##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 30, 2004 Commission file number: 000-50543 PORTEC RAIL PRODUCTS, INC. 
  West Virginia
    
    55-0755271(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 900 Old Freeport Road, Pittsburgh, Pennsylvania
    
    15238-8250(Address of principal executive offices)
    
    (Zip Code)
 (412) 782-6000 
  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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [   ]   NO
[X] As of July 31, 2004, there were 8,618,002 shares of the registrants
common stock outstanding.




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##### 



PORTEC RAIL PRODUCTS, INC. INDEX TO FORM 10-Q ItemNumber
    
    
    
    Page NumberPART I  FINANCIAL INFORMATION1.
    
    Financial Statements:Condensed Consolidated Balance Sheets June 30, 2004 (Unaudited) and December 31, 2003
    
    
    3Condensed Consolidated Statements of Income (Unaudited) Three and six months ended June 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited) Six months ended June 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    62.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    133.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    204.
    
    Controls and Procedures
    
    
    21PART II  OTHER INFORMATION2.
    
    Changes in Securities and Use of Proceeds
    
    
    214.
    
    Submission of Matters to a Vote of Security Holders
    
    
    226.
    
    Exhibits and Reports on Form 8-K
    
    
    22Signatures
    
    
    23
 2




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##### 



PART I  FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Portec Rail Products, Inc.
Condensed Consolidated Balance Sheets June 30
    
    December 312004
    
    2003(Unaudited)(In Thousands)AssetsCurrent assetsCash and cash equivalents
    
    $
    9,918
    
    
    $
    418Accounts receivable, net
    
    
    11,263
    
    
    
    8,099Inventories, net
    
    
    13,098
    
    
    
    12,968Prepaid expenses and other current assets
    
    
    924
    
    
    
    1,394Deferred income taxes
    
    
    402
    
    
    
    401Total current assets
    
    
    35,605
    
    
    
    23,280Property, plant and equipment
    
    
    19,801
    
    
    
    19,717Less accumulated depreciation
    
    
    (8,414
    )
    
    
    (7,876
    )11,387
    
    
    
    11,841Other assets
    
    
    109
    
    
    
    170Goodwill
    
    
    5,130
    
    
    
    5,096Total assets
    
    $
    52,231
    
    
    $
    40,387Liabilities and Shareholders EquityCurrent liabilitiesCurrent maturities of long-term debt
    
    $
    781
    
    
    $
    8,555Accounts payable
    
    
    5,212
    
    
    
    4,939Accrued income taxes
    
    
    1,042
    
    
    
    1,049Customer deposits
    
    
    684
    
    
    
    395Accrued compensation
    
    
    677
    
    
    
    986Other accrued liabilities
    
    
    1,802
    
    
    
    1,201Total current liabilities
    
    
    10,198
    
    
    
    17,125Long-term debt, less current maturities
    
    
    584
    
    
    
    716Accrued pension costs
    
    
    1,760
    
    
    
    1,975Deferred income taxes
    
    
    1,121
    
    
    
    1,172Other long-term liabilities
    
    
    284
    
    
    
    266Total liabilities
    
    
    13,947
    
    
    
    21,254Commitments and Contingencies
    
    
    
    
    
    
    Shareholders equity:Common stock, $1 par value, 50,000,000
shares authorized, 8,618,002 and
6,523,002 shares issued and outstanding
at June 30, 2004 and December 31, 2003,
respectively
    
    
    8,618
    
    
    
    6,523Additional paid-in capital
    
    
    18,633
    
    
    
    2,756Retained earnings
    
    
    12,480
    
    
    
    11,221Accumulated other comprehensive loss
    
    
    (1,447
    )
    
    
    (1,367
    )Total shareholders equity
    
    
    38,284
    
    
    
    19,133Total liabilities and shareholders equity
    
    $
    52,231
    
    
    $
    40,387
 See Notes to condensed Consolidated Financial Statements 3




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##### 



Portec Rail Products, Inc.
Condensed Consolidated Statements of Income
(Unaudited) Three Months Ended
    
    Six Months EndedJune 30
    
    June 302004
    
    2003
    
    2004
    
    2003(Dollars in Thousands, Except Earnings Per Share DataNet sales
    
    $
    18,513
    
    
    $
    17,696
    
    
    $
    33,706
    
    
    $
    31,826Cost of sales
    
    
    13,083
    
    
    
    12,725
    
    
    
    24,405
    
    
    
    22,696Gross profit
    
    
    5,430
    
    
    
    4,971
    
    
    
    9,301
    
    
    
    9,130Selling, general and administrative
    
    
    3,281
    
    
    
    2,777
    
    
    
    6,115
    
    
    
    5,403Amortization expense
    
    
    16
    
    
    
    19
    
    
    
    32
    
    
    
    38Operating income
    
    
    2,133
    
    
    
    2,175
    
    
    
    3,154
    
    
    
    3,689Interest expense
    
    
    25
    
    
    
    100
    
    
    
    71
    
    
    
    201Other (income) expense, net
    
    
    (51
    )
    
    
    30
    
    
    
    (33
    )
    
    
    109Income before income taxes
    
    
    2,159
    
    
    
    2,045
    
    
    
    3,116
    
    
    
    3,379Provision for income taxes
    
    
    695
    
    
    
    753
    
    
    
    995
    
    
    
    1,269Net income
    
    $
    1,464
    
    
    $
    1,292
    
    
    $
    2,121
    
    
    $
    2,110Earnings per shareBasic
    
    $
    .17
    
    
    $
    .20
    
    
    $
    .25
    
    
    $
    .32Diluted
    
    $
    .17
    
    
    $
    .20
    
    
    $
    .25
    
    
    $
    .32Weighted average shares outstandingBasic
    
    
    8,602,169
    
    
    
    6,525,002
    
    
    
    8,602,169
    
    
    
    6,525,002Diluted
    
    
    8,602,169
    
    
    
    6,525,002
    
    
    
    8,602,169
    
    
    
    6,525,002Dividends per share
    
    $
    .05
    
    
    $
    .05
    
    
    $
    .10
    
    
    $
    .05
 See Notes to condensed Consolidated Financial Statements 4




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##### 



Portec Rail Products, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited) Six Months EndedJune 302004
    
    2003(In Thousands)Operating ActivitiesNet income
    
    $
    2,121
    
    
    $
    2,110Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    728
    
    
    
    695Provision for doubtful accounts
    
    
    46
    
    
    
    12Changes in operating assets and liabilities:Accounts receivable
    
    
    (3,187
    )
    
    
    (1,905
    )Inventories
    
    
    (204
    )
    
    
    (2,044
    )Prepaid expenses and other assets
    
    
    391
    
    
    
    (230
    )Accounts payable
    
    
    257
    
    
    
    1,317Income tax payable
    
    
    (10
    )
    
    
    271Accrued expenses
    
    
    455
    
    
    
    375Net cash provided by operating activities
    
    
    597
    
    
    
    601Investing ActivitiesPurchases of property, plant and equipment
    
    
    (309
    )
    
    
    (389
    )Proceeds from sale of assets
    
    
    13
    
    
    
    Net cash used in investing activities
    
    
    (296
    )
    
    
    (389
    )Financing ActivitiesNet (decrease) increase in revolving credit agreement
    
    
    (5,834
    )
    
    
    1,003Principal payments on bank term loans
    
    
    (2,005
    )
    
    
    (1,106
    )Borrowings from Boone County Bank, Inc. (related party)
    
    
    
    
    
    
    100Principal payments to Boone County Bank, Inc. (related
party)
    
    
    (74
    )
    
    
    (126
    )Principal payments on capital leases
    
    
    (5
    )
    
    
    (17
    )Cash dividends paid to shareholders
    
    
    (862
    )
    
    
    (163
    )Purchase of common stock
    
    
    
