UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2010
OR
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o
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
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For the transition period from
to
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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(412) 782-6000
(Registrants Telephone Number)
(Former Name, Former Address and Former Fiscal Year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months
(or for such shorter period that the registrant was required to file such reports) and (2) has been
subject to such requirements for the past 90 days. YES
þ
NO
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). YES
o
NO
o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer
o
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Accelerated Filer
o
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Non-Accelerated Filer
o
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Smaller Reporting Company
þ
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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 Exchange Act). YES
o
NO
þ
As of October 31, 2010 there were 9,603,579 shares issued and outstanding of the
Registrants Common Stock.
PORTEC RAIL PRODUCTS, INC.
INDEX TO FORM 10-Q
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Portec Rail Products, Inc.
Condensed Consolidated Balance Sheets
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September 30
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December 31
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2010
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2009
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(Unaudited)
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(Audited)
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(In Thousands)
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Assets
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Current assets
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Cash and cash equivalents
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$
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16,946
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$
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14,279
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Accounts receivable, net
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15,999
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10,667
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Inventories, net
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20,934
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21,538
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Prepaid expenses and other current assets
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1,965
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1,623
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Deferred income taxes
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85
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160
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Total current assets
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$
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55,929
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$
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48,267
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Property, plant and equipment, net of accumulated
depreciation of $15,177 and $13,938 at September 30, 2010 and
December 31, 2009, respectively.
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9,558
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10,260
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Intangible assets, net of accumulated amortization of $6,145
and $5,171 at September 30, 2010 and December 31, 2009,
respectively
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27,933
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28,507
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Goodwill
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14,486
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14,463
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Other assets
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591
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1,045
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Total assets
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$
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108,497
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$
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102,542
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Liabilities and Shareholders Equity
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Current liabilities
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Current maturities of long-term debt
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$
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7,707
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$
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8,086
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Accounts payable
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8,972
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4,940
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Accrued income taxes
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616
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618
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Customer deposits
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938
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873
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Accrued compensation
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2,378
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2,424
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Other accrued liabilities
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4,468
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2,216
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Total current liabilities
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25,079
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19,157
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Long-term debt, less current maturities
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970
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2,667
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Deferred income taxes
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10,415
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10,070
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Accrued pension costs
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3,549
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3,809
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Other long-term liabilities
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1,228
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1,091
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Total liabilities
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41,241
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36,794
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Commitments and Contingencies
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Shareholders equity:
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Common stock, $1 par value, 50,000,000 shares
authorized, 9,603,579 and 9,602,029 shares issued and
outstanding at
September 30, 2010 and December 31, 2009, respectively
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9,604
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9,602
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Additional paid-in capital
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25,638
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25,547
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Retained earnings
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33,969
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33,136
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Accumulated other comprehensive loss
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(1,955
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(2,537
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)
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Total shareholders equity
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67,256
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65,748
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Total liabilities and shareholders equity
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$
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108,497
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$
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102,542
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See Notes to Condensed Consolidated Financial Statements
3
Portec Rail Products, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
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Three Months Ended
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Nine Months Ended
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September 30
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September 30
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2010
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2009
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2010
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2009
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(Dollars in Thousands, Except Per Share Data)
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Net sales
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$
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27,906
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$
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24,285
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$
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83,663
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$
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72,979
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Cost of sales
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18,985
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15,849
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55,915
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48,674
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Gross profit
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8,921
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8,436
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27,748
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24,305
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Selling, general and administrative
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6,581
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5,411
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21,565
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16,271
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Amortization expense
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313
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283
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929
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806
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Operating income
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2,027
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2,742
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5,254
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7,228
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Interest expense
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62
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64
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185
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217
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Other expense/(income), net
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143
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37
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414
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(83
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)
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Income before income taxes
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1,822
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2,641
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4,655
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7,094
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Provision for income taxes
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581
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618
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2,093
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1,732
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Net income
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$
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1,241
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$
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2,023
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$
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2,562
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$
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5,362
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Earnings per share
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Basic and diluted
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$
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0.13
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$
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0.21
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$
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0.27
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$
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0.56
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Weighted average shares outstanding
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Basic
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9,603,444
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9,602,029
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9,602,763
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9,602,029
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Diluted
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9,617,065
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9,602,029
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9,613,632
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9,602,029
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Dividends per share
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$
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0.06
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$
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0.06
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$
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0.18
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$
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0.18
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See Notes to Condensed Consolidated Financial Statements
4
Portec Rail Products, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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Nine Months Ended
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September 30
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2010
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2009
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(In Thousands)
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Operating Activities
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Net income
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$
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2,562
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$
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5,362
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Adjustments to reconcile net income to net cash
provided by operating activities:
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Depreciation expense
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1,305
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1,309
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Amortization expense
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929
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806
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Provision for doubtful accounts
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61
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78
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Deferred income taxes
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26
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597
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Pension expense
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210
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157
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Defined benefit pension plan contributions
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(441
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)
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(176
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)
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Loss on disposal of assets
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7
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2
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Stock-based compensation expense
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78
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78
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Changes in operating assets and liabilities:
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Accounts receivable
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(5,321
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)
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672
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Inventories
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651
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3,854
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Prepaid expenses and other current assets
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(350
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)
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(685
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)
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Accounts payable
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3,270
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(1,361
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)
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Income taxes payable
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285
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(450
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)
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Accrued expenses
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2,375
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(1,190
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)
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Net cash provided by operating activities
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5,647
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9,053
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Investing Activities
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Purchases of property, plant and equipment
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(657
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)
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(718
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)
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Proceeds from sale of assets
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159
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Contingent consideration business acquisition
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(96
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)
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Net cash used in investing activities
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(498
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)
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(814
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)
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Financing Activities
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Net increase in working capital facilities
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792
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800
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Book overdrafts
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833
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(261
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)
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Principal payments on promissory notes
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(280
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)
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Proceeds from term loans
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300
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Principal payments on term loans
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(2,843
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)
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(2,522
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)
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Fees paid to obtain new financing
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(31
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)
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(17
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)
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Issuance of common stock
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15
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Cash dividends paid to shareholders
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(1,728
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)
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(1,728
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)
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Net cash used in financing activities
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(2,962
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)
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(3,708
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)
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Effect of exchange rate changes on cash and cash equivalents
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480
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|
884
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Increase in cash and cash equivalents
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2,667
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5,415
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Cash and cash equivalents at beginning of period
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14,279
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5,371
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Cash and cash equivalents at end of period
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$
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16,946
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$
|
10,786
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Supplemental Disclosures of Cash Flow Information
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Cash paid during the period for:
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Interest
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$
|
185
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$
|
297
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|
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Income taxes
|
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$
|
1,255
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|
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$
|
1,666
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See Notes to Condensed Consolidated Financial Statements
5
Note 1: Organization
Portec Rail Products, Inc. (sometimes herein referred to as we, our, us, the Company, or
Portec Rail Products) was incorporated in West Virginia in 1997, in conjunction with the purchase
of rail-related assets and select material handling assets of Portec, Inc. We along with our
predecessor, Portec Inc., have served the railroad industry since 1906 by manufacturing, supplying
and distributing a broad range of rail products, including rail joints, rail anchors, rail spikes,
railway friction management products and systems, railway wayside data collection and data
management systems and freight car securement devices. We also manufacture material handling
equipment at our Leicester, England operation. We serve both the domestic and international
markets. Our manufacturing facilities are located in Huntington, West Virginia; St. Jean, Quebec,
Canada; Vancouver, British Columbia, Canada; Leicester, England, United Kingdom; and Sheffield,
England, United Kingdom. We operate an engineering and assembly facility in Dublin, Ohio, and have
offices near Chicago, Illinois, and near Montreal, Quebec, Canada. Our corporate headquarters is
located near Pittsburgh, Pennsylvania.
