Item 1. Business
Item
1 - BUSINESS
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain
statements in this Annual Report on Form 10-K that are not historical facts — but rather reflect our current expectations concerning
future results and events — constitute forward-looking statements. The words “believes,” “expects,” “intends,”
“plans,” “anticipates,” “intend,” “estimate,” “potential,” “continue,”
“hopes,” “likely,” “will,” and similar expressions, or the negative of these terms, identify such
forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors
that could cause the actual results, performance or achievements of Omega Flex, Inc., or industry results, to differ materially from
future results, performance or achievements expressed or implied by such forward-looking statements.
Readers
are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s view only as of the date
of this annual report statement. We undertake no obligation to update the result of any revisions to these forward-looking statements
which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, conditions,
or circumstances.
GENERAL
DESCRIPTION
OF OUR BUSINESS
Overview
of the Company
The
Company’s business is controlled as a single operating segment that consists of the manufacture and sale of flexible metal hose
(also described as corrugated tubing), as well as the sale of the Company’s related proprietary fittings and a vast array of accessories.
The
Company is a leading manufacturer of flexible metal hose, which is used in a variety of ways to carry gases and liquids within their
particular applications. Some of the more prominent uses include:
●
carrying
fuel gases within residential and commercial buildings;
●
carrying
gasoline and diesel gasoline products (both above and below the ground) in a double containment piping to contain any possible leaks,
which is used in automotive and marina refueling, and fueling for back-up generation;
●
using
copper-alloy corrugated piping in medical or health care facilities to carry medical gases (oxygen, nitrogen, vacuum) or pure gases
for pharmaceutical applications; and
●
industrial
applications where the customer requires the piping to have both a degree of flexibility and/or an ability to carry corrosive compounds
or mixtures, or to carry at both very high and very low (cryogenic) temperatures.
The
Company manufactures flexible metal hose at its facilities in Exton, Pennsylvania, and Houston, Texas in the United States (U.S.), and
in Banbury, Oxfordshire in the United Kingdom (U.K.), and primarily sells its products through distributors, wholesalers and to original
equipment manufacturers (“OEMs”) throughout North America and Europe, and to a lesser extent other global markets.
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Industry
Overview
The
flexible metal hose industry is highly fragmented and diverse, with more than 10 companies producing flexible metal hose in the U.S.,
and at least that many in Europe and Asia. Because of its simple and ubiquitous nature, flexible metal hose can be applied and has been
applied to a number of different applications across a broad range of industries.
The
major market categories for flexible metallic hose include (1) automotive, (2) aerospace, (3) residential, commercial, and institutional
construction, and (4) general industrial. Omega Flex participates in the latter two markets for flexible metallic hose. The residential
and commercial construction markets utilize corrugated stainless steel tubing (CSST) primarily for flexible gas piping, double containment
piping for conveying diesel fuel and gasoline from a storage tank to a dispenser or back-up generator. The Company utilizes corrugated
copper tubing for medical gases in medical care facilities, including hospitals, clinics, dental and veterinary offices, and long-term
care facilities. The general industrial market includes all of the processing industries, the most important of which include primary
steel, petrochemical, pharmaceutical, and specialty applications for the transfer of fluids at both extremely low and high temperatures,
(such as the conveying of cryogenic liquids) and a highly fragmented OEM market, as well as the maintenance and repair market.
None
of our competitors appear to be dominant in more than one market. We are a leading supplier of flexible metal hose in each of the markets
in which we participate. Our assessment of our overall competitive position is based on several factors. The flexible gas piping market
in the U.S. is currently concentrated in the residential housing market. Based on the reports issued by the national trade groups on
housing construction, the level of acceptance of flexible gas piping in the construction market, and the average usage of flexible gas
piping in a residential building, we believe that we are able to estimate with a reasonable level of accuracy the size of the total gas
piping market. In addition, the Company is a member of an industry trade group comprised of the largest manufacturers of CSST in the
U.S., which compiles and distributes sales volume statistics for its members relative to flexible gas piping. Based on our sales and
the statistics described above, the Company believes it can estimate its position within that market. For other applications, industry
trade groups collect and report data related to these markets, and we can then compare and estimate our status within that group as a
whole. In addition, the customer base for the products that we sell, and the identity of the manufacturers aligned with those customers
is fairly well known, which again allows the Company to extract information and estimate its market position. Lastly, the term “leading”
implies a host of factors other than sales volume and market share position. It includes the range and capability of the product line,
history of product development and new product launches, all of which information is in the public domain. Based on all of this information,
the Company is reasonably confident that it is indeed a leader in the major market segments in which it participates.
