UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2009.
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission file number:
000-50543
PORTEC RAIL PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
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West Virginia
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55-0755271
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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900 Old Freeport Road, Pittsburgh, Pennsylvania
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15238
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code: (
412) 782-6000
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock, $1.00 par value
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The NASDAQ Stock Market, LLC
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. YES
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NO
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. YES
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NO
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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES
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NO
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Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, 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 such shorter period that the
registrant was required to submit and post such files). YES
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NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). YES
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NO
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The aggregate market value of the voting and non-voting common equity held by non-affiliates of the
Registrant, computed by reference to the last sale price on June 30, 2009, as reported by the
NASDAQ Global Market, was $64.5 million.
As of February 28, 2010, there were issued and outstanding 9,602,029 shares of the Registrants
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Proxy Statement for the 2010 Annual Meeting of Shareholders of the Registrant (Part III).
(2) Annual Report to Shareholders (Part II and IV).
PORTEC RAIL PRODUCTS, INC.
INDEX TO FORM 10-K
Cautionary Statement Relevant to Forward-looking Statements
This Form 10-K contains or incorporates by reference forward-looking statements relating
to the Company. These statements may be found throughout this Form 10-K, particularly under the
headings Managements Discussion and Analysis of Financial Condition and Results of Operations
and Business, among others. 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 below 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:
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the length and severity of the current worldwide recession;
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competitive dynamics in the North American and worldwide railroad and railway supply
industries;
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capital expenditures and maintenance spending by the railway industry in North
America and worldwide;
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economic conditions, including changes in inflation rates or interest rates;
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climate change, including the risks and opportunities in laws and regulations,
development of new technologies, legal and political trends, as well as scientific
developments
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product development and the success of new products;
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our ability to successfully pursue, consummate and integrate attractive acquisition
opportunities;
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changes in laws and regulations;
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the development and retention of sales representation and distribution agreements
with third parties;
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limited international protection of our intellectual property;
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the loss of key personnel;
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fluctuations in the cost and availability of raw materials and supplies, and any
significant disruption of supplies;
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foreign economic conditions, including currency rate fluctuations;
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political unrest in foreign markets and economic uncertainty due to terrorism or
war;
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exposure to pension liabilities;
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seasonal fluctuations in our sales;
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technological innovations by our competitors; and
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the importation of lower cost competitive products into our markets.
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The Company specifically declines to undertake any obligation to publicly revise any
forward-looking statements that have been made to reflect events or circumstances after the date of
those statements or to reflect the occurrence of anticipated or unanticipated events.
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PART I
ITEM 1. BUSINESS
Overview
Portec Rail Products, Inc. (sometimes herein referred to as we, 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 systems. We also manufacture material handling
equipment for industries outside the rail transportation sector at our United Kingdom operation. We
serve both the domestic and international markets.
We operate through four global business segments consisting of Railway Maintenance Products
Division (RMP), Shipping Systems Division (SSD), Portec Rail Nova Scotia Company (Canada) and
Portec Rail Products (UK) Ltd. (United Kingdom). 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. Sales and operating income by segment
are presented in Managements Discussion and Analysis set forth in Item 7 in this annual report on
Form 10-K and Note 11: on page 68 Segments, Geographic and Major Customer Financial Information
of our consolidated financial statements set forth in Item 8 in this annual report on Form 10-K.
Our corporate headquarters is located at 900 Old Freeport Road, Pittsburgh, Pennsylvania
15238. Our telephone number is (412) 782-6000.
Recent Developments
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.
On February 24, 2010, the United States Court of Appeals for the Second Circuit issued its
decision, reversing the order of the United States District Court for the Northern District of New
York, which dismissed Portec Rail Products, Inc., from certain litigation that related to the
Niagara Mohawk Power Corporation v. Chevron U.S.A, Inc., et al. stating that there were genuine
issues of material fact. In addition, the Second Circuit reinstated the plaintiffs claims under
the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), 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. Should we ultimately be held liable, damages may be assessed by the
Court in accordance with CERCLA.
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 named defendants. These
lawsuits are directly related to the Agreement and Plan of Merger with L.B. Foster Company and
Foster Thomas Company. We are currently
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working with legal counsel to prepare our response to, and
defense against these claims. Following is a summary of these lawsuits:
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Date
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Filed
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Court
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Plaintiff
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Defendants
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2/19/2010
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Circuit Court of
Kanawha County,
West Virginia
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Barbara Petkus,
individually and on
behalf of all
others similarly
situated.
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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
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2/24/2010
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Court of Common
Pleas, Allegheny
County,
Pennsylvania
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Everett Harper, on
behalf of himself
and others
similarly situated.
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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
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2/24/2010
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Court of Common
Pleas, Allegheny
County,
Pennsylvania
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Richard S. Gesoff
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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
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3/02/2010
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Court of Common
Pleas, Allegheny
County,
Pennsylvania
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Scott Phillips,
individually and on
behalf of all
others similarly
situated.
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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
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3/03/2010
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Circuit Court of
Kanawha County,
West Virginia
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John Furman,
individually and on
behalf of all
others similarly
situated.
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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
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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.
Railway Maintenance Products Division RMP
RMP, our largest business segment, provides track component and friction management products
and services to railroads, transit systems and railroad contractors from our manufacturing and
assembly plant located in Huntington, West Virginia. Our wholly-owned subsidiary, Salient Systems,
Inc. (Salient Systems), provides our railroad customers with railway wayside detection and
operating asset data management systems from its engineering and assembly operation in Dublin,
Ohio. Approximately 90% to 95% of our sales from this business segment are to our United States
and Canadian customers while approximately 5% to 10% of our sales from this
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segment are to other
customers. RMPs administrative functions such as customer service, engineering, purchasing and
accounting are preformed in Pittsburgh, Pennsylvania in the same office location as our corporate
headquarters.
Track Component Products
. We sell a variety of products used on new or existing rail
for repair. The primary customers for these products are Class I railroads, regional railroads,
local railroads, railroad contractors and transit systems. These products include standard and
insulated rail joints, gauge plates, and curve blocks.
RMP is a major supplier of rail joints in the North American market. Rail joints are high
strength steel bars, designed to join rails together while maintaining rail strength and
continuity. Many joints are designed to be insulated from the rail to facilitate the railway signal
system. Low voltage current is transmitted through the rail and segments of the track are
electrically isolated through the use of insulated rail joints. We furnish our customers
epoxy-bonded insulated joints, polyurethane-encapsulated insulated joints and epoxy fiberglass
(non-steel) insulated joints.
As railroads have increased axle loads, train speeds and utilization of main lines, the
demands placed upon the rail joint also have increased. To meet these demands, we have expanded and
improved our product line of standard joints, bonded insulated joints, polyurethane-encapsulated
insulated joints and fiberglass epoxy insulated joints. Continued technological advancements in
metallurgy and adhesives in addition to engineering tools such as computer aided design analysis
and advanced product testing processes enable us to provide a higher level of product performance.
Friction Management Products and Services
. As the North American market leader, our
friction management products and services control the coefficient-of-friction at the rail/wheel
interface thus improving train-operating efficiency, reducing track stresses and lowering related
maintenance costs for our customers. Friction management includes gauge face lubrication with rail
curve greases and top-of-rail applications with friction modifiers such as our KELTRACK® Trackside.
A friction modifier is designed to maintain friction levels that help provide for efficient train
control and dynamics. Lubricants and friction modifiers can be applied by a fixed station at the
side of the track (wayside application), by a specifically equipped truck as it moves along the
rails (hi-rail application), or by units mounted on a locomotive, a special rail car inside the
train, or transit system car (on-board application). The dominant technology of applying lubricants
or friction modifiers to the rail is a wayside assembly of a tank housing a pump which feeds
special distribution bars fastened to the rail. As railroads increase axle loads and utilization of
main lines, friction management becomes increasingly more important. RMP designs, manufactures and
sells the equipment for our friction management applications, and acts as a distributor for various
other lubricants used in gauge face lubrication applications. RMP also has exclusive distributor
rights for utilizing a mobile rail-mounted tribometer for use in monitoring friction levels of
rail.
Our most advanced wayside friction management system is the Protector® IV
application system which we began producing and selling in August 2000. The Protector®
IV is suitable for transit and freight railroad solutions. It reduces rail wear, lateral forces
and noise, and is in service in North America, South America, Europe and Asia. The
Protector® IV is the most complete wayside system developed to function in the wide
array of operating conditions found in these markets.
We believe we offer our customers the widest choice of railway friction management products
and services for most applications and have a dominant share of the North American market for
railway friction management products.
Wayside Data Collection and Data Management Systems.
Salient Systems designs,
manufactures and provides wayside measurement and detection products, services and support for both
the domestic and the international railway transportation industry. Salient Systems products are
engineered to enhance our rail customers equipment utilization by improving reliability and
reducing maintenance expense.
Salient Systems three major product lines fall under its comprehensive set of solutions
for the global railroad market as its IntelliTrack® technologies.
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Wayside Data Collection Systems
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The wayside data collection systems focus on the health of
rolling stock:
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Wheel Impact Load Detector continually monitors locomotive and rail car wheel health
by measuring and reporting the impact loads from moving trains allowing for the targeted
removal of defective wheels from service.
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Hunting Truck Detector Provides alarms for excessive lateral forces caused by hunting
trucks before they significantly contribute to the rapid wear of rail and rail cars.
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Truck Performance Detector Provides alarms for rail cars whose suspension systems are
not tracking properly along curved track due to worn or defective undercarriages.
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Automatic Vehicle Overload & Imbalance Detector Provides alarms for overloaded or
imbalanced rail cars at track speeds with an additional high speed weigh-in-motion
capability.
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Low Hose Detector Provides alarms for low or dragging coupling hoses on rail cars by
means of an optical sensing approach to minimize false alarms common to mechanically-based
systems.
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Railstress Monitor Provides rail-neutral temperature and rail stress readings in
order to allow proper management of rail laying and maintenance procedures.
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StressNet® A strategic network of proprietary Railstress Monitors installed along the
rail that routinely measure and record a regions longitudinal stress and temperature
history. The data can then be uploaded for analysis and reporting by the StressNet® Data
Management System.
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Database Management Systems.
Salient Systems also markets two database management systems
that provide extensive trend analysis to proactively identify potential safety problems and
optimize maintenance planning:
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Wheel Data Management System Presents fleet performance and actionable maintenance
information in a customer readable form.
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StressNet® Data Management System Provides long-term trend analysis of shifts in
neutral rail temperature to reveal track regions increasingly at risk of rail buckling or
pull-aparts.
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Rail Friction Management Systems.
The rail industry recognizes the benefits of proper
system-wide lubrication and the effects of poor or improper lubrication on fuel consumption,
rail wear and noise. Salient Systems product line includes a tribometer product to assist in
rail friction management that we will utilize as part of our approach of providing a total
solution to a customers friction management problems:
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Portable Tribometer An effective, user-friendly method to spot-check the coefficient
of friction of rail/wheel interfaces and validate the quality of rail lubrication methods.
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Shipping Systems Division SSD
Our SSD business segment engineers and sells load securement systems to the railroad industry.
These systems secure a wide variety of products and lading onto freight cars. Our customers
include railroads, railcar builders, railcar repair shops and railcar lessors. We believe that we
possess a significant share of the North American railroad load securement systems market. Most of
the assembly work for SSD is performed at RMPs Huntington, West Virginia manufacturing plant,
although some manufacturing is subcontracted to independent third parties. SSD is headquartered
near Chicago, in Oak Brook, Illinois.
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In October 2006, we acquired the railroad product line assets of Vulcan Chain Corporation
(Vulcan), a Detroit, Michigan manufacturer of load securement products for the railroad industry.
Since the acquisition date, the Vulcan assets and results of operations have been included in the
SSC business segment and the consolidated financial statements.
SSD continues to work closely with railcar owners and shippers to promote its patented
WinChock
TM
securement system for transporting heavy-duty highway truck tractors. SSD
has also developed and successfully passed the Association of American Railroads (AAR) established
criteria for a new higher-capacity bridge plate.
Portec Rail Nova Scotia Company, our wholly-owned Canadian subsidiary Canada
In conjunction with the acquisition of Kelsan Technologies Corp. in November 2004, we
established a new Canadian subsidiary, Portec Rail Nova Scotia Company, and transferred ownership
of Portec, Rail Products Ltd. to Portec Rail Nova Scotia Company. This subsidiary was initially
established to provide a legal structure for our Canadian entities that would provide the most
advantageous tax benefits under both Canadian and United States income tax laws. In 2007, the
United States Internal Revenue Service (IRS) enacted new regulations that had a potentially adverse
impact on our previous favorable tax position, and resulted in a restructuring of the debt
obligations of the Portec Rail Nova Scotia entity in December 2008. We evaluated the tax structure
of our Canadian business segment and implemented a plan that we believe will preserve the tax
benefits under this new debt structure. As a result, during 2009 we recognized intercompany
foreign exchange gains which we do not expect to continue in future years due to the repayment of
an outstanding debt obligation as of December 31, 2009.
Our Canadian operations produce rail anchors and rail spikes at our manufacturing plant in St.
Jean, Quebec, primarily for the Canadian railroads, with some products exported to the United
States and for other international customers. Rail anchors and rail spikes are devices used to
secure rails to wooden ties to restrain the movement of the rail. We also design, manufacture, and
sell friction management products from our facility in Pointe-Claire, Quebec, a suburb of Montreal.
Our Kelsan Technologies operation is headquartered in Vancouver, British Columbia. Kelsan is
an innovative developer of friction control solutions, which control friction at the wheel/rail
interface in order to reduce costs and improve performance. Used by transit and freight rail
companies around the world, Kelsans patented friction control solutions extend rail and wheel
life, improve fuel efficiency, reduce green house gas emissions, and also reduce noise, lateral
forces, and short pitch corrugations. Kelsan markets the environmentally friendly technology to
customers in both liquid and solid sticks through a variety of delivery systems.
For its liquid products Kelsan manufactures KELTRACK®, which is a patented water-based liquid
friction modifier. KELTRACK® is applied using a Portec Rail Products Protector® IV Top-Of-Rail
application system, or through a variety of other application methods for hi-rail or on-board
systems. When applied, KELTRACK® leaves a dry thin film on the top of the rail surface. The thin
film is then transferred to the vehicles from the top of the rail and provides friction control
between the wheel/rail interface. KELTRACK® is manufactured in different formulas matched to a
variety of applications in both freight and transit systems.
For its solid stick products, Kelsan manufactures a spring-applied solid lubricant stick made
of unique ingredients that when applied to a rail wheel flange or tread, help improve the
lubrication and traction qualities of the rail/wheel interface.
There are two major Canadian transcontinental railroads, the Canadian Pacific Railway and the
Canadian National Railway, that we serve from our Canadian operations, and a number of regional
railroads. Kelsan also has an established network of agents and distributors throughout the world,
in particular Europe, Asia and Australia, to supplement its sales team. This network is now used
to aggressively promote our friction management equipment into these key markets, while realizing
continuing ongoing sales of the friction modifier solutions being pumped onto the rails through our
equipment.
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Portec Rail Products (UK) Ltd., our wholly-owned United Kingdom subsidiary United Kingdom
In the United Kingdom, we operate and serve our customers in two different markets. Our
Portec Rail Group in Sheffield, England serves our United Kingdom and European customers. Product
lines include friction management products and services and track component products similar to
those of our North American divisions. We design and manufacture a complete line of rail joints
including the Coronet epoxy (glue) insulated rail joints, a Coronet nylon-encapsulated insulated
joint, and also distribute a complete line of track fasteners to the United Kingdom railways as
well as to international customers. The Portec Rail Group in Sheffield also designs and sells
friction management products for the United Kingdom and European markets and distributes KELTRACK®
trackside friction modifiers and Protector® IV application systems.
In the material handling market, we operate and serve our customers from our location in
Leicester, England, under the trade name of Conveyors International (CI Logistics). Our material
handling operation designs, manufactures and sells various products, such as overhead and floor
conveyors, expandable boom conveyors, racking systems and mezzanine flooring systems. Our material
handling systems are designed to provide our customers with a total solution to moving products
throughout their factory, offloading their products from trucks and moving their goods in other
types of applications. Our Quodeck product line is a line of racking systems, mezzanine floor
systems and turnkey equipment mainly used in the garment distribution industry.
As a result of a business restructuring which began in 2006, we closed our Stone, England and
Wrexham, Wales locations in the United Kingdom, and sold our Wrexham facility for approximately
$2.0 million (£1,025,000 pounds sterling) in March 2007. The business restructuring was finalized
in the first quarter 2007.
Alliances
We have created alliances with independent strategic partners within our industry to
broaden the scope of the existing friction management products and services that we provide to our
customers. In 2000, we formed an informal alliance of technology companies to enhance friction
management solutions for the wheel/rail interface; however, since 2000, some of the original
members such as Kelsan Technologies and Salient Systems have become wholly-owned subsidiaries of
our company. Except for these wholly-owned subsidiaries and two other independent members, there
are no formal written agreements among all the other members of the alliance. Under the Friction
Force
®
registered trademark brand of products and services, the alliance strengthens our
market position in lubrication and friction management and enables us to deliver improved solutions
with enhanced value to our customers. For one independent alliance member, we have a written
agreement that names us as the exclusive North American distributor for the SoyTrak Rail Curve
Lubricant, a biodegradable, environmentally-friendly soy-based lubricant developed and manufactured
by Environmental Lubricants Manufacturing, Inc. For the other independent alliance member, we have
a written exclusive distributorship for DMF (Diversified Metal Fabricators) to market and use a
mobile rail-mounted tribometer which measures rail friction in order to help manage our friction
management application methods. These alliances evolve as market opportunities arise, as well as
to effectively serve our customers.
Industry Overview
We provide products and services primarily for the railway industry, which includes freight
railroads and transit systems. However, the demand for our products could be impacted by the
continuing fluctuation in energy costs, global climate changes, and economic conditions. We
service the railway industry, which is dependent on the rising and falling costs of energy. Rail
traffic, car loadings, new freight-car builds, capital expenditures and maintenance spending are
factors that impact the demand for our products and services. The global railway industry is a
capital intensive industry, and our sales may be impacted by the industrys capital expenditures
and maintenance spending for programs designed to increase the efficiency and productivity of rail
operations and for routine maintenance of rail operations. Deregulation and consolidation in the
railroad industry, market competition between railroads and trucking and the impact of the global
economy continue to impact the railway industry, including the railway supply market. We believe
the railway industry is in a long-term growth trend despite the current global economic crisis.
9
The Surface Transportation Board, the federal agency responsible for the economic regulation
of the railroad industry, designates United States freight railroads into three classes based upon
their operating revenues. Class I railroads are defined as those with operating revenue of at
least $401.4 million in 2008; Class II railroads had between $32.1 million and $401.4 million of
operating revenue in 2008; Class III railroads had less than $32.1 million of operating revenues
in 2008.
The Association of American Railroads (AAR) identifies two groups of non-Class I railroads
based upon their revenue and mileage characteristics. Regional railroads are defined as
line-haul railroads that operate at least 350 miles of road and/or earned revenue between $40
million and the Class I revenue threshold. Local railroads include freight railroads, which are
not Class I or regional. Local railroads operate less than 350 miles of road and earn less than $40
million of revenue annually.
Since 1979, consolidation in the North American railroad industry has resulted in 36 Class I
railroads being reduced to seven. In particular, several mergers of large U.S. railroads have
occurred in the last 20 years. We believe that the improved efficiency and service capability of
the larger railroads ultimately tends to boost rail traffic, which is an important driver of the
demand for our products.
Business Strategy
Our business strategy is to (i) increase the market share of our track component products that
serve as the foundation for our railway business; (ii) advance the technology and expand the
friction management products and services along with our wayside detection and data operating
management systems that we offer to railroads and transit system companies in North America while
expanding our geographic footprint globally, with a primary focus on Europe, South America and
Asia; (iii) increase our offering of products and services to assist businesses in loading,
securing and transporting materials on railcars; (iv) increase the sales and profitability of our
material handling products; and (v) continue to seek accretive acquisition opportunities that can
assist in growing our business by complementing or expanding our existing products and services.
Sales and Marketing
Each of our business units initiates their individual sales programs, which vary due to the
different product lines and geographic locations. Our marketing efforts include promoting our
business through trade show presentations, industry research/application papers, trade magazine
advertising, a worldwide sales distribution network and through our website. In addition, our
managers and engineers participate in various industry conferences and industry professional
organizations to interface with customer engineers and end users of our products. The business
units also use an in-house sales department to sell replacement parts and field service and a
combination of employee sales personnel, third party sales representatives and distributors to call
on customer purchasing managers, engineers and operations managers. Internationally, we also
utilize a network of agents across Europe, South America and Asia and our internal sales employees
to reach current customers and cultivate potential customers in these areas.
Sources and Availability of Raw Materials and Supplies
The products we manufacture and sell require a supply of raw materials, including steel and
steel fabrications and numerous specialty components, such as pumps, distribution bars and
electronic controls. There are at least two suppliers for most components. Inventory levels are
continually monitored to ensure adequate supplies are available to meet our production
requirements. Periodically, advance purchases are made to avoid possible shortages of material due
to capacity limitations of component suppliers and possible price increases. We rely on established
relationships with major suppliers to ensure the availability of raw materials and specialty items
rather than long term supply contracts. However, when raw material prices are volatile we will
consider the use of multi-year supply agreements. Our goal is to maintain good relationships with
our suppliers and we have not experienced any significant interruptions in recent years in the
supply of raw materials or specialty components.
The fluctuating costs of our raw materials and supplies could negatively impact our profits.
As the volatility of the markets continues to change, so does the pricing of our raw materials and
supplies. We may not have the ability to incorporate these price changes into the marketing of our
products due to contract constraints and competitive pricing pressures. Accordingly, this may
limit our ability to maintain existing margins, and may also have a material effect on our
operating profits.
10
Although there are a large number of domestic and foreign suppliers of steel and steel
fabricators, our RMP segment relies upon three primary steel suppliers for a substantial amount of
its joint bar steel, but also has two other domestic steel suppliers. The steel that we purchase
is priced via combination of prevailing market prices and previously negotiated customer prices.
RMP has utilized steel suppliers in China for some of its domestic steel requirements. This
provides an additional steel source as we continue to monitor the prices and availability from our
domestic steel suppliers. Our Montreal operation obtains the bulk of its steel supply for rail
spikes and rail anchors from three steel suppliers. There is an informal agreement with one of
these suppliers and we purchase steel at prevailing market prices. Our Kelsan operation has one
year remaining on a three-year supply agreement with a supplier of its primary raw material. This
agreement provides fixed pricing and monthly minimum and maximum purchase quantities.
Principal Customers
Our business depends largely upon sales to United States, Canadian and United Kingdom
railroads and transit systems. For year ended December 31, 2009 sales to our two largest customers,
Canadian National Railway and Norfolk Southern Corporation, accounted for 12% and 11% of our
consolidated sales. For the year ended December 31, 2008, sales to our two largest customers,
Canadian Pacific Railway and Canadian National Railway were 15% and 7% of our consolidated sales.
For additional information on our principal customers, see Managements Discussion and Analysis of
Financial Condition and Results of Operations Business Segment Review.
Backlog
Our backlog is based on customer purchase orders that we believe are firm. Customer orders,
however, may be subject to cancellation and other customary industry terms and conditions.
Historically, little variation has been experienced between the number of products ordered and the
number of products actually sold. A significant portion of our sales have very short lead terms of
30 to 60 days that may not be recorded on any quarter or year end backlog summary. The backlog is
not necessarily indicative of future results of operations. The railroad industry, in general, has
historically been subject to fluctuations due to overall economic conditions.
The following table sets forth the dollar amount of backlog for our business segments at the
dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
RMP
|
|
$
|
5,688
|
|
|
$
|
6,665
|
|
|
$
|
8,911
|
|
SSD
|
|
|
674
|
|
|
|
780
|
|
|
|
1,190
|
|
Canada
|
|
|
3,687
|
|
|
|
3,800
|
|
|
|
1,755
|
|
United Kingdom
|
|
|
2,192
|
|
|
|
2,861
|
|
|
|
4,510
|
|
|
|
|
|
|
|
|
|
|
|
Total backlog
|
|
|
12,241
|
|
|
|
14,106
|
|
|
|
16,366
|
|
Less: Intra-company backlog
|
|
|
736
|
|
|
|
1,135
|
|
|
|
323
|
|
|
|
|
|
|
|
|
|
|
|
Net external backlog
|
|
$
|
11,505
|
|
|
$
|
12,971
|
|
|
$
|
16,043
|
|
|
|
|
|
|
|
|
|
|
|
Seasonality of Business
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
pick-up in construction and trackwork 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 trackwork 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.