Note 2: Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Portec Rail
Products, Inc.; Salient Systems, Inc. (Salient Systems), our wholly-owned United States subsidiary;
Portec Rail Nova Scotia Company, our wholly-owned Canadian subsidiary; and Portec Rail Products
(UK) Ltd., our wholly-owned United Kingdom subsidiary (United Kingdom). All significant
intercompany accounts and transactions have been eliminated in consolidation. The foregoing
financial information has been prepared in accordance with the accounting principles generally
accepted in the United States of America (GAAP) and rules and regulations of the Securities and
Exchange Commission for interim financial reporting. The preparation of financial statements in
accordance with GAAP requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ from
these estimates. The results of operations for the nine months ended September 30, 2010 are not
necessarily indicative of the results to be expected for the full year. The accompanying interim
financial information is unaudited; however, we believe that the financial information reflects all
adjustments (consisting of items of a normal recurring nature) necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with GAAP. Certain
information and note disclosures normally included in our annual financial statements prepared in
accordance with GAAP have been condensed or omitted. These interim financial statements should be
read in conjunction with the 2009 Annual Report on Form 10-K. The balance sheet information as of
December 31, 2009 was derived from our audited balance sheet included in our 2009 Annual Report on
Form 10-K. Unless otherwise indicated, all dollar amounts are in United States dollars. Certain
amounts in the prior years consolidated financial statements have been reclassified to conform to
the current year presentation. These reclassifications had no effect on net earnings.
6
Note 3: Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in,
first-out (FIFO) method for all inventories. Inventory costs include material, labor and
manufacturing overhead.
The major components of inventories are as follows:
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|
|
|
|
|
|
|
|
September 30
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In Thousands)
|
|
Raw materials
|
|
$
|
8,511
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|
|
$
|
9,903
|
|
Work in process
|
|
|
197
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|
|
|
279
|
|
Finished goods
|
|
|
12,882
|
|
|
|
11,931
|
|
|
|
|
|
|
|
21,590
|
|
|
|
22,113
|
|
Less reserve for slow-moving and obsolete inventory
|
|
|
656
|
|
|
|
575
|
|
|
|
|
Net inventory
|
|
$
|
20,934
|
|
|
$
|
21,538
|
|
|
|
|
Note 4: Long-Term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In Thousands)
|
|
PNC Financial Credit Facility:
(a)
|
|
|
|
|
|
|
|
|
Term loan Kelsan acquisition
|
|
$
|
1,396
|
|
|
$
|
2,966
|
|
Term loan Vulcan asset acquisition
|
|
|
650
|
|
|
|
1,100
|
|
Revolving credit facility United States
|
|
|
5,291
|
|
|
|
4,500
|
|
Revolving credit facility Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom loans:
(b)
|
|
|
|
|
|
|
|
|
Term loan Coronet Rail acquisition
|
|
|
|
|
|
|
471
|
|
Working capital facility
|
|
|
|
|
|
|
|
|
Term loans vehicles
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Term Loan Boone County Bank, Inc.
(c)
|
|
|
1,340
|
|
|
|
1,715
|
|
|
|
|
|
|
|
8,677
|
|
|
|
10,753
|
|
Less current maturities
|
|
|
7,707
|
|
|
|
8,086
|
|
|
|
|
|
|
$
|
970
|
|
|
$
|
2,667
|
|
|
|
|
(a) PNC Financial Credit Facility
In October 2010, we modified our existing U.S. revolving line of credit facility with PNC Financial
Services Group, Inc. (PNC) by increasing the maximum permitted borrowings from $7.0 million to
$11.0 million. Under the terms of the new agreement, our maximum permitted borrowings outstanding
cannot exceed $11.0 million and are subject to borrowing availability based on eligible collateral
balances. The terms of the new agreement also increase the sub-limit for outstanding
letters-of-credit from $1.6 million to $2.0 million under our domestic revolving line of credit
facility, and decreases our Canadian revolving line of credit facility from $4.8 million ($5.0
million CDN) to $2.4 million ($2.5 million CDN).
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
7
requirements of our United States and Canadian business
units. The components of this facility are as follows: 1) an $11.0 million United States revolving
credit facility; 2) a $2.4 million ($2.5 million CDN) revolving credit facility for our Canadian
operations; 3) an outstanding term loan in the amount of $1.4 million that provided the financing
for the Kelsan acquisition in November 2004; and 4) an outstanding term loan in the amount of
$650,000 that provided the financing for the Vulcan Chain product line acquisition in November
2006. As of September 30, 2010, we had the ability to borrow an
additional $6.5 million under the U.S. and Canadian revolving credit facilities. As of October 31,
2010, as a result of the modification of our PNC credit facilities we had the ability to borrow
approximately $8.1 million under the U.S. and Canadian revolving credit facilities.
This agreement contains certain financial covenants that require us to maintain a current ratio,
cash flow coverage and leverage ratios, and to maintain minimum amounts of net worth. This credit
facility further limits, sales of assets and additional indebtedness. At September 30, 2010, we
were in compliance with all of these financial covenants.
Term Loan Kelsan Acquisition:
In December 2008, we borrowed $4.9 million from PNC to refinance the Kelsan acquisition loan, which
had an outstanding principal balance of $4.9 million ($5.9 million CDN). Portec Rail Products,
Inc. is the borrower and sole guarantor of the term loan with substantially all of our United
States assets pledged as collateral. The monthly principal payment on the loan is approximately
$174,000. Interest on the outstanding balance accrues at a LIBOR-based rate plus 1.75% to 2.25%
and is paid monthly. As of September 30, 2010, the principal balance outstanding was $1.4
million, and accrued interest at a rate of 2.01%. This term loan is scheduled to mature on May 1,
2011.
Term Loan Vulcan Asset Acquisition:
In November 2006, we borrowed $3.0 million from PNC to finance the Vulcan product line acquisition.
Portec Rail Products, Inc. is the sole guarantor of the term loan with substantially all of our
United States assets pledged as collateral. Under this five-year term loan, our monthly principal
payments are $50,000. The outstanding principal balance accrues interest based upon the 30-day
LIBOR rate plus 1.5%. As of September 30, 2010 the principal balance outstanding was $650,000, and
accrued interest at 1.76%. This term loan is scheduled to mature on October 31, 2011.
Revolving Credit Facility United States:
In October 2010, we increased our United States revolving credit facility with PNC to $11.0 million
from $7.0 million. The new agreement permits a maximum loan balance of $11.0 million that is
subject to availability based on eligible collateral balances of our domestic operations. The new
agreement also increases the sub-limit for outstanding letters of credit to $2.0 million from $1.6
million. The interest rate on the outstanding borrowings as of September 30, 2010 is 2.26%. This
facility expires September 30, 2012.
