Omega Flex, Inc. - Quarter Report: 2012 June (Form 10-Q)

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 (Mark One)

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

For the quarterly period ended  June 30, 2012

(   )

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

For the transition period from ________________________ to ______________________

Commission File Number  000-51372

Omega Flex, Inc.

(Exact name of registrant as specified in its charter)

Pennsylvania	23-1948942
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
451 Creamery Way, Exton, PA	19341
(Address of principal executive offices)	(Zip Code)

(610) 524-7272

Registrant’s telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [x]  No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 [ ]   No [x]

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

Large accelerated filer [  ]     Accelerated filer [ ]     Non-accelerated filer [ ]     Smaller reporting Company [x]

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

Yes [ ]  No [x]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS

DURING THE PRECEDING FIVE YEARS.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 12 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the courts.

The number of shares of the registrant’s common stock issued and outstanding as of June 30, 2012 was 10,091,822.

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OMEGA FLEX, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE SIX MONTHS ENDED JUNE 30, 2012

INDEX

PART I - FINANCIAL INFORMATION	Page No.
Item 1 – Financial Statements
Condensed consolidated balance sheets at June 30, 2012 (unaudited)
and December 31, 2011	3
Condensed consolidated statements of income for the
three-months and six-months ended June 30, 2012 and 2011 (unaudited)	4
Condensed consolidated statements of comprehensive income for the three-months
and six-months ended June 30, 2012 and 2011 (unaudited)	5
Condensed consolidated statements of cash flows for the
six-months ended June 30, 2012 and 2011 (unaudited)	6
Notes to the condensed consolidated financial statements (unaudited)	7
Item 2- Management's Discussion and Analysis of Financial Condition
and Results of Operations	18
Item 3 – Quantitative and Qualitative Information About Market Risks	27
Item 4 – Controls and Procedures	28
PART II - OTHER INFORMATION
Item 1 – Legal Proceedings	28
Item 4 – Submission of Matter to a Vote of the Security Holders	29
Item 6 - Exhibits	30
SIGNATURE	31

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PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

OMEGA FLEX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,		December 31,
	2012		2011
	(unaudited)
	(Dollars in thousands)
ASSETS
Current Assets
Cash and Cash Equivalents	$ 8,037		$ 3,476
Accounts Receivable - less allowances of
$607 and $624, respectively	9,157		9,052
Inventories-Net	6,633		6,465
Deferred Taxes	755		714
Other Current Assets	1,041		1,240
Total Current Assets	25,623		20,947
Property and Equipment - Net	5,055		5,270
Goodwill-Net	3,526		3,526
Other Long Term Assets	2,028		1,748
Total Assets	$ 36,232		$ 31,491
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable	$ 1,221		$ 1,019
Accrued Compensation	1,455		1,470
Accrued Commissions and Sales Incentives	2,227		2,098
Other Liabilities	2,287		2,143
Total Current Liabilities	7,190		6,730
Deferred Taxes	987		1,037
Other Long Term Liabilities	728		807
Total Liabilities	8,905		8,574
Shareholders’ Equity:
Omega Flex, Inc. Shareholders’ Equity:
Common Stock – par value $0.01 Share: authorized 20,000,000 Shares:          10,153,633 shares issued and 10,091,822 outstanding at June 30,               2012 and December 31, 2011, respectively	102		102
Treasury Stock	(1)		(1)
Paid-in Capital	10,808		10,808
Retained Earnings	16,794		12,397
Accumulated Other Comprehensive Loss	(487)		(502)
Total Omega Flex, Inc. Shareholders’ Equity	27,216		22,804
Noncontrolling Interest	111		113
Total Shareholders’ Equity	27,327		22,917
Total Liabilities and Shareholders’ Equity	$ 36,232		$ 31,491

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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OMEGA FLEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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 OMEGA FLEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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OMEGA FLEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	For the six-months ended
	June 30,
	2012		2011
	(Dollars in thousands)
Cash Flows from Operating Activities:
Net Income	$ 4,394		$ 1,971
Adjustments to Reconcile Net Income to
Net Cash Provided By (Used In) Operating Activities:
Non-Cash Compensation Expense	13		12
Depreciation and Amortization	324		319
Provision for Losses on Accounts Receivable, net of write-offs and recoveries	(17)		(117)
Changes in Assets and Liabilities:
Accounts Receivable	(81)		(366)
Inventory	(164)		(594)
Other Assets	(141)		124
Accounts Payable	202		231
Accrued Compensation	(18)		(600)
Accrued Commissions and Sales Incentives	128		(1,113)
Other Liabilities	2		(229)
Net Cash Provided by (Used In) Operating Activities	4,642		(362)
Cash Flows from Investing Activities:
Capital Expenditures	(105)		(86)
Net Cash Used in Investing Activities	(105)		(86)
Net Increase (Decrease) in Cash and Cash Equivalents	4,537		(448)
Translation effect on cash	24		41
Cash and Cash Equivalents – Beginning of Period	3,476		2,209
Cash and Cash Equivalents – End of Period	$ 8,037		$ 1,802
Supplemental Disclosure of Cash Flow Information
Cash paid for Income Taxes	$ 2,343		$ 1,428
Cash paid for Interest	$ -		$ -

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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 OMEGA FLEX, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.  BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Omega Flex, Inc. (Omega) and its subsidiaries (collectively the “Company”).  The Company’s unaudited  condensed consolidated financial statements for the quarter ended June 30, 2012 have been prepared in accordance with accounting principles generally accepted in the United States (GAAP), 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 GAAP 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 consolidated 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 Business

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.  In addition, our flexible metal piping is used to carry other types of gases or fluids in a number of industrial applications where the customer requires a degree of flexibility, an ability to carry corrosive compounds or mixtures, a double containment system, or piping to carry gases or fluids at very high or very low (cryogenic) temperatures.