11
Patents and Trademarks
We own a number of United States, Canadian and international patents and trademarks including
those acquired with the purchase of Salient Systems, Kelsan and the Vulcan Chain railroad product
line. We have several patents on our friction management products, such as the Protector® IV
application system, along with a significant number of patents related to our friction modifier
product lines at Kelsan, which we believe are of material importance to the business as a whole.
We believe that, in the aggregate, our patents and trademarks give us a competitive advantage. We
also rely on a combination of trade secrets and other intellectual property laws, non-disclosure
agreements and other protective measures to establish and protect our proprietary rights in
intellectual property.
Research and Development
Our research and development programs focus on improving the effectiveness of our existing
products and innovating new products and technologies for our customers. During the years ended
December 31, 2009, 2008 and 2007, we spent approximately $2.8 million, $3.0 million and $2.4
million, respectively, on research and development programs.
A large portion of our research and development efforts have been devoted to developing
friction management products, particularly the Protector® IV electronic lubricator, as well as the
associated distribution bars for both gauge face lubrication and top-of-rail friction modifiers. In
addition to the wayside Protector® IV system, we have committed resources to various application
methods of our friction modifiers. We will continue to dedicate resources to commercialize the
Salient Systems Railstress Monitor, and to fund technological advancements of Kelsans stick
lubrication and liquid friction modifier product lines. Development efforts also continue on niche
items for our track component group, as heavier axle loads and higher speeds continue to require
more reliability and longer life of some products in this product group.
Competition
Competition on some of our product lines has been strong. We feel that the diversity of our
product lines and product offerings strengthens our competitive position and provides better
products and services to our customers.
For our track component product lines, price competition is strong mostly due to the fact that
this product group is recognized as a commodity group. However, opportunities to obtain better
pricing for a portion of this product group reflects specialized designs being developed due to
heavier axle loads, higher rail traffic volumes and higher train speeds causing the need for longer
lasting and overall better performing products. Competition comes
primarily from various long time suppliers. Foreign suppliers continue to attempt to enter
the larger North American market for some products, but with higher transportation costs, higher
material costs worldwide and potentially difficult testing and approval requirements, foreign
competition has not been a significant threat in 2009 for most of this product group.
For our friction management and wayside detection systems, our highly engineered products
offer opportunities for competing on a value-added basis. Price is a factor, but it can be less
significant when this product group sells on the merits of total value provided to the customer.
Product performance, technological leadership, quality, reliability of delivery and strong customer
service and support are all valued by our customers and are all significant factors when evaluating
the price of our products. We believe we have significant market share positions with both of
these product groups, but the need is always there to use our research and development efforts to
penetrate new market segments. Competitors in these product groups have not changed over the last
year. We believe that our competitors remain committed to enter our markets. Consequently, we
continue to attempt to provide the best value for our customers by supplying a quality product at
the most affordable price. Intellectual property rights also continue to be used to maintain our
market share in North America and in growing our penetration levels into new markets.
For our load securement systems, we have an established position in the marketplace. The
acquisition of the Vulcan Chain product line in October 2006 eliminated a significant competitor.
The integration of this product line into our Huntington, West Virginia manufacturing facility has
positioned us to capitalize on improved cost efficiencies.
12
For our material handling group, which is located in Leicester, England, the competitive
environment has not changed significantly. This is a project-type product group that is bid against
a variety of competitors depending on the type of project. To compete and be successful, we must
sustain a competent technical workforce and strive for the lowest cost of production.
Environmental Matters
We are subject to foreign, national, state, provincial, and local environmental laws and
regulations concerning, among other matters, air emissions, wastewater discharge, solid and
hazardous waste disposal, and employee health and safety. We believe that our current operations
are in compliance with all applicable environmental laws and regulations. See Legal Proceedings
for information relating to a proceeding in which we are involved regarding environmental matters.
Regulation
In the course of our operations we furnish products and services which are required to meet
industry specifications. The American Railway Engineering and Maintenance of Way Association
(AREMA) publishes standards and recommended practices applicable to our track component product
line. Our customers use the AREMA standards and from time to time include their own specifications
for the products and services that they purchase. The Association of American Railroads (AAR)
promulgates a wide variety of rules and regulations governing the safety and design of equipment.
Our securement system designs require AAR approval as well as our customers approval and often the
approval of the shipper. In the United Kingdom, our products must gain approval and meet the
specifications of Network Rail, the national United Kingdom rail infrastructure system.
We maintain quality assurance programs at all of our locations. With two exceptions, all of
our locations are all certified under ISO 9001:2000.
Employees
We employed 262 people at December 31, 2009, of which 122 were located in the United States,
88 were located in Canada, and 52 were located in the United Kingdom. We consider the relationship
with our employees to be good. Our employees in the United States, the United Kingdom and our
Canadian employees in Vancouver, British Columbia are not subject to any collective bargaining
agreement. Approximately 11% of our employees, all of whom are employed at our manufacturing
facility in St. Jean, Quebec, Canada, are subject to a collective bargaining agreement. This
agreement is effective through August 31, 2010.
Available Information
Availability of Reports.
Portec Rail Products, Inc. is a reporting company under the
Securities Exchange Act of 1934, as amended (the 1934 Act), and files reports, proxy statements
and other information with the Securities and Exchange Commission (the Commission). The public
may read and copy any Company filings at the Commissions Public Reference Room at 100 F Street,
N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. Because the Company makes filings to
the Commission electronically, you may access this information at the Commissions internet site:
www.sec.gov
. This site contains reports, proxies and information statements and other
information regarding issuers that file electronically with the Commission.
Web Site Access.
Our internet web site address is
www.portecrail.com
. We make
available, free of charge at this web site, access to annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the 1934 Act as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the Commission. Access to
reports of beneficial ownership filed pursuant to Section 16(a) of the 1934 Act are also available
on our web site.
13
ITEM 1A. RISK FACTORS
Risk Factors Relating to Our Business
Currency fluctuations between the U.S. dollar, Canadian dollar and British pound sterling can
adversely affect our reported financial results.
The majority of our products and services are sold in the United States, Canada and the United
Kingdom. Fluctuations in the relative values of the United States dollar, Canadian dollar and
British pound sterling could significantly increase the cost of our products to the ultimate
purchaser. Under such circumstances our sales may decrease or we may have to reduce the prices for
our products and services, thereby reducing our income.
We report our financial condition and results of operations in United States dollars.
Fluctuations in the relative values of the United States dollar, Canadian dollar and British pound
sterling will require adjustments in our reported earnings and operations to reflect exchange rate
translation in our Canadian and United Kingdom sales and operations. Our reported financial
results will be impacted in response to such currency fluctuations. If the United States dollar
strengthens in value as compared to the value of the Canadian dollar or British pound sterling, our
reported earnings in dollars from sales in those currencies will be unfavorable. Conversely, we
will have a favorable result if the United States dollar weakens in value as compared to the value
of the Canadian dollar or British pound sterling.
We do not have any control over exchange rates, as these are largely driven by worldwide
economic factors. Beginning in approximately the fourth quarter 2008, the exchange rates of the
Canadian dollar and British pound sterling compared to the United States dollar have been volatile.
During 2009, the exchange rate of the British pound sterling compared to the United States dollar
has remained somewhat lower from a recent historical perspective.
New legislation or regulatory changes could impact the Companys earnings or restrict its ability
to independently negotiate prices.
Political changes could result in legislative or regulatory changes that impose new burdens on
the Company and its customers, increase operating costs, reduce operating efficiency or limit
revenues. Legislation passed by Congress or new regulations issued by federal agencies could
potentially have a significant impact on the revenues, costs and profitability of the business of
the Companys railroad customers resulting in a potential adverse impact on our business. The
railroad industry is vulnerable to economic re-regulation by Congress, which could have a
significant negative impact on rail services and would likely force a reduction in capital spending
by the Companys primary customers. For example, statutes imposing price or labor constraints or
affecting rail-to-rail competition could adversely affect the profitability of railroads which in
turn may reduce their expenditures. Also, additional regulations related to environmental matters
such as greenhouse gas emissions, and climate changes legislation could increase operating costs or
reduce operating efficiencies of railroads thereby affecting the business of our customers and
reducing the income we receive from the railroad industry.
We have limited international protection of our intellectual property.
We own a number of patents and trademarks under the intellectual property laws of the United
States, Canada and the United Kingdom. Our patent protections begin expiring in 2014. However, we
have not perfected
patent and trademark protection of our proprietary intellectual property in other countries. The
failure to obtain patent and trademark protection in other countries may result in other companies
copying and marketing products that are based upon our proprietary intellectual property. This
could impede our growth into new markets where we do not have such protections and result in
greater supplies of similar products, which in turn could result in a loss of pricing power and
reduced revenue.
14
Disruption of our relationships with key suppliers would adversely affect our business.
We rely upon third party steel mills to manufacture steel for our track component products
based upon specifications that we provide. In 2009, approximately 90% of our domestic requirements
for steel were purchased from three primary suppliers, and approximately 97% of our Canadian
requirements were purchased from two primary Canadian suppliers. In the event our steel suppliers
for railroad track products were to go out of business, refuse to continue their business
relationship with us or become subject to work stoppages, our business could be disrupted. While
management believes that it could secure alternative manufacturing sources, there can be no
assurance that we would not incur substantial delays and significant expense in securing such
alternative suppliers. Furthermore, alternative suppliers might charge significantly higher prices
than we currently pay. Under such circumstances, the disruption to our business may have a
material adverse impact on our financial condition or results of operations.
If we lose key personnel or qualified technical staff, our ability to manage the day-to-day aspects
of our business will be adversely affected.
We believe that the attraction and retention of qualified personnel is critical to our
success. If we lose key personnel or are unable to recruit qualified personnel, our ability to
manage the day-to-day aspects of our business will be adversely affected. Our operations and
prospects depend in large part on the performance of our senior management team, which includes
Richard J. Jarosinski, our President and Chief Executive Officer, Konstantinos Papazoglou, our
Executive Vice President and Chief Operating Officer, and John N. Pesarsick, our Chief Financial
Officer. The loss of the services of one or all members of our senior management team could have a
material adverse effect on our business, financial condition or results of operations. Because our
senior management team has many years experience with our company and within the industries in
which we operate, it would be difficult to replace them without adversely affecting our business
operations. We do not have employment or non-compete agreements with any members of our senior
management team.
As we expand our sales of products and services internationally, we will increase our exposure to
international economic and political risks.
Historically, substantially all of our business has been conducted in the United States,
Canada and the United Kingdom. International revenues outside of our core United States, Canada
and United Kingdom markets accounted for 15% and 12% of our revenues for the years ended December
31, 2009 and 2008, respectively. We are placing increased emphasis on the expansion of our
international sales opportunities. Doing business outside the United States subjects us to various
risks, including changing economic, climate and political conditions, work stoppages, exchange
controls, currency fluctuations, armed conflicts and unexpected changes in United States and
foreign laws relating to tariffs, trade restrictions, transportation regulations, foreign
investments and taxation. Increasing sales to foreign countries will expose us to increased risk
of loss from foreign currency fluctuations and exchange controls as well as longer accounts
receivable payment cycles. We have no control over most of these risks and may be unable to
anticipate changes in international economic and political conditions and, therefore, unable to
alter our business practices in time to avoid the adverse effect of any of these possible changes.
We have significant pension liabilities, which may significantly increase our funding requirements
under ERISA and other applicable regulations.
We maintain defined benefit pension plans in the United States and United Kingdom that cover a
significant number of our current employees, former employees and retirees. These defined benefit
pension plans were frozen effective December 31, 2003. Our actuaries currently project that our
obligations to the pension plans beneficiaries exceed plan assets. The shortfall in plan assets
may cause us to fund significant amounts of cash into these plans to cover any minimum funding
requirements under regulatory requirements. As a result, in 2010, we will be required to make
minimum contributions to our U.S. defined benefit plan of approximately $400,000, and to our United
Kingdom defined benefit plans of $168,000 (£104,000 pounds sterling).
Our retirement benefit plan liability is inversely impacted by the interest rate used in our
actuarys calculation. As a result, when interest rates decline, our actuarially calculated
benefit plan liability increases.
Conversely, as interest rates increase, the actuarially calculated retirement benefit plan
liability decreases. In 2009, lower interest rates resulted in an increase in our actuarially
calculated retirement benefit plan liability at December
15
31, 2009, which lowered our shareholders
equity by $340,000. In 2008 interest rates decreased which caused higher actuarially calculated
benefit plan liability and the retirement benefit plan liability exceeding the fair value of plan
assets. At December 31, 2008, our shareholders equity was decreased by $1,839,000 in order to
reflect an increase in our minimum pension liability. Further declines in the market value of
these defined benefit pension plan assets will have an adverse impact on our shareholders equity
and uses of cash for other investment opportunities.
We may be required to record a significant charge to earnings if our goodwill or intangible assets
become impaired.
We are required under generally accepted accounting principles to review our intangible assets
for impairment when events or changes in circumstances indicate the carrying value may not be
recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may
be considered to be a change in circumstances indicating that the carrying value of our intangible
assets may not be recoverable include a decline in stock price and market capitalization, a
significant decrease in the market value of an asset, and slower growth rates in our industry. We
may be required to record a significant charge to earnings during the period in which any
impairment of our goodwill or intangible assets is determined. This may adversely impact our
results of operations or financial condition.
We are subject to physical and financial risks associated with climate change.
There is a growing concern that emissions of greenhouse gases are linked to global climate
change. Climate change creates physical and financial risk. Physical risks from climate change
could include an increase in sea level and changes in weather conditions, such as an increase in
changes in precipitation and extreme weather events. The Companys operations are not sensitive to
potential future sea-level rise as it does not operate in coastal areas. However, the Companys
manufacturing facilities and office locations are vulnerable to damage from extreme weather events,
such as ice and heavy snow storms, tornadoes and severe thunderstorms. To the extent the frequency
of extreme weather events increases, this could increase the Companys cost of providing the
products and services we provide. If climate change results in temperature increases the Company
could expect increased electricity demand due to the increase in temperature and longer warm
seasons which this increase in demand could lead to increased energy consumption and higher
operating costs, which may negatively impact our results of operations.
Risk Factors Relating to Our Industry
General economic conditions could negatively impact demand for our products and services.
The current economic environment has impacted demand for rail and rail commodities. Further
decline in general domestic and global economic conditions could further affect demand for our
products, which in turn could reduce our revenues, increase bad debt expense, significantly reduce
our cash flow, or have other adverse effects. Continued weakness of the economy or further
downturns could adversely affect our Companys operating results.
Our sales can fluctuate from quarter to quarter due to seasonal factors or our railroad customers
capital expenditure or routine maintenance spending programs.
Our sales can fluctuate from quarter to quarter because of several factors. First, the demand
for certain of our railroad product lines, including rail joints, rail anchors and spikes, is
subject to seasonal fluctuations. We generally experience strong sales in the second and third
quarters as a result of seasonal pick-up in construction and trackwork due to favorable weather
conditions, compared with an expected downturn in the first and fourth quarter of each year due
largely to reductions in construction and trackwork in the winter months. Notwithstanding expected
seasonal fluctuations, many of our customers are large companies which, as a matter of routine
purchasing practices, place large orders for our products and services that can have a
disproportionate impact on our revenues in a particular quarter. Such large orders in any given
quarter improve the sales performance of that quarter. Conversely, if a major customer delays
spending in a particular quarter, our revenue decreases in that quarter.
16
A decrease in rail traffic or rail capital expenditures due to weakness in the general economy or
competitive factors could adversely affect our operating results.
Weakness in the general economy, or factors such as work stoppage or competition from other
modes of transportation, can cause a decrease in rail transportation or rail capital expenditures,
which could have an adverse impact on our financial condition or results of operations. For
example, railroads directly compete with the trucking industry for the transportation of freight.
In the event that the transportation of freight by truck becomes preferable as a result of pricing,
legislative developments or other factors, the profitability of railroads would be adversely
affected, resulting in a decrease in capital spending or routine maintenance spending. A decrease
in capital spending or routine maintenance spending by our railroad customers could result in lower
sales of our products and decreased revenue.
Competition and innovation by our competitors may adversely affect our business.
The markets for our products are highly competitive. Competition is based on price, product
performance, technological leadership, customer service and other factors. Technological
innovation in the railroad and railroad supply industry has evolved and continues to evolve.
Technological innovation by any of our existing competitors, or new competitors entering any of the
markets in which we do business, could put us at a competitive disadvantage. In particular, our
business would be adversely affected if any existing or new competitors developed improved or less
expensive products.
New or existing competitors may import track component products for sale in the North American
market at reduced prices.
Our rail joint, rail anchor, rail spike and other track component market share could be
reduced by new or existing competitors importing either raw material steel for these products or
finished products from lower cost foreign sources. Standard rail joints are currently available,
imported from Asia, and have been approved for use and are being purchased by some Class I and
short line railroads.
Further consolidation of the railroad industry may adversely affect our business.
Over the past 10 years there has been a consolidation of railroad carriers operating in North
America. Currently, seven Class I railroads operate in North America, which includes two major
railroads in Canada. Future consolidation of the railroad industry may affect our sales and result
in reduced income because the loss of a Class I account to competitors would have a greater impact
on our operations.
Risk Factors Relating to Our Stock Ownership
Potential voting control by directors, management and employees could make a takeover attempt more
difficult to achieve.
Our directors, management and employees control a significant percentage of our common stock.
Executive officers and directors as a group own 2.9 million shares, or 30% of the outstanding
shares as of December 31, 2009. If these individuals were to act together, they could have
significant influence over or control the outcome of any shareholder vote. This voting power may
discourage takeover attempts that other shareholders may desire.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
17
ITEM 2. PROPERTIES
We conduct our business through our corporate and business unit offices, and through our
manufacturing facilities. Our offices and manufacturing facilities are suitable and adequate to
meet our current and future production requirements. The following table sets forth information
about our offices and manufacturing facilities as of December 31, 2009.
|
|
|
Corporate Office
|
|
Owned or Leased
|
900 Old Freeport Road
Pittsburgh, Pennsylvania 15238
|
|
Leased
|
|
|
|
Business Unit Offices
|
|
|
|
|
|
Railway Maintenance Products Division
900 Old Freeport Road
Pittsburgh, Pennsylvania 15238
|
|
Leased
|
|
|
|
Salient Systems, Inc.
4393-K Tuller Road
Dublin, Ohio 43017 (1)
|
|
Leased
|
|
|
|
Shipping Systems Division
120 West 22nd Street
Oak Brook, Illinois 60523
|
|
Leased
|
|
|
|
Portec, Rail Products Ltd.
172 Brunswick Blvd.
Pointe-Claire, Québec,
H9R 5P9 Canada (1)
|
|
Leased
|
|
|
|
Manufacturing Facilities
|
|
|
|
|
|
Portec Rail Products, Inc.
900 Ninth Avenue West
Huntington, West Virginia 25701
|
|
Leased
|
|
|
|
Portec, Rail Products Ltd.
350 Boulevard Industriel
Saint-Jean-sur-Richelieu, Québec,
J3B 4S6 Canada
|
|
Owned
|
|
|
|
Kelsan Technologies Corp.
1140 West 15
th
Street
North Vancouver, B.C.
V7P 1M9 Canada (1)
|
|
Leased
|
|
|
|
Portec Rail Products (UK) Ltd.
43 Wenlock Way
Troon Industrial Area
Leicester LE4 9HU
United Kingdom (1)
|
|
Leased
|
|
|
|
Coronet Rail, Ltd.
Portec Rail Products (UK) Ltd.
Stamford Street
Sheffield S9 2TL
United Kingdom (1)
|
|
Leased
|
|
|
|
(1)
|
|
Serves as a business unit office and manufacturing/assembly facility.
|
18
ITEM 3. LEGAL PROCEEDINGS
We are involved periodically in various claims and lawsuits that arise in connection with our
business. Other than as set forth below, these are routine legal proceedings that, in the
aggregate, are not material to our financial condition and results of operations.
In July 1999, Portec, Inc., the predecessor of Portec Rail Products, was named as a defendant
in
Niagara Mohawk Power Corporation v. Chevron, et al
. venued in the United States District
Court, Northern District of New York. The plaintiff, Niagara Mohawk Power Corporation (Niagara
Mohawk) is seeking contribution from nine named defendants for costs it has incurred, and is
expected to incur, in connection with the environmental remediation of property located in Troy,
New York under the Comprehensive Environmental Response, Compensation and Liability Act, also known
as CERCLA or Superfund, and other causes of action. The basis of the action stems from Niagara
Mohawks agreement with the New York State Department of Environmental Conservation, pursuant to an
Order on Consent, to environmentally remediate property identified as the Troy Water Street Site.
The defendants consist of companies that at the time were industrial in nature, or owners of
companies industrial in nature, and who owned or operated their businesses on portions of the Troy
Water Street site or on properties contiguous, or otherwise in close proximity, to the Troy Water
Street Site. Niagara Mohawk alleges that the defendants either released hazardous materials
directly to the Troy Water Street site or released hazardous materials that migrated onto the Troy
Water Street Site, and therefore the defendants should be responsible for a portion of the costs of
remediation.
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 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 recent United States Supreme Court decision. In July 2008, The
District Count decided that the United States Supreme Court decision did not necessitate any change
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 Rail 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. Should we ultimately be held liable, damages may be assessed
by the Court in accordance with CERCLA.
We believe that Niagara Mohawks case against Portec, Inc. is without merit. Because Niagara
Mohawk is seeking unspecified monetary contribution from the defendants, we are unable to
determine, if Niagara Mohawk were to prevail on appeal, 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. However, total clean up costs at the Troy Water Street site
are expected to be substantial and may approach $50 million. If liability for a portion of these
costs is attributed to us, such liability could be material. Furthermore, if Niagara Mohawk wins on
appeal, 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 seeks to recover
compensatory and punitive damages on four counts. Management believes the claims in the lawsuit
are without merit and intends to vigorously defend against the claims. Ongoing litigation may be
protracted, and we may incur additional ongoing legal expenses, which are not able to be estimated
at this time.
19
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 named defendants. These
lawsuits are directly related to the Agreement and Plan of Merger with L.B. Foster Company and
Foster Thomas Company. We are currently working with legal counsel to prepare our response to, and
defense against these claims. 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,
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
Kanawha 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.
20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended December 31,
2009 to a vote of security holders.
PART II
|
|
|
ITEM 5.
|
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Portec Rail Products, Inc. common stock is currently listed on the NASDAQ Global Market under
the symbol PRPX. Trading in the Companys common stock on the NASDAQ Global Market commenced in
January 2004. As of February 28, 2010, there were 9,602,029 shares of Portec Rail Products, Inc.
common stock issued and outstanding and approximately 184 shareholders of record, which does not
include shares held by shareholders in broker accounts.
Set forth below is information regarding the payment of dividends and our high and low bid and
asked price for each quarter of 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended- 2009
|
|
High
|
|
Low
|
|
Dividends
|
March 31
|
|
$
|
7.75
|
|
|
$
|
4.65
|
|
|
$
|
0.06
|
|
June 30
|
|
|
10.25
|
|
|
|
5.91
|
|
|
|
0.06
|
|
September 30
|
|
|
10.71
|
|
|
|
8.51
|
|
|
|
0.06
|
|
December 31
|
|
|
10.89
|
|
|
|
8.55
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended- 2008
|
|
High
|
|
Low
|
|
Dividends
|
March 31
|
|
$
|
11.64
|
|
|
$
|
8.21
|
|
|
$
|
0.06
|
|
June 30
|
|
|
12.90
|
|
|
|
10.50
|
|
|
|
0.06
|
|
September 30
|
|
|
12.44
|
|
|
|
8.25
|
|
|
|
0.06
|
|
December 31
|
|
|
9.09
|
|
|
|
4.08
|
|
|
|
0.06
|
|
Under West Virginia law, we may pay dividends and make other capital distributions to our
shareholders provided that no distribution may be made if, after giving it effect: (i) we would not
be able to pay our debts as they become due in the usual course of business; or (ii) our total
assets would be less than the sum of our total liabilities plus the amount that would be needed, if
we were to be dissolved at the time of the distribution, or to satisfy the preferential rights upon
dissolution of shareholders whose preferential rights are superior to those of our common
stockholders.
No securities were repurchased by the Company during the year ended December 31, 2009.
21
Stock Performance Graph
The following graph demonstrates a comparison of total cumulative returns for the Companys
common stock, the Dow Jones U.S. Industrial Transportation Index, and the NASDAQ Composite Index.
