##### 



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 September 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
  o o þ
 o þ




---



##### 



PORTEC RAIL PRODUCTS, INC.
 INDEX TO FORM 10-Q
 ItemNumber
    
    
    
    Page NumberPART I  FINANCIAL INFORMATION1.
    
    Financial Statements:Condensed Consolidated Balance Sheets September 30, 2006 (Unaudited) and December 31, 2005
    
    
    3Condensed Consolidated Statements of Income (Unaudited) Three and nine months ended September 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited) Nine months ended September 30, 2006 and 2005
    
    
    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
    
    
    314.
    
    Controls and Procedures
    
    
    31PART II  OTHER INFORMATION1.
    
    Legal Proceedings
    
    
    321A.
    
    Risk Factors
    
    
    322.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    323.
    
    Defaults Upon Senior Securities
    
    
    324.
    
    Submission of Matters to a Vote of Security Holders
    
    
    325.
    
    Other Information
    
    
    326.
    
    Exhibits
    
    
    33Signatures
    
    
    34
  2




---



##### 



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 Portec Rail Products, Inc.
 
 Condensed Consolidated Balance Sheets
 September 30
    
    December 312006
    
    2005(Unaudited)
    
    (Audited)(In Thousands)AssetsCurrent assetsCash and cash equivalents
    
    $
    1,598
    
    
    $
    5,367Accounts receivable, net
    
    
    18,944
    
    
    
    14,198Inventories, net
    
    
    22,988
    
    
    
    20,140Prepaid expenses and other current assets
    
    
    1,446
    
    
    
    845Long-lived assets held for sale
    
    
    500
    
    
    
    Deferred income taxes
    
    
    764
    
    
    
    808Total current assets
    
    $
    46,240
    
    
    $
    41,358Property, plant and equipment, net of
accumulated depreciation of $11,548 and
$10,019 at September 30, 2006 and December
31, 2005, respectively
    
    
    12,512
    
    
    
    12,173Intangible assets, net of accumulated
amortization of $1,379 and $708 at September
30, 2006 and December 31, 2005, respectively
    
    
    27,527
    
    
    
    24,012Goodwill
    
    
    13,210
    
    
    
    11,008Other assets
    
    
    511
    
    
    
    318Total assets
    
    $
    100,000
    
    
    $
    88,869Liabilities and Shareholders EquityCurrent liabilitiesCurrent maturities of long-term debt
    
    $
    5,313
    
    
    $
    3,847Accounts payable
    
    
    8,550
    
    
    
    5,774Accrued income taxes
    
    
    1,338
    
    
    
    813Customer deposits
    
    
    934
    
    
    
    1,401Accrued compensation
    
    
    1,465
    
    
    
    2,231Other accrued liabilities
    
    
    2,589
    
    
    
    1,877Deferred purchase price  current portion
    
    
    562
    
    
    
    Total current liabilities
    
    
    20,751
    
    
    
    15,943Long-term debt, less current maturities
    
    
    12,411
    
    
    
    10,402Accrued pension costs
    
    
    3,144
    
    
    
    3,036Deferred income taxes
    
    
    9,691
    
    
    
    8,556Deferred purchase price, less current maturity
    
    
    421
    
    
    
    Other long-term liabilities
    
    
    543
    
    
    
    484Total liabilities
    
    
    46,961
    
    
    
    38,421Commitments and Contingencies
    
    
    
    
    
    
    Shareholders equity:Common stock, $1 par value, 50,000,000
shares authorized, 9,601,779 shares
issued and outstanding at September 30,
2006 and December 31, 2005, respectively
    
    
    9,602
    
    
    
    9,602Additional paid-in capital
    
    
    25,290
    
    
    
    25,290Retained earnings
    
    
    19,359
    
    
    
    17,332Accumulated other comprehensive loss
    
    
    (1,212
    )
    
    
    (1,776
    )Total shareholders equity
    
    
    53,039
    
    
    
    50,448Total liabilities and shareholders equity
    
    $
    100,000
    
    
    $
    88,869
 See
Notes to Condensed Consolidated Financial Statements
 3




---



##### 



Portec Rail Products, Inc.
 