Development
of Business
Incorporated
in 1975 under the name of Tofle America, Inc., the Company was originally established as the subsidiary of a Japanese manufacturer of
flexible metal hose. For a number of years, the Company was a manufacturer of flexible metal hose that was sold primarily to customers
using the hose for incorporation into finished assemblies for industrial applications. The Company later changed its name to Omega Flex,
Inc., and in 1996, the Company was acquired by Mestek, Inc. (Mestek).
In
January 2005, Mestek announced its intention to distribute its equity ownership in our common stock to the Mestek shareholders. A registration
statement for the Omega Flex common stock was filed with the Securities and Exchange Commission and the registration statement was declared
effective on July 22, 2005. The Company also listed its common stock on the NASDAQ National Market (now the NASDAQ Global Market) under
the stock symbol “OFLX” and began public trading of the common stock on August 1, 2005.
Over
the years, most of the Company’s business has been generated from Omega Flex, Inc., and concentrated in North America, but the
Company also has foreign subsidiaries located in the U.K., which are largely focused on European and other international markets. The
Company also has a local subsidiary which owns the Company’s Exton, Pennsylvania real estate.
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Overview
of Current Business
Strategy
The
Company’s strategy has been, and continues to be, focused on its core strengths in the development, manufacture, and sale of flexible
metal hose for use in a variety of applications. The Company is uniquely situated to exploit its capabilities in this area due to its
long experience in engineering and bringing new products to market, and its proprietary rotary process, which permits the Company to
manufacture flexible metal hose with superior quality and efficiency as compared to its competitors. The Company’s strategy is
to develop flexible metal products in new and developing markets that would recognize and compensate for the value-added propositions
that each product brings to that industry. Typically, this would involve a new flexible metal hose that replaces traditional rigid products,
and thereby improve the quality of the installed product, increase installation efficiency, and provide an overall cost and time savings.
Examples of such new products are our flexible gas piping sold under the TracPipe ® CounterStrike ® trademarks,
our new MediTrac ® corrugated medical gas tubing, and our DoubleTrac ® double-containment piping. In each
instance, the products we bring to market offers customers superior quality, expanded applications due to the product’s flexibility,
and reduced total costs. The Company seeks to protect its investments in product development by seeking and obtaining patent protection
for new and unique features of its products.
Sales,
Products and Customers
The
Company’s business is managed as a single operating segment that consists of the manufacture and sale of flexible metal hose, fittings,
and accessories.
We
sell our products to customers scattered across a wide and diverse set of industries ranging from construction to pharmaceutical with
close to 10,100 customers on record. These sales channels include sales through independent sales representatives, distributors, OEM,
direct sales, and sales through our website on the internet. We utilize various distribution companies in the sale of our TracPipe ®
and Counterstrike ® flexible gas piping, and these distribution customers in the aggregate represent a significant
portion of our business. In particular, the Company has one significant customer, whose various branches had sales in the range of 13%
to 14% of total sales during the periods of 2019 to 2021 and was in the range of 7% to 18% of the Company’s accounts receivable
balance over the last two years. All of this business is done on a purchase order basis for immediate resale commitments or stocking,
and there are no long-term purchase commitments. In the event we were to lose an account, we would not expect any long-term reduction
in our sales due to the broad end-user acceptance of our products. We would anticipate that in the event of a loss of any one or more
distributors, that after an initial transition period, the sale of our products would resume at or near their historical levels. Furthermore,
in the case of certain national distribution chains, which is the case regarding the Company’s largest customer noted above, and
other distributors, it is possible that there would continue to be purchasing activity from one or more regional or branch distribution
customers. We sell our products within North America, primarily in the U.S. and Canada, and we also sell our products internationally,
primarily in Europe through our manufacturing facility located in Banbury, U.K. Our sales outside of North America were in the range
of 7% to 11% of our total sales during the last three years, with most of the sales occurring in the U.K. and elsewhere in Europe. We
do not have a material portion of our long-lived assets located outside of the U.S.
