##### 



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 September 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 October 31, 2004, there were 9,551,336 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
 September 30, 2004 (Unaudited) and December 31, 2003
    
    
    3Condensed Consolidated Statements of Income (Unaudited)
Three and nine months ended September 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    62.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    153.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    234.
    
    Controls and Procedures
    
    
    24PART II  OTHER INFORMATION2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Signatures
    
    
    25
 2




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##### 



PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS Portec Rail Products, Inc. 
 Condensed Consolidated Balance Sheets
 September 30
    
    December 312004
    
    2003(Unaudited)(In Thousands)AssetsCurrent assetsCash and cash equivalents
    
    $
    7,132
    
    
    $
    418Accounts receivable, net
    
    
    12,299
    
    
    
    8,099Inventories, net
    
    
    14,212
    
    
    
    12,968Prepaid expenses and other current assets
    
    
    1,062
    
    
    
    1,394Deferred income taxes
    
    
    402
    
    
    
    401Total current assets
    
    
    35,107
    
    
    
    23,280Property, plant and equipment
    
    
    20,740
    
    
    
    19,717Less accumulated depreciation
    
    
    (8,837
    )
    
    
    (7,876
    )11,903
    
    
    
    11,841Other assets
    
    
    95
    
    
    
    170Intangible assets
    
    
    13,376
    
    
    
    Goodwill
    
    
    5,124
    
    
    
    5,096Total assets
    
    $
    65,605
    
    
    $
    40,387Liabilities and Shareholders EquityCurrent liabilitiesCurrent maturities of long-term debt
    
    $
    319
    
    
    $
    8,555Accounts payable
    
    
    4,834
    
    
    
    4,939Accrued income taxes
    
    
    925
    
    
    
    1,049Customer deposits
    
    
    1,304
    
    
    
    395Accrued compensation
    
    
    1,001
    
    
    
    986Other accrued liabilities
    
    
    1,756
    
    
    
    1,201Purchase price payable
    
    
    775
    
    
    
    Total current liabilities
    
    
    10,914
    
    
    
    17,125Long-term debt, less current maturities
    
    
    1,623
    
    
    
    716Accrued pension costs
    
    
    1,686
    
    
    
    1,975Deferred income taxes
    
    
    1,327
    
    
    
    1,172Contingent consideration payable
    
    
    3,404
    
    
    
    Other long-term liabilities
    
    
    314
    
    
    
    266Total liabilities
    
    
    19,268
    
    
    
    21,254Commitments and Contingencies
    
    
    
    
    
    
    Shareholders equity:Common stock, $1 par value, 50,000,000
shares authorized, 9,551,336 and
6,523,002 shares issued and outstanding
at September 30, 2004 and December 31,
2003, respectively
    
    
    9,551
    
    
    
    6,523Additional paid-in capital
    
    
    24,887
    
    
    
    2,756Retained earnings
    
    
    13,026
    
    
    
    11,221Accumulated other comprehensive loss
    
    
    (1,127
    )
    
    
    (1,367
    )Total shareholders equity
    
    
    46,337
    
    
    
    19,133Total liabilities and shareholders equity
    
    $
    65,605
    
    
    $
    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
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003(Dollars in Thousands, Except Earnings Per Share Data)Net sales
    
    $
    17,023
    
    
    $
    12,911
    
    
    $
    50,729
    
    
    $
    44,737Cost of sales
    
    
    12,535
    
    
    
    9,057
    
    
    
    36,940
    
    
    
    31,753Gross profit
    
    
    4,488
    
    
    
    3,854
    
    
    
    13,789
    
    
    
    12,984Selling, general and administrative
    
    
    2,967
    
    
    
    2,662
    
    
    
    9,082
    
    
    
    8,065Amortization expense
    
    
    16
    
    
    
    20
    
    
    
    48
    
    
    
    58Operating income
    
    
    1,505
    
    
    
    1,172
    
    
    
    4,659
    
    
    
    4,861Interest expense
    
    
    20
    
    
    
    77
    
    
    
    91
    
    
    
    278Other (income) expense, net
    
    
    (9
    )
    
    
    (61
    )
    
    
    (42
    )
    
    
    48Income before income taxes
    
    
    1,494
    
    
    
    1,156
    
    
    
    4,610
    
    
    
    4,535Provision for income taxes
    
    
    518
    
    
    
    406
    
    
    
    1,513
    
    
    
    1,675Net income
    
    $
    976
    
    
    $
    750
    
    
    $
    3,097
    
    
    $
    2,860Earnings per shareBasic
    
    $
    .11
    
    
    $
    .11
    
    
    $
    .36
    
    
    $
    .44Diluted
    
    $
    .11
    
    
    $
    .11
    
    
    $
    .36
    
    
    $
    .44Weighted average shares outstandingBasic
    
    
    8,711,150
    
    
    
    6,524,335
    
    
    
    8,711,150
    
    
    
    6,524,335Diluted
    
    
    8,711,150
    
    
    
    6,524,335
    
    
    
    8,711,150
    
    
    
    6,524,335Dividends per share
    
    $
    .05
    
    
    $
    .05
    
    
    $
    .15
    
    
    $
    .10
 See Notes to Condensed Consolidated Financial Statements 4




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Portec Rail Products, Inc. 
 Condensed Consolidated Statements of Cash Flows
 (Unaudited)
 Nine Months EndedSeptember 302004
    
    2003(In Thousands)Operating ActivitiesNet income
    
    $
    3,097
    
    
    $
    2,860Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,120
    
    
    
    1,036Provision for doubtful accounts
    
    
    46
    
    
    
    100Deferred income taxes
    
    
    
    
    
    
    15(Gain) loss on sale of fixed assets
    
    
    (11
    )
    
    
    4Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,285
    )
    
    
    (552
    )Inventories
    
    
    (373
    )
    
    
    (2,083
    )Prepaid expenses and other assets
    
    
    249
    
    
    
    (231
    )Accounts payable
    
    
    (212
    )
    
    
    199Income tax payable
    
    
    (123
    )
    
    
    234Accrued expenses
    
    
    178
    
    
    
