##### Table of Contents



UNITED STATES 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 June 30, 2006
 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
  Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-Accelerated Filer 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 June 30, 2006 (Unaudited) and December 31, 2005
    
    
    3Condensed Consolidated Statements of Income (Unaudited) Three and six months ended June 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited) Six months ended June 30, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    62.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    183.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    274.
    
    Controls and Procedures
    
    
    27PART II  OTHER INFORMATION1.
    
    Legal Proceedings
    
    
    271A.
    
    Risk Factors
    
    
    282.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    283.
    
    Defaults Upon Senior Securities
    
    
    284.
    
    Submission of Matters to a Vote of Security Holders
    
    
    285.
    
    Other Information
    
    
    286.
    
    Exhibits
    
    
    29Signatures
    
    
    30Exhibit 31.1Exhibit 31.2Exhibit 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
 June 30
    
    
    December 312006
    
    
    2005(Unaudited)
    
    
    (Audited)(In Thousands)AssetsCurrent assetsCash and cash equivalents
    
    $
    2,158
    
    
    $
    5,367Accounts receivable, net
    
    
    18,595
    
    
    
    14,198Inventories, net
    
    
    21,765
    
    
    
    20,140Prepaid expenses and other current assets
    
    
    1,216
    
    
    
    845Deferred income taxes
    
    
    747
    
    
    
    808Total current assets
    
    $
    44,481
    
    
    $
    41,358Property, plant and equipment, net of
accumulated depreciation of $11,156 and
$10,019 at June 30, 2006 and December 31,
2005, respectively
    
    
    13,385
    
    
    
    12,173Intangible assets, net of accumulated
amortization of $1,161 and $708 at June 30,
2006 and December 31, 2005, respectively
    
    
    28,546
    
    
    
    24,012Goodwill
    
    
    12,588
    
    
    
    11,008Other assets
    
    
    442
    
    
    
    318Total assets
    
    $
    99,442
    
    
    $
    88,869Liabilities and Shareholders EquityCurrent liabilitiesCurrent maturities of long-term debt
    
    $
    5,009
    
    
    $
    3,847Accounts payable
    
    
    6,874
    
    
    
    5,774Accrued income taxes
    
    
    1,349
    
    
    
    813Customer deposits
    
    
    1,426
    
    
    
    1,401Accrued compensation
    
    
    1,155
    
    
    
    2,231Other accrued liabilities
    
    
    3,223
    
    
    
    1,877Deferred purchase price  current portion
    
    
    555
    
    
    
    Total current liabilities
    
    
    19,591
    
    
    
    15,943Long-term debt, less current maturities
    
    
    13,188
    
    
    
    10,402Accrued pension costs
    
    
    3,126
    
    
    
    3,036Deferred income taxes
    
    
    10,031
    
    
    
    8,556Deferred purchase price, less current maturity
    
    
    555
    
    
    
    Other long-term liabilities
    
    
    528
    
    
    
    484Total liabilities
    
    
    47,019
    
    
    
    38,421Commitments and Contingencies
    
    
    
    
    
    
    Shareholders equity:Common stock, $1 par value, 50,000,000
shares authorized, 9,601,779 shares
issued and outstanding at June 30, 2006
and December 31, 2005, respectively
    
    
    9,602
    
    
    
    9,602Additional paid-in capital
    
    
    25,290
    
    
    
    25,290Retained earnings
    
    
    18,735
    
    
    
    17,332Accumulated other comprehensive loss
    
    
    (1,204
    )
    
    
    (1,776
    )Total shareholders equity
    
    
    52,423
    
    
    
    50,448Total liabilities and shareholders equity
    
    $
    99,442
    
    
    $
    88,869
 See Notes to Condensed Consolidated Financial Statements
 3




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Portec Rail Products, Inc.
 