 Condensed Consolidated Statements of Income
 (Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005(Dollars in Thousands, Except Per Share Data)Net sales
    
    $
    24,282
    
    
    $
    24,191
    
    
    $
    76,369
    
    
    $
    69,098Cost of sales
    
    
    16,639
    
    
    
    16,336
    
    
    
    53,403
    
    
    
    46,946Gross profit
    
    
    7,643
    
    
    
    7,855
    
    
    
    22,966
    
    
    
    22,152Selling, general and administrative
    
    
    5,524
    
    
    
    4,862
    
    
    
    16,226
    
    
    
    14,607Amortization expense
    
    
    218
    
    
    
    177
    
    
    
    636
    
    
    
    516Operating income
    
    
    1,901
    
    
    
    2,816
    
    
    
    6,104
    
    
    
    7,029Interest expense
    
    
    287
    
    
    
    193
    
    
    
    792
    
    
    
    665Other expense, net
    
    
    102
    
    
    
    175
    
    
    
    173
    
    
    
    140Income before income taxes
    
    
    1,512
    
    
    
    2,448
    
    
    
    5,139
    
    
    
    6,224Provision for income taxes
    
    
    311
    
    
    
    735
    
    
    
    1,383
    
    
    
    1,798Net income
    
    $
    1,201
    
    
    $
    1,713
    
    
    $
    3,756
    
    
    $
    4,426Earnings per shareBasic and diluted
    
    $
    0.13
    
    
    $
    0.18
    
    
    $
    0.39
    
    
    $
    0.46Weighted average shares outstandingBasic and diluted
    
    
    9,601,779
    
    
    
    9,601,779
    
    
    
    9,601,779
    
    
    
    9,601,779Dividends per share
    
    $
    0.06
    
    
    $
    0.05
    
    
    $
    0.18
    
    
    $
    0.15
 See
Notes to Condensed Consolidated Financial Statements
 4




---



##### 



Portec Rail Products, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 (Unaudited)
 Nine Months EndedSeptember 302006
    
    2005(In Thousands)Operating ActivitiesNet income
    
    $
    3,756
    
    
    $
    4,426Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation expense
    
    
    1,512
    
    
    
    1,276Amortization expense
    
    
    636
    
    
    
    517Provision for doubtful accounts
    
    
    36
    
    
    
    7Deferred income taxes
    
    
    (328
    )
    
    
    (19
    )Loss on sale of fixed assets
    
    
    89
    
    
    
    8Impairment of long-lived assets
    
    
    100
    
    
    
    193Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,916
    )
    
    
    (2,342
    )Inventories
    
    
    (563
    )
    
    
    1,955Prepaid expenses and other current assets
    
    
    (697
    )
    
    
    (223
    )Accounts payable
    
    
    1,806
    
    
    
    (1,128
    )Income taxes payable
    
    
    (101
    )
    
    
    700Accrued expenses
    
    
    (921
    )
    
    
    (243
    )Net cash provided by operating activities
    
    
    2,409
    
    
    
    5,127Investing ActivitiesPurchase of property, plant and equipment
    
    
    (1,528
    )
    
    
    (1,128
    )Proceeds from sale of assets
    
    
    1
    
    
    
    5Business acquisition, net of cash acquired
    
    
    (4,826
    )
    
    
    Net cash used in investing activities
    
    
    (6,353
    )
    
    
    (1,123
    )Financing ActivitiesNet increase (decrease) in working capital facilities
    
    
    18
    
    
    
    (597
    )Principal payments on promissory notes
    
    
    (280
    )
    
    
    Proceeds from bank term loans
    
    
    4,178
    
    
    
