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EX-32 - EX-32 - PORTEC RAIL PRODUCTS INCl39644exv32.htm
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EX-31.2 - EX-31.2 - PORTEC RAIL PRODUCTS INCl39644exv31w2.htm
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
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.
(Exact Name of Registrant as Specified in its Charter)
     
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)
     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 twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES þ    NO o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o    NO o
     Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
             
Large Accelerated Filer o   Accelerated Filer o   Non-Accelerated Filer o   Smaller Reporting Company þ
        (Do not check if a smaller reporting Company)    
     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o    NO þ
     As of April 30, 2010, there were 9,602,029 shares issued and outstanding of the Registrant’s Common Stock.
 
 

 


 

PORTEC RAIL PRODUCTS, INC.
INDEX TO FORM 10-Q
         
Item        
Number       Page Number
       
1.      
   
 
   
      3
   
 
   
      4
   
 
   
      5
   
 
   
      6
   
 
   
2.     20
   
 
   
3.     29
   
 
   
4.     29
   
 
   
       
   
 
   
1.     30
   
 
   
1A.     31
   
 
   
2.     31
   
 
   
3.     32
   
 
   
4.     32
   
 
   
5.     32
   
 
   
      33
 EX-31.1
 EX-31.2
 EX-32

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PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Portec Rail Products, Inc.
Condensed Consolidated Balance Sheets
                 
    March 31     December 31  
    2010     2009  
    (Unaudited)     (Audited)  
    (In Thousands)  
Assets
               
Current assets
               
Cash and cash equivalents
  $ 12,021     $ 14,279  
Accounts receivable, net
    15,843       10,667  
Inventories, net
    23,564       21,538  
Prepaid expenses and other current assets
    2,534       1,623  
Deferred income taxes
    68       160  
     
Total current assets
  $ 54,030     $ 48,267  
 
               
Property, plant and equipment, net of accumulated depreciation of $14,404 and $13,938 at March 31, 2010 and December 31, 2009, respectively
    10,132       10,260  
Intangible assets, net of accumulated amortization of $5,555 and $5,171 at March 31, 2010 and December 31, 2009, respectively
    28,444       28,507  
Goodwill
    14,454       14,463  
Other assets
    1,126       1,045  
     
 
               
Total assets
  $ 108,186     $ 102,542  
     
 
               
Liabilities and Shareholders’ Equity
               
Current liabilities
               
Current maturities of long-term debt
  $ 9,849     $ 8,086  
Accounts payable
    8,972       4,940  
Accrued income taxes
    629       618  
Customer deposits
    663       873  
Accrued compensation
    1,117       2,424  
Other accrued liabilities
    3,048       2,216  
     
Total current liabilities
    24,278       19,157  
 
               
Long-term debt, less current maturities
    1,889       2,667  
Deferred income taxes
    10,651       10,070  
Accrued pension costs
    3,775       3,809  
Other long-term liabilities
    1,212       1,091  
     
Total liabilities
    41,805       36,794  
     
 
               
Commitments and Contingencies
           
 
               
Shareholders’ equity:
               
Common stock, $1 par value, 50,000,000 shares authorized, 9,602,029 shares issued and outstanding at March 31, 2010 and December 31, 2009
    9,602       9,602  
Additional paid-in capital
    25,573       25,547  
Retained earnings
    33,017       33,136  
Accumulated other comprehensive loss
    (1,811 )     (2,537 )
     
Total shareholders’ equity
    66,381       65,748  
     
Total liabilities and shareholders’ equity
  $ 108,186     $ 102,542  
     
See Notes to Condensed Consolidated Financial Statements

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Portec Rail Products, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
                 
    Three Months Ended  
    March 31  
    2010     2009  
    (Dollars in Thousands,  
    Except Per Share Data)  
Net sales
  $ 23,327     $ 22,164  
Cost of sales
    14,828       14,891  
     
Gross profit
    8,499       7,273  
 
               
Selling, general and administrative
    6,909       5,380  
Amortization expense
    310       253  
     
Operating income
    1,280       1,640  
 
               
Interest expense
    64       74  
Other expense, net
    473       15  
     
Income before income taxes
    743       1,551  
Provision for income taxes
    286       415  
     
 
               
Net income
  $ 457     $ 1,136  
     
 
               
Earnings per share
               
Basic and diluted
  $ 0.05     $ 0.12  
 
               
Weighted average shares outstanding
               
Basic
    9,602,029       9,602,029  
Diluted
    9,609,267       9,602,029  
 
               
Dividends per share
  $ 0.06     $ 0.06  
See Notes to Condensed Consolidated Financial Statements

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Portec Rail Products, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
                 
    Three Months Ended  
    March 31  
    2010     2009  
    (In Thousands)  
Operating Activities
               
Net income
  $ 457     $ 1,136  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation expense
    437       435  
Amortization expense
    310       253  
Provision for doubtful accounts
    15       14  
Deferred income taxes
    177       63  
Pension expense
    71       49  
Pension contributions
    (40 )     (39 )
Loss on sale of fixed assets
    8       1  
Stock based compensation expense
    26       26  
Changes in operating assets and liabilities:
               
Accounts receivable
    (5,221 )     281  
Inventories
    (1,901 )     (1,606 )
Prepaid expenses and other current assets
    (661 )     (1,397 )
Accounts payable
    3,978       265  
Income taxes payable
    (344 )     (267 )
Accrued expenses
    (559 )     (2,080 )
     
Net cash used in operating activities
    (3,247 )     (2,866 )
     
 
               
Investing Activities
               
Purchase of property, plant and equipment
    (157 )     (234 )
Proceeds from sale of assets
    2        
Contingent consideration – business acquisition
          (35 )
     
Net cash used in investing activities
    (155 )     (269 )
     
 
               
Financing Activities
               
Net increase in working capital facilities
    2,000       3,970  
Book overdrafts
    205       (327 )
Principal payments on promissory notes
          (280 )
Proceeds from term loans
          300  
Principal payments on term loans
    (990 )     (688 )
Cash dividends paid to shareholders
    (576 )     (576 )
     
Net cash provided by financing activities
    639       2,399  
     
 
               
Effect of exchange rate changes on cash and cash equivalents
    505       (300 )
     
Decrease in cash and cash equivalents
    (2,258 )     (1,036 )
Cash and cash equivalents at beginning of period
    14,279       5,371  
     
Cash and cash equivalents at end of period
  $ 12,021     $ 4,335  
     
 
               
Supplemental Disclosures of Cash Flow Information
               
Cash paid during the period for:
               
Interest
  $ 62     $ 87  
     
Income taxes
  $ 480     $ 1,062  
     
See Notes to Condensed Consolidated Financial Statements

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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, in conjunction with the purchase of rail-related assets and select material handling assets of Portec, Inc. We along with our predecessor, Portec Inc., have served the railroad industry since 1906 by manufacturing, supplying and distributing 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 at our Leicester, England operation. We serve both the domestic and international markets. Our manufacturing facilities are located in Huntington, West Virginia; St. Jean, Quebec, Canada; Vancouver, British Columbia, Canada; Leicester, England, United Kingdom; and Sheffield, England, United Kingdom. We operate engineering and assembly facilities located in Dublin, Ohio and near Montreal, Quebec, and have offices near Chicago, Illinois. 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; Portec Rail Nova Scotia Company, our wholly-owned Canadian subsidiary; and Portec Rail Products (UK) Ltd., our wholly-owned United Kingdom subsidiary (United Kingdom). All significant intercompany balances and transactions have been eliminated in consolidation. The foregoing financial information has been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) and rules and regulations of the Securities and Exchange Commission for interim financial reporting. The preparation of 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, 2010 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 2009 Annual Report on Form 10-K. The balance sheet information as of December 31, 2009 was derived from our audited balance sheet included in our 2009 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.

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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 31
    2010   2009
    (In Thousands)
Raw materials
  $ 8,192     $ 9,903  
Work in process
    488       279  
Finished goods
    15,367       11,931  
       
 
    24,047       22,113  
Less reserve for slow-moving and obsolete inventory
    483       575  
       
Net inventory
  $ 23,564     $ 21,538  
       
Note 4: Long-Term Debt
Long-term debt consists of the following:
                 
    March 31   December 31
    2010   2009
    (In Thousands)
PNC Financial Credit Facility: (a)
               
Term loan — Kelsan acquisition
  $ 2,442     $ 2,966  
Term loan — Vulcan asset acquisition
    950       1,100  
Revolving credit facility — United States
    6,500       4,500  
Revolving credit facility — Canada
           
 
               
United Kingdom loans: (b)
               
Term loan — Coronet Rail acquisition
    236       471  
Working capital facility
           
Term loans — vehicles
          1  
 
               
Term Loan — Boone County Bank, Inc. (c)
    1,610       1,715  
       
 
    11,738       10,753  
Less current maturities
    9,849       8,086  
       
 
               
 
  $ 1,889     $ 2,667  
       
Our credit facility with PNC Financial Services Group, Inc. (PNC) is a term loan and revolving credit facility that provided the financing for the Kelsan acquisition in November 2004 and the Vulcan asset acquisition in October 2006, and also supports the working capital requirements of our United States and Canadian business units. The components of this facility are as follows: 1) a $7.0 million United States revolving credit facility; 2) a $4.8 million ($5.0 million CDN) revolving credit facility for our Canadian operations; 3) an outstanding term loan in the original amount of $4.9 million that replaced the term loan in the original amount of $14.9 million ($17.6 million CND) provided for the Kelsan acquisition in November 2004; and 4) an outstanding term loan in the original amount of $3.0 million provided in