Prior to October 2010, our United States revolving credit facility permitted borrowings up to $7.0
million to support the working capital requirements of our United States operations. Included in
the $7.0 million was a sub-limit of $1.6 million for standby and commercial letters-of-credit.
Outstanding borrowings under this facility were priced at a prime-based rate or a LIBOR-based rate.
Revolving Credit Facility Canada:
In October 2010 and in conjunction with the revisions to the United States revolving credit
facility, our Canadian revolving credit facility was reduced from $4.8 million ($5.0 million CDN)
to $2.4 million ($2.5 million CDN). Additionally, the sub-limit for standby and commercial
letters-of-credit was modified to a maximum of $400,000 U.S. dollars or $400,000 Canadian dollars.
No other modifications were made to this agreement.
Prior to October 2010, the working capital requirements for our Canadian operations were supported
by a $4.8 million ($5.0 million CDN) revolving credit facility. Included within the $4.8 million
was a sub-limit of $380,000 ($400,000
8
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 4.00% at September 30, 2010. As of September 30, 2010, 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. The $2.6 million (£1.5 million pounds sterling) loan was
repaid in full during September 2010. Interest during the period ended September 30, 2010 accrued
at 2.25%.
Working Capital Facility:
In July 2010, we entered into a working capital facility for Portec Rail Products (UK) Ltd. which
includes an overdraft availability of $2.2 million (£1.5 million pounds sterling). This credit
facility supports the working capital requirements of our United Kingdom operations and is
collateralized by substantially all of the assets of Portec Rail Products (UK) Ltd. and its
wholly-owned subsidiaries, including Coronet Rail, Ltd. The interest rate on this facility is the
financial institutions base rate plus 1.50%. As of September 30, 2010, the base rate is 0.5%.
Outstanding performance bonds reduce our availability under this credit facility. There were no
borrowings or performance bonds outstanding on this facility as of September 30, 2010. The
expiration date of this credit facility is August 31, 2011.
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 September 30, 2010.
(
c) Term Loan Boone County Bank, Inc.
In July 2008, we entered into a loan agreement with Boone County Bank, Inc. for a credit facility
in the maximum amount of $2.1 million to finance capital expenditures at our manufacturing facility
in Huntington, West Virginia. In February 2009 this credit facility was converted to a 60-month
term loan at the United States prime rate less 0.25%, and began to amortize at a monthly principal
payment of $35,000 plus accrued interest. As of September 30, 2010, the outstanding balance on
this facility was $1.3 million, and the interest rate was 3.0%. This facility has a maturity date
of January 14, 2014.
Boone County Bank, Inc. is a wholly-owned subsidiary of Premier Financial Bancorp, Inc., located in
Madison, West Virginia. Our Chairman of the Board is the Chairman of the Board and a shareholder
of Premier Financial Bancorp, Inc. We believe that our credit facility with Boone County Bank,
Inc. is on terms comparable to those obtained by a non-affiliated third party.
9
Note 5: Income Taxes
We evaluated uncertain tax provisions pursuant to the guidance found within Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC) FASB ASC 740-10-55. A
reconciliation of the beginning and ending amount of unrecognized tax positions is as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In Thousands)
|
|
Balance at January 1
|
|
$
|
436
|
|
|
$
|
313
|
|
Additions based on tax positions related to the current year
|
|
|
50
|
|
|
|
44
|
|
Additions for tax positions of prior years
|
|
|
87
|
|
|
|
116
|
|
Reductions for tax positions of prior years
|
|
|
(59
|
)
|
|
|
(65
|
)
|
Settlements
|
|
|
(23
|
)
|
|
|
31
|
|
|
|
|
Balance at September 30
|
|
$
|
491
|
|
|
$
|
439
|
|
|
|
|
We recognize interest accrued related to unrecognized tax benefits in interest expense and
penalties in operating expenses. The Company or one of its subsidiaries files income tax returns
in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Company is no
longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax
authorities for years before 2004.
In June 2010, an examination of the 2005, 2006 and 2007 provincial tax returns of our subsidiary in
Montreal Quebec was completed and a nominal amount of tax liability and interest were assessed.
Additionally, Kelsan Technologies Corp. is currently being reviewed by Canada Revenue Agency for
the Scientific Research and Experimental Development tax credit for the tax year ended November 30,
2008. We also received notice in July 2010 that Canada Revenue Agency will be reviewing Kelsan
Technologies corporate tax returns for 2008 and 2009. Additionally, we received a notice in
August 2010 from the U.S. Internal Revenue Service which has selected our 2008 domestic corporate
federal tax return for examination. We are currently unable to assess whether any significant
change in the unrecognized tax position will be necessary during the next twelve months as a result
of these reviews.
Note 6: Retirement Plans
The components of net periodic pension expense of our United States defined benefit pension plan
are as follows for the three and nine months ended September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
Interest cost
|
|
$
|
137
|
|
|
$
|
144
|
|
|
$
|
411
|
|
|
$
|
432
|
|
Expected return on plan assets
|
|
|
(162
|
)
|
|
|
(162
|
)
|
|
|
(485
|
)
|
|
|
(486
|
)
|
Amortization of unrecognized loss
|
|
|
48
|
|
|
|
26
|
|
|
|
144
|
|
|
|
76
|
|
|
|
|
Pension expense
|
|
$
|
23
|
|
|
$
|
8
|
|
|
$
|
70
|
|
|
$
|
22
|
|
|
|
|
10
We anticipate making total contributions of $393,000 to this pension plan during 2010 of which
$314,000 was funded during the nine months ended September 30, 2010. During 2009, we made
contributions to this pension plan totaling $202,000, of which $102,000 was funded during the first
nine months of 2009.
The components of net periodic pension expense of our United Kingdom defined benefit pension plans
(the Portec Rail Plan and Conveyors Plan) are as follows for the three and nine months ended
September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portec Rail Plan
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In Thousands)
|
|
Interest cost
|
|
$
|
65
|
|
|
$
|
67
|
|
|
$
|
195
|
|
|
$
|
193
|
|
Expected return on plan assets
|
|
|
(51
|
)
|
|
|
(49
|
)
|
|
|
(154
|
)
|
|
|
(143
|
)
|
Amortization of transition amount
|
|
|
(11
|
)
|
|
|
(12
|
)
|
|
|
(34
|
)
|
|
|
(35
|
)
|
Amortization of unrecognized loss
|
|
|
36
|
|
|
|
31
|
|
|
|
108
|
|
|
|
91
|
|
|
|
|
Pension expense
|
|
$
|
39
|
|
|
$
|
37
|
|
|
$
|
115
|
|
|
$
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conveyors Plan
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In Thousands)
|
|
Interest cost
|
|
$
|
13
|
|
|
$
|
13
|
|
|
$
|
40
|
|
|
$
|
39
|
|
Expected return on plan assets
|
|
|
(10
|
)
|
|
|
(8
|
)
|
|
|
(30
|
)
|
|
|
(25
|
)
|
Amortization of transition amount
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(7
|
)
|
|
|
(7
|
)
|
Amortization of unrecognized loss
|
|
|
8
|
|
|
|
8
|
|
|
|
22
|
|
|
|
22
|
|
|
|
|
Pension expense
|
|
$
|
9
|
|
|
$
|
11
|
|
|
$
|
25
|
|
|
$
|
29
|
|
|
|
|
United Kingdom regulations require trustees to adopt a prudent approach to funding required
contributions to defined benefit pension plans. We anticipate making contributions of $158,000
(£106,000 pounds sterling) and $33,000 (£23,000 pounds sterling) to the Portec Rail and Conveyors
pension plans, respectively, during 2010. For the nine months ended September 30, 2010,
contributions in the amount of $102,000 (£67,000 pounds sterling) and $25,000 (£16,000 pounds
sterling) have been made to the Portec Rail Plan and Conveyors Plan, respectively. For the year
ended December 31, 2009, we contributed $170,000 (£96,000 pounds sterling) and $62,000 (£40,000
pounds sterling) to the Portec Rail Plan and the Conveyors Plan, respectively, of which $62,000
(£40,000 pounds sterling) and $12,000 (£8,000 pounds sterling) was contributed to the Portec Rail
Plan and the Conveyors plan, respectively, during the nine months ended September 30, 2009.