    Principal payments on bank term loans
    
    
    (1,993
    )
    
    
    (2,680
    )Principal payments on capital leases
    
    
    (49
    )
    
    
    (19
    )Fees paid to obtain new financing
    
    
    (74
    )
    
    
    Cash dividends paid to shareholders
    
    
    (1,728
    )
    
    
    (1,440
    )Net cash provided by (used in) financing activities
    
    
    72
    
    
    
    (4,736
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    103
    
    
    
    (40
    )Decrease in cash and cash equivalents
    
    
    (3,769
    )
    
    
    (772
    )Cash and cash equivalents at beginning of period
    
    
    5,367
    
    
    
    7,749Cash and cash equivalents at end of period
    
    $
    1,598
    
    
    $
    6,977Supplemental Disclosures of Cash Flow InformationCash paid during the period for:Interest
    
    $
    808
    
    
    $
    701Income taxes
    
    $
    2,197
    
    
    $
    1,447
 See
Notes to Condensed Consolidated Financial Statements
 5




---



##### 



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




---



##### 



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
    
    
    3,499Goodwill
    
    
    1,906Total assets acquired
    
    
    9,243Accounts 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
    
    $
    5,753
 PRO FORMA FINANCIAL INFORMATION  CORONET RAIL, LTD. ACQUISITION
  7




---



##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005(Dollars in Thousands, Except Per Share Data)Pro forma net sales
    
    $
    24,282
    
    
    $
    26,335
    
    
    $
    78,412
    
    
    $
    74,246Pro forma net income
    
    $
    1,201
    
    
    $
    1,880
    
    
    $
    3,996
    
    
    $
    4,699Pro forma net income per basic and diluted
share
    
    $
    0.13
    
    
    $
    0.20
    
    
    $
    0.42
    
    
    $
    0.49Shares used for basic and diluted computation
    
    
    9,601,779
    
    
    
    9,601,779
    
    
    
    9,601,779
    
    
    
    9,601,779
 Note 4: Inventories
   September 30
    
    December 312006
    
    2005(In Thousands)Raw materials
    
    $
    11,483
    
    
    $
    8,764Work in process
    
    
    976
    
    
    
    284Finished goods
    
    
    10,855
    
    
    
    11,59223,314
    
    
    
    20,640Less reserve for slow-moving and obsolete inventory
    
    
    326
    
    
    
    500Net inventory
    
    $
    22,988
    
    
    $
    20,140
 Note 5: Long-Term Debt
  September 30
    
    December 312006
    
    2005(In Thousands)National City Bank Credit Facility: (a)Term loan facility
    
    $
    10,407
    
    
    $
    11,716Revolving credit facility  United States
    
    
    
    
    
    
    Revolving credit facility  Canada
    
    
    1,073
    
    
    
    1,376United Kingdom loans: (b)Term loans  Coronet Rail acquisition
    
    
    4,263
    
    
    
    Working capital facility  invoice discounting
    
    
    
    
    
    
    Working capital facility  overdraft
    
    
    1,054
    
    
    
    Promissory notes  Salient Systems acquisition (c)
    
    
    840
    
    
    
    1,120Capitalized lease obligations
    
    
    87
    
    
    
    3717,724
    
    
    
    14,249Less current maturities
    
    
    5,313
    
    
    
    3,847$
    12,411
    
    
    $
    10,402
 8




---



##### 



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




---



##### 



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




---



##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Wall Street Journal
 Note 6: Retirement Plans
  Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005(In Thousands)Interest cost
    
    $
    133
    
    
    $
    130
    
    
    $
    398
    
    
    $
    390Expected return on plan assets
    
    
    (161
    )
    
    
    (170
    )
    
    
    (485
    )
    
    
    (510
    )Amortization of unrecognized loss
    
    
    26
    
    
    
    12
    
    
    
    80
    
    
    
    35Pension (benefit)
    
    $
    (2
    )
    
    $
    (28
    )
    