The graph assumes an investment of $100 on January 1, 2005 in the Companys common stock and in
each of the stocks comprising the indices. Each of the indices assumes that all dividends were
reinvested and that the investment was maintained to and including December 31, 2009, the end of
the Companys 2009 fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending
|
|
|
|
Index
|
|
|
12/31/04
|
|
|
|
12/31/05
|
|
|
|
12/31/06
|
|
|
|
12/31/07
|
|
|
|
12/31/08
|
|
|
|
12/31/09
|
|
|
|
Portec Rail Products, Inc.
|
|
|
|
100.00
|
|
|
|
|
128.36
|
|
|
|
|
100.25
|
|
|
|
|
112.09
|
|
|
|
|
75.74
|
|
|
|
|
115.39
|
|
|
|
NASDAQ Composite
|
|
|
|
100.00
|
|
|
|
|
101.37
|
|
|
|
|
111.03
|
|
|
|
|
121.92
|
|
|
|
|
72.49
|
|
|
|
|
104.31
|
|
|
|
Dow Jones Transportation Index
|
|
|
|
100.00
|
|
|
|
|
111.66
|
|
|
|
|
122.61
|
|
|
|
|
124.55
|
|
|
|
|
76.91
|
|
|
|
|
91.20
|
|
|
|
22
Compensation Plans
Set forth below is information as of December 31, 2009 regarding equity compensation plans
that have been approved by shareholders. We have no equity based benefit plans that were not
approved by shareholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
Number of securities
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
|
to be issued upon
|
|
|
|
|
|
|
|
|
|
|
remaining
|
|
|
|
exercise of
|
|
|
Number of securities
|
|
|
|
|
|
|
available for
|
|
|
|
outstanding options
|
|
|
issued on exercise of
|
|
|
Weighted average
|
|
|
issuance under
|
|
Plan
|
|
and rights
|
|
|
options and rights
|
|
|
exercise price
|
|
|
plan
|
|
Equity compensation
plans approved by
shareholders
|
|
|
139,000
|
(1)
|
|
|
250
|
|
|
$
|
9.69
|
|
|
|
10,750
|
(2)
|
|
Equity compensation
plans not approved
by shareholders
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
N/A
|
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
139,000
|
|
|
|
250
|
|
|
$
|
9.69
|
|
|
|
10,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Consists of 79,250 stock options granted on January 16, 2007, 72,750 stock options granted
on January 30, 2008 and 1,750 granted on July 2, 2008 under the 2006 Stock Option Plan less 3,800,
8,700, and 2,000 stock options forfeited during 2009, 2008 and 2007, respectively and 250 options which
were exercised during 2008.
|
|
(2)
|
|
Based upon 150,000 shares of common stock authorized for issuance pursuant to grants of
incentive and non-statutory stock options.
|
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected consolidated historical financial data of Portec Rail
Products, Inc. for the periods and at the dates indicated. The information is derived in part
from, and should be read together with, the audited consolidated financial statements and notes
thereto of Portec Rail Products, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars In thousands, except per share data)
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
92,221
|
|
|
$
|
109,017
|
|
|
$
|
109,503
|
|
|
$
|
99,225
|
|
|
$
|
90,793
|
|
Cost of sales
|
|
|
60,871
|
|
|
|
73,445
|
|
|
|
74,995
|
|
|
|
68,848
|
|
|
|
61,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
31,350
|
|
|
|
35,572
|
|
|
|
34,508
|
|
|
|
30,377
|
|
|
|
29,558
|
|
Selling, general and administrative
|
|
|
21,626
|
|
|
|
22,635
|
|
|
|
22,781
|
|
|
|
22,117
|
|
|
|
19,641
|
|
Amortization expense
|
|
|
1,116
|
|
|
|
1,199
|
|
|
|
1,241
|
|
|
|
926
|
|
|
|
698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
8,608
|
|
|
|
11,738
|
|
|
|
10,486
|
|
|
|
7,334
|
|
|
|
9,219
|
|
Interest expense
|
|
|
298
|
|
|
|
805
|
|
|
|
1,247
|
|
|
|
1,105
|
|
|
|
856
|
|
Other (income)/expense, net
|
|
|
(191
|
)
|
|
|
(87
|
)
|
|
|
246
|
|
|
|
140
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
8,501
|
|
|
|
11,020
|
|
|
|
8,993
|
|
|
|
6,089
|
|
|
|
8,115
|
|
Provision for income tax
|
|
|
1,696
|
|
|
|
3,241
|
|
|
|
2,862
|
|
|
|
1,469
|
|
|
|
2,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,805
|
|
|
$
|
7,779
|
|
|
$
|
6,131
|
|
|
$
|
4,620
|
|
|
$
|
5,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & Diluted
|
|
$
|
0.71
|
|
|
$
|
0.81
|
|
|
$
|
0.64
|
|
|
$
|
0.48
|
|
|
$
|
0.61
|
|
Cash dividends paid per share
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.21
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & Diluted
|
|
|
9,602,029
|
|
|
|
9,601,928
|
|
|
|
9,601,779
|
|
|
|
9,601,779
|
|
|
|
9,601,779
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital(1)
|
|
$
|
29,110
|
|
|
$
|
23,804
|
|
|
$
|
24,445
|
|
|
$
|
24,771
|
|
|
$
|
25,415
|
|
Total assets
|
|
|
102,542
|
|
|
|
96,823
|
|
|
|
104,226
|
|
|
|
101,682
|
|
|
|
88,869
|
|
Short-term debt
|
|
|
8,086
|
|
|
|
6,500
|
|
|
|
6,865
|
|
|
|
5,655
|
|
|
|
3,847
|
|
Long-term debt and
capital lease
obligations, net of
current portion
|
|
|
2,667
|
|
|
|
6,110
|
|
|
|
9,463
|
|
|
|
13,737
|
|
|
|
10,402
|
|
Total shareholders equity
|
|
|
65,748
|
|
|
|
58,176
|
|
|
|
59,897
|
|
|
|
53,096
|
|
|
|
50,448
|
|
|
|
|
(1)
|
|
Working capital represents total current assets less total current liabilities.
|
|
|
|
ITEM 7.
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion should be read in conjunction with the consolidated financial
statements of Portec Rail Products, Inc. and the related notes beginning on page 38. Unless
otherwise specified, any reference to a year is to a year ended December 31. Additionally, when
used in this Form 10-K, unless the context requires otherwise, the terms we, our and us refer
to Portec Rail Products, Inc. and its business segments.
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 systems. 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.
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.
Results of Operations
Year Ended December 31, 2009 compared to the Year Ended December 31, 2008
Net Sales.
Net sales for the year ended December 31, 2009 were $92.2 million compared to
$109.0 million for the year ended December 31, 2008, a decrease of $16.8 million, or 15.4% from the
previous year. Net sales at our United Kingdom segment declined $9.1 million; net sales at our SSD
segment were lower by $5.4 million, net sales from our RMP segment declined $2.0 million and net
sales from our Canada segment declined $311,000 in 2009. The decrease in sales of $9.1 million at
our United Kingdom segment is due to a combination of lower demand for material handling products
resulting from economic conditions within the United Kingdom, lower sales of friction management
products, and an unfavorable foreign currency translation of $2.9 million that negatively impacted
net sales across all major product lines. The decrease of $5.4 million in net sales at our SSD
segment is primarily due to weakened demand across most major product lines, in particular the
automotive product group, resulting from difficult economic conditions in 2009. The net sales
decrease of $2.0 million for our RMP segment is due to lower sales of track components and other
products and services, partially offset by higher sales of friction management products. The
decline in net sales of $311,000 at our Canada segment is a result of an unfavorable foreign
currency translation of $2.2 million that negatively impacted net sales across all major product
lines, partially offset by an increase of $1.9 million in higher sales of both Kelsan friction
management products and our track component products.
24
Cost of Goods Sold.
Cost of goods sold (COGS) decreased to $60.9 million for the
year ended December 31, 2009, a decrease of $12.6 million or 17.1%, from $73.4 million during the
comparable period in 2008, primarily due to lower sales volume. Our COGS as a percentage of net
sales for the year ended December 31, 2009 was 66.0%, a decrease of 1.4%, from 67.4% for the prior
period in 2008. The components of COGS, including direct material, direct labor and overhead,
remained relatively consistent as a percentage of net sales during 2009 compared to 2008. 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 decreased to $31.4 million for the year
ended December 31, 2009, a decrease of $4.2 million or 11.9%, from $35.6 million for the comparable
period in the prior year. This decrease is due to lower gross profit of $3.1 million at our United
Kingdom operations, $2.1 million at SSD and $443,000 at RMP, partially offset by higher gross
profit at our Canadian operations of $1.4 million. The $3.1 million decrease at our United Kingdom
operations is primarily due to an unfavorable foreign currency translation of $2.3 million that
negatively impacted gross profit across all major product lines, along with lower gross profit from
lower material handling product sales. Gross profit at SSD declined $2.1 million in the current
period, primarily due to lower sales volume across all major product lines. Gross profit at RMP
declined $443,000 in the current period, primarily due to lower gross profit on lower sales volume
of track component products, partially offset by higher gross profit on higher sales of friction
management products. The increase in gross profit at our Canadian operations of $1.4 million is a
combination of a $2.1 million increase in gross profit on higher sales of both Kelsan friction
management and Montreal track component products, partially offset by an unfavorable foreign
currency translation of $726,000 that negatively impacted gross profit.
Selling, General and Administrative Expenses.
Selling, general and administrative (SG&A)
expense decreased to $21.6 million for the year ended December 31, 2009, a decrease of $1.0 million
or 4.5% from $22.6 million for the year ended December 31, 2008. This decrease is due to lower
SG&A expenses of $1.2 million at our United Kingdom operations and $284,000 at SSD, partially
offset by higher SG&A expenses of $301,000 at our Canadian operations and $212,000 in corporate
shared services in the current period. The lower SG&A expense of $1.2 million at our United
Kingdom operations is primarily due to a favorable foreign currency translation of $734,000 that
positively impacted SG&A expense and thus lowered expenses, along with a decrease of $491,000 due
to lower employee salaries, benefit costs and incentive expense. SG&A expense for SSD decreased
$284,000 in the current period, primarily due to lower employee salaries, benefit costs and
incentive expense and business travel expenses in the current period. SG&A expense for our
Canadian operations increased $301,000 in the current period due to a combination of $647,000 of
higher employee salaries and benefit costs, higher incentive expense due to higher profitability,
increased research and development expense due to product development efforts, partially offset by
lower business travel expense and lower franchise taxes due to provincial tax law changes. Our
Canadian operations SG&A expense was also affected by a foreign currency translation in the amount
of $346,000 which lowered SG&A expense. The $212,000 increase in SG&A at corporate shared
services is primarily due to higher consulting expenses in 2009, and increased actuarial expense
related to our domestic defined benefit pension plan.
Interest Expense.
Interest expense decreased to $298,000 for the year ended December 31,
2009, a decrease of $507,000 or 63.0%, from $805,000 for the comparable period in 2008. The
decrease is primarily due to lower interest rates on our debt obligations and the reduction of
outstanding debt from $12.6 million at December 31, 2008 to $10.8 million at December 31, 2009.
Provision for Income Taxes.
The provision for income taxes decreased to $1.7 million for the
year ended December 31, 2009 from $3.2 million for the comparable period in 2008, reflecting a
decrease in income before taxes from $11.0 million for the year ended December 31, 2008 to $8.5
million for the year ended December 31, 2009. The effective tax rates on reported taxable income
were 19.9% and 29.4% for the years ended December 31, 2009 and 2008, respectively. Tax rates in
our foreign jurisdictions range from 30.0% to 35.5%. As such, our consolidated effective tax rate
is impacted by our foreign locations pro-rata share of consolidated income before taxes and related
tax expense or benefit. Our consolidated effective tax rate also reflects research and development
tax credits at our Canadian operations, which reduced income tax expense by $369,000 and $465,000,
or 4.3% and 4.2% for the years ended December 31, 2009 and 2008, respectively. Additionally,
income tax expense for the year ended December 31, 2009 is lower by approximately $342,000 or 4.0%,
due to additional research and development credits for RMP, SSD and our United Kingdom operations
that relate to benefits claimed in the current and prior years and extraterritorial income (ETI)
provisions for RMP and SSD that relate to benefits from prior years. Of this $342,000,
approximately $200,000 or $0.02 per share of income tax benefits were recognized in the fourth
quarter 2009.
25
Net Income.
Net income decreased to $6.8 million for the year ended December 31, 2009, a
decrease of $974,000 or 12.5%, from $7.8 million for the comparable period in 2008. Our basic and
diluted net income per share decreased to $0.71 for the year ended December 31, 2009, from $0.81
per share for the comparable period in 2008, on average shares outstanding of 9,602,029, and
9,601,928 for the years ended December 31, 2009 and 2008, respectively.
Year Ended December 31, 2008 compared to the Year Ended December 31, 2007
Net Sales.
Net sales for the year ended December 31, 2008 were $109.0 million compared to
$109.5 million for the year ended December 31, 2007, a decrease of $486,000 or 0.4% from the
previous year. Net sales
within our RMP segment were lower by $4.1 million, while net sales at our United Kingdom
segment declined $1.7 million in 2008. Partially offsetting these sales declines in the current
year were net sales increases of $3.4 million at our Canada segment and $1.9 million at our SSD
segment. The decrease in sales of $4.1 million at RMP is primarily due to lower demand for our
track components and Salient Systems products. The decrease of $1.7 million in net sales at our
United Kingdom operations is a combination of unfavorable foreign currency translation of $2.2
million that negatively impacted net sales across all product lines, and lower demand for material
handling products of approximately $1.6 million due to a weaker market for these products brought
on by economic conditions in the United Kingdom. These decreases were partially offset by an
increase in demand for friction management products of approximately $1.7 million, along with an
increase in sales of track component products. The increase in sales of $3.4 million at our
Canadian operations is primarily due to higher sales of our friction management products due to
securing a contract from a large customer for the implementation of a Total Friction Management
program. Foreign currency translation of Canadian dollars into U.S. dollars did not have a
significant impact on our net sales for the year ended December 31, 2008. The increase in net
sales of $1.9 million at SSD is primarily due to increased sales of our automotive products and
chain securement systems.
Gross Profit.
Our consolidated gross profit increased to $35.6 million for the year ended
December 31, 2008, an increase of $1.1 million or 3.1%, from $34.5 million for the comparable
period in the prior year. This increase is due to increases of $2.1 million at our Canadian
operations and $383,000 at SSD, partially offset by lower gross profit at our United Kingdom
operations of $1.0 million and $414,000 at RMP. The $2.1 million increase at our Canadian
operations is due to a favorable product mix, as sales of our friction management products were
significantly higher in the current period. Gross profit at our United Kingdom operations declined
$1.0 million, reflecting a combination of an unfavorable foreign currency translation of $717,000
that negatively impacted gross profit, lower gross profit on material handling product sales of
approximately $690,000, and higher gross profit of $413,000 on sales of friction management
products. The decrease of $414,000 in gross profit at RMP is a combination of lower gross profit
of $1.3 million on lower sales of Salient Systems products due to weaker demand in the current
period, higher gross profit of $449,000 contributed by the track component product line due to
lower warranty expense associated with defective BTRs in 2008 than in 2007 (See Note 10:
Commitments and Contingencies, Page 66), and higher gross profit on sales of friction management
products in 2008.
Selling, General and Administrative Expenses.
Selling, general and administrative (SG&A)
expense decreased to $22.6 million for the year ended December 31, 2008, a decrease of $146,000 or
0.6% from $22.8 million for the year ended December 31, 2007. This decrease is due to lower SG&A
expenses of $423,000 at our United Kingdom operations and $373,000 within Corporate shared services
in the current period. These decreases were partially offset by higher SG&A expenses of $285,000
at our Canadian operations, $196,000 at RMP and $169,000 at SSD. The lower SG&A expense at our
United Kingdom operations is primarily due to a favorable foreign currency translation of $490,000
that positively impacted SG&A expense and thus lowered expenses, partially offset by an increase of
$67,000 due to higher professional fees and employee salary and benefit costs. SG&A expense for
Corporate shared service decreased $373,000 in the current period, primarily due to lower
professional fees, employee salary and benefit costs and depreciation expense, partially offset by
higher legal fees, contractual services and research and development expenses. SG&A expense for
our Canadian operations increased $285,000 in the current period due to higher employee salary and
benefit costs, higher incentive expense due to higher profitability, and higher professional fees,
partially offset by lower insurance expense. The $196,000 increase in SG&A at RMP is primarily due
to increased professional fees and higher employee salary and benefit costs. The $169,000 increase
in SG&A at SSD is primarily due to higher employee salary and benefit costs due to new hires and
higher incentive expense due to increased profitability and higher trade show expense in the
current period.
26
Interest Expense.
Interest expense decreased to $805,000 for the year ended December 31,
2008, a decrease of $442,000 or 35.5%, from $1.2 million for the comparable period in 2007. The
decrease is primarily due to lower interest rates on our debt obligations and the reduction of
outstanding debt from $16.3 million at December 31, 2007 to $12.6 million at December 31, 2008.
Other (Income)/Expense.
Other income of $87,000 for the year ended December 31, 2008,
includes foreign currency transaction gains of $206,000, interest income of $68,000 and an
insurance policy deductible recovery of $25,000, partially offset by losses on disposals of fixed
assets of $236,000. Other expense of $246,000 for the year ended December 31, 2007 includes
foreign currency transaction losses of $354,000 and an impairment charge of $50,000 related to the
sale of our Troy, NY property in May 2007 (See Note 13: Impairment of Long-Lived Assets, Page 71).
These expenses for the year ended December 31, 2007 were partially offset by an insurance policy
recovery of $114,000 and rental income of $18,000 on our Troy, NY property prior to its sale in May
2007.
Provision for Income Taxes.
The provision for income taxes increased to $3.2 million for the
year ended December 31, 2008 from $2.9 million for the comparable period in 2007, reflecting an
increase in income before taxes from $9.0 million for the year ended December 31, 2007 to $11.0
million for the year ended December 31, 2008. The effective tax rates on reported taxable income
were 29.4% and 31.8% for the years ended December 31, 2008 and 2007, respectively. Tax rates in
our foreign jurisdictions range from 30.0% to 35.5%. As such, our consolidated effective tax rate
is impacted by our foreign locations pro-rata share of consolidated income before taxes and related
tax expense or benefit. Our consolidated effective tax rate also reflects research and development
tax credits at our Canadian operations, which reduced income tax expense by $465,000 and $314,000,
or 4.2% and 3.5% for the years ended December 31, 2008 and 2007, respectively. Income tax expense
for the year ended December 31, 2007 is higher by approximately $128,000 or 1.4%, due to the income
tax on the gain recorded in the United Kingdom on the sale in March 2007 of our Wrexham, Wales,
United Kingdom facility. In conjunction with this transaction, the gain reported in the United
Kingdom was effectively eliminated in the U.S. by the write-off of the remaining step-up basis,
which originated in connection with the purchase of the Company in 1997.
Net Income.
Net income increased to $7.8 million for the year ended December 31, 2008, an
increase of $1.6 million or 26.8%, from $6.1 million for the comparable period in 2007. Our basic
and diluted net income per share increased to $0.81 for the year ended December 31, 2008, from
$0.64 per share for the comparable period in 2007, on average shares outstanding of 9,601,928, and
9,601,779 for the years ended December 31, 2008 and 2007, respectively.
Business Segment Review
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. Coronet Rails results of operations and its assets and liabilities have
been included in the United Kingdom segment and the consolidated financial statements since the
date of the acquisition. Assets acquired from Vulcan Chain are included in the Shipping Systems
business segment and our consolidated financial statements since the acquisition date.
27
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 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. RMPs largest customers are Class I
railroads in North America. For the years ended December 31, 2009, 2008 and 2007, RMPs
consolidated external sales to its two largest customers represented 38%, 28% and 32%,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
External sales
|
|
$
|
44,247
|
|
|
$
|
46,268
|
|
|
$
|
50,327
|
|
Intersegment sales
|
|
|
1,669
|
|
|
|
2,969
|
|
|
|
1,993
|
|
Operating income
|
|
|
5,998
|
|
|
|
6,447
|
|
|
|
7,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by product line
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Track component products
|
|
$
|
19,849
|
|
|
$
|
24,175
|
|
|
$
|
28,063
|
|
Friction management products and services
|
|
|
17,687
|
|
|
|
15,720
|
|
|
|
14,977
|
|
Wayside data collection and data
management systems
|
|
|
5,087
|
|
|
|
5,170
|
|
|
|
6,685
|
|
Other products and services
|
|
|
3,293
|
|
|
|
4,172
|
|
|
|
2,595
|
|
|
|
|
|
|
|
|
|
|
|
Total product and service sales
|
|
$
|
45,916
|
|
|
$
|
49,237
|
|
|
$
|
52,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes intersegment sales.
|
For the year ended December 31, 2009, external sales for RMP decreased by $2.0 million or
4.4%, to $44.2 million from $46.3 million during the comparable period in 2008. The decrease in
external sales is primarily due to lower sales of track components and other products and services,
partially offset by higher sales of friction management products. Freight railway traffic volumes
in North America were lower in 2009 compared to 2008 by approximately an average of 20%, which
directly impacted demand for our track component products. Cost of goods sold, including direct
material, direct labor and overhead, as a percentage of net external sales for RMP remained
consistent between 2008 and 2009. Operating income for the year ended December 31, 2009 decreased
to $6.0 million from $6.4 million for the comparable period in 2008, a decrease of $449,000 or
7.0%. The decrease in operating income is primarily due to lower gross profit on lower sales of
track components and other products and services, partially offset by higher gross profit on higher
sales of friction management products.
For the year ended December 31, 2008, external sales for RMP decreased by $4.1 million or
8.1%, to $46.3 million from $50.3 million during the comparable period in 2007. The decrease in
external sales is primarily due to lower sales of Salient Systems products and track component
products, reflecting weaker demand, partially offset by higher sales of friction management
products, and sales of our locomotive car repair products and services, which are included in other
products and services. Operating income for the year ended December 31, 2008 decreased to $6.4
million from $7.1 million for the comparable period in 2007, a decrease of $624,000 or 8.8%. The
decrease in operating income is primarily due to lower gross profit on lower sales of our Salient
Systems products, partially offset by higher gross profit on higher sales of friction management
products and other products and services. Additionally, we incurred $1.3 million of warranty
expense in 2007 related to defective BTRs. During 2008, we did not incur any warranty expense
related to this issue (See Note 10: Commitments and Contingencies, Page 66). Also contributing to
the lower operating income is an increase of $196,000 in selling, general and administrative
expenses at RMP, primarily due to higher professional fees and higher employee salary and benefit
costs.
28
Shipping Systems Division SSD.
Our SSD segment 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. Most of the assembly work for SSD is
performed at RMPs Huntington, West Virginia manufacturing plant, although some manufacturing is
subcontracted to independent third parties. The results of operations for the SSD segment include
the results from our Vulcan load securement products, which were purchased from Vulcan Chain
Corporation in October 2006. For the years ended December 31, 2009, 2008 and 2007, SSDs two
largest customers represented 44%, 44% and 33% of external sales, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
External sales
|
|
$
|
5,292
|
|
|
$
|
10,679
|
|
|
$
|
8,817
|
|
Intersegment sales
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Operating income
|
|
|
43
|
|
|
|
1,836
|
|
|
|
1,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by product line
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Chain securement systems
|
|
$
|
2,050
|
|
|
$
|
3,087
|
|
|
$
|
2,331
|
|
Automotive products
|
|
|
2,682
|
|
|
|
6,298
|
|
|
|
4,939
|
|
Strap securement systems
|
|
|
176
|
|
|
|
419
|
|
|
|
759
|
|
All other load securement systems
|
|
|
384
|
|
|
|
875
|
|
|
|
785
|
|
|
|
|
|
|
|
|
|
|
|
Total product and service sales
|
|
$
|
5,292
|
|
|
$
|
10,679
|
|
|
$
|
8,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes intersegment sales.
|
For the year ended December 31, 2009, external sales for SSD decreased by $5.4 million or
50.4%, to $5.3 million from $10.7 million during the comparable period in 2008. The $5.4 million
decrease in external sales is primarily due to lower sales across all major product lines, in
particular the automotive products, due to the economic recession, which has weakened demand for
the products supplied by SSD. Cost of goods sold, including direct material, direct labor and
overhead, as a percentage of net sales was unfavorably impacted by a lower absorption rate of
overhead costs in the current period, primarily due to lower sales volume in the current period.