    (242
    )Net cash provided by operating activities
    
    
    1,686
    
    
    
    1,340Investing ActivitiesBusiness acquisition, net of cash acquired
    
    
    (2,411
    )
    
    
    Purchases of property, plant and equipment
    
    
    (823
    )
    
    
    (495
    )Proceeds from sale of assets
    
    
    14
    
    
    
    9Net cash used in investing activities
    
    
    (3,220
    )
    
    
    (486
    )Financing ActivitiesNet (decrease) increase in revolving credit agreement
    
    
    (6,301
    )
    
    
    1,192Principal payments on bank term loans
    
    
    (2,082
    )
    
    
    (1,869
    )Borrowings from Boone County Bank, Inc. (related party)
    
    
    
    
    
    
    100Principal payments to Boone County Bank, Inc. (related
party)
    
    
    (74
    )
    
    
    (193
    )Principal payments on capital leases
    
    
    (9
    )
    
    
    (21
    )Cash dividends paid to shareholders
    
    
    (1,292
    )
    
    
    (489
    )Purchase of common stock
    
    
    
    
    
    
    (14
    )Issuance of common stock
    
    
    17,972
    
    
    
    Net cash provided by (used in) financing activities
    
    
    8,214
    
    
    
    (1,294
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    34
    
    
    
    180Increase in cash and cash equivalents
    
    
    6,714
    
    
    
    (260
    )Cash and cash equivalents at beginning of period
    
    
    418
    
    
    
    1,431Cash and cash equivalents at end of period
    
    $
    7,132
    
    
    $
    1,171Supplemental Disclosures of Cash Flow InformationCash paid during the period for:Interest
    
    $
    89
    
    
    $
    275Income taxes
    
    $
    1,730
    
    
    $
    1,460Capital lease obligation incurred for equipment
    
    $
    16
    
    
    $
    7Non cash items for business acquisition:Issuance of common stock
    
    $
    7,187
    
    
    $
    Notes payable
    
    $
    1,120
    
    
    $
    
 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, railway wayside data collection and data
management 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 nine months ended September 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 audited financial
statements contained in 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: Acquisition of Salient Systems, Inc. On September 30, 2004, we completed the merger with Salient Systems, Inc.
(Salient Systems) whereby we acquired 100% of the outstanding shares of Salient
Systems for $12,791,000. The net cash purchase price of $2,411,000 includes
the actual purchase price of $12,791,000, plus actual and estimated direct
acquisition costs of $453,000, less the issuance of 933,334 shares of common
stock with a market value at September 30, 2004 of $7,187,000, less the
issuance of promissory notes in the amount of $1,120,000, less $2,526,000 of
acquired cash. We feel that this acquisition will strengthen our global
footprint in the growing market for Wayside Detection and Operating Asset Data
Management systems as well as strengthen our friction management product line
so that we can better serve our railway customers. The acquisition of Salient
Systems is reflected in our September 30, 2004 condensed consolidated balance
sheet. Salient systems is operated under the RMP business unit and all assets
and liabilities are included in the RMP segment. Salient Systems operating
results will begin to be reflected in our consolidated results in the fourth
quarter of 2004 and will be included in the RMP segment. In accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations,we accounted for the acquisition using the purchase
method of accounting. Accordingly, the assets and liabilities from the
acquisition of Salient Systems were adjusted to fair value at the date of the
merger. In addition, all identified intangible assets were 6




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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) recorded at fair value and included as part of the net assets acquired. The
fair value of intangible assets were determined by an independent appraiser.
As a result of the independent valuation, we recorded $13,376,000 of identified
intangibles without determinable lives. In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets,goodwill and identified intangibles
without determinable lives will not be amortized, but will be evaluated for
impairment annually. All intangible assets resulting from the acquisition are
included in the RMP segment. The purchase price allocations are subject to
adjustment and may be modified within one year from the acquisition.
Subsequent changes are not expected to have a material effect on our
consolidated financial position. The accrued purchase price payable represents
the estimated working capital adjustment to be paid in cash and Portec Rail
Products, Inc. common stock, in accordance with the terms of the merger
agreement. It is anticipated that the working capital adjustment will be paid
and additional common stock issued prior to November 30, 2004. The contingent
consideration payable represents the excess fair value of net assets acquired
over the purchase price. In accordance with the terms of the merger agreement,
we may be required to pay additional consideration, in the form of Portec Rail
Products, Inc. common stock, based upon the future profitability of Salient
Systems. The contingent consideration payable is included in long term
liabilities on the condensed consolidated balance sheet. The following summarizes the estimated fair values at the merger date: September 302004(In Thousands)Cash and cash equivalents
    
    $
    2,526Accounts receivable, net
    
    
    1,862Inventories, net
    
    
    765Prepaid expenses and other current assets
    
    
    52Property, plant and equipment, net
    
    
    72Intangible assets
    
    
    13,376Total assets acquired
    
    
    18,653Accounts payable
    
    $
    46Customer deposits
    
    
    786Accrued compensation
    
    
    22Other accrued liabilities
    
    
    376Purchase price payable
    
    
    775Contingent consideration payable
    
    
    3,404Total liabilities
    
    
    5,409Net assets acquired
    
    $
    13,244
 Pro forma financial information The following table presents the unaudited pro forma financial information of
the Company including Salient Systems for the three months and nine months
ended September 30, 2004 and 2003, as if the merger had occurred on January 1,
2003, after giving effect to certain purchase accounting adjustments. The pro
forma adjustments include the elimination of certain officers salaries,
elimination of acquisition related expenses, the recording of a bonus and
consulting agreement and related income tax effects. These results are
presented for illustrative purposes only and are not necessarily indicative of
the actual operating results or financial position that would have occurred if
the transaction had been consummated on January 1, 2003. 7




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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003(Dollars in Thousands,
Except Earnings Per Share Data)Pro forma net sales
    
    $
    19,572
    
    
    $
    14,380
    
    
    $
    54,182
    
    
    $
    47,450Pro forma net income
    
    
    1,966
    
    
    
    1,173
    
    
    
    4,037
    
    
    