 Condensed Consolidated Statements of Income
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in Thousands, Except Per Share Data)Net sales
    
    $
    28,972
    
    
    $
    24,086
    
    
    $
    52,087
    
    
    $
    44,907Cost of sales
    
    
    20,488
    
    
    
    16,311
    
    
    
    36,764
    
    
    
    30,610Gross profit
    
    
    8,484
    
    
    
    7,775
    
    
    
    15,323
    
    
    
    14,297Selling, general and administrative
    
    
    5,668
    
    
    
    5,050
    
    
    
    10,701
    
    
    
    9,744Amortization expense
    
    
    247
    
    
    
    173
    
    
    
    418
    
    
    
    340Operating income
    
    
    2,569
    
    
    
    2,552
    
    
    
    4,204
    
    
    
    4,213Interest expense
    
    
    296
    
    
    
    209
    
    
    
    505
    
    
    
    472Other expense (income), net
    
    
    73
    
    
    
    36
    
    
    
    71
    
    
    
    (35
    )Income before income taxes
    
    
    2,200
    
    
    
    2,307
    
    
    
    3,628
    
    
    
    3,776Provision for income taxes
    
    
    678
    
    
    
    599
    
    
    
    1,072
    
    
    
    1,063Net income
    
    $
    1,522
    
    
    $
    1,708
    
    
    $
    2,556
    
    
    $
    2,713Earnings per shareBasic and diluted
    
    $
    0.16
    
    
    $
    0.18
    
    
    $
    0.27
    
    
    $
    0.28Weighted average shares outstandingBasic and diluted
    
    
    9,601,779
    
    
    
    9,601,779
    
    
    
    9,601,779
    
    
    
    9,601,779Dividends per share
    
    $
    .06
    
    
    $
    .05
    
    
    $
    .12
    
    
    $
    .10
 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)
 Six Months EndedJune 302006
    
    
    2005(In Thousands)Operating ActivitiesNet income
    
    $
    2,556
    
    
    $
    2,713Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation expense
    
    
    971
    
    
    
    838Amortization expense
    
    
    418
    
    
    
    341Provision for doubtful accounts
    
    
    36
    
    
    
    7Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,434
    )
    
    
    (2,872
    )Inventories
    
    
    597
    
    
    
    (292
    )Prepaid expenses and other current assets
    
    
    (318
    )
    
    
    (1,601
    )Accounts payable
    
    
    42
    
    
    
    473Income taxes payable
    
    
    (303
    )
    
    
    183Accrued expenses
    
    
    (104
    )
    
    
    (171
    )Net cash provided by (used in) operating activities
    
    
    1,461
    
    
    
    (381
    )Investing ActivitiesPurchases of property, plant and equipment
    
    
    (1,289
    )
    
    
    (768
    )Proceeds from sale of assets
    
    
    1
    
    
    
    Business acquisition, net of cash acquired
    
    
    (4,664
    )
    
    
    Net cash used in investing activities
    
    
    (5,952
    )
    
    
    (768
    )Financing ActivitiesNet decrease in working capital facilities
    
    
    (258
    )
    
    
    (413
    )Principal payments on promissory note
    
    
    (280
    )
    
    
    Proceeds from bank term loans
    
    
    4,178
    
    
    
    Principal payments on bank term loans
    
    
    (1,204
    )
    
    
    (1,832
    )Principal payments on capital leases
    
    
    (27
    )
    
    
    (13
    )Fees paid to obtain new financing
    
    
    (73
    )
    
    
    Cash dividends paid to shareholders
    
    
    (1,152
    )
    
    
    (960
    )Net cash provided by (used in) financing activities
    
    
    1,184
    
    
    
    (3,218
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    98
    
    
    
    (44
    )Decrease in cash and cash equivalents
    
    
    (3,209
    )
    
    
    (4,411
    )Cash and cash equivalents at beginning of period
    
    
    5,367
    
    
    
    7,749Cash and cash equivalents at end of period
    
    $
    2,158
    
    
    $
    3,338Supplemental Disclosures of Cash Flow InformationCash paid during the period for:Interest
    
    $
    553
    
    
    $
    557Income taxes
    
    $
    1,560
    
    
    $
    1,161
 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 Coronet Rail, Ltd.
  6




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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Business
Combinations, Goodwill and Other Intangible
Assets,
 The following summarizes the estimated fair values as of the acquisition effective date:
 April 8,2006(In Thousands)Cash and cash equivalents
    
    $
    12Accounts receivable, net
    
    
    1,801Inventories, net
    
    
    1,663Property, plant and equipment, net
    
    
    362Intangible Assets
    
    
    4,322Goodwill
    
    
    1,297Total assets acquired
    
    
    9,457Accounts payable
    
    $
    1,157Working capital facility
    
    
    612Accrued income taxes
    
    
    376Accrued compensation
    
    
    2Other accrued liabilities
    
    
    180Deferred income taxes (current and long-term)
    