Operating income for the year ended December 31, 2009 decreased to $43,000 from $1.8 million during
the comparable period in 2008, a decrease of $1.8 million or 97.7%, primarily due to a $2.0 million
decrease in gross profit resulting from lower sales of all SSD products, partially offset by lower
SG&A expense of $284,000, due to lower incentive expense on lower profitability and lower business
travel expenses in the current period.
For the year ended December 31, 2008, external sales for SSD increased by $1.9 million or
21.1%, to $10.7 million from $8.8 million during the comparable period in 2007. The $1.9 million
increase in external sales is primarily due to higher sales of automotive products and chain
securement systems. Operating income for the year ended December 31, 2008 increased to $1.8
million from $1.6 million during the comparable period in 2007, an increase of $212,000 or 13.1%,
primarily due to increased gross profit on higher sales of automotive products and chain securement
systems, partially offset by higher selling, general and administrative expense of $169,000, due to
higher employee salaries and benefit expenses, increased incentive expense and higher trade show
expense in the current period.
29
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). Our Montreal operation manufactures rail anchors
and rail spikes and assembles 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 the manufacturing of the KELTRACK®
product line. For the years ended December 31, 2009, 2008 and 2007, Canadas consolidated external
sales to its two largest customers represented 61%, 54% and 64%, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except translation rate)
|
|
External sales
|
|
$
|
26,176
|
|
|
$
|
26,486
|
|
|
$
|
23,059
|
|
Intersegment sales
|
|
|
7,657
|
|
|
|
7,472
|
|
|
|
7,065
|
|
Operating income (1)
|
|
|
5,521
|
|
|
|
4,323
|
|
|
|
2,470
|
|
Average translation rate of Canadian
dollar to United States dollar
|
|
|
0.8839
|
|
|
|
0.9411
|
|
|
|
0.9419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by product line
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Track component products (3)
|
|
$
|
15,236
|
|
|
$
|
14,954
|
|
|
$
|
15,406
|
|
Friction management products and services
|
|
|
17,623
|
|
|
|
17,257
|
|
|
|
13,520
|
|
Other products and services
|
|
|
974
|
|
|
|
1,747
|
|
|
|
1,198
|
|
|
|
|
|
|
|
|
|
|
|
Total product and service sales
|
|
$
|
33,833
|
|
|
$
|
33,958
|
|
|
$
|
30,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Operating income includes an operating loss from Portec Rail Nova Scotia Company of $575,000,
$654,000 and $631,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
|
|
(2)
|
|
Includes intersegment sales.
|
|
(3)
|
|
Formerly referred to as Rail anchors and spikes
|
For the year ended December 31, 2009, external sales for Canada decreased by $310,000 or 1.2%,
to $26.2 million from $26.5 million during the comparable period in 2008. The decrease in external
sales of $310,000 is a result of an unfavorable foreign currency translation of $2.2 million that
negatively impacted net sales across all major product lines, partially offset by an increase of
$1.9 million in higher sales of both Kelsan friction management products and our track component
products. Direct material and direct labor costs, which are components of Cost of Good Sold
(COGS), as a percentage of net sales remained consistent in the current period compared to the
prior year; however, overhead costs as a percentage of net sales declined in the current period due
primarily to improved manufacturing productivity on our track components at our Montreal location.
Operating income for the year ended December 31, 2009 increased to $5.5 million from $4.3 million
during the comparable period in 2008, an increase of $1.2 million or 27.7%. The increase in
operating income is primarily due to higher gross profit of $2.1 million due to higher sales volume
of our friction management and track component products, partially offset by a foreign currency
translation which reduced operating income by $338,000. Operating income was also reduced by an
increase in SG&A expense of $647,000 due to higher employee salaries and benefit costs, higher
incentive expense due to higher profitability and increased research and development expense due to
product development efforts, partially offset by lower business travel expense and lower franchise
taxes due to provincial tax law changes.
For the year ended December 31, 2008, external sales for Canada increased by $3.4 million or
14.9%, to $26.5 million from $23.1 million during the comparable period in 2007. The increase in
external sales is primarily due to higher sales of friction management products and services.
Operating income for the year ended December 31, 2008 increased to $4.3 million from $2.5 million
during the comparable period in 2007, an increase of $1.9 million or 75.0%. The increase in
operating income is primarily due to higher gross profit of $2.1 million due to higher sales volume
of our friction management products, partially offset by an increase in selling, general, and
administrative expense of $285,000, primarily due to higher employee salaries and incentive
expense, and increased professional fees.
30
Portec Rail Products (UK) Ltd. United Kingdom.
In the United Kingdom, we operate and
serve our customers in two different markets. The United Kingdoms rail business, which comprised
approximately 76%, 64% and 58% of total segment sales for the years ended 2009, 2008 and 2007,
respectively, includes sales of friction management and track component products and services to
the United Kingdom passenger rail network. For the years ended December 31, 2009, 2008 and 2007,
our two largest rail customers represented 20%, 31% and 24% of total external sales, respectively.
Over the same time period described above, our material handling business represented
approximately 24%, 36% and 42%, respectively, of the total sales generated by our United Kingdom
segment. Our major product lines in this market include overhead and floor conveyor systems, boom
conveyors, racking systems and mezzanine flooring systems. The end users of our products are
primarily United Kingdom-based companies in the manufacturing, distribution, garment and food
industries. As our material handling products are primarily dependent upon the capital spending
plans of manufacturers, our largest customers vary each year depending upon the contracts that are
secured. For the years ended December 31, 2009, 2008 and 2007, our two largest material handling
customers represented 5%, 8% and 8% of total external sales, respectively.
During the third quarter 2006, we announced a business reorganization plan, which consolidated
our rail and material handling operations in the United Kingdom from four locations into two; one
at our Sheffield, England facility (Rail) and the other at our Leicester, England facility
(Material Handling). This reorganization was completed during the first quarter 2007 with the sale
of our Wrexham, Wales facility.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except translation rate)
|
|
External sales
|
|
$
|
16,506
|
|
|
$
|
25,584
|
|
|
$
|
27,300
|
|
Intersegment sales
|
|
|
2
|
|
|
|
|
|
|
|
146
|
|
Operating income
|
|
|
518
|
|
|
|
2,394
|
|
|
|
2,956
|
|
Average translation rate of British
pound sterling to United States dollar
|
|
|
1.5714
|
|
|
|
1.8432
|
|
|
|
2.0086
|
|
|
Sales by product line
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Friction management products and services
|
|
$
|
8,388
|
|
|
$
|
11,172
|
|
|
$
|
10,407
|
|
Track component products
|
|
|
4,153
|
|
|
|
5,218
|
|
|
|
5,519
|
|
Material handling products
|
|
|
3,967
|
|
|
|
9,194
|
|
|
|
11,520
|
|
|
|
|
|
|
|
|
|
|
|
Total product and service sales
|
|
$
|
16,508
|
|
|
$
|
25,584
|
|
|
$
|
27,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes intersegment sales.
|
For the year ended December 31, 2009, external sales at our United Kingdom operations
decreased $9.1 million or 35.5%, to $16.5 million from $25.6 million during the comparable period
in 2008. The decrease in external sales of $9.1 million at our United Kingdom segment is due to a
combination of lower demand for primarily material handling products resulting from economic
conditions within the United Kingdom, lower sales of friction management products, and an
unfavorable foreign currency translation of $2.9 million that negatively impacted net sales across
all product lines. Cost of good sold, including direct material, direct labor and overhead, as a
percentage of net sales increased slightly due to a lower overhead absorption rate in the current
period, primarily due to lower sales volume. Operating income for the year ended December 31, 2009
decreased to $518,000 from $2.4 million during the comparable period in 2008, a decrease of $1.9
million or 78.4%. The decrease in operating income is primarily due to lower gross profit on lower
sales volume across all major product lines, along with a foreign currency translation of $71,000
that negatively impacted operating income in the current period. Partially offsetting the lower
gross profit are lower SG&A expenses of $491,000 due to lower employee salary and benefit costs and
incentive expense in the current period.
For the year ended December 31, 2008, external sales at our United Kingdom operations
decreased $1.7 million or 6.3%, to $25.6 million from $27.3 million during the comparable period in
2007. The decrease of $1.7 million in external sales is a combination of unfavorable foreign
currency translation of $2.2 million that negatively impacted net sales across all product lines
and lower demand for material handling products of approximately $1.6 million, due to a weaker
market for these products brought on by economic conditions in the United Kingdom.
31
These decreases were partially offset by an increase in demand for friction management products of approximately
$1.7 million, along with an increase in sales of track component products. Operating income for
the year ended December 31, 2008 decreased to $2.4 million from $3.0 million during the comparable
period in 2007, a decrease of $562,000 or 19.0%. The decrease in operating income is a combination
of an unfavorable foreign currency translation of $717,000 that negatively impacted gross profit,
lower gross profit on material handling product sales of approximately $690,000, and higher gross profit of $413,000 on sales of fiction management
products. In addition to lower gross profit, selling general and administrative expense declined
$423,000 in the current period, which positively impacted operating income. This decrease of
$423,000 is primarily due to a favorable foreign currency translation of $490,000 that positively
impacted SG&A expense and thus lowered expenses, partially offset by an increase of $67,000 due to
higher professional fees and employee salary and benefit costs.
Liquidity and Capital Resources
Our cash flow from operations is the primary source of financing for internal growth, capital
expenditures, repayments of long-term contractual obligations, dividends to our shareholders and
other commercial commitments. The most significant risk associated with our ability to generate
sufficient cash flow from operations is the overall level of demand for our products. Our total
cash balance is $14.3 million at December 31, 2009. We may use this cash for acquisitions, product
line expansions or general corporate purposes. In addition to cash generated from operations, we
have revolving and overdraft credit facilities in place to support the working capital needs of
each of our business segments. We believe that cash flow from operations and the ability to borrow
additional cash under our working capital credit facilities along with our existing cash balances
will be sufficient to meet our cash flow needs over the next twelve months.
Cash Flow Analysis
.
For the year ended December 31, 2009, we generated $13.5 million in cash from operating
activities compared to $10.1 million for the year ended December 31, 2008. Cash generated from
operating activities during the year ended December 31, 2009 includes net income of $6.8 million, a
decrease of $974,000 from 2008. Depreciation and amortization expense totaled $2.9 million in 2009
compared to $3.1 million in 2008, a decrease of $171,000. Lower inventory balances generated $4.0
million of cash during the current period, primarily due to efforts to reduce inventory levels,
while lower accounts payable balances used $2.7 million of cash during the current period,
primarily due to lower overall purchasing activity and the timing of vendor payments. Lower
accounts receivable balances generated $4.6 million of cash, primarily due to lower sales volumes.
Lower accrued expenses used $1.3 million of cash, due to lower company-wide incentive plan
accruals, and lower customer deposits at RMP and our Untied Kingdom operations. Additionally,
minimum funding requirements of our defined benefit pension plans required cash contributions into
the plans of $398,000 during 2009.
Net cash used in investing activities was $1.1 million in 2009, compared to $2.9 million of
cash used in investing activities during 2008. Net cash used in investing activities during 2009
includes $989,000 for capital expenditures. In 2008, we completed two significant capital projects
that had begun in 2007 and which totaled $1.9 million. These capital projects pertain to our
Bonded-to-Rail (BTRs) joint bar products at our Huntington, West Virginia manufacturing facility,
and were previously approved by our Board of Directors. Cash used in investing activities includes
contingent consideration paid to the former owners of Vulcan in the amounts of $130,000 and
$202,000 for 2009 and 2008, respectively.
Net cash used in financing activities was $4.6 million in 2009 compared to net cash used in
financing activities of $4.9 million in 2008. Net cash used in financing activities during 2009
includes repayment of long-term debt obligations of $4.0 million and cash dividends of $2.3 million
on common stock paid to shareholders. Cash provided by financing activities in 2009 includes $1.7
million in net borrowings on our working capital credit facilities, and $300,000 borrowed in
February 2009 from Boone County Bank, a related party, to support the capital improvements made to
our Huntington, West Virginia manufacturing facility.
32
Credit Facilities.
In December 2008, PNC Financial Services Group Inc. (PNC) of Pittsburgh, Pennsylvania
completed its acquisition of National City Corp. of Cleveland, Ohio. PNC is currently in the
process of integrating National City Bank into its operations. We have several lending facilities
with PNC. We are unsure what impact, if any, that the acquisition of National City by PNC may have
on our existing credit facilities.
Our credit facility with 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 CDN) provided for the Kelsan
acquisition in November 2004; and 4) an outstanding term loan in the original amount of $3.0
million provided in November 2006 for the Vulcan asset acquisition. As of December 31, 2009 we had two
outstanding letters of credit in the amount of $372,000 under our United States revolving credit
facility, and we had the ability to borrow an additional $6.9 million under the United States and
Canadian revolving credit facilities. This agreement contains financial covenants that require us
to maintain a current ratio, cash flow coverage and leverage ratios, and maintain minimum amounts
of tangible net worth. This credit facility further limits capital expenditures, sales of assets,
and additional indebtedness. We were in compliance with all of these financial covenants as of
December 31, 2009. For additional details on our debt obligations and credit facilities, see Note
6: Long-Term Debt, Page 52.
As of December 31, 2009, the balance outstanding on the U.S. revolving credit facility was
$4.5 million. The balance outstanding on the Kelsan acquisition loan was $3.0 million at December
31, 2009. The balance outstanding on the Vulcan acquisition loan was $1.1 million at December 31,
2009. Our Canadian revolving credit facility had no outstanding borrowings as of December 31,
2009.
We have a working capital facility with a United Kingdom financial institution that supports
the working capital requirements of our United Kingdom operations and 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. There were no outstanding borrowings on the facility or any outstanding
performance bonds as of December 31, 2009. The balance outstanding on the Coronet Rail acquisition
loan was $471,000 (£291,000 pounds sterling) at December 31, 2009.
In July 2008, we entered into a loan agreement with Boone County Bank, Inc. for a line of
credit 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. As of December 31, 2009 and 2008, the outstanding balance on this
facility was $1.7 million and $1.8 million, respectively, and interest accrued at a rate of 3.00%
and 3.25%, respectively. This facility has a current maturity date of January 14, 2014. Boone
County Bank, Inc. is a related-party (see Note 6: Long-Term Debt, Page 52).
33
Summary of Contractual Obligations
The following is a summary of our contractual obligations as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
|
than 1
|
|
|
1 3
|
|
|
3 5
|
|
|
than 5
|
|
Contractual Obligations
|
|
Total
|
|
|
year
|
|
|
years
|
|
|
years
|
|
|
years
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Term loans
|
|
$
|
6,253
|
|
|
$
|
3,586
|
|
|
$
|
2,212
|
|
|
$
|
455
|
|
|
$
|
|
|
|
Purchase obligations
|
|
|
2,700
|
|
|
|
2,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases (1)
|
|
|
4,585
|
|
|
|
1,279
|
|
|
|
1,622
|
|
|
|
877
|
|
|
|
807
|
|
|
Working capital facilities
|
|
|
4,500
|
|
|
|
4,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future interest payments (2)
|
|
|
171
|
|
|
|
102
|
|
|
|
61
|
|
|
|
8
|
|
|
|
|
|
|
Pension contributions (3)
|
|
|
3,241
|
|
|
|
563
|
|
|
|
1,460
|
|
|
|
1,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations (4)
|
|
$
|
21,450
|
|
|
$
|
12,730
|
|
|
$
|
5,355
|
|
|
$
|
2,558
|
|
|
$
|
807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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)
|
|
Represents future interest payments on long-term debt obligations as of December 31,
2009. Assumes that interest rates on our long-term debt agreements at December 31, 2009
will continue for the life of the agreements.
|
|
(3)
|
|
Pension plan contributions that may be required more than one year from December 31,
2009 will be dependent upon the performance of plan assets.
|
|
(4)
|
|
As a result of adopting FASB ASC Topic 740,
Income Taxes
, we recognized an initial
liability of $313,000 related to uncertain tax positions. We recognized a total of
$123,000 and $0 of expense related to uncertain tax positions during 2009 and 2008,
respectively. This amount is included within other long-term liabilities on the December
31, 2009 and 2008 consolidated balance sheet. However, because of the high degree of
uncertainty regarding the timing of future cash flows associated with this uncertain tax
liability, we cannot reasonably estimate the periods of related future payments, and as
such, we have excluded the uncertain tax position liability from the contractual
obligations table.
|
Financial Condition
Higher foreign currency translation rates had a significant impact on our consolidated balance
sheet as of December 31, 2009, as the conversion of our foreign subsidiaries balance sheets into
U.S. dollars is at a higher rate as of December 31, 2009 than at December 31, 2008. At December
31, 2009 total assets were $102.5 million, an increase of $5.7 million from $96.8 million as of
December 31, 2008. The increase in assets at December 31, 2009 is primarily due to an $8.9 million
increase in cash and cash equivalents, which is a primarily a result of $13.5 million of cash
generated by operating activities in 2009. Additionally, higher intangible assets and goodwill
balances of $1.8 million contributed to the total asset increase, and are primarily due to higher
foreign currency translation rates at December 31, 2009 compared to December 31, 2008.
Total outstanding debt obligations at December 31, 2009 decreased by $1.9 million or 14.7%, to
$10.8 million as of December 31, 2009, from $12.6 million at December 31, 2008. The decrease in
total outstanding debt obligations is primarily due to the repayment of long-term debt obligations
during 2009.
Our consolidated shareholders equity was positively impacted by $7.6 million during 2009, of
which $3.3 million is due to the impact of higher foreign currency translation rates in converting
our foreign subsidiary balance sheets into U.S. dollars at December 31, 2009. Actuarial losses on
our defined benefit pension plans and post-retirement benefit plan in 2009 negatively impacted our
December 31, 2009 shareholders equity by $340,000.
The majority of our track components 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 resulted in surcharges at
times being added to raw material costs, and other
34
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. In 2009, steel prices for the most part have been lower
than in recent years. We continue to monitor the price of our primary raw materials. If a
prolonged increase in steel prices occurred and we are unable to pass on these higher costs to our
customers, our future earnings could be negatively impacted.
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 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
comparing 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. The economic conditions could affect our customers ability to pay and
changes in the estimate could have a material effect on net income.
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. 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.
35
Goodwill and Other Intangible Assets.
In accordance with FASB ASC Topic 350,
Goodwill and
Other Intangible Assets
, we classify intangible assets into three categories: (1) intangible assets
with definite lives subject to amortization; (2) intangible assets with indefinite lives not
subject to amortization; and (3) goodwill. 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
ASC 350. FASB accounting standards require that goodwill be tested for impairment using a two-step
process. The first step is to test for 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 our business segments 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 tests 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.
Our amortizable intangible assets are evaluated for impairment in accordance with FASB ASC
Topic 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.
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 know warranty issues. However any changes in estimates may have an impact on our results
of operations.
Pension and Other Post-Retirement Benefit Obligations.
We maintain defined benefit pension
plans in the United States and the United Kingdom that cover a significant number of our active
employees, former employees and retirees. We account for these plans as required under FASB ASC
715,
Compensation Retirement Benefits.
Accounting procedures pertaining to defined benefit
pension plans and other post-retirement benefit plans 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.
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,
Compensation Retirement Benefits
. Actuarial
estimates are 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
36
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.
Our retirement benefit plan liability is inversely impacted by the interest rate used in our
actuarial calculation. As a result, when interest rates decline, the actuarially calculated
retirement benefit plan liability increases. Conversely, as interest rates increase, the
actuarially calculated retirement benefit plan liability decreases.
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 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 and accounting 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 deferred tax assets on our
consolidated balance sheet as of December 31, 2009.
As of January 1, 2007, we adopted FASB ASC Topic 740,
Income Taxes
, 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risk on our contractual long-term debt obligations and our
working capital facilities are under floating interest rate arrangements. However, 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 increased rates will
increase our interest expense. Conversely, if interest rates decrease on our variable long-term
debt, it will have a positive impact on future earnings because the lower rates will decrease our
interest expense. Based upon the long-term debt amount as of December 31, 2009, for every 100
basis point increase or decrease in the interest rate on our long-term debt, our annual interest
expense will fluctuate by approximately $108,000.
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 the 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 the year ended December 31, 2009,
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 approximately $59,000. 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
37
Kingdom operations for the year ended December 31, 2009 would have
been approximately $3,000. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
|
The following are included in this item:
|
|
|
|
Consolidated Financial Statements:
|
|
|
|
|
39
|
|
|
|
40
|
|
|
|
41
|
|
|
|
42
|
|
|
Notes to Consolidated Financial Statements
|
|
|
|
|
77
|
|
|
|
78
|
The supplementary data required by this Item (selected quarterly financial data) is provided in
Note 12: of the Notes to Consolidated Financial Statements.