    3,318Pro forma net income per basic
and diluted share
    
    $
    .21
    
    
    $
    .16
    
    
    $
    .42
    
    
    $
    .44Shares used for basic and diluted
computation
    
    
    9,540,780
    
    
    
    7,457,669
    
    
    
    9,540,780
    
    
    
    7,457,669
 Note 4: 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: September 30
    
    December 312004
    
    2003(In Thousands)Raw materials
    
    $
    6,169
    
    
    $
    5,825Work in process
    
    
    638
    
    
    
    363Finished goods
    
    
    7,727
    
    
    
    7,05614,534
    
    
    
    13,244Less reserve for slow-moving and obsolete inventory
    
    
    322
    
    
    
    276Net inventory
    
    $
    14,212
    
    
    $
    12,968
 Note 5: Long-Term Debt Long-term debt consists of the following: September 30
    
    December 312004
    
    2003(In Thousands)Senior Credit Facility:Revolving credit facility
    
    $
    
    
    
    $
    5,510Term loan
    
    
    
    
    
    
    1,2252002 Term loan
    
    
    
    
    
    
    625Salient acquisition notes payable
    
    
    1,120
    
    
    
    Revolving credit facility (Canada)
    
    
    
    
    
    
    811Term loan (United Kingdom)
    
    
    304
    
    
    
    338Property loan (United Kingdom)
    
    
    148
    
    
    
    199Quodeck acquisition loan (United Kingdom)
    
    
    347
    
    
    
    474Overdraft credit facility (United Kingdom)
    
    
    
    
    
    
    Boone County Bank, Inc. (related party)
    
    
    
    
    
    
    73Capitalized lease obligations
    
    
    23
    
    
    
    161,942
    
    
    
    9,271Less current maturities
    
    
    319
    
    
    
    8,555$
    1,623
    
    
    $
    716
 8




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##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) Following 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 require
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 September
30, 2004. The revolving credit facility expires on December 31, 2006. In connection with the acquisition of Salient Systems, Inc., we executed two
promissory notes on September 30, 2004 (Salient acquisition notes payable).
One promissory note was executed with Harold Harrison, the founder and former
President and Chief Executive Officer of Salient Systems. This promissory note,
in the aggregate principal amount of $1,064,000 is due to Mr. Harrison in four
equal, annual installments of $266,000 beginning January 3, 2006 and ending
January 3, 2009. A second promissory note was also executed with Falls River
Group, LLC, who acted as a financial advisor to Salient Systems, Inc. This
promissory note, in the aggregate principal amount of $56,000 is due to Falls
River Group, LLC in four equal, annual installments of $14,000 beginning
January 3, 2006 and ending January 3, 2009. The unpaid principal balance of
the promissory notes accrue interest at the prime rate as published in the Wall
Street Journal. All accrued and unpaid interest is payable annually beginning
January 3, 2006. The outstanding balance on the promissory notes accrued
interest at 4.75% at September 30, 2004. Our Canadian subsidiary has a secured revolving demand credit facility with a
bank for borrowings to a maximum of 3,750,000 Canadian dollars ($2,973,000).
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 4.50% at
December 31, 2003. No borrowings were outstanding under the revolving line of
credit at September 30, 2004. The credit facility is secured by specific
pledges of land, building, equipment, accounts receivable and inventory. Our United Kingdom subsidiary has a £400,000 ($725,000) 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
($725,000) 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 September 30, 2004. The
overdraft credit facility expires on March 19, 2005. 9




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##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) Note 6: 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 nine months ended
September 30, 2004 and 2003: Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003(In Thousands)Service cost
    
    $
    
    
    
    $
    64
    
    
    $
    
    
    
    $
    194Interest cost
    
    
    128
    
    
    
    189
    
    
    
    384
    
    
    
    565Expected return on plan assets
    
    
    (178
    )
    
    
    (292
    )
    
    
    (534
    )
    
    
    (767
    )Amortization of transition and prior service cost
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    3Effect of curtailment
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    47Pension (benefit) cost
    
    $
    (50
    )
    
    $
    9
    
    
    $
    (150
    )
    
    $
    42
 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. The components of net periodic pension cost (benefit) of our United Kingdom
defined benefit pension plans are as follows for the three months ended
September 30, 2004 and 2003: Portec Rail
    
    Conveyors
    
    Portec Rail
    
    ConveyorsPlan
    
    Plan
    
    Plan
    
    Plan2004
    
    2004
    
    2003
    
    2003(In Thousands)Service cost
    
    $
    
    
    
    $
    
    
    
    $
    103
    
    
    $
    Less employee contributions
    
    
    
    
    
    
    
    
    
    
    (29
    )
    
    
    Interest cost
    
    
    69
    
    
    
    10
    
    
    
    183
    
    
    
    42Expected return on plan assets
    
    
    (69
    )
    
    
    (17
    )
    
    
    (202
    )
    
    
    (54
    )Amortization of transition
amount
    
    
    (14
    )
    
    
    (2
    )
    
    
    (49
    )
    
    
    (9
    )Amortization of unrecognized
loss (gain)
    
    
    19
    
    
    
    (1
    )
    
    
    28
    
    
    
    (5
    )Pension cost (benefit)
    
    $
    5
    
    
    $
    (10
    )
    
    $
    34
    
    
    $
    (26
    )
 10




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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 nine months ended
September 30, 2004 and 2003: Portec Rail
    
    Conveyors
    
    Portec Rail
    
    ConveyorsPlan
    
    Plan
    
    Plan
    
    Plan2004
    
    2004
    
    2003
    
    2003(In Thousands)Service cost
    
    $
    28
    
    
    $
    
    
    
    $
    103
    
    
    $
    Less employee contributions
    
    
    
    
    
    
    
    
    
    
    (29
    )
    
    
    Interest cost
    
    
    208
    
    
    
    30
    
    
    
    183
    
    
    
    42Expected return on plan assets
    
    
    (215
    )
    
    
    (51
    )
    
    
    (202
    )
    
    
    (54
    )Amortization of transition
amount
    
    
    (41
    )
    
    
    (8
    )
    
    
    (49
    )
    
    
    (9
    )Amortization of unrecognized
loss (gain)
    