    
    1,320Capital leases (current and long-term)
    
    
    90Total liabilities
    
    
    3,737Net assets acquired
    
    $
    5,720
 PRO FORMA FINANCIAL INFORMATION  CORONET RAIL, LTD. ACQUISITION
  7




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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Three Months Ended
    
    Six Months EndedJune 30
    
    June 302006
    
    2005
    
    2006
    
    2005(Dollars in Thousands, Except Per Share Data)Pro forma net sales
    
    $
    29,009
    
    
    $
    25,261
    
    
    $
    54,130
    
    
    $
    47,911Pro forma net income
    
    $
    1,517
    
    
    $
    1,686
    
    
    $
    2,782
    
    
    $
    2,796Pro forma net income per basic and diluted
share
    
    $
    0.16
    
    
    $
    0.18
    
    
    $
    0.29
    
    
    $
    0.29Shares used for basic and diluted computation
    
    
    9,601,779
    
    
    
    9,601,779
    
    
    
    9,601,779
    
    
    
    9,601,779
 Note 4: Inventories
   June 30
    
    
    December 312006
    
    
    2005(In Thousands)Raw materials
    
    $
    10,276
    
    
    $
    8,764Work in process
    
    
    499
    
    
    
    284Finished goods
    
    
    11,304
    
    
    
    11,59222,079
    
    
    
    20,640Less reserve for slow-moving and obsolete inventory
    
    
    314
    
    
    
    500Net inventory
    
    $
    21,765
    
    
    $
    20,140
 Note 5: Long-Term Debt
  June 30
    
    
    December 312006
    
    
    2005(In Thousands)National City Bank Credit Facility: (a)Term loan facility
    
    $
    11,073
    
    
    $
    11,716Revolving credit facility  United States
    
    
    
    
    
    
    Revolving credit facility  Canada
    
    
    1,747
    
    
    
    1,376United Kingdom loans: (b)Term loans  Coronet Rail acquisition
    
    
    4,348
    
    
    
    Working capital facility  invoice discounting
    
    
    82
    
    
    
    Working capital facility  overdraft
    
    
    
    
    
    
    Promissory notes  Salient Systems acquisition (c)
    
    
    840
    
    
    
    1,120Capitalized lease obligations
    
    
    107
    
    
    
    3718,197
    
    
    
    14,249Less current maturities
    
    
    5,009
    
    
    
    3,847$
    13,188
    
    
    $
    10,402
 8




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##### Table of Contents



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 (a) National City Bank Credit Facility
   National City Bank (Canada) Term Loan Facility
  National City Bank  United States Revolving Credit Facility:
  National City Bank (Canada)  Canadian Revolving Credit Facility
  9




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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) Promissory Notes  Salient Systems Acquisition
  10




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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Wall Street Journal
 Note 6: Retirement Plans
  Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005(In Thousands)Interest cost
    
    $
    132
    
    
    $
    130
    
    
    $
    265
    
    
    $
    260Expected return on plan assets
    
    
    (162
    )
    
    
    (170
    )
    
    
    (324
    )
    
    
    (340
    )Amortization of unrecognized loss
    
    
    27
    
    
    
    12
    
    
    
    54
    
    
    
    24Pension (benefit)
    
    $
    (3
    )
    
    $
    (28
    )
    
    $
    (5
    )
    
    $
    (56
    )
   Three Months Ended June 30,Portec Rail
    
    
    Conveyors
    
    
    Portec Rail
    
    
    ConveyorsPlan
    
    
    Plan
    
    
    Plan
    
    
    Plan2006
    
    
    2006
    
    
    2005
    
    
    2005(In Thousands)Interest cost
    
    $
    71
    
    
    $
    16
    
    
    $
    77
    
    
    $
    11Expected return on plan assets
    
    
    (77
    )
    
    
    (16
    )
    
    
    (73
    )
    
    
    (18
    )Amortization of transition amount
    
    
    (13
    )
    
    
    (3
    )
    
    
    (13
    )
    
    
    (3
    )Amortization of unrecognized loss (gain)
    
    
    30
    
    
    
    2
    
    
    
    30
    
    
    
    (3
    )Pension cost/(benefit)
    
    $
    11
    
    
    $
    (1
    )
    