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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
November 2006 for the Vulcan Chain product line acquisition. As of March 31, 2010, we had the ability to borrow an additional $5.3 million under the U.S. and Canadian revolving credit facilities.
This agreement contains certain financial covenants that require us to maintain a current ratio, cash flow coverage and leverage ratios, and to maintain minimum amounts of tangible net worth. This credit facility further limits capital expenditures, sales of assets, and additional indebtedness. At March 31, 2010, we were in compliance with all of these financial covenants.
Term Loan — Kelsan Acquisition:
In December 2008, we borrowed $4.9 million from National City Bank to refinance the Kelsan acquisition loan, which had an outstanding principal balance of $4.9 million ($5.9 million CDN). Portec Rail Products, Inc. is the borrower and sole guarantor of the term loan with substantially all of our United States assets pledged as collateral. The monthly principal payment on this loan is approximately $174,000. Interest on the outstanding balance accrues at LIBOR-based rate plus 1.75% to 2.25% and is paid monthly. As of March 31, 2010, the principal balance outstanding was $2.4 million, and accrued interest at a rate of 1.99%. This term loan is scheduled to mature on May 1, 2011.
Term Loan — Vulcan Asset Acquisition:
In November 2006, we borrowed $3.0 million from National City Bank to finance the Vulcan product line acquisition. Portec Rail Products, Inc. is the sole guarantor of the term loan with substantially all of our United States assets pledged as collateral. Under this five-year term loan, our monthly principal payments are $50,000. The outstanding principal balance accrues interest based upon the 30-day LIBOR rate plus 1.5%. As of March 31, 2010, the principal balance outstanding was $950,000, and accrued interest at 1.74%. This term loan is scheduled to mature on October 31, 2011.
Revolving Credit Facility — United States:
Our United States revolving credit facility permits borrowings up to $7.0 million to support the working capital requirements of our United States operations. Included in the $7.0 million is a sub-limit of $1.6 million for standby and commercial letters-of-credit. Outstanding borrowings under this facility can be priced at a prime-based rate or a LIBOR-based rate. As of March 31, 2010, outstanding borrowings under this facility were $6.5 million and accrued interest at 2.24%. Outstanding commercial letters-of-credit reduce our availability under this credit facility; however there are no outstanding commercial letters-of-credit as of March 31, 2010. This credit facility expires on September 30, 2012.
Revolving Credit Facility — Canada:
The working capital requirements for our Canadian operations are supported by a $4.8 million ($5.0 million CDN) revolving credit facility. Included within the $4.8 million is a sub-limit of $380,000 ($400,000 CDN) for standby and commercial letters-of-credit. The interest rate is the Canadian prime rate plus 1.0%. Borrowings on this facility accrued interest at 3.25% at March 31, 2010. As of March 31, 2010, there were no outstanding borrowings or commercial letters-of-credit under this facility. This facility is scheduled to expire on December 31, 2011.
(b) United Kingdom Loans
Term Loan — Coronet Rail Acquisition:
In conjunction with the acquisition of Coronet Rail in April 2006, we borrowed $2.6 million (£1.5 million pounds sterling) and $1.6 million (£900,000 pounds sterling) in the form of two term loans provided by a United Kingdom financial institution. The $1.6 million (£900,000 pounds sterling) loan was repaid in full in March 2007. The $2.6 million (£1.5 million pounds sterling) loan has an outstanding balance of approximately $236,000 (£155,000 pounds sterling) as of

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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2010, and accrued interest at 2.25%. The monthly principal and interest payment is approximately $47,000 (£29,000 pounds sterling). This term loan was originally scheduled to mature on April 12, 2011; however, the loan is expected to be repaid by September 2010.
Working Capital Facility:
The working capital facility for Portec Rail Products (UK) Ltd. includes an overdraft availability of $1.5 million (£900,000 pounds sterling); $283,000 (£175,000 pounds sterling) for the issuance of performance bonds, and $65,000 (£40,000 pounds sterling) for the negotiation of foreign checks. This credit facility supports the working capital requirements of our United Kingdom operations and is collateralized by substantially all of the assets of Portec Rail Products (UK) Ltd. and its wholly-owned subsidiaries, including Coronet Rail, Ltd. The interest rate on this facility is the financial institution’s base rate plus 1.50%, which as of March 31, 2010 is at 1.50%. Outstanding performance bonds reduce our availability under this credit facility. There are no borrowings or performance bonds outstanding on this facility as of March 31, 2010. This facility is scheduled to expire on August 31, 2010.
Our United Kingdom loan agreements contain certain financial covenants that require us to maintain senior interest and cash flow coverage ratios. We were in compliance with these financial covenants as of March 31, 2010.
(c) Term Loan — Boone County Bank, Inc.
In July 2008, we entered into a loan agreement with Boone County Bank, Inc. for a credit facility in the maximum amount of $2.1 million to finance capital expenditures at our manufacturing facility in Huntington, West Virginia. In February 2009 this credit facility was converted to a 60-month term loan at the United States prime rate less 0.25%, and began to amortize at a monthly principal payment of $35,000 plus accrued interest. As of March 31, 2010, the outstanding balance on this facility was $1.6 million, and the interest rate was 3.0%. This facility has a maturity date of January 14, 2014.
Boone County Bank, Inc. is a wholly-owned subsidiary of Premier Financial Bancorp, Inc., located in Madison, West Virginia. Our Chairman of the Board is the Chairman of the Board and a shareholder of Premier Financial Bancorp, Inc. We believe that our credit facility with Boone County Bank, Inc. is on terms comparable to those obtained by a non-affiliated third party.
Note 5: Income Taxes
We evaluated uncertain tax provisions pursuant to the guidance found within Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) FASB ASC 740-10-55. A reconciliation of the beginning and ending amount of unrecognized tax positions is as follows:

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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
                 
    Three Months Ended
    March 31
    2010   2009
    (In Thousands)
Balance at January 1
  $ 436     $ 313  
Additions based on tax positions related to the current year
    50       44  
Additions for tax positions of prior years
    87       83  
Reductions for tax positions of prior years
    (59 )     (65 )
Settlements
           
       
Balance at March 31
  $ 514     $ 375  
       
We recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2004. An examination began during the second quarter 2009 for the 2005 to 2007 provincial tax returns of our subsidiary in Montreal, Canada. Our Kelsan Technologies business unit is currently being reviewed by Canadian Revenue Agency for the Scientific Research and Experimental Development tax credit for the tax year ended November 30, 2008. We are currently unable to assess whether any significant change in the unrecognized tax position will be necessary during the next twelve months.
Note 6: Retirement Plans
The components of net periodic pension expense of our United States defined benefit pension plan are as follows for the three months ended March 31, 2010 and 2009:
                 
    Three Months Ended
    March 31
    2010   2009
    (In Thousands)
Interest cost
  $ 137     $ 144  
Expected return on plan assets
    (162 )     (162 )
Amortization of unrecognized loss
    48       25  
       
 
               
Pension expense
  $ 23     $ 7  
       
We anticipate making total contributions of $393,000 to this pension plan during 2010 of which $79,000 was funded during April 2010. During 2009, we made contributions to this pension plan totaling $202,000.

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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The components of net periodic pension expense (benefit) of our United Kingdom defined benefit pension plans (the Portec Rail Plan and Conveyors Plan) are as follows for the three months ended March 31, 2010 and 2009:
                                 
    Portec Rail   Conveyors   Portec Rail   Conveyors
    Plan   Plan   Plan   Plan
    2010   2010   2009   2009
    (In Thousands)   (In Thousands)
Interest cost
  $ 66       13     $ 60       12  
Expected return on plan assets
    (52 )     (10 )     (44 )     (8 )
Amortization of transition amount
    (12 )     (2 )     (11 )     (2 )
Amortization of unrecognized loss
    37       8       28       7  
             
 
                               
Pension expense
  $ 39     $ 9     $ 33     $ 9  
             
United Kingdom regulations require trustees to adopt a prudent approach to funding required contributions to defined benefit pension plans. We anticipate making contributions of $155,000 (£100,000 pounds sterling) and $35,000 (£23,000 pounds sterling) to the Portec Rail and Conveyors pension plans, respectively, during 2010. For the three months ended March 31, 2010, contributions in the amount of $33,000 (£21,000 pounds sterling) and $7,000 (£5,000 pounds sterling) have been made to the Portec Rail Plan and Conveyors Plan, respectively. For the year ended December 2009, we contributed $170,000 (£96,000 pounds sterling) and $61,000 (£29,000 pounds sterling) to the Portec Rail Plan and the Conveyors Plan, respectively, of which $4,000 (£3,000 pounds sterling) was contributed to the Portec Rail Plan during the first quarter 2009.
Note 7: Comprehensive Income
Comprehensive income for the three months ended March 31, 2010 and 2009 is as follows:
                 
    Three Months Ended
    March 31
    2010   2009
    (In Thousands)
Net income
  $ 457     $ 1,136  
Minimum pension liability adjustment, net of tax
    78       59  
Foreign currency translation adjustments, net of tax
    647       (742 )
       
