UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended   June 30, 2009

 

 

For the transition period from ________________________ to ______________________

 

Commission File Number              000-51372

 

Omega Flex, Inc.

 

(Exact name of registrant as specified in its charter)

 

 

 

(610) 524-7272

 

Registrant’s telephone number, including area code

 

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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                                                 Yes o No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of The Exchange Act).

 

 

The number of shares of the registrant’s common stock issued and outstanding as of June 30, 2009 was 10,091,822.

 

OMEGA FLEX, INC.

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE SIX MONTHS ENDED JUNE 30, 2009

 

INDEX

 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1 - Financial Statements

OMEGA FLEX, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

 

 

 

 

 

 

OMEGA FLEX, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

OMEGA FLEX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

OMEGA FLEX, INC.

 

JUNE 30, 2009

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All dollars in thousands except per share amounts)

 

(Unaudited)

 

1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

 

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Omega Flex, Inc. (Omega) and its subsidiaries (collectively the “Company”). The Company’s unaudited condensed consolidated financial statements for the quarter ended June 30, 2009 have been prepared in accordance with generally accepted accounting principles, and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the company believes that the disclosures made are adequate to make the information not misleading. All material inter-company accounts and transactions have been eliminated in consolidation. It is Management’s opinion that all adjustments necessary for a fair statement of the results for the interim periods have been made, and that all adjustments are of a normal recurring nature or a description is provided for any adjustments that are not of a normal recurring nature.

 

 

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. These applications include carrying liquefied gases in certain processing applications, fuel gases within residential and commercial buildings and vibration absorbers in high vibration applications. Our industrial flexible metal piping is 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 facility in Exton, Pennsylvania, with a minor amount of manufacturing performed in the UK, and sells its product through distributors, wholesalers and to original equipment manufacturers (“OEMs”) throughout North America, and in certain European markets.

 

Accounting Changes

 

In June 2009 the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the hierarchy of Generally Accepted Accounting Principles” which replaces statement 162 and establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by non governmental entities in the preparation of financial statements in conformity with GAAP.  Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  Following

 

this statement, the Board will not issue new standards in the forms of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts.  Instead it will issue Accounting Standards Updates.  This statement shall be effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company intends to adopt the disclosure requirements of SFAS 168 for the quarter ending September 30, 2009.

 

In May 2009, the FASB issued Statement No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 establishes the standards for accounting for and disclosure of events that occur after the balance sheet date, but before the financial statements are issued or are available to be issued. The statement sets forth the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. The statement also identifies the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 is effective for interim periods ending after June 15, 2009. The Company adopted the disclosure requirements of SFAS 165 for the quarter ended June 30, 2009, and the adoption had no effect on the Company’s consolidated statements of operations, financial position or cash flows.

 

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (“SFAS 160”), SFAS 160 establishes and provides accounting and reporting standards for the noncontrolling interest in a consolidated subsidiary and for the deconsolidation of a subsidiary. The Company has adopted FAS 160 beginning January 1, 2009 via retrospective application of the presentation and disclosure requirements.

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

 

The preparation of financial statements in conformity with generally accepted accounting principles 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 valuations, inventory valuations, goodwill valuation, and accounting for income taxes. Actual amounts could differ significantly from these estimates.

 

 

The Company’s revenue recognition activities relate almost entirely to the manufacture and sale of flexible metal hose and pipe. Under generally accepted accounting principles, revenues are considered to have been earned when the Company has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. The following criteria represent preconditions to the recognition of revenue:

 

 

 

The Company generally recognizes revenue upon shipment in accordance with the above principles.

 

Gross sales are reduced for all consideration paid to customers for which no identifiable benefit is received by the Company. This includes promotional incentives, year end rebates, and discounts. The amounts of certain incentives are estimated at the time of sale.

 

Commissions, for which the Company receives an identifiable benefit, are accounted for as a sales expense.

 

 

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.

 

 

Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates prevailing on the balance sheet date. The Statement of Operations is translated into U.S. dollars at average exchange rates. 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 operations (other income (expense)) in the period in which they occur.

 

 

The Company accounts for federal tax liabilities in accordance with SFAS No. 109, “Accounting for Income Taxes”. 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.