    $
    21
    
    
    $
    (13
    )
 Six Months Ended June 30,Portec Rail
    
    
    Conveyors
    
    
    Portec Rail
    
    
    ConveyorsPlan
    
    
    Plan
    
    
    Plan
    
    
    Plan2006
    
    
    2006
    
    
    2005
    
    
    2005(In Thousands)Interest cost
    
    $
    140
    
    
    $
    31
    
    
    $
    159
    
    
    $
    22Expected return on plan assets
    
    
    (152
    )
    
    
    (32
    )
    
    
    (150
    )
    
    
    (37
    )Amortization of transition amount
    
    
    (26
    )
    
    
    (5
    )
    
    
    (27
    )
    
    
    (5
    )Amortization of unrecognized loss (gain)
    
    
    59
    
    
    
    3
    
    
    
    62
    
    
    
    (6
    )Pension cost/(benefit)
    
    $
    21
    
    
    $
    (3
    )
    
    $
    44
    
    
    $
    (26
    )
 11




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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
  Note 7: Comprehensive Income
  Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005(In Thousands)Net income
    
    $
    1,522
    
    
    $
    1,708
    
    
    $
    2,556
    
    
    $
    2,713Minimum pension liability adjustment, net of tax
    
    
    (81
    )
    
    
    88
    
    
    
    (93
    )
    
    
    113Foreign currency translation adjustments, net of tax
    
    
    652
    
    
    
    (373
    )
    
    
    666
    
    
    
    (488
    )Comprehensive income
    
    $
    2,093
    
    
    $
    1,423
    
    
    $
    3,129
    
    
    $
    2,338
 Note 8: Earnings Per Share
   12




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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Note 9: Commitments and Contingencies
 Contractual Obligations
  Less
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    1  3
    
    
    3  5
    
    
    than 5Contractual Obligations
    
    Total
    
    
    year
    
    
    years
    
    
    years
    
    
    years(In Thousand)Long term debt
    
    $
    16,261
    
    
    $
    1,407
    
    
    $
    6,279
    
    
    $
    6,158
    
    
    $
    2,417Revolving credit facilities
    
    
    1,829
    
    
    
    1,829
    
    
    
    
    
    
    
    
    
    
    
    Future interest payments (1)
    
    
    2,999
    
    
    
    446
    
    
    
    1,457
    
    
    
    660
    
    
    
    436Purchase obligations
    
    
    5,570
    
    
    
    5,570
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    3,262
    
    
    
    601
    
    
    
    1,517
    
    
    
    488
    
    
    
    656Capital leases
    
    
    107
    
    
    
    43
    
    
    
    64
    
    
    
    
    
    
    
    Pension contributions (2)
    
    
    11
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    30,039
    
    
    $
    9,907
    
    
    $
    9,317
    
    
    $
    7,306
    
    
    $
    3,509
 
 (1)
    
    Represents future interest payments on long-term debt obligations as of June 30, 2006. Assumes
that the interest rates on our long-term debt agreements at June 30, 2006 (See Note 4 of the
consolidated financial statements of Form 10-Q) will continue for the life of the agreements.(2)
    
    Pension plan contributions that may be required more than one year from June 30, 2006 will be
dependent upon the performance on plan assets. Litigation
  Note 10: Segment Information
  13




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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005(In Thousands)External Sales (A)RMP
    
    $
    13,905
    
    
    $
    11,403
    
    
    $
    24,149
    
    
    $
    20,762SSD
    
    
    729
    
    
    
    1,544
    
    
    
    1,853
    
    
    
    2,877Canada
    
    
    7,191
    
    
    
    7,204
    
    
    
    12,988
    
    
    
    13,097United Kingdom
    
    
    7,147
    
    
    
    3,935
    
    
    
    13,097
    
    
    
    8,171Total
    
    $
    28,972
    
    
    $
    24,086
    
    
    $
    52,087
    
    
    $
    44,907Intersegment Sales (A)RMP
    
    $
    638
    
    
    $
    519
    
    
    $
    1,192
    
    
    $
    1,035SSD
    
    
    11
    
    
    
    3
    
    
    
    11
    
    
    
    3Canada
    
    
    1,988
    
    
    
    1,750
    
    
    
    3,664
    
    
    
    2,830United Kingdom
    
    
    10
    
    
    
    7
    
    
    
    12
    
    
    
    32Total
    
    $
    2,647
    
    
    $
    2,279
    
    
    $
    4,879
    
    
    $
    3,900Total SalesRMP
    
    $
    14,543
    
    
    $
    11,922
    
    
    $
    25,341
    
    
    $
    21,797SSD
    
    
    740
    
    
    