The Company manufactures flexible metal hose at its facility in Exton, Pennsylvania, with a minor amount of manufacturing performed in the United Kingdom.  The Company sells its product through distributors, wholesalers and to original equipment manufacturers (“OEMs”) throughout North America, and in certain European markets.

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2. SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to revenue recognition and related sales incentives, accounts receivable valuations, inventory valuations, goodwill valuation, product liability reserve and accounting for income taxes.  Actual amounts could differ significantly from these estimates.

Revenue Recognition

The Company’s revenue recognition activities relate almost entirely to the manufacture and sale of flexible metal hose and pipe.  Under GAAP, 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.

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

Gross sales are reduced for all consideration paid to customers for which no identifiable benefit is received by the Company.  This includes promotional incentives, which includes various programs including year-end rebates and discounts.  The amounts of certain incentives are known with reasonable certainty at the time of sale, while others are projected based upon the most reliable information available at the reporting date.

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

Accounts Receivable

Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on specific analysis of accounts in the receivable portfolio and historical write-off experience. While management believes the allowance to be adequate, if the financial condition of the

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 Company’s customers were to deteriorate, resulting in their inability to make payments, additional allowances may be required.

Inventory

Inventories are valued at the lower of cost or market.  Cost of inventories is 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 FASB ASC Topic 350 Intangibles – Goodwill, the Company performed an annual impairment test in accordance with this guidance as of December 31, 2011.  This analysis did not indicate any impairment of goodwill.  There are no circumstances that indicate that Goodwill might be impaired at June 30, 2012.

Product Liability Reserves

Product liability reserves represent the estimated unpaid amounts under the Company’s insurance policies with respect to existing claims.  The Company uses the most current available data to estimate claims.  As explained more fully under Contingencies, for various product liability claims covered under the Company’s general liability insurance policies, the Company must pay certain defense costs within its deductible or self-insured retention limits, ranging from $25,000 to $250,000 per claim, depending on the terms of the policy in the applicable policy year, up to an aggregate amount.  The Company is vigorously defending against all known claims.

Fair Value of Financial and Nonfinancial Instruments

     

The Company measures financial instruments in accordance with Financial Accounting Standards Board (FASB) ASC Topic 820, Fair Value Measurements and Disclosures.  The accounting standard defines fair value, establishes a framework for measuring fair value under GAAP, and enhances disclosures about fair value measurements.  Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.  The standard creates a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. The Company relies on its actively traded share value – a level 1 input – in determining the fair value of the reporting unit in its annual impairment test as described in the

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FASB ASC Topic 350 Goodwill and Intangibles.

Earnings per Common Share

Basic earnings per share have been computed using the weighted-average number of common shares outstanding.  For the periods presented, there are no dilutive securities.  Consequently, basic and dilutive earnings per share are the same.

Currency Translation

Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates prevailing on the balance sheet dates.  The statements of income are translated into U.S. dollars at average exchange rates for the period.  Adjustments resulting from the translation of financial statements are excluded from the determination of income and are accumulated in a separate component of shareholders’ equity.  Exchange gains and losses resulting from foreign currency transactions are included in operations (other income (expense)) in the period in which they occur.

Income Taxes

The Company accounts for taxes in accordance with the FASB ASC Topic 740 Income Taxes.  Under this method the Company records income tax expense and the related deferred taxes and tax benefits.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period in which the rate is enacted.  A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize the benefit, or that future deductibility is uncertain.  No valuation reserve was deemed necessary at June 30, 2012 or at December 31, 2011.  Also, in accordance with FASB ASC Topic 740 (formerly FIN 48), the Company had reserves on the books for uncertainties in tax positions of $146,000 at June 30, 2012, and $135,000 at December 31, 2011.  These reserves are reviewed each quarter.

Other Comprehensive Income (Loss)

For the three and six-months ended June 30, 2012 and 2011, respectively, the sole component of Other Comprehensive Income (Loss) was a foreign currency translation adjustment.

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New Accounting Pronouncements

Accounting Standards Update (ASU) 2011-08, Intangibles—Goodwill and Other (Topic 350):  Testing Goodwill for Impairment.  In September 2011, the FASB issued guidance to amend and simplify the rules related to testing goodwill for impairment.  The revised guidance allows an entity to make an initial qualitative evaluation, based on the entity’s events and circumstances, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  The results of this qualitative assessment determine whether it is necessary to perform the currently required two-step impairment test.  The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Management is currently evaluating the impact on the consolidated financial statements as a result of potentially adopting this guidance, but does believe it will have any material impact.

ASU 2011-05, Comprehensive Income (Topic 220):  Presentation of Comprehensive Income.  In June 2011, the FASB issued new accounting guidance related to the presentation of comprehensive income that eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity.  The amendments require that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted.  The Company adopted this guidance in the quarter ended March 31, 2012.  The adoption of this guidance did not have any impact on the Company's financial position, results of operations or cash flows and only impacted the presentation of other comprehensive income in the financial statements.

