this investigation the
Company noted a limited number of RPTs which are disclosed hereto. Legal services were performed by a firm
which formerly employed one member of the board. On occasion the Company shares a small amount of services
with its former parent Mestek, Inc., mostly related to board meeting expenses. The Company is aware of
transactions between a few service providers which employ individuals with associations to Omega Flex employees.
In all cases, these transactions have been determined to be independent transactions with no indication that they are
influenced by the related relationships. Other than as disclosed above, 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.
13. SUBSEQUENT EVENTS
The Company evaluated all events or transactions that occurred through the date of this filing. During this
period, no events came to the Company’s attention that would impact the Consolidated Financial Statements for
2020.
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14. QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The table below sets forth selected quarterly information for each quarter of 2020 and 2019.
First
For the Year-Ended December 31, 2020
Third
(dollars in thousands except per share data)
Second
Fourth
Year
Net Sales
Gross Profit
$25,266
$21,818
$27,087
$31,625
$105,796
$15,769
$13,262
$17,266
$20,253
$66,550
Net Income attributable to Omega Flex, Inc.
$4,344
$3,571
$4,817
$7,178
$19,910
Basic and Diluted Earnings per common share
$0.43
$0.35
$0.48
$0.71
$1.97
First
For the Year-Ended December 31, 2019
Third
(dollars in thousands except per share data)
Second
Fourth
Year
Net Sales
Gross Profit
$26,788
$26,809
$28,030
$29,733
$111,360
$16,946
$16,736
$17,704
$19,101
$70,487
Net Income attributable to Omega Flex, Inc.
$4,382
$3,983
$3,368
$5,553
$17,286
Basic and Diluted Earnings per common share
$0.43
$0.39
$0.33
$0.55
$1.71
Item 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
Item 9A – CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
We evaluated, under the supervision and with the participation of the Chief Executive Officer and
Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(“Exchange Act”), as amended, as of December 31, 2020, 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, 2020. Disclosure controls and procedures are designed to ensure that
information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i)
is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and
forms and (ii) is accumulated and communicated to management, including the chief executive officer and
chief financial officer, as appropriate, to allow timely decisions regarding required disclosures.
(b) Management’s Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control
over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or
15d-15(f) promulgated under the Exchange Act and is a process designed by, or under the
supervision of, our principal executive and principal financial officers and effected by our board of
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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, 2020. 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, 2020 based on criteria in the
Internal Control-Integrated Framework (2013) issued by COSO.
The Company’s independent registered public accounting firm, RSM US LLP, audited the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. RSM
US LLP’s report on the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2020 is included herein on page 38.
(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, 2020, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B – OTHER INFORMATION
None.
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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, 2020, a definitive proxy statement relating to the Company’s annual meeting of
shareholders (the “2021 Proxy Statement”).
Item 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding directors of the Company will be set forth in the 2021 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 2021 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 2021 Proxy Statement, under the caption “Board Committees”, and incorporated herein by
reference. Information concerning any delinquent filings under Section 16(a) of the Securities Exchange Act of 1934
will be set forth in the Company’s proxy statement also, under the Caption “Delinquent Section 16(a) Reports”
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 2021 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 2021 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 2021 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 2021 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.
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Item 15 – EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
PART IV
(a)
The following documents are filed as part of this Form 10-K:
1.
2.
Exhibits. See Index to Exhibits on pages 63 through 65.
Consolidated Financial Statements. See Index to Consolidated Financial Statements on
page 35.
EXHIBIT INDEX
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
No.
3.1
3.2
4.1
10.1
10.2
Description
Articles of Incorporation of Omega Flex, Inc., as amended
Amended and Restated By-laws of Omega Flex, Inc.
Description of Common Stock
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.
10.3
* Schedule of Directors/Officers with Indemnification Agreement
10.4
10.5
10.6
10.7
10.8
* 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.
Reference
Key
(A)
(A)
(B)
(A)
(C)
**
(D)
(E)
(D)
(E)
(F)
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10.9
10.10
10.11
10.12
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.)
10.13
* Executive Salary Continuation Agreement
10.14
* Phantom Stock Plan dated December 11, 2006.
10.15
* First Amendment to the Omega Flex, Inc. 2006 Phantom Stock Plan
10.16
10.17
10.18
10.19
10.20
21.1
23.1
31.1
31.2
32.1
* Form of Phantom Stock Agreement entered into between Omega Flex, Inc. and
its directors, officers and employees.
* Schedule of Phantom Stock Agreements between Omega Flex, Inc. and its
directors and executive officers as of December 31, 2020.
* Form of Non-Employee Director Restricted Stock Unit Award Agreement
entered into between Omega Flex, Inc. and certain non-employee directors.
* Form of Change of Control Agreement entered into between Omega Flex, Inc.
and certain executive officers.
* Schedule of Change of Control Agreements between Omega Flex, Inc. and
certain executive officers as of December 31, 2020.
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
***
-64-
(G)
(H)
(I)
(F)
(J)
(K)
(G)
(K)
**
(L)
(B)
**
**
**
**
**
101.1NS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
XBRL Instance Document (the instance document does not appear in the
Interactive Data File because its XBRL tags are embedded within the Inline
XBRL 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
Cover Page Interactive Data File (the cover page XBRL tags are embedded in the
Inline XBRL document and included in Exhibit 101).
**
**
**
**
**
**
Reference Key
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
(J)
(K)
(L)
*
**
***
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 9, 2020.
Filed as an Exhibit to the Quarterly Report on Form 10-Q filed May 4, 2020.
Filed as an Exhibit to the Annual Report on Form 10-K filed March 18, 2009.
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 5, 2017.
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 filed December 29, 2014.
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 April 2, 2007.
Filed as an Exhibit to the Registration Statement on Form S-8 filed December 13, 2018.
Management contract, compensatory plan or arrangement
Filed herewith
Furnished herewith
Item 16 – Form 10-K Summary
None.
-65-
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
Date: March 8, 2021
Date: March 8, 2021
Date: March 8, 2021
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 8, 2021
Date: March 8, 2021
Date: March 8, 2021
Date: March 8, 2021
Date: March 8, 2021
Date: March 8, 2021
Date: March 8, 2021
Date: March 8, 2021
By:
By:
By:
By:
By:
By:
By:
By:
/S/ Mark F. Albino
Mark F. Albino, Director
/S/ James M. Dubin
James M. Dubin, 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
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