Comprehensive income
  $ 1,182     $ 453  
       
Note 8: Earnings Per Share
Basic earnings per share (EPS) are 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. We calculated the dilutive effect of our stock options in accordance with FASB ASC Topic 260, Earnings per Share. For the first quarter of 2010, we have determined that our stock options have a dilutive effect on earnings per share, as the incremental shares related to the 2007 and the January 2008 stock option grants increased our average shares outstanding by 6,280 shares and 958 shares, respectively, for the three months ended March 31, 2010. The incremental shares associated with the July 2008 stock option grant would reduce our first quarter 2010 average shares outstanding by 323 shares, and as such, these anti-dilutive shares are not included in the calculation of diluted earnings per share for the three months ended March 31, 2010. For the three months ended March 31, 2009, we determined that our stock options have an anti-dilutive effect on earnings per share, as the incremental shares

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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
related to the 2007 and 2008 grants would reduce our average shares outstanding by 69,432 shares. As such, the anti-dilutive shares are not included in the calculation of diluted earnings per share for the three months ended March 31, 2009.
Note 9: Commitments and Contingencies
Contractual Obligations
The following is a summary of our contractual obligations as of March 31, 2010, due on a calendar year basis:
                                         
            Less                     More  
            than 1     1 – 3     3 – 5     than 5  
Contractual Obligations   Total     year     years     years     years  
    (In Thousands)  
Long-term debt obligations
  $ 5,238     $ 3,349     $ 1,434     $ 455     $  
Working capital facilities
    6,500       6,500                    
Operating leases (1) 
    4,479       1,114       1,663       900       802  
Pension contributions (2)
    3,992       543       1,518       938       993  
Purchase obligations
    3,731       3,731                    
Future interest payments (3)
    138       69       61       8        
 
                             
Total contractual obligations (4)
  $ 24,078     $ 15,306     $ 4,676     $ 2,301     $ 1,795  
 
                             
 
(1)   The majority of our future operating lease obligations are for property leases at our operating locations. There are no unusual terms or conditions within these leases.
 
(2)   Pension plan contributions that may be required more than one year from March 31, 2010 will be dependent upon the performance of plan assets.
 
(3)   Represents future interest payments on long-term debt obligations as of March 31, 2010. Assumes that the interest rates on our long-term debt agreements at March 31, 2010 (See Note 4: Long-Term Debt, Page 7) will continue for the life of the agreements.
 
(4)   As a result of adopting FASB ASC Topic 740, Income Taxes as it relates to uncertain tax positions, we recorded an initial liability of $313,000 related to uncertain tax positions for 2007. During the first quarter 2010 and 2009, we recognized $78,000 and $62,000, respectively, of additional liability. See Note 5: Income Taxes, Page 9. The total amount of $514,000 and $375,000 are included within other long-term liabilities on the March 31, 2010 and December 31, 2009 consolidated balance sheets. However, because of the high degree of uncertainty regarding the timing of future cash outflows associated with uncertain tax positions, we cannot reasonably estimate the periods of related future payments, and as such, we have excluded the uncertain tax liability from the contractual obligations table.
Contingencies
We currently have a Director and Officer liability insurance coverage policy that provides a total of $3.0 million of coverage for legal and settlement costs in the event that a lawsuit is filed against our directors and officers. As a result of the shareholder lawsuits that have been brought against several named defendants (See Litigation footnote, Pages 13-15), we have filed a claim with our insurance carrier to pay for costs incurred during the first quarter 2010 pertaining to these lawsuits. The policy has a $150,000 deductible in effect, which we have properly accrued for as of March 31, 2010. In April 2010, we were notified by our insurance carrier that the carrier is reviewing the policy to make a determination as to the validity of the claim and the ultimate responsibility of these expenses. As of March 31, 2010, the expenses that we are seeking the insurance carrier to pay amount to $337,000. We are working with our insurance carrier to provide all of the information that they are requesting. However, if the insurance carrier determines that the policy does not provide coverage for the current lawsuits, the Company may be responsible for these expenses, which would have a negative impact on our results of operations and our financial condition.

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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 have been 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 we 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. In November 2003, the motion for summary judgment was granted and we were dismissed from the case by the United States District Court for the Northern District of New York. In March 2004, the plaintiff filed a notice of appeal to the United States Court of Appeals for the Second Circuit, appealing, in part, the District Court’s decision to dismiss all claims against us. In April 2005, the plaintiff’s appeal was dismissed by the Second Circuit Court without prejudice, and the matter was remanded to the United States District Court for the Northern District of New York for consideration in light of a then-recent United States Supreme Court decision. As a result, in June 2006, the District Court dismissed all claims brought by the plaintiff pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund). In July 2006, the plaintiff filed a notice of appeal to the Second Circuit. However, in early 2008, the plaintiff’s appeal was dismissed again by the Second Circuit Court without prejudice, and the matter was remanded to the District Court for consideration in light of another then-recent United States Supreme Court decision. In July 2008, The District Court decided that the United States Supreme Court decision did not necessitate any changes in the District Court’s prior determinations in this case and held that all of its prior rulings stand. In August 2008, the plaintiff filed a third notice of appeal to the Second Circuit Court. On February 24, 2010, the Second Circuit issued its decision, reversing the order of the District Court which dismissed Portec from the litigation, stating that there were genuine issues of material fact. In addition, the Second Circuit reinstated the plaintiff’s CERCLA claims, stating that the plaintiff is entitled to bring a claim for contribution under Section 113(f)(3)(B) of CERCLA. Ongoing litigation may be protracted, and we may incur additional ongoing legal expenses, which are not estimable at this time.
We believe that plaintiff’s case against Portec, Inc. is without merit. Because plaintiff is seeking unspecified monetary contribution from the defendants, we are unable to determine, if plaintiff were to prevail on its claims against Portec, the extent to which we would have to make a contribution, or whether such contribution would have a material adverse effect on our financial condition or results of operations. Furthermore, ongoing litigation may be protracted and legal expenses may be material to our results of operations.
In August 2009, Portec Rail Products, Inc. and Kelsan Technologies Corp. were named as defendants in a civil lawsuit by Snyder Equipment Co. Inc. alleging breach of contract and other claims related to a non-disclosure agreement. The plaintiff filed the complaint with the United States District Court for the Western District of Missouri, Southern Division and was seeking to recover compensatory and punitive damages on four counts. In March 2010 the parties to this lawsuit entered into a new agreement, and the lawsuit was dismissed with prejudice.
On February 19, 2010, and through March 3, 2010, a total of five lawsuits initiated by purported shareholders of Portec Rail have been filed against several defendants including the Company and certain members of its Board of Directors. These lawsuits are directly related to the Agreement and Plan of Merger with L.B. Foster Company and Foster Thomas Company, which was signed on February 16, 2010. Following is a summary of these lawsuits:

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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
             
Date Filed   Court   Plaintiff   Defendants
2/19/2010
  Circuit Court of Kanawha County, West Virginia   Barbara Petkus, individually and on behalf of all others similarly situated.   Portec Rail Products, Inc., Richard J. Jarosinski, Marshall T. Reynolds, John S. Cooper, Louis J. Akers, Philip E. Cline, Daniel P. Harrington, A. Michael Perry, Douglas V. Reynolds, Neal W. Scaggs, Philip Todd Shell, Kirby J. Taylor, and Thomas W. Wright
 
           
2/24/2010
  Court of Common Pleas, Allegheny County, Pennsylvania   Everett Harper, on behalf of himself and others similarly situated.   Marshall T. Reynolds, John S. Cooper, Louis J. Akers, Philip E. Cline, Daniel P. Harrington, A. Michael Perry, Douglas V. Reynolds, Neal W. Scaggs, Philip Todd Shell, Kirby J. Taylor, Thomas W. Wright, Portec Rail Products, Inc., L.B. Foster Company, and Foster Thomas Company
 
           
2/24/2010
  Court of Common Pleas, Allegheny County, Pennsylvania   Richard S. Gesoff   Marshall T. Reynolds, John S. Cooper, Louis J. Akers, Philip E. Cline, Daniel P. Harrington, A. Michael Perry, Douglas V. Reynolds, Neal W. Scaggs, Philip Todd Shell, Kirby J. Taylor, Thomas W. Wright, Portec Rail Products, Inc., L.B. Foster Company, and Foster Thomas Company
 
           
3/02/2010
  Court of Common Pleas, Allegheny County, Pennsylvania   Scott Phillips, individually and on behalf of all others similarly situated.   L.B. Foster Company, Marshall T. Reynolds, John S. Cooper, Louis J. Akers, Philip E. Cline, Daniel P. Harrington, A. Michael Perry, Douglas V. Reynolds, Neal W. Scaggs, Philip Todd Shell, Kirby J. Taylor, Thomas W. Wright, Portec Rail Products, Inc., and Foster Thomas Company
 
           
3/03/2010
  Circuit Court of Cabell County, West Virginia   John Furman, individually and on behalf of all others similarly situated.   Marshall T. Reynolds, John S. Cooper, Louis J. Akers, Philip E. Cline, Daniel P. Harrington, A. Michael Perry, Douglas V. Reynolds, Neal W. Scaggs, Philip Todd Shell, Kirby J. Taylor, Thomas W. Wright, Portec Rail Products, Inc., L.B. Foster Company, and Foster Thomas Company
The lawsuits allege, among other things, that Portec Rail’s directors breached their fiduciary duties and L.B. Foster and Purchaser aided and abetted such alleged breaches of fiduciary duties. Based on these allegations, the lawsuits seek, among other relief, injunctive relief enjoining the defendants from consummating the Offer and the Merger. They also purport to seek recovery of the costs of the action, including reasonable legal fees.