3. INVENTORIES

Inventories, net of reserves consisted of the following:

	June 30,		December 31,
	2012		2011
	(dollars in thousands)
Finished Goods	$ 5,038		$ 4,824
Raw Materials	1,595		1,641
Total Inventory	$ 6,633		$ 6,465

4. LINE OF CREDIT

On December 30, 2010, the Company agreed to a new Revolving Line of Credit Note and Loan Agreement with Sovereign Bank, NA (“Sovereign”).  The Company established a line of credit facility in the maximum amount of $10,000,000, maturing on December 31, 2014, with funds available for working capital purposes and other cash needs.  The loan is collateralized by all of the Company’s tangible and intangible assets.  The loan agreement provides for the

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payment of any borrowings under the agreement at an interest rate range of either LIBOR plus 1.75% to plus 2.75% (for borrowings with a fixed term of 30, 60, or 90 days), or, Prime less 0.50% to plus 0.50% (for borrowings with no fixed term other than the December 31, 2014 maturity date), depending upon the Company’s then existing financial ratios.  At June 30, 2012, the Company’s ratio would allow for the most favorable rate under the agreement’s range, which would be a rate of 2.20% (LIBOR plus 1.75%).  The Company is required to pay an annual commitment fee for the access to the funds, and is also obligated to pay a “Line Fee” ranging from 17.5 to 35.0 basis points of the average unused balance on a quarterly basis, depending again upon the Company’s then existing financial ratios.  The Company may terminate the line at any time during the four year term, as long as there are no amounts outstanding.

As of June 30, 2012, and December 31, 2011, the Company had no outstanding borrowings on its line of credit.

As of June 30, 2012 and December 31, 2011, the Company was in compliance with all debt covenants.

5. COMMITMENTS AND CONTINGENCIES

Commitments:

Under a number of indemnity agreements between the Company and each of its officers and directors, the Company has agreed to indemnify each of its officers and directors against any liability asserted against them in their capacity as an officer or director, or both.  The Company’s indemnity obligations under the indemnity agreements are subject to certain conditions and limitations set forth in each of the agreements.  Under the terms of the Agreement, the Company is contingently liable for costs which may be incurred by the officers and directors in connection with claims arising by reason of these individuals’ roles as officers and directors.  The Company has obtained directors’ and officers’ insurance policies to fund certain of the Company’s obligations under the indemnity agreements.

The Company has salary continuation agreements with one current employee, and one former employee who retired at the end of 2010.  These agreements provide for monthly payments to each of the employees or their designated beneficiary upon the employee’s retirement or death.  The payment benefits range from $1,000 per month to $3,000 per month with the term of such payments limited to 15 years after the employee’s retirement 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 associated with these agreements is $477,000 at June 30, 2012, of which $465,000 is included in Other Long Term Liabilities, and the remaining current portion of $12,000 is included in Other Liabilities, associated with the retired employee previously noted who is now receiving benefit payments.  The December 31, 2011 liability of $468,000, had $456,000 reported in Other Long Term Liabilities, and a current portion of $12,000 in Other Liabilities. The increase in the liability was largely related to the time value of money, and the related decrease in the discount rate used to compute the liability.

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The Company has obtained and is the beneficiary of three whole life insurance policies with respect to the two employees discussed above, and one other employee policy.  The cash surrender value of such policies (included in Other Long Term Assets) amounts to $809,000 at June 30, 2012 and $756,000 at December 31, 2011.

Contingencies:

The Company’s general liability insurance policies are subject to deductibles or retentions, ranging from $25,000 to $250,000 per claim, (depending on the terms of the policy and the applicable policy year) up to an aggregate amount.  The Company is insured on a ‘first dollar’ basis for workers’ compensation subject to statutory limits.  

In the ordinary and normal conduct of the Company’s business, it is subject to periodic lawsuits, investigations and claims (collectively, the “Claims”).  There has been an increase in the frequency of those Claims over the past two years relating to product liability.  The Company does not believe that the Claims have legal merit, and is therefore vigorously defending against those Claims.  The Company has in place commercial general liability insurance policies that cover the Claims, as noted above, including those alleging damages as a result of product defects.  Litigation is subject to many uncertainties and management is unable to predict the outcome of the pending suits and claims. The potential liability for a given claim could range from zero to a maximum of $250,000, depending upon the insurance deductible in place for the respective claim year, and the aggregate maximum exposure for all current open claims is estimated to not exceed $3,500,000.  It is possible that the results of operations or liquidity and capital resources of the Company could be adversely affected by the ultimate outcome of the pending litigation or as a result of the costs of contesting such lawsuits, potentially materially. Again, the Company is currently unable to estimate the ultimate liability, if any, that may result from the pending litigation and, accordingly, no provision for any liability (except for accrued legal costs for services and claim settlements previously rendered) has been made in the consolidated financial statements. The liabilities recorded on the Company’s books at June 30, 2012 and December 31, 2011 were $610,000 and $414,000, respectively, and are included in Other Liabilities.  

In 2007, the Company instituted a legal complaint against a former insurer, seeking reimbursement of amounts paid in defense of a class action litigation, as well as supplementary payments made in connection with the class action.  In March of 2012, the Company and the insurer settled the litigation for $4,700,000, with receipt of the cash occurring during that same month.  For clarity regarding this item, it is defined as the “Insurance Legal Recovery” on the accompanying condensed consolidated statement of income for the six-months ended June 30, 2012.

