UNITED STATES
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Pennsylvania 23-1948942 (I.R.S. Employer Identification No.) 451 Creamery Way, Exton, PA 19341 (Address of principal executive offices) (Zip Code) Yes [ ] No [x] MARCH 31, 2010 PART I - FINANCIAL INFORMATION Page No. Item 1 – Financial Statements Condensed consolidated balance sheets at and December 31, 3 Condensed consolidated statements of operations for the three-months ended Condensed consolidated statements of cash flows for the 5 Notes to the condensed consolidated financial statements (unaudited) 6 Item 2- Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3 – Quantitative and Qualitative Information About Market Risks 23 Item 4 – Controls and Procedures 23 PART II - OTHER INFORMATION Item 1 – Legal Proceedings Item 4 – Submission of Item 6 - Exhibits SIGNATURE September 30, December 31 2009 2008 (Dollars in thousands) ASSETS Current Assets Cash and Cash Equivalents $10,701 $9,773 Accounts Receivable - less allowances of $67 and $42, respectively 6,579 6,986 Inventories, Net 6,585 10,242 Other Current Assets 1,388 1,525 Total Current Assets 25,253 28,526 Property and Equipment - net 6,449 6,407 Goodwill 3,526 3,526 Note Receivable from former Parent Company 3,250 - Other Long Term Assets 592 534 Total Assets $39,070 $38,993 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts Payable $559 $1,562 Accrued Compensation 924 2,169 Accrued Commissions & Sales Incentives 1,636 2,028 Other Liabilities 1,427 1,657 Total Current Liabilities 4,546 7,416 Other Long-Term Liabilities 2,253 2,193 Total Liabilities 6,799 9,609 Equity: Omega Flex, Inc. Shareholders' Equity: Common Stock – par value $0.01 Share: authorized 20,000,000 Shares: 10,091,822 and 10,093,808 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively 102 102 Paid in Capital 10,808 10,832 Retained Earnings 21,655 18,986 Accumulated Other Comprehensive (Loss) (438) (674) Total Omega Flex, Inc. Shareholders' Equity 32,127 29,246 Non-Controlling Interest 144 138 Total Shareholders’ Equity 32,271 29,384 Total Liabilities and Shareholders’ Equity $39,070 $38,993 ====== ====== See Accompanying Notes to Consolidated Financial Statements. For the three-months ended For the nine-months ended September 30, September 30, 2009 2008 2009 2008 (Amounts in thousands, except earnings per Common Share) Net Sales $11,328 $17,669 $31,545 $50,500 Cost of Goods Sold 5,082 8,837 15,923 25,244 Gross Profit 6,246 8,862 15,622 25,256 Selling Expense 1,982 2,750 5,945 8,054 General and Administrative Expense 1,584 1,915 4,303 5,707 Engineering Expense 525 510 1,644 1,627 Operating Profit 2,155 3,687 3,730 9,868 Interest Income, Net 64 54 110 223 Other Income (Expense), Net 22 (28) 97 (8) Income Before Income Taxes 2,241 3,713 3,937 10,083 Income Tax Expense 602 1,293 1,274 3,615 Net Income including Noncontrolling Interest 1,639 2,420 2,663 6,468 Less: Net (Income) Loss – Noncontrolling Interest (3) (30) 6 (76) Net Income attributable to Omega Flex, Inc. $1,636 $2,390 $2,669 $6,392 ===== ===== ===== ===== Basic Earnings per Common Share: Net Income $0.16 $0.24 $0.26 $0.63 ===== ===== ===== ===== Basic Weighted Average Shares Outstanding 10,092 10,094 10,092 10,102 ===== ===== ===== ===== Diluted Earnings per Common Share: Net Income $0.16 $0.24 $0.26 $0.63 ===== ===== ===== ===== Diluted Weighted Average Shares Outstanding 10,092 10,094 10,092 10,102 ===== ===== ===== ===== OPERATIONS For the nine-months ended September 30, 2009 2008 (Dollars in thousands) Cash Flows from Operating Activities: Net Income including Noncontrolling Interest $2,663 $6,468 Less: Net (Income) Loss – Noncontrolling Interest 6 (76) Net Income attributable to Omega Flex, Inc. 2,669 6,392 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 348 420 Non-Cash Compensation Expense 49 28 Provision for Losses on Accounts Receivable, net of write-offs and recoveries 27 (69) Changes in Operating Assets and Liabilities: Accounts Receivable 441 282 Inventory 3,790 (230) Accounts Payable (1,096) (635) Accrued Compensation (1,245) (818) Other Liabilities (1,105) (2,387) Other Assets 487 43 Net Cash Provided by Operating Activities 4,365 3,026 Cash Flows from Investing Activities: Notes Receivable from former Parent Company (3,250) 3,250 Capital Expenditures (318) (364) Net Cash (Used in) Provided by Investing Activities (3,568) 2,886 Cash Flows from Financing Activities: Treasury Stock Purchase (24) (540) Dividends Paid --- (7,092) Net Cash Used in Financing Activities (24) (7,632) Net Increase (Decrease) in Cash and Cash Equivalents 773 (1,720) Translation effect on cash 155 (227) Cash and Cash Equivalents – Beginning of Period 9,773 13,143 Cash and Cash Equivalents – End of Period $10,701 $11,196 ====== ====== Supplemental Disclosure of Cash Flow Information Cash paid for Income Taxes $ 891 $ 2,462 ==== ===== Cash received from Income Tax Refunds $ 23 $ 26 ==== ===== 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 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 Standards 