##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2005 Commission file number: 000-50543 PORTEC RAIL PRODUCTS, INC. 
 West Virginia
    
    55-0755271(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)900 Old Freeport Road, Pittsburgh, Pennsylvania
    
    15238-8250(Address of principal executive offices)
    
    (Zip Code)
 (412) 782-6000 
  Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ o
 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). o þ
 As of April 30, 2005, there were 9,601,779 shares of the registrants common stock
outstanding.




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##### 



PORTEC RAIL PRODUCTS, INC. INDEX TO FORM 10-Q ItemNumber
    
    
    
    Page NumberPART I  FINANCIAL INFORMATION1.
    
    Financial Statements:Condensed Consolidated Balance Sheets
March 31, 2005 (Unaudited) and December 31, 2004
    
    
    3Condensed Consolidated Statements of Income (Unaudited)
Three months ended March 31, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6-132.
    
    Managements Discussion and
Analysis of Financial Condition and Results of Operations
    
    
    143.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    204.
    
    Controls and Procedures
    
    
    21PART II  OTHER INFORMATION1.
    
    Legal Proceedings
    
    
    212.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    213.
    
    Defaults Upon Senior Securities
    
    
    214.
    
    Submission of Matters to a Vote of Security Holders
    
    
    215.
    
    Other Information
    
    
    216.
    
    Exhibits
    
    
    22Signatures
    
    
    23
 2




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##### 



PART I  FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Portec Rail Products, Inc.
Condensed Consolidated Balance Sheets March 31
    
    
    December 312005
    
    
    2004(Unaudited)
    
    
    (Audited)(In Thousands)AssetsCurrent assetsCash and cash equivalents
    
    $
    5,097
    
    
    $
    7,749Accounts receivable, net
    
    
    13,591
    
    
    
    12,452Inventories, net
    
    
    17,720
    
    
    
    18,814Prepaid expenses and other current assets
    
    
    1,951
    
    
    
    895Deferred income taxes
    
    
    567
    
    
    
    762Total current assets
    
    $
    38,926
    
    
    $
    40,672Property, plant and equipment, net
    
    
    12,407
    
    
    
    12,660Intangible assets, net
    
    
    23,960
    
    
    
    24,185Goodwill
    
    
    10,981
    
    
    
    10,957Other assets
    
    
    180
    
    
    
    151Total assets
    
    $
    86,454
    
    
    $
    88,625Liabilities and Shareholders EquityCurrent liabilitiesCurrent maturities of long-term debt
    
    $
    4,910
    
    
    $
    3,611Accounts payable
    
    
    5,074
    
    
    
    6,417Accrued income taxes
    
    
    815
    
    
    
    503Customer deposits
    
    
    847
    
    
    
    1,572Accrued compensation
    
    
    675
    
    
    
    1,484Other accrued liabilities
    
    
    1,978
    
    
    
    1,824Total current liabilities
    
    
    14,299
    
    
    
    15,411Long-term debt, less current maturities
    
    
    12,928
    
    
    
    14,108Accrued pension costs
    
    
    2,779
    
    
    
    2,829Deferred income taxes
    
    
    8,611
    
    
    
    8,889Other long-term liabilities
    
    
    359
    
    
    
    344Total liabilities
    
    
    38,976
    
    
    
    41,581Commitments and Contingencies
    
    
    
    
    
    
    Shareholders equity:Common stock, $1 par value, 50,000,000
shares authorized, 9,601,779 shares
issued and outstanding at March 31, 2005
and December 31, 2004, respectively
    
    
    9,602
    
    
    
    9,602Additional paid-in capital
    
    
    25,290
    
    
    
    25,290Retained earnings
    
    
    14,046
    
    
    
    13,521Accumulated other comprehensive loss
    
    
    (1,460
    )
    
    
    (1,369
    )Total shareholders equity
    
    
    47,478
    
    
    
    47,044Total liabilities and shareholders equity
    
    $
    86,454
    
    
    $
    88,625
 See Notes to Condensed Consolidated Financial Statements 3




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##### 



Portec Rail Products, Inc.
Condensed Consolidated Statements of Income
(Unaudited) Three Months EndedMarch 312005
    
    
    2004(Dollars in Thousands, Except PerShare Data)Net sales
    
    $
    20,821
    
    
    $
    15,193Cost of sales
    
    
    14,299
    
    
    
    11,322Gross profit
    
    
    6,522
    
    
    
    3,871Selling, general and administrative
    
    
    4,695
    
    
    
    2,834Amortization expense
    
    
    166
    
    
    
    16Operating income
    
    
    1,661
    
    
    
    1,021Interest expense
    
    
    263
    
    
    
    46Other (income) expense, net
    
    
    (71
    )
    
    
    18Income before income taxes
    
    
    1,469
    
    
    
    957Provision for income taxes
    
    
    464
    
    
    
    300Net income
    
    $
    1,005
    
    
    $
    657Earnings per shareBasic and diluted
    
    $
    .10
    
    
    $
    .08Weighted average shares outstandingBasic and diluted
    
    
    9,601,779
    
    
    
    8,586,335Dividends per share
    
    $
    .05
    
    
    $
    .05
 See Notes to Condensed Consolidated Financial Statements 4




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##### 



Portec Rail Products, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited) Three Months EndedMarch 312005
    
    
    2004(In Thousands)Operating ActivitiesNet income
    
    $
    1,005
    
    
    $
    657Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    581
    
    
    
    364Provision for doubtful accounts
    
    
    
    
    
    
    30Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,397
    )
    
    
    (534
    )Inventories
    
    
    997
    
    
    
    485Prepaid expenses and other assets
    
    
    (1,145
    )
    
    
    40Accounts payable
    
    
    (1,080
    )
    
    
    74Income tax payable
    
    
    310
    
    
    
    (121
    )Accrued expenses
    
    
    (1,413
    )
    
    
    (286
    )Net cash (used in) provided by operating activities
    
    
    (2,142
    )
    
    
    709Investing ActivitiesPurchases of property, plant and equipment
    
    
    (284
    )
    
    
    (186
    )Net cash used in investing activities
    
    
    (284
    )
    
    
    (186
    )Financing ActivitiesNet increase (decrease) in revolving credit agreements
    
    
    1,168
    
    
    
    (5,718
    )Principal payments on bank term loans
    
    
    (906
    )
    
    
    (1,929
    )Principal payments to Boone County Bank, Inc. (related
party)
    
    
    
    
    
    
    (73
    )Principal payments on capital leases
    
    
    (8
    )
    
    
    (2
    )Cash dividends paid to shareholders
    
    
    (480
    )
    
    
    (431
    )Issuance of common stock
    
    
    
    
    
    
    17,972Net cash (used in) provided by financing activities
    
    
    (226
    )
    
    
    9,819Effect of exchange rate changes on cash and cash equivalents
    
    
    (1
    )
    
    
    6(Decrease) increase in cash and cash equivalents
    
    
    (2,652
    )
    
    
    10,348Cash and cash equivalents at beginning of period
    
    
    7,749
    
    
    