In February of 2012, the Company was made aware of a fraud perpetrated by an outside party involving approximately $400,000 of insurance related premiums that the Company had prepaid for umbrella coverage. The assets are currently secured by a governmental agency who is investigating the case, and being held in a custodial account.  It is possible that not all of those

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funds will be returned to the Company, or the Company may need to incur additional costs to procure collection, but the outcome is currently not known or able to be estimated.  The Company is currently pursing all avenues in an effort to bring closure to the event, reclaim the assets, and has since replaced the aforementioned insurance coverage.  These assets, which are included in Other Long Term Assets, were $354,000 at June 30, 2012.

Warranty Commitments:

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

6. STOCK BASED PLANS

Phantom Stock Plan

Plan Description.  On April 1, 2006, the Company adopted the Omega Flex, Inc. 2006 Phantom Stock Plan (the “Plan”).  The Plan authorizes the grant of up to one million units of phantom stock to employees, officers or directors of the Company and of any of its subsidiaries.  The phantom stock units ("Units") each represent a contractual right to payment of compensation in the future based on the market value of the Company’s common stock.  The Units are not shares of the Company’s common stock, and a recipient of the Units does not receive any of the following:

§

ownership interest in the Company

§

shareholder voting rights

§

other incidents of ownership to the Company’s common stock

The Units are granted to participants upon the recommendation of the Company’s CEO, and the approval of the Compensation Committee.  Each of the Units that are granted to a participant will be initially valued by the Compensation Committee, and at a minimum, the Unit’s value will be equal to the closing price of the Company’s common stock on the grant date.  The Units follow a vesting schedule, with a maximum vesting of 3 years after the grant date.  Upon vesting, the Units represent a contractual right of payment for the value of the Unit.  The Units will be paid on their maturity date, one year after all of the Units granted in a particular award have fully vested, unless an acceptable event occurs under the terms of the Plan prior to one year, which would allow for earlier payment.  The amount to be paid to the participant on the maturity date is dependent on the type of Unit granted to the participant.

The Units may be Full Value, in which the value of each Unit at the maturity date, will equal the closing price of the Company’s common stock as of the maturity date; or Appreciation Only, in which the value of each Unit at the maturity date will be equal to the closing price of the Company’s common stock at the maturity date minus the closing price of the Company’s

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common stock at the grant date.

On December 9, 2009, the Board of Directors authorized an amendment to the Plan to pay an amount equal to the value of any cash or stock dividend declared by the Company on its common stock to be accrued to the phantom stock units outstanding as of the record date of the common stock dividend.  The dividend equivalent will be paid at the same time the underlying phantom stock units are paid to the participant.

In certain circumstances, the Units may be immediately vested upon the participant’s death or disability.  All Units granted to a participant are forfeited if the participant is terminated from his relationship with the Company or its subsidiary for “cause,” which is defined under the Plan.  If a participant’s employment or relationship with the Company is terminated for reasons other than for “cause,” then any vested Units will be paid to the participant upon termination.  However, Units granted to certain “specified employees” as defined in Section 409A of the Internal Revenue Code will be paid approximately 181 days after termination.

Grants of Phantom Stock Units.  As of December 31, 2011, the Company had 16,381 unvested units outstanding, all of which were granted at Full Value.  On February 16, 2012, the Company granted an additional 8,690 Full Value Units with a fair value of $14.44 per unit on grant date, using historical volatility. In all cases, the grant price was equal to the closing price of the Company’s common stock at the grant date. In March 2012, the Company paid $77,000 for the 5,076 fully vested and matured units that were granted on March 6, 2008.

The Company uses the Black-Scholes option pricing model as its method for determining fair value of the Units.  The Company uses the straight-line method of attributing the value of the stock-based compensation expense relating to the Units.  The compensation expense (including adjustment of the liability to its fair value) from the Units is recognized over the vesting period of each grant or award.

The FASB ASC Topic 718 Stock Compensation requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates in order to derive the Company’s best estimate of awards ultimately to vest.

Forfeitures represent only the unvested portion of a surrendered Unit and are typically estimated based on historical experience.  Based on an analysis of the Company’s historical data, which has limited experience related to any stock-based plan forfeitures, the Company applied a 0% forfeiture rate to Plan Units outstanding in determining its Plan Unit compensation expense as of June 30, 2012.

The total Phantom Stock related liability as of June 30, 2012 was $234,000 of which $117,000 is included in other liabilities, as it is expected to be paid in March 2013, and the balance of $117,000 is included in other long term liabilities.

In accordance with FASB ASC Topic 718 Stock Compensation, the Company recorded compensation expense of approximately $13,000 related to the Phantom Stock Plan for each of the six month periods ended June 30, 2012 and 2011.

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The following table summarizes information about the Company’s nonvested phantom stock Units at June 30, 2012:

 The total unrecognized compensation costs calculated at June 30, 2012 were $143,000 which will be recognized through March of 2015.  The Company will recognize the related expense over the weighted average period of 1.91 years.

7.  NONCONTROLLING INTERESTS

The Company owns 100% of all subsidiaries, except for its UK subsidiary Omega Flex, Limited, of which it owns 95%.  A noncontrolling interest owns the other 5%, and held a value of $113,000 at December 31, 2011.  The total equity of the Company including the non-controlling interest was $22,917,000 at December 31, 2011.

For the six months ended June 30, 2012, the operations of Omega Flex, Limited generated loss of $62,000.  The noncontrolling interest’s portion of the loss was $3,000.