As
mentioned previously, we sell our products primarily through independent outside sales organizations, including independent sales representatives,
distributors, fabricating distributors, wholesalers, and OEMs. We have a limited internal sales function that sells our products to key
accounts, including OEMs and distributors of bulk hose. We believe that within each geographic market in which the independent sales
representative, distributor or wholesaler is located that our outside sales organizations are the first or second most successful outside
sales organization for the particular product line within that geographic area.
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The
Company has had the most success within the residential construction industry with its flexible gas piping products, TracPipe ® ,
which was introduced in 1997, and its more robust counterpart TracPipe ® CounterStrike ® , which came to market
in 2004. Partnered with the development of our AutoFlare ® and AutoSnap ® patented fittings and accessories,
both have enjoyed wide acceptance due to their reliability and durability. Within the residential construction industry, the flexible
gas piping products that we offer and similar products offered by our competitors have sought to overcome the use of black iron pipe
that has traditionally been used by the construction industry in the U.S. and Canada for the piping of fuel gases within a building.
Prior to the introduction of the first CSST system in 1989, nearly all construction in the U.S. and Canada used traditional black iron
pipe for gas piping. However, the advantages of CSST in areas subject to high incidence and likelihood of seismic events had been first
demonstrated in Japan. In seismic testing, the CSST was shown to withstand the stresses on a piping system created by the shifting and
movement of an earthquake better than rigid pipe. The advantages of CSST over the traditional black iron pipe also include lower overall
installation costs because it can be installed in long uninterrupted lines within the building.
The
flexibility of the tube allows it to be bent by hand without any tools when a change in direction in the line is required. In contrast,
black iron pipe requires that each bend in the pipe have a separate fitting attached. This requires the installer to thread the ends
of the black iron pipe, apply an adhesive to the threads, and then screw on the fitting, all of which is labor intensive and costly,
including testing and rework if the work is not done properly. As a result of these advantages, the Company estimates that CSST now commands
over one-half of the market for fuel gas piping in new and remodeled residential construction in the U.S., and the use of rigid iron
pipe, and to a lesser degree copper tubing, accounts for the remainder of the market. The Company plans to continue its growth trend
by demonstrating its advantages against other technologies, in both the residential and commercial markets, in both the U.S. and overseas
in geographic areas that have access to natural gas distribution systems.
As
previously mentioned, in 2004, the Company introduced a new brand of flexible gas piping sold under the registered trademark “CounterStrike ®” .
CounterStrike ® is designed to be more resistant to damage from transient electrical arcing. This feature is particularly
desirable in areas that are subject to high levels of lightning strikes, such as the Southeast and Ohio Valley sections of the U.S. In
a lightning strike, the electrical energy of the lightning can energize all metal systems and components in a building. This electrical
energy, in attempting to reach ground, may arc between metal systems that have different electrical resistance, and arcing can cause
damage to the metal systems. In standard CSST systems, an electrical bond between the CSST and the building’s grounding electrode
would address this issue, but lightning is an extremely powerful and unpredictable force. CounterStrike ® CSST is designed
to be electrically conductive and therefore disperse the energy of any electrical charge over the entire surface of the CounterStrike ®
line. In 2007, the Company introduced a new version of CounterStrike ® CSST that was tested to be even more resistant
to damage from electrical arcing than the original version, and substantially more effective than standard CSST products. As a result
of its robust performance, the new version of CounterStrike ® has been widely accepted in the market, and thus during 2011,
the Company made the decision to sell exclusively CounterStrike ® within the U.S. This move demonstrated the Company’s
commitment to innovation and safety, and further enhanced our leadership in the marketplace.
