##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2007
 OR
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 For the transition period from  to
 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  (Registrants Telephone Number)
 (Former Name, Former Address and Former Fiscal Year, if changed since last report)
 þ o
  o þ o
 o þ




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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 March 31, 2007 (Unaudited) and December 31, 2006
    
    
    3Condensed Consolidated Statements of Income (Unaudited) Three months ended March 31, 2007 and 2006
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited) Three months ended March 31, 2007 and 2006
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    62.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    203.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    294.
    
    Controls and Procedures
    
    
    29PART II  OTHER INFORMATION1.
    
    Legal Proceedings
    
    
    291A.
    
    Risk Factors
    
    
    302.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    303.
    
    Defaults Upon Senior Securities
    
    
    304.
    
    Submission of Matters to a Vote of Security Holders
    
    
    305.
    
    Other Information
    
    
    306.
    
    Exhibits
    
    
    30Signatures
    
    
    31EX-31.1EX-31.2EX-32
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 Portec Rail Products, Inc.
 
 Condensed Consolidated Balance Sheets
 March 31
    
    December 312007
    
    2006(Unaudited)
    
    (Audited)(In Thousands)AssetsCurrent assetsCash and cash equivalents
    
    $
    683
    
    
    $
    1,822Accounts receivable, net
    
    
    19,710
    
    
    
    16,862Inventories, net
    
    
    22,063
    
    
    
    23,255Prepaid expenses and other current assets
    
    
    1,868
    
    
    
    647Long-lived assets held for sale
    
    
    500
    
    
    
    2,525Deferred income taxes
    
    
    582
    
    
    
    682Total current assets
    
    $
    45,406
    
    
    $
    45,793Property, plant and equipment, net of
accumulated depreciation of $11,989 and
$10,687 at March 31, 2007 and December 31,
2006, respectively
    
    
    10,523
    
    
    
    10,403Intangible assets, net of accumulated
amortization of $1,924 and $1,618 at March
31, 2007 and December 31, 2006, respectively
    
    
    30,632
    
    
    
    30,744Goodwill
    
    
    14,269
    
    
    
    14,176Other assets
    
    
    662
    
    
    
    566Total assets
    
    $
    101,492
    
    
    $
    101,682Liabilities and Shareholders EquityCurrent liabilitiesCurrent maturities of long-term debt
    
    $
    6,127
    
    
    $
    5,655Accounts payable
    
    
    9,752
    
    
    
    7,701Accrued income taxes
    
    
    643
    
    
    
    995Customer deposits
    
    
    1,675
    
    
    
    2,046Accrued compensation
    
    
    702
    
    
    
    1,826Other accrued liabilities
    
    
    3,404
    
    
    
    2,212Deferred purchase price  current portion
    
    
    590
    
    
    
    587Total current liabilities
    
    
    22,893
    
    
    
    21,022Long-term debt, less current maturities
    
    
    11,101
    
    
    
    13,737Deferred income taxes
    
    
    9,541
    
    
    
    9,517Accrued pension costs
    
    
    3,357
    
    
    
    3,336Deferred purchase price, less current maturity
    
    
    148
    
    
    
    294Other long-term liabilities
    
    
    926
    
    
    
    680Total liabilities
    
    
    47,966
    
    
    
    48,586Commitments and Contingencies
    
    
    
    
    
    
    Shareholders equity:Common stock, $1 par value, 50,000,000
shares authorized, 9,601,779 shares
issued and outstanding at March 31, 2007
and December 31, 2006, respectively
    
    
    9,602
    
    
    
    9,602Additional paid-in capital
    
    
    25,302
    
    
    
    25,290Retained earnings
    
    
    19,963
    
    
    
    19,647Accumulated other comprehensive loss
    
    
    (1,341
    )
    
    
    (1,443
    )Total shareholders equity
    
    
    53,526
    
    
    
    53,096Total liabilities and shareholders equity
    
    $
    101,492
    
    
    
    101,682
 See Notes to Condensed Consolidated Financial Statements
 3




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##### Table of Contents



Portec Rail Products, Inc.
 