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.UNITED STATES (MarkSeptember 30, 2009For the transition period from ________________________ to ______________________For the transition period from __________________________________________ to ____________________________ (State (State or other jurisdiction of incorporation or organization)oIndicate 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 oLarge accelerated filer oAccelerated filer oNon-accelerated filer oSmaller reporting Company xo No xSeptember 30, 2009April 22, 2010 was 10,091,822.NINETHREE MONTHS ENDED SEPTEMBER 30, 2009September 30, 2009 (unaudited)20082009 (unaudited)September 30,March 31, 2010 and 2009 and 2008 (unaudited) and the4 nine-months ended September 30, 2009 and 2008 (unaudited)4nine-months three-months ended September 30,March 31, 2010 and 2009 and 2008 (unaudited)24MattersMatter to a Vote of the Security Holders242526(unaudited)
(unaudited)OMEGA FLEX, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(unaudited) March 31, December 31, 2010 2009 (Dollars in thousands) ASSETS Current Assets Cash and Cash Equivalents $1,906 $1,881 Accounts Receivable - less allowances of $160 and $92, respectively 6,920 6,515 Inventories-Net 6,060 6,188 Deferred Taxes 712 712 Note Receivable – from Former Parent 3,250 3,250 Other Current Assets 381 Total Current Assets 19,229 Property and Equipment - Net 6,119 6,296 Goodwill 3,526 3,526 Other Long Term Assets 657 622 Total Assets $29,531 $29,532 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts Payable $813 $863 Line of Credit 7,500 7,500 Accrued Compensation 1,025 1,552 Accrued Commissions & Sales Incentives 1,270 1,680 Taxes Payable 530 226 Other Liabilities 1,342 Total Current Liabilities 12,480 13,367 Deferred Taxes 1,293 1,372 Other Long Term Liabilities 1,037 Total Liabilities 14,810 Equity: Omega Flex, Inc. Shareholders’ Equity: 102 102 Treasury Stock (1) (1) Paid in Capital 10,808 10,808 Retained Earnings 4,259 3,184 Accumulated Other Comprehensive Loss Total Omega Flex, Inc. Shareholders’ Equity Noncontrolling Interest 147 Total Shareholders’ Equity 13,806 Total Liabilities and Shareholders’ Equity CASH FLOWS 2010 2009 Net Sales $11,691 $10,093 Cost of Goods Sold 5,273 5,765 Gross Profit 6,418 4,328 Selling Expense 2,155 1,994 General and Administrative Expense 1,959 1,163 Engineering Expense 549 Operating Profit 1,720 622 Interest Income (Expense), Net ( 15) 19 Other Expense, Net Income Before Income Taxes 1,704 631 Income Tax Expense 638 246 Net Income $1,066 $385 Less: Net Loss attributable to the Noncontrolling Interest 7 Net Income attributable to Omega Flex, Inc. $1,075 $392 ===== ===== Basic Earnings per Common Share: Net Income $0.11 $0.04 Basic Weighted Average Shares Outstanding 10,092 10,093 Diluted Earnings per Common Share: Net Income $0.11 $0.04 Diluted Weighted Average Shares Outstanding 10,092 10,093 For the three-months ended March 31, 2010 2009 (Dollars in thousands) Cash Flows from Operating Activities: Net Income $1,066 $385 Adjustments to Reconcile Net Income to Net Cash Provided By (Used In) Operating Activities: Non-Cash Compensation Expense 21 7 Depreciation and Amortization 165 116 Provision for Losses on Accounts Receivable, net of write-offs and recoveries 73 (8) Changes in Assets and Liabilities: Accounts Receivable (516) 923 Inventory 60 2,051 Accounts Payable (32) (1,822) Accrued Compensation (521) (1,972) Other Liabilities (342) (127) Other Assets 126 Net Cash Provided by (Used In) Operating Activities 100 Cash Flows from Investing Activities: Capital Expenditures Net Cash Used in Investing Activities Cash Flows from Financing Activities: Treasury Stock Purchases Net Cash Used in Financing Activities Net Increase (Decrease) in Cash and Cash Equivalents 77 (828) Translation effect on cash (52) (28) Cash and Cash Equivalents – Beginning of Period 9,773 Cash and Cash Equivalents – End of Period $1,906 $8,917 ===== ===== Supplemental Disclosure of Cash Flow Information Cash paid for Income Taxes $408 $403 ==== ==== Cash paid for Interest $75 $--- === === SEPTEMBER 30, 2009Basis of PresentationSeptember 30, 2009March 31, 2010 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. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest shareholders’ annual report (Form 10-K). 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.Description of Businessandor 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, a double containment systems, or piping to carry gases or fluids at both very high and very low (cryogenic) temperatures. Generally Accepted Accounting Principles (GAAP) Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) identifies the sources of accounting principles and the framework for selecting theUpdates.Updates (ASU). 