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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The three lawsuits pending in Allegheny County, Pennsylvania have been consolidated and on March 22 and 23, 2010, hearings were held on Plaintiffs’ Motion for Preliminary Injunction, which seeks to enjoin the transaction set forth in the Agreement and Plan of Merger. On April 21, 2010, the Court of Common Pleas of Allegheny County, Pennsylvania (the “Court”) entered an order in the matter captioned In re Portec Rail Products, Inc. Shareholders Litigation, preliminarily enjoining Foster from completing the Offer until the Court determines that the Board of Directors of Portec has cured the breach of fiduciary duties as found by the Court and disclosed certain material information. A copy of the order was filed as an exhibit to the SC 14D-9/A filed by the Company on April 22, 2010.
In the two lawsuits pending in West Virginia, Motions to Dismiss the lawsuits were filed on behalf of the Company and the Director Defendants. In the Furman case, the parties agreed to transfer the lawsuit to Cabell County, West Virginia. In the Petkus case, the Motion to Dismiss also included a Motion to Transfer Venue from Kanawha County, West Virginia to Cabell County, West Virginia. In both West Virginia cases, Plaintiffs have filed Motions for Preliminary Injunctions, but as of the date of this filing, no hearings have been scheduled.
Ongoing litigation in these matters may be protracted, and we may incur additional ongoing legal expenses, which are not able to be estimated at this time.
Note 10: Segment Information
We operate four business segments consisting of the Railway Maintenance Products Division (RMP), the Shipping Systems Division (SSD), Portec Rail Nova Scotia Company (Canada) and Portec Rail Products (UK) Ltd. (United Kingdom), along with 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 conducted 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.
                 
    Three Months Ended
    March 31
    2010   2009
    (In Thousands)
External Sales
               
RMP
  $ 10,608     $ 10,657  
SSD
    1,910       1,263  
Canada
    6,798       5,837  
United Kingdom
    4,011       4,407  
       
Total
  $ 23,327     $ 22,164  
       
 
               
Intersegment Sales
               
RMP
  $ 393     $ 516  
SSD
           
Canada
    2,170       1,548  
United Kingdom
    9        
       
Total
  $ 2,572     $ 2,064  
       

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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
                 
    Three Months Ended  
    March 31  
    2010     2009  
    (In Thousands)  
Total Sales
               
RMP
  $ 11,001     $ 11,173  
SSD
    1,910       1,263  
Canada
    8,968       7,385  
United Kingdom
    4,020       4,407  
     
 
               
Total
  $ 25,899     $ 24,228  
     
 
               
Operating Income (Loss)
               
RMP
  $ 1,306     $ 1,243  
SSD
    241       (168 )
Canada
    1,430       1,307  
United Kingdom
    263       219  
Corporate shared services
    (1,960 )     (961 )
     
Total
    1,280       1,640  
 
               
Interest Expense
    64       74  
 
               
Other Expense, net
    473       15  
     
 
               
Income Before Income Taxes
  $ 743     $ 1,551  
     
Depreciation Expense
               
RMP
  $ 159     $ 180  
SSD
    44       48  
Canada
    166       148  
United Kingdom
    45       46  
Corporate shared services
    23       13  
     
 
               
Total
  $ 437     $ 435  
     
 
               
Amortization Expense
               
RMP
  $ 14     $ 9  
SSD
    58       53  
Canada
    182       146  
United Kingdom
    56       45  
     
 
               
Total
  $ 310     $ 253  
     
 
               
Capital Expenditures
               
RMP
  $ 62     $ 39  
SSD
    16       23  
Canada
    67       149  
United Kingdom
    12       18  
Corporate shared services
          5  
     
 
               
Total
  $ 157     $ 234  
     

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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
                 
    March 31     December 31  
    2010     2009  
|     |
Total Assets
               
RMP
  $ 39,716     $ 37,520  
SSD
    7,117       7,029  
Canada
    46,626       43,514  
United Kingdom
    14,523       14,242  
Corporate shared services
    204       237  
     
 
               
Total
  $ 108,186     $ 102,542  
     
Note 11: Fair Value of Financial Instruments
Effective January 1, 2008, we adopted FASB ASC Topic 820, Fair Value Measurements and Disclosure. FASB ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The FASB has issued guidance about the measuring of fair values when the volume and level of the market activity has significantly decreased and there is a need for more timely fair value information of certain financial instruments. The fair value disclosure requirement have been increased from annual to quarterly and requires disclosure of any changes to inputs and valuation techniques used to measure fair value. Reporting entities are also required to define the major categories of financial instruments.
Although the Company has adopted FASB ASC 820, the recently-issued guidance on fair value measurement will have no material effect on financial results. The carrying amounts of cash and cash equivalents, trade accounts receivable, other assets, short-term borrowings, trade accounts payable, and due to related party, approximate fair value because of the short maturity of these instruments. All of theses financial instruments are considered Level 1 and are traded openly in an active market.
Note 12: Recent Accounting Pronouncements
In June 2009, the FASB approved Topic 105, The FASB Accounting Standards Codification, or the Codification, as the single source of authoritative nongovernmental Generally Accepted Accounting Principles, or GAAP, in the United States. The Codification is effective for interim and annual periods ending after September 15, 2009. Upon the effective date, the Codification will be the single source of authoritative accounting principles to be applied by all nongovernmental

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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
U.S. entities. All other accounting literature not included in the Codification will be non-authoritative. We currently have adopted this standard and do not expect the adoption of the Codification to have an impact on our financial position or results of operations.
In May 2009, FASB issued FASB ASC Topic 855, Subsequent Events, which is effective for annual and interim financial periods ending after June 15, 2009. FASB ASC 855 establishes the accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. The adoption of the standard does not have a significant impact on the Company’s results of operations, financial condition or liquidity.
Note 13: Stock Options
During 2008 and 2007, the Company granted a total of 153,750 stock option awards to certain employees, which includes 3,750 of forfeited stock options that have been re-granted to certain employees. The exercise price of the stock options is equal to the closing stock price on the date of the grants. These stock options will vest ratably over a five year period and will expire ten years after the grant date. The stock options were granted under the Portec Rail Products, Inc. 2006 Stock Option Plan (the Option Plan), which authorizes the issuance of up to 150,000 shares of common stock of Portec Rail Products, Inc. pursuant to grants of incentive and non-statutory stock options and will remain in effect for a period of ten years.
During the three months ended March 31, 2010, no stock options were forfeited from the 2008 and 2007 grants and for the three months ended March 31, 2009, 800 and 1,800 stock options from the 2008 and 2007 grants, respectively, were forfeited.
We account for stock based compensation in accordance with FASB ASC Topic 718, Compensation — Stock Compensation. For the three months ended March 31, 2010 and 2009, we recognized compensation expense of $26,000 and $26,000, respectively, which relates to the 2008 and 2007 stock option grants. These amounts are included in selling, general and administrative expenses on the consolidated income statement. We expect to recognize additional compensation expense of approximately $142,000 and $96,000 over the remaining vesting periods of the 2008 and 2007 stock option grants, respectively.
To calculate our fair value price per stock option, we utilized a Black-Scholes Model. The following inputs were used in our Black-Scholes Model calculation:
                                                                 
                    Stock   Exercise                        
    # of   Fair   Price on   Price per   Annual                   Expected
Grant   Shares   Value   Grant   Stock   Dividend   Risk-free   Expected   Term
Date   Granted   Price   Date   Option   Yield   Rate   Volatility   (in years)
7/02/08
    1,750     $ 4.56     $ 12.01     $ 12.01       2.00 %     4.25 %     36.36 %     7.5  
1/30/08
    72,750     $ 3.67     $ 9.68     $ 9.68       2.48 %     4.00 %     38.87 %     7.5  
1/16/07
    79,250     $ 3.61     $ 9.65     $ 9.65       2.50 %     4.73 %     39.40 %     6.5  
Note 14: Merger with L.B. Foster Company
On February 16, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with L.B. Foster Company, a Pennsylvania corporation (“Foster”), and Foster Thomas Company, a West Virginia corporation and a

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Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
wholly-owned subsidiary of Foster (“Purchaser”). Pursuant to the Merger Agreement, Purchaser will conduct a tender offer to purchase all of the outstanding shares of common stock of Portec (the “Shares”) at a price of $11.71 per share (the “Offer”), net to the seller in cash (without interest and subject to applicable withholding taxes). Subsequent to the tender offer, Portec will be merged with Purchaser, with Portec as the surviving corporation, with Portec surviving as a wholly-owned subsidiary of Foster (the “Merger”). Consummation of the Offer by Purchaser is subject to certain conditions, including (1) the condition that the number of Shares that have been validly tendered and not withdrawn, together with the number of Shares then owned by Foster or any of its subsidiaries represents at least 65% of the total number of outstanding Shares, on a fully diluted basis (the “Minimum Condition”), (2) the expiration or termination of applicable waiting periods under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976 and (3) other required regulatory approvals and customary closing conditions.
Note 15: Subsequent Events
The Company has evaluated, accounted for and disclosed, as necessary, all subsequent events from the balance sheet date through May 7, 2010 at the date of issuance of the financial statements.