 Condensed Consolidated Statements of Income
 (Unaudited)
 Three Months EndedMarch 312007
    
    2006(Dollars in Thousands, Except Per ShareData)Net sales
    
    $
    27,484
    
    
    $
    23,115Cost of sales
    
    
    19,438
    
    
    
    16,276Gross profit
    
    
    8,046
    
    
    
    6,839Selling, general and administrative
    
    
    5,663
    
    
    
    5,034Amortization expense
    
    
    306
    
    
    
    170Operating income
    
    
    2,077
    
    
    
    1,635Interest expense
    
    
    317
    
    
    
    209Other income, net
    
    
    (70
    )
    
    
    (2
    )Income before income taxes
    
    
    1,830
    
    
    
    1,428Provision for income taxes
    
    
    625
    
    
    
    395Net income
    
    $
    1,205
    
    
    $
    1,033Earnings per share
    
    $
    0.13
    
    
    $
    0.11Basic and dilutedWeighted average shares outstanding
    
    
    9,601,779
    
    
    
    9,601,779Basic and dilutedDividends per share
    
    $
    0.06
    
    
    $
    0.06
 See Notes to Condensed Consolidated Financial Statements
 4




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##### Table of Contents



Portec Rail Products, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 (Unaudited)
 Three Months EndedMarch 312007
    
    2006(In Thousands)Operating ActivitiesNet income
    
    $
    1,205
    
    
    $
    1,033Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation expense
    
    
    555
    
    
    
    461Amortization expense
    
    
    306
    
    
    
    170Provision for doubtful accounts
    
    
    27
    
    
    
    27Deferred income taxes
    
    
    (66
    )
    
    
    Pension expense (income)
    
    
    18
    
    
    
    6Loss on disposal of assets
    
    
    43
    
    
    
    Stock based compensation expense
    
    
    11
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,797
    )
    
    
    (2,390
    )Inventories
    
    
    1,254
    
    
    
    (1,501
    )Prepaid expenses and other current assets
    
    
    (1,472
    )
    
    
    (1,134
    )Accounts payable
    
    
    2,175
    
    
    
    1,280Accrued income taxes
    
    
    (343
    )
    
    
    (485
    )Accrued expenses
    
    
    (510
    )
    
    
    (1,135
    )Net cash provided by (used in) operating activities
    
    
    406
    
    
    
    (3,668
    )Investing ActivitiesPurchases of property, plant and equipment
    
    
    (592
    )
    
    
    (489
    )Proceeds from the sale of assets
    
    
    1,988
    
    
    
    Contingent consideration  Business acquisition
    
    
    (31
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    1,365
    
    
    
    (489
    )Financing ActivitiesNet increase in revolving credit agreements
    
    
    561
    
    
    
    1,350Proceeds from term loans
    
    
    54
    
    
    
    Principal payments on bank term loans
    
    
    (2,594
    )
    
    
    (549
    )Principal payments on promissory notes
    
    
    (280
    )
    
    
    (280
    )Principal payments on capital leases
    
    
    (17
    )
    
    
    (6
    )Cash dividends paid to shareholders
    
    
    (576
    )
    
    
    (576
    )Net cash used in financing activities
    
    
    (2,852
    )
    
    
    (61
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (58
    )
    
    
    43Decrease in cash and cash equivalents
    
    
    (1,139
    )
    
    
    (4,175
    )Cash and cash equivalents at beginning of period
    
    
    1,822
    
    
    
    5,367Cash and cash equivalents at end of period
    
    $
    683
    
    
    $
    1,192Supplemental Disclosures of Cash Flow InformationCash paid during the period for:Interest
    
    $
    370
    
    
    $
    279Income taxes
    
    $
    1,019
    
    
    $
    698
 See Notes to Condensed Consolidated Financial Statements
 5




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##### Table of Contents



Portec Rail Products, Inc.
 
 Notes to Condensed Consolidated Financial Statements
 (Unaudited)
 Note 1: Organization
  Note 2: Basis of Presentation
  Note 3: Acquisition of Vulcan Chain Corporation Assets
   6




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##### Table of Contents



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
  The following summarizes the estimated fair values at the acquisition date:
 October 102006(In Thousands)Property, plant and equipment, net
    
    $
    196Intangible Assets
    
    
    3,453Goodwill
    
    
    830Total assets acquired
    
    $
    4,479
 Note 4: Acquisition of Coronet Rail, Ltd.
   7




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##### Table of Contents



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
  The following summarizes the estimated fair values as of the acquisition effective date:
 April 82006(In Thousands)Cash and cash equivalents
    
    $
    12Accounts receivable, net
    
    
    1,801Inventories, net
    
    
    1,663Property, plant and equipment, net
    
    
    362Intangible Assets
    
    
    3,499Goodwill
    
    
    1,915Total assets acquired
    
    
    9,252Accounts payable
    
    $
    1,157Working capital facility
    
    
    612Accrued income taxes
    
    
    376Accrued compensation
    
    
    2Other accrued liabilities
    
    
    180Deferred income taxes (current and long-term)
    