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. The guidance is effective for interim and annual periods ending after September 15, 2009. The Company adopted this guidance in the quarter ended September 30, 2009 and it did not have a material effect on the Company’s consolidated statements of operations, financial position or cash flows.The Subsequent Events Topic of the FASB ASC establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued or available to be issued. The guidance is effective for interim and annual periods ending after June 15, 2009. The Company adopted this guidance in the quarter ended June 30, 2009 and it did not have a material effect on the Company’s consolidated statements of operations, financial position or cash flows.The Consolidation Topic of the FASB ASC establishes and provides accounting and reporting standards for the noncontrolling interest in a consolidated subsidiary and for the deconsolidation of a subsidiary. The Company adopted this guidance beginning in January 1, 2009 via retrospective application of the presentation and disclosure requirements.Use of EstimatesRevenue Recognition
The Company’s revenue recognition activities relate almost entirely to the manufacture and sale of flexible metal hose and pipe. RevenuesUnder 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:
·Persuasive evidence of an arrangement for the sale of product or services must exist.
·Delivery has occurred or services rendered.
·The sales price to the customer is fixed or determinable.
·Collection is reasonably assured.
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.
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 the Intangibles – Goodwill and Other Topic of the FASB Accounting Standards Codification, the Company ceased recording amortization of goodwill and intangible assets with indefinite lives effective January 1, 2002. The Company performed annual impairment tests, 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.
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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.
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Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates prevailing on the balance sheet date. The Statements of Operations are 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.
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The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and by various state taxing authorities for the calendar years 2006 through 2008. The Company believes that the potential liability for any uncertain tax positions is adequately reserved in its FIN 48 reserve as of September 30, 2009.
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For the quarters ended September 30,March 31, 2010 and 2009, and 2008, respectively, the componentssole component of Other Comprehensive (Loss) Income consisted solely ofwas a foreign currency translation adjustments.
adjustment. September 30, December 31, 2009 2008 (dollars in thousands) Finished Goods $4,670 $7,673 Raw Materials 1,915 2,569 Total Inventory $6,585 $10,242 ===== ===== As of all debt covenants.the prior year’syears’ financial statements to conform to the Consolidation Topic2010 presentation.FASB ASCfollowing: March 31, December 31, 2010 2009 (dollars in thousands) Finished Goods $4,192 $4,447 Raw Materials 1,741 Total Inventory $6,060 includes accounting guidanceis either prime rate plus 0.75% or LIBOR rate plus 3%, with a 4% floor. The Company is also required to pay a nominal commitment fee for the additional $7,500 of available funds, and is delegated to pay a noncontrolling interests in“Line Fee” equal to 17.5 basis points of the average unused balance on a consolidated subsidiary.3. INVENTORIESInventories consisted of the following:4. SHAREHOLDERS’ EQUITY(Amounts in thousands, except share amounts)September 30, 2009March 31, 2010 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 11, 2009, the Company’s Board of Directors authorized an extension of the stock repurchase program for an additional 24 months. The original program established in September of 2007 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. 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 connectionwas in compliance with the aforementioned share buyback program, on September 15, 2009 the Company entered into an amendment of the Rule 10b5-1 Repurchase Plan (the “Plan”) dated 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.(Dollars in thousands)
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. 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 ownership interest in the Company shareholder voting rights dividends or distributions other incidents of ownership to the Company’s common stock 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, March 31, 2010. Year Ended December 31, Expected Term Expected Volatility Factor Expected Dividend Amount Risk-Free Interest Rate 2007 3.0 111.00% 1.93% 4.46% 2008 3.0 87.95% 4.27% 1.77% 2009 3.0 69.56% 2.39% 1.30% Units Weighted Average Grant Date Fair Value Number of Phantom Stock Unit Awards: Nonvested at December 31, 2008 6,892 $16.11 Granted 8,645 $14.54 Vested (2,600) ($16.24) Forfeited (---) ($---) Canceled (---) ($---) Nonvested at September 30, 2009 12,937 $14.94 ===== ===== Phantom Stock Unit Awards Expected to Vest 12,937 $14.94 ===== ====== Units Outstanding Year Range of Exercise Price Number of Units Outstanding Weighted Average Remaining Contractual Life Weighted Average Exercise Price Aggregate Intrinsic Value 2007 $22.02 2,724 0.42 $22.02 --- 2008 $15.76 5,076 1.42 $15.76 $ 5 2009 $15.62 8,645 2.34 $15.62 $10 Units Exercisable Year Range of Exercise Price Number of Units Exercisable Weighted-Average Remaining Contractual Life Weighted-Average Exercise Price Aggregate Intrinsic Value 2007 $22.02 --- 0.42 $22.02 --- 2008 $15.76 --- 1.42 $15.76 --- 2009 $15.62 --- 2.34 $15.62 --- 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. Three-months ended September 30, (in thousands) 2009 2009 2008 2008 ($000) % ($000) % Net Sales $11,328 100.0% $17,699 100.0% Gross Profit $ 6,246 55.1% $ 8,862 50.1% Operating Profit $ 2,155 19.0% $ 3,687 20.8% March 31, 2010. March 31, 2010. Nine-months ended September 30, (in thousands) 2009 2009 2008 2008 ($000) % ($000) % Net Sales $31,545 100.0% $50,500 100.0% Gross Profit $15,622 49.5% $25,256 50.0% Operating Profit $ 3,730 11.8% $ 9,868 19.5% (All Amounts in Thousands) Financial Reporting Release No. 60, released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 2 of the Notes to the Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. The following is a brief discussion of the Company’s more significant accounting policies. ·Persuasive evidence of an arrangement for the sale of product or services must exist. ·Delivery has occurred or services rendered. ·The sales price to the customer is fixed or determinable. ·Collection is reasonably assured. 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 2009, which represents an increase of $25 between periods. Form 10-K, the Company expects the collection of a $3,250 note to its former parent Mestek, Inc. in October of 2010. 2010. $24, as noted above. No purchases have been made during 2010. pay a “Line Fee” equal to principal balance of the aforementioned $7,500 outstanding line of credit to start during the second quarter of 2010 and may potentially payoff the entire balance of the debt by the end of the year. Internal Controls. 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. 31.2 Certification of Chief Financial Officer of Omega Flex, Inc. pursuant to 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended. 32.1 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. OMEGA FLEX, INC. (Registrant) Date: By: /S/ Paul J. Kane Paul J. Kane Vice President – Finance and Chief Financial Officeremployeesemployee 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 $400 for September 30, 2009$413 at March 31, 2010 and $350 for$388 at December 31, 2008,2009, respectively. The$592$657 at September 30, 2009March 31, 2010 and $534$622 at December 31, 2008,2009, respectively. 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 includedare subject to deductibles or retentions ofand amounts ranging from $25$50 to $75, subject to an agreed aggregate. The Company is insured on a ‘first dollar’ basis for workers’ compensation subject to statutory limits.§ §§ §§ §§ §which is a maximum of one year after all of the Units granted in a particular award have fully vested.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 dependantdependent on the type of Unit granted to the participant.2008,2009, the Company had 6,89212,937 unvested units outstanding, all of which were granted at Full Value. On February 20, 2009,March 3, 2010, the Company granted an additional 8,645 8,100 Full Value Units with a fair value at grant date of $14.54$10.52 per unit. In all cases, the grant price was equal to the closing price of the Company’s common stock at the grant date. Topic of the FASB ASC 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.As of October 8, 2007, in connection with an officer’s resignation, a total of 2,874 unvested units were forfeited, however; basedBased 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 September 30, 2009.theFASB ASC Topic 718 Stock Compensation, Topic of the FASB ASC, the Company recorded compensation expense of approximately $49 in 2009$21 and $7 related to the Phantom Stock Plan.thirdfirst quarter September 30, 2009March 31, 2010 using the Black-Scholes option-pricing model as of the grant date, uses the following assumptions:Expected Term 2010 3.0 77.12% 7.14% 1.34% SEC Staff Accounting Bulletin (SAB)SAB 107, and has opted to use the Expected Dividend Amount rather than an Expected Dividend Yield.September 30, 2009:March 31, 2010: Units Number of Phantom Stock Unit Awards: Nonvested at December 31, 2009 12,937 $14.77 Granted 8,100 $ 8.49 Vested (5,482) ($15.30) Forfeited (---) ($---) Canceled ($---) Nonvested at March 31, 2010 15,555 Phantom Stock Unit Awards Expected to Vest 15,555 September 30, 2009,March 31, 2010, a total of 3,5088,990 Units have vested including 2,600,5,482, which vested during the first quarter of 2009.2010. The Units granted are expected to vest in one year intervals over three years, subject to earlier termination or forfeiture.September 30, 2009,March 31, 2010, the unrecognized compensation costs related to Plan Units vesting will be primarily recognized at various times through 2012.2013.