The noncontrolling interest must also recognize its share of any currency translation adjustment, since the subsidiary’s functional currency is British Pounds, and the local books are translated into US Dollars for consolidation purposes.  The noncontrolling interest’s share of foreign currency translation income was $1,000 as of June 30, 2012.

At June 30, 2012, after considering the income and foreign currency translation components described above, the balance of the noncontrolling interest was $111,000.

8. SHAREHOLDERS’ EQUITY

As of June 30, 2012 and December 31, 2011, the Company had authorized 20,000,000 common stock shares with par value of $0.01 per share.  At both dates, the number of shares issued was 10,153,633, and the total number of outstanding shares was 10,091,822, with the 61,811 variance representing shares held in Treasury.

On April 4, 2012, the Company’s Board of Directors authorized an extension of its stock repurchase program without expiration, up to a maximum amount of $1,000,000.  The original

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program established in December of 2007 authorized the purchase of up to $5,000,000 of its common stock.  The purchases may be made from time-to-time in the open market or in privately negotiated transactions, depending on market and business conditions.  The Board retained the right to cancel, extend, or expand the share buyback program, at any time and from time-to-time.  Since inception, the Company has purchased a total of 61,811 shares for approximately $932,000, or approximately $15 per share.  The Company did not make any stock repurchases during the first six months of 2012, or during the year ended December 31, 2011.

In connection with the aforementioned share buyback program, on December 15, 2009 the Company entered into an amendment of its Rule 10b5-1 Repurchase Plan (the “Plan”) dated December 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.

9.

SUBSEQUENT EVENTS

The Company evaluated all events or transactions that occurred through the date of this filing.  During this period, the Company did not have any material subsequent events that impacted its condensed consolidated financial statements.

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements, which are subject to inherent uncertainties.  These uncertainties include, but are not limited to, variations in weather, changes in the regulatory environment, customer preferences, general economic conditions, increased competition, the outcome of outstanding litigation, and future developments affecting environmental matters.  All of these are difficult to predict, and many are beyond the ability of the Company to control.

Certain statements in this Quarterly Report on Form 10-Q that are not historical facts, but rather reflect the Company’s current expectations concerning future results and events, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  The words “believes”, “expects”, “intends”, “plans”, “anticipates”, “hopes”, “likely”, “will”, and similar expressions identify such forward-looking statements.  Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from future results, performance or achievements expressed or implied by such forward-looking statements.

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s view only as of the date of this Form 10-Q.  The Company undertakes no obligation to update the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, conditions or circumstances.

OVERVIEW

The Company is a leading manufacturer of flexible metal hose, and is currently engaged in a number of different markets, including construction, manufacturing, transportation, petrochemical, pharmaceutical and other industries.

The Company’s business is managed as a single operating segment that consists of the manufacture and sale of flexible metal hose and accessories.  The Company’s products are concentrated in residential and commercial construction, and general industrial markets. The Company’s primary product, flexible gas piping, is used for gas piping within residential and commercial buildings.  Through its flexibility and ease of use with patented fittings distributed under the trademark AutoFlare^®, TracPipe^® and TracPipe^® CounterStrike^® flexible gas piping allows users to substantially cut the time required to install gas piping, as compared to traditional methods.  Most of the Company’s products are manufactured at the Company’s Exton, Pennsylvania facility with a minor amount of manufacturing performed in the UK.  A majority of the Company’s sales across all industries are generated through independent outside sales organizations such as sales representatives, wholesalers and distributors, or a combination of both.  The Company has a broad distribution network in North America and to a lesser extent in other global markets.

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CHANGES IN FINANCIAL CONDITION

Cash and cash equivalents were $8,037,000 at June 30, 2012, compared to $3,476,000 at December 31, 2011, increasing $4,561,000 or 131.2% during the six months ended June 30, 2012.  As disclosed in previous SEC filings, in March of 2012 the Company received $4,700,000 as part of an Insurance Legal Recovery.  The Insurance Legal Recovery, less its by-product costs such as taxes, accounts for a majority of the change between periods.  Earnings from the general business operation and its resulting cash account for the remainder of the change.

Other Long Term Assets have increased by $280,000 (16.0%), when comparing the June 30, 2012 balance to December 31, 2011.  The increase is primarily attributed to the Company’s purchase of long term insurance coverage, partially offset by the current year amortization of those policies.

Accounts Payable has increased $202,000 (19.8%), ending at $1,221,000 at June 30, 2012, from a balance of $1,019,000 at December 31, 2011.  The majority of the change is timing related, with more payments due to vendors outstanding at the quarter end then experienced at December 31, 2011, but nothing of an unusual nature.

RESULTS OF OPERATIONS

Three-months ended June 30, 2012 vs. June 30, 2011

The Company reported comparative results from operations for the three-month period ended June 30, 2012 and 2011 as follows:

The Company’s 2012 second quarter sales increased $869,000 (6.5%) over the same period in 2011, ending at $14,256,000 for the three months ended June 30, 2012, compared to $13,387,000 for the same three months in 2011.

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During the second quarter, the Company recognized steady growth over the prior year with its flagship gas piping product, TracPipe^® CounterStrike^® , and experienced a continued surge in the sales of its emerging double-containment piping products, such as DoubleTrac^® and DEF-Trac^®.  The increase in sales occurred mostly in the United States, as sales in the United Kingdom have slowed during the quarter, as that territory, and Europe in general have shown signs of economic weakness.  Volume, or units sold, increased approximately 9% compared to the prior year quarter, but this increase was partially offset by pricing related concessions required to combat competitive market conditions.