    1,547
    
    
    
    1,864
    
    
    
    2,880Canada
    
    
    9,179
    
    
    
    8,954
    
    
    
    16,652
    
    
    
    15,927United Kingdom
    
    
    7,157
    
    
    
    3,942
    
    
    
    13,109
    
    
    
    8,203Total
    
    $
    31,619
    
    
    $
    26,365
    
    
    $
    56,966
    
    
    $
    48,807
 14




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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005(In Thousands)Operating Income (Loss) (A), (B)RMP
    
    $
    2,082
    
    
    $
    1,714
    
    
    $
    3,017
    
    
    $
    2,917SSD
    
    
    32
    
    
    
    294
    
    
    
    140
    
    
    
    501Canada
    
    
    697
    
    
    
    1,099
    
    
    
    1,158
    
    
    
    1,668United Kingdom
    
    
    568
    
    
    
    187
    
    
    
    1,432
    
    
    
    543Corporate Shared Services
    
    
    (810
    )
    
    
    (742
    )
    
    
    (1,543
    )
    
    
    (1,416
    )Total
    
    
    2,569
    
    
    
    2,552
    
    
    
    4,204
    
    
    
    4,213Interest Expense
    
    
    296
    
    
    
    209
    
    
    
    505
    
    
    
    472Other Expense (Income), net
    
    
    73
    
    
    
    36
    
    
    
    71
    
    
    
    (35
    )Income Before Income Taxes
    
    $
    2,200
    
    
    $
    2,307
    
    
    $
    3,628
    
    
    $
    3,776Depreciation and AmortizationRMP
    
    $
    197
    
    
    $
    181
    
    
    $
    387
    
    
    $
    359SSD
    
    
    5
    
    
    
    2
    
    
    
    10
    
    
    
    4Canada
    
    
    315
    
    
    
    286
    
    
    
    620
    
    
    
    565United Kingdom
    
    
    219
    
    
    
    122
    
    
    
    330
    
    
    
    242Corporate Shared Services
    
    
    22
    
    
    
    7
    
    
    
    42
    
    
    
    9Total
    
    $
    758
    
    
    $
    598
    
    
    $
    1,389
    
    
    $
    1,179Capital ExpendituresRMP
    
    $
    79
    
    
    $
    296
    
    
    $
    271
    
    
    $
    403SSD
    
    
    37
    
    
    
    
    
    
    
    37
    
    
    
    Canada
    
    
    625
    
    
    
    80
    
    
    
    868
    
    
    
    175United Kingdom (1)
    
    
    25
    
    
    
    45
    
    
    
    59
    
    
    
    106Corporate Shared Services
    
    
    34
    
    
    
    63
    
    
    
    54
    
    
    
    84Total
    
    $
    800
    
    
    $
    484
    
    
    $
    1,289
    
    
    $
    768
 
 (1)
    
    Capital expenditures for the United Kingdom do not include assets purchased with the Coronet
Rail acquisition of $362,000 of property, plant, and equipment and $5.6 million of goodwill and
intangible assets. (A)
 Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005(In Thousands)Effects on External SalesCanada
    
    $
    
    
    
    $
    (803
    )
    
    $
    
    
    
    $
    (1,600
    )United Kingdom
    
    
    
    
    
    
    803
    
    
    
    
    
    
    
    1,600Total
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 15




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##### Table of Contents



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005(In Thousands)Effects on Intersegment SalesCanada (1)
    
    $
    
    
    
    $
    (33
    )
    
    $
    
    
    
    $
    406United Kingdom
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    
    
    
    $
    (33
    )
    
    $
    
    
    
    $
    406(In Thousands)Effects on Operating IncomeCanada
    
    $
    
    
    
    $
    (50
    )
    
    $
    
    
    
    $
    (191
    )United Kingdom
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    191Total
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Represents intersegment sales between Kelsan-Canada (selling division) and Kelsan-Europe
(purchasing division). Prior to January 1, 2006, these sales were eliminated as part of the
consolidation of Kelsan Technologies. Beginning January 1, 2006, Kelsan Europe is now included
within the United Kingdom business segment; therefore, these sales need to be classified as
intersegment sales for the Canada business segment. This reclassification has no effect on
consolidated results. (B)
 Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005(In Thousands)Effects on Operating IncomeRMP
    