    
    
    
    (14
    )Issuance of common stock
    
    
    17,972
    
    
    
    Net cash provided by (used in) financing activities
    
    
    9,192
    
    
    
    (323
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    7
    
    
    
    167Increase in cash and cash equivalents
    
    
    9,500
    
    
    
    56Cash and cash equivalents at beginning of period
    
    
    418
    
    
    
    1,431Cash and cash equivalents at end of period
    
    $
    9,918
    
    
    $
    1,487Supplemental Disclosures of Cash Flow InformationCash paid during the period for:Interest
    
    $
    67
    
    
    $
    199Income taxes
    
    $
    1,075
    
    
    $
    1,111Capital lease obligation incurred for equipment
    
    $
    16
    
    
    $
    7
 See Notes to condensed Consolidated Financial Statements 5




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##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) Note 1: Organization Portec Rail Products, Inc. (sometimes herein referred to as we, our, us,
the Company, or Portec Rail Products) was incorporated in West Virginia in
1997. We manufacture, supply and distribute a broad range of railroad
products, including rail joints, rail anchors, rail spikes, railway friction
management products and systems and freight car securement devices. We also
manufacture material handling equipment through our United Kingdom operation.
We serve both domestic and international markets. We and our predecessors have
served the railroad industry since 1906. In 1997, a group of private investors
including several senior executives of Portec, Inc., our predecessor company,
purchased the rail-related assets and selected material handling assets of, and
assumed certain liabilities of, Portec, Inc. We operate through four global
business units consisting of Railway Maintenance Products Division (RMP),
Shipping Systems Division (SSD), Portec, Rail Products Ltd. (Canada) and
Portec Rail Products (UK) Ltd. (United Kingdom). Note 2: Basis of Presentation The accompanying condensed consolidated financial statements include the
accounts of Portec Rail Products, Inc., our wholly-owned Canadian subsidiary,
Portec, Rail Products Ltd. (Canada) and our wholly-owned United Kingdom
subsidiary, Portec Rail Products (UK) Ltd. (United Kingdom). All significant
intercompany accounts and transactions have been eliminated in consolidation.
The foregoing financial information has been prepared in accordance with the
accounting principles generally accepted in the United States of America
(GAAP) and rules and regulations of the Securities and Exchange Commission
for interim financial reporting. The preparation of the financial statements
in accordance with GAAP requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from these estimates. The results of
operations for the six months ended June 30, 2004 are not necessarily
indicative of the results to be expected for the full year. The accompanying
interim financial information is unaudited; however, we believe, the financial
information reflects all adjustments (consisting of items of a normal recurring
nature) necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with GAAP. Certain information and
note disclosures normally included in our annual financial statements prepared
in accordance with GAAP have been condensed or omitted. These interim
financial statements should be read in conjunction with the 2003 Annual Report
on Form 10-K. The balance sheet information as of December 31, 2003 was
derived from our audited balance sheet included in our 2003 Annual Report on
Form 10-K. Certain amounts in the prior years consolidated financial statements have been
reclassified to conform with the current year presentation. These
reclassifications had no effect on net earnings. Note 3: Inventories Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method for all inventories. Inventory
costs include material, labor and manufacturing overhead. The major components of inventories are as follows: June 30
    
    December 312004
    
    2003(In Thousands)Raw materials
    
    $
    6,188
    
    
    $
    5,825Work in process
    
    
    586
    
    
    
    363Finished goods
    
    
    6,635
    
    
    
    7,05613,409
    
    
    
    13,244Less reserve for slow-moving and obsolete inventory
    
    
    311
    
    
    
    276Net inventory
    
    $
    13,098
    
    
    $
    12,968
 6




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##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) Note 4: Long-Term Debt Long-term debt consists of the following: June 30
    
    December 312004
    
    2003(In Thousands)Senior Credit Facility :Revolving credit facility
    
    $
    
    
    
    $
    5,510Term loan
    
    
    
    
    
    
    1,2252002 Term loan
    
    
    
    
    
    
    625Revolving credit facility (Canada)
    
    
    459
    
    
    
    811Term loan (United Kingdom)
    
    
    318
    
    
    
    338Property loan (United Kingdom)
    
    
    167
    
    
    
    199Quodeck acquisition loan (United Kingdom)
    
    
    394
    
    
    
    474Overdraft credit facility (United Kingdom)
    
    
    
    
    
    
    Boone County Bank, Inc. (related party)
    
    
    
    
    
    
    73Capitalized lease obligations
    
    
    27
    
    
    
    161,365
    
    
    
    9,271Less current maturities
    
    
    781
    
    
    
    8,555$
    584
    
    
    $
    716
 As a result of our initial public offering, all outstanding loans under our
Senior Credit Facility and Boone County Bank, Inc. (related party) were repaid
in January 2004. Under the Senior Credit Facility, we have a secured revolving credit facility
with a bank for borrowings to a maximum of $6,250,000. Borrowings under the
revolving credit facility can be in an amount up to 80% of the outstanding
eligible accounts receivable plus 50% of the aggregate value of eligible
inventory. Advances against eligible inventory are limited to $3,750,000. We
are required to pay a 0.25% fee on the average daily unused portion of the
revolving credit facility. Advances under the revolving credit facility accrue
interest, at our option, at the Eurodollar rate plus 1.75% to 2.50% or the
financial institutions prime rate plus 0.00% to 0.50%. The Senior Credit
Facility is collateralized by substantially all of our assets in the United
States. The Senior Credit Facility contains certain covenants which requires
us to maintain leverage ratios, current ratios, fixed charge coverage ratios
and minimum amounts of tangible net worth. The Senior Credit Facility further
limits capital expenditures, sales of assets, management bonuses, management
fees and additional indebtedness. The Senior Credit Facility also restricts
the sale of the capital stock of our wholly-owned subsidiaries. Borrowings on
the revolving credit facility accrued interest at 4.00% at December 31, 2003.
No borrowings were outstanding under the revolving credit facility at June 30,
2004. The revolving credit facility expires on December 31, 2006. Our Canadian subsidiary has a secured revolving demand credit facility with a
bank for borrowings to a maximum of 3,750,000 Canadian dollars ($2,800,000).
Borrowings under the revolving credit facility can be in an amount up to 80% of
the outstanding eligible accounts receivable plus 50% of the aggregate value of
eligible inventory. Advances against eligible inventory are limited to
1,875,000 Canadian dollars. The interest rate is the Canadian prime rate plus
1.00%. Borrowings on the revolving line of credit accrued interest at 4.75%
and 4.50% at June 30, 2004 and December 31, 2003, respectively. The credit
facility is secured by specific pledges of land, building, equipment, accounts
receivable and inventory. At June 30, 2004, borrowings under this credit
facility were 615,000 Canadian dollars ($459,000) and additional borrowings of
3,135,000 Canadian dollars ($2,341,000) were available. 7




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##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) Our United Kingdom subsidiary has a £400,000 ($728,000) overdraft facility on
its primary bank account with a financial institution in the United Kingdom.
The purpose of the overdraft facility is to provide for working capital
requirements. The interest rate on the overdraft facility is the financial
institutions base rate plus 1.625%. For any borrowings in excess of £400,000
($728,000) that the financial institution approves, the interest rate is the
financial institutions base rate plus 6.75%. The United Kingdom loans are
collateralized by substantially all of the assets of our United Kingdom
subsidiary and its wholly-owned subsidiaries. In addition, the loans contain
certain covenants, which require our United Kingdom subsidiary to maintain a
minimum tangible net worth, profitability, cash generation and limits
additional borrowings. The covenants also restrict any payments of dividends
and limit capital expenditures by our United Kingdom subsidiary. No borrowings
were outstanding under the overdraft facility at June 30, 2004. The overdraft
credit facility expires on March 19, 2005. Note 5: Retirement Plans In December 2003, the FASB issued revisions to SFAS 132, Employers Disclosures
about Pensions and Other Postretirement Benefits. The revised statement
includes new and revised disclosures for sponsors of defined benefit plans.
The revised disclosure rules require interim presentation of net periodic
benefit cost recognized, showing the component amounts separately. The revised
disclosure rules also have requirements regarding interim disclosure of
employer contributions paid and expected to be paid. The revised disclosure is
effective for interim periods beginning after December 15, 2003 for both
domestic and foreign plans. We have updated the following defined benefit
plans disclosures to incorporate these requirements. The components of net periodic pension (benefit) cost of our United States
defined benefit pension plan are as follows for the three and six months ended
June 30, 2004 and 2003: Three Months Ended
    