38
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2009
|
|
2008
|
|
|
(In Thousands)
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,279
|
|
|
$
|
5,371
|
|
Accounts receivable, net
|
|
|
10,667
|
|
|
|
14,553
|
|
Inventories, net
|
|
|
21,538
|
|
|
|
23,856
|
|
Prepaid expenses and other current assets
|
|
|
1,623
|
|
|
|
489
|
|
Deferred income taxes
|
|
|
160
|
|
|
|
369
|
|
|
|
|
Total current assets
|
|
|
48,267
|
|
|
|
44,638
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
10,260
|
|
|
|
10,203
|
|
Intangible assets, net
|
|
|
28,507
|
|
|
|
27,732
|
|
Goodwill
|
|
|
14,463
|
|
|
|
13,413
|
|
Other assets
|
|
|
1,045
|
|
|
|
837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
102,542
|
|
|
$
|
96,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
8,086
|
|
|
$
|
6,500
|
|
Accounts payable
|
|
|
4,940
|
|
|
|
7,155
|
|
Accrued income taxes
|
|
|
618
|
|
|
|
513
|
|
Customer deposits
|
|
|
873
|
|
|
|
1,935
|
|
Accrued compensation
|
|
|
2,424
|
|
|
|
2,641
|
|
Other accrued liabilities
|
|
|
2,216
|
|
|
|
2,088
|
|
|
|
|
Total current liabilities
|
|
|
19,157
|
|
|
|
20,832
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities
|
|
|
2,667
|
|
|
|
6,110
|
|
Deferred income taxes
|
|
|
10,070
|
|
|
|
7,224
|
|
Accrued pension costs
|
|
|
3,809
|
|
|
|
3,583
|
|
Other long-term liabilities
|
|
|
1,091
|
|
|
|
898
|
|
|
|
|
Total liabilities
|
|
|
36,794
|
|
|
|
38,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $1 par value, 50,000,000
shares authorized, 9,602,029 shares
issued and outstanding at December 31,
2009 and 2008
|
|
|
9,602
|
|
|
|
9,602
|
|
Additional paid-in capital
|
|
|
25,547
|
|
|
|
25,443
|
|
Retained earnings
|
|
|
33,136
|
|
|
|
28,635
|
|
Accumulated other comprehensive loss
|
|
|
(2,537
|
)
|
|
|
(5,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
65,748
|
|
|
|
58,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
102,542
|
|
|
$
|
96,823
|
|
|
|
|
See Notes to Consolidated Financial Statements
39
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollars in Thousands, Except Per Share Data)
|
Net sales
|
|
$
|
92,221
|
|
|
$
|
109,017
|
|
|
$
|
109,503
|
|
Cost of sales
|
|
|
60,871
|
|
|
|
73,445
|
|
|
|
74,995
|
|
|
|
|
Gross profit
|
|
|
31,350
|
|
|
|
35,572
|
|
|
|
34,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
21,626
|
|
|
|
22,635
|
|
|
|
22,781
|
|
Amortization expense
|
|
|
1,116
|
|
|
|
1,199
|
|
|
|
1,241
|
|
|
|
|
Operating income
|
|
|
8,608
|
|
|
|
11,738
|
|
|
|
10,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
298
|
|
|
|
805
|
|
|
|
1,247
|
|
Other (income)/expense, net
|
|
|
(191
|
)
|
|
|
(87
|
)
|
|
|
246
|
|
|
|
|
Income before income taxes
|
|
|
8,501
|
|
|
|
11,020
|
|
|
|
8,993
|
|
Provision for income taxes
|
|
|
1,696
|
|
|
|
3,241
|
|
|
|
2,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,805
|
|
|
$
|
7,779
|
|
|
$
|
6,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
0.71
|
|
|
$
|
0.81
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
See Notes to Consolidated Financial Statements
40
Consolidated Statements of Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
Common Stock
|
|
Paid-in
|
|
Retained
|
|
Comprehensive
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Income (Loss)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
Balance at January 1, 2007
|
|
|
9,601,779
|
|
|
$
|
9,602
|
|
|
$
|
25,290
|
|
|
$
|
19,647
|
|
|
$
|
(1,443
|
)
|
|
$
|
53,096
|
|
Cash dividends on common
stock paid to shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,304
|
)
|
|
|
|
|
|
|
(2,304
|
)
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
Cumulative effect of a change
in accounting principle (FIN
48)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(313
|
)
|
|
|
|
|
|
|
(313
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,131
|
|
|
|
|
|
|
|
6,131
|
|
Minimum pension liability
adjustment, net of tax
provision of $684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,380
|
|
|
|
1,380
|
|
Foreign currency
translation adjustment,
net of tax provision of $1,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,855
|
|
|
|
1,855
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
9,601,779
|
|
|
$
|
9,602
|
|
|
$
|
25,342
|
|
|
$
|
23,161
|
|
|
$
|
1,792
|
|
|
$
|
59,897
|
|
Issuance of common stock
|
|
|
250
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Cash dividends on common
stock paid to shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,305
|
)
|
|
|
|
|
|
|
(2,305
|
)
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
98
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,779
|
|
|
|
|
|
|
|
7,779
|
|
Minimum pension liability
adjustment, net of tax
benefit of $1,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,839
|
)
|
|
|
(1,839
|
)
|
Foreign currency
translation adjustment,
net of tax benefit of $3,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,457
|
)
|
|
|
(5,457
|
)
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
9,602,029
|
|
|
$
|
9,602
|
|
|
$
|
25,443
|
|
|
$
|
28,635
|
|
|
$
|
(5,504
|
)
|
|
$
|
58,176
|
|
Cash dividends on common
stock paid to shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,304
|
)
|
|
|
|
|
|
|
(2,304
|
)
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
104
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,805
|
|
|
|
|
|
|
|
6,805
|
|
Minimum pension liability
adjustment, net of tax
benefit of $141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(340
|
)
|
|
|
(340
|
)
|
Foreign currency
translation adjustment,
net of tax provision of $2,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,307
|
|
|
|
3,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
9,602,029
|
|
|
$
|
9,602
|
|
|
$
|
25,547
|
|
|
$
|
33,136
|
|
|
$
|
(2,537
|
)
|
|
$
|
65,748
|
|
|
|
|
See Notes to Consolidated Financial Statements
41
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In Thousands)
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,805
|
|
|
$
|
7,779
|
|
|
$
|
6,131
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
1,764
|
|
|
|
1,852
|
|
|
|
2,343
|
|
Amortization expense
|
|
|
1,116
|
|
|
|
1,199
|
|
|
|
1,241
|
|
Provision for doubtful accounts
|
|
|
65
|
|
|
|
123
|
|
|
|
70
|
|
Deferred income taxes
|
|
|
708
|
|
|
|
838
|
|
|
|
(346
|
)
|
Pension expense (income)
|
|
|
210
|
|
|
|
(64
|
)
|
|
|
75
|
|
Loss on sale of fixed assets
|
|
|
24
|
|
|
|
271
|
|
|
|
81
|
|
Pension contributions
|
|
|
(398
|
)
|
|
|
(809
|
)
|
|
|
(207
|
)
|
Stock-based compensation expense
|
|
|
104
|
|
|
|
98
|
|
|
|
52
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
|
|
|
|
50
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
4,604
|
|
|
|
630
|
|
|
|
(148
|
)
|
Inventories
|
|
|
3,991
|
|
|
|
(4,014
|
)
|
|
|
1,264
|
|
Prepaid expenses and other current assets
|
|
|
(657
|
)
|
|
|
(246
|
)
|
|
|
85
|
|
Accounts payable
|
|
|
(2,723
|
)
|
|
|
2,467
|
|
|
|
(1,745
|
)
|
Income taxes payable
|
|
|
(765
|
)
|
|
|
13
|
|
|
|
(281
|
)
|
Accrued expenses
|
|
|
(1,343
|
)
|
|
|
(30
|
)
|
|
|
269
|
|
|
|
|
Net cash provided by operating activities
|
|
|
13,505
|
|
|
|
10,107
|
|
|
|
8,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(989
|
)
|
|
|
(2,697
|
)
|
|
|
(2,348
|
)
|
Proceeds from sale of assets
|
|
|
14
|
|
|
|
32
|
|
|
|
2,514
|
|
Contingent consideration business acquisition
|
|
|
(130
|
)
|
|
|
(202
|
)
|
|
|
(168
|
)
|
|
|
|
Net cash used in investing activities
|
|
|
(1,105
|
)
|
|
|
(2,867
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in working capital facilities
|
|
|
1,697
|
|
|
|
(33
|
)
|
|
|
898
|
|
Outstanding checks in excess of funds on deposit
|
|
|
(297
|
)
|
|
|
61
|
|
|
|
309
|
|
Principal payments on promissory notes
|
|
|
(280
|
)
|
|
|
(280
|
)
|
|
|
(280
|
)
|
Proceeds from term loans
|
|
|
300
|
|
|
|
6,684
|
|
|
|
55
|
|
Principal payments on term loans
|
|
|
(3,678
|
)
|
|
|
(9,043
|
)
|
|
|
(5,316
|
)
|
Principal payments on capital leases
|
|
|
|
|
|
|
|
|
|
|
(69
|
)
|
Issuance of common stock
|
|
|
|
|
|
|
2
|
|
|
|
|
|
Cash dividends paid to shareholders
|
|
|
(2,304
|
)
|
|
|
(2,305
|
)
|
|
|
(2,304
|
)
|
Fees paid to obtain new financing
|
|
|
(14
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
Net cash used in by financing activities
|
|
|
(4,576
|
)
|
|
|
(4,934
|
)
|
|
|
(6,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1,084
|
|
|
|
(1,208
|
)
|
|
|
226
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
8,908
|
|
|
|
1,098
|
|
|
|
2,451
|
|
Cash and cash equivalents at beginning of period
|
|
|
5,371
|
|
|
|
4,273
|
|
|
|
1,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
14,279
|
|
|
$
|
5,371
|
|
|
$
|
4,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
548
|
|
|
$
|
829
|
|
|
$
|
1,314
|
|
|
|
|
Income taxes
|
|
$
|
2,063
|
|
|
$
|
2,500
|
|
|
$
|
3,211
|
|
|
|
|
See Notes to Consolidated Financial Statements
42
Note 1: Nature of Operations and Significant Accounting Policies
Nature of Operations
We manufacture, supply and distribute a broad range of rail products, including rail joints, rail
anchors, rail spikes, railway friction management products and systems, railway wayside data
collection and data management systems and freight car securement systems. We also manufacture
material handling equipment for industries outside the rail transportation sector 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 in Dublin, Ohio and near Montreal, Quebec, and have an
office near Chicago, Illinois. Our corporate headquarters is located near Pittsburgh,
Pennsylvania.
Principles of Consolidation
The accompanying 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. All significant intercompany accounts and transactions
have been eliminated in consolidation. For further details regarding our subsidiaries, refer to
Exhibit 21, Subsidiaries of the Registrant.
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of 90 days or less to be cash
equivalents. Outstanding checks in excess of funds on deposit (book overdrafts) are shown as part
of accounts payable on the consolidated balance sheet. The change in book overdrafts between
periods is presented as a use or source of cash from financing activities on our consolidated
statement of cash flows.
Accounts Receivable
Accounts receivable are stated at the amount billed to our customers. We provide an allowance for
doubtful accounts, which is based upon a review of outstanding receivables, historical collection
information and existing economic conditions. Accounts receivable are generally due between 30 and
60 days after the issuance of the invoice. Accounts past due more than 90 days are considered
delinquent. Delinquent receivables are written-off based on individual credit evaluation and
specific customer circumstances.
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.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is
recorded by the straight-line method based on estimated useful lives as follows:
|
|
|
|
|
Buildings and improvements
|
|
10-25 years
|
Machinery and equipment
|
|
4-10 years
|
Office furniture and equipment
|
|
3-5 years
|
Leasehold improvements are amortized over the shorter of the useful life of the asset or the term
of the lease. Expenses for repairs, maintenance and renewals are charged to operations as
incurred. Expenditures that improve an asset or extend its useful life are capitalized.
43
Goodwill and Identifiable Intangible Assets
The Financial Accounting Standards Board (FASB) issued FASB ASC Topic 350,
Goodwill and Other
Intangible Assets
. FASB ASC 350 ceased the amortization of goodwill and other intangible assets
with indefinite useful lives. FASB ASC 350 also requires that these assets be reviewed for
impairment at least annually. Intangible assets with definite lives will continue to be amortized
over their estimated useful lives and will be reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. We adopted FASB ASC 350
effective January 1, 2002. We are required to test our goodwill for impairment using a two-step
process described in FASB ASC 350 on an annual basis or whenever events or circumstances indicate
that the fair value of our reporting units may have been affected. The first step is a screen for
potential impairment, while the second step measures the amount of the impairment, if any. We have
established October 1
st
as our annual measurement date for impairment testing. We
completed the annual impairment tests for 2009, 2008 and 2007, and determined that no impairment
adjustment was required.
In accordance with FASB ASC Topic 360,
Accounting for Impairment or Disposal of Long-Lived Assets,
we evaluate the recoverability of identifiable intangible assets whenever events or changes in
circumstances indicate that an intangible assets carrying amount may not be recoverable. Such
circumstances could include, but are not limited to: (1) a significant decrease in the market
value of an asset, (2) a significant adverse change in the extent or manner in which an asset is
used, or (3) an accumulation of costs significantly in excess of the amount originally expected for
the acquisition of an asset. We measure the carrying amount of the asset against the estimated
discounted future cash flows associated with it. Should the sum of the expected future net cash
flows be less than the carrying value of the asset being evaluated, an impairment loss would be
recognized. The impairment loss would be calculated as the amount by which the carrying value of
the asset exceeds its fair value. The fair value is measured based on quoted market prices, if
available. If quoted market prices are not available, the estimate of fair value is based on
various valuation techniques, including the discounted value of estimated future cash flows. The
evaluation of asset impairment requires that we make assumptions about future cash flows over the
life of the asset being evaluated. These assumptions require significant judgment and actual
results may differ from assumed and estimated amounts.
Patents
Patents consist of legal and filing costs incurred in obtaining patent protection for product
technology. The accounting rules allow for patent costs to be amortized over the legal life or the
useful life of the patent, whichever is shorter. We generally amortize patent costs on a
straight-line basis over a period of five to twenty years.
Deferred Financing Costs
Deferred financing costs that relate to obtaining debt facilities are capitalized and amortized
over the term of the facility using the straight-line method. When a loan is paid in full, any
unamortized financing costs are removed from the related accounts and charged to operations.
Foreign Currency Translation
The assets and liabilities of our foreign subsidiaries are measured using the local currency as the
functional currency and are translated into U.S. dollars at exchange rates as of the balance sheet
date. Income statement amounts are translated at the weighted-average rates of exchange during the
year. The translation adjustment is accumulated as a separate component of accumulated other
comprehensive income (loss). Foreign currency transaction gains and losses are included in
determining net income.
44
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. 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.
When the estimate on a contract indicates a loss, our policy is to record the entire loss 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.
Applicable taxes assessed by governmental authorities, such as sales, use, value added, and some
excise taxes are billed to customers at the time of sale and not included as a part of net sales.
Theses taxes assessed are remitted as required by each governmental jurisdiction on a monthly,
quarterly or annual basis.
Related Party Transactions
Related party transactions are conducted with companies under common control of our shareholders or
directors. During 2008, we entered into a loan agreement with Boone County Bank, which is a
related party. See Note 6: Long-Term Debt, Page 52 for further details.
Warranty Obligations
Most of our products are covered by a replacement warranty. We record a liability for product
warranty obligations based upon historical warranty claims experience or known warranty issues and
their replacement costs. During 2007, we incurred $1.3 million of warranty expense related to
RMPs Bonded to Rail (BTR) joint bars manufactured in Huntington, WV, which are covered by a
standard one-year replacement warranty. We did not incur any warranty expense during 2008 related
to this issue. At December 31, 2009 and 2008, our BTR warranty accrual was $40,000 and $177,000,
respectively. See Note 10: Commitments and Contingencies, Page 66 for further details.
Income Taxes
Deferred income taxes are provided for the tax consequences of temporary differences between
financial statement carrying amounts and the tax basis of assets and liabilities. A valuation
allowance is established to reduce deferred tax assets if it is more likely than not that a
deferred tax asset will not be realized.
As of January 1, 2007, we adopted FASB ASC Topic 740,
Income Taxes,
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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles
in the United States of America requires us to make estimates and assumptions that affect the
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
45
Shipping and Handling
Shipping and handling costs that we incur are included in the cost of sales.
Financial Instruments
The carrying value of our financial instruments approximates their fair values as they are short
term in nature.
Research and Development
Research and development costs are charged to expense as incurred. Research and development costs
incurred during 2009, 2008 and 2007 were approximately $2.8 million, $3.0 million and $2.4 million,
respectively.
Advertising Expense
Advertising expense is comprised of trade shows and other promotional expenses. Advertising
expenses are charged to income during the period incurred. Advertising expenses charged to income
totaled $316,000 in 2009, $299,000 in 2008 and $265,000 in 2007.
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
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.
In December 2007, FASB issued Topic 805,
Business Combinations
, which will significantly alter the
way that companies account for business combinations under the acquisition method. Under FASB ASC
805, an acquiring entity will be required to recognize the assets acquired and liabilities assumed
in a transaction at the acquisition-date fair value with limited exceptions. In addition, the
following specific changes will be made: (1) all acquisition costs will be expensed as incurred;
(2) any restructuring charges related to the business combination will generally be expensed
subsequent to the acquisition date; (3) non-controlling interests will be recorded at fair value at
the acquisition date; (4) acquired contingent liabilities will be recorded at fair value at
acquisition date and subsequently measured at either the higher of such amount or the amount
determined under existing guidance for non-acquired contingencies; (5) in-process research and
development will be recorded at fair value as an indefinite-lived intangible asset at the
acquisition date; and (6) changes in the deferred tax asset valuation allowances and income tax
uncertainties after the acquisition date will generally affect income tax expense. For calendar
year companies, FASB ASC 805 prospectively applies to business combinations for which the
acquisition date is on or after January 1, 2009. The adoption of FASB ASC 805 will have an impact
on future business combinations which we may engage in; however, at this time, we cannot determine
the impact to the Company.
46
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 years ended December 31, 2009 and 2008, we determined that our stock options have an
anti-dilutive effect on earnings per share, as the incremental shares related to the 2007 and 2008
stock options grants (see Note 14: Stock Options, Page 71) would reduce our average shares
outstanding by 26,599 and 24,004 shares, respectively. The incremental shares related to the 2007
stock option grant would reduce our average shares outstanding by 7,126 shares for the year ended
December 31, 2007. As such, the anti-dilutive shares are not included in the calculation of
diluted earnings per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollars in Thousands, Except Share and Per Share Data)
|
Net income available to common shareholders
|
|
$
|
6,805
|
|
|
$
|
7,779
|
|
|
$
|
6,131
|
|
Basic common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
9,602,029
|
|
|
|
9,601,928
|
|
|
|
9,601,779
|
|
Diluted average shares outstanding
|
|
|
9,602,029
|
|
|
|
9,601,928
|
|
|
|
9,601,779
|
|
Basic and diluted earnings per share
|
|
$
|
0.71
|
|
|
$
|
0.81
|
|
|
$
|
0.64
|
|
Reclassifications
Certain reclassifications have been made to the 2008 and 2007 financial statements to conform to
the 2009 financial statement presentation. These reclassifications had no effect on net earnings.
Note 2: Accounts Receivable
Accounts receivable are presented net of an allowance for doubtful accounts. We generally do not
require collateral for our trade accounts receivable. We continually evaluate our accounts
receivable and adjust our allowance for doubtful accounts for changes in potential credit risk.
Accounts receivable consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2009
|
|
2008
|
|
|
(In Thousands)
|
Accounts receivable
|
|
$
|
10,820
|
|
|
$
|
14,671
|
|
Less allowance for doubtful accounts
|
|
|
153
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net accounts receivable
|
|
$
|
10,667
|
|
|
$
|
14,553
|
|
|
|
|
47
Note 3: Inventories
The major components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2009
|
|
2008
|
|
|
(In Thousands)
|
Raw materials
|
|
$
|
9,903
|
|
|
$
|
10,617
|
|
Work in process
|
|
|
279
|
|
|
|
411
|
|
Finished goods
|
|
|
11,931
|
|
|
|
13,727
|
|
|
|
|
|
|
|
22,113
|
|
|
|
24,755
|
|
Less reserve for slow-moving and obsolete inventory
|
|
|
575
|
|
|
|
899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net inventory
|
|
$
|
21,538
|
|
|
$
|
23,856
|
|
|
|
|
Note 4: Property, Plant and Equipment
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2009
|
|
2008
|
|
|
(In Thousands)
|
Land
|
|
$
|
135
|
|
|
$
|
117
|
|
Buildings and improvements
|
|
|
7,605
|
|
|
|
7,402
|
|
Machinery and equipment
|
|
|
14,012
|
|
|
|
13,270
|
|
Office furniture and equipment
|
|
|
2,400
|
|
|
|
1,773
|
|
Construction-in-progress
|
|
|
46
|
|
|
|
86
|
|
|
|
|
|
|
|
24,198
|
|
|
|
22,648
|
|
Less accumulated depreciation
|
|
|
13,938
|
|
|
|
12,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
10,260
|
|
|
$
|
10,203
|
|
|
|
|
Total depreciation expense was $1,764,000, $1,852,000 and $2,343,000 for the years ended December
31, 2009, 2008 and 2007, respectively.
Note 5: Goodwill and Intangible Assets
The net carrying value of our goodwill by business segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
Acquired
|
|
Foreign
|
|
December 31
|
|
|
2008
|
|
Goodwill
|
|
Exchange
|
|
2009
|
|
|
(In Thousands)
|
RMP
|
|
$
|
4,656
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,656
|
|
SSD
|
|
|
1,458
|
|
|
|
130
|
|
|
|
|
|
|
|
1,588
|
|
Canada
|
|
|
4,518
|
|
|
|
|
|
|
|
642
|
|
|
|
5,160
|
|
United Kingdom
|
|
|
2,781
|
|
|
|
|
|
|
|
278
|
|
|
|
3,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,413
|
|
|
$
|
130
|
|
|
$
|
920
|
|
|
$
|
14,463
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
Acquired
|
|
Foreign
|
|
December 31
|
|
|
2007
|
|
Goodwill
|
|
Exchange
|
|
2008
|
|
|
(In Thousands)
|
RMP
|
|
$
|
4,656
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,656
|
|
SSD
|
|
|
1,256
|
|
|
|
202
|
|
|
|
|
|
|
|
1,458
|
|
Canada
|
|
|
5,434
|
|
|
|
|
|
|
|
(916
|
)
|
|
|
4,518
|
|
United Kingdom
|
|
|
3,713
|
|
|
|
|
|
|
|
(932
|
)
|
|
|
2,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,059
|
|
|
$
|
202
|
|
|
$
|
(1,848
|
)
|
|
$
|
13,413
|
|
|
|
|
The increase in Acquired Goodwill of our SSD segment pertains to an accrued earn-out based upon
sales volume of the railroad product line assets of Vulcan Chain Corporation, which were purchased
in October 2006, which is recorded as an increase of the total purchase price in accordance with
FASB ASC Topic 805,
Business Combinations
. During the years ended December 31, 2009 and 2008, we
made total earn-out payments of $165,000 and $195,000, respectively to the former owners of Vulcan.
We anticipate approximately $70,000 of additional earn-out payments will be made in 2010.
49
The carrying basis and accumulated amortization of definite lived intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
Amortization
|
|
Gross
|
|
|
|
|
|
|
Period
|
|
Carrying
|
|
Accumulated
|
|
Net Carrying
|
Amortizable Intangible Assets
|
|
(in years)
|
|
Value
|
|
Amortization
|
|
Amount
|
|
|
(In Thousands)
|
Patents & Licensing Agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMP
|
|
|
7
|
|
|
$
|
306
|
|
|
$
|
(65
|
)
|
|
$
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SSD
|
|
|
10
|
|
|
|
43
|
|
|
|
(11
|
)
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
7 to 20
|
|
|
|
1,116
|
|
|
|
(498
|
)
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
5
|
|
|
|
32
|
|
|
|
(2
|
)
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,497
|
|
|
|
(576
|
)
|
|
|
921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kelsan Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stick friction modifier product
technology
|
|
|
15
|
|
|
|
6,209
|
|
|
|
(2,104
|
)
|
|
|
4,105
|
|
Keltrack
®
liquid friction
modifier product technology
|
|
|
28
|
|
|
|
5,841
|
|
|
|
(1,060
|
)
|
|
|
4,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,050
|
|
|
|
(3,164
|
)
|
|
|
8,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coronet Rail Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
20
|
|
|
|
3,044
|
|
|
|
(567
|
)
|
|
|
2,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
|
|
5
|
|
|
|
31
|
|
|
|
(12
|
)
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supply agreement
|
|
|
10
|
|
|
|
174
|
|
|
|
(130
|
)
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred financing fees
|
|
|
5
|
|
|
|
51
|
|
|
|
(40
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,300
|
|
|
|
(749
|
)
|
|
|
2,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vulcan Product Line Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
19
|
|
|
|
2,169
|
|
|
|
(364
|
)
|
|
|
1,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unique customer relationship
|
|
|
17
|
|
|
|
890
|
|
|
|
(167
|
)
|
|
|
723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle restraint assembly technology
|
|
|
11
|
|
|
|
344
|
|
|
|
(102
|
)
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supply agreement
|
|
|
3
|
|
|
|
47
|
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
|
|
7
|
|
|
|
5
|
|
|
|
(2
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
3,455
|
|
|
|
(682
|
)
|
|
|
2,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
20,302
|
|
|
$
|
(5,171
|
)
|
|
$
|
15,131
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
Amortization
|
|
Gross
|
|
|
|
|
|
|
Period
|
|
Carrying
|
|
Accumulated
|
|
Net Carrying
|
Amortizable Intangible Assets
|
|
(in years)
|
|
Value
|
|
Amortization
|
|
Amount
|
|
|
(In Thousands)
|
Patents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMP
|
|
|
7
|
|
|
$
|
209
|
|
|
$
|
(27
|
)
|
|
$
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SSD
|
|
|
10
|
|
|
|
41
|
|
|
|
(7
|
)
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
5 to 20
|
|
|
|
816
|
|
|
|
(358
|
)
|
|
|
458
|
|
|
|
|
|
|
|
|
|
|
|
|
1,066
|
|
|
|
(392
|
)
|
|
|
674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kelsan Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stick friction modifier product
technology
|
|
|
15
|
|
|
|
5,365
|
|
|
|
(1,460
|
)
|
|
|
3,905
|
|
Keltrack
®
liquid friction
modifier product technology
|
|
|
28
|
|
|
|
5,047
|
|
|
|
(736
|
)
|
|
|
4,311
|
|
|
|
|
|
|
|
|
|
|
|
|
10,412
|
|
|
|
(2,196
|
)
|
|
|
8,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coronet Rail Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
20
|
|
|
|
2,748
|
|
|
|
(375
|
)
|
|
|
2,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
|
|
5
|
|
|
|
158
|
|
|
|
(86
|
)
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supply agreement
|
|
|
10
|
|
|
|
28
|
|
|
|
(8
|
)
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred financing fees
|
|
|
5
|
|
|
|
46
|
|
|
|
(27
|
)
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,980
|
|
|
|
(496
|
)
|
|
|
2,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vulcan Product Line Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
19
|
|
|
|
2,169
|
|
|
|
(251
|
)
|
|
|
1,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unique customer relationship
|
|
|
17
|
|
|
|
890
|
|
|
|
(115
|
)
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle restraint assembly technology
|
|
|
11
|
|
|
|
344
|
|
|
|
(70
|
)
|
|
|
274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supply agreement
|
|
|
3
|
|
|
|
47
|
|
|
|
(35
|
)
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
|
|
7
|
|
|
|
5
|
|
|
|
(2
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,455
|
|
|
|
(473
|
)
|
|
|
2,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
17,913
|
|
|
$
|
(3,557
|
)
|
|
$
|
14,356
|
|
|
|
|
No significant residual value is estimated for these intangible assets. The carrying amounts and
accumulated amortization were impacted by foreign currency translation adjustments. Aggregate
amortization expense for all intangible assets for the years ended December 31, 2009, 2008 and 2007
totaled $1,116,000, $1,199,000, $1,241,000, respectively.