    
    1,073Capital leases (current and long-term)
    
    
    90Total liabilities
    
    
    3,490Net assets acquired
    
    $
    5,762
 PRO FORMA FINANCIAL INFORMATION  CORONET RAIL, LTD. ACQUISITION
  8




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##### Table of Contents



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Three Months Ended2007
    
    2006Actual
    
    Pro forma(Dollars in Thousands, Except Shareand Per Share Data)Net sales
    
    $
    27,484
    
    
    $
    25,158Net income
    
    
    1,205
    
    
    
    1,273Net income per share   basic
    
    $
    0.13
    
    
    $
    0.13Shares used for basic computation
    
    
    9,601,779
    
    
    
    9,601,779
 Note 5: Inventories
   March 31
    
    December 312007
    
    2006(In Thousands)Raw materials
    
    $
    11,285
    
    
    $
    11,109Work in process
    
    
    639
    
    
    
    700Finished goods
    
    
    10,502
    
    
    
    11,75122,426
    
    
    
    23,560Less reserve for slow-moving and obsolete inventory
    
    
    363
    
    
    
    305Net inventory
    
    $
    22,063
    
    
    $
    23,255
 Note 6: Long-Term Debt
  March 31
    
    December 312007
    
    2006(In Thousands)National City Bank Credit Facility: (a)Term loan  Kelsan acquisition
    
    $
    8,897
    
    
    $
    9,350Term loan  Vulcan asset acquisition
    
    
    2,750
    
    
    
    2,950Revolving credit facility  United States
    
    
    1,975
    
    
    
    850Revolving credit facility  Canada
    
    
    259
    
    
    
    1,029United Kingdom loans: (b)Term loans  Coronet Rail acquisition
    
    
    2,481
    
    
    
    4,307Working capital facility  invoice discounting
    
    
    211
    
    
    
    Working capital facility  overdraft
    
    
    
    
    
    
    Term loans  vehicles
    
    
    45
    
    
    
    Promissory notes  Salient Systems acquisition (c)
    
    
    560
    
    
    
    840Revolving credit facility  Boone County Bank, Inc. (d)
    
    
    
    
    
    
    Capitalized lease obligations
    
    
    50
    
    
    
    6617,228
    
    
    
    19,392Less current maturities
    
    
    6,127
    
    
    
    5,655$
    11,101
    
    
    $
    13,737
 9




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##### Table of Contents



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 (a) National City Bank Credit Facility
   Term Loan  Kelsan Acquisition:
  Term Loan  Vulcan Asset Acquisition:
  Revolving Credit Facility  United States:
  Revolving Credit Facility  Canada:
  10




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##### Table of Contents



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 (b) United Kingdom Loans
 Term Loans  Coronet Rail Acquisition:
  Working Capital Facility  Invoice Discounting:
  Working Capital Facility  Overdraft
  (c) Salient Systems Promissory Notes
 Wall Street Journal
 11




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##### Table of Contents



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
  (d) Revolving Credit Facility  Boone County Bank, Inc.
  Note 7: Retirement Plans
  Three Months EndedMarch 312007
    
    2006(In Thousands)Interest cost
    
    $
    134
    
    
    $
    133Expected return on plan assets
    
    
    (157
    )
    
    
    (162
    )Amortization of unrecognized loss
    
    
    32
    
    
    
    27Pension cost (benefit)
    
    $
    9
    
    
    $
    (2
    )
   Portec Rail
    
    Conveyors
    
    Portec Rail
    
    ConveyorsPlan
    
    Plan
    
    Plan
    
    Plan2007
    
    2007
    
    2006
    
    2006(In Thousands)Interest cost
    
    $
    79
    
    
    $
    18
    
    
    $
    69
    
    
    $
    15Expected return on plan assets
    
    
    (86
    )
    
    
    (18
    )
    
    
    (75
    )
    
    
    (16
    )Amortization of transition amount
    
    
    (15
    )
    
    
    (3
    )
    
    
    (13
    )
    
    
    (2
    )Amortization of unrecognized loss
    
    
    33
    
    
    
    1
    
    
    
    29
    
    
    
    1Pension cost (benefit)
    
    $
    11
    
    
    $
    (2
    )
    