    418Cash and cash equivalents at end of period
    
    $
    5,097
    
    
    $
    10,766Supplemental Disclosures of Cash Flow InformationCash paid during the period for:Interest
    
    $
    433
    
    
    $
    46Income taxes
    
    $
    241
    
    
    $
    453
 See Notes to Condensed Consolidated Financial Statements 5




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##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) Note 1: Organization Portec Rail Products, Inc. (sometimes herein referred to as we, our, us, the Company, or
Portec Rail Products) was incorporated in West Virginia in 1997. We manufacture, supply and
distribute a broad range of rail products, including rail joints, rail anchors, rail spikes,
railway friction management products and systems, railway wayside data collection and data
management systems and freight car securement devices. We also manufacture material handling
equipment through our United Kingdom operation. We serve both the domestic and international
markets. Our five manufacturing facilities are located in Huntington, West Virginia; St. Jean,
Quebec, Canada; Vancouver, British Columbia, Canada; Wrexham, Wales, United Kingdom; and Leicester,
England, United Kingdom. We also have an engineering and assembly facility located in Dublin,
Ohio, and have offices near Chicago, Illinois; Montreal, Quebec, Canada; Birmingham, England,
United Kingdom. Our corporate headquarters is located near Pittsburgh, Pennsylvania. Note 2: Basis of Presentation The accompanying condensed consolidated financial statements include the accounts of Portec Rail
Products, Inc.; Salient Systems, Inc. (Salient Systems), our wholly-owned United States subsidiary;
3094497 Nova Scotia Company, our wholly-owned Canadian subsidiary (Canada); and Portec Rail
Products (UK) Ltd., our wholly-owned United Kingdom subsidiary (United Kingdom). All significant
intercompany accounts and transactions have been eliminated in consolidation. The foregoing
financial information has been prepared in accordance with the accounting principles generally
accepted in the United Sates of America (GAAP) and rules and regulations of the Securities and
Exchange Commission for interim financial reporting. The preparation of financial statements in
accordance with GAAP requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ from
these estimates. The results of operations for the three months ended March 31, 2005 are not
necessarily indicative of the results to be expected for the full year. The accompanying interim
financial information is unaudited; however, we believe that the financial information reflects all
adjustments (consisting of items of a normal recurring nature) necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with GAAP. Certain
information and note disclosures normally included in our annual financial statements prepared in
accordance with GAAP have been condensed or omitted. These interim financial statements should be
read in conjunction with the 2004 Annual Report on Form 10-K. The balance sheet information as of
December 31, 2004 was derived from our audited balance sheet included in our 2004 Annual Report on
Form 10-K. Unless otherwise indicated, all dollar amounts are in U.S. dollars. Certain amounts in the prior years consolidated financial statements have been reclassified to
conform to the current year presentation. These reclassifications had no effect on net earnings. Note 3: Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in,
first-out (FIFO) method for all inventories. Inventory costs include material, labor and
manufacturing overhead. The major components of inventories are as follows: March 31
    
    
    December 312005
    
    
    2004(In Thousands)Raw materials
    
    $
    7,129
    
    
    $
    8,972Work in process
    
    
    421
    
    
    
    357Finished goods
    
    
    10,499
    
    
    
    9,82218,049
    
    
    
    19,151Less reserve for slow-moving and obsolete inventory
    
    
    329
    
    
    
    337Net inventory
    
    $
    17,720
    
    
    $
    18,814
 6




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##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) Note 4: Long-Term Debt Long-term debt consists of the following: March 31
    
    
    December 312005
    
    
    2004(In Thousands)National City Bank Credit Facility: (a)Term loan facility
    
    $
    14,062
    
    
    $
    14,710Revolving credit facility  United States
    
    
    
    
    
    
    Revolving credit facility  Canada
    
    
    1,736
    
    
    
    834United Kingdom loans: (b)Term loan
    
    
    
    
    
    
    211Property loan
    
    
    
    
    
    
    137Quodeck acquisition loan
    
    
    268
    
    
    
    320Overdraft credit facility
    
    
    
    
    
    
    Kelsan overdraft credit facility (c)
    
    
    598
    
    
    
    325Salient Systems promissory notes (d)
    
    
    1,120
    
    
    
    1,120Capitalized lease obligations
    
    
    54
    
    
    
    6217,838
    
    
    
    17,719Less current maturities
    
    
    4,910
    
    
    
    3,611$
    12,928
    
    
    $
    14,108
 (a) National City Bank Credit Facility On November 30, 2004, we entered into a $25.0 million term loan and revolving credit facility with
National City Bank and its Canadian affiliate that provided acquisition financing in addition to
supporting the working capital requirements of our United States business units and our Canadian
operation near Montreal. Under this agreement, there are three separate borrowing components, a
$7.0 million United States revolving credit facility, a $3.1 million ($3.75 million Canadian
dollars) revolving credit facility for our Montreal, Canada operation, and an outstanding term loan
of $14.1 million under the $25.0 million total facility. As of March 31, 2005, we had the ability
to borrow an additional $8.4 million under this facility, as the combined borrowings under the
total facility cannot exceed $25.0 million. This agreement contains certain financial covenants
that require us to maintain cash flow coverage and leverage ratios as well as maintaining minimum
amounts of tangible net worth. This credit facility further limits capital expenditures, sales of
assets, and additional indebtedness. We were in compliance with all of these financial covenants
as of March 31, 2005. National City Bank (Canada) Term Loan Facility: To finance the acquisition of Kelsan Technologies Corp. on November 30, 2004 we borrowed $17.6
million Canadian dollars ($14.9 million U.S.) under the term loan facility through 3094497 Nova
Scotia Company (Nova Scotia), a wholly-owned subsidiary of Portec Rail Products, Inc. Nova
Scotia is the borrower of the funds under the credit agreement, and Portec Rail Products, Inc. is
the sole guarantor of the term loan with substantially all of our United States assets, including a
$1.5 million United States Treasury Bill that matures in May 2005, pledged as collateral. Under
this seven-year term loan, our monthly principal payments are $210,050 Canadian dollars
(approximately $174,000 U.S.). We have the option to direct outstanding borrowings under a
Canadian prime lending rate option, a Canadian Bankers Acceptance Equivalent Note (BA Note)
option, or utilize a combination of both of these interest rate options at our discretion.
Interest rates under these options are the prevailing Canadian prime rate and BA Note interest
rates plus an applicable margin of 1.25% 7