    Six Months EndedJune 30
    
    June 302004
    
    2003
    
    2004
    
    2003(In Thousands)Service cost
    
    $
    
    
    
    $
    65
    
    
    $
    
    
    
    $
    130Interest cost
    
    
    128
    
    
    
    188
    
    
    
    256
    
    
    
    376Expected return on plan assets
    
    
    (178
    )
    
    
    (217
    )
    
    
    (356
    )
    
    
    (475
    )Amortization of transition and prior service cost
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    2Pension (benefit) cost
    
    $
    (50
    )
    
    $
    37
    
    
    $
    (100
    )
    
    $
    33
 We previously disclosed in the financials statements for the year ended
December 31, 2003, that the required minimum contribution for the United States
defined benefit pension plan was approximately $147,000, which was funded in
February 2004. We do not anticipate any additional contributions will be made
to this pension plan for the remainder of 2004. 8




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##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) The components of net periodic pension cost (benefit) of our United Kingdom
defined benefit pension plans are as follows for the three months ended June
30, 2004 and 2003: Portec Rail
    
    Conveyors
    
    Portec Rail
    
    ConveyorsPlan
    
    Plan
    
    Plan
    
    Plan2004
    
    2004
    
    2003
    
    2003(In Thousands)Service cost
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Less employee contributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest cost
    
    
    69
    
    
    
    10
    
    
    
    
    
    
    
    Expected return on plan assets
    
    
    (70
    )
    
    
    (17
    )
    
    
    
    
    
    
    Amortization of transition
amount
    
    
    (13
    )
    
    
    (3
    )
    
    
    
    
    
    
    Amortization of unrecognized
loss (gain)
    
    
    19
    
    
    
    (1
    )
    
    
    
    
    
    
    Pension cost (benefit)
    
    $
    5
    
    
    $
    (11
    )
    
    $
    0
    
    
    $
    0
 The components of net periodic pension cost (benefit) of our United Kingdom
defined benefit pension plans are as follows for the six months ended June 30,
2004 and 2003: Portec Rail
    
    Conveyors
    
    Portec Rail
    
    ConveyorsPlan
    
    Plan
    
    Plan
    
    Plan2004
    
    2004
    
    2003
    
    2003(In Thousands)Service cost
    
    $
    28
    
    
    $
    
    
    
    $
    
    
    
    $
    Less employee contributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest cost
    
    
    139
    
    
    
    20
    
    
    
    
    
    
    
    Expected return on plan assets
    
    
    (146
    )
    
    
    (34
    )
    
    
    
    
    
    
    Amortization of transition
amount
    
    
    (27
    )
    
    
    (6
    )
    
    
    
    
    
    
    Amortization of unrecognized
loss (gain)
    
    
    38
    
    
    
    (2
    )
    
    
    
    
    
    
    Pension cost (benefit)
    
    $
    32
    
    
    $
    (22
    )
    
    $
    0
    
    
    $
    0
 During the third quarter of 2003, the Company recorded the full year net
periodic pension cost of approximately $34,000 for the Portec Rail plan and the
full year net periodic pension benefit of approximately $26,000 for the
Conveyors plan. The impact of this adjustment on the quarterly financial
statements for the year ended December 31, 2003 was not material. Future
pension plan funding for the United Kingdom defined benefit pension plans will
be dependent upon the performance of plan assets. As of June 30, 2004, $15,000
and $0 in employer contributions have been made to the Portec Rail plan and the
Conveyors plan, respectively. For the remainder of 2004, we anticipate making
additional contributions of approximately £11,000 ($20,000), plus the payment
of certain plan administrative expenses, to the Portec Rail plan. We do not
anticipate making any contributions to the Conveyors plan in 2004. 9




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##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) Note 6: Comprehensive Income Comprehensive income for the three and six months ended June 30, 2004 and 2003
is as follows: Three Months Ended
    
    Six Months EndedJune 30
    
    June 302004
    
    2003
    
    2004
    
    2003(In Thousands)Net income
    
    $
    1,464
    
    
    $
    1,292
    
    
    $
    2,121
    
    
    $
    2,110Minimum pension liability adjustment, net of tax
    
    
    15
    
    
    
    (20
    )
    
    
    (24
    )
    
    
    (12
    )Foreign currency translation adjustments, net of tax
    
    
    (163
    )
    
    
    537
    
    
    
    (56
    )
    
    
    694Comprehensive income
    
    $
    1,316
    
    
    $
    1,809
    
    
    $
    2,041
    
    
    $
    2,792
 Note 7: Earnings Per Share Basic earnings per share (EPS) is computed as net income available to common
shareholders divided by the weighted average common shares outstanding.
Diluted earnings per share considers the potential dilution that occurs related
to issuance of common stock under stock option plans. At the present time, the
company does not have any stock option plans or other instruments that would
cause dilution. Note 8: Commitments and Contingencies Contractual Obligations The following is a summary of our contractual obligations in the form of leases
and debt as of June 30, 2004: Six MonthsEndingContractual Obligations
    
    12/31/2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total(In thousands)Long term debt
    
    $
    154
    
    
    $
    310
    
    
    $
    234
    
    
    $
    55
    
    
    $
    54
    
    
    $
    72
    
    
    $
    879Revolving credit facilities
    
    
    
    
    
    
    459
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    459Capital leases and equipment loans
    
    
    7
    
    
    
    9
    
    
    
    7
    
    
    
    3
    
    
    
    1
    
    
    
    
    
    
    
    27Operating leases
    
    
    381
    
    
    
    541
    
    
    
    478
    
    
    
    346
    
    
    
    173
    
    
    
    30
    
    
    
    1,949Total contractual obligations
    
    $
    542
    
    
    $
    1,319
    
    
    $
    719
    
    
    $
    404
    
    
    $
    228
    
    
    $
    102
    
    
    $
    3,314
 Litigation We are involved from time to time in lawsuits that arise in the normal course
of business. We actively and vigorously defend all lawsuits. We are named
with numerous other defendants in an environmental lawsuit. The plaintiff
seeks to recover costs, which it has incurred to investigate and remediate its
own property as required by the New York State Department of Environmental
Conservation (NYSDEC). We have not been named as a liable party by the NYSDEC
and believe we have no liability to the plaintiff in the case. We filed a
motion of summary judgment seeking a ruling to have us dismissed from the case.
On November 6, 2003, the motion of summary judgment was granted and we were
dismissed from the case. On March 25, 2004, the plaintiff filed a notice of
appeal. If the plaintiff wins on appeal, ongoing litigation may be protracted,
and we will incur additional ongoing legal expenses, which are not estimable at
this time. 10




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##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) Note 9: Segment Information We operate four business segments consisting of Railway Maintenance Products
Division (RMP), Shipping Systems Division (SSD), Portec, Rail Products Ltd.
(Canada) and Portec Rail Products (UK) Ltd. (United Kingdom), along with a
corporate functional shared service. The presentation of segment information
reflects the manner in which we organize our segments by geographic areas for
making operating decisions, assessing performance and allocating resources. Intersegment sales are accounted for at arms-length prices, reflecting
prevailing market conditions within the United States, Canada and the United
Kingdom. Such sales and associated costs are eliminated in the consolidated
financial statements. Three Months Ended
    