(Amounts in thousands) Fiscal year ending 2010 2011 2012 2013 Total Compensation Expense $66 $69 $26 $4 $165 September 30, 2009March 31, 2010 were in the following exercise price ranges: Units Outstanding $22.02 2,724 --- $22.02 --- $15.76 5,076 0.92 $15.76 --- $15.62 8,645 1.84 $15.62 --- 2010 $10.52 8,100 2.93 $10.52 --- Units Exercisable Year 2007 $22.02 2,724 --- $22.02 --- 2008 $15.76 --- 0.92 $15.76 --- 2009 $15.62 --- 1.84 $15.62 --- 2010 $10.52 --- 2.93 $10.52 --- 2008,2009, the Company’s net equity of $29,384$13,806 consisted of $53$41 other comprehensive income pertaining to foreign currency translation and $136 of$147 comprehensive income, both related to the Company’sour Noncontrolling Interest. ThroughDuring the thirdfirst quarter of 20092010 the Noncontrolling Interest represented a $6$9 loss and $13 loss$8 income within the total Consolidated Company Income of $2,663$1,066 and Other Comprehensive IncomeLoss of $236,$144, respectively.RELATED PARTY TRANSACTIONSSHAREHOLDERS’ EQUITYOn June 10,agreedhad authorized 20,000,000 common stock shares with par value of $0.01 per share. Shares outstanding for the same periods were 10,091,822. Shares issued for the same periods were 10,153,633.loan Mestek, Inc. (Mestek), its former parent, $3,250, in exchange for a promissory note (the “Note”). The Note requires monthly interest payments at a rateshareholders of 6% per annumrecord on all unpaid principal, and payment in fullDecember 21, 2009, amounting to be received no later than October 20, 2010. Payment$20,183.Note is however subjectstock repurchase program for an additional 24 months. The original program established in September of 2007 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. The Board retained the termsright to cancel, extend, or expand the share buyback program, at any time and conditions of a subordination agreement that exists between Omega Flex and Bank of America, N.A.from time-to-time. The Company had no purchases under the program during 2010. Since inception, the Company has receivedpurchased a total of 61,811 shares for approximately $932, or $15 per share.unconditional and continuing guarantyamendment of the loan from Sterling Realty Trust, ofRule 10b5-1 Repurchase Plan (the “Plan”) dated September 15, 2008 with Hunter Associates, Inc. (“Hunter”), by which J.E. Reed isHunter will continue to implement the trustee.Regarding the relationship between Omega Flex and Mestek, Mr. J. E. Reed, the Company’s chairman of the board, and Mr. S. B. Reed, oneshare buyback program by purchasing shares of the Company’s directors, are also directors, executive officers,common stock in accordance with the terms of the Plan and greater than 10% ownerswithin the safe harbor afforded by Rule 10b5-1.Mestek.2009, the Company adopted a new accounting standard, which established general standards of evaluation and disclosure of events, which occur after the balance sheet date. The Company evaluated all events or transactions that occurred through the date on which the Company issued these financial statements. During this period, the Company did not have any material subsequent events that impacted its consolidated financial statements.OVERVIEWThe Company’s operations generated cash during showing an increase of $928 from$405. The increase is primarily the result of increased sales between the month of March of 2010 and December 31, 2008 to September 30,of 2009. The cash position allowed the Company to make a $3,250 loan at favorable terms to a related party, Mestek, Inc. in June of 2009, which is discussed in detail in Note 8. The loan did not exist at December 31, 2008, and therefore the entire note balance is a variance compared to September 30, 2009.During 2009, the Company’s inventory balance$3,657 from $10,242 at December 31, 2008 to $6,585 at September 30, 2009. The decrease is largely due to a focus on inventory management and reductions, along with the favorable raw materials pricing reductions compared to previous years.Accounts Payable at September 30, 2009 was $559, a decrease of $1,003 compared to $1,562 at December 31, 2008. The most significant factor was the 2009 1st quarter payment of $490 related to a 2008 raw material purchase. No other item was uniquely significant.Accrued Compensation at September 30, 2009 has decreased $1,245 compared to December 31, 2008$527 as a result of the annual first quarter scheduled compensation payment less a diminishedthe 2010 accrued expense.requirement.to $1,270 at March 31, 2010. Consistent with prior years, the Company paid approximately one-third of the sales incentives obligations for the preceding year during the first quarter of the current year. This was then offset partially by the recording of the 2010 obligations.September 30,March 31, 2010 vs. March 31, 2009 vs. September 30, 2008nine-monththree-month period ended September 30,March 31, 2010 and 2009 and 2008 as