    $
    10
    
    
    $
    (2
    )
  12




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##### Table of Contents



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Note 8: Comprehensive Income
  Three Months EndedMarch 312007
    
    2006(In Thousands)Net income
    
    $
    1,205
    
    
    $
    1,033Minimum pension liability adjustment, net of tax
    
    
    (9
    )
    
    
    (12
    )Foreign currency translation adjustments, net of tax
    
    
    112
    
    
    
    14Comprehensive income
    
    $
    1,308
    
    
    $
    1,035
 Note 9: Earnings Per Share
   Note 10: Commitments and Contingencies
 Contractual Obligations
  MoreLess
    
    
    1  3
    
    
    3  5
    
    
    than 5Contractual Obligations
    
    Total
    
    
    than 1 year
    
    
    Years
    
    
    years
    
    
    years(In Thousands)Long term debt
    
    $
    14,688
    
    
    $
    2,491
    
    
    $
    7,304
    
    
    $
    4,893
    
    
    $
    Purchase obligations
    
    
    5,611
    
    
    
    5,611
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    5,408
    
    
    
    969
    
    
    
    1,698
    
    
    
    1,116
    
    
    
    1,625Working capital facilities
    
    
    2,445
    
    
    
    2,445
    
    
    
    
    
    
    
    
    
    
    
    Future interest payments (1)
    
    
    1,975
    
    
    
    618
    
    
    
    1,126
    
    
    
    231
    
    
    
    Deferred purchase price (2)
    
    
    738
    
    
    
    443
    
    
    
    295
    
    
    
    
    
    
    
    Pension contributions (3)
    
    
    175
    
    
    
    175
    
    
    
    
    
    
    
    
    
    
    
    Capital leases
    
    
    95
    
    
    
    61
    
    
    
    33
    
    
    
    1
    
    
    
    Total contractual obligations (4)
    
    $
    31,135
    
    
    $
    12,813
    
    
    $
    10,456
    
    
    $
    6,241
    
    
    $
    1,625
 13




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##### Table of Contents



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
 (1)
    
    Represents future interest payments on long-term debt obligations as of March 31, 2007.
Assumes that the interest rates on our long-term debt agreements at March 31, 2007 (See Note 6,
Long-Term Debt. ) will continue for the life of the agreements.(2)
    
    Represents the deferred purchase price obligation related to the purchase of Coronet Rail in
April 2006.(3)
    
    Pension plan contributions that may be required more than one year from March 31, 2007 will be
dependent upon the performance of plan assets.(4)
    
    During the first quarter 2007, we recognized a liability of $313,000 for uncertain tax
positions in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109 (FIN 48).
See Note14, Change in Accounting Principle. This amount is included within other long-term
liabilities on the March 31, 2007 consolidated balance sheet. However, because of the high degree
of uncertainty regarding the timing of future cash outflows associated with this FIN 48 liability,
we cannot reasonably estimate the periods of related future payments, and as such, we have excluded
our FIN 48 liability from the contractual obligations table. Litigation
  Note 11: Segment Information
  14




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##### Table of Contents



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Three Months EndedMarch 312007
    
    2006(In Thousands)External SalesRMP
    
    $
    11,114
    
    
    $
    10,244SSD
    
    
    2,148
    
    
    
    1,124Canada
    
    
    7,346
    
    
    
    5,797United Kingdom
    
    
    6,876
    
    
    
    5,950Total
    
    $
    27,484
    
    
    $
    23,115Intersegment SalesRMP
    
    $
    491
    
    
    $
    554SSD
    
    
    (3
    )
    
    
    Canada
    
    
    1,791
    
    
    
    1,676United Kingdom
    
    
    
    
    
    
    2Total
    
    $
    2,279
    
    
    $
    2,232Total SalesRMP
    
    $
    11,605
    
    
    $
    10,798SSD
    
    
    2,145
    
    
    
    1,124Canada
    
    
    9,137
    
    
    
    7,473United Kingdom
    
    
    6,876
    
    
    
    5,952Total
    
    $
    29,763
    
    
    $
    25,347Operating Income (Loss)RMP
    
    $
    1,024
    
    
    $
    935SSD
    
    
    294
    
    
    
    108Canada
    
    
    1,116
    
    
    
    461United Kingdom
    
    
    698
    
    
    
    864Corporate shared services
    
    
    (1,055
    )
    
    
    (733
    )Total
    
    
    2,077
    
    
    
    1,635Interest Expense
    
    
    317
    
    
    
    209Other Income, net
    
    
    (70
    )
    