    
    57
    
    
    
    (3
    )
    
    
    28
    
    
    
    (5
    )Pension cost (benefit)
    
    $
    37
    
    
    $
    (32
    )
    
    $
    34
    
    
    $
    (26
    )
 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 September 30, 2004,
$29,000 in employer contributions have been made to the Portec Rail plan and no
employer contributions were made to the Conveyors plan. For the remainder of
2004, we anticipate making additional contributions of approximately £3,000
($5,000), plus the payment of certain plan administrative expenses, to the
Portec Rail plan. We do not anticipate making any contributions to the
Conveyors plan for the remainder of 2004. Note 7: Comprehensive Income Comprehensive income for the three and nine months ended September 30, 2004 and
2003 is as follows: Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003(In Thousands)Net income
    
    $
    976
    
    
    $
    750
    
    
    $
    3,097
    
    
    $
    2,860Minimum pension liability adjustment, net of tax
    
    
    4
    
    
    
    (584
    )
    
    
    (20
    )
    
    
    (596
    )Foreign currency translation adjustments, net of tax
    
    
    316
    
    
    
    11
    
    
    
    260
    
    
    
    705Comprehensive income
    
    $
    1,296
    
    
    $
    177
    
    
    $
    3,337
    
    
    $
    2,969
 Note 8: 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. 11




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##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) Note 9: Commitments and Contingencies Contractual Obligations The following is a summary of our contractual obligations in the form of leases
and debt as of September 30, 2004: ThreeMonthsEndingContractual Obligations
    
    12/31/2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total(In thousands)Long term debt
    
    $
    77
    
    
    $
    308
    
    
    $
    513
    
    
    $
    334
    
    
    $
    334
    
    
    $
    353
    
    
    $
    1,919Revolving credit facilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital leases and equipment loans
    
    
    3
    
    
    
    9
    
    
    
    7
    
    
    
    3
    
    
    
    1
    
    
    
    
    
    
    
    23Operating leases
    
    
    218
    
    
    
    645
    
    
    
    615
    
    
    
    479
    
    
    
    297
    
    
    
    873
    
    
    
    3,127Total contractual obligations
    
    $
    298
    
    
    $
    962
    
    
    $
    1,135
    
    
    $
    816
    
    
    $
    632
    
    
    $
    1,226
    
    
    $
    5,069
 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 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, a motion of summary judgment was granted and we were
dismissed as a defendant from the case. On March 25, 2004, the plaintiff filed
a notice of appeal. If the plaintiff prevails on appeal, we may be reinstated
as a defendant and ongoing litigation may be protracted, and we will incur
additional ongoing legal expenses, which are not estimable at this time. Note 10: 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. The acquisition of Salient Systems is reflected in our September 30, 2004
condensed consolidated balance sheet. Salient Systems is operated under the
direction of the RMP business unit and all assets and liabilities are included
in the RMP segment. Salient Systems operating results will begin to be
reflected in our consolidated results in the fourth quarter of 2004 and will be
included in the RMP segment. 12




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##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003(In Thousands)External SalesRMP
    
    $
    8,177
    
    
    $
    6,584
    
    
    $
    24,497
    
    
    $
    20,366SSD
    
    
    1,430
    
    
    
    778
    
    
    
    3,367
    
    
    
    3,687Canada
    
    
    3,299
    
    
    
    2,600
    
    
    
    12,003
    
    
    
    10,216United Kingdom
    
    
    4,117
    
    
    
    2,949
    
    
    
    10,862
    
    
    
    10,468Total
    
    $
    17,023
    
    
    $
    12,911
    
    
    $
    50,729
    
    
    $
    44,737Intersegment SalesRMP
    
    $
    369
    
    
    $
    337
    
    
    $
    1,134
    
    
    $
    1,298SSD
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Canada
    
    
    722
    
    
    
    613
    
    
    
    1,618
    
    
    
    1,507United Kingdom
    
    
    4
    
    
    
    18
    
    
    
    31
    
    
    
    51Total
    
    $
    1,095
    
    
    $
    968
    
    
    $
    2,783
    
    
    $
    2,856Total SalesRMP
    
    $
    8,546
    
    
    $
    6,921
    
    
    $
    25,631
    
    
    $
    21,664SSD
    
    
    1,430
    
    
    
    778
    
    
    
    3,367
    
    
    
    3,687Canada
    
    
    4,021
    
    
    
    3,213
    
    
    
    13,621
    
    
    
    11,723United Kingdom
    
    
    4,121
    
    
    
    2,967
    
    
    
    10,893
    
    
    
    10,519Total
    
    $
    18,118
    
    
    $
    13,879
    
    
    $
    53,512
    
    
    $
    47,593Operating Income (Loss)RMP
    
    $
    1,017
    
    
    $
    751
    
    
    $
    3,354
    
    
    $
    2,782SSD
    
    
    220
    
    
    
    43
    
    
    
    437
    
    
    
    488Canada
    
    
    255
    
    
    
    503
    
    
    
    1,472
    
    
    
    1,635United Kingdom
    
    
    343
    
    
    
    194
    
    
    
    508
    
    
    
    836Corporate
    
    
    (330
    )
    
    
    (319
    )
    
    
    (1,112
    )
    
    
    (880
    )Total
    
    
    1,505
    
    
    
    1,172
    
    
    
    4,659
    
    
    
    4,861Interest Expense
    
    
    20
    
    
    
    77
    
    
    
    91
    
    
    
    278Other (Income) Expense, net
    
    
    (9
    )
    
    
    (61
    )
    
    
    (42
    )
    
    
    48Income Before Income Taxes
    
    $
    1,494
    
    
    $
    1,156
    
    
    $
    4,610
    
    
    $
    4,535
 13




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##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003(In Thousands)Depreciation and AmortizationRMP
    
    $
    178
    
    
    $
    153
    
    
    $
    496
    
    
    $
    462SSD
    
    
    3
    
    
    
    3
    
    
    
    9
    
    
    
    9Canada
    
    
    88
    
    
    
    78
    
    
    
    249
    
    
    
    227United Kingdom
    
    
    122
    
    
    