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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 4. 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 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.

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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 products and systems, railway wayside data collection and data management systems and load securement products. End users of our rail products include Class I railroads, short-line and regional railroads and transit systems. Our 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 for industries outside the rail transportation sector, primarily to end users within the United Kingdom. These products include overhead and floor conveyor systems, expandable boom conveyors, racking systems and mezzanine flooring systems. The end users of our material handling products are primarily in the manufacturing, distribution, garment and food industries.
     Our operations are organized into four business segments consisting of the Railway Maintenance Products Division (RMP), the Shipping Systems Division (SSD), Portec Rail Nova Scotia Company (Canada) and Portec Rail Products (UK) Ltd. (United Kingdom), along with corporate shared services. 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.
     The demand for some of our products is subject to seasonal fluctuations. Our railroad product lines normally experience strong sales during the second and third quarters as a result of seasonal increases in construction and track work due to favorable weather conditions. In contrast, our railroad product lines experience normal downturns in sales during the first and fourth quarters due in part to reductions in construction and track work during the winter months, particularly in the northern United States and Canada. This reduction in sales generally has a negative impact on our first and fourth quarter results. Notwithstanding seasonal trends, quarterly fluctuations in railroad spending for capital programs and routine maintenance can alter the expected seasonal impact on our business.
     For the three months ended March 31, 2010, the exchange rate of the Canadian dollar and British pound sterling strengthened when compared to the U.S. dollar for the same period in the prior year. We experienced a 20.0% increase in the yearly average exchange rate of the Canadian dollar and a 7.5% increase in the British pound sterling when compared to the U.S. dollar over the three months ended March 31, 2009. These higher exchange rates when compared to the U.S. dollar have a positive impact on our results of operations, as the net sales and net income of our Canadian and United Kingdom operating locations, because they are profitable, are higher in U.S. dollars. We do not have any control over exchange rates, as these are largely driven by worldwide economic factors.
     On February 16, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with L.B. Foster Company, a Pennsylvania corporation (“Foster”), and Foster Thomas Company, a West Virginia corporation and a wholly-owned subsidiary of Foster (“Purchaser”). Pursuant to the Merger Agreement, Purchaser will conduct a tender offer to purchase all of the outstanding shares of common stock of Portec (the “Shares”) at a price of $11.71 per Share (the “Offer”), net to the seller in cash (without interest and subject to applicable withholding taxes). Subsequent to the tender offer, Portec will be merged with Purchaser, with Portec as the surviving corporation, with Portec surviving as a wholly-owned subsidiary of Foster (the “Merger”). Consummation of the Offer by Purchaser is subject to certain conditions, including (1) the condition that the number of Shares that have been validly tendered and not withdrawn, together with the number of Shares then owned by Foster or any of its subsidiaries represents at least 65% of the total number of outstanding Shares, on a fully diluted basis (the “Minimum Condition”), (2) the expiration or termination of applicable waiting periods under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976 and (3) and other required regulatory approvals and customary closing conditions. Please see Note 14: on Page 18.
Results of Operations
Three Months Ended March 31, 2010 compared to Three Months Ended March 31, 2009
     Net Sales. Net sales increased to $23.3 million for the three months ended March 31, 2010, an increase of $1.2 million or 5.2%, from $22.1 million for the comparable period in 2009. The increase in net sales is primarily attributable to higher sales of $961,000 at our Canadian operations and $647,000 at SSD, partially offset by lower sales of $396,000 at our United Kingdom operations. The $961,000 increase in net sales at our Canadian operations is a combination of a $1.5 million foreign currency translation that positively impacted net sales, along with higher sales of friction management products primarily from our Vancouver location, partially offset by lower sales of track components. SSD’s increase in net sales of $647,000 is due to higher net sales of our chain securement systems related to the improvement in rail traffic and better economic conditions. Net sales at our United Kingdom operations declined $396,000, which is due to $677,000 of lower sales of friction management and material handling products, partially offset by higher sales of track component products. Foreign currency translation also positively impacted net sales in the amount of $281,000.

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     Cost of Goods Sold. Cost of goods sold (COGS) decreased slightly to $14.8 million for the three months ended March 31, 2010, a decrease of $63,000 or 0.4%, from $14.9 million during the comparable period in 2009. Our COGS as a percentage of net sales for the three months ended March 31, 2010 was 63.6%, a decrease of 360 basis points, from 67.2% for the prior period in 2009. The components of COGS, including direct material, direct labor and overhead, as a percentage of net sales, showed that our overhead costs as a percentage of net sales was positively impacted in the current period, primarily related to higher absorption rate from an increase in net sales, while direct material and direct labor costs as a percentage of net sales remained relatively consistent when compared to the prior period. On a period to period basis, our COGS is primarily driven by product mix, as our diverse product groups have different cost components.
     Gross Profit. Our consolidated gross profit percent increased to 36.4% for the three months ended March 31, 2010 from 32.8% for the comparable period of the prior year, primarily due to a more favorable product mix in the current period. Gross profit dollars increased to $8.5 million for the three months ended March 31, 2010, an increase of $1.2 million or 16.9%, from $7.3 million for the comparable period in 2009. The increase in gross profit is attributable to higher gross profit of $738,000 at our Canadian operations, $394,000 at SSD and $189,000 at RMP. Higher gross profit of $738,000 at our Canadian operations is due to the favorable impact of foreign currency translation in the amount of $555,000, along with an increase in gross profit in the amount of $183,000 on higher sales volume of friction management products at our Vancouver location. SSD’s gross profit increase of $394,000 is primarily due to higher sales volume of chain securement products. Gross profit increased at RMP by $189,000 due to a favorable product mix on track components, friction management and other products and services, offset by lower gross profit on wayside data collection and data management systems.
     Selling, General and Administrative Expenses. Selling, general and administrative expenses (SG&A) were $6.9 million for the three months ended March 31, 2010, an increase of $1.5 million or 28.4%, from $5.4 million for the comparable period in 2009. This increase is primarily due to higher SG&A expenses of $998,000 at corporate shared services, $581,000 at our Canadian operations and $121,000 at RMP, offset by lower SG&A expenses of $150,000 at our United Kingdom operations. The increase of $998,000 at corporate shared services is primarily due to legal and advisory fees associated with the Agreement and Plan of Merger with L.B. Foster and legal fees associated with the related shareholder lawsuits. SG&A expenses for our Canada segment increased $581,000 due to $276,000 of foreign currency translation that negatively impacted SG&A and thus raised expenses, along with $305,000 of higher SG&A expenses due to an increase in commission expense related to higher sales volume of friction management products, higher salaries and benefit costs at our Vancouver location and an increase in professional fees. RMP SG&A expenses increased $121,000 primarily due to higher commission costs, and an increase in professional and consulting fees related to further penetration and expansion into the Chinese market. The decrease in SG&A expenses of $150,000 at our United Kingdom operations is due to lower employee salaries and benefit costs of $217,000, primarily due to fewer employees, a decrease in professional and legal fees, lower sales commission expenses and lower overall costs from efforts to reduce discretionary spending, offset by the negative impact of foreign currency translation in the amount of $67,000 which raised SG&A expenses.
     Interest Expense. Interest expense decreased to $64,000 for the three months ended March 31, 2010, a decrease of $10,000 or 13.5%, from $74,000 for the comparable period in 2009. This decrease is primarily a result of lower total debt for the three months ended March 31, 2010 compared to the same period in 2009. Total debt obligations decreased to $11.7 million at March 31, 2010 from $15.9 million as of March 31, 2009.
     Other Expense. Other expense increased to $473,000 for the three months ended March 31, 2010, an increase of $458,000, from other expense of $15,000 for the comparable period in 2009. Other expense in the current period includes foreign currency transaction losses of $487,000, offset by interest income of $22,000. Other income in the prior period includes foreign currency transaction gains of $50,000, offset by royalty and interest income of $33,000.
     Provision for Income Taxes. Provision for income taxes decreased to $286,000 for the three months ended March 31, 2010, from $415,000 for the comparable period in 2009, reflecting a decrease in income before taxes from $1.6 million for the three months ended March 31, 2009 to $743,000 for the three months ended March 31, 2010. Our effective tax rates on taxable income were 38.4% and 26.8% for the three months ended March 31, 2010 and 2009, respectively. Our consolidated effective tax rate is impacted by our divisions’ pro-rata share of consolidated income before taxes and related tax expense or benefit. Our consolidated effective tax rate reflects the benefit of Canadian research and development tax credits, which reduced income tax expense by $98,000 and $51,000, or 13.2% and 3.3% for the three months ended March 31, 2010 and 2009, respectively. Additionally, our income tax expense is higher by approximately $340,000 in the current period due to the tax treatment of certain costs associated with the L.B. Foster merger transaction.
     Net Income. Net income decreased to $457,000 for the three months ended March 31, 2010, a decrease of $679,000 or 59.8%, from $1.1 million for the comparable period in 2009. Our basic and diluted net income decreased to $0.05 per share for the three months ended March 31, 2010, from $0.12 per share for the comparable period in 2009, on

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average shares outstanding of 9,602,029 for the three months ended March 31, 2010 and 2009, respectively. Excluding merger-related costs, our net income would have been $1.5 million or $0.15 per share for the three months ended March 31, 2010.
Business Segment Review
     Railway Maintenance Products Division — “RMP”. Our RMP business segment manufactures and assembles track components and related products, friction management products, and wayside data collection and data management systems. We also provide services to railroads, transit systems and railroad contractors, and we 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.
                 