    $
    (7
    )
    
    $
    (85
    )
   Three Months Ended September 30,Portec Rail
    
    Conveyors
    
    Portec Rail
    
    ConveyorsPlan
    
    Plan
    
    Plan
    
    Plan2006
    
    2006
    
    2005
    
    2005(In Thousands)Interest cost
    
    $
    73
    
    
    $
    17
    
    
    $
    77
    
    
    $
    11Expected return on plan assets
    
    
    (80
    )
    
    
    (16
    )
    
    
    (72
    )
    
    
    (18
    )Amortization of transition amount
    
    
    (14
    )
    
    
    (3
    )
    
    
    (13
    )
    
    
    (2
    )Amortization of unrecognized loss (gain)
    
    
    32
    
    
    
    1
    
    
    
    30
    
    
    
    (3
    )Pension cost/(benefit)
    
    $
    11
    
    
    $
    (1
    )
    
    $
    22
    
    
    $
    (12
    )
 Nine Months Ended September 30,Portec Rail
    
    Conveyors
    
    Portec Rail
    
    ConveyorsPlan
    
    Plan
    
    Plan
    
    Plan2006
    
    2006
    
    2005
    
    2005(In Thousands)Interest cost
    
    $
    213
    
    
    $
    48
    
    
    $
    236
    
    
    $
    33Expected return on plan assets
    
    
    (232
    )
    
    
    (48
    )
    
    
    (222
    )
    
    
    (54
    )Amortization of transition amount
    
    
    (40
    )
    
    
    (8
    )
    
    
    (41
    )
    
    
    (8
    )Amortization of unrecognized loss (gain)
    
    
    91
    
    
    
    4
    
    
    
    92
    
    
    
    (9
    )Pension cost/(benefit)
    
    $
    32
    
    
    $
    (4
    )
    
    $
    65
    
    
    $
    (38
    )
 11




---



##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
  Note 7: Comprehensive Income
  Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005(In Thousands)Net income
    
    $
    1,201
    
    
    $
    1,713
    
    
    $
    3,756
    
    
    $
    4,426Minimum pension liability adjustment, net of tax
    
    
    (17
    )
    
    
    25
    
    
    
    (110
    )
    
    
    137Foreign currency translation adjustments, net of tax
    
    
    7
    
    
    
    300
    
    
    
    673
    
    
    
    (188
    )Comprehensive income
    
    $
    1,191
    
    
    $
    2,038
    
    
    $
    4,319
    
    
    $
    4,375
 Note 8: Earnings Per Share
   12




---



##### 



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 Thousands)Long term debt
    
    $
    15,510
    
    
    $
    703
    
    
    $
    6,267
    
    
    $
    6,152
    
    
    $
    2,388Revolving credit facilities
    
    
    2,127
    
    
    
    2,127
    
    
    
    
    
    
    
    
    
    
    
    Future interest payments (1)
    
    
    2,873
    
    
    
    222
    
    
    
    1,488
    
    
    
    675
    
    
    
    488Purchase obligations
    
    
    5,364
    
    
    
    5,364
    
    
    
    
    
    
    
    
    
    
    
    Operating leases Capital
leases
    
    
    3,003
    
    
    
    301
    
    
    
    1,543
    
    
    
    503
    
    
    
    656Capital leases
    
    
    87
    
    
    
    22
    
    
    
    65
    
    
    
    
    
    
    
    Pension contributions (2)
    
    
    6
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    28,970
    
    
    $
    8,745
    
    
    $
    9,363
    
    
    $
    7,330
    
    
    $
    3,532
 
 (1)
    
    Represents future interest payments on long-term debt obligations as of September 30, 2006.
Assumes that the interest rates on our long-term debt agreements at September 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 September 30, 2006 will
be dependent upon the performance on plan assets. Litigation
  Note 10: Segment Information
  13




---



##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005(In Thousands)External Sales (A)RMP
    