Note 7: Comprehensive Income
Comprehensive income for the three and nine months ended September 30, 2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
Net income
|
|
$
|
1,241
|
|
|
$
|
2,023
|
|
|
$
|
2,562
|
|
|
$
|
5,362
|
|
Minimum pension liability adjustment, net of tax
|
|
|
(64
|
)
|
|
|
36
|
|
|
|
36
|
|
|
|
(67
|
)
|
Foreign currency translation adjustments, net of tax
|
|
|
1,246
|
|
|
|
1,399
|
|
|
|
546
|
|
|
|
2,906
|
|
|
|
|
Comprehensive income
|
|
$
|
2,423
|
|
|
$
|
3,458
|
|
|
$
|
3,144
|
|
|
$
|
8,201
|
|
|
|
|
11
Note 8: Earnings Per Share
Basic earnings per share (EPS) are computed as net income available to common shareholders divided
by the weighted average common shares outstanding. Diluted earnings per share considers the
potential dilution that occurs related to the 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 both the three and nine months ended September
30, 2010, we determined that our stock options have a dilutive effect on earnings per share. The
incremental shares related to the 2007 and the January 2008 stock option grants increased our
average shares outstanding by 13,621 shares and 10,869 shares, for the three and nine months ended
September 30, 2010, respectively. The incremental shares associated with the July 2008 stock
option grant would reduce our average shares outstanding by 222 shares and 264 shares for the three
and nine months ended September 30, 2010, respectively, and as such, these anti-dilutive shares are
not included in the calculation of diluted earnings per share for the three and nine months ended
September 30, 2010.
For the three and nine months ended September 30, 2009, we determined that our stock options have
an anti-dilutive effect on earnings per share, as the incremental shares related to the 2008 and
2007 stock options grants would reduce our average shares outstanding by 10,570 shares and 31,853
shares, respectively. The anti-dilutive shares are not included in the calculation of diluted
earnings per share.
Note 9: Commitments and Contingencies
Contractual Obligations
The following is a summary of our contractual obligations as of September 30, 2010, due on a
calendar year basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
|
than 1
|
|
|
1 3
|
|
|
3 5
|
|
|
than 5
|
|
Contractual Obligations
|
|
Total
|
|
|
year
|
|
|
years
|
|
|
years
|
|
|
years
|
|
|
|
(In Thousands)
|
|
Long-term debt obligations
|
|
$
|
3,385
|
|
|
$
|
2,415
|
|
|
$
|
575
|
|
|
$
|
395
|
|
|
$
|
|
|
Working capital facilities
|
|
|
5,292
|
|
|
|
5,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases (1)
|
|
|
3,801
|
|
|
|
350
|
|
|
|
1,724
|
|
|
|
927
|
|
|
|
800
|
|
Pension contributions (2)
|
|
|
3,781
|
|
|
|
134
|
|
|
|
1,562
|
|
|
|
982
|
|
|
|
1,103
|
|
Purchase obligations
|
|
|
4,538
|
|
|
|
4,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future interest payments (3)
|
|
|
82
|
|
|
|
18
|
|
|
|
58
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations (4)
|
|
$
|
20,879
|
|
|
$
|
12,747
|
|
|
$
|
3,919
|
|
|
$
|
2,310
|
|
|
$
|
1,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The majority of our future operating lease obligations are for property leases at our operating
locations. There are no unusual terms or conditions within these leases.
|
|
(2)
|
|
Pension plan contributions that may be required more than one year from September 30, 2010 will
be dependent upon the performance of plan assets.
|
|
(3)
|
|
Represents future interest payments on long-term debt obligations as of September 30, 2010.
Assumes that the interest rates on our long-term debt agreements at September 30, 2010 (See Note 4:
Long-Term Debt, Page 7) will continue for the life of the agreements.
|
|
(4)
|
|
As a result of adopting FASB ASC Topic 740,
Income Taxes
as it relates to uncertain tax
positions, we recorded an initial liability of $313,000 related to uncertain tax positions in 2007.
During the nine months ended September 30, 2010 and 2009, we recognized $55,000 and $126,000,
respectively, of additional liability. See Note 5: Income Taxes, Page 10. The total amount of
$491,000 and $436,000 are included within other long-term liabilities on the September 30, 2010 and
December 31, 2009 consolidated balance sheets. However, because of the high degree of uncertainty
regarding the timing of future cash outflows associated with uncertain tax positions, we cannot
reasonably estimate the periods of related future payments, and as such, we have excluded the
uncertain tax liability from the contractual obligations table.
|
12
Contingencies
Our Director and Officer liability insurance policy provides $3.0 million of coverage, less a
deductible of $150,000, for defense and/or settlement costs incurred in the event that a lawsuit is
filed against our directors and/or officers. As a result of the shareholder lawsuits that have
been brought against several named defendants (See Litigation footnote, Page 14), we have filed a
claim with our insurance carrier for costs incurred pertaining to these lawsuits. In May 2010, we
were notified by our insurance carrier that the carrier is reviewing the policy to determine the
validity of the claim and the ultimate responsibility of these expenses. The insurance carrier has
raised a number of questions regarding the claim. We have reviewed this matter with counsel and in
the opinion of counsel, there appears to be some validity to the questions
raised by the insurance carrier. Accordingly, for the nine months ended September 30, 2010 we have
recognized a total of $2.0 million for costs associated with the shareholder lawsuits, of which
$638,000 was recognized during the three months ended September 30, 2010. We may incur additional
ongoing expenses related to these shareholder lawsuits, which are not estimable at this time.
Litigation
We are involved from time to time in lawsuits that arise in the normal course of business. We
actively and vigorously defend all lawsuits.