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##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) to 1.75% under the prime rate option or 2.25% to 2.75%
under the BA Note option. As of March 31, 2005, we had outstanding borrowings of $16.5 million
Canadian dollars (approximately $13.6 million U.S.) that were priced under the
BA Note rate option at 5.1%, and $514,000 Canadian dollars (approximately $425,000 U.S.) that were
priced under the Canadian prime rate option at 5.75%. This term loan matures on November 30, 2011. (b) United Kingdom Loans Term Loan: In connection with a plant expansion, our United Kingdom subsidiary entered into a £300,000 pounds
sterling ($466,000 U.S.) term loan with a financial institution in the United Kingdom. The
interest rate is the financial institutions base rate plus 2.25%. The term loan is repayable in
equal monthly installments and had an original scheduled maturity date of July 31, 2010. This loan
was repaid in full during March 2005. Property Loan: In connection with the acquisition of Conveyors International Ltd., Torvale Fisher Limited, a
wholly-owned subsidiary of Portec Rail Products (UK) Ltd., entered into a property loan with a
financial institution in the United Kingdom. This £400,000 pounds sterling ($664,000 U.S.)
property loan is repayable in equal monthly installments and had an original scheduled maturity
date of March 31, 2009. The interest rate is the financial institutions base rate plus 2.25%.
This loan was repaid in full during March 2005. Quodeck Acquisition Loan: In connection with the acquisition of the assets of Quodeck Ltd., our United Kingdom subsidiary
entered into a £300,000 pounds sterling ($471,000 U.S.) term loan with a financial institution in
the United Kingdom. The Quodeck acquisition loan is repayable in equal monthly installments
beginning in September 2003 and had an original maturity date of September 10, 2006. The interest
rate is the financial institutions base rate plus 1.75%. Borrowings on this loan accrued interest
at 6.5% and 5.75% at March 31, 2005 and 2004, respectively. This loan was repaid in full during
April 2005. Overdraft Credit Facility: Our United Kingdom subsidiary has an overdraft facility on its primary bank account with a
financial institution in the United Kingdom. The original amount of this facility was £400,000
pounds sterling (approximately $767,000 U.S.). In conjunction with the expiration of this facility
on March 19, 2005, the overdraft facility was increased to £750,000 pounds sterling (approximately
$1.4 million U.S.) and extended to March 19, 2006. The purpose of the credit facility is to
provide for working capital requirements. The interest rate on the overdraft facility is the
financial institutions base rate plus 1.5%. For any borrowings in excess of £750,000 pounds
sterling that the financial institution approves, the interest rate is the financial institutions
base rate plus 3.5%. At March 31, 2005, the interest rate on this credit facility was 6.25% and
there were no outstanding borrowings on this facility. The overdraft credit facility is secured
with substantially all of the assets of Portec Rail Products (UK) Ltd. and its wholly-owned
subsidiaries. (c) Kelsan Overdraft Credit Facility In connection with the acquisition of Kelsan Technologies Corp. on November 30, 2004, we assumed a
$750,000 Canadian dollar (approximately $620,000 U.S.) overdraft credit facility with a local
financial institution to support the working capital requirements of our Vancouver operation. This
credit facility is secured by a general security agreement granting a first security interest in
all the assets of Kelsan. The interest rate is the Canadian prime rate plus 1.25%. As of March
31, 2005, outstanding borrowings were $723,000 Canadian dollars (approximately $598,000 U.S.) and
interest accrued at 5.5%. This credit facility is due upon demand, and borrowings under this
facility are included in current maturities of long-term debt. This credit facility is reviewed on
an annual basis and has a current maturity date of December 31, 2005. In April 2005, this
overdraft credit facility was increased to $1.5 million Canadian dollars (approximately $1.2
million U.S.) and the interest rate was reduced to the Canadian prime rate plus 1.0%. 8




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##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) (d) Salient Systems Promissory Notes In connection with the acquisition of Salient Systems on September 30, 2004, we executed two
promissory notes. One promissory note was executed with Harold Harrison, the founder and former
President and Chief Executive Officer of Salient Systems. This promissory note, in the aggregate
principal amount of $1,064,000 is due to Mr. Harrison in four equal, annual installments of
$266,000 beginning January 3, 2006 and ending January 3, 2009. A second promissory note
was executed with Falls River Group, LLC, which acted as a financial advisor to Salient Systems.
This promissory note, in the aggregate principal amount of $56,000 is due to Falls River Group, LLC
in four equal, annual installments of $14,000 beginning January 3, 2006 and ending January 3, 2009.
The unpaid principal balance of the promissory notes accrues interest at the prime rate as
published in the Wall Street Journal. All accrued and unpaid interest is payable annually
beginning January 3, 2006. The outstanding balance on the promissory notes accrued interest at
5.75% as of March 31, 2005. At March 31, 2005, we had accrued interest of $27,000 related to these
promissory notes. Note 5: Retirement Plans In December 2003, the FASB issued revisions to SFAS 132, Employers Disclosures about Pensions and
Other Postretirement Benefits. The revised statement includes new and revised disclosures for
sponsors of defined benefit plans. The revised disclosure rules require interim presentation of
net periodic benefit cost recognized, showing the component amounts separately. The revised
disclosure rules also have requirements regarding interim disclosure of employer contributions paid
and expected to be paid, and are effective for interim periods beginning after December 15, 2003
for both domestic and foreign plans. The following defined benefit plans disclosures incorporate
these requirements. The components of net periodic pension cost (benefit) of our United States defined benefit pension
plan are as follows for the three months ended March 31, 2005 and 2004: Three Months EndedMarch 312005
    
    
    2004(In Thousands)Service cost
    
    $
    
    
    
    $
    Interest cost
    
    
    130
    
    
    
    128Expected return on plan assets
    
    
    (170
    )
    
    
    (178
    )Amortization of unrecognized loss
    
    
    12
    
    
    
    -Pension (benefit)
    
    $
    (28
    )
    
    $
    (50
    )
 We previously disclosed in the financial statements for the year ended December 31, 2004, that the
required minimum contribution for the United States defined benefit pension plan was approximately
$147,000, which was funded in February 2004. During 2005, we do not anticipate that any
contributions will be made to this pension plan. 9




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##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) The components of net periodic pension cost (benefit) of our United Kingdom defined benefit pension
plans are as follows for the three months ended March 31, 2005 and 2004: Portec Rail
    
    
    Conveyors
    
    
    Portec Rail
    
    
    ConveyorsPlan
    
    
    Plan
    
    
    Plan
    
    
    Plan2005
    
    
    2005
    
    
    2004
    
    
    2004(In Thousands)Service cost
    
    $
    
    
    
    $
    
    
    
    $
    28
    
    
    $
    Less employee contributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest cost
    
    
    82
    
    
    
    11
    
    
    
    70
    
    
    
    10Expected return on plan assets
    
    
    (77
    )
    
    
    (19
    )
    
    
    (76
    )
    
    
    (17
    )Amortization of transition
amount
    
    
    (14
    )
    
    
    (2
    )
    
    
    (14
    )
    
    
    (3
    )Amortization of unrecognized
loss (gain)
    
    
    31
    
    
    
    (3
    )
    
    
    19
    
    
    
    (1
    )Pension cost (benefit)
    
    $
    22
    
    
    $
    (13
    )
    