    $
    11,577
    
    
    $
    12,501
    
    
    $
    35,726
    
    
    $
    33,263SSD
    
    
    754
    
    
    
    1,846
    
    
    
    2,607
    
    
    
    4,723Canada
    
    
    4,050
    
    
    
    5,523
    
    
    
    17,038
    
    
    
    18,620United Kingdom
    
    
    7,901
    
    
    
    4,321
    
    
    
    20,998
    
    
    
    12,492Total
    
    $
    24,282
    
    
    $
    24,191
    
    
    $
    76,369
    
    
    $
    69,098Intersegment Sales (A)RMP
    
    $
    504
    
    
    $
    759
    
    
    $
    1,696
    
    
    $
    1,794SSD
    
    
    1
    
    
    
    6
    
    
    
    12
    
    
    
    9Canada
    
    
    1,333
    
    
    
    1,569
    
    
    
    4,997
    
    
    
    4,398United Kingdom
    
    
    3
    
    
    
    9
    
    
    
    15
    
    
    
    41Total
    
    $
    1,841
    
    
    $
    2,343
    
    
    $
    6,720
    
    
    $
    6,242Total SalesRMP
    
    $
    12,081
    
    
    $
    13,260
    
    
    $
    37,422
    
    
    $
    35,057SSD
    
    
    755
    
    
    
    1,852
    
    
    
    2,619
    
    
    
    4,732Canada
    
    
    5,383
    
    
    
    7,092
    
    
    
    22,035
    
    
    
    23,018United Kingdom
    
    
    7,904
    
    
    
    4,330
    
    
    
    21,013
    
    
    
    12,533Total
    
    $
    26,123
    
    
    $
    26,534
    
    
    $
    83,089
    
    
    $
    75,340
 14




---



##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005(In Thousands)Operating Income (Loss) (A), (B)RMP
    
    $
    1,671
    
    
    $
    2,085
    
    
    $
    4,688
    
    
    $
    5,002SSD
    
    
    43
    
    
    
    309
    
    
    
    183
    
    
    
    810Canada
    
    
    87
    
    
    
    681
    
    
    
    1,245
    
    
    
    2,349United Kingdom
    
    
    799
    
    
    
    358
    
    
    
    2,230
    
    
    
    901Corporate Shared Services
    
    
    (699
    )
    
    
    (617
    )
    
    
    (2,242
    )
    
    
    (2,033
    )Total
    
    
    1,901
    
    
    
    2,816
    
    
    
    6,104
    
    
    
    7,029Interest Expense
    
    
    287
    
    
    
    193
    
    
    
    792
    
    
    
    665Other Expense, net
    
    
    102
    
    
    
    175
    
    
    
    173
    
    
    
    140Income Before Income Taxes
    
    $
    1,512
    
    
    $
    2,448
    
    
    $
    5,139
    
    
    $
    6,224Depreciation and AmortizationRMP
    
    $
    198
    
    
    $
    187
    
    
    $
    585
    
    
    $
    546SSD
    
    
    6
    
    
    
    4
    
    
    
    16
    
    
    
    8Canada
    
    
    342
    
    
    
    300
    
    
    
    962
    
    
    
    865United Kingdom
    
    
    191
    
    
    
    117
    
    
    
    521
    
    
    
    359Corporate Shared Services
    
    
    22
    
    
    
    6
    
    
    
    64
    
    
    
    15Total
    
    $
    759
    
    
    $
    614
    
    
    $
    2,148
    
    
    $
    1,793Capital ExpendituresRMP
    
    $
    40
    
    
    $
    132
    
    
    $
    311
    
    
    $
    536SSD
    
    
    
    
    
    
    40
    
    
    
    37
    
    
    
    40Canada
    
    
    148
    
    
    
    77
    
    
    
    1,016
    
    
    
    252United Kingdom (1)
    
    
    39
    
    
    
    98
    
    
    
    98
    
    
    