We have been named with numerous other defendants in an environmental lawsuit. The plaintiff seeks
to recover costs which it has incurred, and may continue to incur, to investigate and remediate its
former property as required by the New York State Department of Environmental Conservation
(NYSDEC). We have not been named as a liable party by the NYSDEC and we believe we have no
liability to the plaintiff in the case. We filed a motion for summary judgment seeking a ruling to
have us dismissed from the case. In November 2003, the motion for summary judgment was granted and
we were dismissed from the case by the United States District Court for the Northern District of
New York. In March 2004, the plaintiff filed a notice of appeal to the United States Court of
Appeals for the Second Circuit, appealing, in part, the District Courts decision to dismiss all
claims against us. In April 2005, the plaintiffs appeal was dismissed by the Second Circuit Court
without prejudice, and the matter was remanded to the United States District Court for the Northern
District of New York for consideration in light of a then-recent United States Supreme Court
decision. As a result, in June 2006, the District Court dismissed all claims brought by the
plaintiff pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act
(CERCLA or Superfund). In July 2006, the plaintiff filed a notice of appeal to the Second
Circuit. However, in early 2008, the plaintiffs appeal was dismissed again by the Second Circuit
Court without prejudice, and the matter was remanded to the District Court for consideration in
light of another then-recent United States Supreme Court decision. In July 2008, The District
Court decided that the United States Supreme Court decision did not necessitate any changes in the
District Courts prior determinations in this case and held that all of its prior rulings stand.
In August 2008, the plaintiff filed a third notice of appeal to the Second Circuit Court. On
February 24, 2010, the Second Circuit issued its decision, reversing the order of the District
Court which dismissed Portec from the litigation, stating that there were genuine issues of
material fact. In addition, the Second Circuit reinstated the plaintiffs CERCLA claims, stating
that the plaintiff is entitled to bring a claim for contribution under Section 113(f)(3)(B) of
CERCLA. Ongoing litigation may be protracted, and we may incur additional ongoing legal expenses,
which are not estimable at this time.
We believe that plaintiffs case against Portec, Inc. is without merit. Because plaintiff is
seeking unspecified monetary contribution from the defendants, we are unable to determine, if
plaintiff were to prevail on its claims against Portec, the extent to which we would have to make a
contribution, or whether such contribution would have a material adverse effect on our financial
condition or results of operations. Furthermore, ongoing litigation may be protracted and legal
expenses may be material to our results of operations.
In August 2009, Portec Rail Products, Inc. and Kelsan Technologies Corp. were named as defendants
in a civil lawsuit by Snyder Equipment Co. Inc. alleging breach of contract and other claims
related to a non-disclosure agreement. The
13
plaintiff filed the complaint with the United States
District Court for the Western District of Missouri, Southern Division and was seeking to recover
compensatory and punitive damages on four counts. In March 2010 the parties to this lawsuit
entered into a new agreement, and the lawsuit was dismissed with prejudice.
On February 19, 2010, and through March 3, 2010, a total of five lawsuits initiated by purported
shareholders of Portec Rail have been filed against several defendants including the Company and
certain members of its Board of Directors. These lawsuits are directly related to the Agreement
and Plan of Merger with L.B. Foster Company and Foster Thomas Company, which was signed on February
16, 2010. Following is a summary of these lawsuits:
|
|
|
|
|
|
|
Date Filed
|
|
Court
|
|
Plaintiff
|
|
Defendants
|
2/19/2010
|
|
Circuit Court of
Kanawha County,
West Virginia
|
|
Barbara Petkus,
individually and on
behalf of all
others similarly
situated.
|
|
Portec Rail
Products, Inc.,
Richard J.
Jarosinski,
Marshall T.
Reynolds, John S.
Cooper, Louis J.
Akers, Philip E.
Cline, Daniel P.
Harrington, A.
Michael Perry,
Douglas V.
Reynolds, Neal W.
Scaggs, Philip Todd
Shell, Kirby J.
Taylor, and Thomas
W. Wright
|
|
|
|
|
|
|
|
2/24/2010
|
|
Court of Common
Pleas, Allegheny
County,
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
|
14
|
|
|
|
|
|
|
Date Filed
|
|
Court
|
|
Plaintiff
|
|
Defendants
|
3/03/2010
|
|
Circuit Court of
Cabell County, West
Virginia
|
|
John Furman,
individually and on
behalf of all
others similarly
situated.
|
|
Marshall T.
Reynolds, John S.
Cooper, Louis J.
Akers, Philip E.
Cline, Daniel P.
Harrington, A.
Michael Perry,
Douglas V.
Reynolds, Neal W.
Scaggs, Philip Todd
Shell, Kirby J.
Taylor, Thomas W.
Wright, Portec Rail
Products, Inc.,
L.B. Foster
Company, and Foster
Thomas Company
|
The lawsuits allege, among other things, that Portec Rails directors breached their fiduciary
duties and L.B. Foster and Purchaser aided and abetted such alleged breaches of fiduciary duties.
Based on these allegations, the lawsuits seek, among other relief, injunctive relief enjoining the
defendants from consummating the Offer and the Merger. They also purport to seek recovery of the
costs of the action, including reasonable legal fees.
The three lawsuits filed in Allegheny County, Pennsylvania were consolidated and on March 22 and
23, 2010, hearings were held on Plaintiffs Motion for Preliminary Injunction, which seeks to
enjoin the transaction set forth in the Agreement and Plan of Merger. On April 21, 2010, the Court
of Common Pleas of Allegheny County, Pennsylvania (the Court) entered an order in the matter
captioned
In re Portec Rail Products, Inc. Shareholders Litigation,
preliminarily enjoining Foster
from completing the Offer until the Court determines that the Board of Directors of Portec has
cured the breach of fiduciary duties as found by the Court and disclosed certain material
information. A copy of the order was filed as an exhibit to the SC 14D-9/A filed by the Company on
April 22, 2010.
On June 24, 2010, the Court of Common Pleas of Allegheny County, Pennsylvania (the Court) granted
a Motion to Dissolve Preliminary Injunction in the case styled
In Re Portec Rail Products, Inc.
Shareholders Litigation
. A copy of the order was filed as an exhibit to the SC 14D-9/A filed by
the Company on June 29, 2010.
In the two lawsuits pending in West Virginia, Motions to Dismiss the lawsuits were filed in April
2010 on behalf of the Company and the Director Defendants. In the Furman case, the parties agreed
to transfer the lawsuit to Cabell County, West Virginia. In the Petkus case, the Motion to Dismiss
also included a Motion to Transfer Venue from Kanawha County, West Virginia to Cabell County, West
Virginia. In both West Virginia cases, Plaintiffs have filed Motions for Preliminary Injunctions,
but as of the date of this filing, no hearings have been scheduled.
Ongoing litigation in these matters may be protracted, and we may incur additional ongoing legal
expenses, which are not able to be estimated at this time.
Note 10: Segment Information
We operate four business segments consisting of the Railway Maintenance Products Division (RMP),
the Shipping Systems Division (SSD), Portec Rail Nova Scotia Company (Canada) and Portec Rail
Products (UK) Ltd. (United Kingdom), along with corporate functional shared service. The
presentation of segment information reflects the manner in which we organize and manage our
segments by geographic areas for making operating decisions, assessing performance and allocating
resources. Intersegment sales are conducted at arms-length prices, reflecting prevailing market
conditions within the United States, Canada and the United Kingdom. Such sales and associated
costs are eliminated in the consolidated financial statements.