    106
    
    
    
    363
    
    
    
    335Corporate
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    3Total
    
    $
    392
    
    
    $
    341
    
    
    $
    1,120
    
    
    $
    1,036Capital ExpendituresRMP
    
    $
    95
    
    
    $
    91
    
    
    $
    330
    
    
    $
    342SSD
    
    
    23
    
    
    
    
    
    
    
    25
    
    
    
    28Canada
    
    
    380
    
    
    
    2
    
    
    
    414
    
    
    
    64United Kingdom
    
    
    10
    
    
    
    13
    
    
    
    64
    
    
    
    68Corporate
    
    
    6
    
    
    
    
    
    
    
    6
    
    
    
    Total
    
    $
    514
    
    
    $
    106
    
    
    $
    839
    
    
    $
    502
 September 30
    
    December 312004
    
    2003Total AssetsRMP
    
    $
    37,129
    
    
    $
    17,462SSD
    
    
    1,880
    
    
    
    1,525Canada
    
    
    11,360
    
    
    
    10,194United Kingdom
    
    
    10,110
    
    
    
    9,577Corporate
    
    
    5,126
    
    
    
    1,629Total
    
    $
    65,605
    
    
    $
    40,387
 Note 11: Subsequent Events On October 4, 2004, we terminated our Senior Credit Facility
and entered into a new Revolving Credit Facility with our United States bank for secured borrowings to a
maximum of $8,500,000.
We entered into this new Revolving Credit Facility to provide us with increased borrowing capacity to help
fund future acquisition opportunities, working capital requirements and capital expenditures, as well as
eliminate certain covenant requirements that were imposed on us under the pre-existing Senior Credit Facility.
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 $4,250,000. We are required to pay a 0.20% fee on the average daily
unused portion of the Revolving Credit Facility. Advances under the Revolving
Credit Facility accrue interest at the Eurodollar rate plus 1.50% to 1.75%.
The Revolving Credit Facility is collateralized primarily by accounts
receivable and inventory levels in the United States. The Revolving Credit
Facility contains certain covenants, which require us to maintain leverage
ratios. The Revolving Credit Facility expires on September 30, 2007. On November 1, 2004, we entered into a definitive merger agreement with Kelsan
Technologies Corp. (Kelsan) whereby we will purchase 100% of the outstanding
shares of Kelsan. The all cash acquisition price is $20.0 million (Canadian
currency) or approximately $16.4 million U.S. and is subject to a working
capital adjustment at closing. It is anticipated that the entire acquisition
price will be funded through a term loan with a Canadian financial institution.
The merger agreement has been approved by the Board of Directors of both
companies and is subject to approval by the Kelsan shareholders. It is
anticipated that the transaction will close in late November or early December. 14




---



##### 



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 nine months ended is to the three or nine months
ended September 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. 15




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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, railway wayside data collection and data management
systems 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 September 30, 2004 compared to Three Months Ended September
30, 2003 Net Sales.Net sales increased to $17.0 million for the three months
ended September 30, 2004, an increase of $4.1 million or 31.8%, from $12.9
million for the comparable period in the prior year. The increase in net sales
is attributable to increased sales of $1.6 million at RMP, $1.2 million at our
United Kingdom operation, $699,000 at our Canadian operation and $652,000 at
SSD. The increase in sales at RMP is primarily due to increases in sales of
our rail joints and related products, as our larger customers continue to
increase spending for these products. The increase in sales at our United
Kingdom operation is attributable to sales volume increases of $743,000 due to
increased customer demand for our material handling products, along with a
favorable foreign currency translation of approximately $425,000. The
increased sales at our Canadian operation are primarily due to sales volume
increases of $551,000 resulting from increased customer demand for our rail
anchors and spikes, along with a favorable foreign currency translation of
approximately $148,000. The increase in sales at SSD is attributable to an
increase in sales of strap securement systems resulting from increased customer
demand for these products and an improved freight car market. Gross Profit.Gross profit increased to $4.5 million for the three months
ended September 30, 2004, an increase of $634,000 or 16.5%, from $3.9 million
for the comparable period in the prior year. The gross profit increase is due
to increased gross profit of $338,000 at RMP, $233,000 at SSD and $149,000 at
our United Kingdom operation due primarily to the increased sales volumes,
along with favorable foreign currency translation of British pounds sterling
and Canadian dollars into U.S. dollars of approximately $148,000. These
increases in gross profit were partially offset by a decrease in gross profit
of $234,000 at our Canadian operation, primarily due to higher raw material
costs on our rail anchor and spike product lines as a result of steel
surcharges. These steel surcharges are being passed through to our customers
without adding margin to the sales price. Due to the timing of passing these
increases onto our customers, our gross profit, primarily at our Canadian
operation, has been negatively impacted during the third quarter of 2004. Selling, General and Administrative Expenses.Selling, general and
administrative expenses for the three months ended September 30, 2004 increased
by $305,000 or 11.5% to $3.0 million from $2.7 million during the comparable
period in the prior year. This increase is primarily attributable to increased
expenses at RMP of $72,000 and SSD of $58,000, primarily resulting from
employee additions and general salary and benefit increases. In addition,
unfavorable foreign currency translation of British pounds sterling and
Canadian dollars into U.S. dollars increased these expenses by approximately
$100,000 during the third quarter of 2004. Interest Expense.Interest expense decreased to $20,000 for the three
months ended September 30, 2004, a decrease of $57,000 or 74.0%, from $77,000
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
$1.9 million at September 30, 2004, from $8.8 million at September 30, 2003. Provision for Income Taxes.Provision for income taxes increased to
$518,000 for the three months ended September 30, 2004, from $406,000 for the
comparable period in the prior year. The effective tax rates on reported
taxable income were 34.7% and 35.1% for the three months ended September 30,
2004 and 2003, respectively. Our 16