    Six Months EndedJune 30
    
    June 302004
    
    2003
    
    2004
    
    2003(In Thousands)External SalesRMP
    
    $
    8,455
    
    
    $
    7,205
    
    
    $
    16,320
    
    
    $
    13,782SSD
    
    
    1,235
    
    
    
    1,222
    
    
    
    1,937
    
    
    
    2,909Canada
    
    
    4,862
    
    
    
    5,376
    
    
    
    8,704
    
    
    
    7,616United Kingdom
    
    
    3,961
    
    
    
    3,893
    
    
    
    6,745
    
    
    
    7,519Total
    
    $
    18,513
    
    
    $
    17,696
    
    
    $
    33,706
    
    
    $
    31,826Intersegment SalesRMP
    
    $
    500
    
    
    $
    551
    
    
    $
    765
    
    
    $
    961SSD
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    Canada
    
    
    475
    
    
    
    444
    
    
    
    896
    
    
    
    894United Kingdom
    
    
    21
    
    
    
    11
    
    
    
    27
    
    
    
    33Total
    
    $
    996
    
    
    $
    1,006
    
    
    $
    1,688
    
    
    $
    1,888Total SalesRMP
    
    $
    8,955
    
    
    $
    7,756
    
    
    $
    17,085
    
    
    $
    14,743SSD
    
    
    1,235
    
    
    
    1,222
    
    
    
    1,937
    
    
    
    2,909Canada
    
    
    5,337
    
    
    
    5,820
    
    
    
    9,600
    
    
    
    8,510United Kingdom
    
    
    3,982
    
    
    
    3,904
    
    
    
    6,772
    
    
    
    7,552Total
    
    $
    19,509
    
    
    $
    18,702
    
    
    $
    35,394
    
    
    $
    33,714Operating Income (Loss)RMP
    
    $
    1,259
    
    
    $
    1,070
    
    
    $
    2,337
    
    
    $
    2,031SSD
    
    
    198
    
    
    
    165
    
    
    
    217
    
    
    
    445Canada
    
    
    793
    
    
    
    957
    
    
    
    1,217
    
    
    
    1,132United Kingdom
    
    
    346
    
    
    
    279
    
    
    
    165
    
    
    
    642Corporate
    
    
    (463
    )
    
    
    (296
    )
    
    
    (782
    )
    
    
    (561
    )Total
    
    
    2,133
    
    
    
    2,175
    
    
    
    3,154
    
    
    
    3,689Interest Expense
    
    
    25
    
    
    
    100
    
    
    
    71
    
    
    
    201Other (Income) Expense, net
    
    
    (51
    )
    
    
    30
    
    

    
    (33
    )
    
    
    109Income Before Income Taxes
    
    $
    2,159
    
    
    $
    2,045
    
    
    $
    3,116
    
    
    $
    3,379
 11




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##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) Three Months Ended
        
        Six Months EndedJune
          30
        
        June
          302004
        
        2003
        
        2004
        
        2003(In
            Thousands)Depreciation and
            AmortizationRMP
        
        $
        160
        
        
        $
        155
        
        
        $
        318
        
        
        $
        309SSD
        
        
        3
        
        
        
        3
        
        
        
        6
        
        
        
        6Canada
        
        
        80
        
        
        
        78
        
        
        
        161
        
        
        
        149United Kingdom
        
        
        120
        
        
        
        120
        
        
        
        241
        
        
        
        229Corporate
        
        
        1
        
        
        
        1
        
        
        
        2
        
        
        
        2Total
        
        $
        364
        
        
        $
        357
        
        
        $
        728
        
        
        $
        695Capital ExpendituresRMP
        
        $
        84
        
        
        $
        44
        
        
        $
        235
        
        
        $
        251SSD
        
        
        
        
        
        
        7
        
        
        
        2
        
        
        
        28Canada
        
        
        11
        
        
        
        57
        
        
        
        34
        
        
        
        62United Kingdom
        
        
        44
        
        
        
        35
        
        
        
        54
        
        
        
        55Corporate
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Total
        
        $
        139
        
        
        $
        143
        
        
        $
        325
        
        
        $
        396June 30
        
        
        
        
        
        
        
        
        
        December 312004
        
        
        
        
        
        
        
        
        
        2003Total AssetsRMP
        
        $
        18,174
        
        
        
        
        
        
        
        
        
        
        $
        17,462SSD
        
        
        1,864
        
        
        
        
        
        
        
        
        
        
        
        1,525Canada
        
        
        11,318
        
        
        
        
        
        
        
        
        
        
        
        10,194United Kingdom
        
        
        10,636
        
        
        
        
        
        
        
        
        
        
        
        9,577Corporate
        
        
        10,239
        
        
        
        
        
        
        
        
        
        
        
        1,629Total
        
        $
        52,231
        
        
        
        
        
        
        
        
        
        
        $
        40,387
 Note 1: Subsequent Events On July 20, 2004, we entered into a definitive merger agreement with Salient
Systems, Inc. whereby we will acquire 100% of the outstanding shares of Salient
Systems for a combination of our stock and cash. The initial purchase value is
estimated to be in the range of $12.4 million to $14.0 million depending upon
our stock price prior to closing. In addition, there is an earn-out provision
for the years 2004 to 2006 and a working capital adjustment. The merger
agreement has been approved by the Board of Directors of both companies and is
subject to the satisfaction of certain conditions, including the approval of
the Salient Systems, Inc. shareholders. We will be filing a registration
statement, prospectus and other relevant documents with the Securities and
Exchange Commission. It is anticipated that the transaction will close in
September 2004. 12




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##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the condensed
consolidated financial statements of Portec Rail Products, Inc. and the related
notes beginning on page 3. Unless otherwise specified, any reference to the
three months ended or six months ended is to the three or six months ended
June 30. Additionally, when used in this Form 10-Q, unless the context requires
otherwise, the terms we, our and us refer to Portec Rail Products, Inc.
and its business segments. Cautionary Statement Relevant to Forward-looking Statements This Form 10-Q contains or incorporates by reference forward-looking
statements relating to the Company. Forward-looking statements typically are
identified by the use of terms, such as may, will, plan, should,
expect, anticipate, believe, if, estimate, intend, and similar
words, although some forward-looking statements are expressed differently. You
should consider statements that contain these and similar words carefully
because they describe our expectations, plans, strategies, goals and beliefs
concerning future business conditions, our results of operations, our financial
position, and our business outlook, or state other forward-looking
information based on currently available information. Although we believe that
the expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors. We
undertake no obligation to update publicly or revise any forward-looking
statements. You should not place undue reliance on the forward-looking
statements. The Company identifies below important factors that could affect the
Companys financial performance and could cause the Companys actual results
for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements. In
particular, the Companys future results could be affected by a variety of
factors, such as:  
    
    customer demand;
    
    competitive dynamics in the North American and worldwide
railroad and railway supply industries;
    
    capital expenditures by the railway industry in North America and worldwide;
    
    economic conditions, including changes in inflation rates or interest rates;
    
    product development and the success of new products;
    
    our ability to successfully pursue, consummate and integrate
attractive acquisition opportunities;
    
    changes in laws and regulations;
    
    the development and retention of sales representation and
distribution agreements with third parties;
    
    limited international protection of our intellectual property;
    
    the loss of key personnel;
    
    fluctuations in the cost and availability of raw materials
and supplies, and any significant disruption of supplies;
    
    foreign economic conditions, including currency rate fluctuations;
    
    political unrest in foreign markets and economic uncertainty due to terrorism or war;
    
    exposure to pension liabilities;
    
    seasonal fluctuations in our sales;
    
    technological innovations by our competitors; and
    
    the importation of lower cost competitive products into our markets. The Company specifically declines to undertake any obligation to publicly
revise any forward-looking statements that have been made to reflect events or
circumstances after the date of those statements or to reflect the occurrence
of anticipated or unanticipated events. 13