The Company’s gross profit margins went down slightly between the two periods, being 49.7% and 50.9% for the three-months ended June 30, 2012 and 2011, respectively.

Selling Expenses.  Selling expenses consist primarily of employee salaries and associated overhead costs, commissions, and the cost of marketing programs such as advertising, trade shows and related communication costs, and freight.  Selling expense was $3,058,000 and $2,690,000 for the three-months ended June 30, 2012 and 2011, respectively, representing an increase of $368,000.  Commissions and Freight together increased $236,000, largely in stride with the increase in sales volume, which is more than half of the variance from last year.  The Company also added sales staff during the year, and had additional travel costs.  Sales expense as a percent of net sales increased mildly, being 21.5% for the three-months ended June 30, 2012, and 20.1% for the three-months ended June 30, 2011.

General and Administrative Expenses.  General and administrative expenses consist primarily of employee salaries, benefits for administrative, executive and finance personnel, legal and accounting, insurance, and corporate general and administrative services.  General and administrative expenses were $2,699,000 and $1,677,000 for the three-months ended June 30, 2012 and 2011, respectively, increasing $1,022,000 between periods.  The Company experienced an increase of $1,216,000 in legal and insurance related expenses primarily associated with product liability claims and coverage.  Those increases were however slightly offset by a decrease in costs of various other items.  As a percentage of sales, general and administrative expenses increased to 18.9% for the three months ended June 30, 2012 from 12.5% for the three months ended June 30, 2011.

Engineering Expense.  Engineering expenses consist of development expenses associated with the development of new products, and costs related to enhancements of existing products and manufacturing processes.  Engineering expenses decreased $53,000.  They were $595,000 and $648,000 for the three months ended June 30, 2012 and 2011, respectively.  Engineering expenses as a percentage of sales were 4.2% for the three months ended June 30, 2012 and 4.8% for the three months ended June 30, 2011.

Operating Profits.  Reflecting all of the factors mentioned above, Operating Profits diminished by $1,067,000 or 59.2%.  The Company had a profit of $735,000 in the three-month period ended June 30, 2012, versus a profit of $1,802,000 in the three-months ended June 30, 2011.

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Interest Income (Expense)-Net.  Interest income is recorded on cash investments, and interest expense is recorded at times when the Company has debt amounts outstanding on its line of credit.  The interest income was nominal for the first quarter of 2012 and 2011, and both periods had similar amounts of income.

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

Income Tax Expense.  Income Tax Expense was $255,000 for the second quarter of 2012, compared to $671,000 for the same period in 2011.  The Company’s effective tax rate in 2012 does however approximate the 2011 rate and does not differ materially from expected statutory rates.

Six-months ended June 30, 2012 vs. June 30, 2011

The Company reported comparative results from operations for the six-month period ended June 30, 2012 and 2011 as follows:

The Company’s sales for the first six months of 2012 increased $3,919,000 (15.7%) over the same period in 2011, ending at $28,804,000 and $24,885,000 in 2012 and 2011, respectively.

The success over the prior year is primarily driven by the appeal in the gas market of the Company’s flagship product, TracPipe^® CounterStrike^® , along with a surge in the sales of its emerging products, such as DoubleTrac^® and DEF-Trac^® double-containment flexible piping systems.  The sales incline has been produced by domestic operations, as United Kingdom operations have slowed, as that territory, and Europe in general have shown signs of economic weakness. Volume, or units sold, increased approximately 17% compared to the prior year quarter, but pricing concessions due to a competitive market place trimmed the increase in sales dollars back to the 15.7% discussed above.

The Company’s gross profit margins are very similar for the two periods, being 50.5% and 51.3% for the six-months ended June 30, 2012 and 2011, respectively.

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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 $6,014,000 and $5,048,000 for the six-months ended June 30, 2012 and 2011, respectively, representing an increase of $966,000.  Commissions and Freight increased largely in unison with the increase in sales volume, accounting for $540,000, or slightly more than half of the variance from last year.  The Company also had more costs in advertising relating to various initiatives, and additional sales staff and travel related expenses compared to last year.  Sales expense was however largely on par with the prior year when compared as a percent of net sales, being 20.9% for the six-months ended June 30, 2012, and 20.3% for the six-months ended June 30, 2011.

General and Administrative Expenses.  General and administrative expenses consist primarily of employee salaries, benefits for administrative, executive and finance personnel, legal and accounting, insurance, and corporate general and administrative services.  General and administrative expenses were $5,265,000 and $3,421,000 for the six-months ended June 30, 2012 and 2011, respectively, increasing $1,844,000 between periods.  Compared to last year, the Company incurred 1,150,000 of additional legal and insurance related expenses primarily associated with product liability claims and coverage.  Furthermore, the Company absorbed $765,000 additional administrative staffing expenses in 2012, which includes an increase in incentive compensation related to increased profits from this year’s general business activities, as well as the additional earnings derived from the Insurance Legal Recovery discussed below.  Those increases were slightly offset by efficiencies found in various other items.  As a percentage of sales, general and administrative expenses increased to 18.3% for the six-months ended June 30, 2012 from 13.7% for the six months ended June 30, 2011.

