Omega Flex, Inc. (OFLX)

Item
7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You
should read the following discussion and analysis of our financial condition and results of operations together with our consolidated
financial statements and related notes included in this annual report. This discussion contains forward-looking statements based upon
current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth under the section titled “Risk Factors” or in other
parts of this annual report. See “Cautionary Note Regarding Forward-Looking Statements” in this annual report. Our historical
results are not necessarily indicative of the results that may be expected for any period in the future.

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, fittings,
and accessories. The Company’s products are concentrated in residential and commercial construction within buildings, and general
industrial markets, with a comprehensive portfolio of intellectual property and patents issued in various countries around the world.
The residential and commercial construction market also utilizes corrugated stainless steel tubing (“CSST”) primarily for
flexible gas piping. Through its flexibility and ease of use, the Company’s TracPipe® CSST and TracPipe®
CounterStrike® CSST, along with its fittings distributed under the trademark AutoFlare®, allows users
to substantially cut the time required to install gas piping, as compared to traditional methods. The Company’s newest product
line MediTrac® corrugated medical tubing (“CMT”) is used for piping medical gases (oxygen, nitrogen, nitrous
oxide, carbon dioxide, and medical vacuum) in health care facilities. Building on the recognized strengths and strategies employed in
the flexible gas piping market, MediTrac® CMT can be used in place of rigid copper pipe, and due to its long continuous
lengths and flexibility, it can be installed approximately five times faster than rigid copper pipe, saving on installation labor and
construction schedules. The Company’s products are manufactured at its Exton, Pennsylvania and Houston, Texas facilities in the
U.S., and in Banbury, Oxfordshire in the U.K. A majority of the Company’s sales across all industries are generated through independent
outside sales organizations such as sales representatives, wholesalers and distributors, or a combination of both. The Company has a
broad distribution network in North America and to a lesser extent in other global markets.

Changes
in Financial Condition

The
Company’s cash and cash equivalents balance of $53,226,000 as of December 31, 2025 increased $1,527,000 or 3.0% from a $51,699,000
balance at December 31, 2024. The primary reason for the increase is due to income generated from operations during 2025. This was partially
offset by dividend payments during 2025 totaling $13,729,000, as detailed in Note 12, Shareholders’ Equity, to the Consolidated
Financial Statements included in this report. See the Company’s Consolidated Statements of Cash Flows for further details regarding
the change in cash and cash equivalents.

Retained
earnings were $73,979,000 and $72,880,000 as of December 31, 2025 and December 31, 2024, respectively, increasing $1,099,000 or 1.5%.
The increase was primarily due to an increase from net income during the year, as provided on the Company’s Consolidated Statements
of Income, partially offset by dividends declared during 2025, as discussed in detail in Note 12, Shareholders’ Equity, to the
Consolidated Financial Statements included in this report.

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Results
of Operations

Twelve
months ended December 31, 2025 vs. twelve months ended December 31, 2024

The
Company reported comparative results from operations for the twelve month periods ended December 31, 2025 and 2024 as follows:

Net
Sales. The Company’s sales for the year were $98,296,000, reflecting a decrease of $3,385,000, or 3.3%, compared to $101,681,000
in the previous year. The decrease in sales is mainly due to lower sales unit volumes as a result of the overall market being suppressed
because of, among other factors, a decline in housing starts.

Gross
Profit. The Company’s gross profit margins were 60.0% and 61.2% for the years ended December 31, 2025, and 2024, 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 expenses were $20,730,000 and $20,539,000
for 2025 and 2024, respectively, representing an increase of $191,000, or 0.9%. The increase is mostly related to higher sales incentive
compensation. As a percentage of net sales, selling expenses were 21.1% and 20.2% for the twelve months ended December 31, 2025 and 2024,
respectively.

General
and Administrative Expenses. General and administrative expenses consist primarily of employee salaries, benefits for administrative,
executive and finance personnel, legal and accounting, insurance, and corporate general and administrative services. General and administrative
expenses were $16,300,000 and $16,085,000 for the years ended December 31, 2025 and 2024, respectively, increasing $215,000, or 1.3%
between periods. The increase is due to higher staffing related costs, mainly employee benefits, celebration activities associated with
the Company’s fifty-year anniversary, and stock based compensation, which moves in relation to the Company’s stock price,
as detailed in Note 8, Stock Based Compensation Plans. These were partly offset by lower product liability reserves and expenses and
the incentive compensation component, which is aligned with profitability, due to lower operating profits. As a percentage of net sales,
general and administrative expenses were 16.6% and 15.8% for the twelve months ended December 31, 2025 and 2024, respectively.