    $
    27
    
    
    $
    (11
    )
 Beginning in 2004, our funding policy for the Portec Rail plan is to contribute the greater of
£12,000 pounds sterling (approximately $23,000 U.S.) or the minimum annual contribution required by
applicable regulations. For the three months ended March 31, 2005, £3,000 pounds sterling
(approximately $6,000 U.S.) in employer contributions has been made to the Portec Rail plan. For
the remainder of 2005, we anticipate making additional contributions of approximately £9,000 pounds
sterling (approximately $17,000 U.S.), plus the payment of certain plan administrative expenses, to
the Portec Rail pension plan. For the three months ended March 31, 2005, we have not made any
employer contributions to the Conveyors plan, nor do we anticipate making any employer
contributions to the Conveyors plan for the remainder of 2005. Note 6: Comprehensive Income Comprehensive income for the three months ended March 31, 2005 and 2004 is as follows: Three Months EndedMarch 312005
    
    
    2004(In Thousands)Net income
    
    $
    1,005
    
    
    $
    657Minimum pension liability adjustment, net of tax
    
    
    25
    
    
    
    (39
    )Foreign currency translation adjustments, net of tax
    
    
    (115
    )
    
    
    107Comprehensive income
    
    $
    915
    
    
    $
    725
 Note 7: Earnings Per Share Basic earnings per share (EPS) is computed as net income available to common shareholders divided
by the weighted average common shares outstanding. Diluted earnings per share considers the
potential dilution that occurs related to issuance of common stock under stock option plans. At the
present time, the company does not have any stock option plans that would cause dilution. 10




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##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) Note 8: Commitments and Contingencies Contractual Obligations The following is a summary of our contractual obligations as of March 31, 2005, on a calendar year
basis: MoreLess
    
    
    1  3
    
    
    3  5
    
    
    than 5Contractual Obligations
    
    Total
    
    
    than 1 year
    
    
    years
    
    
    years
    
    
    years(In Thousands)Long term debt
    
    $
    15,450
    
    
    $
    1,704
    
    
    $
    4,853
    
    
    $
    4,727
    
    
    $
    4,166Future interest payments for
long-term debt obligations
(1)
    
    
    2,477
    
    
    
    350
    
    
    
    1,207
    
    
    
    698
    
    
    
    222Revolving credit facilities
    
    
    2,334
    
    
    
    2,334
    
    
    
    
    
    
    
    
    
    
    
    Capital leases
    
    
    54
    
    
    
    17
    
    
    
    36
    
    
    
    1
    
    
    
    Operating leases
    
    
    4,032
    
    
    
    965
    
    
    
    1,820
    
    
    
    553
    
    
    
    694Total contractual obligations
    
    $
    24,347
    
    
    $
    5,370
    
    
    $
    7,916
    
    
    $
    5,979
    
    
    $
    5,082
   (1) Assumes that the interest rates on our long-term debt agreements at March 31, 2005 (See Note 4
of the consolidated financial statements of Form 10-Q) will continue for the life of the
agreements. Litigation We are involved from time to time in lawsuits that arise in the normal course of business. We
actively and vigorously defend all lawsuits. We are named with numerous other defendants in an
environmental lawsuit. The plaintiff seeks to recover costs, which it has incurred, and may
continue to incur, to investigate and remediate its former property as required by the New York
State Department of Environmental Conservation (NYSDEC). We have not been named as a liable party
by the NYSDEC and believe we have no liability to the plaintiff in the case. We filed a motion for
summary judgment seeking a ruling to have us dismissed from the case. On November 6, 2003, the
motion for summary judgment was granted and we were dismissed from the case. On March 25, 2004,
the plaintiff filed a notice of appeal to the United States Court of Appeals for the Second
Circuit. In April 2005, the plaintiffs appeal was dismissed by the Second Circuit Court without
prejudice. The matter has been remanded to the district court for consideration in light of a
recent United States Supreme Court decision. However, ongoing litigation may be protracted, and we
may incur additional ongoing legal expenses, which are not estimable at this time. Note 9: Segment Information We operate four business segments consisting of Railway Maintenance Products Division (RMP),
Shipping Systems Division (SSD), 3094497 Nova Scotia Company (Canada) and Portec Rail Products (UK)
Ltd. (United Kingdom), along with a corporate functional shared service. The presentation of
segment information reflects the manner in which we organize and manage our segments by geographic
areas for making operating decisions, assessing performance and allocating resources. Intersegment sales are accounted for at arms-length prices, reflecting prevailing market
conditions within the United States, Canada and the United Kingdom. Such sales and associated
costs are eliminated in the consolidated financial statements. With the acquisition of Salient
Systems on September 30, 2004 this business unit is operated under the RMP segment. Since the
acquisition date, all assets and liabilities of Salient Systems, as well as the results of
operations for Salient Systems, have been included in the RMP segment and the consolidated
financial statements. In conjunction with the Kelsan acquisition in November 2004, we established
a new Canadian subsidiary, 3094497 Nova Scotia Company (Nova Scotia) and transferred ownership of
Portec, Rail Products Ltd. to Nova Scotia. Portec, Rail Products Ltd. is now a wholly-owned
indirect Canadian subsidiary and Nova Scotia is our wholly-owned Canadian subsidiary. Nova Scotia
was 11




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##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) established to provide a legal structure for our Canadian subsidiaries that would provide the
most advantageous tax benefits under both Canadian and United States income tax laws. With the
acquisition of Kelsan on November 30, 2004, this business unit is operated under our Canada
segment and all assets and liabilities of Kelsan are included in the Canada segment. The results
of operations for Kelsan have been included in the Canada segment and the consolidated financial
statements since the November 30, 2004 acquisition date. Three Months EndedMarch 312005
    
    
    2004(In Thousands)External SalesRMP
    
    $
    9,359
    
    
    $
    7,865SSD
    
    
    1,333
    
    
    
    702Canada
    
    
    6,690
    
    
    
    3,842United Kingdom
    
    
    3,439
    
    
    
    2,784Total
    
    $
    20,821
    
    
    $
    15,193Intersegment SalesRMP
    
    $
    516
    
    
    $
    265SSD
    
    
    
    
    
    
    Canada
    
    
    641
    
    
    
    421United Kingdom
    
    
    25
    
    
    
    6Total
    
    $
    1,182
    
    
    $
    692Total SalesRMP
    
    $
    9,875
    
    
    $
    8,130SSD
    
    
    1,333
    
    
    
    702Canada
    
    
    7,331
    
    
    
    4,263United Kingdom
    
    
    3,464
    
    
    
    2,790Total
    
    $
    22,003
    
    
    $
    15,885Operating Income (Loss)RMP
    
    $
    1,105
    
    
    $
    1,078SSD
    
    
    207
    
    
    
    19Canada
    
    
    679
    
    
    
    424United Kingdom
    
    
    215
    
    
    
    (181
    )Corporate
    
    
    (545
    )
    
    
    (319
    )Total
    
    
    1,661
    
    
    
    1,021Interest Expense
    
    
    263
    
    
    
    46Other (Income) Expense, net
    
    
    (71
    )
    
    
    18Income Before Income Taxes
    
    $
    1,469
    
    
    $
    957
 12




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##### 



Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited) Three Months EndedMarch 312005
    