    204Corporate Shared Services
    
    
    12
    
    
    
    12
    
    
    
    66
    
    
    
    96Total
    
    $
    239
    
    
    $
    359
    
    
    $
    1,528
    
    
    $
    1,128
 
 (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 $5.3 million of goodwill and
intangible assets.(A)
    
    External sales, intersegment sales, and operating income for the three and nine months ended
September 30, 2005 include adjustments for the reclassification of the results of operations of
Kelsan Europe from the Canada business segment to the United Kingdom business segment to be
consistent with 2006 segment presentation. 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 the consolidated results is zero;
however, the effects on external sales, intersegment sales, and operating income by business
segment are as follows: Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005(In Thousands)Effects on External SalesCanada
    
    $
    
    
    
    $
    (809
    )
    
    $
    
    
    
    $
    (2,409
    )United Kingdom
    
    
    
    
    
    
    809
    
    
    
    
    
    
    
    2,409Total
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 15




---



##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005(In Thousands)Effects on Intersegment SalesCanada (1)
    
    $
    
    
    
    $
    322
    
    
    $
    
    
    
    $
    728United Kingdom (1)
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3Total
    
    $
    
    
    
    $
    325
    
    
    $
    
    
    
    $
    731(In Thousands)Effects on Operating IncomeCanada
    
    $
    
    
    
    $
    (77
    )
    
    $
    
    
    
    $
    (268
    )United Kingdom
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    268Total
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Represents intersegment sales between Kelsan-Canada (selling division) and Kelsan-Europe
(purchasing division) and vice versa. 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 and United Kingdom business segments. This reclassification
has no effect on consolidated results.(B)
    
    Operating Income (Loss) for the three and nine months ended September 30, 2005 includes an
adjustment for the reclassification of three professional and two executive employees salary and
benefit expenses to be consistent with the allocation of these expenses in 2006. Beginning in
April 2005, corporate shared services began to absorb the salaries, benefits, and business travel
expenses for one professional and two executive employees due to internal promotions and new
responsibilities. 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 for these employees. The effects of these adjustments on total
Operating Income are zero; however, the effects on Operating Income (Loss) by business segment is
as follows: Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005(In Thousands)Effects on Operating IncomeRMP
    
    $
    
    
    
    $
    39
    
    
    $
    
    
    
    $
    176Canada
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31Corporate Shared Services
    
    
    
    
    
    
    (39
    )
    
    
    
    
    
    
    (207
    )Total
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 September 30
    
    
    December 312006
    
    
    2005(In Thousands)
    
    
    (In Thousands)Total AssetsRMP
    
    $
    40,624
    
    
    $
    42,531SSD
    
    
    2,045
    
    
    
    2,007Canada
    
    
    32,778
    
    
    
    32,040United Kingdom
    
    
    23,845
    
    
    
    11,503Corporate Shared Services
    
    
    708
    
    
    
    788Total
    
    $
    100,000
    
    
    $
    88,869
 16




---



##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Note 11: Restructuring Costs
       Employee
    
    Lease
    
    OtherTermination
    
    Termination
    
    AssociatedTotal
    
    Benefits
    
    Costs
    
    CostsBeginning balance, January 1, 2006
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Costs incurred
    
    
    93
    
    
    
    93
    
    
    
    
    
    
    
    Cash payments
    
    
    (49)
    
    
    
    (49
    )
    
    
    
    
    
    
    Adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ending balance, September 30, 2006
    
    $
    44
    
    
    $
    44
    
    
    $
    
    
    
    $
    
 17




---



##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 Note 12: Impairment of Long-Lived Assets
  Note 13: Change in Accounting Principle
    Note 14: Recent Accounting Pronouncements
   18




---



##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
  Note 15: Subsequent Events
  19




---



##### 



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




---



##### 



Overview
    Results of Operations
 Three Months Ended September 30, 2006 compared to Three Months Ended September 30, 2005
 Net Sales.
 Gross Profit.
 Selling, General and Administrative Expenses.
 21




