Attached files
file | filename |
---|---|
EX-32 - EX-32 - PORTEC RAIL PRODUCTS INC | l39644exv32.htm |
EX-31.1 - EX-31.1 - PORTEC RAIL PRODUCTS INC | l39644exv31w1.htm |
EX-31.2 - EX-31.2 - PORTEC RAIL PRODUCTS INC | l39644exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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
(Registrants 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 Registrants
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 |
2
Table of Contents
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
3
Table of Contents
Portec
Rail Products, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(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
4
Table of Contents
Portec
Rail Products, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(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
5
Table of Contents
Portec
Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(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 years consolidated financial statements have been reclassified to conform to the current
year presentation. These reclassifications had no effect on net earnings.
6
Table of Contents
Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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
7
Table of Contents
Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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
8
Table of Contents
Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 institutions 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:
9
Table of Contents
Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
10
Table of Contents
Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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
11
Table of Contents
Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
12
Table of Contents
Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 Courts decision to dismiss all
claims against us. In April 2005, the plaintiffs 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 plaintiffs 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
Courts 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 plaintiffs 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 plaintiffs 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:
13
Table of Contents
Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 Rails 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.
14
Table of Contents
Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 arms-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 | ||||
15
Table of Contents
Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 | ||||
16
Table of Contents
Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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
17
Table of Contents
Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 Companys 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
18
Table of Contents
Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
19
Table of Contents
ITEM 2. | MANAGEMENTS 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 Companys financial performance
and could cause the Companys 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 Companys 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.
20
Table of Contents
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. SSDs 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.
21
Table of Contents
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. SSDs
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
22
Table of Contents
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 RMPs Huntington, West Virginia manufacturing plant.
23
Table of Contents
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. Kelsans 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
24
Table of Contents
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 Kingdoms 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 Kingdoms 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
25
Table of Contents
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
26
Table of Contents
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 units 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.
27
Table of Contents
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 companys 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
28
Table of Contents
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 operations 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 Companys 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 Companys 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 Commissions rules and forms. There has been no change in the Companys internal control
over financial reporting during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting.
29
Table of Contents
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 Courts decision to
dismiss all claims against us. In April 2005, the plaintiffs 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 plaintiffs 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 Courts 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 plaintiffs 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 plaintiffs 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. |
30
Table of Contents
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 Rails 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 Companys Annual Report on Form
10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Nothing to report under this item.
31
Table of Contents
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 |
32
Table of Contents
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 |
33
Table of Contents
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 |
34