follows: Three-months ended March 31, (in thousands) 2010 2010 2009 2009 ($000) % ($000) % Net Sales $11,691 100.0% $10,093 100.0% Gross Profit $ 6,418 54.9% $ 4,328 42.9% Operating Profits $ 1, 720 14.7% $ 622 6.2% decreased $6,371 (36.0%increased $1,598 (15.8%) from $17,699$10,093 in the three-month period ended September 30, 2008March 31, 2009 as compared to $11,328$11,691 in the three-month period September 30, 2009.September 30, 2009March 31, 2010 reflects continued weakness in the residential and commercial construction industry. In an effort to outperform this general trend, the Company continues to focus on the expansion of itsincreased customer demand for our proprietary products into the market.products. Overall volume for the quarter was down 39.8%up approximately 18% compared to the prior year quarter.improvedmargins increased from 50.1% to 55.1% for42.9% in the three-month period ended September 30, 2008March 31, 2009 to 54.9% in the three-month period ended March 31, 2010. The increase in margin is primarily the result of increased volume, and September 30, 2009, respectively, primarily duealso decreases in cost of materials of approximately 7.5 percentage points to lowersales, which included a $278 decrease in obsolescence. To a lesser extent, the Company recognized production costs, including lower raw materialefficiencies and shed royalty costs.$2,750$1,994 and $1,982$2,155 for the three months ended September 30, 2008March 31, 2009 and 2009,2010, respectively. The $768 reductionmonetary rise was most significantly dueattributable to a $473 decrease in commissions, related to sales volume. The remaining $295 is primarily due to a reduction in freight, combined with othervarious insignificant items.components. Sales expense as a percentage of sales increaseddecreased from 15.5%19.8% for the three-months ended September 30, 2008March 31, 2009 to 17.5%18.4% for the three-months ended September 30, 2009.March 31, 2010, largely due to the fixed selling costs in relation to the sales growth.$1,915$1,163 and $1,584$1,959 for the three months ended September 30, 2008March 31, 2009 and 2009, respectively, a decrease2010, respectively. The $796 increase in expenses is partially attributable to an increase in employee salaries of $331. The change was primarily due$478, mostly related to a decrease of $375 in executive incentives on par withincentive compensation, while the reduction in profit, partiallyprior year’s expenses were offset by the cash settlement of the Parker Hannifin case, as outlined in thevariables. Ascomponents. Administrative expense, as a percentage of sales, general and administrative expenses increased from 10.8%11.5% for the three months ended September 30, 2008March 31, 2009 to 14.0% for the three months ended September 30, 2009.$510$549 and $525$584 for the three months ended September 30, 2008March 31, 2009 and 2009,2010, respectively. Engineering expenses as a percentage of sales were 2.9%decreased from 5.4% for the three months ended September 30, 2008 and 4.6%March 31, 2009 to 5.0% for the three months ended September 30, 2009.March 31, 2010.decreased $1,532 (41.6%)increased $1,098 from a profit of $3,687$622 in the three-month period ended September 30, 2008March 31, 2009 to a profit of $2,155$1,720 in the three-month period ended September 30, 2009. As a percentage of sales however, profit margins were largely in line at 19% for 2009 and 20.8% for 2008.Income-Net.Income (Expense)-Net. Interest income-netincome includes interest income on our interest-bearing investments and interest income on the note receivable from Mestek for the applicable months.Other (Expense) Income-Net. Other Income-net primarily consistsfirst quarter of foreign currency exchange gains (losses) on transactions.Income Tax Expense. The Company’s effective tax rate in 2009 approximates the 2008 rate2010, and does not differ materially from expected statutory rates.However, a reversal of a portion of the FIN 48 liability described in Note 2, due to the expiration of the statute of limitations, lowered tax expense in the three-months ending September 30, 2009.Nine-months ended September 30, 2009 vs. September 30, 2008The Company reported comparative results from continuing operations for the nine-month period ended September 30, 2009 and 2008 as follows:The Company’s sales decreased $18,955 (37.5%) from $50,500 in the nine-month period ended September 30, 2008 as compared to $31,545 in the nine-month period September 30, 2009.Revenue for the nine-months ended September 30, 2009 was consistent with the contraction in the construction industry. In an effort to outperform this general trend, the Company continues to focus on the expansion of its proprietary products into the market. Overall volume for the nine months was down 42.7% compared to the prior year.The Company’s gross profit margins were fairly consistent at 50.0% in the nine-month period ended September 30, 2008 and 49.5% in the nine-month period ended September 30, 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 $8,054 and $5,945 for the nine months ended September 30, 2008 and 2009, respectively. The $2,109 reduction was strongly impacted by a $1,229 decrease in commissions, related to sales volume. The remaining $880 represents a decrease in freight, and to a lesser extent various insignificant components. Sales expense as a percentage of sales increased from 15.9% for the nine-months ended September 30, 2008 to 18.8% for the nine-months ended September 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 $5,707 and $4,303 for the nine months ended September 30, 2008 and 2009, respectively. The $1,404 decrease is largely attributable to an $895 decrease in executive incentive compensation. A decrease in legal costs, 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, and other various items account for the remaining $509 decrease. General and administrative expense, as a percentage of sales, increased from 11.3% for the nine months ended September 30, 2008 to 13.6% for the nine months ended September 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 largely in line for the nine months ended September 30, 2008 and 2009 being $1,627 and $1,644, respectively. Engineering expenses as a percentage of sales were 3.2% for the nine months ended September 30, 2008 and 5.2% for the nine months ended September 30, 2009.Reflecting all of the factors mentioned above, Operating Profit margins decreased $6,138 (62.2%) from a profit of $9,868 in the nine-month period ended September 30, 2008 to a profit of $3,730 in the nine-month period ended September 30, 2009.Interest Income-Net. Interest income-net includes interest income on our interest-bearing investments for both quarters ending March 31, 2009 and interest income2010. Interest expense was recorded at 4% on the note receivable from Mestek for$7,500 line of credit outstanding during the applicable months.first quarter of 2010.(Expense) Income-Net. Other Income-net primarily consists of foreign currency exchange gains (losses) on transactions with Omega Flex Limited, our U.K. subsidiary.20092010 approximates the 20082009 rate and does not differ materially from expected statutory rates.However, a reversal of a portion of the FIN 48 liability described in Note 2, due to the expiration of the statute of limitations, lowered tax expense in the nine-months ending September 30, 2009.(All dollars are in thousands)health care claims reserves, and accounting for income taxes. Actual amounts could differ significantly from these estimates.RevenuesUnder 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:impairment of their abilityinability to make payments, additional allowances may be required.Inventorytwo-yearstwo-years’ usage, measured on a historical usage basis, to be excess inventory and reduces the gross carrying value of inventory accordingly. the Intangibles – Goodwill and Other Topic 350 of the FASB Accounting Standards Codification,ASC, the Company ceased recording amortization of goodwill and intangible assets with indefinite lives effective January 1, 2002. The Company performed annual impairment tests where fair value of the reporting unit was compared to the carrying amount. The fair value of the reporting unit exceeded the carrying amounts, thereforein accordance with this guidance as of December 31, 2008 the analysis showed no2009 and December 31, 2008. These analyses did not indicate any impairment of goodwill.the first $50 ofvarious product liability claims.claims on a per occurrence basis under its general liability insurance policies, ranging from $25 to $75, depending on the policy year. To date, the Company has not experienced a meaningful product failure rate.Income Taxes Topic of the FASB Accounting Standards Codification. Company recorded tax expense and related deferred taxes and tax benefits.(All amountsthousands except share amounts)Ninethousands)September 30, 2009As of September 30, 2009, the Company had $10,701 in consolidatedMarch 31, 2010and cash equivalents, which is $928 more thanbalance at March 31, 2010 was $1,906, compared to $1,881 at December 31, 2008.Cash providedoperations$1,790. The first quarter of 2009 required higher payments for the first nine monthssettlement of 2009 was $4,365 compared with $3,026 providedliabilities connected to the increased sales from 2008, and in the first nine monthsaddition, included a unique raw material payment of 2008, a $1,339 increase. The significant changes in operating activities included Inventory and Other Liabilities.Cash provided by Inventories of $3,790 for the first nine months of 2009, is an improvement of $4,020 compared to 2008. This is a result of the reduction of inventory purchases in 2009 in relation to lower sales and an overall improvement in our inventory price structure.Cash outflows for Other Liabilities decreased significantly compared to 2008, which is largely$490. Accrued compensation required $1,451 less cash due to the final $1,850diminished 2009 results, which also impacted the compensation formulas.payment that was made