In
2008, the Company introduced its first double containment piping product – DoubleTrac ® . DoubleTrac ®
double containment piping has earned stringent industry certifications for its ability to safely contain and convey liquid fuels. DoubleTrac ®
received certification from Underwriters Laboratory, the testing and approval agency, that our product is fully compliant with
UL971A, which is the product standard in the U.S. for metallic underground fuel piping, ULc S679 which is the product standard in Canada
for metallic underground fuel piping, as well as approvals from other relevant state agencies that have more stringent testing procedures
for the product. Additionally, DoubleTrac® is fully complaint to UL 1369, which is the bi-national USA and Canada standard for aboveground
piping for flammable and combustible liquids. DoubleTrac® is one of a select few piping systems having listings and approvals for
both belowground and aboveground piping systems. Similar to our flexible gas piping, DoubleTrac ® provides advantages over
older rigid pipe technologies. DoubleTrac ® is made and can be installed in long continuous runs, eliminating the need
for manually assembling rigid pipe junctions at the end of a pipe or at a turn in direction. In addition, DoubleTrac ®
has superior performance in terms of its ability to safely convey fuel from the storage tank to the dispenser, primarily because DoubleTrac ®
is essentially a zero permeation piping system, far exceeding the most stringent government regulations. Originally designed for
applications involving automotive fueling stations running from the storage tank to the fuel dispenser, the ability of DoubleTrac ®
to handle a variety of installation challenges has broadened its applications to include refueling at marinas, fuel lines for back-up
generators, and corrosive liquids at waste treatment plants. In short, in applications where double containment piping is required to
handle potentially contaminating fluids or corrosive fluids, DoubleTrac ® is engineered to handle those demanding applications.
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DEF-Trac ® ,
a complementary product which is very similar to DoubleTrac ® , was brought to the marketplace in 2011. DEF-Trac ®
piping is specifically engineered to handle the demanding requirements for diesel emissions fluid (DEF). Federal regulations require
all diesel engines to use DEF to reduce the particulate contaminants from the diesel combustion process. However, DEF is highly corrosive
and cannot be pre-mixed with the diesel fuel. This requires that new diesel trucks and automobiles must have separate tanks built into
the vehicle so that the diesel emissions fluid can be injected into the catalytic converter after the point of combustion. Similarly,
a large portion of fueling stations carrying diesel fuel are now also selling DEF through a separate dispenser. In addition to being
highly corrosive, DEF also has a high freezing temperature, requiring a heat trace in the piping in applications in northern areas of
the U.S. DEF-Trac ® flexible piping is uniquely suited to handle all of these challenges, as the stainless steel inner
core is corrosion resistant, and DEF-Trac ® also comes with options for heat trace that is extruded directly into the wall
of the product. In summary, DEF-Trac ® provides a complete solution to the demanding requirements of this unique application,
as such, DEF-Trac ® has been met with enormous acceptance from the industry that was searching for a solution to the new
environmental requirement. The advantageous market position of DEF-Trac ® has leveraged the penetration of DoubleTrac ®
into the broader market for automotive fueling applications.
In
September 2013, the Company announced that it would be releasing a newly developed fitting, AutoSnap ® , as part of its
flexible gas piping product line. After successfully completing all required testing by independent testing agencies, as well as extensive
field trials across the U.S. by trained TracPipe ® CounterStrike ® installers, AutoSnap ® was
officially introduced to the market in January 2014 to wide acceptance. With its patent-pending design, the product simplified the installation
process, and addressed installer preferences for both speed and ease of installation. The AutoSnap ® fitting now commands
a significant portion of the Company’s fittings demand.