    
    2004(In Thousands)Depreciation and AmortizationRMP
    
    $
    178
    
    
    $
    158SSD
    
    
    2
    
    
    
    3Canada
    
    
    279
    
    
    
    81United Kingdom
    
    
    120
    
    
    
    121Corporate
    
    
    2
    
    
    
    1Total
    
    $
    581
    
    
    $
    364Capital ExpendituresRMP
    
    $
    107
    
    
    $
    151SSD
    
    
    
    
    
    
    2Canada
    
    
    95
    
    
    
    23United Kingdom
    
    
    61
    
    
    
    10Corporate
    
    
    21
    
    
    
    Total
    
    $
    284
    
    
    $
    186
 March 31
    
    
    December 312005
    
    
    2004(In Thousands)
    
    
    (In Thousands)Total AssetsRMP
    
    $
    37,805
    
    
    $
    40,060SSD
    
    
    2,257
    
    
    
    1,699Canada
    
    
    33,280
    
    
    
    32,504United Kingdom
    
    
    10,007
    
    
    
    10,532Corporate
    
    
    3,105
    
    
    
    3,830Total
    
    $
    86,454
    
    
    $
    88,625
 Note 10: Subsequent Event  On
May 11, 2005, a fire occurred at our Troy, New York property
destroying some of the structures at that location. The Troy property
was acquired as part of the original purchase from our former parent
company, Portec Inc., in December 1997 and is a non-operating asset.
We are currently renting the entire property to a tenant for a
nominal amount. Due to the poor condition of the property, it is
uninsurable, but we do not anticipate a write-down of the asset. At
this time, we are unable to determine the extent of the clean-up or
any contingent costs; however, we do not believe these costs will be
material to our financial results. 13




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##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the condensed consolidated
financial statements of Portec Rail Products, Inc. and the related notes beginning on page 3.
Unless otherwise specified, any reference to the three months ended is to the three months ended
March 31. Additionally, when used in this Form 10-Q, unless the context requires otherwise, the
terms we, our and us refer to Portec Rail Products, Inc. and its business segments. Cautionary Statement Relevant to Forward-looking Statements This Form 10-Q contains or incorporates by reference forward-looking statements relating to
the Company. Forward-looking statements typically are identified by the use of terms such as
may, will, plan, should, expect, anticipate, believe, if, estimate, intend, and
similar words, although some forward-looking statements are expressed differently. You should
consider statements that contain these and similar words carefully because they describe our
expectations, plans, strategies, goals and beliefs concerning future business conditions, our
results of operations, our financial position, and our business outlook, or state other
forward-looking information based on currently available information. Although we believe that
the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. Our actual results could differ
materially from those anticipated in these forward-looking statements as a result of various
factors. We undertake no obligation to update publicly or revise any forward-looking statements.
You should not place undue reliance on the forward-looking statements. The Company identifies important factors below that could affect the Companys financial
performance and could cause the Companys actual results for future periods to differ materially
from any opinions or statements expressed with respect to future periods in any current statements.
In particular, the Companys future results could be affected by a variety of factors, such as:  
    customer demand;
    competitive dynamics in the North American and worldwide railroad and railway supply
industries;
    capital expenditures by the railway industry in North America and worldwide;
    economic conditions, including changes in inflation rates or interest rates;
    product development and the success of new products;
    our ability to successfully pursue, consummate and integrate attractive acquisition opportunities;
    changes in laws and regulations;
    the development and retention of sales representation and distribution agreements
with third parties;
    limited international protection of our intellectual property;
    the loss of key personnel;
    fluctuations in the cost and availability of raw materials and supplies, and any
significant disruption of supplies;
    foreign economic conditions, including currency rate fluctuations;
    political unrest in foreign markets and economic uncertainty due to terrorism or war;
    exposure to pension liabilities;
    seasonal fluctuations in our sales;
    technological innovations by our competitors; and
    the importation of lower cost competitive products into our markets. The Company specifically declines to undertake any obligation to publicly revise any
forward-looking statements that have been made to reflect events or circumstances after the date of
those statements or to reflect the occurrence of anticipated or unanticipated events. 14




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Overview In the United States, Canada and the United Kingdom, we are a manufacturer, supplier and
distributor of a broad range of rail products, including rail joints, rail anchors, rail spikes,
railway friction management systems and products and securement devices. End users of our rail
products include Class I railroads, short-line and regional railroads and transit systems. Our
three North American business segments along with the rail division of our United Kingdom business
segment serve these end users. In addition, our United Kingdom business segment also manufactures
and supplies material handling products primarily to end users within the United Kingdom. These
products include overhead and floor conveyor systems, racking systems and mezzanine flooring
systems. The end users of our material handling products are primarily in the manufacturing,
distribution, garment and food industries. Results of Operations Three Months Ended March 31, 2005 compared to Three Months Ended March 31, 2004 Net Sales.Net sales increased to $20.8 million for the three months ended March 31, 2005, an
increase of $5.6 million or 36.8%, from $15.2 million for the comparable period in 2004. The
increase in net sales is primarily attributable to increased sales of $2.9 million at our Canadian
operations, $1.5 million at RMP, $656,000 at our United Kingdom operation, and $631,000 at SSD.
Net sales for Canada were positively impacted by the acquisition of Kelsan that added $1.6 million
in sales during the first quarter of 2005, along with increased customer demand, primarily for rail
anchors and spikes, which has contributed approximately $913,000 of additional sales volume in the
current period. Foreign currency translation of Canadian dollars into U.S. dollars has favorably
impacted sales in the current period by approximately $377,000. Net sales at RMP reflect the
acquisition of Salient Systems, which contributed $853,000 in sales during the first quarter of
2005, along with increased customer demand for our track component products, primarily rail joints
and related products, which has contributed approximately $641,000 of additional sales during the
current period. Net sales at SSD increased $631,000 during the current period, primarily due to
sales of a newly designed bridge plate for auto carriers to a large customer, along with a general
improvement in the railcar market. Net sales at our United Kingdom operation increased $656,000 in
the current period, primarily due to increased rail sales to Network Rail, our largest rail
customer, increased material handling sales due to increased demand for these products, and a
favorable foreign currency translation of British pounds sterling into U.S. dollars of
approximately $97,000. Gross Profit.Gross profit increased to $6.5 million for the three months ended March 31,
2005, an increase of $2.6 million or 66.7%, from $3.9 million for the comparable period in 2004.
The increase in gross profit is primarily due to the acquisitions of Kelsan and Salient Systems,
which contributed $1.1 million and $514,000 of gross profit, respectively, during the first quarter
of 2005. In addition, gross profit increased $418,000 at our Canadian operation near Montreal,
primarily due to the increased sales volume of rail anchors and rail spikes, along with a favorable
foreign currency translation adjustment of approximately $90,000. Gross profit at our United
Kingdom operation increased $375,000 in the current period, primarily due to the additional gross
profit on the higher sales volume, primarily for our rail products, along with labor cost
reductions that occurred in the first quarter of 2004. Selling, General and Administrative Expenses.Selling, general and administrative expenses
increased to $4.7 million for the three months ended March 31, 2005, an increase of $1.9 million or
67.9%, from $2.8 million for the comparable period in 2004. This increase is primarily due to the
acquisitions of Kelsan and Salient Systems that have added $944,000 and $470,000, respectively, of
selling, general and administrative expenses in the current period. Corporate shared service
expenses have increased $226,000 in the current period, primarily due to increased employee
salaries and benefits and employee additions, which have added approximately $86,000 of additional
expenses in the current period. Additionally, increased professional fees of approximately $76,000
for expenses associated with Sarbanes-Oxley compliance efforts have been incurred in the current
period, which were not present in the prior period. Selling, general and administrative expenses
at our Montreal, Canada operation increased $131,000 in the current period, primarily due to
increased research and development expenses for new product development and higher employee salary
and benefit expenses. Amortization Expense.Amortization expense increased to $166,000 for the three months ended
March 31, 2005, an increase of $150,000 from $16,000 for the comparable period in 2004. This
increase is primarily due to 15