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##### 



Overview In the United States, Canada and the United Kingdom, we are a
manufacturer, supplier and distributor of a broad range of rail products,
including rail joints, rail anchors, rail spikes, railway friction management
systems and products and securement devices. End users of our rail products
include Class I railroads, short-line and regional railroads and transit
systems. Our three North American business segments along with the rail
division of our United Kingdom business segment serve these end users. In
addition, our United Kingdom business segment also manufactures and supplies
material handling products primarily to end users within the United Kingdom.
These products include overhead and floor conveyor systems, racking systems and
mezzanine flooring systems. The end users of our material handling products are
primarily in the manufacturing, distribution, garment and food industries. Results of Operations Three Months Ended June 30, 2004 compared to Three Months Ended June 30, 2003 Net Sales.Net sales increased to $18.5 million for the three months
ended June 30, 2004, an increase of $817,000 or 4.6%, from $17.7 million for
the comparable period in the prior year. The increase in net sales is
primarily attributable to increased sales of $1.3 million at RMP, partially
offset by decreased sales of $514,000 at our Canadian operation. The increase
in sales at RMP is primarily related to increased sales of our friction
management products and rail joints, as customer demand has increased for these
products during the current period. The decrease in sales at our Canadian
operation is primarily attributable to sales volume decreases of $714,000
across our primary product lines, partially offset by a favorable foreign
currency translation of Canadian dollars to U.S. dollars of approximately
$200,000. Gross Profit.Gross profit increased to $5.4 million for the three months
ended June 30, 2004, an increase of $459,000 or 9.2%, from $5.0 million for the
comparable period in the prior year. The gross profit increase is primarily
due to increased gross profit of $322,000 at RMP, due primarily to the
increased sales volume. Selling, General and Administrative Expenses.Selling, general and
administrative expenses increased to $3.3 million for the three months ended
June 30, 2004, an increase of $504,000 or 18.1%, from $2.8 million for the
comparable period in the prior year. This increase is attributable to
increased Corporate shared service expenses of $168,000 in the current period,
primarily due to higher legal fees, professional fees and director and officer
insurance costs as a result of becoming a public company. In addition,
selling, general and administrative expenses at RMP increased by $133,000 in
the current period, primarily due to employee additions, salary and benefit
increases and higher sales commissions due to increased sales volumes. Lastly,
favorable foreign currency translation of British pounds sterling and Canadian
dollars into U.S. dollars increased these expenses by approximately $119,000 in
the current period. Interest Expense.Interest expense decreased to $25,000 for the three
months ended June 30, 2004, a decrease of $75,000 or 75.0%, from $100,000 for
the comparable period in the prior year, primarily due to reduced debt levels.
Net proceeds from our initial public offering of common stock in January 2004
were used to repay outstanding domestic indebtedness of approximately $7.3
million in January 2004. Total long-term debt decreased to $1.4 million at
June 30, 2004, from $9.5 million at June 30, 2003. Provision for Income Taxes.Provision for income taxes decreased to
$695,000 for the three months ended June 30, 2004, from $753,000 for the
comparable period in the prior year. The effective tax rates on reported
taxable income were 32.2% and 36.8% for the three months ended June 30, 2004
and 2003, respectively. Our consolidated tax rate for the three months ended
June 30, 2004 was reduced due to research and development tax credits received
by our Canadian operation and lower taxes on foreign source income. Net Income.Net income increased to $1.5 million for the three months
ended June 30, 2004, an increase of $172,000 or 13.3%, from $1.3 million for
the comparable period in the prior year for the reasons set forth above. Our
basic and diluted net income per share decreased to $.17 for the three months
ended June 30, 2004 on average basic and diluted shares of 8,602,169, from $.20
for the comparable period in the prior year on average basic and diluted shares
of 6,525,002. 14




---



##### 



Six Months Ended June 30, 2004 compared to Six Months Ended June 30, 2003 Net Sales.Net sales increased to $33.7 million for the six months ended
June 30, 2004, an increase of $1.9 million or 6.0%, from $31.8 million for the
comparable period in the prior year. The increase in net sales is attributable
to increased sales of $2.5 million at RMP and $1.1 million at our Canadian
operation, partially offset by decreased sales of $972,000 at SSD and $774,000
at our United Kingdom operation. The increase in sales at RMP is primarily
related to increases in sales of friction management products and services, as
our larger customers continue to increase spending for these products and
services. The increase in sales at our Canadian operation is attributable to
sales volume increases of $510,000 due to increased customer demand for our
products, along with a favorable foreign currency translation of Canadian
dollars to U.S. dollars of approximately $578,000. The decreased sales at SSD
is primarily due to lower demand for our heavy-duty load securement systems,
along with a program to refurbish military flat cars as a result of the war in
Iraq and our largest customer upgrading its fleet of flat cars that favorably
impacted sales in the first four months of 2003. The decreased sales at our
United Kingdom operation is attributable to a sales volume decrease of
approximately $1.6 million, partially offset by a favorable foreign currency
translation of approximately $785,000. The sales volume decrease is due to
declines in both friction management products and services and material
handling product sales. Material handling sales have been negatively impacted
by customer demand for our Quodeck product line, while rail sales have been
negatively impacted as a result of our largest customer, Network Rail,
undergoing a significant reorganization. Gross Profit.Gross profit increased to $9.3 million for the six months
ended June 30, 2004, an increase of $171,000 or 1.9%, from $9.1 million for the
comparable period in the prior year. The increase in gross profit is primarily
due to increased gross profit at RMP of $443,000, due primarily to increased
sales volume, and favorable foreign currency translation of British pounds
sterling and Canadian dollars into U.S. dollars of approximately $226,000 and
$133,000, respectively, in the current period. These increases in gross profit
were partially offset by decreases in gross profit of $489,000 at our United
Kingdom operation and $209,000 at SSD, primarily due to decreased sales
volumes. Selling, General and Administrative Expenses.Selling, general and
administrative expenses increased to $6.1 million for the six months ended June
30, 2004, an increase of $712,000 or 13.2%, from $5.4 million for the
comparable period in the prior year. This increase is due to unfavorable
foreign currency translation of British pounds sterling and Canadian dollars
into U.S. dollars of approximately $257,000 in the current period. In
addition, Corporate shared service expenses have increased $222,000 in the
current period, primarily due to higher legal and professional fees and
director and officer insurance costs as a result of becoming a public company.
RMP expenses have also increased $136,000 in the current period, primarily due
to employee additions, salary and benefit increases and higher sales
commissions due to increased sales volumes. Interest Expense.Interest expense decreased to $71,000 for the six
months ended June 30, 2004, a decrease of $130,000 or 64.7%, from $201,000 for
the comparable period in the prior year, primarily due to reduced debt levels.
Net proceeds from our initial public offering of common stock in January 2004
were used to repay outstanding domestic indebtedness of approximately $7.3
million in January 2004. Total long-term debt decreased to $1.4 million at
June 30, 2004, from $9.5 million at June 30, 2003. Provision for Income Taxes.Provision for income taxes decreased to
$995,000 for the six months ended June 30, 2004, from $1.3 million for the
comparable period in the prior year. The effective tax rates on reported
taxable income were 31.9% and 37.6% for the six months ended June 30, 2004 and
2003, respectively. Our consolidated tax rate for the six months ended June
30, 2004 was reduced due to research and development tax credits received by
our Canadian operation and lower taxes on foreign source income. Net Income.Net income increased to $2.1 million for the six months ended
June 30, 2004, an increase of $11,000 over the comparable period in the prior
year for the reasons set forth above. Our basic and diluted net income per
share decreased to $.25 for the six months ended June 30, 2004 on average basic
and diluted shares of 8,602,169, from $.32 for the comparable period in the
prior year on average basic and diluted shares of 6,525,002. 15