51
The following table represents the total estimated amortization expense for the five succeeding
years:
|
|
|
|
|
|
|
Estimated Amortization
|
For the Year Ending December 31,
|
|
Expense
|
|
|
(In Thousands)
|
2010
|
|
$
|
1,137
|
|
2011
|
|
|
1,096
|
|
2012
|
|
|
1,087
|
|
2013
|
|
|
1,086
|
|
2014
|
|
|
1,049
|
|
The carrying value of indefinite-lived intangible assets is as follows as of December 31, 2009 and
December 31, 2008:
|
|
|
|
|
Non-Amortized Intangible Assets (Salient Systems):
|
|
Carrying Value
|
|
|
|
(In Thousands)
|
|
Wheel Impact Load Detector technology
|
|
$
|
9,797
|
|
Railstress Monitor technology
|
|
|
3,579
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,376
|
|
|
|
|
|
Note 6: Long-Term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2009
|
|
2008
|
|
|
(In Thousands)
|
PNC Financial Credit Facility:
(a)
|
|
|
|
|
|
|
|
|
Term loan Kelsan acquisition
|
|
$
|
2,966
|
|
|
$
|
4,884
|
|
Term loan Vulcan asset acquisition
|
|
|
1,100
|
|
|
|
1,700
|
|
Revolving credit facility United States
|
|
|
4,500
|
|
|
|
2,800
|
|
Revolving credit facility Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom loans:
(b)
|
|
|
|
|
|
|
|
|
Term loan Coronet Rail acquisition
|
|
|
471
|
|
|
|
1,131
|
|
Working capital facility
|
|
|
|
|
|
|
|
|
Term loans vehicles
|
|
|
1
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Promissory notes Salient Systems acquisition
(c)
|
|
|
|
|
|
|
280
|
|
Term Loan Boone County Bank, Inc. (
d)
|
|
|
1,715
|
|
|
|
1,800
|
|
|
|
|
|
|
|
10,753
|
|
|
|
12,610
|
|
Less current maturities
|
|
|
8,086
|
|
|
|
6,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,667
|
|
|
$
|
6,110
|
|
|
|
|
52
(a) PNC Financial Credit Facility
In December 2008, PNC Financial Services Group Inc. (PNC) of Pittsburgh, Pennsylvania completed its
acquisition of National City Corp. of Cleveland, Ohio. We have several lending facilities with
National City Bank, now part of PNC. PNC is currently in the process of integrating National City
Bank into its operations. We are unsure what impact, if any, that the acquisition of National City
by PNC may have on our existing credit facilities.
Our credit facility with 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 or $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 November 2006 for the Vulcan asset acquisition. As of December 31, 2009, we
had the ability to borrow an additional $6.9 million under the United States 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 December 31, 2009, we were in compliance with all of these financial covenants.
Term Loan Kelsan Acquisition
To finance the acquisition of Kelsan on November 30, 2004 we borrowed $14.9 million ($17.6 million
CDN) from National City Bank (Canada) through Portec Rail Nova Scotia Company, a wholly-owned
subsidiary of Portec Rail Products, Inc. In December 2008, we replaced the outstanding balance of
$4.9 million ($5.9 million CDN) on the Canadian loan with a new $4.9 million loan from National
City Bank. Portec Rail Products, Inc. is the sole guarantor of the term loan with substantially
all of our United States assets pledged as collateral. The monthly principal payment on the new
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 December 31, 2009 and 2008, the principal balance
outstanding was $3.0 million and $4.9, respectively, and accrued interest at a rate of 1.98% and
2.2%, respectively. This term loan is scheduled to mature on May 1, 2011.
Term Loan Vulcan Asset Acquisition
On November 7, 2006, we borrowed $3.0 million from National City Bank to finance the Vulcan
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 December 31, 2009 and 2008, we had outstanding borrowings of
$1.1 million and $1.7 million, respectively, which accrued interest at 1.73% and 1.97% as of
December 31, 2009 and 2008, respectively. 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. Outstanding
borrowings under this facility were $4.5 million and $2.8 million as of December 31, 2009 and 2008,
respectively. Borrowings on this facility accrued interest at 2.23% and 1.97% at December 31, 2009
and 2008, respectively. As of December 31, 2009 and 2008, we had $372,000 and $0, respectively, of
outstanding commercial letters-of-credit. This credit facility expires on September 30, 2012.
53
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% and 4.5% at
December 31, 2009 and 2008, respectively. As of December 31, 2009 and 2008, there were no
outstanding borrowings 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 with proceeds from the sale of the Wrexham facility. The
$2.6 million (£1.5 million pounds sterling) loan had an outstanding balance of approximately
$470,000 (£291,000 pounds sterling) and $1.1 million (£775,000 pounds sterling) as of December 31,
2009 and 2008, respectively. The monthly principal and interest payment is approximately $47,000
(£29,000 pounds sterling) and accrued interest at 2.25% and 3.75% at December 31, 2009 and 2008,
respectively.
Working Capital Facility
The working capital facility for our United Kingdom operations 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 Portec Rail Products (UK) Ltd.
and its wholly-owned subsidiaries, including Coronet Rail, Ltd. Interest accrues on the
outstanding borrowings at the United Kingdom base rate plus 1.5%. The interest rate on the
overdraft facility as of December 31, 2009 is 1.5%. Our availability under this credit facility is
reduced by outstanding performance bonds of $0 and $227,000 (£156,000 pounds sterling) at December
31, 2009 and 2008, respectively. There were no outstanding borrowings on this facility as of
December 31, 2009 and 2008. 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 December 31, 2009.
(c) Salient Systems Promissory Notes
In connection with the acquisition of Salient Systems on September 30, 2004, we executed two
promissory notes in the aggregate amount of $1.1 million. The original note holders were Harold
Harrison, the founder and former President and Chief Executive Officer of Salient Systems, and
Falls River Group, LLC, which acted as a financial advisor to Salient Systems. The final principal
and interest payments on these notes were made in January 2009. As of December 31, 2009, there was
no balance outstanding on these debt obligations.
(d) Term Loan Boone County Bank, Inc.
In July 2008, we entered into a loan agreement with Boone County Bank, Inc. for a line of credit 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. As of December 31, 2009 and 2008, the outstanding balance on this facility was
$1.7 million and $1.8 million, respectively, and interest accrued at a rate of 3.00% and 3.25%,
respectively. This facility has a current maturity date of January 14, 2014. We previously had a
$2.0 million line of credit with Boone County Bank, Inc. for our United States business segments
that was terminated in April, 2008.
54
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.
Future Maturities of Long-Term Debt
Future maturities of long-term debt are as follows:
|
|
|
|
|
|
|
(In Thousands)
|
|
2010
|
|
$
|
8,086
|
|
2011
|
|
|
1,792
|
|
2012
|
|
|
420
|
|
2013
|
|
|
420
|
|
2014
|
|
|
35
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,753
|
|
|
|
|
|
Note 7: Retirement Plans
Defined Contribution Plans
We maintain a qualified defined contribution 401(k) plan covering substantially all of our United
States employees. Under the terms of the plan, we contribute 3% of each employees monthly
compensation as a non-elective contribution and may also contribute up to 50% of the first 6% of
each employees compensation contributed to the plan as an annual profit sharing match, depending
on certain profitability thresholds. Total expense that we recorded for non-elective and matching
contributions was approximately $360,000, $428,000 and $406,000 for the years ended December 31,
2009, 2008 and 2007, respectively.
At our Canadian operation near Montreal, we maintain a defined contribution plan covering all
non-union employees. Under the terms of the Canadian plan, we may contribute 4% of each employees
compensation as a non-elective contribution and may also contribute 30% of the first 6% of each
employees compensation contributed to the plan. Total expense that we recorded for non-elective
and matching contributions for the Canadian defined contribution plan was approximately $93,000,
$90,000 and $88,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
We also maintain a defined contribution plan covering substantially all employees of Portec Rail
Products (UK) Ltd. Benefits under this plan are provided under no formal written agreement. Under
the terms of the defined contribution plan, we may make non-elective contributions of between 3%
and 10% of each employees compensation. There are no Company matching contributions. Total
expense that we recorded for the United Kingdom defined contribution plan contributions was
approximately $91,000, $110,000 and $131,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.
In July 2009, we started a new defined contribution plan covering substantially all the employees
of Kelsan Technologies Corp. Under the terms of the Kelsan plan, we make a non-elective
contribution of 4% of each employees compensation. Total expense that we recorded for the
Vancouver defined contribution plan was approximately, $34,000 for the year ended December 31,
2009.
Defined Benefit Pension Plans
We account for our defined benefit plans in accordance with FASB ASC Topic 715,
Compensation-Retirement Benefits
. Under this standard, companies must recognize a net liability or
asset, based upon the Projected Benefit Obligation (pension plans) or the Accumulated
Postretirement Benefit Obligation (other post retirement plans), to report the funded
55
status of their defined benefit pension and other postretirement benefit plans on their balance
sheets. The difference between a plans funded status and its current balance sheet position will
be recognized, net of tax, as a component of accumulated other comprehensive income. This standard
requires annual disclosures for sponsors of defined benefit plans. For each annual statement of
income presented, the new disclosures require companies to disclose the change in accumulated other
comprehensive income during the period by component, and require companies to separately disclose
the amounts recognized in accumulated other comprehensive income at year-end due to gains/losses,
prior service costs/credits, and transition assets/obligations. In addition, companies are
required to disclose the amortization of gains/losses, prior service cost/credits, and transition
assets/obligations expected to be recognized in the income statement during the following fiscal
year, as well as the expected return on plan assets during the period. In the year of adoption,
companies are required to disclose the incremental impact of applying FASB ASC 715 on individual
financial statement line items including the liability for pension benefits, deferred income taxes,
total liabilities, accumulated other comprehensive income and total shareholders equity. The
adoption of this standard and the annual disclosures are effective for fiscal years ending after
December 15, 2006. Retroactive application of this standard is not permitted. United Kingdom
regulations require trustees to adopt a prudent approach to funding defined benefit pension plans.
We maintain a total of three defined benefit pension plans: one in the United States and two in
the United Kingdom. Benefits for all three pension plans were frozen effective December 31, 2003.
These plans are discussed in further detail below.
United States Defined Benefit Pension Plan
We maintain a defined benefit pension plan that covers a significant number of our current United
States employees, former employees and retirees. For hourly employees, benefits under the plan are
based on years of service. For salaried employees, benefits under the plan are based on years of
service and the employees average compensation during defined periods of service. No minimum
contribution was required by the plan during calendar year 2007. In 2008, we made contributions to
the plan totaling $615,000, of which $492,000 relates to the 2007 plan year and $123,000 relates to
the 2008 plan year. In 2009, we made contributions to the plan totaling $202,000 of which $15,000
relates to the 2008 plan year and $187,000 relates to the 2009 plan year. In 2010, we anticipate
making total contributions of $393,000 for the 2009 and 2010 plan years.
Portec Rail Products (UK) Limited Pension Plan (Portec Rail Plan)
:
We maintain the Portec Rail Products (UK) Limited Pension Plan (Portec Rail plan), a defined
benefit pension plan in the United Kingdom. The Portec Rail plan covers some current employees,
former employees and retirees, and has been frozen to new entrants since April 1, 1997. Benefits
under the Portec Rail plan were based on years of service and eligible compensation during defined
periods of service. Our funding policy for the Portec Rail plan is to make minimum annual
contributions required by applicable regulations. Our total contributions into the Portec Rail
plan amounted to approximately $170,000, $124,000 and $170,000 for the years ended December 31,
2009, 2008 and 2007, respectively. We expect to contribute $138,000 (£86,000 pounds sterling) to
the Portec Rail plan during 2010. The unrecognized transition obligation for the Portec Rail plan
of $239,000 will continue to be amortized over the average remaining service period of employees in
the plan.
Conveyors International Limited Pension Plan (Conveyors Plan)
:
We also maintain the Conveyors International Limited Pension Plan (Conveyors plan), a defined
benefit pension plan in the United Kingdom. After January 2002, the Conveyors plan covers only
former employees. Benefits under the Conveyors plan were based on years of service and eligible
compensation during defined periods of service. Our funding policy for the Conveyors plan is to
make minimum annual contributions required by applicable regulations. Our total contributions into
the Conveyors plan amounted to approximately $61,000, $28,000 and $38,000 for the years ended
December 31, 2009, 2008 and 2007, respectively. Our future net periodic pension cost and plan
funding will be dependent upon the performance of plan assets. We expect to contribute $31,000
(£19,000 pounds sterling) to the Conveyors plan during 2010.
The unrecognized transition obligation for the Conveyors plan of $45,000 will continue to be
amortized over the average remaining service period of employees in the plan.
56
Other Post-Retirement Benefit Plan
At our Canadian operation near Montreal, we maintain a post-retirement benefit plan, which provides
retiree life insurance, health care benefits and, for a closed group of employees, dental care.
Retiring employees with a minimum of 10 years of service are eligible for the plan benefits. The
plan is not funded, and as such, does not have any assets to fund future benefit obligations. Cost
of benefits earned by employees is charged to expense as services are rendered. For the years
ended December 31, 2009, 2008, and 2007, we recognized expense of $58,000 ($66,000 CDN), $48,000
($51,000 CDN), and $52,000 ($55,000 CDN), respectively. Our accrued benefit obligation per our
actuarial valuation was $568,000 ($597,000 CDN) and $377,000 ($458,000 CDN) as of December 31, 2009
and 2008, respectively. This amount is recognized within other long-term liabilities with
corresponding amounts included in deferred income tax and accumulated other comprehensive income on
the consolidated balance sheet.
United States Defined Benefit Plan
We use a December 31 measurement date for the United States defined benefit pension plan. The
funded status of our United States defined benefit pension plan is as follows for the periods
ended:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2009
|
|
2008
|
|
|
(In Thousands)
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
8,628
|
|
|
$
|
8,736
|
|
Interest cost
|
|
|
570
|
|
|
|
545
|
|
Actuarial gain (loss)
|
|
|
932
|
|
|
|
(85
|
)
|
Benefits paid
|
|
|
(551
|
)
|
|
|
(568
|
)
|
|
|
|
Benefit obligation at end of year
|
|
|
9,579
|
|
|
|
8,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
5,899
|
|
|
|
7,929
|
|
Actual return on plan assets
|
|
|
1,259
|
|
|
|
(2,077
|
)
|
Employer contributions
|
|
|
202
|
|
|
|
615
|
|
Benefits paid
|
|
|
(551
|
)
|
|
|
(568
|
)
|
|
|
|
Fair value of plan assets at end of year
|
|
|
6,809
|
|
|
|
5,899
|
|
|
|
|
Funded status of the plan
|
|
|
(2,770
|
)
|
|
|
(2,729
|
)
|
|
|
|
|
Net pension (liability)
|
|
$
|
(2,770
|
)
|
|
$
|
(2,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Benefit Obligation
|
|
$
|
9,579
|
|
|
$
|
8,628
|
|
|
|
|
Amounts recognized in the balance sheets:
|
|
|
|
|
|
|
|
|
Accrued benefit liability
|
|
$
|
(2,770
|
)
|
|
$
|
(2,729
|
)
|
Accumulated other comprehensive loss
|
|
|
4,833
|
|
|
|
4,607
|
|
|
|
|
|
Net amount recognized at December 31
|
|
$
|
2,063
|
|
|
$
|
1,878
|
|
|
|
|
Amounts Recognized in Accumulated Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2009
|
|
2008
|
|
|
(
In Thousands
)
|
Net actuarial loss
|
|
|
4,833
|
|
|
|
4,607
|
|
|
|
|
|
|
$
|
4,833
|
|
|
$
|
4,607
|
|
|
|
|
57
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income
|
|
|
|
|
|
|
For the year ended
|
|
|
|
December 31
|
|
|
|
2009
|
|
|
|
(
In Thousands
)
|
|
Net actuarial loss arising during measurement period
|
|
$
|
328
|
|
Amortization of prior net actuarial gains
|
|
|
(102
|
)
|
|
|
|
|
Total Recognized in Other Comprehensive Income
|
|
$
|
226
|
|
|
|
|
|
The weighted average assumptions used to determine the benefit obligation are as follows for the
periods ended
:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2009
|
|
2008
|
|
|
|
Discount rate
|
|
|
5.90
|
%
|
|
|
6.90
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
The weighted-average assumptions used for determining net periodic pension cost are as follows for
the periods ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
Discount rate
|
|
|
5.90
|
%
|
|
|
6.90
|
%
|
|
|
6.53
|
%
|
Expected return on plan assets
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
The components of net periodic pension (benefit) cost for the years ended December 31, 2009, 2008
and 2007 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In Thousands)
|
Interest cost
|
|
$
|
570
|
|
|
$
|
545
|
|
|
$
|
534
|
|
Expected return on plan assets
|
|
|
(654
|
)
|
|
|
(661
|
)
|
|
|
(627
|
)
|
Amortization of net actuarial loss
|
|
|
102
|
|
|
|
66
|
|
|
|
129
|
|
|
|
|
|
Pension cost (benefit)
|
|
$
|
18
|
|
|
$
|
(50
|
)
|
|
$
|
36
|
|
|
|
|
We have estimated the long-term rate of return on plan assets based primarily on historical returns
on plan assets, adjusted for changes in target portfolio allocations and recent changes in
long-term interest rates based on publicly available information.
Plan assets are held by a trust company as trustee, which invests the plan assets in accordance
with the provisions of the trust agreement and investment objective guidelines. These plan
documents permit investment in cash/money market funds, United States fixed income securities and
equity securities, based on certain target allocation percentages.
Asset allocation is primarily based on a strategy to provide stable earnings while still permitting
the plan to recognize potentially higher returns through investment in equity securities within the
prescribed guidelines. Substantially all plan assets held within our United States defined benefit
pension plans consists of level one marketable securities as defined by
58
FASB ASC Topic 820,
Fair Value Measures and Disclosures
. The target asset allocation percentages
for 2009 and 2008 are as follows:
|
|
|
|
|
|
|
Pension Assets
|
Cash/money market funds
|
|
|
0 10
|
%
|
U.S. fixed income securities
|
|
|
20 40
|
%
|
Equity securities
|
|
|
60 80
|
%
|
Plan assets are re-balanced at least quarterly. At December 31, 2009 and 2008, plan assets by
category are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
|
Cash/money market funds
|
|
|
1
|
%
|
|
|
1
|
%
|
U.S. fixed income securities
|
|
|
34
|
|
|
|
39
|
|
Equity securities
|
|
|
65
|
|
|
|
60
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
We anticipate the following components of net periodic (benefit) cost during 2010:
Components of 2010 Net Periodic Pension (Benefit) Cost
|
|
|
|
|
|
|
(In Thousands)
|
|
Interest cost
|
|
$
|
549
|
|
Expected return on assets
|
|
|
(647
|
)
|
Amortization of unrecognized actuarial loss
Amo
|
|
|
192
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
94
|
|
|
|
|
|
The following estimated future benefit payments are expected to be paid under the United States
defined benefit pension plan:
|
|
|
|
|
|
|
Pension Benefits
|
|
|
(In Thousands)
|
2010
|
|
$
|
555
|
|
2011
|
|
|
562
|
|
2012
|
|
|
563
|
|
2013
|
|
|
570
|
|
2014
|
|
|
579
|
|
2015 2019
|
|
|
3,208
|
|
59
United Kingdom Defined Benefit Pension Plans
We use a December 31 measurement date for the United Kingdom defined benefit pension plans. The
funded status of our United Kingdom defined benefit pension plans is as follows for the years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portec Rail
|
|
Conveyors
|
|
Portec Rail
|
|
Conveyors
|
|
|
Plan
|
|
Plan
|
|
Plan
|
|
Plan
|
|
|
2009
|
|
2009
|
|
2008
|
|
2008
|
|
|
(In Thousands)
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
4,048
|
|
|
$
|
791
|
|
|
$
|
5,748
|
|
|
$
|
1,283
|
|
Interest cost
|
|
|
270
|
|
|
|
53
|
|
|
|
250
|
|
|
|
55
|
|
Actuarial (gain)/loss
|
|
|
569
|
|
|
|
168
|
|
|
|
(301
|
)
|
|
|
(92
|
)
|
Benefits paid
|
|
|
(289
|
)
|
|
|
(61
|
)
|
|
|
(123
|
)
|
|
|
(115
|
)
|
Foreign currency translation adjustments
|
|
|
435
|
|
|
|
85
|
|
|
|
(1,526
|
)
|
|
|
(340
|
)
|
|
|
|
Benefit obligation at end of year
|
|
|
5,033
|
|
|
|
1,036
|
|
|
|
4,048
|
|
|
|
791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
3,397
|
|
|
|
633
|
|
|
|
5,530
|
|
|
|
1,133
|
|
Actual return on plan assets
|
|
|
656
|
|
|
|
110
|
|
|
|
(665
|
)
|
|
|
(111
|
)
|
Employer contributions
|
|
|
170
|
|
|
|
61
|
|
|
|
124
|
|
|
|
28
|
|
Benefits paid
|
|
|
(289
|
)
|
|
|
(61
|
)
|
|
|
(123
|
)
|
|
|
(115
|
)
|
Foreign currency translation adjustments
|
|
|
285
|
|
|
|
68
|
|
|
|
(1,514
|
)
|
|
|
(302
|
)
|
|
|
|
Fair value of plan assets at end of year
|
|
|
4,219
|
|
|
|
811
|
|
|
|
3,352
|
|
|
|
633
|
|
|
|
|
Funded status of the plan
|
|
|
(814
|
)
|
|
|
(225
|
)
|
|
|
(696
|
)
|
|
|
(158
|
)
|
|
|
|
|
Net pension liability
|
|
$
|
(814
|
)
|
|
$
|
(225
|
)
|
|
$
|
(696
|
)
|
|
$
|
(158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Benefit Obligation
|
|
$
|
5,033
|
|
|
$
|
1,036
|
|
|
$
|
4,048
|
|
|
$
|
791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Accrued benefit liability
|
|
|
(814
|
)
|
|
|
(225
|
)
|
|
|
(696
|
)
|
|
|
(158
|
)
|
Accumulated other comprehensive loss
|
|
|
1,327
|
|
|
|
538
|
|
|
|
1,169
|
|
|
|
423
|
|
|
|
|
|
Net amount recognized at December 31
|
|
$
|
513
|
|
|
$
|
313
|
|
|
$
|
473
|
|
|
$
|
265
|
|
|
|
|
Amounts Recognized in Accumulated Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portec Rail
|
|
Conveyors
|
|
Portec Rail
|
|
Conveyors
|
|
|
Plan
|
|
Plan
|
|
Plan
|
|
Plan
|
|
|
December 31
|
|
December 31
|
|
December 31
|
|
December 31
|
|
|
2009
|
|
2009
|
|
2008
|
|
2008
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
Transition obligation
|
|
$
|
(239
|
)
|
|
$
|
(45
|
)
|
|
$
|
(260
|
)
|
|
$
|
(48
|
)
|
Net actuarial loss
|
|
|
1,566
|
|
|
|
583
|
|
|
|
1,429
|
|
|
|
471
|
|
|
|
|
|
|
$
|
1,327
|
|
|
$
|
538
|
|
|
$
|
1,169
|
|
|
$
|
423
|
|
|
|
|
60
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
Portec Rail
|
|
Conveyors
|
|
|
Plan
|
|
Plan
|
|
|
For the year ended
|
|
|
December 31
|
|
December 31
|
|
|
2009
|
|
2009
|
|
|
(In Thousands)
|
Net actuarial loss
|
|
$
|
110
|
|
|
$
|
30
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
Transition obligation
|
|
|
48
|
|
|
|
8
|
|
Net actuarial (gain)/loss
|
|
|
(126
|
)
|
|
|
31
|
|
Foreign currency translation adjustment
|
|
|
126
|
|
|
|
46
|
|
|
|
|
Total Recognized in Other Comprehensive Income
|
|
$
|
158
|
|
|
$
|
115
|
|
|
|
|
The weighted-average assumptions used to determine the benefit obligation are as follows for the
years ended:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2009
|
|
2008
|
|
|
|
Discount rate
|
|
|
5.60
|
%
|
|
|
6.10
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
The weighted-average assumptions used for determining net periodic pension cost are as follows for
the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
Discount rate
|
|
|
5.60
|
%
|
|
|
6.10
|
%
|
|
|
5.90
|
%
|
Expected return on plan assets Portec Rail Plan
|
|
|
5.36
|
%
|
|
|
5.40
|
%
|
|
|
7.20
|
%
|
Expected return on plan assets Conveyors Plan
|
|
|
5.30
|
%
|
|
|
5.40
|
%
|
|
|
7.20
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
The components of net periodic pension cost (benefit) are as follows for the years ended December
31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portec Rail
|
|
Conveyors
|
|
Portec Rail
|
|
Conveyors
|
|
Portec Rail
|
|
Conveyors
|
|
|
Plan
|
|
Plan
|
|
Plan
|
|
Plan
|
|
Plan
|
|
Plan
|
|
|
2009
|
|
2009
|
|
2008
|
|
2008
|
|
2007
|
|
2007
|
|
|
(In Thousands)
|
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5
|
|
|
$
|
4
|
|
Interest cost
|
|
|
270
|
|
|
|
53
|
|
|
|
250
|
|
|
|
56
|
|
|
|
318
|
|
|
|
72
|
|
Expected return on plan assets
|
|
|
(197
|
)
|
|
|
(34
|
)
|
|
|
(280
|
)
|
|
|
(53
|
)
|
|
|
(355
|
)
|
|
|
(73
|
)
|
Amortization of transition
amount
|
|
|
(48
|
)
|
|
|
(8
|
)
|
|
|
(44
|
)
|
|
|
(7
|
)
|
|
|
(59
|
)
|
|
|
(11
|
)
|
Amortization of unrecognized
loss
|
|
|
125
|
|
|
|
31
|
|
|
|
61
|
|
|
|
3
|
|
|
|
133
|
|
|
|
5
|
|
|
|
|
|
Pension cost (benefit)
|
|
$
|
150
|
|
|
$
|
42
|
|
|
$
|
(13
|
)
|
|
$
|
(1
|
)
|
|
$
|
42
|
|
|
$
|
(3
|
)
|
|
|
|
61
We have estimated the long-term rate of return on plan assets based primarily on historical returns
on plan assets, adjusted for changes in target portfolio allocations and recent changes in
long-term interest rates based on publicly available information.