---



##### 



Amortization Expense.
 Interest Expense.
 Other Expense.
 Provision for Income Taxes.
 Net Income.
 Nine Months Ended September 30, 2006 compared to Nine Months Ended September 30, 2005
 Net Sales.
 Gross Profit.
 22




---



##### 



Selling, General and Administrative Expenses.
 Amortization Expense.
 Interest Expense.
 Other Expense.
 Provision for Income Taxes.
 23




---



##### 



Net Income.
 Business Segment Review
  Railway Maintenance Products Division  RMP .
 Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302006
    
    
    2005
    
    
    2006
    
    
    2005(In Thousands)External sales
    
    $
    11,577
    
    
    $
    12,501
    
    
    $
    35,726
    
    
    $
    33,263Intersegment sales
    
    
    504
    
    
    
    759
    
    
    
    1,696
    
    
    
    1,794Operating income (2)
    
    
    1,671
    
    
    
    2,085
    
    
    
    4,688
    
    
    
    5,002Sales by product line(1)Track component products (3)
    
    $
    5,999
    
    
    $
    5,568
    
    
    $
    19,381
    
    
    $
    17,236Friction management products and services
    
    
    4,150
    
    
    
    5,884
    
    
    
    13,298
    
    
    
    13,750Wayside data collection and data management systems
    
    
    1,441
    
    
    
    1,500
    
    
    
    3,601
    
    
    
    3,182Other products and services
    
    
    491
    
    
    
    308
    
    
    
    1,142
    
    
    
    889Total product and service sales
    
    $
    12,081
    
    
    $
    13,260
    
    
    $
    37,422
    
    
    $
    35,057
 
 (1)
    
    Includes intersegment sales.(2)
    
    Includes an adjustment of $39,000 for the three months ended September 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 $176,000 for the
nine months ended September 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 September 30, 2005 and totaled $59,000 for the nine months ended September 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 September 30, 2005 and $117,000 for
the nine months ended September 30, 2005.(3)
    
    Formerly referred to as Rail Joints and Related Products. 24




---



##### 



Shipping Systems Division  SSD .
  Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302006
    
    
    2005
    
    
    2006
    
    
    2005(In Thousands)External sales
    
    $
    754
    
    
    $
    1,846
    
    
    $
    2,607
    
    
    $
    4,723Intersegment sales
    
    
    1
    
    
    
    6
    
    
    
    12
    
    
    
    9Operating income
    
    
    43
    
    
    
    309
    
    
    
    183
    
    
    
    810Sales by product line(1)Auto rack load securement systems
    
    $
    128
    
    
    $
    30
    
    
    $
    299
    
    
    $
    1,005Heavy duty load securement
systems
    
    
    203
    
    
    
    1,155
    
    
    
    908
    
    
    
    2,045Strap securement
systems
    
    
    343
    
    
    
    142
    
    
    
    721
    
    
    
    514All other load securement systems
    
    
    81
    
    
    
    525
    
    
    
    691
    
    
    
    1,168Total product and service sales
    
    $
    755
    
    
    $
    1,852
    
    
    $
    2,619
    
    
    $
    4,732
 
 (1)
    
    Includes intersegment sales.   25




---



##### 



Portec Rail Nova Scotia Company  Canada . ® ®
 Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302006
    
    
    2005
    
    
    2006
    
    
    2005(In Thousands)External sales (2)
    
    $
    4,050
    
    
    $
    5,523
    
    
    $
    17,038
    
    
    $
    18,620Intersegment sales (2)
    
    
    1,333
    
    
    
    1,569
    
    
    
    4,997
    
    
    
    4,398Operating income (2), (3)
    
    
    87
    
    
    
    681
    
    
    
    1,245
    
    
    
    2,349Average translation rate of Canadian
dollar to United States dollar
    
    
    0.8947
    
    
    