 

 

For the quarters ended June 30, 2009 and 2008, respectively, the components of Other Comprehensive (Loss) Income consisted solely of foreign currency translation adjustments.

 

Reclassifications

 

Certain reclassifications have been made to prior years’ financial statements to conform to SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”.

 

 

3. INVENTORIES

 

 

 

 

 

4. SHAREHOLDERS’ EQUITY

 

As of June 30, 2009 and December 31, 2008, the Company had authorized 20,000,000 common stock shares with par value of $0.01 per share, and had 10,091,822 and 10,093,808 shares issued and outstanding, respectively.

 

On December 11, 2007, the Board authorized a special dividend of $0.70 per share to all Shareholders of record as of January 3, 2008, which was subsequently paid on January 16, 2008 in the amount of $7,092. In addition, on December 11, 2008, the Company announced that on December 8, 2008 the Board declared a dividend of $0.50 per share to all shareholders of record as of December 16, 2008, which was paid on December 23, 2008 in the amount of $5,047.

 

On September 12, 2007, the Company announced that its Board of Directors has authorized the purchase of up to $5,000 of its common stock. The purchases may be made from time-to-time in open market or in privately negotiated transactions, depending on market and business conditions, within the next 24 months. The Board retained the right to cancel, extend, or expand the share buyback program, at any time and from time-to-time. During 2009, the Company purchased 1,986 shares for $24, including commissions. Since inception, the Company has purchased a total of 61,811 shares for approximately $932 or $15 per share.

 

In connection with the aforementioned share buyback program, the Company has entered into a Rule 10b5-1 Repurchase Plan (the “Plan”) as of September 15, 2008 with Hunter Associates, Inc. (“Hunter”), by which Hunter will continue to implement the share buyback program by purchasing shares of the Company’s common stock in accordance with the terms of the Plan and within the safe harbor afforded by Rule 10b5-1.

 

5. 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 entered into salary continuation agreements with two employees, which provide for monthly payments to each of the employees or his designated beneficiary upon the employee’s retirement or death. The payment benefits range from $1 per month to $3 per month with the term of such payments limited to 15 years after the employee’s retirement at age 65. The agreements also provide for survivorship benefits if the employee dies before attaining age 65, and severance payments if the employee is terminated without cause, the amount of which is dependent on the length of company service at the date of termination. The net present value of the retirement payments is included in Other Long-Term Liabilities, which amounts to $351 for June 30, 2009 and $350 for December 31, 2008, respectively. The Company has obtained and is the beneficiary of three whole life insurance policies in respect of the two employees discussed above, and one other policy. The cash surrender value of such policies (included in Other Assets) amounts to $525 at June 30, 2009 and $534 at December 31, 2008, respectively.

 

Contingencies:

 

The Company retains significant obligations under its commercial insurance policies for losses occurring in the policy years in which it was a subsidiary of Mestek, Inc. For the policy year ending October 1, 2004, the Company retained liability for the first $2,000 per occurrence of commercial general liability claims (including product liability claims), subject to an agreed aggregate. In addition, for 2004 the Company retained liability for the first $250 per occurrence of workers compensation coverage, subject to an agreed aggregate. However, for policy years beginning on July 22, 2005 (the effective date of the Spin-Off, which is defined in the Company’s December 31, 2008 annual report on Form 10-K), the Company’s general liability insurance policies included deductibles or retentions of amounts ranging from $25 to $50, subject to an agreed aggregate. The Company is insured on a ‘first dollar’ basis for workers’ compensation subject to statutory limits.

 

The Company’s liability related to health insurance is limited to $35 per case and an aggregate of $660 annually.

 

Warranty Commitments:

 

Gas transmission products such as those made by the Company carry potentially serious personal injury risks in the event of failures in the field. As a result, the Company has extensive internal testing and other quality control procedures and historically the Company has not had a meaningful failure rate in the field due to the extensive nature of these quality controls. Due to the Company’s quality systems, the warranty expense is de minimis, and accordingly, the Company does not maintain a warranty reserve beyond a nominal amount.