In
2019, the Company commercialized MediTrac ® , corrugated medical tubing (“CMT”), following its 2018 launch with
several beta sites. Developed for the healthcare industry, the product can be used in hospitals, ambulatory care centers, dental, physician
and veterinary clinics, laboratories, and any facility that uses medical gases (oxygen, nitrogen, carbon dioxide, etc.). Made from a
copper alloy with an exterior fire-retardant jacket, MediTrac ® is made and sold in long continuous-length rolls. MediTrac’s
flexible nature and storage in rolls allows it to be transported to and installed in health care facilities much more easily and quickly
than traditional medical grade rigid copper pipe, which comes in 20 foot long sections. MediTrac ® is unrolled from a spool
and installed in a medical facility in one long continuous length and is bent by hand when a change in direction is needed. The long
lengths and ability to change direction with ease eliminates labor that would otherwise be needed to braze connections to straight sections
of copper pipe or elbows or tees for changes in direction, while increasing installation efficiency and operational safety and minimizing
downtime for healthcare facilities. Easy to assemble axial swaged brass fittings connect with all K, L and DWV medical tubing that is
sized from ½” to 2” in diameter and provides a leak-tight seal using ordinary hand tools. The patent-pending fitting
also prevents tampering or disassembly through the use of a tamper-proof sleeve that is required by the Health Care Facilities Code (NFPA
99 – 2018 edition). Rated for 185 psig, MediTrac ® can deliver the necessary volume of gas wherever it is needed
across a facility. A recent case study comparing the installation of rigid copper pipe and MediTrac ® showed that MediTrac ®
increases installation efficiency by a factor of five (i.e., a 500% increase in efficiency). By reducing the number of joints and
brazed connections, MediTrac ® also reduces possible contamination into the medical gas system along with the fire risk
associated with brazing. MediTrac ® is currently listed to UL 1365 and has an ASTM E84 rating of 25/50 and meets all 2018
requirements of the Health Care Facilities Code (NFPA 99 – 2018).
In
2020, the MediTrac ® product line experienced significant growth in use and acceptance in the marketplace resulting from
its ability to be quickly and safely installed to meet the unprecedented crisis caused by the COVID-19 pandemic. Numerous medical institutions
and emergency medical centers used MediTrac ® CMT to quickly install medical gas lines in tent hospitals or in converted
facilities to handle the surging demand. For example, MediTrac ® medical gas piping was installed in a NYC temporary hospital
located in Central Park and in the Cleveland Clinic for patients with COVID-19 infections and in need of supplemental oxygen treatments.
On September 25, 2020, the Centers for Medicare & Medicaid Services (CMS) issued a waiver allowing the use of CMT in new and existing
healthcare facilities based on the provisions in NFPA 99 – 2018, allowing MediTrac ® to be installed in all facilities
in the U.S.
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In
addition to the flexible gas piping and other previously described markets, our flexible metal hose is used in a wide variety of other
applications. Our involvement in these markets is important because just as the flexible gas piping applications have sprung from our
expertise in manufacturing metal hose, other applications may also evolve from our participation in the industry. Flexible metal hose
is used in a wide variety of industrial and processing applications where the characteristics of the flexible hose in terms of its flexibility,
and its ability to absorb vibration and thermal expansion and contraction, have substantial benefits over rigid piping. For example,
in certain pharmaceutical processing applications, the process of developing the specific pharmaceutical may require rapid freezing of
various compounds through the use of liquefied gases, such as liquefied nitrogen, helium or Freon. The use of flexible metal tubing is
particularly appropriate in these types of applications. Flexible metal hose can accommodate the thermal expansion caused by the liquefied
gases carried through the hose, and the total length of the hose will not significantly vary. In contrast, fixed or rigid metal pipe
would expand and contract along its length as the liquid gases passed through it, causing stresses on the pipe junctions that would over
time cause fatigue and failure. Alternatively, within certain industrial or commercial applications using steam, either as a heat source
or in the industrial process itself, the pumps used to transfer the liquid or steam within the system are subject to varying degrees
of vibration. Additionally, flexible metal hoses can also be used as connections between the pump and the intake of the fluids being
transferred to eliminate the vibration effects of the pumps on the piping transfer system. All of these areas provide opportunities for
the flexible metal hose arena, and thus the Company continues to participate in these markets, as it seeks new innovative solutions which
will generate additional revenue streams for the future.