    0.8340
    
    
    
    0.8882
    
    
    
    0.8192Sales by product line(1)Rail anchors and spikes
    
    $
    2,317
    
    
    $
    3,974
    
    
    $
    12,311
    
    
    $
    14,090Friction management products and services
    
    
    2,773
    
    
    
    2,728
    
    
    
    8,972
    
    
    
    8,022Other products and services
    
    
    293
    
    
    
    390
    
    
    
    752
    
    
    
    906Total product and service sales
    
    $
    5,383
    
    
    $
    7,092
    
    
    $
    22,035
    
    
    $
    23,018
 
 (1)
    
    Includes intersegment sales.(2)
    
    Results for the three months ended September 30, 2005 include adjustments of
($809,000), $322,000, and ($77,000) to external sales, intersegment sales, and operating
income, respectively, to be consistent with 2006 segment presentation. Results for the
nine months ended September 30, 2005 include adjustments of ($2.4 million), $728,000, and
($268,000) 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 nine months ended September 30, 2006 is zero.(3)
    
    Includes an adjustment of $31,000 for the nine months ended September 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 September 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 $151,000 and $140,000 for the three months ended
September 30, 2006 and 2005, respectively, and an operating loss from Portec Rail Nova
Scotia Company of $448,000 and $413,000 for the nine months ended September 30, 2006 and
2005, respectively.   26




---



##### 



Portec Rail Products (UK) Ltd.  United Kingdom .
 Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302006
    
    
    2005
    
    
    2006
    
    
    2005(In Thousands)External sales (2)
    
    $
    7,901
    
    
    $
    4,321
    
    
    $
    20,998
    
    
    $
    12,492Intersegment sales
    
    
    3
    
    
    
    9
    
    
    
    15
    
    
    
    41Operating income (2)
    
    
    799
    
    
    
    358
    
    
    
    2,230
    
    
    
    901Average translation rate of British
pound sterling to United States dollar
    
    
    1.8735
    
    
    
    1.7789
    
    
    
    1.8290
    
    
    
    1.8374Sales by product line(1)Material handling products
    
    $
    3,393
    
    
    $
    2,354
    
    
    $
    10,321
    
    
    $
    6,769Friction management products and services
    
    
    3,166
    
    
    
    1,976
    
    
    
    7,800
    
    
    
    5,764Track component products (3)
    
    
    1,345
    
    
    
    
    
    
    
    2,892
    
    
    
    Total product and service sales
    
    $
    7,904
    
    
    $
    4,330
    
    
    $
    21,013
    
    
    $
    12,533
 
 (1)
    
    Includes intersegment sales.(2)
    
    Results for the three months ended September 30, 2005 include adjustments of $809,000,
$3,000 and $77,000 to external sales, intersegment sales, and operating income, respectively, to be
consistent with 2006 segment presentation. Results for the nine months ended September 30, 2005
include adjustments of $2.4 million, $3,000 and $268,000 to external sales, intersegment 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.  27




---



##### 



Liquidity and Capital Resources
  Cash Flow Analysis .
   Financial Condition
  28




---



##### 



Discussion of Critical Accounting Policies
  Revenue Recognition.
   Allowances for Doubtful Accounts.
 29




---



##### 



Inventories.
 Goodwill and Other Intangible Assets.
  Defined Benefit Pension Plans.
 30




---



##### 



Income Taxes.
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
  31




---



##### 



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 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
  
 32




---



##### 



ITEM 6. EXHIBTS
 (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
 33




---



##### 



SIGNATURES
  PORTEC RAIL PRODUCTS, INC.Date: November 14, 2006
    
    By:
    
    /s/ Richard J. JarosinskiRichard J. Jarosinski, President and
Chief Executive OfficerDate: November 14, 2006
    
    By:
    
    /s/ John N. PesarsickJohn N. Pesarsick, Chief Financial
Officer
 34




---



##### 



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
 35