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
External Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMP
|
|
$
|
12,678
|
|
|
$
|
11,556
|
|
|
$
|
36,444
|
|
|
$
|
35,394
|
|
SSD
|
|
|
1,820
|
|
|
|
1,293
|
|
|
|
6,574
|
|
|
|
4,054
|
|
Canada
|
|
|
7,914
|
|
|
|
6,511
|
|
|
|
26,407
|
|
|
|
20,824
|
|
United Kingdom
|
|
|
5,494
|
|
|
|
4,925
|
|
|
|
14,238
|
|
|
|
12,707
|
|
|
|
|
Total
|
|
$
|
27,906
|
|
|
$
|
24,285
|
|
|
$
|
83,663
|
|
|
$
|
72,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMP
|
|
$
|
422
|
|
|
$
|
377
|
|
|
$
|
1,050
|
|
|
$
|
1,218
|
|
SSD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
2,324
|
|
|
|
2,252
|
|
|
|
6,163
|
|
|
|
6,107
|
|
United Kingdom
|
|
|
26
|
|
|
|
1
|
|
|
|
79
|
|
|
|
1
|
|
|
|
|
Total
|
|
$
|
2,772
|
|
|
$
|
2,630
|
|
|
$
|
7,292
|
|
|
$
|
7,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMP
|
|
$
|
13,100
|
|
|
$
|
11,933
|
|
|
$
|
37,494
|
|
|
$
|
36,612
|
|
SSD
|
|
|
1,820
|
|
|
|
1,293
|
|
|
|
6,574
|
|
|
|
4,054
|
|
Canada
|
|
|
10,238
|
|
|
|
8,763
|
|
|
|
32,570
|
|
|
|
26,931
|
|
United Kingdom
|
|
|
5,520
|
|
|
|
4,926
|
|
|
|
14,317
|
|
|
|
12,708
|
|
|
|
|
Total
|
|
$
|
30,678
|
|
|
$
|
26,915
|
|
|
$
|
90,955
|
|
|
$
|
80,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMP
|
|
$
|
1,650
|
|
|
$
|
1,571
|
|
|
$
|
5,006
|
|
|
$
|
4,884
|
|
SSD
|
|
|
119
|
|
|
|
(6
|
)
|
|
|
840
|
|
|
|
(24
|
)
|
Canada
|
|
|
1,321
|
|
|
|
1,522
|
|
|
|
4,773
|
|
|
|
4,510
|
|
United Kingdom
|
|
|
657
|
|
|
|
517
|
|
|
|
1,335
|
|
|
|
508
|
|
Corporate Shared Services
|
|
|
(1,720
|
)
|
|
|
(862
|
)
|
|
|
(6,700
|
)
|
|
|
(2,650
|
)
|
|
|
|
Total
|
|
|
2,027
|
|
|
|
2,742
|
|
|
|
5,254
|
|
|
|
7,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
62
|
|
|
|
64
|
|
|
|
185
|
|
|
|
217
|
|
Other Expense/(Income), net
|
|
|
143
|
|
|
|
37
|
|
|
|
414
|
|
|
|
(83
|
)
|
|
|
|
Income Before Income Taxes
|
|
$
|
1,822
|
|
|
$
|
2,641
|
|
|
$
|
4,655
|
|
|
$
|
7,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMP
|
|
$
|
156
|
|
|
$
|
157
|
|
|
$
|
472
|
|
|
$
|
498
|
|
SSD
|
|
|
40
|
|
|
|
49
|
|
|
|
127
|
|
|
|
147
|
|
Canada
|
|
|
167
|
|
|
|
170
|
|
|
|
499
|
|
|
|
469
|
|
United Kingdom
|
|
|
46
|
|
|
|
53
|
|
|
|
133
|
|
|
|
148
|
|
Corporate Shared Services
|
|
|
26
|
|
|
|
20
|
|
|
|
74
|
|
|
|
47
|
|
|
|
|
Total
|
|
$
|
435
|
|
|
$
|
449
|
|
|
$
|
1,305
|
|
|
$
|
1,309
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMP
|
|
$
|
17
|
|
|
$
|
8
|
|
|
$
|
47
|
|
|
$
|
26
|
|
SSD
|
|
|
51
|
|
|
|
53
|
|
|
|
159
|
|
|
|
160
|
|
Canada
|
|
|
186
|
|
|
|
170
|
|
|
|
555
|
|
|
|
475
|
|
United Kingdom
|
|
|
59
|
|
|
|
52
|
|
|
|
168
|
|
|
|
145
|
|
Corporate Shared Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
313
|
|
|
$
|
283
|
|
|
$
|
929
|
|
|
$
|
806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMP
|
|
$
|
|
|
|
$
|
|
|
|
$
|
131
|
|
|
$
|
180
|
|
SSD
|
|
|
|
|
|
|
9
|
|
|
|
16
|
|
|
|
33
|
|
Canada
|
|
|
212
|
|
|
|
136
|
|
|
|
377
|
|
|
|
371
|
|
United Kingdom
|
|
|
48
|
|
|
|
5
|
|
|
|
99
|
|
|
|
26
|
|
Corporate Shared Services
|
|
|
30
|
|
|
|
66
|
|
|
|
34
|
|
|
|
108
|
|
|
|
|
Total
|
|
$
|
290
|
|
|
$
|
216
|
|
|
$
|
657
|
|
|
$
|
718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In Thousands)
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
RMP
|
|
$
|
39,615
|
|
|
$
|
37,520
|
|
SSD
|
|
|
6,581
|
|
|
|
7,029
|
|
Canada
|
|
|
47,016
|
|
|
|
43,514
|
|
United Kingdom
|
|
|
15,088
|
|
|
|
14,242
|
|
Corporate Shared Services
|
|
|
197
|
|
|
|
237
|
|
|
|
|
Total
|
|
$
|
108,497
|
|
|
$
|
102,542
|
|
|
|
|
Note 11: Fair Value of Financial Instruments
Effective January 1, 2008, we adopted FASB ASC Topic 820,
Fair Value Measurements and
Disclosure
. FASB ASC 820 defines fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants at the measurement
date. FASB ASC 820 establishes a three-level fair value hierarchy that prioritizes the inputs used
to measure fair value. This hierarchy requires entities to maximize the use of observable inputs
and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value
are as follows:
Level 1
Quoted prices in active markets for identical assets or liabilities.
Level 2
Observable inputs other than quoted prices included in Level 1, such as quoted prices
for similar assets and liabilities in active markets; quoted prices for identical or similar assets
and liabilities in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data.
Level 3
Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the asset or liabilities. This includes certain pricing models,
discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
17
The FASB has issued guidance about the measuring of fair values when the volume and level of the
market activity has significantly decreased and there is a need for more timely fair value
information of certain financial instruments. The fair value disclosure requirement have been
increased from annual to quarterly and requires disclosure of any changes to inputs and valuation
techniques used to measure fair value. Reporting entities are also required to define the major
categories of financial instruments.
Although the Company has adopted FASB ASC 820, the recently-issued guidance on fair value
measurement will have no material effect on financial results. The carrying amounts of cash and
cash equivalents, trade accounts receivable, other assets, short-term borrowings, trade accounts
payable, and due to related party, approximate fair value because of the short maturity of these
instruments. All of theses financial instruments are considered Level 1 and are traded openly in
an active market.