    $
    
    
    
    $
    39
    
    
    $
    
    
    
    $
    137Canada
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31Corporate Shared Services
    
    
    
    
    
    
    (39
    )
    
    
    
    
    
    
    (168
    )Total
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 June 30
    
    
    
    
    
    
    
    
    
    
    December 312006
    
    
    
    
    
    
    
    
    
    
    2005(In Thousands)
    
    
    
    
    
    
    
    
    
    
    (In Thousands)Total AssetsRMP
    
    $
    40,853
    
    
    
    
    
    
    
    
    
    
    $
    42,531SSD
    
    
    2,193
    
    
    
    
    
    
    
    
    
    
    
    2,007Canada
    
    
    32,824
    
    
    
    
    
    
    
    
    
    
    
    32,040United Kingdom
    
    
    22,771
    
    
    
    
    
    
    
    
    
    
    
    11,503Corporate Shared Services
    
    
    801
    
    
    
    
    
    
    
    
    
    
    
    788Total
    
    $
    99,442
    
    
    
    
    
    
    
    
    
    
    $
    88,869
 16




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##### Table of Contents



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Note 11: Subsequent Event
  Note 12: Change in Accounting Principle
    Note 13: Recent Accounting Pronouncements
 
 17




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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.
  18




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##### Table of Contents



Overview
   Results of Operations
 Three Months Ended June 30, 2006 compared to Three Months Ended June 30, 2005
 Net Sales.
 Gross Profit.
 Selling, General and Administrative Expenses.
 19




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##### Table of Contents



Amortization Expense.
 Interest Expense.
 Provision for Income Taxes.
 Net Income.
 Six Months Ended June 30, 2006 compared to Six Months Ended June 30, 2005
 Net Sales.
 Gross Profit.
 Selling, General and Administrative Expenses.
 20




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##### Table of Contents



Amortization Expense.
 Interest Expense.
 Provision for Income Taxes.
 Net Income.
 Business Segment Review
  Railway Maintenance Products Division  RMP .
 21




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005(In Thousands)External sales
    
    $
    13,905
    
    
    $
    11,403
    
    
    $
    24,149
    
    
    $
    20,762Intersegment sales
    
    
    638
    
    
    
    519
    
    
    
    1,192
    
    
    
    1,035Operating income (2)
    
    
    2,082
    
    
    
    1,714
    
    
    
    3,017
    
    
    
    2,917Sales by product line(1)Track component products (3)
    
    $
    7,336
    
    
    $
    6,063
    
    
    $
    13,382
    
    
    $
    11,656Friction management
products and services
    
    
    5,352
    
    
    
    4,739
    
    
    
    9,148
    
    
    
    7,878Wayside data collection
and data management
systems
    
    
    1,458
    
    
    
    830
    
    
    
    2,161
    
    
    
    1,683Other products and
services
    
    
    397
    
    
    
    290
    
    
    
    650
    
    
    
    580Total product and
service sales
    
    $
    14,543
    
    
    $
    11,922
    
    
    $
    25,341
    
    
    $
    21,797
 
 (1)
    
    Includes intersegment sales.(2)
    
    Includes an adjustment of $39,000 for the three months ended June 30, 2005 to reclass
salary and benefit expenses for two professional employees to be consistent with the
allocation of these expenses during 2006. Includes an adjustment of $137,000 for the six
months ended June 30, 2005 to reclass salary and benefit expenses for one executive and
three professional employees to be consistent with the allocation of these expenses during
2006. Beginning in April 2005, corporate shared services began to absorb the salaries,
benefits, and business travel expenses for one professional and one executive employee due
to internal promotions and assignment of new responsibilities. The adjustment for this
one professional and one executive employee was zero for the three months ended June 30,
2005 and totaled $59,000 for the six months ended June 30, 2005. Additionally, beginning
in January 2006, corporate shared services began to absorb the salaries, benefits and
business travel expenses for two professional employees due to the assignment of new
responsibilities. The adjustment for these two professional employees totaled $39,000 for
the three months ended June 30, 2005 and $78,000 for the six months ended June 30, 2005.(3)
    
    Formerly referred to as Rail Joints and Related Products.   22




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##### Table of Contents



Shipping Systems Division  SSD .
 Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005(In Thousands)External sales
    
    $
    729
    
    
    $
    1,544
    
    
    $
    1,853
    
    
    $
    2,877Intersegment sales
    
    
    11
    
    
    