    Three Months Ended  
    March 31  
    2010     2009  
    (In Thousands)  
External sales
  $ 10,608     $ 10,657  
Intersegment sales
    393       516  
Operating income
    1,306       1,243  
 
               
Sales by product line(1)
               
Track component product
  $ 5,819     $ 5,783  
Friction management products and services
    3,427       3,424  
Wayside data collection and data management systems
    1,121       1,433  
Other products and services
    634       533  
 
           
Total product and service sales
  $ 11,001     $ 11,173  
 
           
 
(1)   Includes intersegment sales.
     For the three months ended March 31, 2010, external sales for RMP decreased by $49,000 or 0.5%, to $10.6 million from $10.7 million during the comparable period in 2009. The decrease in external sales is primarily due to lower sales of wayside data collection and data management systems. Cost of goods sold, including direct material, direct labor and overhead, as a percentage of net external sales for the current period was consistent with the prior period for RMP. Operating income for the three months ended March 31, 2010 was slightly higher than the prior period at $1.3 million. This is primarily due to an increase in gross profit of $189,000 due to a favorable product mix on track components, friction management and other products and services, offset by lower gross profit on wayside data collection and data management systems due to a decrease in sales volume. An increase in SG&A expenses of $121,000 offset the higher gross profit. The higher SG&A expenses are primarily due to higher commission costs, and higher professional and consulting fees related to the expansion into the Chinese market during the current period.
     Shipping Systems Division — “SSD”. SSD engineers and sells load securement systems and related products to the railroad freight car market. These systems are used to secure a wide variety of products and lading onto freight cars. SSD is also a major supplier of new and reconditioned tie-down systems for the shipment of new automobiles and vans by the rail industry. The assembly work for SSD is primarily performed at RMP’s Huntington, West Virginia manufacturing plant.

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    Three Months Ended  
    March 31  
    2010     2009  
    (In Thousands)  
External sales
  $ 1,910     $ 1,263  
Intersegment sales
           
Operating income/(loss)
    241       (168 )
 
               
Sales by product line
               
Chain securement systems
  $ 1,183     $ 527  
Automotive products
    639       626  
Strap securement systems
    28       53  
All other load securement systems
    60       57  
 
           
Total product and service sales
  $ 1,910     $ 1,263  
 
           
     For the three months ended March 31, 2010, external sales for SSD increased by $647,000 or 51.2%, to $1.9 million from $1.3 million during the comparable period in 2009. The increase in external sales is primarily due to higher demand for chain securement systems due to improved rail traffic in North America. Cost of goods sold, including direct material, direct labor and overhead, decreased as a percentage of net sales during the current period due to selective price increases on certain products and lower direct labor and overhead costs due to a lower employee headcount in the current quarter compared to 2009. Operating income was $241,000 for the three months ended March 31, 2010, an increase of $409,000 or 243.5%, from an operating loss of $168,000 during the comparable period in 2009, due mostly to an increase in gross profit on higher sales volume of primarily chain securement systems.
     Portec Rail Nova Scotia Company — “Canada”. Our Canadian operations include a manufacturing operation near Montreal, Quebec, and a manufacturing and technology facility in Vancouver, British Columbia (Kelsan Technologies Corp. — “Kelsan”). 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. 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.
                 
    Three Months Ended  
    March 31  
    2010     2009  
    (In Thousands,Except Translation Rate)  
External sales
  $ 6,798     $ 5,837  
Intersegment sales
    2,170       1,548  
Operating income
    1,430       1,307  
Average translation rate of Canadian dollar to U.S. dollar.
    0.9567       0.7982  
 
               
Sales by product line(1)
               
Track component products
  $ 3,260     $ 3,285  
Friction management products and services
    5,518       3,885  
Other products and services
    190       215  
 
           
Total product and service sales
  $ 8,968     $ 7,385  
 
           
 
(1)   Includes intersegment sales.
     For the three months ended March 31, 2010, external sales for Canada increased by $961,000 or 16.5%, to $6.8 million from $5.8 million during the comparable period in 2009. The increase in external sales is due to a $1.5 million foreign currency translation that positively impacted net sales, offset by $525,000 in lower net sales volume, which was a combination of higher friction management products sales at our Vancouver location, offset by lower sales of our track component products manufactured near Montreal, Canada. Cost of goods sold, including direct material, direct labor and overhead, as a percentage of net external sales for the current period, remained relatively consistent in the current period

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compared to the prior year, however direct material cost as a percentage of net external sales declined slightly in the current period, due primarily to a slight reduction in material costs for track component products. Operating income for the three months ended March 31, 2010 increased to $1.4 million from $1.3 million during the comparable period in 2009, an increase of $123,000 or 8.6%. Operating income in the current period includes a favorable foreign currency translation of $250,000, partially offset by higher SG&A costs in Vancouver, primarily due to higher employee salaries and benefit costs and increased sales commissions on higher sales of friction management products.
     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 includes friction management products and services and track component products such as insulated rail joints and track fasteners. The rail products are primarily sold to the United Kingdom passenger rail network and international customers. The United Kingdom’s material handling business includes product lines such as overhead and floor conveyor systems, expandable boom conveyors, racking systems and mezzanine flooring systems. The end users of our material handling products are primarily United Kingdom-based companies in the manufacturing, distribution, garment and food industries.
                 
    Three Months Ended  
    March 31  
    2010     2009  
    (In Thousands, Except Translation Rate)  
External sales
  $ 4,011     $ 4,407  
Intersegment sales
    9        
Operating income
    263       219  
Average translation rate of British pound sterling to U.S. dollar
    1.5468       1.4385  
 
               
Sales by product line(1)
               
Material handling products
  $ 1,254     $ 1,511  
Friction management products and services
    1,736       2,240  
Track component products
    1,030       656  
 
           
Total product and service sales
  $ 4,020     $ 4,407  
 
           
 
(1)   Includes intersegment sales
     For the three months ended March 31, 2010, external sales at our United Kingdom operations decreased by $396,000 or 9.0%, to $4.0 million from $4.4 million during the comparable period in 2009. The decrease in external sales is primarily due lower sales of friction management and material handling products, partially offset by an increase in sales volume of track component products and a foreign currency translation in the amount of $281,000 that positively impacted external sales. The components of cost of goods sold, including direct material, direct labor and overhead, as a percentage of net external sales for the current period was consistent with the prior period. Operating income for the three months ended March 31, 2010 increased slightly to $263,000 from $219,000 during the comparable period in 2009, an increase of $44,000 or 20.1%. The increase in operating income is primarily due to lower SG&A expenses in the current period, due mostly to lower employee salaries and benefit costs, primarily as a result of a lower employee headcount in 2010. Operating income was also impacted by a favorable foreign currency translation in the amount of $17,000 in the current period.
Liquidity and Capital Resources
     Our cash flow from operations is the primary source of financing for internal growth, capital expenditures, repayment of long-term 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. Our cash balance was $12.0 million at March 31, 2010. 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 our cash flow from operations and the ability to borrow additional cash under our working capital 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, 2010, we used $3.2 million in cash from operations compared to $2.9 million of cash used from operations during the same period in 2009. Cash used in operations is due to net income of $457,000 in the current period, compared to $1.1 million during the same period in