    
    (2
    )Income Before Income Taxes
    
    $
    1,830
    
    
    $
    1,428Depreciation ExpenseRMP
    
    $
    201
    
    
    $
    190SSD
    
    
    27
    
    
    
    5Canada
    
    
    175
    
    
    
    135United Kingdom
    
    
    126
    
    
    
    111Corporate shared services
    
    
    26
    
    
    
    20Total
    
    $
    555
    
    
    $
    461Amortization ExpenseRMP
    
    $
    1
    
    
    $
    SSD
    
    
    53
    
    
    
    Canada
    
    
    174
    
    
    
    170United Kingdom
    
    
    78
    
    
    
    Total
    
    $
    306
    
    
    $
    170
 15




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##### Table of Contents



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Three Months EndedMarch 312007
    
    2006(In Thousands)Capital ExpendituresRMP
    
    $
    66
    
    
    $
    192SSD
    
    
    333
    
    
    
    Canada
    
    
    68
    
    
    
    243United Kingdom
    
    
    111
    
    
    
    34Corporate shared services
    
    
    14
    
    
    
    20Total
    
    $
    592
    
    
    $
    489
 March 31
    
    December 312007
    
    2006(In Thousands)Total AssetsRMP
    
    $
    39,990
    
    
    $
    40,903SSD
    
    
    8,271
    
    
    
    7,571Canada
    
    
    30,961
    
    
    
    30,022United Kingdom
    
    
    21,553
    
    
    
    22,478Corporate shared services
    
    
    717
    
    
    
    708Total
    
    $
    101,492
    
    
    $
    101,682
 Note 12: Restructuring Costs
 United Kingdom
  ,
Accounting for Costs Associated with Exit or Disposal Activities
  16




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##### Table of Contents



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
  Employee
    
    Lease
    
    OtherTermination
    
    Termination
    
    AssociatedTotal
    
    Benefits
    
    Costs
    
    CostsBeginning balance, January 1, 2006
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Costs incurred
    
    
    206
    
    
    
    182
    
    
    
    
    
    
    
    24Cash payments
    
    
    (155
    )
    
    
    (131
    )
    
    
    
    
    
    
    (24
    )Adjustments
    
    
    (11
    )
    
    
    (11
    )
    
    
    
    
    
    
    Ending balance, December 31, 2006
    
    $
    40
    
    
    $
    40
    
    
    $
    
    
    
    $
    Costs incurred
    
    
    14
    
    
    
    14
    
    
    
    
    
    
    
    Cash payments
    
    
    (54
    )
    
    
    (54
    )
    
    
    
    
    
    
    Adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ending balance, March 31, 2007
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 Kelsan
   Employee
    
    Lease
    
    OtherTermination
    
    Termination
    
    AssociatedTotal
    
    Benefits
    
    Costs
    
    CostsBeginning balance, January 1, 2006
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Costs incurred
    
    
    105
    
    
    
    105
    
    
    
    
    
    
    
    Cash payments
    
    
    (54
    )
    
    
    (54
    )
    
    
    
    
    
    
    Adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ending balance, December 31, 2006
    
    $
    51
    
    
    $
    51
    
    
    $
    
    
    
    $
    Costs incurred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash payments
    
    
    (51
    )
    
    
    (51
    )
    
    
    
    
    
    
    Adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ending balance, March 31, 2007
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 17




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##### Table of Contents



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Note 13: Impairment of Long-Lived Assets
  Note 14: Change in Accounting Principle
  Note 15: Recent Accounting Pronouncements
   Note 16: Stock Options
  18




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##### Table of Contents



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
   Exercise PriceStock Price on
    
    per Stock
    
    Annual
    
    
    
    Expected
    
    Expected TermGrant Date
    
    Option
    
    Dividend Yield
    
    Risk-free Rate
    
    Volatility
    
    (in years)$9.65
    
    $9.65
    
    2.50%
    
    4.73%
    
    39.40%
    
    6.5
 19




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
  Cautionary Statement Relevant to Forward-looking Statements
   
    
    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.
  20




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##### Table of Contents



Overview
     Results of Operations
 Three Months Ended March 31, 2007 compared to Three Months Ended March 31, 2006
 Net Sales. %,
 Gross Profit.
 21




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##### Table of Contents



Selling, General and Administrative Expenses.
 Amortization Expense.
 Interest Expense.
 Provision for Income Taxes.
 Net Income.
 Business Segment Review
 Railway Maintenance Products Division  RMP.
 22