    3
    
    
    
    11
    
    
    
    3Operating income
    
    
    32
    
    
    
    294
    
    
    
    140
    
    
    
    501Sales by product line(1)Auto rack load securement systems
    
    $
    33
    
    
    $
    456
    
    
    $
    170
    
    
    $
    975Heavy duty load securement
systems
    
    
    240
    
    
    
    229
    
    
    
    379
    
    
    
    372Strap securement
systems
    
    
    261
    
    
    
    436
    
    
    
    705
    
    
    
    889All other load securement systems
    
    
    206
    
    
    
    426
    
    
    
    610
    
    
    
    644Total product and service sales
    
    $
    740
    
    
    $
    1,547
    
    
    $
    1,864
    
    
    $
    2,880
 
 (1)
    
    Includes intersegment sales.   Portec Rail Nova Scotia Company  Canada . ® ®
 23




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005(In Thousands)External sales (2)
    
    $
    7,191
    
    
    $
    7,204
    
    
    $
    12,988
    
    
    $
    13,097Intersegment sales (2)
    
    
    1,988
    
    
    
    1,750
    
    
    
    3,664
    
    
    
    2,830Operating income (2),
(3)
    
    
    697
    
    
    
    1,099
    
    
    
    1,158
    
    
    
    1,668Average translation
rate of Canadian dollar
to United States dollar
    
    
    0.8883
    
    
    
    0.8086
    
    
    
    0.8852
    
    
    
    0.8089Sales by product line(1)Rail anchors and spikes
    
    $
    5,479
    
    
    $
    5,495
    
    
    $
    9,986
    
    
    $
    10,110Friction management
products and services
    
    
    3,396
    
    
    
    3,132
    
    
    
    6,205
    
    
    
    5,296Other products and
services
    
    
    304
    
    
    
    327
    
    
    
    461
    
    
    
    521Total product and
service sales
    
    $
    9,179
    
    
    $
    8,954
    
    
    $
    16,652
    
    
    $
    15,927
 
 (1)
    
    Includes intersegment sales.(2)
    
    Results for the three months ended June 30, 2005 include adjustments of ($803,000),
($33,000), and ($50,000) to external sales, intersegment sales, and operating income,
respectively, to be consistent with 2006 segment presentation. Results for the six months
ended June 30, 2005 include adjustments of ($1.6 million), $406,000, and $(191,000) to
external sales, intersegment sales, and operating income, respectively, to be consistent
with 2006 segment presentation. The net effect of the adjustment made to external and
intersegment sales is reflected within sales of friction management products and services.
On December 31, 2005, the assets of Kelsan Europe (formerly part of the Canada segment)
were purchased by Portec Rail Products (UK) Ltd. (United Kingdom segment). Beginning
January 1, 2006, the results of operations for Kelsan Europe are included within our United
Kingdom business segment. The net effect of these adjustments on consolidated results for
the three and six months ended June 30, 2006 is zero.(3)
    
    Includes an adjustment of $31,000 for the six months ended June 30, 2005 to reclass
salary expense for one executive to be consistent with the allocation of these expenses
during 2006. No adjustment is necessary for the three months ended June 30, 2005.
Beginning in April 2005, corporate shared services began to absorb the salary and business
travel expenses for this employee due to an internal promotion and assignment of new
responsibilities for this employee. Operating income includes an operating loss from
Portec Rail Nova Scotia Company of $150,000 and $135,000 for the three months ended June
30, 2006 and 2005, respectively, and an operating loss from Portec Rail Nova Scotia Company
of $297,000 and $273,000 for the six months ended June 30, 2006 and 2005, respectively.   24




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##### Table of Contents



Portec Rail Products (UK) Ltd.  United Kingdom .
 Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2005
    
    
    2005(In Thousands)External sales (2)
    
    $
    7,147
    
    
    $
    3,935
    
    
    $
    13,097
    
    
    $
    8,171Intersegment sales
    
    
    10
    
    
    
    7
    
    
    
    12
    
    
    
    32Operating income (2)
    
    
    568
    
    
    
    187
    
    
    
    1,432
    
    
    
    543Average translation rate of British pound
sterling to United States dollar
    
    
    1.8208
    
    
    
    1.8517
    
    
    
    1.8027
    
    
    