In
each instance, whether the application is for CSST for fuel gases, flexible metal hose for handling specialty chemicals or gases, flexible
double containment piping, unique industrial applications requiring the ability to withstand wide variations in temperature and vibration,
or copper alloyed CMT for medical facilities, all of our success rests on our metal hose. Most of our flexible metal hoses range in diameter
from 1/4” to 2” while certain applications require diameters of up to 16”. All of our smaller diameter pipe (2”
inner diameter and smaller) is made by a proprietary process that is known as the rotary process. The proprietary process that we use
to manufacture our annular hose is the result of a long-term development effort begun in 1995. Through continuous improvement over the
years, we have developed and fine-tuned the process so that we can manufacture annular flexible metal hose on a high speed, continuous
process. We believe that our own rotary process for manufacturing annular corrugated metal hose is the most cost efficient method in
the industry, and that our rotary process provides us with a significant advantage in many of the industries in which we participate.
As a result, we are able to provide our product on a demand basis. Over the years, the Company has had great success in achieving on-time
delivery performance to the scheduled ship date. The quick inventory turnover reduces our costs for in-process inventory, and further
contributes to our gross profit levels. We have also improved our productivity on a historical basis.
Markets
and Competition
There
are approximately 10 manufacturers of flexible metal hose in the U.S., and approximately that number in Europe and Asia. The U.S. manufacturers
include Titeflex Corporation, Ward Manufacturing, Microflex, Hose Master, Pennflex, and several smaller privately held companies. No
one manufacturer, as a general rule, participates in more than two of the major market categories, automotive, aerospace, residential
and commercial construction, and general industrial, with most concentrating in just one. We estimate that we are at or near the top
position of the two major categories in which we participate in regards to market share. In the flexible gas piping market, the U.S.
market is currently concentrated in the residential housing market. Based on the reports issued by the national trade groups on housing
construction, the level of acceptance of flexible gas piping in the construction market, and the average usage of flexible gas piping
in a residential building, as well as through our sales position within that market, we are able to estimate with a high level of accuracy
the size of the total gas piping market. In addition, the Company is a member of an industry trade group, which compiles and distributes
sales statistics for its members relative to flexible gas piping. For other applications, industry trade groups collect and report on
the size of the relevant market, and we can estimate our percentage of the relevant market based on our sales as compared to the market
as a whole. The larger of our two markets, the construction industry, has seen a modest increase in the number of residential housing
starts in 2021, as compared to the previous year. As discussed elsewhere, black iron pipe or copper tubing was historically used by all
builders of commercial and residential buildings until the advent of flexible gas piping and changes in the relevant building codes.
Since that time, flexible gas piping has taken an increasing share of the total amount of fuel gas piping used in construction.
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Due
to the number of applications in which flexible metal hose may be used, and the number of companies engaged in the manufacture and sale
of flexible metal hose, the general industrial market is very fragmented, and we estimate that no one company has a predominant market
share of the business over other competitors. In the market for double containment piping, we compete primarily against rigid pipe systems
that are more costly to install than DoubleTrac ® double containment piping. For medical tubing applications, the main
competitor is medical grade (Type K or Type L) rigid copper pipe. MediTrac ® is the only corrugated medical tubing in the
U.S. that is approved to the stringent requirements of UL 1365. The general industrial markets within Europe are very mature and tend
to offer opportunities that are interesting to us in niche markets or during periods in which a weak dollar increases the demand for
our products on a competitive basis. Such has been the case for several years and has created new relationships for us. Currently, we
are not heavily engaged in the manufacture of flexible metal hose for the aerospace or automotive markets, but we continue to review
opportunities in all markets for our products to determine appropriate applications that will provide growth potential and high margins.
In some cases, where the product offering is considered a commodity, price is the overriding competing factor. In other cases, a proprietary
product offering or superior performance will be the major factors with pricing being secondary, and in some cases, a non-factor. The
majority of our sales are to distributors and wholesalers, and our relationships with these customers are on an arms-length basis in
that neither we, nor the customers are so dependent on the other to yield any significant business advantage. From our perspective, we
are able to maintain a steady demand for our products due to broad acceptance of our products by end users, regardless of which distributor
or wholesaler sells the product.