Note 12: Recent Accounting Pronouncements
In April 2010, the FASB issued changes to the classification of certain employee share-based
payment awards. These changes clarify that there is not an indication of a condition that is other
than market, performance, or service if an employee share-based payment awards exercise price is
denominated in the currency of a market in which a substantial portion of the entitys equity
securities trade and differs from the functional currency of the employer entity or payroll
currency of the employee. An employee share-based payment award is required to be classified as a
liability if the award does not contain a market, performance, or service condition. These changes
become effective on January 1, 2011. Prior to this guidance, the Company did not consider the
difference between the currency denomination of an employee share-based payment awards exercise
price and the functional currency of the employer entity or payroll currency of the employee in
determining the proper classification of the share-based payment award. As a result, management has
determined these changes will not have an impact on the Consolidated Financial Statements.
In January 2010, the FASB issued changes to disclosure requirements for fair value measurements.
Specifically, the changes require a reporting entity to disclose, in the reconciliation of fair
value measurements using significant unobservable inputs (Level 3), separate information about
purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net
number). These changes become effective for the Company beginning January 1, 2011. Other than the
additional disclosure requirements, management has determined these changes will not have an impact
on the Consolidated Financial Statements.
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.
Note 13: Stock Options
During 2008 and 2007, the Company granted a total of 153,750 stock option awards to certain
employees, which includes 3,750 of forfeited stock options that have been re-granted to certain
employees. The exercise price of the stock options is equal to the closing stock price on the date
of the grants. These stock options will vest ratably over a five year period and will expire ten
years after the grant date. The stock options were granted under the Portec Rail Products, Inc.
2006 Stock Option Plan (the Option Plan), which authorizes the issuance of up to 150,000 shares of
common stock of Portec Rail Products, Inc. pursuant to grants of incentive and non-statutory stock
options and will remain in effect for a period of ten years.
18
During the three and nine months ended September 30, 2010, stock options forfeited from stock
option grants were 600 and 2,300, respectively. During the three and nine months ended September
30, 2009, stock options forfeited were 0 and 3,800, respectively.
We account for stock based compensation in accordance with FASB ASC Topic 718,
Compensation
Stock Compensation
. For both the three and nine months ended September 30, 2010 and 2009, we
recognized compensation expense of $26,000 and $78,000, 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 $117,000 and $69,000 over the remaining vesting periods of the stock option grants,
respectively.
To calculate our fair value price per stock option, we utilized a Black-Scholes Model. The
following inputs were used in our Black-Scholes Model calculation:
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Stock
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Exercise
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# of
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Fair
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Price on
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Price per
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Expected
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Grant
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Shares
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Value
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Grant
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Stock
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Annual
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Risk-free
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Expected
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Term
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Date
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Granted
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Price
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Date
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Option
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Dividend Yield
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Rate
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Volatility
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(in years)
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7/02/08
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1,750
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$4.56
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$12.01
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$12.01
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2.00%
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4.25%
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36.36%
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7.5
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1/30/08
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72,750
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$3.67
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$9.68
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$9.68
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2.48%
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4.00%
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38.87%
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7.5
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1/16/07
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79,250
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$3.61
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$9.65
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$9.65
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2.50%
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4.73%
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39.40%
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6.5
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Note 14: Merger with L.B. Foster Company
On February 16, 2010, the Company entered into an Agreement and Plan of Merger (the Merger
Agreement) with L.B. Foster Company, a Pennsylvania corporation (Foster), and Foster Thomas
Company, a West Virginia corporation and a wholly-owned subsidiary of Foster (Purchaser).
Pursuant to the Merger Agreement, on February 26, Purchaser commenced a tender offer to purchase
all of the outstanding shares of common stock of Portec (the Shares) at a price of $11.71 per
share (the Offer), net to the seller in cash (without interest and subject to applicable
withholding taxes). Subsequent to the tender offer, Portec will be merged with Purchaser, with
Portec as the surviving corporation, with Portec surviving as a wholly-owned subsidiary of Foster
(the Merger). Consummation of the Offer by Purchaser is subject to certain conditions, including
(1) the condition that the number of Shares that have been validly tendered and not withdrawn,
together with the number of Shares then owned by Foster or any of its subsidiaries represents at
least 65% of the total number of outstanding Shares, on a fully diluted basis (the Minimum
Condition), (2) the expiration or termination of applicable waiting periods under the United
States Hart-Scott-Rodino Antitrust Improvements Act of 1976 and (3) other required regulatory
approvals and customary closing conditions.
On August 30, 2010, the Company and Foster entered into Amendment #2 to the Merger Agreement,
which: 1) extended the Drop Dead date per the Merger Agreement to December 30, 2010; 2)
increased the offering price for the purchase of the Shares to $11.80 from $11.71; and 3) requires
a payment of $2.0 million by Foster to the Company under certain conditions.
19
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The following discussion should be read in conjunction with the condensed consolidated
financial statements of Portec Rail Products, Inc. and the related notes beginning on page 3.
Unless otherwise specified, any reference to the three months ended or nine months ended is to
the three or nine months ended September 30. Additionally, when used in this Form 10-Q, unless the
context requires otherwise, the terms we, our and us refer to Portec Rail Products, Inc. and
its business segments.
Cautionary Statement Relevant to Forward-looking Statements
This Form 10-Q contains or incorporates by reference forward-looking statements relating to
the Company. Forward-looking statements typically are identified by the use of terms, such as
may, will, plan, should, expect, anticipate, believe, if, estimate, intend, and
similar words, although some forward-looking statements are expressed differently. You should
consider statements that contain these and similar words carefully because they describe our
expectations, plans, strategies, goals and beliefs concerning future business conditions, our
results of operations, our financial position, and our business outlook, or state other
forward-looking information based on currently available
information. Although we believe that the expectations reflected in the forward-looking statements
are reasonable, we cannot guarantee future results, levels of activity, performance or
achievements. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors. We undertake no obligation to update
publicly or revise any forward-looking statements. You should not place undue reliance on the
forward-looking statements.
The Company identifies important factors that could affect the Companys financial performance
and could cause the Companys actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current statements. In
particular, the Companys future results could be affected by a variety of factors, such as:
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customer demand;
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competitive dynamics in the North American and worldwide railroad and railway supply
industries;
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capital expenditures 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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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.
Overview
In the United States, Canada and the United Kingdom, we are a manufacturer, supplier and
distributor of a broad range of rail products, including rail joints, rail anchors, rail spikes,
railway friction management products and systems, railway wayside data collection and data
management systems and load securement products. End users of our rail products include Class I
railroads, regional railroads, short-line railroads and transit systems. Our North American
business segments along with the rail division of our United Kingdom business segment serve these
end users. In addition,
20
our United Kingdom business segment also manufactures and supplies material
handling products for industries outside the rail transportation sector, primarily to end users
within the United Kingdom. These products include overhead and floor conveyor systems, expandable
boom conveyors, racking systems and mezzanine flooring systems. The end users of our material
handling products are primarily in the manufacturing, distribution, garment and food industries.
Our operations are organized into four business segments consisting of the Railway Maintenance
Products Division (RMP), the Shipping Systems Division (SSD), Portec Rail Nova Scotia Company
(Canada) and Portec Rail Products (UK) Ltd. (United Kingdom), along with corporate shared services.