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##### 



amortization expense on intangible assets purchased and deferred financing fees incurred as a
result of the Kelsan acquisition in November 2004. Amortization expense for these intangible
assets amounted to $138,000 for the current period. Interest Expense.Interest expense increased to $263,000 for the three months ended March 31,
2005, an increase of $217,000 or 471.7%, from $46,000 for the comparable period in 2004. This
increase is primarily due to a term loan for $14.9 million obtained in November 2004 from National
City Bank (Canada) used to finance the Kelsan acquisition. Net proceeds from our initial public
offering of common stock in January 2004 were used to repay outstanding domestic indebtedness of
approximately $7.3 million in January 2004, which resulted in lower interest expense in the first
quarter of 2004. Additionally, in September 2004 promissory notes in the amount of $1.1 million
were issued to partially finance the acquisition of Salient Systems. Total outstanding debt
obligations increased to $17.8 million at March 31, 2005, from $1.6 million at March 31, 2004. Provision for Income Taxes.Provision for income taxes increased to $464,000 for the three
months ended March 31, 2005, from $300,000 for the comparable period in 2004, reflecting an
increase in income before taxes to $1.5 million for the three months ended March 31, 2005 from
$957,000 in 2004. The effective income tax rate on reported taxable income was 31.6% and 31.4% for
the three months ended March 31, 2005 and 2004, respectively. Net Income.Net income increased to $1.0 million for the three months ended March 31, 2005,
an increase of $348,000 or 53.0%, from $657,000 for the comparable period in 2004. Our basic and
diluted net income per share increased to $.10 for the three months ended March 31, 2005, from $.08
for the comparable period in 2004. Business Segment Review Our operations are organized into four business segments consisting of the Railway Maintenance
Products Division (RMP), the Shipping Systems Division (SSD), 3094497 Nova Scotia Company
(Canada) and Portec Rail Products (UK) Ltd. (United Kingdom), along with a corporate functional
shared service. The presentation of segment information reflects the manner in which we organize
and manage our segments by geographic areas for making operating decisions, assessing performance
and allocating resources. Intersegment sales do not have an impact on our consolidated financial
condition or results of operations. Salient Systems is operated under the RMP segment and its
assets and liabilities are included in the RMP segment. Results of operations for Salient Systems
have been included in the RMP segment and the consolidated financial statements since the date of
acquisition. In conjunction with the Kelsan acquisition, we established a new Canadian subsidiary,
3094497 Nova Scotia Company (Nova Scotia) and transferred ownership of Portec, Rail Products Ltd.
to Nova Scotia. Portec, Rail Products Ltd. is now a wholly-owned indirect Canadian subsidiary and
Nova Scotia is our wholly-owned Canadian subsidiary. Nova Scotia was established to provide a
legal structure for our Canadian subsidiaries that would provide the most advantageous tax benefits
under both Canadian and United States income tax laws. Kelsan is operated under the Canada
business segment and all of its assets and liabilities are included in the Canada business segment.
Kelsans results of operations have been included in the Canada segment and the consolidated
financial statements since the date of acquisition. Railway Maintenance Products Division RMP.Our RMP business segment manufactures and
assembles track components and related products, friction management products, wayside data
collection and data management systems. We also provide services to railroads, transit systems and
railroad contractors, and are a distributor and reseller of purchased track components, and
lubricants manufactured by third parties. Our manufactured and assembled track component and
friction management products consist primarily of standard and insulated rail joints, friction
management systems and wayside data collection and data management systems. Our purchased and
distributed products consist primarily of various lubricants. On September 30, 2004, we acquired
Salient Systems, which designs, manufactures and provides wayside measurement and detection
products, services and support for both the domestic and international railway transportation
industry. Salient Systems equipment and software are engineered to enhance our rail customers
equipment utilization by improving reliability and reducing maintenance expense . Since
the acquisition date, the results of operations and related assets and liabilities for Salient
Systems are included in this business segment. 16




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Three Months EndedMarch 312005
    
    
    2004(In Thousands)External sales
    
    $
    9,359
    (2)
    
    $
    7,865Intersegment sales
    
    
    516
    
    
    
    265Operating income (3)
    
    
    1,105
    (2)
    
    
    1,078Sales by product line(1)Rail joints and related products
    
    $
    5,592
    
    
    $
    4,504Friction management products and services
    
    
    3,140
    
    
    
    3,334Wayside data collection and data management systems (3)
    
    
    853
    (2)
    
    
    Other products and services
    
    
    290
    
    
    
    292Total product and service sales
    
    $
    9,875
    
    
    $
    8,130
   (1)
    
    Includes intersegment sales.(2)
    
    Includes Salient Systems sales of $853,000 and operating income of $44,000 for the first
quarter of 2005.(3)
    
    On an unaudited basis and before pro forma adjustments, Salient Systems net sales and
operating loss for the three months ended March 31, 2004 was $335,000 and $236,000,
respectively. The amounts listed under this footnote are not included in the above RMP table. For the three months ended March 31, 2005, external sales for RMP increased by $1.5 million or
19.0%, to $9.4 million from $7.9 million during the comparable period in 2004. This increase in
external sales is primarily due to the acquisition of Salient Systems that added $853,000 in sales
during the first quarter of 2005, along with increased customer demand for our track component
products, primarily rail joints and related products. Additionally, approximately $378,000 of the
sales increase was related to steel surcharges being a pass-through cost to our customers. These
sales increases were partially offset by slightly lower friction management product sales in the
first quarter of 2005. Although our external sales level increased approximately 19% at RMP during
the first quarter of 2005, operating income was comparable with the prior period. The primary
reasons for the relatively flat operating income was due to the absorption of $470,000 in selling,
general and administrative expenses for Salient Systems in the first quarter of 2005, steel
surcharges being passed on to our customers at no gross margin, and a higher sales level of our
lower-margin rail joints and related products. Shipping Systems Division SSD.SSD engineers and sells load securement systems to the
railroad freight car market. These systems are used to secure a wide variety of products and lading
onto freight cars. Three Months EndedMarch 312005
    