Resources
and Raw Materials
We
use various materials in the manufacture of our products, primarily stainless steel for our flexible metal hose and plastics for our
jacketing material on TracPipe ® CounterStrike ® flexible gas piping and DoubleTrac ® double
containment piping, as well as a copper alloy for our MediTrac ® CMT. We also purchase all of our proprietary fittings
for use with the TracPipe ® and CounterStrike ® flexible gas piping, DoubleTrac ® double containment
piping, and MediTrac ® CMT. Although we have multiple sources qualified for all of our major raw materials and components,
we have historically used only one or two sources of supply for such raw materials and components. Our current orders for stainless steel
and fittings are each placed with one or two suppliers. If any one of these sources of supply were interrupted for any reason, then we
would have to devote additional time and expense in obtaining the same volume of supply from our other qualified sources. This potential
transition, if it were to occur, could affect our operations and financial results during the period of such transition. During 2021,
the commodity prices of nickel and copper were higher compared to last year. Nickel is a prime material in stainless steel which the
Company utilizes to manufacture CSST, and copper is a key component of the Company’s brass fittings and our MediTrac ®
CMT. Fortunately, the Company was able to maintain reasonably stable margins during 2021. This was mainly accomplished by implementing
our own pricing actions to help offset the upward movements in the respective material markets. We believe that with our purchase commitments
for stainless steel, polyethylene and for our proprietary fittings, we have adequate sources of supply for these raw materials and components.
Like most other manufacturers, we had sporadic supply chain issues in 2021, but we believe our multiple suppliers have sufficient raw
materials and capacity minimizing any potential disruption. We believe that the supply sufficiency of stainless steel will continue until
there is a reduction in global capacity, such as mine closures, which would then cause a constriction. Volatility in the commodities
marketplace and competitive conditions in the sale of our products could potentially restrict us from passing along raw materials or
component part price increases to our customers.
Business
Seasonality
The
demand for our flexible piping products that are related to construction activity including TracPipe ® , Counterstrike ® ,
DoubleTrac ® and MediTrac ® , may be affected by the construction industry’s demand, which generally
tightens during the winter months of each year due to cold and inclement weather. Accordingly, sales are usually higher in the spring,
summer, and fall.
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Government
Regulations including Environmental Regulations
The
Company believes that its businesses and operations, including its manufacturing plants and equipment, are in substantial compliance
with all applicable government laws and regulations, including those related to environmental, consumer protection, international trade,
labor and employment, human rights, tax, anti-bribery, and competition matters. Any additional measures to maintain compliance are not
expected to materially affect the Company’s capital expenditures (including expenditures for environmental control facilities),
competitive position, financial position, or results of operations.
Various
legislative and administrative regulations applicable to the Company in the matters noted above have become effective or are under consideration
in many parts of the world. To date, such developments have not had a substantial adverse impact on the Company. However, if new or amended
laws or regulations impose significant operational restrictions and compliance requirements upon the Company or its products, the Company’s
business, capital expenditures, results of operations, financial condition and competitive position could be negatively impacted. Refer
to Item 1A. Risk Factors for further information.
Human
Capital
We
believe that our employees are the foundation of the innovative ideas necessary for the advancement of our products, and success of our
Company. Our employees are the conduits to successful relationships with our customers, vendors, and various business partners, as well
as the custodians of a safe and efficient operation of our assets ending with a highly satisfied customer. The Company fosters a collaborative,
inclusive, and safety-minded work environment, with a focus on ingenuity. We seek to identify the most highly qualified talent for our
organization, enabling us to execute on our strategic objectives of providing the most innovative and technologically advanced flexible
metal hose products in the market. To attract and retain employees, the Company offers competitive wages across all levels, and maintains
a superior package of employee benefits, including medical insurance, life insurance, and retirement and savings programs, for all employees,
as well as executive compensation plans as described in our proxy statement.