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##### 



consolidated tax rate for the three months ended September 30, 2004 was
reduced due to research and development tax credits received by our Canadian
operation. Net Income.Net income increased to $976,000 for the three months ended
September 30, 2004, an increase of $226,000 or 30.1%, from $750,000 for the
comparable period in the prior year for the reasons set forth above. Our basic
and diluted net income per share remained unchanged at $.11 for the three
months ended September 30, 2004 and 2003, on average basic and diluted shares
of 8,711,150 and on average basic and diluted shares of 6,524,335, for the
respective periods. Nine Months Ended September 30, 2004 compared to Nine Months Ended September
30, 2003 Net Sales.Net sales increased to $50.7 million for the nine months ended
September 30, 2004, an increase of $6.0 million or 13.4%, from $44.7 million
for the comparable period in the prior year. The increase in net sales is
attributable to increased sales of $4.1 million at RMP, $1.8 million at our
Canadian operation and $394,000 at our United Kingdom operation, partially
offset by decreased sales of $320,000 at SSD. The increase in sales at RMP is
primarily due to increases in sales of our rail joints and related products and
our friction management products and services, as we have seen greater spending
by our larger customers on both of these product lines. The increase in sales
at our Canadian operation is attributable to sales volume increases of $1.0
million due to increased customer demand for rail anchors and spikes, along
with a favorable foreign currency translation of Canadian dollars to U.S.
dollars of approximately $760,000. The increase in sales at our United Kingdom
operation is attributable to a favorable foreign currency translation of
approximately $1.2 million, partially offset by a sales volume decrease of
approximately $839,000. This sales volume decrease is primarily due to
decreased demand for our friction management products and services, as a result
of our largest customer, Network Rail, undergoing a significant reorganization,
which negatively impacted rail sales. The decrease in sales at SSD is
primarily due to lower customer demand for our heavy-duty load securement
systems, partially offset by increased customer demand for our strap securement
systems. Gross Profit.Gross profit increased to $13.8 million for the nine months
ended September 30, 2004, an increase of $805,000 or 6.2%, from $13.0 million
for the comparable period in the prior year. The increase in gross profit is
primarily due to increased gross profit at RMP of $781,000, due primarily to
increased sales volume of our rail joints and related products and our friction
management products and services. In addition, a favorable foreign currency
translation of British pounds sterling and Canadian dollars into U.S. dollars
of approximately $352,000 and $167,000, respectively, has increased gross
profit in the current period. These increases in gross profit were partially
offset by a decrease in gross profit of $346,000 at our United Kingdom
operation, due primarily to decreased sales volume of our friction management
products and services, and a decrease in gross profit of $173,000 at our
Canadian operation, due primarily to higher raw material costs on our rail
anchor and spike product lines as a result of steel surcharges. These steel
surcharges are being passed through to our customers without adding margin to
the sales price. Due to the timing of passing these increases onto our
customers, our gross profit, primarily at our Canadian operation, has been
negatively impacted during the third quarter of 2004. Selling, General and Administrative Expenses.Selling, general and
administrative expenses for the nine months ended September 30, 2004 increased
by $1.0 million or 12.6% to $9.1 million from $8.1 million during the
comparable period in the prior year. This increase is partially due to
unfavorable foreign currency translation of British pounds sterling and
Canadian dollars into U.S. dollars of approximately $364,000 in the current
period. In addition, Corporate shared service expenses have increased $232,000
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.
Also, increased expenses at RMP of $209,000, our Canadian operation of $82,000
and SSD of $77,000 are primarily attributable to increased salaries, fringe
benefit costs and employee additions. Interest Expense.Interest expense decreased to $91,000 for the nine
months ended September 30, 2004, a decrease of $187,000 or 67.3%, from $278,000
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
$1.9 million at September 30, 2004, from $8.8 million at September 30, 2003. 17




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Provision for Income Taxes.Provision for income taxes decreased to $1.5
million for the nine months ended September 30, 2004, from $1.7 million for the
comparable period in the prior year. The effective tax rates on reported
taxable income were 32.8% and 36.9% for the nine months ended September 30,
2004 and 2003, respectively. Our consolidated tax rate for the nine months
ended September 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 $3.1 million for the nine months
ended September 30, 2004, an increase of $237,000 or 8.3%, from $2.9 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 $.36 for the nine
months ended September 30, 2004 on average basic and diluted shares of
8,711,150, from $.44 for the comparable period in the prior year on average
basic and diluted shares of 6,524,335. 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
and manage 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.
The acquisition of Salient Systems is reflected in our September 30, 2004
condensed consolidated balance sheet. Salient Systems is operated under the
RMP business unit and all assets and liabilities are included in the RMP
segment. Salient Systems operating results will begin to be reflected in our
consolidated results in the fourth quarter of 2004 and will be included in the
RMP segment. Railway Maintenance Products Division  RMP.RMP manufactures and
assembles track components and related products, friction management products,
wayside data collection and data management systems 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
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003(In thousands)External sales
    
    $
    8,177
    
    
    $
    6,584
    
    
    $
    24,497
    
    
    $
    20,366Intersegment sales
    
    
    369
    
    
    
    337
    
    
    
    1,134
    
    
    
    1,298Operating income
    
    
    1,017
    
    
    
    751
    
    
    
    3,354
    
    
    
    2,782Sales by product line(1)Rail joints and related products
    
    $
    4,889
    
    
    $
    3,160
    
    
    $
    13,902
    
    
    $
    11,199Friction management products and services
    
    
    3,264
    
    
    
    3,351
    
    
    
    10,680
    
    
    
    9,297Other products and services
    
    
    393
    
    
    
    410
    
    
    
    1,049
    
    
    
    1,168Total product and service sales
    
    $
    8,546
    
    
    $
    6,921
    
    
    $
    25,631
    
    
    $
    21,664
   (1)
    
    Includes intersegment sales. For the three months ended September 30, 2004, RMPs external sales of
$8.2 million increased by $1.6 million or 24.2%, from $6.6 million during the
same period in 2003. The increase in external sales is primarily due to
increased customer demand during the current period for our rail joints and
related products, while sales of our higher margin friction management products
and services experienced a slight decrease. Operating income for the three
months ended September 30, 2004 increased to $1.0 million from $751,000 for the
same period in 2003, an increase of $266,000 or 35.4%. This increase is
primarily due to increased gross profit on the additional sales 18