    1.8687Sales by product line(1)Material handling products
    
    $
    3,625
    
    
    $
    2,167
    
    
    $
    6,911
    
    
    $
    4,415Friction management products and services
    
    
    1,985
    
    
    
    1,775
    
    
    
    4,651
    
    
    
    3,788Track component products (3)
    
    
    1,547
    
    
    
    
    
    
    
    1,547
    
    
    
    Total product and service sales
    
    $
    7,157
    
    
    $
    3,942
    
    
    $
    13,109
    
    
    $
    8,203
 
 (1)
    
    Includes intersegment sales.(2)
    
    Results for the three months ended June 30, 2005 include adjustments of $803,000 and
$50,000 to external sales and operating income, respectively, to be consistent with 2006 segment
presentation. Results for the six months ended June 30, 2005 include adjustments of $1.6 million
and $191,000 to external sales and operating income, respectively, to be consistent with 2006
segment presentation. The increase in external sales is reflected within sales of friction
management products and services. On December 31, 2005, the assets of Kelsan Europe (formerly part
of the Canada segment) were purchased by Portec Rail Products (UK) Ltd. Beginning January 1, 2006,
the results of operations for Kelsan Europe are included within our United Kingdom business
segment. The net effect of these adjustments on consolidated results for the three and six months
ended June 30, 2006 is zero.(3)
    
    Prior to the acquisition, Coronet Rails fiscal year end was March 31st.
Before pro forma adjustments, Coronet Rail audited net sales and operating profit for the year
ended March 31, 2006 was $7.9 million (£4.4 million pounds sterling) and $1.3 million (£756,000
pounds sterling), respectively. For the year ended March 31, 2005, Coronet Rail audited net sales
and operating income was $2.7 million (£1.5 million pounds sterling) and $306,000 (£165,000 pounds
sterling), respectively. The amounts listed under this footnote are not included in the above
United Kingdom table.   25




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##### Table of Contents



Liquidity and Capital Resources
  Cash Flow Analysis .
   Financial Condition
    26




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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
  27




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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
  1.
    
    With respect to the election of eleven (11) directors whose terms expire in 2007:
 For
    
    Withheld
    
    Broker Non-VoteMarshall T. Reynolds
    
    
    8,185,942
    
    
    
    814,224
    
    
    
    564,197Carl M. Callaway
    
    
    8,967,476
    
    
    
    32,690
    
    
    
    564,197John S. Cooper
    
    
    8,930,075
    
    
    
    70,091
    
    
    
    564,197Philip E. Cline
    
    
    8,822,375
    
    
    
    177,791
    
    
    
    564,197Daniel P. Harrington
    
    
    8,971,056
    
    
    
    29,110
    
    
    
    564,197A. Michael Perry
    
    
    8,052,982
    
    
    
    947,184
    
    
    
    564,197Douglas V. Reynolds
    
    
    8,804,340
    
    
    
    195,826
    
    
    
    564,197Neal W. Scaggs
    
    
    8,045,695
    
    
    
    954,471
    
    
    
    564,197Phillip Todd Shell
    
    
    8,964,369
    
    
    
    35,797
    
    
    
    564,197Kirby J. Taylor
    
    
    8,929,625
    
    
    
    70,541
    
    
    
    564,197Thomas W. Wright
    
    
    8,978,851
    
    
    
    21,315
    
    
    
    564,197
 2.
    
    With respect to the ratification of the appointment of BKD, LLP as the Companys
independent auditors for the year ending December 31, 2006:
 For
    
    Against
    
    Abstained
    
    Broker Non-VoteBKD, LLP
    
    
    8,652,164
    
    
    
    58,801
    
    
    
    289,201
    
    
    
    564,197
 3.
    
    With respect to the approval of the Portec Rail Products, Inc. 2006 Stock Option Plan
(Option Plan):
 For
    
    Against
    
    AbstainedOption Plan
    
    
    6,240,596
    
    
    
    351,169
    
    
    
    51,223
 
 ITEM 5. OTHER INFORMATION
  28




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##### Table of Contents



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
 29




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##### Table of Contents



SIGNATURES
  PORTEC RAIL PRODUCTS, INC.Date: August 14, 2006
    By:
    /s/ John S. CooperJohn S. Cooper, President and Chief Executive Officer Date: August 14, 2006
    By:
    /s/ John N. PesarsickJohn N. Pesarsick, Chief Financial Officer 30




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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
 31