As
of December 31, 2021, the Company had 170 employees. Most of our employees are located in our manufacturing facilities in Exton, Pennsylvania,
which contain our factory personnel, engineering, finance, human resources and most of our sales staff. Our factory workforce in Exton,
Pennsylvania, is not party to a collective bargaining agreement. A small number of employees work at our facility in Houston, Texas.
We also maintain an office in Middletown, Connecticut where certain management, sales and administrative personnel are assigned. A number
of individual sales personnel are also scattered across the U.S. We also maintain a manufacturing facility in Banbury, U.K., which contains
employees of similar functions to those in the U.S., but on a much smaller scale, including a small presence in France. The sales personnel
in England and France handle all sales and service for our products in Europe, most notably the U.K., and the majority of our transactions
with other international territories.
We
are committed to fostering a work environment in which all employees treat each other with dignity and respect. This commitment extends
to providing equal employment and advancement opportunities based on merit and experience. We continually strive to attract a diverse
workforce by partnering with local organizations to identify potential candidates to advance and strengthen our human capital management
program.
Intellectual
Property
We
have a comprehensive portfolio of intellectual property, including approximately 247 patents issued in various countries around the world.
The patents cover (a) the fittings used by the flexible gas piping to join the piping to a junction or assembly, (b) pre-sleeved CSST
for use in underground applications, (c) an electrically conductive jacket for flexible gas piping that we sell under the trademark CounterStrike ® ,
(d) a tubing containment system for our DoubleTrac ® double containment piping, and (e) fittings for use with our MediTrac®
corrugated medical tubing. Our AutoSnap ® fitting is a prominently used product with flexible gas piping because it offers
a metal-to-metal seal between the fitting and the tubing, and because of its robustness and ease of use. The metal-to-metal contact provides
for a longer lasting and more reliable seal than fittings which use gaskets or sealing compounds that can deteriorate over time. In applications
involving fuel gases in a building, the ability to maintain the seal and prevent the leaking of such gases over long periods of time
is valued by our customers. In addition, the AutoSnap ® fitting provides the installer with greater ease of use by preassembling
all the securing elements inside the body of the fitting. We also have received a patent for the composition of the polyethylene jacket
used in our CounterStrike ® flexible gas piping product, which has increased ability to dissipate electrical energy in
the event of a nearby lightning strike. The tubing containment system of our DoubleTrac ® double containment piping, which
is also patented in the U.S. and in other countries, allows for the monitoring and collection of any liquids that may leak from the stainless
steel containment layer. We have filed patent applications for the MediTrac ® fittings to cover the unique requirements
in the U.S. for fittings that permanently affix the fitting to the CMT system, and provides a tamper-proof connection to the CMT system.
The expiration dates for the several patents covering the Counterstrike ® patent will expire in 2025. We currently have
several patent applications pending in the U.S. and internationally covering improvements to our AutoFlare ® fittings and
our CounterStrike ® polyethylene jacket, and also have a patent pending on our MediTrac ® fitting. Finally,
and as mentioned above, our unique rotary process for manufacturing flexible metal hose has been developed over a number of years and
constitutes a valuable trade secret.
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Internet
Website
You
may learn more about our Company by visiting our website at www.omegaflexcorp.com. Among other things, you can access our filings with
the Securities and Exchange Commission, which maintains a website at www.sec.gov that contains the Company’s various reports,
proxy, and information statements. These filings include proxy statements, annual reports (Form 10-K), quarterly reports (Form 10-Q),
and current reports (Form 8-K), as well as Section 16 reports filed by our officers and directors (Forms 3, 4 and 5). All of these reports
will be available on the website as soon as reasonably practicable after we file the reports with the SEC. In addition, we have made
available on our website under the heading “Compliance” the charters for the Audit, Compensation and Nominating/Governance
Committees of our Board of Directors and our Code of Business Ethics. We intend to make available on our website any future amendments
or waivers to our Code of Business Ethics. The information on our website is not part of this report.