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volume, partially offset by increased selling, general and administrative
expenses resulting from employee additions and general salary and benefit
increases. For the nine months ended September 30, 2004, RMPs external sales of
$24.5 million increased by $4.1 million or 20.3%, from $20.4 million during the
same period in 2003. The increase in external sales is primarily due to
increases in sales of our rail joints and related products and our friction
management products and services, as we have seen greater spending by our
larger customers on these product lines. Operating income for the nine months
ended September 30, 2004 increased to $3.4 million from $2.8 million for the
same period in 2003, an increase of $572,000 or 20.6%, primarily due to
increased gross profit on the additional sales volume, partially offset by
increased selling, general and administrative expenses resulting from employee
additions and general salary and benefit increases. 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
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003(In thousands)External sales
    
    $
    1,430
    
    
    $
    778
    
    
    $
    3,367
    
    
    $
    3,687Intersegment sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income
    
    
    220
    
    
    
    43
    
    
    
    437
    
    
    
    488Sales by product line(1)Heavy duty load securement systems
    
    $
    322
    
    
    $
    405
    
    
    $
    1,086
    
    
    $
    2,170Strap securement systems
    
    
    950
    
    
    
    78
    
    
    
    1,559
    
    
    
    554All other load securement systems
    
    
    158
    
    
    
    295
    
    
    
    722
    
    
    
    963Total product and service sales
    
    $
    1,430
    
    
    $
    778
    
    
    $
    3,367
    
    
    $
    3,687
   (1)
    
    Includes intersegment sales. For the three months ended September 30, 2004, SSDs external sales of
$1.4 million increased by $652,000 or 83.8% from $778,000 during the same
period in 2003. This increase in external sales is primarily due to an
increase in sales of our strap securement systems resulting from increased
customer demand for these products and an improved freight car market.
Operating income for the three months ended September 30, 2004 increased to
$220,000 from $43,000 during the same period in 2003, an increase of $177,000.
The increase in operating income is due to an increase in gross profit,
resulting primarily from increased sales volume, partially offset by increased
selling, general and administrative expenses resulting from general increases
in certain other selling and administrative expenses. For the nine months ended September 30, 2004, SSDs external sales
decreased by $320,000 or 8.7%, to $3.4 million from $3.7 million during the
same period in 2003. This decrease is primarily due to lower customer demand
for our heavy-duty load securement systems, partially offset by increased
customer demand for our strap securement systems. Operating income for the
nine months ended September 30, 2004 decreased by $51,000 or 10.5% to $437,000
from $488,000 during the same period in 2003. The decrease in operating income
is primarily due to increased selling, general and administrative expenses
resulting from general increases in certain other selling and administrative
expenses, partially offset by an increase in gross profit resulting from
increased sales volume of higher margin products. 19




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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
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003(In thousands)External sales
    
    $
    3,299
    
    
    $
    2,600
    
    
    $
    12,003
    
    
    $
    10,216Intersegment sales
    
    
    722
    
    
    
    613
    
    
    
    1,618
    
    
    
    1,507Operating income
    
    
    255
    
    
    
    503
    
    
    
    1,472
    
    
    
    1,635Average translation rate of Canadian
dollar to United States dollar
    
    
    0.7634
    
    
    
    0.7292
    
    
    
    0.7536
    
    
    
    0.7059Sales by product line(1)Rail anchors and spikes
    
    $
    3,012
    
    
    $
    2,100
    
    
    $
    10,241
    
    
    $
    8,534Friction management products and services
    
    
    858
    
    
    
    988
    
    
    
    2,879
    
    
    
    2,790Other products and services
    
    
    151
    
    
    
    125
    
    
    
    501
    
    
    
    399Total product and service sales
    
    $
    4,021
    
    
    $
    3,213
    
    
    $
    13,621
    
    
    $
    11,723
   (1)
    
    Includes intersegment sales. For the three months ended September 30, 2004, Canadas external sales of
$3.3 million increased by $699,000 or 26.9%, from $2.6 million during the same
period in 2003. The increase in external sales is primarily attributable to
sales volume increases of $551,000 resulting from increased customer demand for
rail anchors and spikes, along with a favorable foreign currency translation of
Canadian dollars to U.S. dollars of approximately $148,000. Operating income
for the three months ended September 30, 2004 decreased by $248,000 or 49.3% to
$255,000 from $503,000 during the same period in 2003. The decrease in
operating income is primarily due to higher raw material costs on our rail
anchor and spike product lines as a result of steel surcharges. These steel
surcharges are being passed through to our customers without adding margin to
the sales price. Due to the timing of passing these increases onto our
customers, our gross profit has been negatively impacted primarily during the
third quarter of 2004. For the nine months ended September 30, 2004, Canadas external sales of
$12.0 million increased by $1.8 million or 17.5%, from $10.2 million during the
same period in 2003. The increase in external sales is attributable to sales
volume increases of $1.0 million due to increased demand for rail anchors and
spikes, along with a favorable foreign currency translation of Canadian dollars
to U.S. dollars of approximately $760,000. Operating income for the nine
months ended September 30, 2004 decreased by $163,000 or 10.0% to $1.5 million
from $1.6 million during the same period in 2003. This decrease in operating
income is primarily due to higher raw material costs on our rail anchor and
spike product lines as a result of steel surcharges. These steel surcharges
are being passed through to our customers without adding margin to the sales
price. Due to the timing of passing these increases onto our customers, our
gross profit has been negatively impacted primarily during the third quarter of
2004. In addition, increased selling, general and administrative expenses for
certain other administrative costs have also negatively impacted operating
income. These decreases in operating income are being partially offset by a
favorable foreign currency translation of Canadian dollars to U.S. dollars of
approximately $93,000. 20




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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
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003(In thousands)External sales
    
    $
    4,117
    
    
    $
    2,949
    
    
    $
    10,862
    
    
    $
    10,468Intersegment sales
    
    
    4
    
    
    
    18
    
    
    
    31
    
    
    
    51Operating income
    
    
    343
    
    
    
    194
    
    
    
    508
    
    
    
    836Average translation rate of British
pound sterling to United States dollar
    
    
    1.8137
    
    
    