Plan assets are invested by the Trustees in accordance with a written Statement of Investment
Principles. This statement permits investment in equities, corporate bonds, United Kingdom
government securities, commercial property and cash, based on certain target allocation
percentages.
Asset allocation is primarily based on a strategy to provide steady growth without undue
fluctuations. The target asset allocation percentages for 2009 and 2008 were as follows:
|
|
|
|
|
|
|
Portec Rail
|
|
Conveyors
|
|
|
Plan
|
|
Plan
|
Equity securities
|
|
Up to 100%
|
|
Up to 100%
|
Commercial property
|
|
Not to exceed 50%
|
|
Not to exceed 50%
|
U.K. Government securities
|
|
Not to exceed 50%
|
|
Not to exceed 50%
|
Cash
|
|
Up to 100%
|
|
Up to 100%
|
Substantially all plan assets held within our United Kingdom defined benefit pension plans consist
of level one marketable securities as defined by FASB ASC 820 Fair Value Measures and Disclosures.
The plan assets by category for the years ended December 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portec Rail
|
|
Conveyors
|
|
Portec Rail
|
|
Conveyors
|
|
|
Plan
|
|
Plan
|
|
Plan
|
|
Plan
|
|
|
2009
|
|
2009
|
|
2008
|
|
2008
|
|
|
|
Equity securities
|
|
|
43
|
%
|
|
|
48
|
%
|
|
|
38
|
%
|
|
|
29
|
%
|
Bonds
|
|
|
12
|
|
|
|
11
|
|
|
|
32
|
|
|
|
34
|
|
Commercial property
|
|
|
19
|
|
|
|
19
|
|
|
|
4
|
|
|
|
|
|
Cash
|
|
|
26
|
|
|
|
22
|
|
|
|
26
|
|
|
|
37
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
We anticipate the following components of net periodic (benefit) cost during 2010:
Components of 2010 Net Periodic (Benefit) Cost
|
|
|
|
|
|
|
|
|
|
|
Portec Rail
|
|
Conveyors
|
|
|
Plan
|
|
Plan
|
|
|
(In Thousands)
|
Interest cost
|
|
$
|
280
|
|
|
$
|
56
|
|
|
Expected return on assets
|
|
|
(230
|
)
|
|
|
(42
|
)
|
|
Amortization of transition obligation
|
|
|
(48
|
)
|
|
|
(10
|
)
|
|
Amortization of actuarial loss
|
|
|
118
|
|
|
|
36
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
120
|
|
|
$
|
40
|
|
|
|
|
62
The following estimated future benefit payments are expected to be paid, under the United Kingdom
defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
Portec Rail
|
|
Conveyors
|
|
|
Plan
|
|
Plan
|
|
|
(In Thousands)
|
2010
|
|
$
|
128
|
|
|
$
|
25
|
|
2011
|
|
|
145
|
|
|
|
25
|
|
2012
|
|
|
184
|
|
|
|
26
|
|
2013
|
|
|
187
|
|
|
|
28
|
|
2014
|
|
|
219
|
|
|
|
29
|
|
2015 2019
|
|
|
1,459
|
|
|
|
150
|
|
Note 8: Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Currency
|
|
Minimum
|
|
Other
|
|
|
Translation
|
|
Liability
|
|
Comprehensive
|
|
|
Adjustment
|
|
Retirement Plans
|
|
Income (Loss)
|
|
|
(In Thousands)
|
Balance at January 1, 2007
|
|
$
|
2,115
|
|
|
$
|
(3,558
|
)
|
|
$
|
(1,443
|
)
|
Net change
|
|
|
1,855
|
|
|
|
1,380
|
|
|
|
3,235
|
|
|
|
|
Balance at December 31, 2007
|
|
|
3,970
|
|
|
|
(2,178
|
)
|
|
|
1,792
|
|
Net change
|
|
|
(5,457
|
)
|
|
|
(1,839
|
)
|
|
|
(7,296
|
)
|
|
|
|
Balance at December 31, 2008
|
|
|
(1,487
|
)
|
|
|
(4,017
|
)
|
|
|
(5,504
|
)
|
Net change
|
|
|
3,307
|
|
|
|
(340
|
)
|
|
|
2,967
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
1,820
|
|
|
$
|
(4,357
|
)
|
|
$
|
(2,537
|
)
|
|
|
|
The deferred tax asset/(liability) associated with the currency translation adjustment included in
accumulated other comprehensive income for other non-United States subsidiaries was approximately
$(1,116,000), $912,000, and $(2,433,000), at December 31, 2009, 2008 and 2007, respectively. The
deferred tax asset/(liability) associated with the minimum pension liability included in
accumulated other comprehensive income was approximately $2,421,000, $2,249,000, and $1,166,000 at
December 31, 2009, 2008 and 2007, respectively.
Note 9: Income Taxes
Income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In Thousands)
|
Income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(65
|
)
|
|
$
|
794
|
|
|
$
|
1,068
|
|
State
|
|
|
36
|
|
|
|
139
|
|
|
|
210
|
|
Foreign
|
|
|
967
|
|
|
|
1,390
|
|
|
|
1,349
|
|
|
|
|
|
|
|
938
|
|
|
|
2,323
|
|
|
|
2,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
382
|
|
|
|
336
|
|
|
|
(37
|
)
|
State
|
|
|
42
|
|
|
|
70
|
|
|
|
(30
|
)
|
Foreign
|
|
|
334
|
|
|
|
512
|
|
|
|
302
|
|
|
|
|
|
|
|
758
|
|
|
|
918
|
|
|
|
235
|
|
|
|
|
|
Total
|
|
$
|
1,696
|
|
|
$
|
3,241
|
|
|
$
|
2,862
|
|
|
|
|
63
A reconciliation of U.S. income tax computed at the statutory rate and actual expense is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In Thousands)
|
Amount computed at statutory rate
|
|
$
|
2,890
|
|
|
$
|
3,747
|
|
|
$
|
3,057
|
|
State and local taxes less applicable federal income tax
|
|
|
51
|
|
|
|
138
|
|
|
|
119
|
|
Incremental tax on foreign operations
|
|
|
(866
|
)
|
|
|
(678
|
)
|
|
|
(27
|
)
|
Amendment of prior year tax returns
|
|
|
(341
|
)
|
|
|
(82
|
)
|
|
|
|
|
Non-taxable income
|
|
|
|
|
|
|
|
|
|
|
(328
|
)
|
Other
|
|
|
(38
|
)
|
|
|
116
|
|
|
|
41
|
|
|
|
|
|
Total
|
|
$
|
1,696
|
|
|
$
|
3,241
|
|
|
$
|
2,862
|
|
|
|
|
The components of the net deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2009
|
|
2008
|
|
|
(In Thousands)
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
1,002
|
|
|
$
|
955
|
|
Goodwill and intangible assets
|
|
|
10,364
|
|
|
|
9,886
|
|
Unrepatriated earnings of foreign subsidiaries
|
|
|
528
|
|
|
|
457
|
|
Foreign currency translation
|
|
|
1,116
|
|
|
|
|
|
Other
|
|
|
143
|
|
|
|
151
|
|
|
|
|
Total deferred tax liabilities
|
|
|
13,153
|
|
|
|
11,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Minimum pension liability
|
|
|
2,396
|
|
|
|
2,228
|
|
Inventory reserves
|
|
|
190
|
|
|
|
268
|
|
Accrued expenses
|
|
|
37
|
|
|
|
87
|
|
Accounts receivable
|
|
|
13
|
|
|
|
13
|
|
Uniform capitalization
|
|
|
145
|
|
|
|
197
|
|
Foreign tax credit carryforward
|
|
|
216
|
|
|
|
276
|
|
Foreign currency translation
|
|
|
|
|
|
|
912
|
|
Foreign operating losses and research expenditures
|
|
|
108
|
|
|
|
512
|
|
Other
|
|
|
138
|
|
|
|
101
|
|
|
|
|
Total deferred tax assets
|
|
|
3,243
|
|
|
|
4,594
|
|
Valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
3,243
|
|
|
|
4,594
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
9,910
|
|
|
$
|
6,855
|
|
|
|
|
The above net deferred tax liability is presented on the balance sheet as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2009
|
|
2008
|
|
|
(In Thousands)
|
Deferred tax asset current
|
|
$
|
160
|
|
|
$
|
369
|
|
Deferred tax liability long-term
|
|
|
10,070
|
|
|
|
7,224
|
|
|
|
|
Net deferred tax liability
|
|
$
|
9,910
|
|
|
$
|
6,855
|
|
|
|
|
64
Our foreign tax credit carry forwards expire from 2011 to 2016. At December 31, 2009 and 2008, we
had approximately $3,214,000 and $2,525,000, respectively, of net deferred tax liabilities located
outside of the United States. We have approximately $372,000 of scientific research and
development expenditures available for unlimited carry forward to offset the taxable income of
Kelsan in future years.
Uncertain Tax Positions
We have evaluated uncertain tax provisions pursuant to the guidance found within FASB ASC
740-10-55. The adoption of this interpretation during the first quarter of 2007 resulted in a
transition adjustment which reduced retained earnings as of January 1, 2007 by $313,000, of which
$195,000 was for taxes and $118,000 was for interest and penalties. During 2008, we identified
additional liabilities of $93,000 which were offset by reductions in prior year tax positions of
$93,000. During 2009, we identified additional liabilities of $319,000, offset by $227,000 of
reductions in prior year tax positions and an additional $31,000 related to settlements occurring
during the year.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years
ended December 31, 2008 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2009
|
|
2008
|
|
|
(In Thousands)
|
Balance at January 1
|
|
$
|
313
|
|
|
$
|
313
|
|
Additions based on tax positions related to the current year
|
|
|
44
|
|
|
|
81
|
|
Additions for tax positions of prior years
|
|
|
275
|
|
|
|
12
|
|
Reductions for tax positions of prior years
|
|
|
(227
|
)
|
|
|
(93
|
)
|
Settlements
|
|
|
31
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
436
|
|
|
$
|
313
|
|
|
|
|
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 United States federal jurisdiction, and various state and foreign jurisdictions. The
Company believes that it is no longer subject to U.S. state and local, or non-U.S. income tax
examinations by tax authorities for the years before 2003 and for years before 2007 for the United
States federal jurisdiction.
An examination began during the second quarter of 2009 for the 2005 to 2007 provincial tax returns
of our subsidiary in Quebec, Montreal. Our Kelsan Technologies business unit is currently being
reviewed by the 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.
65
Note 10: Commitments and Contingencies
Lease Commitments
All of our operating locations, except our manufacturing facility in Saint-Jean-sur-Richelieu,
Quebec, Canada, are leased facilities. In addition, we lease certain automobiles and office
equipment. These leases are subject to renewal options for varying periods. Future minimum
payments under noncancelable operating leases with initial or remaining terms of one year or more
consist of the following:
|
|
|
|
|
|
|
(In Thousands)
|
|
2010
|
|
$
|
1,278
|
|
2011
|
|
|
980
|
|
2012
|
|
|
642
|
|
2013
|
|
|
446
|
|
2014
|
|
|
431
|
|
Thereafter
|
|
|
807
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
4,585
|
|
|
|
|
|
Operating lease expense under such arrangements was $1,369,000, $1,390,000, and $1,386,000 for the
years ended December 31, 2009, 2008 and 2007, respectively.
Contingencies
During 2007, we became aware of a problem with RMPs Bonded to Rail (BTR) joint bars regarding the
failure in some instances of epoxy adhesive. We identified the causes of the problem and took
corrective action on the deficiencies. The BTR products manufactured by RMP are covered by a
one-year replacement warranty. The balance in the BTR warranty reserve at December 31, 2009 and
2008 was $40,000 and $177,000, respectively.
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.
In 1999, we were named with numerous other defendants in an environmental lawsuit, currently named
Niagara Mohawk Power Corporation v. Chevron U.S.A., Inc., et al. This action was filed in the
United States District Court for the Northern District of New York. 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 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
recent United States Supreme Court decision. In July 2008, The District Count decided that the
United States Supreme Court decision did not necessitate any change 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. Should we ultimately be held liable, damages may be assessed by the Court in accordance with
CERCLA.
66
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 seeks to recover
compensatory and punitive damages on four counts. Management believes the claims in the lawsuit
are without merit and intends to vigorously defend against the claims. Ongoing litigation may be
protracted, and we may incur additional ongoing legal expenses, which are not able to be estimated
at this time.
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 named defendants. These lawsuits are
directly related to the Agreement and Plan of Merger with L.B. Foster Company and Foster Thomas
Company. We are currently working with legal counsel to prepare our response to, and defense
against, these claims. 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,
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
Kanawha 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 reliefs, injunctive relief enjoining the
defendants from consummating the Offer and the Merger. They also purport to seek recovery of the
costs of the actions, 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.
67
Purchase Obligations
At December 31, 2009, we had $1.4 million of outstanding steel purchase orders. Commitments for
steel purchases by our Canadian operation near Montreal represent $1.0 million of the $1.4 million
total. The remaining $400,000 represent steel purchases by the RMP division. These obligations
become due during 2010.
In addition, at December 31, 2009, based upon our three-year supply agreement beginning in 2008 for
a primary raw material at Kelsan, we have an obligation to purchase $1.3 million of raw material
through December 31, 2010.
Note 11: Segments, Geographic and Major Customer Financial Information
Segments
We operate four business segments consisting of Railway Maintenance Products Division (RMP),
Shipping Systems Division (SSD), Portec Rail Nova Scotia Company (Canada) and Portec Rail Products
(UK) Ltd. (United Kingdom), along with a corporate functional shared service. The presentation of
segment information reflects the manner in which we organize and manage our segments by geographic
areas for making operating decisions, assessing performance and allocating resources. Intersegment
sales are accounted for at 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.
Railway Maintenance Products Division (RMP)
Our RMP segment manufactures and assembles track
components and related products, friction management products, railway wayside data collection and
data management systems and provides services to railroads, transit systems and railroad
contractors. RMP is also a distributor and reseller of purchased track components and lubricants
manufactured by third parties. The 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. The purchased and distributed
products consist primarily of various lubricants. The friction management products are designed
for rail customers to help them achieve cost savings primarily through reduced rail wear, wheel
wear and fuel usage in order to be more competitive. The manufactured and assembled track
components, such as rail joints, are used for rail replacement or repair. Salient Systems is
operated under the RMP segment.
Shipping Systems Division (SSD)
Our SSD segment engineers and sells securement systems and related
products primarily to the railroad freight car market. These systems are used to secure a wide
variety of products and lading onto freight cars. Most of the assembly work for SSD is performed at
RMPs Huntington, West Virginia manufacturing plant, although some manufacturing is subcontracted
to independent third parties.
Portec Rail Nova Scotia Company (Canada)
Our Canada segment includes Kelsan, located in Vancouver,
British Columbia, and our operation near Montreal. Our Montreal operation manufactures rail
anchors and rail spikes and assembles friction management products, primarily for the two largest
Canadian railroads. Rail anchors and rail spikes are devices to secure rails to the ties to
restrain the movement of the rail. Through its technology and manufacturing facility in Vancouver,
Kelsan engineers and manufactures stick friction modifiers and related application systems. The
manufacturing process for the production of Kelsans liquid friction modifier,
Keltrack
®
, is subcontracted to an independent contractor. Friction modifiers are
water-based liquids that contain a suspension of active friction modifier materials that help
reduce friction and noise while being applied on top of the rail without impacting a trains
braking or traction capabilities. The friction management products are aimed at our rail customers
to help them achieve cost savings primarily through reduced rail wear, wheel wear and fuel usage in
order to be more competitive.
Portec Rail Products (UK) Ltd. (United Kingdom)
Our United Kingdom segment operates and serves
customers in two different markets. In the rail market, product lines include friction management
products and services and track component products that primarily serve the United Kingdom
passenger rail network. In the material handling market, the major product lines are overhead and
floor conveyor systems, boom conveyors, and racking and mezzanine flooring systems. The end users
of the material handling products are primarily United Kingdom-based customers in the
manufacturing, distribution, garment and food industries.
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In Thousands)
|
External Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
RMP
|
|
$
|
44,247
|
|
|
$
|
46,268
|
|
|
$
|
50,327
|
|
SSD
|
|
|
5,292
|
|
|
|
10,679
|
|
|
|
8,817
|
|
Canada
|
|
|
26,176
|
|
|
|
26,486
|
|
|
|
23,059
|
|
United Kingdom
|
|
|
16,506
|
|
|
|
25,584
|
|
|
|
27,300
|
|
|
|
|
|
Total
|
|
$
|
92,221
|
|
|
$
|
109,017
|
|
|
$
|
109,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
RMP
|
|
$
|
1,669
|
|
|
$
|
2,969
|
|
|
$
|
1,993
|
|
SSD
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Canada
|
|
|
7,657
|
|
|
|
7,472
|
|
|
|
7,065
|
|
United Kingdom
|
|
|
2
|
|
|
|
|
|
|
|
146
|
|
|
|
|
|
Total
|
|
$
|
9,328
|
|
|
$
|
10,441
|
|
|
$
|
9,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
RMP
|
|
$
|
45,916
|
|
|
$
|
49,237
|
|
|
$
|
52,320
|
|
SSD
|
|
|
5,292
|
|
|
|
10,679
|
|
|
|
8,814
|
|
Canada
|
|
|
33,833
|
|
|
|
33,958
|
|
|
|
30,124
|
|
United Kingdom
|
|
|
16,508
|
|
|
|
25,584
|
|
|
|
27,446
|
|
|
|
|
|
Total
|
|
$
|
101,549
|
|
|
$
|
119,458
|
|
|
$
|
118,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
RMP
|
|
$
|
5,998
|
|
|
$
|
6,447
|
|
|
$
|
7,071
|
|
SSD
|
|
|
43
|
|
|
|
1,836
|
|
|
|
1,624
|
|
Canada
|
|
|
5,521
|
|
|
|
4,323
|
|
|
|
2,470
|
|
United Kingdom
|
|
|
518
|
|
|
|
2,394
|
|
|
|
2,956
|
|
Corporate Shared Services
|
|
|
(3,472
|
)
|
|
|
(3,262
|
)
|
|
|
(3,635
|
)
|
|
|
|
Total
|
|
|
8,608
|
|
|
|
11,738
|
|
|
|
10,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
298
|
|
|
|
805
|
|
|
|
1,247
|
|
|
Other (Income)/Expense, net
|
|
|
(191
|
)
|
|
|
(87
|
)
|
|
|
246
|
|
|
|
|
|
Income Before Income Taxes
|
|
$
|
8,501
|
|
|
$
|
11,020
|
|
|
$
|
8,993
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In Thousands)
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
RMP
|
|
$
|
656
|
|
|
$
|
580
|
|
|
$
|
800
|
|
SSD
|
|
|
191
|
|
|
|
206
|
|
|
|
154
|
|
Canada
|
|
|
645
|
|
|
|
780
|
|
|
|
797
|
|
United Kingdom
|
|
|
204
|
|
|
|
220
|
|
|
|
480
|
|
Corporate Shared Services
|
|
|
68
|
|
|
|
66
|
|
|
|
112
|
|
|
|
|
|
Total
|
|
$
|
1,764
|
|
|
$
|
1,852
|
|
|
$
|
2,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
RMP
|
|
$
|
38
|
|
|
$
|
20
|
|
|
$
|
7
|
|
SSD
|
|
|
214
|
|
|
|
217
|
|
|
|
215
|
|
Canada
|
|
|
653
|
|
|
|
730
|
|
|
|
751
|
|
United Kingdom
|
|
|
211
|
|
|
|
232
|
|
|
|
268
|
|
Corporate Shared Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,116
|
|
|
$
|
1,199
|
|
|
$
|
1,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
RMP
|
|
$
|
37,520
|
|
|
$
|
40,870
|
|
|
$
|
40,360
|
|
SSD
|
|
|
7,029
|
|
|
|
7,882
|
|
|
|
7,862
|
|
Canada
|
|
|
43,514
|
|
|
|
32,990
|
|
|
|
36,014
|
|
United Kingdom
|
|
|
14,242
|
|
|
|
14,938
|
|
|
|
19,775
|
|
Corporate Shared Services
|
|
|
237
|
|
|
|
143
|
|
|
|
215
|
|
|
|
|
|
Total
|
|
$
|
102,542
|
|
|
$
|
96,823
|
|
|
$
|
104,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
RMP
|
|
$
|
334
|
|
|
$
|
2,212
|
|
|
$
|
801
|
|
SSD
|
|
|
35
|
|
|
|
84
|
|
|
|
519
|
|
Canada
|
|
|
420
|
|
|
|
154
|
|
|
|
525
|
|
United Kingdom
|
|
|
143
|
|
|
|
199
|
|
|
|
407
|
|
Corporate Shared Services
|
|
|
57
|
|
|
|
48
|
|
|
|
96
|
|
|
|
|
|
Total
|
|
$
|
989
|
|
|
$
|
2,697
|
|
|
$
|
2,348
|
|
|
|
|
Geographic information for sales, based on country of destination, and assets, based on country of
location, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In Thousands)
|
External Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
43,309
|
|
|
$
|
47,760
|
|
|
$
|
51,696
|
|
Canada
|
|
|
23,515
|
|
|
|
29,017
|
|
|
|
23,590
|
|
United Kingdom
|
|
|
11,529
|
|
|
|
19,678
|
|
|
|
26,627
|
|
Other
|
|
|
13,868
|
|
|
|
12,562
|
|
|
|
7,590
|
|
|
|
|
|
Total
|
|
$
|
92,221
|
|
|
$
|
109,017
|
|
|
$
|
109,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2009
|
|
2008
|
|
2007
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
44,786
|
|
|
$
|
48,895
|
|
|
$
|
48,437
|
|
Canada
|
|
|
43,514
|
|
|
|
32,990
|
|
|
|
36,014
|
|
United Kingdom
|
|
|
14,242
|
|
|
|
14,938
|
|
|
|
19,775
|
|
|
|
|
|
Total
|
|
$
|
102,542
|
|
|
$
|
96,823
|
|
|
$
|
104,226
|
|
|
|
|
70
Major Customers
Our largest customers are North American Class I railroads. Our products are also sold to a
variety of regional and short-line railroads, rail transit systems, and original equipment
manufacturers for the material handling market in the United Kingdom. Our two largest customers
represented approximately 23%, 22% and 19% of our consolidated sales for the years ended December
31, 2009, 2008 and 2007, respectively. At December 31, 2009 and 2008, our two largest customers
represented approximately 18% and 6%, respectively, of our total accounts receivable.