Engineering
Expenses. Engineering expenses consist of development expenses associated with the development of new products, and costs related
to enhancements of existing products and manufacturing processes. Engineering expenses increased $973,000 or 23.9% between periods, being
$5,041,000 and $4,068,000 for the years ended December 31, 2025 and 2024, respectively, mainly associated with increases in product development
and certification related expenses, staffing related costs, and consulting. As a percentage of net sales for the year, engineering expenses
were 5.1% in 2025 and 4.0% in 2024.

Operating
Profit. Reflecting all the factors mentioned above, operating profits decreased $4,640,000, or 21.5%, between periods, reflecting
a profit of $16,931,000 in 2025, as compared to $21,571,000 in 2024.

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Interest
Income. Interest income is recorded on investments in cash equivalents, and interest expense is recorded at times when the Company
has debt amounts outstanding on its line of credit. The Company recorded interest income of $1,989,000 for 2025, compared to $2,278,000
for 2024. The decrease in interest income was mainly due to lower interest rates. There were no borrowings on its line of credit during
2025 or 2024.

Other
Income (Expense). Other income (expense) primarily consists of foreign currency exchange gains (losses) on transactions settled in
currencies other than the Company’s local currency, typically related to the Company’s foreign U.K. and France subsidiaries
and Canada. The Company recognized other income of $331,000 during 2025 and other expense of $227,000 during 2024.

Income
Tax Expense. Income tax expense was $4,667,000 for 2025, compared to $5,707,000 for 2024. The $1,040,000 or 18.2% decrease in tax
expense was largely the result of the decrease in income before taxes. The effective tax rate for 2025 and 2024 was 24.2% of income before
taxes respectively.

Commitments
and Contingencies

See
Note 7 to the Consolidated Financial Statements included in this report for a detailed description of commitments and contingencies.

Liquidity
and Capital Resources

Historically,
the Company’s primary cash needs have been related to working capital items, which the Company has largely funded through cash
generated from operations.

As
of December 31, 2025, the Company had a cash and cash equivalents balance of $53,226,000. Additionally, the Company has a $15,000,000
line of credit available, as discussed in detail in Note 6, Line of Credit and Other Borrowings, which had no borrowings outstanding
against it as of December 31, 2025. As of December 31, 2024, the Company had a cash and cash equivalents balance of $51,699,000, with
no borrowings against the line of credit.

Operating
Activities

Cash
provided by operating activities is net income adjusted for certain non-cash items and changes in certain assets and liabilities, such
as those included in working capital.

For
2025, the Company’s cash provided from operating activities was $17,173,000, compared to $20,857,000 of cash provided during 2024.
This illustrates a decrease of $3,684,000 during 2025. For details of the operating cash flows refer to the Consolidated Statements of
Cash Flows in the Company’s Consolidated Financial Statements.

As
a general trend, the Company tends to deplete or generate lower amounts of cash early in the year, as significant payments are typically
made for accrued promotional incentives, incentive compensation, and taxes. Cash has then historically shown a tendency to be restored
and accumulated during the latter portion of the year.

Investing
Activities

Cash
used in investing activities during 2025 and 2024 was $1,822,000 and $2,006,000, respectively, all related to various capital expenditure
projects.

Financing
Activities

All
financing activities relate to dividend payments, which are detailed in Note 12, Shareholders’ Equity, in the Consolidated Financial
Statements included in this report. Dividend payments for 2025 and 2024 amounted to $13,729,000 and $13,527,000, respectively. The Company
had no borrowings or payments on its line of credit during 2025 or 2024 as described in Note 6, Line of Credit and Other Borrowings.

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Liquidity

We
believe our existing cash and cash equivalents, along with our borrowing capacity, will be sufficient to meet our anticipated cash needs
for at least the next twelve months. Our future capital requirements will depend upon many factors including our rate of revenue growth,
the timing and extent of any expansion efforts, the potential for investments in, or the acquisition of any complementary products, businesses,
or supplementary facilities for additional capacity.

Future
Impact of Known Trends or Uncertainties

The
Company’s operations are sensitive to a number of market and extrinsic factors, any one of which could materially adversely affect
the Company’s business, competitive position, results of operations or financial condition in any given year. See Item 1A, Risk
Factors, for a detailed description.

Critical
Accounting Policies and Estimates

Note
2, Significant Accounting Policies, to the Consolidated Financial Statements included in th

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