    1.6265
    
    
    
    1.8225
    
    
    
    1.6157Sales by product line(1)Material handling products sales
    
    $
    2,839
    
    
    $
    1,672
    
    
    $
    7,507
    
    
    $
    6,501Friction management products and services
    
    
    1,282
    
    
    
    1,295
    
    
    
    3,386
    
    
    
    4,018Total product sales
    
    $
    4,121
    
    
    $
    2,967
    
    
    $
    10,893
    
    
    $
    10,519
   (1)
    
    Includes intersegment sales. For the three months ended September 30, 2004, United Kingdoms external
sales of $4.1 million increased by $1.2 million or 39.6%, from $2.9 million
during the same period in 2003. The increase in external sales is attributable
to sales volume increases of $743,000 due to increased customer demand for our
material handling products, along with a favorable foreign currency translation
of approximately $425,000. Operating income for the three months ended
September 30, 2004 increased to $343,000 from $194,000 during the same period
in 2003, an increase of $149,000 or 76.8%. The increase in operating income is
primarily due to increased gross profit on higher sales volume of our material
handling products. For the nine months ended September 30, 2004, United Kingdoms external
sales of $10.9 million increased by $394,000 or 3.8%, from $10.5 million during
the same period in 2003. This increase in external sales is attributable to a
favorable foreign currency translation of approximately $1.2 million, partially
offset by a sales volume decrease of approximately $839,000. The sales volume
decrease is primarily due to decreased demand for friction management products
and services, as a result of our largest customer, Network Rail, undergoing a
significant reorganization, which negatively impacted rail sales. Operating
income for the nine months ended September 30, 2004 decreased by $328,000 or
39.2% to $508,000 from $836,000 during the same period in 2003. This decrease
is primarily due to decreased gross profit on the lower sales volume of our
friction management products and services. 21




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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 $3.6 million at September 30, 2004, primarily as a result of our
initial public offering and subsequent underwritten over-allotment exercise.
Also, we have another $3.5 million of cash and cash equivalents, primarily due
to $2.5 million of cash acquired in the Salient Systems acquisition on
September 30, 2004 and operating cash at our foreign subsidiaries. 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. Also, we have a commitment from a Canadian
financial institution for the funding of the Kelsan Technologies Corp.
acquisition. It is anticipated that this acquisition will be funded entirely
by a 7 year term loan that will contain certain financial and negative
covenants and will have a floating interest rate. The detailed terms of this
facility have not been finalized. We believe that cash flow from operations and
the ability to borrow additional cash under our credit and overdraft facilities
along with the remaining 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 nine months ended September 30, 2004, we
generated $1.7 million in cash flow from operations compared to $1.3 million
during the same 2003 period. The primary reasons for this increase of $346,000
in cash generated from operations are related to timing differences in
operating assets and liabilities, along with an increase in income. Accounts
receivable balances increased $2.3 million due to higher sales volumes at RMP,
SSD, Canada and the UK during the third quarter of 2004. For the nine months
ended September 30, 2003, inventory levels 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. The inventory level was
restored to normal levels throughout 2003. Net cash used in investing activities was $3.2 million for the nine months
ended September 30, 2004, compared to $486,000 during the same period in 2003.
On September 30, 2004 we completed our acquisition of Salient Systems, which
resulted in net cash used of $2.4 million (see Note 3 in the notes to the
condensed consolidated financial statements). In addition, 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 dollars (approximately $373,000). We estimate 2004 total capital
expenditures to approximate $900,000 to $1,100,000, 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 $8.2 million for the nine
months ended September 30, 2004, compared to $1.3 million 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 $1.3 million were paid
during the nine months ended September 30, 2004. 22




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Financial Condition At September 30, 2004, total assets were $65.6 million, an increase of
$25.2 million or 62.4%, from December 31, 2003. The increase at September 30,
2004 is primarily due to $16.2 million of assets acquired, net of cash of $2.5
million, in the Salient Systems acquisition (see Note 3 in the notes to the
condensed consolidated financial statements) and an increase of $6.7 million in
cash, primarily due to the remaining proceeds from the initial public offering.
Additionally, an increase of $2.3 million in accounts receivable at September
30, 2004 is primarily due to an increase in sales volume at RMP, Canada and the
UK for the three months ended September 30, 2004. At September 30, 2004, net
working capital (defined as current assets minus current liabilities) was $24.2
million, an increase of $18.0 million or 290%, from $6.2 million at December
31, 2003. The increase in working capital at September 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 an increase
in working capital resulting from the Salient Systems acquisition and an
overall increase in accounts receivable levels due to higher sales volumes. 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 first nine months 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. We are
continuing to work with our customers on the overall absorption of these higher
raw material costs. While these higher material costs have had some negative
impact on our financial results during the three and nine months ended
September 30, 2004, we believe the impact of the higher material costs have not
had a material impact on our overall financial results for the nine months
ended September 30, 2004, as we have been successful in passing through the
steel surcharges on to most of our customers. However, if a prolonged increase
in steel prices should continue and we are not able to pass these increases on
to our customers, our future earnings may continue to 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 continued at this pace throughout
the third quarter of 2004. We believe that the demand for our products by
Network Rail will remain at this level or improve as their restructuring
program nears its completion; however, if demand for our products does not
remain at this level or 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 nine months ended September 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
$3,300 and $19,500, 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 nine months
ended September 30, 2004 would have been approximately $1,900 and $2,800,
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. 23




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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. UNREGISTERED SALES OF EQUITY 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 September 30, 2004, the net proceeds of the offering were used as
follows: $7,313,000 was used to repay indebtedness; $4,484,000 was used for
the acquisition of Salient Systems; $1,855,000 was used for working capital;
and $4,320,000 was used for temporary investments, consisting of short-term
government money market funds and cash. 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. 24




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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: November 15, 2004
    
    By:
    
    /s/ John S. CooperJohn S. Cooper, Chief ExecutiveOfficer and PresidentDate: November 15, 2004
    
    By:
    
    /s/ Michael D. BornakMichael D. Bornak, ChiefFinancial Officer and ChiefAccounting Officer
 25




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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 26