---



##### 



Business Segment Review Our operations are organized into four business segments consisting of the
Railway Maintenance Products Division (RMP), the Shipping Systems Division
(SSD), Portec, Rail Products Ltd. (Canada) and Portec Rail Products (UK)
Ltd. (United Kingdom), along with a corporate functional shared service. The
presentation of segment information reflects the manner in which we organize
segments by geographic areas for making operating decisions, assessing
performance and allocating resources. Intersegment sales do not have an impact
on our consolidated financial condition or results of operations. Railway Maintenance Products Division  RMP.RMP manufactures and
assembles track components and related products, friction management products,
and provides services to railroads, transit systems and railroad contractors.
We are also a distributor and reseller of purchased track components,
lubricants and friction modifiers manufactured by third parties. Our
manufactured and assembled track component and friction management products
consist primarily of standard and insulated rail joints and friction management
systems. Our purchased and distributed products consist primarily of various
lubricants and friction modifiers. Three Months Ended
    
    Six Months EndedJune 30
    
    June 302004
    
    2003
    
    2004
    
    2003(In thousands)External sales
    
    $
    8,455
    
    
    $
    7,205
    
    
    $
    16,320
    
    
    $
    13,782Intersegment sales
    
    
    500
    
    
    
    551
    
    
    
    765
    
    
    
    961Operating income
    
    
    1,259
    
    
    
    1,070
    
    
    
    2,337
    
    
    
    2,031Sales by product line(1)Rail joints and related products
    
    $
    4,510
    
    
    $
    3,844
    
    
    $
    9,014
    
    
    $
    8,039Friction management products and services
    
    
    4,081
    
    
    
    3,446
    
    
    
    7,415
    
    
    
    5,946Other products and services
    
    
    364
    
    
    
    466
    
    
    
    656
    
    
    
    758Total product and service sales
    
    $
    8,955
    
    
    $
    7,756
    
    
    $
    17,085
    
    
    $
    14,743
   (1)
    
    Includes intersegment sales. For the three months ended June 30, 2004, RMPs external sales increased
by $1.3 million or 17.3%, to $8.5 million from $7.2 million during the same
period in 2003. The increase in external customer sales is primarily related to
increases in sales of friction management products, in particular lubricants,
and rail joints and related products, as customer demand has increased for
these products during the current period. Operating income for the three
months ended June 30, 2004 increased to $1.3 million from $1.1 million for the
same period in 2003, an increase of $189,000 or 17.7%, primarily due to
increased gross profit on the additional sales volume, partially offset by
increased selling, general and administrative expenses resulting from employee
additions, salary and benefit increases and higher sales commissions due to
increased sales volumes. For the six months ended June 30, 2004, RMPs external sales increased by
$2.5 million or 18.4%, to $16.3 million from $13.8 million during the same
period in 2003. The increase in external customer sales is related to increases
in sales of friction management products and services and our track component
products, as our larger customers continue to increase spending for these
products and services. Operating income for the six months ended June 30, 2004
increased to $2.3 million from $2.0 million for the same period in 2003, an
increase of $306,000 or 15.1%, primarily due to increased gross profit on the
additional sales volume, partially offset by increased selling, general and
administrative expenses resulting from employee additions, salary and benefit
increases and higher sales commissions due to increased sales volumes. 16




---



##### 



Shipping Systems Division  SSD.SSD engineers and sells load
securement systems to the railroad freight car market. These systems are used
to secure a wide variety of products and lading onto freight cars. Three Months Ended
    
    Six Months EndedJune 30
    
    June 302004
    
    2003
    
    2004
    
    2003(In thousands)External sales
    
    $
    1,235
    
    
    $
    1,222
    
    
    $
    1,937
    
    
    $
    2,909Intersegment sales
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    Operating income
    
    
    198
    
    
    
    165
    
    
    
    217
    
    
    
    445Sales by product line(1)Heavy duty load securement systems
    
    $
    453
    
    
    $
    550
    
    
    $
    764
    
    
    $
    1,765All other load securement systems.
    
    
    782
    
    
    
    672
    
    
    
    1,173
    
    
    
    1,144Total product and service sales
    
    $
    1,235
    
    
    $
    1,222
    
    
    $
    1,937
    
    
    $
    2,909
   (1)
    
    Includes intersegment sales. For the three months ended June 30, 2004, SSDs external sales of $1.2
million are almost identical with the prior period. Operating income for the
three months ended June 30, 2004 increased to $198,000 from $165,000 during the
same period in 2003, an increase of $33,000 or 20.0%. The increase in
operating income is due to an increase in gross profit, resulting from
increased sales of higher margin products and the introduction of a new product
for flat cars, partially offset by increased selling, general and
administrative expenses resulting from the hiring of a new product development
engineer, along with increases in certain other selling and administrative
expenses. For the six months ended June 30, 2004, SSDs external sales decreased by
$972,000 or 33.4%, to $1.9 million from $2.9 million during the same period in
2003. This decrease is primarily due to lower demand for our heavy-duty load
securement systems during the first six months of 2004, along with a program to
refurbish military flatcars as a result of the war in Iraq and our largest
customer upgrading its fleet of flat cars that favorably impacted sales in the
first four months of 2003. Operating income for the six months ended June 30,
2004 decreased to $217,000 from $445,000 during the same period in 2003, a
decrease of $228,000 or 51.2%, primarily due to decreased gross profit on the
lower sales volumes. Portec, Rail Products Ltd.  Canada.At our Canadian operation, we
manufacture rail anchors and rail spikes and assemble friction management
products primarily for the two largest Canadian railroads. Rail anchors and
spikes are devices to secure rails to the ties to restrain the movement of the
rail tracks. Three Months Ended
    
    Six Months EndedJune 30
    
    June 302004
    
    2003
    
    2004
    
    2003(In thousands)External sales
    
    $
    4,862
    
    
    $
    5,376
    
    
    $
    8,704
    
    
    $
    7,616Intersegment sales
    
    
    475
    
    
    
    444
    
    
    
    896
    
    
    
    894Operating income
    
    
    793
    
    
    
    957
    
    
    
    1,217
    
    
    
    1,132Average translation rate of Canadian
dollar to United States dollar
    
    
    0.7432
    
    
    
    0.7127
    
    
    
    0.7460
    
    
    
    0.6965Sales by product line(1)Rail anchors and spikes
    
    $
    3,825
    
    
    $
    4,323
    
    
    $
    7,228
    
    
    $
    6,430Friction management products and services
    
    
    1,295
    
    
    
    1,333
    
    
    
    2,022
    
    
    
    1,808Other products and services
    
    
    217
    
    
    
    164
    
    
    
    350
    
    
    
    272Total product and service sales
    
    $
    5,337
    
    
    $
    5,820
    
    
    $
    9,600
    
    
    $
    8,510
   (1)
    