 

 

 

6. STOCK BASED 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 one 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:

 

 

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, and at a minimum, the Unit’s value will be in an amount equal to the closing price of the Company’s common stock on the grant date. The Units follow a vesting schedule, with a maximum vesting schedule of 3 years after the grant date. Upon vesting, the Units represent a contractual right to the payment of the value of the Unit. The Units will be paid on their maturity date, which is a maximum of one year after all of the Units granted in a particular award have fully vested. The amount to be paid to the participant on the maturity date is dependant 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.

 

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 that termination.

 

Grants of Phantom Stock Units. As of December 31, 2008, the Company had 6,892 units outstanding, all of which were granted at Full Value. On February 20, 2009, the Company granted an additional 8,645 Full Value Units with a fair value at grant date of $14.54 per unit. In all cases, the grant price was equal to the closing price of the Company’s common stock at the grant date.

 

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 service or vesting period of each grant or award.

 

SFAS 123R, “Stock Based 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. As of October 8, 2007, in connection with an officer’s resignation, a total of 2,874 unvested units were forfeited, however; 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 for June 30, 2009.

 

In accordance with SFAS 123R, the Company recorded compensation expense of approximately $28 in 2009 related to the Phantom Stock Plan.

 

The fair value of the Units granted through the second quarter June 30, 2009 using the Black-Scholes option-pricing model, uses the following assumptions:

 

 

The Company has elected to use the “Simplified” method for calculating the Expected Term in accordance with Staff Accounting Bulletin (SAB) 107, and has opted to use the Expected Dividend Amount rather than an Expected Dividend Yield.

 

The following table summarizes information about the Company’s nonvested phantom stock Units at June 30, 2009:

 

 

 

 

 

At June 30, 2009, a total of 3,508 Units have vested including 2,600, which vested during the first quarter of 2009. The Units granted are expected to vest in one year intervals over three years, subject to earlier termination or forfeiture.

 

As of June 30, 2009, the unrecognized compensation costs related to Plan Units vesting will be primarily recognized over a period of approximately 3 years.

 

 

 

 

The Units outstanding and exercisable at June 30, 2009 were in the following exercise price ranges:

 

 

 

 

 

7. NONCONTROLLING INTERESTS

 

As of December 31, 2008, the Company’s net equity of $29,384 consisted of $53 other comprehensive income pertaining to foreign currency translation and $136 comprehensive income, both related to our Noncontrolling Interest. Through the second quarter of 2009 the Noncontrolling Interest represented a $9 loss and $18 loss within the total Consolidated Company Income of $1,024 and Other Comprehensive Income of $341 respectively.

 

 

 

8. RELATED PARTY TRANSACTIONS

 

On June 10, 2009, the Company agreed to loan Mestek, Inc. (Mestek), its former parent, $3,250, in exchange for a promissory note (Note). The Note requires monthly interest payments at a rate of 6% per annum on all unpaid principal, and payment in full to be received no later than October 20, 2010. Payment of the Note is however subject to the terms and conditions of a subordination agreement that exists between Omega Flex and Bank of America, N.A. The Company has received an unconditional and continuing guaranty of the loan from Sterling Realty Trust, a company which J.E. Reed is the trustee.

 

Regarding the relationship between Omega Flex and Mestek, two of our directors, Mr. J.E. Reed and Mr. S.B. Reed are executive officers of Mestek, and Messers. J.E. Reed and S.B. Reed are more than 10% owners of Mestek.

 

Item 2 – 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 Quarterly Report on Form 10-Q 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-Q. 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.

 

The Company’s business is controlled 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. The Company’s primary product line, flexible gas piping, is used for gas piping within residential and commercial buildings. Through its flexibility and ease of use with patented fittings distributed under the trademark AutoFlare^®, the TracPipe^® and CounterStrike^® flexible gas piping systems allows users to substantially cut the time required to install the gas piping, as compared to traditional methods. Most of the Company’s products are manufactured at the Company’s Exton, Pennsylvania facility with a minor amount of manufacturing performed 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

(All dollars in thousands)

 

Cash has been positively generated during 2009 from operations, but shows a decrease of $1,495 from December 31, 2008 to June 30, 2009, largely as a result of a $3,250 loan made to a related party, Mestek, Inc., which is discussed in detail in Note 8. This also explains the $3,250 increase in the Note Receivable from former Parent.