Note 12: Selected Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
(Dollars in Thousands, Except Per Share Data)
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
22,164
|
|
|
$
|
26,530
|
|
|
$
|
24,285
|
|
|
$
|
19,242
|
|
Gross Profit
|
|
|
7,273
|
|
|
|
8,596
|
|
|
|
8,436
|
|
|
|
7,045
|
|
Net Income
|
|
|
1,136
|
|
|
|
2,203
|
|
|
|
2,023
|
|
|
|
1,443
|
|
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
0.12
|
|
|
$
|
0.23
|
|
|
$
|
0.21
|
|
|
$
|
0.15
|
|
Cash Dividend per Share
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
24,843
|
|
|
$
|
30,194
|
|
|
$
|
29,644
|
|
|
$
|
24,336
|
|
Gross Profit
|
|
|
7,710
|
|
|
|
9,918
|
|
|
|
9,913
|
|
|
|
8,031
|
|
Net Income
|
|
|
1,344
|
|
|
|
2,403
|
|
|
|
2,516
|
|
|
|
1,515
|
|
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
0.14
|
|
|
$
|
0.25
|
|
|
$
|
0.26
|
|
|
$
|
0.16
|
|
Cash Dividend per Share
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
27,484
|
|
|
$
|
29,090
|
|
|
$
|
27,998
|
|
|
$
|
24,931
|
|
Gross Profit
|
|
|
8,046
|
|
|
|
9,103
|
|
|
|
9,195
|
|
|
|
8,164
|
|
Net Income
|
|
|
1,205
|
|
|
|
1,887
|
|
|
|
1,890
|
|
|
|
1,149
|
|
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
0.13
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.12
|
|
Cash Dividend per Share
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
The sums of the quarterly earnings per share may not equal annual amounts due to rounding.
Additionally, the above unaudited financial information reflects all adjustments which, in the
opinion of management, are necessary to present a fair statement of the results of the respective
interim periods.
Note 13: Impairment of Long-Lived Assets
In May 2007, we sold our Troy, New York property to the Troy Local Development Corporation
for net proceeds of $448,000, which included $2,000 of transfer taxes paid. In conjunction with
this transaction, during the second quarter 2007, we recognized a pre-tax impairment loss of
$50,000 on our Troy property to reflect its current market value. This impairment charge of
$50,000 is included as a component of other expense in the consolidated income statement for the
year ended December 31, 2007.
Note 14: Stock Options
During 2008 and 2007, the Company granted 153,750 incentive stock options awards to certain
employees which include 3,750 of forfeited stock options that have been re-granted to certain
employees. The exercise price is equal to the closing stock price on the date of the grants.
These stock options will vest ratably over a 5-year vesting period and will expire ten years after
the grant date. These 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.
71
We account for stock based compensation in accordance with FASB ASC Topic 718,
Compensation Stock
Compensation
. For the years ended December 31, 2009, 2008, and 2007 we recognized compensation
expense of $104,000, $98,000 and $52,000, respectively, which relates to the 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 $154,000
and $110,000 over the remaining vesting periods of the 2008 and 2007 stock option grants,
respectively. During the second quarter of 2008, 250 stock options were exercised and we received
$2,400 of cash for the exercised stock options.
We recorded a tax benefit of $39,000 and $42,000 for the compensation expense recognized on these
stock options during 2009 and 2008, respectively. Incentive stock options do not provide a tax
deduction for the Company unless the optionee makes a disqualifying disposition of the stock within
two years from the date the option is granted or one year from the date the option is exercised. A
cashless exercise is an example of a disqualifying disposition as the optionee exercises the stock
options and disposes of stock at the same time. As we anticipate that the majority of our
employees that were granted stock options will choose to exercise their options via a cashless
exercise, we have recognized a tax benefit in order to account for the expected tax deduction.
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
|
|
|
Shares
|
|
Value
|
|
Grant
|
|
Stock
|
|
Dividend
|
|
Risk-fee
|
|
Expected
|
|
Term
|
Grant 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
|
Our annual dividend yield is calculated by dividing the sum of per share dividends declared and
paid during the previous four quarters by the stock price on the grant date. Our risk-free rate is
based upon the current United States Treasury yield on a seven-year note. Expected volatility is a
function of our historical closing stock price over a period of one-year. We have limited
historical information available regarding employee stock option exercise patterns. Therefore, we
estimate the expected term on our stock option grants based upon historical employee turnover.
The following table summarizes The Companys historical stock option transactions:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Weighted Average
|
|
|
Stock Options
|
|
Exercise Price
|
|
|
(in Thousands)
|
Outstanding at January 1, 2007
|
|
|
|
|
|
|
N/A
|
|
Granted
|
|
|
79
|
|
|
$
|
9.65
|
|
Exercised
|
|
|
|
|
|
|
N/A
|
|
Forfeited
|
|
|
(2
|
)
|
|
$
|
9.65
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
77
|
|
|
$
|
9.65
|
|
|
|
|
Granted
|
|
|
75
|
|
|
$
|
9.73
|
|
Exercised
|
|
|
|
|
|
|
N/A
|
|
Forfeited
|
|
|
(9
|
)
|
|
$
|
9.66
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
143
|
|
|
$
|
9.69
|
|
|
|
|
Granted
|
|
|
|
|
|
|
N/A
|
|
Exercised
|
|
|
|
|
|
|
N/A
|
|
Forfeited
|
|
|
(4
|
)
|
|
$
|
9.66
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
139
|
|
|
$
|
9.69
|
|
|
|
|
Exercisable at December 31, 2009
|
|
|
42
|
|
|
$
|
9.68
|
|
|
|
|
72
A summary of information regarding stock options outstanding as of December 31, 2009, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
Number
|
|
Weighted
|
|
|
|
|
|
Number
|
|
|
|
|
Outstanding at
|
|
Average
|
|
Weighted
|
|
Exercisable at
|
|
Weighted
|
Range of Exercise
|
|
December 31,
|
|
Remaining
|
|
Average
|
|
December 31,
|
|
Average
|
Prices
|
|
2009
|
|
Life
|
|
Exercise Price
|
|
2009
|
|
Exercise Price
|
|
|
(in Thousands)
|
|
(in years)
|
|
|
|
|
|
(in Thousands)
|
|
|
|
|
$9.65 $12.01
|
|
|
139
|
|
|
|
7.50
|
|
|
$
|
9.69
|
|
|
|
42
|
|
|
$
|
9.68
|
|
A summary of the status of, and changes to, unvested options, is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Stock
|
|
Weighted Average
|
|
|
Options
|
|
Exercise Price
|
|
|
(in Thousands)
|
|
|
|
|
Non-vested at January 1, 2007
|
|
|
|
|
|
|
N/A
|
|
Granted
|
|
|
79
|
|
|
$
|
9.65
|
|
Vested
|
|
|
|
|
|
|
N/A
|
|
Forfeited
|
|
|
(2
|
)
|
|
$
|
9.65
|
|
|
|
|
Non-vested at December 31, 2007
|
|
|
77
|
|
|
$
|
9.65
|
|
|
|
|
Granted
|
|
|
75
|
|
|
$
|
9.73
|
|
Vested
|
|
|
(15
|
)
|
|
$
|
9.65
|
|
Forfeited
|
|
|
(9
|
)
|
|
$
|
9.66
|
|
|
|
|
Non-vested at December 31, 2008
|
|
|
128
|
|
|
$
|
9.70
|
|
|
|
|
Granted
|
|
|
|
|
|
|
N/A
|
|
Vested
|
|
|
(29
|
)
|
|
$
|
9.68
|
|
Forfeited
|
|
|
(2
|
)
|
|
$
|
9.66
|
|
Non-vested at December 31, 2009
|
|
|
97
|
|
|
$
|
9.70
|
|
|
|
|
Note 15: Financial Instruments
We are exposed to market risk due to changes in currency exchange rates and interest rates. We
currently do not utilize hedging or derivatives to offset these risks.
Currency Exchange Risk
Occasionally, we are exposed to currency exchange risk from transactions we enter into with
customers whereby we settle in a currency other than our primary currency. Our primary foreign
currency exposures in relation to the U.S. dollar are the British pound sterling and the Canadian
dollar. The amount of transactions and the currency exchange differences that we recorded for
reported years and periods could be significant.
Interest Rate Risk
We have $10.7 million of debt as of December 31, 2009. Most of this debt is variable rate and
adjusts based upon an underlying index such as LIBOR or Prime Rate.
Note 16: 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.
73
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 17: Certain Significant Estimates
Our estimates that influence the financial statements are normally based on knowledge and
experience about past and current events and assumptions about future events. We consider the
following estimates impacting the financial statements to be significant.
Employee BenefitsDefined Benefit Plan
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, the long-term rate of return on
plan assets and assumptions relating to the employee workforce (retirement age and mortality). The
rate used to discount future estimated liabilities is determined considering the rates available at
year end on debt instruments that could be used to settle obligations of the plan. The long-term
rate of return is estimated by considering historical returns and expected returns on current and
projected asset allocations.
Warranty Reserves
We provide replacement warranties for defective products. As such, we establish warranty reserves
for expected warranty claims based upon our historical experience. In addition, specific reserves
are established for known warranty issues and their estimable losses.
Goodwill and Other Intangible Assets
We evaluate the recoverability of the goodwill of each of our reporting units as required under
FASB ASC Topic 350,
Intangibles Goodwill and Other
, by comparing the fair value of each reporting
unit with its carrying value. The fair values of our reporting units are determined by using a
discounted cash flow analysis based upon historical and projected financial information. We apply
our best judgment when assessing the reasonableness of the financial projections used to determine
the fair value of each reporting unit.
In accordance with FASB ASC Topic 360,
Property, Plant and Equipment
, we evaluate the
recoverability of identifiable intangible assets whenever events or changes in circumstances
indicate that an intangible assets carrying amount may not be recoverable.
74
Income Taxes
As a company with international operations, we record an estimated liability or benefit for income
taxes 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 dependent on various matters including the resolution
of 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.
As of January 1, 2007, we adopted FASB ASC Topic 740,
Income Taxes
, as it related to uncertain tax
positions 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.
Note 18: Subsequent Events
The Company has evaluated, accounted for and disclosed, as necessary, all subsequent events from
the balance sheet date through March 15, 2010.
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 (Purchaser), a West Virginia corporation and a wholly-owned subsidiary of Foster.
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.
On February 24, 2010, the United States Court of Appeals for the Second Circuit issued its
decision, reversing the order of the United States District Court for the Northern District of New
York, which dismissed Portec Rail Products, Inc., from certain litigation that related to the
Niagara Mohawk Power Corporation v. Consolidated Rail Corporation, et al. stating that there were
genuine issues of material fact. In addition, the Second Circuit reinstated the plaintiffs claims
under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), 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. Should we ultimately be held liable, damages may be assessed
by the Court in accordance with CERCLA. For more information see Note 10: Commitments and
Contingencies on page 66.
75
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 named defendants. These lawsuits are
directly related to the Agreement and Plan of Merger with L.B. Foster Company and Foster Thomas
Company. We are currently working with legal counsel to prepare our response to, and defense
against, these claims. 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,
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
Kanawha 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 reliefs, 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. For
more information see Note 10: Commitments and Contingencies on page 66.
76
Report of Management on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. Internal control over financial reporting refers to the
process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial
Officer, and effected by our Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles, and includes those policies and procedures that:
(1) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company;
(2) Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Companys assets that could have a material effect on the
Companys financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
Management has used the framework set forth in the report entitled Internal Control
Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway
Commission to evaluate the effectiveness of the Companys internal control over financial
reporting. Management has not identified any material weakness in the Companys internal control
over financial reporting. Management has concluded that the Companys internal control over
financial reporting was effective as of the end of the most recent fiscal year. The Companys
internal control over financial reporting as of December 31, 2009 has been audited by Arnett &
Foster, PLLC and Garbutt & Elliott, Ltd. independent registered public accounting firms, as stated
in their reports which appear herein.
|
|
|
|
|
|
|
/s/ Richard J. Jarosinski
Richard J. Jarosinski
|
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
Principal Executive Officer
|
|
|
|
|
|
|
|
|
|
/s/ John N. Pesarsick
John N. Pesarsick
|
|
|
|
|
Chief Financial Officer and
|
|
|
|
|
Principal Accounting Officer
|
|
|
77
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Portec Rail Products, Inc.
Pittsburgh, Pennsylvania
We have audited Portec Rail Products, Inc., and Subsidiaries, internal control over financial
reporting as of December 31, 2009, based on criteria established in
Internal ControlIntegrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Portec
Rail Products, Inc. and Subsidiaries management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Report of Management on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the companys internal control
over financial reporting based on our audit. We did not audit the internal control over financial
reporting of Portec Rail Products (UK) Ltd., and Subsidiaries, a wholly-owned consolidated
subsidiary, whose consolidated financial statements reflect total assets and net sales of $14,041
and $16,506 (dollars in thousands), respectively, included in the related consolidated financial
statement amounts as of and for the year ended December 31, 2009. The internal control over
financial reporting of this wholly-owned consolidated subsidiary was audited by other accountants,
whose report has been furnished to us, and our opinion, insofar as it relates to the internal
control over financial reporting of Portec Rail Products (UK) Ltd., is based solely on the report
of the other accountants.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that
(a)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(b)
provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and
(c)
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Innovation With Results
AF Center · 101 Washington Street, East · P.O. Box 2629 · Charleston, West Virginia 25329
304/346-0441 · 800/642-3601
www.afnetwork.com
78
In our opinion, based on our audit and the report of the other accountants, Portec Rail Products,
Inc., and Subsidiaries, maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal
ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets as December 31, 2009 and 2008, and the
related consolidated statements of income, shareholders equity, and cash flows for each of the
three years in the period ended December 31, 2009 of Portec Rail Products, Inc., and Subsidiaries,
and our report dated March 15, 2010, expressed an unqualified opinion.
ARNETT & FOSTER P.L.L.C.
Charleston, West Virginia
March 15, 2010
79
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Portec Rail Products, Inc.
Pittsburgh, Pennsylvania
We have audited the consolidated balance sheets of Portec Rail Products, Inc., and Subsidiaries, as
of December 31, 2009 and 2008, and the related consolidated statements of income, shareholders
equity, and cash flows for each of the three years in the period ended December 31, 2009. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did not audit the 2009,
2008, and 2007 consolidated financial statements of Portec Rail Products (UK) Ltd., and
Subsidiaries, a wholly-owned consolidated subsidiary, whose consolidated financial statements
reflect total assets of $14,041 and net sales of $16,506 (dollars in thousands) for 2009, total
assets of $14,736 and net sales of $25,584 (dollars in thousands) for 2008, and net sales of
$27,300 (dollars in thousands) for 2007, that are included in the related consolidated financial
statement amounts as of December 31, 2009 and 2008, and for each of the three years in the period
ended December 31, 2009. Those consolidated financial statements were audited by other accountants,
whose report has been furnished to us, and our opinion, insofar as it relates to the amounts
included for Portec Rail Products (UK) Ltd., and Subsidiaries, is based solely on the report of the
other accountants. Our audit included auditing the adjustments to convert the financial statements
of Portec Rail Products (UK) Ltd., and Subsidiaries, to U.S. generally accepted accounting
principles in its consolidation into the financial statements of Portec Rail Products, Inc., and
Subsidiaries.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other accountants, the consolidated
financial statements referred to above present fairly, in all material respects, the financial
position of Portec Rail Products, Inc., and Subsidiaries, as of December 31, 2009 and 2008, and the
results of their operations and their cash flows for each of the three years in the period ended
December 31, 2009, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Portec Rail Products, Inc., and Subsidiaries internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal
ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 15, 2010, expressed an unqualified opinion on the
effectiveness of Portec Rail Products, Inc., and Subsidiaries internal control over financial
reporting.
ARNETT & FOSTER P.L.L.C.
Charleston, West Virginia
March 15, 2010
Innovation With Results
AF Center · 101 Washington Street, East · P.O. Box 2629 · Charleston, West Virginia 25329
304/346-0441 · 800/642-3601
www.afnetwork.com
80
Report of Independent Registered Public Accounting Firm
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS,
PORTEC RAIL PRODUCTS (UK) LIMITED
SHEFFIELD
UNITED KINGDOM
We have audited Portec Rail Products (UK) Limiteds internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Portec Rail
Products (UK) Limiteds management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Report of Management on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that:
(1)
|
|
pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
|
(2)
|
|
provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and
|
(3)
|
|
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on
the financial statements.
|
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Portec Rail Products (UK) Limited maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) the consolidated financial statements for the year ended December 31, 2009 of
Portec Rail Products (UK) Limited and our report dated March 15, 2010 expressed an unqualified
opinion thereon.
/s/ Garbutt & Elliot LLP
Garbutt & Elliott LLP
York
United Kingdom
March 15, 2010
81
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
PORTEC RAIL PRODUCTS (UK) LIMITED
SHEFFIELD
UNITED KINGDOM
We have audited the consolidated balance sheets of Portec Rail Products (UK) Limited and
Subsidiaries (the Company) as of December 31, 2009 and 2008, and the related consolidated
statements of income for each of the years in the three year period ended December 31, 2009. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. Our
audit of the financial statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company as of December 31, 2009 and
2008, and the consolidated results of its operations for each of the years in the three year period
ended December 31, 2009 in conformity with accounting principles generally accepted in the United
Kingdom.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of December 31,
2009 based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March
15, 2010, expressed an unqualified opinion on the effective operation of internal control over
financial reporting.
/s/ Garbutt & Elliott LLP
Garbutt & Elliott LLP
York
United Kingdom
March 15, 2010
82
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a)
|
|
Evaluation of Disclosure Controls and Procedures
|
Under the supervision and with the participation of the Companys management, including the
Chief Executive Officer and Chief Financial Officer and Principal Accounting 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
fiscal year covered by this annual report (the Evaluation Date). Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer and Principal Accounting 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 (i) recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commissions rules and forms, and
(ii) accumulated and communicated to our management, including the Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b)
|
|
Managements Report on Internal Control over Financial Reporting
|
|
|
|
Our Internal Control over Financial Reporting is set forth in Item 8 and incorporated herein
by reference.
|
(c) Changes in Internal Controls over Financial Reporting
No change in the Companys internal control over financial reporting occurred during the most
recent fiscal quarter that has materially affected, or is reasonably likely to materially affect,
the Companys internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to the information
set forth under the caption Election of Directors in our definitive proxy statement to be filed
with the Securities and Exchange Commission within 120 days after December 31, 2009 (2010 Proxy
Statement).
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the information
set forth under the caption Election of Directors in the 2010 Proxy Statement.
83
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference to the information
set forth under the caption Security Ownership of Certain Beneficial Owners and certain
information regarding stock ownership under the caption Election of Directors in the 2010 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the information
set forth under the caption Election of Directors in the 2010 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the information
with respect to principal accountant fees and services set forth under the caption Ratification of
Appointment of Auditors in the 2010 Proxy Statement.
84
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits and financial statement schedules filed as a part of this Form 10-K
are as follows:
|
(a)(1)
|
|
Financial Statements
|
|
|
|
|
Consolidated Balance Sheets,
December 31, 2009 and 2008
|
|
|
|
|
Consolidated Statements of Income,
Years Ended December 31, 2009, 2008 and 2007
|
|
|
|
|
Consolidated Statements of Shareholders Equity,
Years Ended December 31, 2009, 2008 and 2007
|
|
|
|
|
Consolidated Statements of Cash Flows,
Years Ended December 31, 2009, 2008 and 2007
|
|
|
|
|
Notes to Consolidated Financial Statements.
|
|
|
|
|
Report of Management on Internal Control over Financial Reporting
|
|
|
|
|
Reports of Independent Registered Public Accounting Firms
|
|
|
(a)(2)
|
|
Financial Statement Schedules
|
|
|
|
|
No financial statement schedules are filed because the required information is not applicable or is
included in the consolidated financial statements or related notes.
|
|
|
(a)(3)
|
|
Exhibits
|
|
3.1
|
|
Articles of Incorporation of Portec Rail Products, Inc., as amended*
|
|
|
3.2
|
|
Bylaws of Portec Rail Products, Inc.*
|
|
|
4
|
|
Form of Common Stock Certificate*
|
|
|
10
|
|
Portec Rail Products, Inc. 2006 Stock Option Plan***
|
|
|
14
|
|
Code of Ethics**
|
|
|
21
|
|
Subsidiaries of the Registrant
|
|
|
23.1
|
|
Consent of Garbutt & Elliott, Ltd.
|
|
|
23.2
|
|
Consent of Arnett & Foster, PLLC
|
|
|
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
|
|
|
|
*
|
|
Incorporated by reference to the Registrants
Registration Statement on Form S-1 under the Securities Act of 1933,
filed with the SEC on November 6, 2003, as amended (Registration No.
333-110288).
|
85
|
|
|
**
|
|
Incorporated by reference to previously filed Form 10-K
for the year ended December 31, 2006.
|
|
***
|
|
Incorporated by reference to previously filed Form 10-K
for the year ended December 31, 2007.
|
|
(b)
|
|
The exhibits listed under (a)(3) above are filed herewith.
|
|
|
(c)
|
|
Not applicable.
|
86
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 15, 2010
|
By:
|
/s/ Richard J. Jarosinski
|
|
|
|
Richard J. Jarosinski, President and
|
|
|
|
Chief Executive Officer
Principal Executive Officer
(Duly Authorized Representative)
|
|
|
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Richard J. Jarosinski
|
|
|
|
By:
|
|
/s/ John N. Pesarsick
|
|
|
|
|
|
|
|
|
|
|
|
Richard J. Jarosinski, President and Chief Executive
(Principal Executive Officer)
|
|
|
|
|
|
John N. Pesarsick, Chief Financial Officer
(Principal Accounting Officer)
|
|
|
|
|
|
|
|
|
|
|
|
Date: March 15, 2010
|
|
|
|
|
|
Date: March 15, 2010
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Marshall T. Reynolds
|
|
|
|
By:
|
|
/s/ Douglas V. Reynolds
|
|
|
|
|
|
|
|
|
|
|
|
Marshall T. Reynolds, Chairman of the Board
|
|
|
|
|
|
Douglas V. Reynolds, Director
|
|
|
|
|
|
|
|
|
|
|
|
Date: March 15, 2010
|
|
|
|
|
|
Date: March 15, 2010
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ John S. Cooper
|
|
|
|
By:
|
|
/s/ Louis J. Akers
|
|
|
|
|
|
|
|
|
|
|
|
John S. Cooper, Vice Chairman of the Board
|
|
|
|
|
|
Louis J. Akers, Director
|
|
|
|
|
|
|
|
|
|
|
|
Date: March 15, 2010
|
|
|
|
|
|
Date: March 15, 2010
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Neal W. Scaggs
|
|
|
|
By:
|
|
/s/ Philip E. Cline
|
|
|
|
|
|
|
|
|
|
|
|
Neal W. Scaggs, Director
|
|
|
|
|
|
Philip E. Cline, Director
|
|
|
|
|
|
|
|
|
|
|
|
Date: March 15, 2010
|
|
|
|
|
|
Date: March 15, 2010
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Philip Todd Shell
|
|
|
|
By:
|
|
/s/ Daniel P. Harrington
|
|
|
|
|
|
|
|
|
|
|
|
Philip Todd Shell, Director
|
|
|
|
|
|
Daniel P. Harrington, Director
|
|
|
|
|
|
|
|
|
|
|
|
Date: March 15, 2010
|
|
|
|
|
|
Date: March 15, 2010
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Kirby J. Taylor
|
|
|
|
By:
|
|
/s/ A. Michael Perry
|
|
|
|
|
|
|
|
|
|
|
|
Kirby J. Taylor, Director
|
|
|
|
|
|
A. Michael Perry, Director
|
|
|
|
|
|
|
|
|
|
|
|
Date: March 15, 2010
|
|
|
|
|
|
Date: March 15, 2010
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Thomas W. Wright
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas W. Wright, Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date: March 15, 2010
|
|
|
|
|
|
|
87
EXHIBIT INDEX
3.1
|
|
Articles of Incorporation of Portec Rail Products, Inc.*
|
|
3.2
|
|
Bylaws of Portec Rail Products, Inc.*
|
|
4
|
|
Form of Common Stock Certificate*
|
|
10
|
|
Portec Rail Products, Inc. 2006 Stock Option Plan***
|
|
14
|
|
Code of Ethics**
|
|
21
|
|
Subsidiaries of the Registrant
|
|
23.1
|
|
Consent of Garbutt & Elliott, Ltd.
|
|
23.2
|
|
Consent of Arnett & Foster, PLLC
|
|
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
|
|
|
|
*
|
|
Incorporated by reference to the Registrants Registration Statement on Form S-1 under the
Securities Act of 1933, filed with the SEC on November 6, 2003 (Registration No. 333-110288).
|
|
**
|
|
Incorporated by reference to previously filed Form 10-K for the year ended December 31, 2006.
|
|
***
|
|
Incorporated by reference to previously filed Form 10-K for the year ended December 31, 2007.
|
88
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