    Includes intersegment sales. 17




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##### 



For the three months ended June 30, 2004, Canadas external sales of $4.9
million decreased by $514,000 or 9.6%, from $5.4 million during the same period
in 2003. The decrease in external sales is primarily attributable to sales
volume decreases of $714,000 across our primary product lines, partially offset
by a favorable foreign currency translation of Canadian dollars to U.S. dollars
of approximately $200,000. In addition, sales at our Canadian operation during
the second quarter of 2003 were favorably impacted by a labor stoppage at a
primary steel supplier in late 2002, which caused an increase in shipments for
second quarter of 2003, as we needed to rebuild inventory during the first
quarter of 2003. Operating income for the three months ended June 30, 2004
decreased to $793,000 from $957,000 during the same period in 2003, a decrease
of $164,000 or 17.1%, primarily due to decreased gross profit on lower sales
volume. For the six months ended June 30, 2004, Canadas external sales of $8.7
million increased by $1.1 million or 14.3%, from $7.6 million during the same
period in 2003. The increase in external sales is attributable to sales volume
increases of $510,000 due to increased demand for our products, along with a
favorable foreign currency translation of Canadian dollars to U.S. dollars of
approximately $578,000. Operating income for the six months ended June 30,
2004 increased to $1.2 million from $1.1 million during the same period in
2003, an increase of $85,000 or 7.5%. The increase in operating income is
primarily due to the additional gross profit generated on the increased sales
volume, partially offset by increased selling, general and administrative
expenses, primarily due to increased employee fringe benefit costs. Portec Rail Products (UK) Ltd.  United Kingdom.In the United Kingdom,
we operate and serve our customers in two markets. The United Kingdoms rail
business is primarily driven by sales of friction management products and
services to the United Kingdom passenger rail network. The United Kingdoms
material handling business includes product lines such as overhead and floor
conveyor systems, racking systems and mezzanine flooring systems. The end users
of our material handling products are primarily United Kingdom-based companies
in the manufacturing, distribution, garment and food industries. Three Months Ended
    
    Six Months EndedJune 30
    
    June 302004
    
    2003
    
    2004
    
    2003(In thousands)External sales
    
    $
    3,961
    
    
    $
    3,893
    
    
    $
    6,745
    
    
    $
    7,519Intersegment sales
    
    
    21
    
    
    
    11
    
    
    
    27
    
    
    
    33Operating income
    
    
    346
    
    
    
    279
    
    
    
    165
    
    
    
    642Average translation rate of British
pound sterling to United States dollar
    
    
    1.8187
    
    
    
    1.6181
    
    
    
    1.8279
    
    
    
    1.6151Sales by product line(1)Material handling products sales
    
    $
    2,719
    
    
    $
    2,727
    
    
    $
    4,667
    
    
    $
    4,828Friction management products and services
    
    
    1,263
    
    
    
    1,177
    
    
    
    2,105
    
    
    
    2,724Total product sales
    
    $
    3,982
    
    
    $
    3,904
    
    
    $
    6,772
    
    
    $
    7,552
   (1)
    
    Includes intersegment sales. For the three months ended June 30, 2004, United Kingdoms external sales
of $4.0 million increased by $68,000 or 1.7%, from $3.9 million during the same
period in 2003. The increase in external sales is attributable to a favorable
foreign currency translation of approximately $437,000, offset by sales volume
decreases of approximately $369,000, primarily on our material handling product
line, as there has been a reduced customer demand for our Quodeck product line
during the second quarter of 2004. Operating income for the three months ended
June 30, 2004 increased to $346,000 from $279,000 during the same period in
2003, an increase of $67,000 or 24.0%. The increase in operating income is
primarily due to a favorable foreign currency translation of approximately
$38,000 and an improvement in gross profit resulting from employee cost
reductions initiated in the first quarter of 2004, partially offset by
increased legal and professional fees. 18




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##### 



For the six months ended June 30, 2004, United Kingdoms external sales of
$6.7 million decreased by $774,000 or 10.3%, from $7.5 million during the same
period in 2003. This decrease in external sales is attributable to a sales
volume decrease of approximately $1.6 million, partially offset by a favorable
foreign currency translation of approximately $785,000. The sales volume
decrease is due to decreased demand for both our friction management products
and services and material handling products. Material handling sales have been
negatively impacted by a reduced customer demand for our Quodeck product line,
while rail sales have been negatively impacted as a result of our largest
customer, Network Rail, undergoing a significant reorganization. Operating
income for the six months ended June 30, 2004 decreased to $165,000 from
$642,000 during the same period in 2003, a decrease of $477,000 or 74.3%. This
decrease is primarily due to decreased gross profit on lower sales volumes of
our rail and Quodeck product lines. Liquidity and Capital Resources Our cash flow from operations is the primary source of financing for
internal growth, capital expenditures, repayments of long-term contractual
obligations, dividends to our shareholders, and other commercial commitments.
The most significant risk associated with our ability to generate sufficient
cash flow from operations is the overall level of demand for our products. In
addition, we have cash invested in short-term government money market funds of
approximately $9.4 million at June 30, 2004 primarily as a result of our
initial public offering and subsequent underwritten over-allotment exercise.
We may use this cash for acquisitions, product line expansions, and other
general corporate purposes. We believe we can manage our working capital and
control costs to meet our cash flow needs for the next twelve months to meet
our growth objectives. In addition to cash generated from operations, we have
revolving and overdraft credit facilities in place to support the working
capital needs of each of our business segments. We believe that cash flow from
operations and the ability to borrow additional cash under our credit and
overdraft facilities along with the proceeds from our initial public offering
will be sufficient to meet our cash flow requirements over the next twelve
months. Cash Flow Analysis.During the six months ended June 30, 2004, we
generated $597,000 in cash flow from operations compared to $601,000 during the
same 2003 period. Although the overall cash generated during these periods is
comparable, timing differences resulted in fluctuations in accounts receivable
balances, inventory levels and accounts payable balances. Accounts receivable
balances increased due to higher sales volumes at RMP, SSD, Canada and the UK
during the second quarter of 2004. For the six months ended June 30, 2003,
inventory levels and accounts payable balances increased as the result of a
labor stoppage at our primary steel supplier that significantly reduced our
inventory levels at our Canadian operation in late 2002. Net cash used in investing activities was $296,000 for the six months
ended June 30, 2004, compared to $389,000 during the same period in 2003. In
July 2004, we exercised our purchase option on the lease for our spike product
line manufacturing equipment at our Canadian operation in the amount of
$500,000 Canadian dollar (approximately $373,000). We estimate 2004 total
capital expenditures to approximate $750,000 to $1,000,000, which will be used
to upgrade our machinery and equipment, support new strategic initiatives or
develop new products. The majority of our capital spending is discretionary.
We believe that the overall level of capital spending for our business segments
is sufficient to remain competitive. Net cash provided by financing activities was $9.2 million for the six
months ended June 30, 2004, compared to $323,000 of cash used in financing
activities during the same period in 2003. The increase in cash provided by
financing activities during 2004 is primarily due to the net proceeds received
from our initial public offering of common stock in January 2004, and
subsequent exercising of an over-allotment option by the underwriter, which
provided approximately $18.0 million in net proceeds. These net proceeds were
used to repay short and long-term debt obligations of approximately $7.3
million during January 2004. Also, cash dividends of $862,000 were paid during
the first six months of 2004. 19