 

During 2009, the Company’s inventory balance has decreased $2,852 from $10,242 at December 31, 2008 to $7,390 at June 30, 2009. The decrease is largely due to a focus on inventory management and reductions, along with an inventory write-down resulting from the implementation of updated material standards.

 

Accrued Compensation at June 30, 2009 has decreased $1,690 compared to December 31, 2008 as a result of the annual first quarter scheduled compensation payment less the 2009 accrued expense.

 

RESULTS OF OPERATIONS

(All dollars in thousands)

 

Three-months ended June 30, 2009 vs. June 30, 2008

 

The Company reported comparative results from continuing operations for the three-month period ended June 30, 2009 and 2008 as follows:

 

 

 

The Company’s sales decreased $6,254 (38.2%) from $16,378 in the three-month period ended June 30, 2008 as compared to $10,124 in the three-month period June 30, 2009.

 

Revenue for the three-months ended June 30, 2009 reflects continued weakness in the residential and commercial construction industry, which was offset somewhat by emerging products market penetration of proprietary products. Overall, volume for the quarter was down 45.1% compared to the prior year quarter, partially offset by other slightly favorable variables, including sales price.

 

The Company’s gross profit margins were mostly in line at approximately 50% for the three-month period ended June 30, 2008 and 2009.

 

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 $2,810 and $1,969 for the three months ended June 30, 2008 and 2009, respectively. The reduction was largely attributable to decreases in commissions and freight related to sales volume. Sales expense as a percentage of sales increased from 17.2% for the three-months ended June 30, 2008 to 19.4% for the three-months ended June 30, 2009.

 

General and Administrative Expenses. General and administrative expenses consist primarily of employee salaries, benefits for administrative, executive and finance personnel, legal and accounting, and corporate general and administrative services. General and administrative expenses were $1,901 and $1,556 for the three months ended June 30, 2008 and 2009, respectively. The majority of the change was due to a decrease in legal expenses. As a percentage of sales, general and administrative expenses increased from 11.6% for the three months ended June 30, 2008 to 15.4% for the three months ended June 30, 2009.

 

 

Engineering Expense. Engineering expenses consist of development expenses associated with the development of new products and enhancements to existing products, and manufacturing engineering costs. Engineering expenses were $514 and $570 for the three months ended June 30, 2008 and 2009, respectively. Engineering expenses as a percentage of sales were 3.1% for the three months ended June 30, 2008 and 5.6% for the three months ended June 30, 2009.

 

Reflecting all of the factors mentioned above, Operating Profit margins decreased $2,036 (68.1%) from a profit of $2,989 in the three-month period ended June 30, 2008 to a profit of $953 in the three-month period ended June 30, 2009.

 

Interest Income-Net. Interest income-net includes interest income on our interest-bearing investments and interest income on the note receivable from Mestek for the full second quarter of 2008, but only for a portion of June in 2009.

 

Other (Expense) Income-Net. Other Income-net primarily consists of foreign currency exchange gains (losses) on transactions.

 

Income Tax Expense. The Company’s effective tax rate in 2009 approximates the 2008 rate and does not differ materially from expected statutory rates.

 

Six-months ended June 30, 2009 vs. June 30, 2008

 

The Company reported comparative results from continuing operations for the six-month period ended June 30, 2009 and 2008 as follows:

 

 

 

The Company’s sales decreased $12,584 (38.4%) from $32,801 in thee six-month period ended June 30, 2008 as compared to $20,217 in the six-month period June 30, 2009.

 

Revenue for the six-months ended June 30, 2009 reflects continued weakness in the residential and commercial construction industry, which was offset somewhat by gains from emerging products and apparent increases in market share largely related to proprietary products. Overall volume for the six months was down 46.2% compared to the prior year, partially offset by other slightly favorable variables, including sales price.

 

The Company’s gross profit margins decreased from 50.0% in the six-month period ended June 30, 2008 to 46.4% in the six-month period ended June 30, 2009. The decrease in margin is primarily the result of the sales factors mentioned above.