    
    2004(In Thousands)External sales
    
    $
    1,333
    
    
    $
    702Intersegment sales
    
    
    
    
    
    
    Operating income
    
    
    207
    
    
    
    19Sales by product lineAuto rack load securement systems
    
    $
    519
    
    
    $
    1Heavy duty load securement systems
    
    
    454
    
    
    
    310All other load securement systems
    
    
    360
    
    
    
    391Total product and service sales
    
    $
    1,333
    
    
    $
    702
 For the three months ended March 31, 2005, external sales for SSD increased by $631,000 or
90.0%, to $1.3 million from $702,000 during the comparable period in 2004. This increase in
external sales is primarily due to sales of a newly designed bridge plate for auto carriers to a
large customer during the first quarter of 2005, along with a 17




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##### 



general improvement in the railcar market. Operating income for the three months ended March
31, 2005 increased to $207,000 from $19,000 during the comparable period in 2004, an increase of
$188,000. This increase is primarily related to the increased gross profit on higher sales volume
in the first quarter of 2005. 3094497 Nova Scotia Company Canada.At our Canadian operation near Montreal, we
manufacture rail anchors and rail spikes and assemble friction management products primarily for
the two largest Canadian railroads. Rail anchors and spikes are devices to secure rails to the ties
to restrain the movement of the rail tracks. On November 30, 2004 we acquired Kelsan, which
operates a technology and manufacturing facility in Vancouver, British Columbia. Kelsans two
primary product lines are stick lubrication and application systems and a liquid friction modifier,
Keltrack®. Kelsan manufactures its stick and applicator systems in Vancouver and
subcontracts its manufacturing of the Keltrack®product line. Since the acquisition
date, the results of operations and related assets and liabilities for Kelsan have been included in
this business segment. Three
Months EndedMarch 312005
    
    
    2004(In Thousands)External sales
    
    $
    6,690
    (2)
    
    $
    3,842Intersegment sales
    
    
    641
    
    
    
    421Operating income (3)
    
    
    679
    (2)
    
    
    424Average translation rate of Canadian dollar
to United States dollar
    
    
    0.8152
    
    
    
    0.7553Sales by product line(1)Rail anchors and spikes
    
    $
    4,621
    
    
    $
    3,408Friction management products and services (3)
    
    
    2,517
    (2)
    
    
    722Other products and services
    
    
    193
    
    
    
    133Total product and service sales
    
    $
    7,331
    
    
    $
    4,263
   (1)
    
    Includes intersegment sales.(2)
    
    Includes Kelsan sales of $1.6 million and operating income of $106,000 for the first quarter
of 2005. Also includes Nova Scotia amortization expense of $138,000 on acquired intangible
assets and deferred financing fees.(3)
    
    On an unaudited basis and before pro forma adjustments, Kelsans net sales and operating
income for the three months ended March 31, 2004 were $2.6 million and $515,000, respectively.
The amounts listed under this footnote are not included in the above Canada table. For the three months ended March 31, 2005, external sales for Canada increased by $2.9 million
or 76.3%, to $6.7 million from $3.8 million during the comparable period in 2004. This increase in
external sales is primarily attributable to the acquisition of Kelsan, which contributed $1.6
million in sales during the first quarter of 2005. In addition, increased customer demand,
primarily for rail anchors and rail spikes, has contributed approximately $913,000 of additional
sales volume in the current period. Also, foreign currency translation of Canadian dollars into
U.S. dollars has favorably impacted sales in the current period by approximately $377,000.
Operating income for the three months ended March 31, 2005 increased to $679,000 from $424,000
during the same period in 2004, an increase of $255,000 or 60.1%. This increase is primarily due
to additional gross profit of approximately $418,000 on the higher sales volume at our location
near Montreal in addition to $106,000 of operating income from Kelsan in 2005. Offsetting these
increases in operating income were increased selling, general and administrative expenses of
approximately $131,000, primarily research and development expenses, at our location near Montreal,
and Nova Scotia amortization expense of $138,000 on acquired intangible assets and deferred
financing fees. Portec Rail Products (UK) Ltd.- United Kingdom.In the United Kingdom, we operate and serve
our customers in two markets. The United Kingdoms rail business is primarily driven by sales of
friction management products and services to the United Kingdom passenger rail network. The United
Kingdoms material handling business includes product lines such as overhead and floor conveyor
systems, racking systems and mezzanine flooring systems. The end users of our material handling
products are primarily United Kingdom-based companies in the manufacturing, distribution, garment
and food industries. 18




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##### 



Three Months EndedMarch 312005
    
    
    2004(In Thousands)External sales
    
    $
    3,439
    
    
    $
    2,784Intersegment sales
    
    
    25
    
    
    
    6Operating income (loss)
    
    
    215
    
    
    
    (181
    )Average translation rate of British
pound sterling to United States dollar
    
    
    1.8988
    
    
    
    1.8453Sales by product line(1)Material handling products
    
    $
    2,249
    
    
    $
    1,949Friction management products and services
    
    
    1,215
    
    
    
    841Total product and service sales
    
    $
    3,464
    
    
    $
    2,790
   (1)
    
    Includes intersegment sales. For the three months ended March 31, 2005, United Kingdoms external sales increased by
$656,000 or 23.6%, to $3.4 million from $2.8 million during the comparable period in 2004. This
increase in external sales is primarily attributable to increased rail sales to Network Rail, our
largest rail customer; increased demand for material handling products in the current period, and a
favorable foreign currency translation of British pounds sterling into U.S. dollars of
approximately $97,000. Operating income for the current period increased to $215,000 from an
operating loss of $181,000, an increase of $396,000 or 218.8%. This increase is primarily due to
increased gross profit on the higher sales volume of both our rail and material handling products
in the current period, along with lower labor costs as a result of the workforce reduction and
severance costs that were incurred in the first quarter of 2004. Liquidity and Capital Resources Our cash flow from operations is the primary source of financing for internal growth, capital
expenditures, repayments of long-term contractual obligations, dividends to our shareholders, and
other commercial commitments. The most significant risk associated with our ability to generate
sufficient cash flow from operations is the overall level of demand for our products. As of March
31, 2005, we have cash invested in short-term government money market funds and U.S. Treasury Bills
of approximately $3.6 million and $1.5 million, respectively. We may use this cash for
acquisitions, product line expansions or general corporate purposes. In addition to cash generated
from operations, we have revolving and overdraft credit facilities in place to support the working
capital needs of each of our business segments. We believe that cash flow from operations and the
ability to borrow additional cash under our credit and overdraft facilities along with our existing
cash balances will be sufficient to meet our cash flow requirements and growth objectives over the
next twelve months. Cash Flow Analysis.During the three months ended March 31, 2005, we used $2.1 million in
cash from operations compared to generating $709,000 in cash flow from operations during the same
2004 period. The primary reasons for this decrease of $2.8 million in cash generated from
operations are related to timing differences in operating assets and liabilities. Additionally,
cash generated from operations during the first three months of 2004 includes approximately
$827,000 for decreases in prepaid expenses and other assets, primarily related to legal and
accounting costs incurred for the initial public offering of our common stock in January 2004. Net cash used in investing activities was $284,000 for the three months ended March 31, 2005,
compared to $186,000 during the same period in 2004. Cash used in investing activities was for
capital expenditures, which upgrade our machinery and equipment, support new strategic initiatives
or develop new products. The majority of our capital spending is discretionary. We believe that
the overall level of capital spending for our business segments is sufficient to remain
competitive. 19