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Financial Condition At June 30, 2004, total assets were $52.2 million, an increase of $11.8
million or 29.2%, from December 31, 2003. The increase at June 30, 2004 is
primarily due to an increase of $9.5 million in cash, primarily due to the
issuance of common stock as a result of our initial public offering.
Additionally, an increase of $3.2 million in accounts receivable at June 30,
2004 is primarily due to an increase in sales volume at RMP, SSD, Canada and
the UK for the three months ended June 30, 2004. At June 30, 2004, net working
capital (defined as current assets minus current liabilities) was $25.4
million, an increase of $19.2 million or 310%, from $6.2 million at December
31, 2003. The increase in working capital at June 30, 2004 is primarily due to
the cash proceeds from the initial public offering and the repayment of certain
indebtedness during the first quarter of 2004, along with the increase in
accounts receivable. The products we manufacture and sell, such as our joint bars, rail anchors
and rail spikes, require steel as a major element in the production process.
During the first half of 2004, worldwide steel scrap prices have increased
resulting in surcharges being added to our overall raw material costs. As a
result, these steel surcharges increased our raw material costs and we are
continuing to work with our customers on the overall absorption of these higher
raw material costs. We believe that the impact of the higher material costs
have not had a material impact on our financial results for the first six
months of 2004, as we have been successful in passing the steel surcharges on
to most of our customers. However, if a prolonged increase in steel prices
should continue, our future earnings may be negatively impacted. In addition, our largest rail customer in the United Kingdom, Network
Rail, has undertaken a significant restructuring program. According to
published reports, Network Rail plans to take direct control over all of its
track maintenance work, which was previously handled by third party maintenance
contractors. As a result of this restructuring program, we have experienced
lower demand for our rail products during the end of 2003 and first quarter of
2004 at our United Kingdom operation. Demand for our rail products began to
improve during the second quarter of 2004 and we believe that the demand for
our products by Network Rail will continue to improve as their restructuring
program nears completion; however, if demand for our products does not continue
to improve, our future earnings could be negatively impacted. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to interest rate risk on our contractual long-term debt
obligations and our working capital facilities are under floating interest rate
arrangements. We have determined that these risks are not significant enough to
warrant hedging programs. A significant portion of our floating interest rate
long-term debt obligations were repaid in January 2004, in conjunction with our
initial public offering. In addition, we are exposed to foreign currency translation fluctuations
with our two international operations. We do not have any foreign exchange
derivative contracts to hedge against foreign currency exposures. Therefore, we
are exposed to the related effects when foreign currency exchange rates
fluctuate. If the U.S. dollar strengthens against the Canadian dollar and/or
the British pound sterling, the translation rate for these foreign currencies
will decrease, which will have a negative impact on our operating income. For
example, for the three and six months ended June 30, 2004, for every 1/100
change in the exchange rate of the Canadian dollar to the U.S. dollar, our
Canadian operations operating income would have changed by approximately
$10,700 and $16,300, respectively. Further, for every 1/100 change in the
exchange rate of the British pound sterling to the U.S. dollar, the impact on
operating income for our United Kingdom operation for the three and six months
ended June 30, 2004 would have been approximately $1,900 and $900,
respectively. Foreign currency translation fluctuations have no impact on cash
flows as long as we continue to reinvest any profits back into the respective
foreign operations. 20




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ITEM 4. CONTROLS AND PROCEDURES Under the supervision and with the participation of the Companys
management, including the Chief Executive Officer and Chief Financial Officer,
the Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Exchange Act) as of the end of the period covered by this quarterly
report on Form 10-Q (the Evaluation Date). Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that, as of the
Evaluation Date, the Companys disclosure controls and procedures are effective
to ensure that information required to be disclosed in the reports that the
Company files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commissions rules and forms. There has been no change
in the Companys internal control over financial reporting during the most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting. PART II  OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On January 15, 2004, the Companys registration statement on Form S-1
(Registration No. 333-110288) was declared effective. Pursuant to the
registration statement, as amended, the Company registered 2,300,000 shares of
common stock, par value $1.00 per share, with a proposed maximum aggregate
offering price of $29,900,000. The stock was first offered to the public
pursuant to a preliminary prospectus dated January 6, 2004. On January 28,
2004, the Company completed the sale of 2,000,000 shares of common stock at a
price to the public of $10.00 per share. Ferris, Baker Watts, Incorporated, of
Baltimore, Maryland, acted as sole underwriter for the offering. On February
26, 2004, the Company completed the sale of an additional 95,000 shares of its
common stock at a price to the public of $10.00 per share upon the exercise by
Ferris, Baker Watts, Incorporated of its over-allotment option to purchase
additional shares. The stock offering, including the exercise of the
over-allotment option, resulted in gross proceeds of $20,950,000. Expenses
related to the offering were as follows: $1,467,000 for underwriting discounts
and commissions, $367,000 for expenses paid to or for the underwriter
(including a $105,000 financial advisory fee), and $1,144,000 for other
expenses. Total expenses were $2,978,000. No finders fees were paid in
connection with the offering. None of the expenses were direct or indirect
payment to directors, officers, general partners of the Company or their
associates, to persons owning 10% or more of the Companys common stock or to
affiliates of the Company. Net proceeds of the offering were approximately
$17,972,000. As of June 30, 2004, the net proceeds of the offering were used as
follows: $7,313,000 was used to repay indebtedness; $1,220,000 was used for
working capital; and $9,439,000 was used for temporary investments, consisting
of short-term government money market funds. The repayment of debt included a
payment of $73,000 to pay off our outstanding loan balance to Boone County
Bank, Inc. Marshall T. Reynolds, our chairman of the board, may be deemed an
associate of Boone County Bank, Inc. 21




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##### 



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of shareholders was held on May 26, 2004. Proxy
material had been circulated on May 3, 2004, proposing the election of eleven
(11) directors to the Board of Directors for a one year term and the
ratification of the appointment of BKD, LLP as independent auditors for the
Company for the year ending December 31, 2004. Of the 7,975,602 shares present
by proxy, the following is the number of shares voted for, against or withheld
and abstained.  1.
    
    With respect to the election of eleven (11) directors whose terms
expire in 2005: For
    
    Withheld
    
    Broker Non-VoteMarshall T. Reynolds
    
    
    7,954,596
    
    
    
    21,006
    
    
    
    4,300John S. Cooper
    
    
    7,952,996
    
    
    
    22,606
    
    
    
    4,300Philip E. Cline
    
    
    7,878,811
    
    
    
    96,791
    
    
    
    4,300Daniel P. Harrington
    
    
    7,881,011
    
    
    
    94,591
    
    
    
    4,300Charles R. Hooten, Jr.(a)
    
    
    7,950,596
    
    
    
    25,006
    
    
    
    4,300A. Michael Perry
    
    
    7,948,896
    
    
    
    26,706
    
    
    
    4,300Douglas V. Reynolds
    
    
    7,953,896
    
    
    
    21,706
    
    
    
    4,300Neal W. Scaggs
    
    
    7,952,996
    
    
    
    22,606
    
    
    
    4,300Robert L. Shell, Jr.
    
    
    7,878,011
    
    
    
    97,591
    
    
    
    4,300Kirby J. Taylor
    
    
    7,949,896
    
    
    
    25,706
    
    
    
    4,300Thomas W. Wright
    
    
    7,951,596
    
    
    
    24,006
    
    
    
    4,300
 __________________   2.
    
    With respect to the ratification of the appointment of BKD, LLP as
the Companys independent auditors for the year ending December 31,
2004: For
    
    Against
    
    Abstained
    
    Broker Non-VoteBKD, LLP
    
    
    7,969,802
    
    
    
    350
    
    
    
    5,450
    
    
    
    4,300
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits filed as part of this Form 10-Q:  31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232
    
    Certification of Chief Executive Officer
and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002  (b)
    
    The following reports on Form 8-K were filed during the quarter for
which this report is filed:Form 8-K dated May 7, 2004, filed May 10, 2004 regarding Portec
Rail Products, Inc.s press release titled Portec Rail Products,
Inc. Reports 2004 First Quarter Operating Results (unaudited).Form 8-K dated May 27, 2004, filed May 28, 2004 regarding Portec
Rail Products, Inc.s press release titled Portec Rail Products,
Inc. Announces Second Quarter 2004 Dividend.Form 8-K dated June 24, 2004, filed June 28, 2004 regarding Portec
Rail Products, Inc.s press release titled Portec Rail Products,
Inc. Announces Directors Death. 22




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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. PORTEC RAIL PRODUCTS, INC.Date: August 4, 2004
    
    By:
    
    /s/ John S. CooperJohn S. Cooper, Chief Executive
Officer and PresidentDate: August 4, 2004
    
    By:
    
    /s/ Michael D. BornakMichael D. Bornak, Chief Financial Officerand Chief
Accounting Officer
 23




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##### 



EXHIBIT INDEX 31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232
    
    Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 24