 

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 $5,304 and $3,963 for the six months ended June 30, 2008 and 2009, respectively. The reduction was largely attributable to decreases in commissions and freight related to sales volume. Sales expense as a percentage of sales increased from 16.2% for the six-months ended June 30, 2008 to 19.6% for the six-months ended June 30, 2009.

 

General and Administrative Expenses. General and administrative expenses consist primarily of employee salaries, benefits for administrative, executive and finance personnel, legal and accounting, and corporate general and administrative services. General and administrative expenses were $3,792 and $2,719 for the six months ended June, 2008 and 2009, respectively. General and administrative expense, as a percentage of sales, increased from 11.6% for the six months ended June 30, 2008 to 13.4% for the six months ended June 30, 2009. The $1,073 decrease is largely attributable to a decrease in legal which was partially related to the cash settlement of the Parker Hannifin case, as outlined in the Company’s December 31, 2008 Form 10-K, as well as decreases in staffing related expenses and consulting.

 

Engineering Expense. Engineering expenses consist of development expenses associated with the development of new products and enhancements to existing products, and manufacturing engineering costs. Engineering expenses were largely in line for the six months ended June 30, 2008 and 2009 respectively. Engineering expenses as a percentage of sales were 3.4% for the six months ended June 30, 2008 and 5.5% for the six months ended June 30, 2009.

 

Reflecting all of the factors mentioned above, Operating Profit margins decreased $4,606 (74.5%) from a profit of $6,181 in the six-month period ended June 30, 2008 to a profit of $1,575 in the six-month period ended June 30, 2009.

 

Interest Income-Net. Interest income-net includes interest income on our interest-bearing investments and interest income on the note receivable from Mestek for the first six months of 2008, and for a portion of June in 2009.

 

Other (Expense) Income-Net. Other Income-net primarily consists of foreign currency exchange gains (losses) on transactions with Omega Flex, Limited, our U.K. subsidiary.

 

Income Tax Expense. The Company’s effective tax rate in 2009 approximates the 2008 rate and does not differ materially from expected statutory rates.

 

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

 

Financial Reporting Release No. 60, released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 2 of the Notes to the Consolidated Financial Statements include a summary of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. The following is a brief discussion of the Company’s more significant accounting policies.

 

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to revenue recognition, accounts receivable valuations, inventory valuations, goodwill and intangible asset valuations, product liability costs, workers compensation claims reserves, health care claims reserves, and accounting for income taxes. Actual amounts could differ significantly from these estimates.

 

Our critical accounting policies and significant estimates and assumptions are described in more detail as follows:

 

Revenue Recognition

 

The Company’s revenue recognition activities relate almost entirely to the manufacture and sale of flexible metal hose and pipe. Under generally accepted accounting principles, revenues are considered to have been earned when the Company has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. The following criteria represent preconditions to the recognition of revenue:

 

 

 

 

 

The Company generally recognizes revenue upon shipment in accordance with the above principles.

 

Gross sales are reduced for all consideration paid to customers for which no identifiable benefit is received by the Company. This includes promotional incentives, year-end rebates, and discounts. The amounts of certain incentives are estimated at the time of sale.

 

Commissions, for which the Company receives an identifiable benefit, are accounted for as a sales expense.

 

Accounts Receivable

 

Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on specific analysis of accounts in the receivable portfolio and historical write-off experience. While management believes the allowance to be adequate, if the financial condition of the Company’s customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required.

 

 

 

Inventory

 

Inventories are valued at the lower of cost or market. Cost of inventories are determined by the first-in, first-out (FIFO) method. The Company generally considers inventory quantities beyond two-years usage, measured on a historical usage basis, to be excess inventory and reduces the gross carrying value of inventory accordingly.

 

Goodwill and Intangible Assets

 

In accordance with SFAS 142, “Goodwill and Other Intangible Assets”, the Company ceased recording amortization of goodwill and intangible assets with indefinite lives effective January 1, 2002. The Company performed annual impairment tests in accordance with SFAS 142, where fair value of the reporting unit was compared to the carrying amount. The fair value of the reporting unit exceeded the carrying amounts, therefore as of December 31, 2008 the analysis showed no impairment of goodwill.