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2009, a decrease of $679,000. Cash used in operations during the three months ended March 31, 2010 includes higher accounts receivable of $5.2 million due to higher sales volumes. Cash used in operations during the three months ended March 31, 2010 also includes $1.9 million in higher inventory balances, primarily to meet customer requirements and the timing of customer orders. Higher accounts payable balances provided $4.0 million of cash during the current period, due to the timing of vendor payments. Cash used in operations also includes higher prepaid expenses and other current assets of $661,000, primarily due to prepaid insurance premiums, and refundable goods and services taxes paid at our Montreal location, lower accrued expenses used $559,000 of cash, primarily due to company-wide incentive plan payments and lower customer deposits at RMP and our United Kingdom operations.
     Net cash used in investing activities was $155,000 for the three months ended March 31, 2010, compared to $269,000 used in investing activities during the same period in 2009. Cash used in investing activities is primarily due to capital expenditures of $157,000. Our capital expenditures upgrade our machinery and equipment, improve our facilities, support new strategic initiatives or develop new products. We believe that the overall level of capital spending for our business segments is sufficient to remain competitive.
     Net cash provided by financing activities was $639,000 for the three months ended March 31, 2010, compared to $2.4 million of cash provided by financing activities during the comparable period in 2009. Cash provided by financing activities in 2010 includes $2.0 million of net borrowings on working capital facilities, $990,000 of repayments of long-term debt obligations and $576,000 in cash dividends paid to our common stockholders.
Financial Condition
     At March 31, 2010, total assets were $108.2 million, an increase of $5.7 million or 5.5%, from $102.5 million at December 31, 2009. The increase at March 31, 2010 is primarily due to higher inventory balances of $2.0 million primarily to support customer requirements, higher accounts receivable of $5.2 million due to higher sales levels, and higher prepaid expenses and other current assets of $911,000 due to prepaid insurance premiums, and refundable goods and services taxes paid at our Montreal location. Partially offsetting these increases are lower cash and cash equivalents of $2.3 million, and lower net property, plant and equipment of $128,000, which is primarily due to the fluctuation of foreign currency translation rates of the Canadian dollar and the British pound sterling in relation to the U.S. dollar as of March 31, 2010 compared to December 31, 2009.
     Total outstanding debt obligations were $11.7 million at March 31, 2010, an increase of $985,000 or 9.2% from $10.8 million at December 31, 2009. The increase reflects higher outstanding borrowings on working capital facilities, which increased by $2.0 million during the current period. During the three months ended March 31, 2010, we repaid $990,000 of long-term debt obligations.
     The majority of our track component products that we manufacture and sell, such as our rail joints, rail anchors and rail spikes, require steel as a major element in the production process. Worldwide steel prices have been volatile in the last few years, which has resulted in surcharges at times being added to raw material costs, and other times resulting in higher base prices for certain steel. We have been successful in passing on higher steel prices to our customers in most circumstances over the last few years. The volatility in the global steel markets has continued throughout 2009 and into 2010, resulting in periods of both high and low prices depending on demand at that time. We continue to monitor the price of our primary raw materials. Any prolonged increase in steel prices in which we are unable to pass along the additional costs to our customers could be negatively impacted our future earnings.
Discussion of Critical Accounting Policies
     Our discussion and analysis of our financial condition and results of operations is based upon our audited and unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We review the accounting policies we use in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. We evaluate the appropriateness of these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. We believe the

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following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
     Revenue Recognition. Revenue from product sales is recognized at the time products are delivered and title has passed or when service is performed. Delivery is determined by our shipping terms, which are primarily FOB shipping point. Shipments are made only under a valid contract or purchase order where the sales price is fixed or determinable and collectability of the resulting receivable is reasonably assured. Revenue is recognized net of returns, discounts and other allowances.
     Revenue from installation of material handling equipment and railway wayside data collection and data management systems is generally recognized by applying percentages of completion for each contract to the total estimated profits for the respective contracts. The length of each contract varies, but is typically about two to five months. The percentages of completion are determined by relating the actual costs of work performed to date, to the current estimated total costs of the respective contracts. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, repairs and depreciation costs.
     When the estimate on a contract indicates a loss, the entire loss is immediately recorded in the accounting period that the loss is determined. The cumulative effect of revisions in estimates of total costs or revenue during the course of the work is reflected in the accounting period in which the facts that caused the revision first become known.
     Allowances for Doubtful Accounts. We maintain a reserve to absorb potential losses relating to bad debts arising from uncollectible accounts receivable. The allowance for doubtful accounts is maintained at a level that we consider adequate to absorb potential bad debts inherent in the accounts receivable balance and is based on ongoing assessments and evaluations of the collectability, historical loss experience of accounts receivable and the financial status of customers with accounts receivable balances. Bad debts are charged and recoveries are credited to the reserve when incurred.
     We believe the accounting estimate related to the allowance for doubtful accounts is a “critical accounting estimate” because we have a significant concentration of accounts receivable in the rail industry. Economic conditions could affect our customers’ ability to pay and changes in the estimate could have a material effect on net income.
     Inventories. We establish obsolescence reserves for slow-moving and obsolete inventories. Obsolescence reserves reduce the carrying value of slow moving and obsolete inventories to their estimated net realizable value, which generally approximates the recoverable scrap value. We utilize historical usage, our experience, current backlog and forecasted usage to evaluate our reserve amounts. We also periodically evaluate our inventory carrying value to ensure that the amounts are stated at the lower of cost or market. If actual market conditions are less favorable than those projected by us, additional inventory reserves may be required.
     Goodwill and Other Intangible Assets. We assess the impairment of goodwill and other intangible assets at least annually and whenever events or significant changes in circumstances indicate that the carrying value may not be recoverable. We evaluate the goodwill of each of our reporting units and our indefinite-lived intangible assets for impairment as required under FASB Topic 350, Intangibles, Goodwill and Other. FASB ASC 350 requires that goodwill be tested for impairment using a two-step process. The first step is to identify a potential impairment and the second step measures the amount of an impairment loss, if any. Goodwill is deemed to be impaired if the carrying amount of a reporting unit’s goodwill exceeds its estimated fair value. The fair values of our reporting units are determined using a discounted cash flow analysis based upon historical and projected financial information. The intangible assets of Salient Systems are tested following the same process. The estimates of future cash flows, discount rates, and long-term growth rates, based on reasonable and supportable assumptions and projections, require our judgment. Factors that could change the result of our goodwill and intangible asset impairment test include, but are not limited to, different assumptions used to forecast future revenue, expenses, capital expenditures and working capital requirements used in our cash flow models. In addition, selection of a risk adjusted discount rate on the estimated undiscounted cash flow is susceptible to future changes in market conditions and when unfavorable, can adversely affect our original estimates of fair values. As such, to account for the uncertainty inherent in our estimates and future projections, we perform sensitivity analyses to determine our margin of error. Since adoption of FASB ASC 350, we have not recognized any impairment of goodwill or other intangible assets.

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     Our amortizable intangible assets are evaluated for impairment in accordance with FASB ASC 360, Accounting for Impairment or Disposal of Long-Lived Assets. FASB ASC 360 requires amortizable intangible assets to be tested for impairment when events or circumstances indicate that the carrying value of the asset may not be recoverable. Furthermore, FASB ASC 360 presents six factors that should be considered in conjunction with a company’s intangible assets as the presence of any one of these factors might indicate that the asset is impaired. Since the adoption of FASB ASC 360, we have not recognized any impairment of intangible assets.
     In conjunction with the acquisitions of Coronet Rail and the assets of Vulcan, we recorded the fair value of the acquired tangible and intangible assets in accordance with FASB ASC 360. As part of our procedures to assign fair values to all acquired assets, we engaged an independent valuation expert to evaluate the technology and intellectual property along with other intangible assets that could be assigned a fair value under these acquisitions. We supplied the independent valuation expert with the historical and estimated cash flows of the companies along with an estimate of future costs to maintain these technologies. The independent valuation expert used these estimates and other assumptions to determine the present value of the discounted cash flows of these various technologies. In addition, we evaluated the future lives of the identified intangible assets to determine if they have definite or indefinite lives.
     Warranty Reserves. Most of our products are covered by a replacement warranty. We establish warranty reserves for expected warranty claims based upon our historical experience, or for known warranty issues and their estimable replacement costs. We feel our estimates are appropriate to cover any known warranty issues. However any changes in estimates may have an impact on our results of operations.
     Retirement Benefit Plans. We maintain defined benefit pension plans that cover a significant number of our active employees, former employees and retirees. We account for these plans as required under FASB ASC Topic 715, Compensation – Retirement Benefits. The liabilities and expenses for pensions require significant judgments and estimates. These amounts are determined using actuarial methodologies and incorporate significant assumptions, including the rate used to discount the future estimated liability, inflation, the long-term rate of return on plan assets and mortality tables. Management has mitigated the future liability for active employees by freezing all defined benefit pension plans effective December 31, 2003. The rate used to discount future estimated liabilities is determined based upon a hypothetical double A yield curve represented by a series of annualized individual discount rates from one-half to thirty years. Our inflation assumption is based on an evaluation of external market indicators. The long-term rate of return is estimated by considering historical returns and expected returns on current and projected asset allocations. The effects of actual results that differ from these assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligations in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our obligations and future expense.
     As interest rates decline, the actuarially calculated retirement benefit plan liability increases. Conversely, as interest rates increase, the actuarially calculated retirement benefit plan liability decreases. Past declines in interest rates and equity markets have had a negative impact on the retirement benefit plan liability and fair value of our plan assets. As a result, the accumulated benefit obligation exceeded the fair value of plan assets at December 31, 2009. Our liability at December 31, 2009 is more than the liability at December 31, 2008, which resulted in a $340,000, net of tax, decrease in shareholders’ equity.
     We maintain a post-retirement benefit plan at our Canadian operation near Montreal, which provides retiree life insurance, health care benefits and, for a closed group of employees, dental care. We account for this plan under FASB ASC 715. The liabilities and expenses for post-retirement benefit plans require significant judgments and estimates. These amounts are actuarially determined using the projected benefit method pro rated on service and significant management assumptions, including salary escalation, retirement ages of employees and expected health care costs. Retirement benefit plan adjustments and changes in assumptions are amortized to earnings over the estimated average remaining service life of the members and, therefore, generally affect recognized expense and the recorded obligations in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our obligations and future expense.
     Income Taxes. Significant judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any necessary valuation allowance recorded against net deferred tax assets. As a company with international operations, we record an estimated liability or benefit for our current income tax provision and other taxes based on what we determine will likely be paid in various jurisdictions in which we operate. We use our best judgment in the determination of these amounts. However, the liabilities ultimately realized and paid are