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##### Table of Contents



Three Months EndedMarch 312007
    
    
    2006(In Thousands)External sales
    
    $
    11,114
    
    
    $
    10,244Intersegment sales
    
    
    491
    
    
    
    554Operating income
    
    
    1,024
    
    
    
    935Sales by product line(1)Track component products
    
    $
    7,356
    
    
    $
    6,046Friction management products and services
    
    
    3,351
    
    
    
    3,796Wayside data collection and data management systems
    
    
    577
    
    
    
    703Other products and services
    
    
    321
    
    
    
    253Total product and service sales
    
    $
    11,605
    
    
    $
    10,798
 
 (1)
    
    Includes intersegment sales.  Shipping Systems Division  SSD .
 Three Months EndedMarch 312007
    
    
    2006(In Thousands)External sales (1)
    
    $
    2,148
    
    
    $
    1,124Intersegment sales
    
    
    (3
    )
    
    
    Operating income (1)
    
    
    294
    
    
    
    108Sales by product line(2)Chain securement systems (3), (4)
    
    $
    740
    
    
    $
    782Automotive products (3), (5)
    
    
    929
    
    
    
    136Strap securement systems
    
    
    246
    
    
    
    139All other load securement systems (3)
    
    
    230
    
    
    
    67Total product and service sales
    
    $
    2,145
    
    
    $
    1,124
 
 (1)
    
    Includes Vulcan-acquired product sales of $843,000 and operating income of $132,000 for the
three months ended March 31, 2007. The three months ended March 31, 2006 do not include
historical sales and operating income of Vulcan.(2)
    
    Includes intersegment sales. 23




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##### Table of Contents



(3)
    
    Includes Vulcan-acquired product sales of $177,000, $469,000, and $197,000 within chain
securement systems, automotive products, and all other securement systems, respectively, for
the three months ended March 31, 2007.(4)
    
    Includes heavy duty load securement systems, previously shown separately.(5)
    
    Includes auto rack load securement systems, previously shown separately.  Portec Rail Nova Scotia Company  Canada . ® ®
 Three Months EndedMarch 312007
    
    
    2006(In Thousands)External sales
    
    $
    7,346
    
    
    $
    5,797Intersegment sales
    
    
    1,791
    
    
    
    1,676Operating income
    
    
    1,116
    
    
    
    461Average translation rate of Canadian dollar
to United States dollar
    
    
    0.8569
    
    
    
    0.8714Sales by product line(1)Rail anchors and spikes
    
    $
    5,489
    
    
    $
    4,502Friction management products and services
    
    
    3,424
    
    
    
    2,813Other products and services
    
    
    224
    
    
    
    158Total product and service sales
    
    $
    9,137
    
    
    $
    7,473
 
 (1)
    
    Includes intersegment sales.  Portec Rail Products (UK) Ltd. - United Kingdom .
 24




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##### Table of Contents



Three Months EndedMarch 312007
    
    
    2006(In Thousands)External sales
    
    $
    6,876
    
    
    $
    5,950Intersegment sales
    
    
    
    
    
    
    2Operating income
    
    
    698
    
    
    
    864Average translation rate of British pound
sterling to United States dollar
    
    
    1.9656
    
    
    
    1.7566Sales by product line(1)Material handling products
    
    $
    3,244
    
    
    $
    3,298Friction management products and services
    
    
    2,098
    
    
    
    2,654Track component products
    
    
    1,534
    
    
    
    Total product and service sales
    
    $
    6,876
    
    
    $
    5,952
 
 (1)
    
    Includes intersegment sales.  Liquidity and Capital Resources
  Cash
Flow Analysis.
  25




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##### Table of Contents



Financial Condition
    Discussion of Critical Accounting Policies
  Revenue Recognition.
  26




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##### Table of Contents



Allowances for Doubtful Accounts.
  Inventories.
 Goodwill and Other Intangible Assets.
   27




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##### Table of Contents



Retirement Benefit Plans.
   Income Taxes.
  28




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
  
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  29




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##### Table of Contents



ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 (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
 30




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##### Table of Contents



SIGNATURES
  PORTEC RAIL PRODUCTS, INC.Date: May 9, 2007
    
    By:
    
    /s/ Richard J. JarosinskiRichard J. Jarosinski, President andChief Executive OfficerDate: May 9, 2007
    
    By:
    
    /s/ John N. PesarsickJohn N. Pesarsick, Chief Financial Officer
 31




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##### Table of Contents



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
 32