 

Product Liability Reserves

 

As explained more fully under Contingencies, the Company retains liability for the first $50 of product liability claims. To date, the Company has not experienced a meaningful product failure rate.

 

Accounting for Income Taxes

 

The Company accounts for federal tax liabilities in accordance with SFAS No. 109, “Accounting for Income Taxes”. 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.

 

LIQUIDITY AND CAPITAL RESOURCES  

(All amounts in thousands except share amounts)

 

Six Months ended June 30, 2009

 

As of June 30, 2009, we had $8,278 in consolidated cash and cash equivalents, which is $1,495 less than at December 31, 2008.

 

Operating Activities

 

Cash provided by operations for the first six months of 2009 was $1,923 compared with $1,248 provided in the first six months of 2008, a $675 increase.

 

Investing Activities

 

Cash used in investing activities for the first six months of 2009 was $3,553, which includes a $3,250 loan to our former parent company, detailed in Note 8, compared with $382 used in the first six months of 2008. Capital spending was $303 and $382 in the first six months ended June 30, 2009 and June 30, 2008, respectively.

 

Financing

 

Cash used in financing activities during the first six months of 2009 was $24 compared with $7,632 used in the first six months of 2008. The most significant component for the first six months of 2008 was the $7,092 related to the special dividend outlined in Note 4, Shareholders’ Equity.

 

On September 12, 2007, the Company announced that its Board of Directors has authorized the purchase of up to $5,000 of its common stock. The purchases may be made from time-to-time in open market or in privately negotiated transactions, depending on market and business conditions, within the next 24 months. The Board retained the right to cancel, extend, or expand the share buyback program at any time and from time-to-time. During the first six months of 2009, the Company had purchased 1,986 shares of treasury stock for $24.

 

On September 18, 2008, the Company extended its Revolving Line of Credit Note and a Loan Agreement with Sovereign Bank, N.A., whereby the company established a line of credit facility for a one-year duration ending September 4, 2009, and in the maximum amount of $7,500. The loan agreement provides for the payment of any loan under the agreement at a rate that is either prime rate less 1%, or LIBOR rate plus 1%. Under the terms of the agreement, the Company is required to pay a nominal commitment fee, and is also delegated to pay a “Line Fee” equal to one-tenth percent (0.10%) of the average unused balance on a quarterly basis. As of June 30, 2009, the Company does not have any loans or loan balances outstanding under the loan agreement.

 

The Company believes its liquidity position as of June 30, 2009 is fully adequate to meet foreseeable future needs and that the Company will possess adequate cash reserves to meet its day-to-day needs including any acquisitions or capital expenditures or stock repurchases it can reasonably foresee at this time.

 

 

CONTINGENT LIABILITIES AND GUARANTEES

 

See Note 5 to the Company’s financial statements.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

Refer to Item 7 of the Company’s 2008 year-end Form 10-K under the caption “Tabular Disclosure of Contractual Obligations and Off-Balance Sheet Arrangements”.

 

Item 3. Quantitative And Qualitative Information 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.

 

Item 4 – Controls And Procedures

 

At the end of the fiscal first quarter of 2009, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, the chief executive officer and the chief financial officer have concluded that, as of the date of this report, the Company’s disclosure controls and procedures were effective in (1) recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and (2) ensuring that information required to be disclosed by the Company in such reports is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

There was no change in the Company’s “internal control over financial reporting” (as defined in Rule 13a-15(f) of the Exchange Act) identified in connection with the evaluation that occurred during the three-month period covered by this Report on Form 10-Q that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting subsequent to the date the chief executive officer and chief financial officer completed their evaluation.

 

PART II - OTHER INFORMATION

 

Item 1 – Legal Proceedings

 

 

Item 4 – Submission of Matters to a Vote of the Security Holders

 

On June 2, 2009, the Company held its 2009 Annual Meeting of Shareholders.  The shareholders voted on the following proposals:

 

 

 

The results of the voting are as follows:

 

 

 

 

Item 6 - Exhibits  

 

Exhibit

 

 

 

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.