indiminishment, cash used for inventory increased $1,991 between periods, as purchases were significantly reduced during the first quarter of 2008 related2009 as management focused on trimming inventory levels to match sales volume. Inventory turns however were fairly consistent between the periods being 3.2 and 3.9 for 2009 and 2010, respectively. Also, accounts receivable collections went down $1,439. This was primarily due to the Legal Settlement.Investing ActivitiesCash useddecrease in investing activities forsales from the fourth quarter of 2008 to the same quarter in 2009, thus impacting the eventual cash collections during the first nine monthsquarter of 2009 was $3,568, which includes a $3,250 loanthe succeeding year.our former parent company, detailed in Note 8, compared with $2,886 provided in the first nine months of 2008.investing activities. Capital spending was $318$23 and $364$313 for 2010 and 2009, respectively. As stated in Note 12 of the first nine months ended September 30,Company’s December 31, 2009 and September 30, 2008, respectively.nine monthsquarter of 2009 was $24, compared with $7,632 usedno finance spending in the first nine months of 2008. The most significant component for the nine months of 2008 was the $7,092 related to the special dividend outlined in Note 4, Shareholders’ Equity.time-to-time. tim-to-time. the first nine months of 2009, the Company had purchased 1,986 shares of treasury stock for $24.September 4,December 17, 2009, the Company extended itsagreed to a Revolving Line of Credit Note and a Loan Agreement with Sovereign Bank, N.A., whereby the companyNA (“Sovereign”). The Company thereby established a line of credit facility for a one-year duration ending September 1, 2010, and in the maximum amount of $7,500.$15,000, maturing on December 31, 2010, with funds available for working capital purposes and to fund dividends. This supersedes the existing $7,500 line of credit the Company previously had in place with Sovereign. The loan is collateralized by all of the Company’s tangible and intangible assets. The loan agreement provides for the payment of any loan under the agreement at a rate that is either prime rate less 0.25%plus 0.75%, or LIBOR rate plus 1.75%. Under the terms of the agreement, the3%, with a 4% floor. The Company iswas also required to pay a nominal commitment fee for the additional $7,500 of available funds, and is also delegated to0.175%17.5 basis points of the average unused balance on a quarterly basis. As of September 30, 2009, theThe Company does not have anyhas no other loans or loan balances outstanding underat March 31, 2010.loan agreement.September 30, 2009March 31, 2010 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.The Company expects the collection of the $3,250 Mestek Note described in Note 8 in October of 2010. 20082009 year-end Form 10-K under the caption “Tabular Disclosure of Contractual Obligations and Off-Balance Sheet Arrangements”.thirdfirst quarter of 2009,2010, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures. The Company’s disclosure controls and procedures (asare designed to ensure that the Company records, processes, summarizes and reports in a timely manner the information required to be disclosed in the periodic reports filed by the Company with the Securities and Exchange Commission. The Company’s management, including the chief executive officer, chief financial officer and principal accounting officer, have conducted an evaluation of the effectiveness of the design and operation of the Company’s Disclosure Controls and Procedures as defined in Rulesthe Rule 13a-15(e) or 15d-15(e) under theof Securities Exchange Act of 1934, as amended (the “Exchange Act”)).1934. Based on that evaluation, the chief executive officer, and the chief financial officer and principal accounting officer have concluded that, as of the date of this report, the Company’s disclosure controls and procedures wereare effective to provide reasonable assurance of achieving the purposes described in (1) recording, processing, summarizingRule 13a-15(e), and reporting, on a timely basis, informationno changes are required to be disclosed by the Companyat this time.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.Rulerule 13a-15(f) of the Securities Exchange Act)Act of 1934) identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934 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 and principal accounting officer completed their evaluation.NoneMattersMatter to a Vote of the Security Holdersthirdfirst quarter of 2009.2010.ExhibitDescriptionNo.____Description10.1Second Allonge to Revolving Line of Credit Note dated September 4, 2009 between Omega Flex, Inc. and Sovereign Bank.10.2Second Amendment to the Loan Agreement dated September 4, 2009 between Omega Flex, Inc. and Sovereign Bank.10.3Amendment 1 to the Rule 10b5-1 Repurchase Plan dated September 15, 2009 between Omega Flex, Inc. and Hunter Associates, Inc.31.1November 5, 2009______________
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