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dependent on various matters including the resolution of the tax audits in the various affected tax jurisdictions and may differ from the amounts recorded. An adjustment to the estimated liability would be recorded through income in the period in which it becomes probable that the amount of the actual liability differs from the recorded amount. We do not believe that such a charge would be material.
     The process of recording deferred tax assets and liabilities involves summarizing temporary differences resulting from the different treatment of items for tax than for financial statement purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet. We must then assess the likelihood that deferred tax assets will be recovered from future taxable income and to the extent that we believe that recovery is not likely, a valuation allowance is established. If a valuation allowance is established in a period, an expense is recorded. The valuation allowance is based on our experience and current economic situation. We believe that operations will provide taxable income levels to recover the deferred tax assets.
     As of January 1, 2007, we adopted FASB ASC Topic 740, Income Taxes 109 (FIN 48), which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of uncertain tax positions to be taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The determination of the amount of benefits to be recognized and the sustainability of our tax positions upon examination require us to make certain estimates and to use our best judgment based upon historical experience.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     We are exposed to interest rate risk on our 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 decline 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 our long-term debt amounts as of March 31, 2010, for every 1% increase or decrease in the interest rate on our long-term debt, our annual interest expense will fluctuate by approximately $117,000.
     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, 2010, for every 1/100 change in the exchange rate of the Canadian dollar to the U.S. dollar, our Canadian operation’s operating income would have changed by $16,000. 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 three months ended March 31, 2010 would have been $2,000. 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.

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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 have been 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 we 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. In November 2003, the motion for summary judgment was granted and we were dismissed from the case by the United States District Court for the Northern District of New York. In March 2004, the plaintiff filed a notice of appeal to the United States Court of Appeals for the Second Circuit, appealing, in part, the District Court’s decision to dismiss all claims against us. In April 2005, the plaintiff’s appeal was dismissed by the Second Circuit Court without prejudice, and the matter was remanded to the United States District Court for the Northern District of New York for consideration in light of a then-recent United States Supreme Court decision. As a result, in June 2006, the District Court dismissed all claims brought by the plaintiff pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund). In July 2006, the plaintiff filed a notice of appeal to the Second Circuit. However, in early 2008, the plaintiff’s appeal was dismissed again by the Second Circuit Court without prejudice, and the matter was remanded to the District Court for consideration in light of another then-recent United States Supreme Court decision. In July 2008, The District Court decided that the United States Supreme Court decision did not necessitate any changes in the District Court’s prior determinations in this case and held that all of its prior rulings stand. In August 2008, the plaintiff filed a third notice of appeal to the Second Circuit Court. On February 24, 2010, the Second Circuit issued its decision, reversing the order of the District Court which dismissed Portec from the litigation, stating that there were genuine issues of material fact. In addition, the Second Circuit reinstated the plaintiff’s CERCLA claims, stating that the plaintiff is entitled to bring a claim for contribution under Section 113(f)(3)(B) of CERCLA. Ongoing litigation may be protracted, and we may incur additional ongoing legal expenses, which are not estimable at this time.
     We believe that plaintiff’s case against Portec, Inc. is without merit. Because plaintiff is seeking unspecified monetary contribution from the defendants, we are unable to determine, if plaintiff were to prevail on its claims against Portec, the extent to which we would have to make a contribution, or whether such contribution would have a material adverse effect on our financial condition or results of operations. Furthermore, ongoing litigation may be protracted and legal expenses may be material to our results of operations.
     In August 2009, Portec Rail Products, Inc. and Kelsan Technologies Corp. were named as defendants in a civil lawsuit by Snyder Equipment Co. Inc. alleging breach of contract and other claims related to a non-disclosure agreement. The plaintiff filed the complaint with the United States District Court for the Western District of Missouri, Southern Division and was seeking to recover compensatory and punitive damages on four counts. In March 2010 the parties to this lawsuit entered into a new agreement, and the lawsuit was dismissed with prejudice.
     On February 19, 2010, and through March 3, 2010, a total of five lawsuits initiated by purported shareholders of Portec Rail have been filed against several defendants including the Company and certain members of its Board of Directors. These lawsuits are directly related to the Agreement and Plan of Merger with L.B. Foster Company and Foster Thomas Company, which was signed on February 16, 2010. Following is a summary of these lawsuits:
             
Date Filed   Court   Plaintiff   Defendants
2/19/2010
  Circuit Court of Kanawha County, West Virginia   Barbara Petkus, individually and on behalf of all others similarly situated.   Portec Rail Products, Inc., Richard J. Jarosinski, Marshall T. Reynolds, John S. Cooper, Louis J. Akers, Philip E. Cline, Daniel P. Harrington, A. Michael Perry, Douglas V. Reynolds, Neal W. Scaggs, Philip Todd Shell, Kirby J. Taylor, and Thomas W. Wright
 
           
2/24/2010
  Court of Common Pleas, Allegheny County,   Everett Harper, on behalf of himself and others   Marshall T. Reynolds, John S. Cooper, Louis J. Akers, Philip E. Cline, Daniel P. Harrington, A.

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Date Filed   Court   Plaintiff   Defendants
 
  Pennsylvania   similarly situated.   Michael Perry, Douglas V. Reynolds, Neal W. Scaggs, Philip Todd Shell, Kirby J. Taylor, Thomas W. Wright, Portec Rail Products, Inc., L.B. Foster Company, and Foster Thomas Company
 
           
2/24/2010
  Court of Common Pleas, Allegheny County, Pennsylvania   Richard S. Gesoff   Marshall T. Reynolds, John S. Cooper, Louis J. Akers, Philip E. Cline, Daniel P. Harrington, A. Michael Perry, Douglas V. Reynolds, Neal W. Scaggs, Philip Todd Shell, Kirby J. Taylor, Thomas W. Wright, Portec Rail Products, Inc., L.B. Foster Company, and Foster Thomas Company
 
           
3/02/2010
  Court of Common Pleas, Allegheny County, Pennsylvania   Scott Phillips, individually and on behalf of all others similarly situated.   L.B. Foster Company, Marshall T. Reynolds, John S. Cooper, Louis J. Akers, Philip E. Cline, Daniel P. Harrington, A. Michael Perry, Douglas V. Reynolds, Neal W. Scaggs, Philip Todd Shell, Kirby J. Taylor, Thomas W. Wright, Portec Rail Products, Inc., and Foster Thomas Company
 
           
3/03/2010
  Circuit Court of Cabell County, West Virginia   John Furman, individually and on behalf of all others similarly situated.   Marshall T. Reynolds, John S. Cooper, Louis J. Akers, Philip E. Cline, Daniel P. Harrington, A. Michael Perry, Douglas V. Reynolds, Neal W. Scaggs, Philip Todd Shell, Kirby J. Taylor, Thomas W. Wright, Portec Rail Products, Inc., L.B. Foster Company, and Foster Thomas Company
     The lawsuits allege, among other things, that Portec Rail’s directors breached their fiduciary duties and L.B. Foster and Purchaser aided and abetted such alleged breaches of fiduciary duties. Based on these allegations, the lawsuits seek, among other relief, injunctive relief enjoining the defendants from consummating the Offer and the Merger. They also purport to seek recovery of the costs of the action, including reasonable legal fees. Ongoing litigation may be protracted, and we may incur additional ongoing legal expenses, which are not able to be estimated at this time.
     The three lawsuits pending in Allegheny County, Pennsylvania have been consolidated and on March 22 and 23, 2010, hearings were held on Plaintiffs’ Motion for Preliminary Injunction, which seeks to enjoin the transaction set forth in the Agreement and Plan of Merger. On April 21, 2010, the Court of Common Pleas of Allegheny County, Pennsylvania (the “Court”) entered an order in the matter captioned In re Portec Rail Products, Inc. Shareholders Litigation preliminarily enjoining Foster from completing the Offer until the Court determines that the Board of Directors of Portec has cured the breach of fiduciary duties as found by the Court and disclosed certain material information. A copy of the order was filed as an exhibit to the SC 14D-9/A filed by the Company on April 22, 2010.
     In the two lawsuits pending in West Virginia, Motions to Dismiss the lawsuits were filed on behalf of the Company and the Director Defendants. In the Furman case, the parties agreed to transfer the lawsuit to Cabell County, West Virginia. In the Petkus case, the Motion to Dismiss also included a Motion to Transfer Venue from Kanawha County, West Virginia to Cabell County, West Virginia. In both West Virginia cases, Plaintiffs have filed Motions for Preliminary Injunctions, but as of the date of this filing, no hearings have been scheduled.
ITEM 1A. RISK FACTORS
     There are no changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
     Nothing to report under this item.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
     Nothing to report under this item.
ITEM 4. OTHER INFORMATION
     Nothing to report under this item.
ITEM 5. 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 2002
 
   
31.2
  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
32
  Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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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 7, 2010  By:   /s/ Richard J. Jarosinski    
    Richard J. Jarosinski,   
    President and Chief Executive Officer and
Principal Executive Officer 
 
 
     
Date: May 7, 2010  By:   /s/ John N. Pesarsick    
    John N. Pesarsick,   
    Chief Financial Officer and
Principal Accounting Officer 
 

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EXHIBIT INDEX
     
31.1
  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
31.2
  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
32
  Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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