Insurance Legal Recovery – As previously disclosed in the Form 8-K/A filed with the Securities and Exchange Commission on March 15, 2012, the Company agreed to settle a legal dispute relating to insurance coverage and received $4,700,000 as part of the settlement during the same month.  This receipt was all recorded as income during the first quarter of 2012.  There was no comparable event during the previous year, and thus the change between periods is $4,700,000.  This event also impacted incentive compensation, which is included in the General and Administrative Expenses, and Income Tax Expense, increasing both significantly compared to last year.

Engineering Expense.  Engineering expenses consist of development expenses associated with the development of new products, and costs related to enhancements of existing products and manufacturing processes.  Engineering expenses were largely in-line between periods, as they were $1,230,000 and $1,236,000 for the six months ended June 30, 2012 and 2011, respectively.  Engineering expenses as a percentage of sales improved, being 4.3% for the six months ended June 30, 2012 and 5.0% for the six months ended June 30, 2011.

Operating Profits.  Reflecting all of the factors mentioned above, Operating Profits were up 119.6%, increasing by $3,667,000 to a profit of $6,733,000 in the six-months ended June 30, 2012, from a profit of $3,066,000 in the six-months ended June 30, 2011.  Excluding the Insurance Legal Recovery less its applicable auxiliary costs, operating profits were however 8.9% lower than in the prior year.

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Interest Income (Expense)-Net.  Interest income is recorded on cash investments, and interest expense is recorded at times when the Company has debt amounts outstanding on its line of credit.  The interest income was nominal for the first quarter of 2012 and 2011, and both periods had similar amounts of income.

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

Income Tax Expense.  Income Tax Expense was $2,392,000 for the first six months of 2012, compared to $1,153,000 for the same period in 2011.  Of the $1,239,000 increase in tax expense, approximately $1,400,000 was the result of the receipt of the Insurance Legal Recovery, with a partially offsetting decrease however associated with the decrease in profits from general operations.  The Company’s effective tax rate in 2012 does however approximate the 2011 rate and does not differ materially from expected statutory rates.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

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

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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, product liability reserve and accounting for income taxes.  Actual amounts could differ significantly from these estimates.

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

Revenue Recognition

The Company’s revenue recognition activities relate almost entirely to the manufacture and sale of flexible metal hose and pipe.  Under GAAP, 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:

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·

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.

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

Gross sales are reduced for all consideration paid to customers for which no identifiable benefit is received by the Company.  This includes promotional incentives, which includes various programs including year-end rebates and discounts.  The amounts of certain incentives are known with reasonable certainty at the time of sale, while others are projected based upon the most reliable information available at the reporting date.

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

Accounts Receivable

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

Inventory

Inventories are valued at the lower of cost or market.  Cost of inventories is 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 FASB ASC Topic 350 Intangibles – Goodwill, the Company performs an annual impairment test in accordance with this guidance at the end of each year, or when a triggering event is noted that may create impairment.  This was last tested at December 31, 2011, and the analysis did not indicate any impairment of goodwill.  There are no circumstances that indicate that Goodwill might be impaired at June 30, 2012.

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Product Liability Reserves

Product liability reserves represent the estimated unpaid amounts under the Company’s insurance policies with respect to existing claims.  The Company uses the most current available data to estimate claims.  As explained more fully under Contingencies, for various product liability claims covered under the Company’s general liability insurance policies, the Company must pay certain defense costs within its deductible or self-insured retention limits, ranging from $25,000 to $250,000 per claim, depending on the terms of the policy in the applicable policy year, up to an aggregate amount.  The Company is vigorously defending against all known claims.

Fair Value of Financial and Nonfinancial Instruments

The Company measures financial instruments in accordance with Financial Accounting Standards Board (FASB) ASC Topic 820, Fair Value Measurements and Disclosures.  The accounting standard defines fair value, establishes a framework for measuring fair value under GAAP, and enhances disclosures about fair value measurements.  Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.  The standard creates a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. The Company relies on its actively traded share value – a level 1 input – in determining the fair value of the reporting unit in its annual impairment test as described in the FASB ASC Topic 350 Goodwill and Intangibles.

Earnings per Common Share

Basic earnings per share have been computed using the weighted-average number of common shares outstanding.  For the periods presented, there are no dilutive securities.  Consequently, basic and dilutive earnings per share are the same.

Currency Translation

Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates prevailing on the balance sheet dates.  The Statements of Income are translated into U.S. dollars at average exchange rates for the period.  Adjustments resulting from the translation of financial statements are excluded from the determination of income and are accumulated in a separate component of shareholders’ equity.  Exchange gains and losses resulting from foreign currency transactions are included in operations (other income (expense)) in the period in which they occur.

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Accounting for Income Taxes

The Company accounts for federal tax liabilities in accordance with ASC Topic 740, Income Taxes.  Under this method the Company recorded tax expense and related deferred taxes and tax benefits.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize the benefit, or that future deductibility is uncertain.  No valuation allowance was deemed necessary at June 30, 2012 or at December 31, 2011.  Also, in accordance with FASB ASC Topic 740, the Company had reserves on the books for uncertainties in tax positions of $146,000 at June 30, 2012, and $135,000 at December 31, 2011.  These reserves are reviewed each quarter.

Other Comprehensive Income (Loss)

For the quarter ended June 30, 2012 and 2011, respectively, the sole component of Other Comprehensive Income (Loss) was a foreign currency translation adjustment.

LIQUIDITY AND CAPITAL RESOURCES

Six-months ended June 30, 2012

The Company’s cash balance at June 30, 2012 was $8,037,000 compared to $3,476,000 at December 31, 2011, which represents an increase of $4,561,000 between periods.