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##### 



Net cash used in financing activities was $226,000 for the three months ended March 31, 2005,
compared to $9.8 million provided by financing activities during the same period in 2004. Cash
used for financing activities in 2005 includes debt principal payments of $906,000 and cash
dividends paid on common stock of $480,000. These uses of cash were partially offset by increased
revolver and overdraft credit facility borrowings of $1.2 million to support working capital
requirements in the current period. Cash provided by financing activities in 2004 was primarily
related to the net proceeds received from our initial public offering of common stock in January
2004, and subsequent exercising of an over-allotment option by the underwriter, which provided
approximately $18.0 million in net proceeds. Uses of cash during the first quarter of 2004 included $7.7 million of debt
principal payments, the majority of which was repaid with net proceeds from the initial public
offering of common stock, and cash dividends paid on common stock of $431,000. Financial Condition At March 31, 2005, total assets were $86.5 million, a decrease of $2.1 million or 2.4%, from
$88.6 million at December 31, 2004. The decrease at March 31, 2005 is primarily due to a decrease
of $2.7 million in cash and cash equivalents, primarily for cash used in operations, debt service,
and a dividend payment in the current quarter. At March 31, 2005, net working capital (defined
as current assets minus current liabilities) was $24.6 million, a decrease of $634,000 or 2.5%,
from $25.3 million at December 31, 2004. Total outstanding debt obligations were $17.8 million at March 31, 2005, an increase of
$119,000 or .7% from $17.7 million at December 31, 2004. Increased revolver and overdraft credit
facility borrowings, primarily to support working capital requirements, in the current period, have
offset principal payments on our long-term debt obligations. The products we manufacture and sell, such as our joint bars, rail anchors and rail spikes,
require steel as a major element in the production process. Throughout 2004, worldwide steel
prices have spiked upwards resulting in surcharges being added to our overall raw material costs.
As a result, these steel surcharges increased our raw material costs. While these higher material
costs have had some negative impact on our financial results during the first quarter of 2005,
particularly on our rail anchor and rail spike product lines and our track component product lines,
we believe the impact of the higher material costs have not had a material impact on our overall
financial results. Although we have been successful in passing through most of the steel
surcharges to our customers, we have been able to do so at no added gross margin. If a prolonged
increase in steel prices should continue and we are unable to pass on these added costs to our
customers, our future earnings could be negatively impacted. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to interest rate risk on our contractual long-term debt obligations and our
working capital facilities are under floating interest rate arrangements. We have determined that
these risks are not significant enough to warrant hedging programs. If interest rates increase we
will be exposed to higher interest rates and we will be required to use more cash to settle our
long-term debt obligations. As interest rates increase on our variable long-term debt, it will
have a negative impact on future earnings because the interest rates will increase our interest
expense. Conversely, if interest rates decrease on our variable long-term debt, it will have a
positive impact on future earnings because lower interest rates will decrease our interest expense.
Based upon the long-term debt amount as of March 31, 2005, for every 1% increase or decrease in
the interest rate on our long-term debt, our annual interest expense will fluctuate by
approximately $178,000. In addition, we are exposed to foreign currency translation fluctuations with our
international operations. We do not have any foreign exchange derivative contracts to hedge against
foreign currency exposures. Therefore, we are exposed to the related effects when foreign currency
exchange rates fluctuate. If the U.S. dollar strengthens against the Canadian dollar and/or the
British pound sterling, the translation rate for these foreign currencies will decrease, which will
have a negative impact on our operating income. For example, for the three months ended March 31,
2005, for every 1/100 change in the exchange rate of the Canadian dollar to the U.S. dollar,
operating income for Canada would have changed by approximately $8,000. Further, for every 1/100
change in the exchange rate of the British pound sterling to the U.S. dollar, the impact on
operating income for our United Kingdom operation for the 20




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three months ended March 31, 2005 would have been approximately $1,000. Foreign currency
translation fluctuations have no impact on cash flows as long as we continue to reinvest any
profits back into the respective foreign operations. ITEM 4. CONTROLS AND PROCEDURES Under the supervision and with the participation of the Companys management, including the
Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of
the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e)
and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report
on Form 10-Q (the Evaluation Date). Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that, as of the Evaluation Date, the Companys disclosure
controls and procedures are effective to ensure that information required to be disclosed in the
reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms. There has been no change in the Companys internal control over
financial reporting during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting. PART II  OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are involved from time to time in lawsuits that arise in the normal course of business. We
actively and vigorously defend all lawsuits. We are named with numerous other defendants in an
environmental lawsuit. The plaintiff seeks to recover costs, which it has incurred, and may
continue to incur, to investigate and remediate its former property as required by the New York
State Department of Environmental Conservation (NYSDEC). We have not been named as a liable party
by the NYSDEC and believe we have no liability to the plaintiff in the case. We filed a motion for
summary judgment seeking a ruling to have us dismissed from the case. On November 6, 2003, the
motion for summary judgment was granted and we were dismissed from the case. On March 25, 2004,
the plaintiff filed a notice of appeal to the United States Court of Appeals for the Second
Circuit. In April 2005, the plaintiffs appeal was dismissed by the Second Circuit Court without
prejudice. The matter has been remanded to the district court for consideration in light of a
recent United States Supreme Court decision. However, ongoing litigation may be protracted, and we
may incur additional ongoing legal expenses, which are not estimable at this time. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Nothing to report under this item. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Nothing to report under this item. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Nothing to report under this item. ITEM 5. OTHER INFORMATION On
May 11, 2005, a fire occurred at our Troy, New York property
destroying some of the structures at that location. The Troy property
was acquired as part of the original purchase from our former parent
company, Portec Inc., in December 1997 and is a non-operating asset.
We are currently renting the entire property to a tenant for a
nominal amount. Due to the poor condition of the property, it is
uninsurable, but we do not anticipate a write-down of the asset. At
this time, we are unable to determine the extent of the clean-up or
any contingent costs; however, we do not believe these costs will be
material to our financial results. 21




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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 22




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PORTEC RAIL PRODUCTS, INC.Date: May 12, 2005
    By:
    /s/ John S. CooperJohn S. Cooper, President and ChiefExecutive Officer Date: May 12, 2005
    By:
    /s/ Michael D. BornakMichael D. Bornak, Vice President ofFinance, Chief Financial Officer and
Chief Accounting Officer 23




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