Operating Activities

For the first six months of 2012, the company’s cash from operations increased $5,004,000 over the comparable period in the prior year.  The Insurance Legal Recovery received during the first quarter of 2012 served to enhance cash from operations by approximately $3,300,000 after considering the deduction for taxes.  The other main contributors to the cash increase relate to Inventory, Accrued Compensation and Accrued Sales Commissions and Incentives, as described below.

Cash expended for Inventory purchases had been reduced by $430,000 during the first six months of June compared to the same period last year.  During the first six months of 2011, the Company had to ramp up inventory levels that were highly depleted during the end of 2010 when some significant customers had bought ahead.  The purchasing habits in 2012 have been more standard.

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Accrued compensation changed favorably by $582,000, largely because the Company has recorded additional incentive compensation during the first quarter of 2012, earned largely in associated with the previously noted Insurance Legal Recovery.  Although the additional accrued compensation amount impacted net income, the related cash will not be paid out until the first quarter of 2013, and is thus added back to cash from operations for cash flow purposes.  The accrual for 2011 was more normal and less significant in nature.

Accrued commissions and sales incentives required $1,241,000 less cash.  In 2010, numerous customers were able to reach growth tiers and earn higher annual rebates, including our most significant customer, which was then paid out during the first quarter of 2011.  Although sales in 2011 were stronger than in 2010, the number of customers that achieved growth tiers was not as dramatic, and therefore the payouts made during the first quarter of 2012 relative to sales incentives earned in 2011 had decreased.

Investing Activities

Cash used in investing activities for the first six months of 2012 and 2011 was $105,000 and $86,000, respectively, all related to capital expenditures for both years.

Financing

There were no financing activities relative to the first six months of 2012 or 2011.

CONTINGENT LIABILITIES AND GUARANTEES

See Note 5 to the Company’s financial statements.

 OFF-BALANCE SHEET ARRANGEMENTS

Refer to Item 7 of the Company’s 2011 year-end Form 10-K under the caption “Tabular Disclosure of Contractual Obligations and Off-Balance Sheet Arrangements”.

Item 3. Quantitative And Qualitative Information About Market Risks

The Company does not engage in the purchase or trading of market risk sensitive instruments.  The Company does not presently have any positions with respect to hedge transactions such as forward contracts relating to currency fluctuations.  No market risk sensitive instruments are held for speculative or trading purposes.  

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Item 4 – Controls And Procedures

(a)

Evaluation of Disclosure Controls and Procedures.

At the end of the fiscal second quarter of 2012, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures.  The Company’s disclosure controls and procedures are 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 and chief financial officer, have conducted an evaluation of the effectiveness of the design and operation of the Company’s Disclosure Controls and Procedures as defined in the Rule 13a-15(e) of Securities Exchange Act of 1934.  Based on that evaluation, the chief executive officer and chief financial officer have concluded that, as of the date of this report, the Company’s disclosure controls and procedures are effective to provide reasonable assurance of achieving the purposes described in Rule 13a-15(e), and no changes are required at this time.

(b)

Changes in Internal Controls.

There was no change in the Company’s “internal control over financial reporting” (as defined in rule 13a-15(f) of the Securities Exchange 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 completed their evaluation.

PART II - OTHER INFORMATION

Item 1 – Legal Proceedings

The Company is not presently involved in any single litigation that it believes could materially and adversely affect its financial condition or results of operations.  The results could however be materially impacted if the cumulative open cases resulted in unfavorable determinations.

In October 2010, the Company took the first case relating to CSST and lightning to trial.  At trial the Company proved that it was not negligent in the product design, but the jury did find the Company liable under strict product liability.  However, the company has appealed the jury verdict.  The final outcome of the case is not yet determined.  The Company has insurance protection with regards to this case and therefore no liability is reflected in the financials associated with this item.

In 2007, the Company instituted a legal complaint against a former insurer, seeking reimbursement of amounts paid in defense of a class action litigation, as well as supplementary payments made in connection with the class action.  In March of 2012, the Company and the

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insurer settled the litigation for $4,700,000, with receipt of the cash occurring during that same month.

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

On June 5, 2012, the Company held its 2012 Annual Meeting of Shareholders.  The shareholders voted on the following proposals:

1.

To elect three Class 3 directors for a three year term expiring at the 2015 annual meeting of shareholders.

2.

To ratify the appointment by the audit committee of the board of directors of McGladrey LLP (McGladrey), as the independent auditors for the Company for the fiscal year ending December 31, 2012.

The results of the voting are as follows:

1.	Election of Directors
			For		Withheld		Non-votes
	David K Evans		6,448,542		514,348		1,187,771
	David W Hunter		6,448,338		514,552		1,187,771
	Stewart B Reed		6,288,841		674,049		1,187,771
2.		The proposal to approve the Omega Flex, Inc
		Executive Incentive Plan
		For	6,895,423
		Against	50,352
		Abstain	17,115
3.		To ratify the appointment of McGladrey
		to audit the Company’s financial
		statements for the year ending
		December 31, 2012:
		For	7,387,148
		Against	753,440
		Abstain	10,073

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Item 6 - Exhibits

Exhibit

No.

Description

31.1

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.

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 SIGNATURES

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

	OMEGA FLEX, INC.
	(Registrant)
Date: August 8, 2012	By: /S/ Paul J. Kane______________
	Paul J. Kane
	Vice President – Finance
	and Chief Financial Officer

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