The presentation of segment information reflects the manner in which we organize and manage our
segments by geographic areas for making operating decisions, assessing performance and allocating
resources. Intersegment sales do not have an impact on our consolidated financial condition or
results of operations.
The demand for some of our products is subject to seasonal fluctuations. Our railroad product
lines normally experience strong sales during the second and third quarters as a result of seasonal
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.
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, on February 26, Purchaser commenced a tender offer to purchase
all of the outstanding shares of common stock of Portec (the Shares) at a price of $11.71 per
share (the Offer), net to the seller in cash (without interest and subject to applicable
withholding taxes). Subsequent to the tender offer, Portec will be merged with Purchaser, with
Portec as the surviving corporation, with Portec surviving as a wholly-owned subsidiary of Foster
(the Merger). Consummation of the Offer by Purchaser is subject to certain conditions, including
(1) the condition that the number of Shares that have been validly tendered and not withdrawn,
together with the number of Shares then owned by Foster or any of its subsidiaries represents at
least 65% of the total number of outstanding Shares, on a fully diluted basis (the Minimum
Condition), (2) the expiration or termination of applicable waiting periods under the United
States Hart-Scott-Rodino Antitrust Improvements Act of 1976 and (3) other required regulatory
approvals and customary closing conditions.
On August 30, 2010, the Company and Foster entered into Amendment #2 to the Merger Agreement,
which: 1) extended the Drop Dead date per the Merger Agreement to December 30, 2010; 2)
increased the offering price for the purchase of the Shares to $11.80 from $11.71; and 3) requires
a payment of $2.0 million by Foster to the Company under certain conditions. Please see Note 14:
on Page 19.
Results of Operations
Three Months Ended September 30, 2010 compared to Three Months Ended September 30, 2009
Net Sales.
Net sales increased to $27.9 million for the three months ended September 30,
2010, an increase of $3.6 million or 14.9%, from $24.3 million during the comparable period in
2009. The net sales increase is attributable to higher sales of $1.4 million at our Canadian
operations, $1.1 million at RMP, $569,000 at our United Kingdom operations and $527,000 at SSD in
the current period. The increase in net sales of $1.4 million at our Canadian operations reflects
higher sales of Kelsan friction management products, certain track components, primarily rail
anchors, and a foreign currency translation of $499,000 that positively impacted net sales,
partially offset by lower net sales of some friction management products at our Montreal location.
RMPs net sales increase of $1.1 million is primarily related to higher sales volume of track
components, partially offset by lower net sales of friction management and other products and
services. Our United Kingdom net sales increase of $569,000 is primarily due to higher sales of
material handling products, partially offset by lower friction management product sales and a
foreign currency translation in the amount of $335,000 that negatively impacted net sales. SSDs
increase in net sales of $527,000 is primarily a reflection of higher sales of chain securement
systems, driven primarily by increased rail traffic in the North American heavy-haul freight rail
industry that has resulted in railcars being moved from storage back into production.
Cost of Goods Sold.
Cost of goods sold (COGS) increased to $19.0 million for the three months
ended September 30, 2010, an increase of $3.1 million or 19.8%, from $15.8 million during the
comparable period in 2009. Our COGS as a percentage of net sales for the three months ended
September 30, 2010 increased to 68.0% from 65.3% for the
21
prior
period in 2009, an increase of 2.7%.
Direct material as a component of COGS increased as a percentage of net sales when compared to the
prior period in 2009, primarily due to the product mix of sales within our operating segments. The
product mix of sales of automotive products within our SSD segment, and our Canadian friction
management products and certain track component products, primarily rail spikes, resulted in
slightly higher direct material costs as a percentage of net sales when compared to the prior
period, while direct labor and overhead costs as a percentage of net sales in the current period
remained consistent when compared to the prior period. On a period to period basis, our COGS is
primarily driven by product mix, as our diverse product groups have different cost components.
Gross Profit.
Gross profit increased to $8.9 million for the three months ended September 30,
2010, an increase of $485,000 or 5.7%, from $8.4 million for the comparable period in 2009. The
increase in gross profit is attributable to higher gross profit of $205,000 at RMP, $151,000 at our
United Kingdom operations and $149,000 at SSD. Higher gross profit of $205,000 at RMP is primarily
due to higher gross profit on an increase in sales volume of track component products, partially
offset by lower gross profit on lower sales of friction management products and services. The
increase in gross profit of $151,000 at our United Kingdom operations is a combination of increased
gross profit on higher sales of material handling products, partially offset by lower gross profit
on lower sales of friction management products, and a foreign currency translation of $107,000 that
negatively impacted gross profit in the current period. Gross profit at SSD increased $149,000 in
the current period, primarily due to higher sales volume in the current period, driven largely by
increased rail traffic in the North American rail transportation industry.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses
(SG&A) increased to $6.6 million for the three months ended September 30, 2010, an increase of $1.2
million or 21.6%, from $5.4 million for the comparable period in 2009. The increase is primarily
due to higher expenses of $858,000 within corporate shared services, $165,000 at our Canadian
operations and $118,000 at RMP. The $858,000 increase within corporate shared
services is primarily due to acquisition costs pertaining to the Agreement and Plan of Merger
with L.B. Foster Company (See Note 14: Merger with L.B. Foster Company, Page 19). The majority of
the acquisition costs are legal fees associated with the effort to comply with the U.S.
Hart-Scott-Rodino Act, along with defense costs that relate to the shareholder lawsuits (See Note
9: Commitments and Contingencies, Page 12). The increase of $165,000 at our Canadian operations is
a combination of foreign currency translation in the amount of $76,000 that negatively impacted
SG&A and thus increased expenses, along with an increase in SG&A of $89,000, primarily due to
higher employee salary and benefit costs at our Vancouver location. RMPs increase of $118,000 in
SG&A is primarily due to higher business travel costs, increased research and development spending,
and higher legal fees in the current period at our Salient Systems location.
Interest Expense.
Interest expense decreased to $62,000 for the three months ended September
30, 2010, a decrease of $2,000 or 3.1%, from $64,000 for the
comparable period in 2009. The lower interest expense reflects lower
debt balances, as our total debt
obligations decreased to $8.7 million at September 30, 2010, from $11.0 million at September 30,
2009.
Other Expense.
Other expense increased to $143,000 for the three months ended September 30,
2010, an increase of $106,000, from $37,000 for the comparable period in 2009. Other expense in
the current period primarily includes foreign currency transaction
losses of $173,000, partially offset by interest
income of $28,000. Other expense in the comparable period in 2009 includes foreign currency
transaction losses of $49,000, partially offset by interest and commission income of $22,000.
Provision for Income Taxes.
Provision for income taxes decreased to $581,000 for the three
months ended September 30, 2010, from $618,000 for the comparable period in 2009. Our provision
for income taxes decreased in the current period because income before taxes decreased to $1.8
million for the three months ended September 30, 2010 from $2.6 million for the three months ended
September 30, 2009. Our effective tax rates on taxable income were 31.9% and 23.4% for the three
months ended September 30, 2010 and 2009, respectively. Income tax expense is higher by
approximately $304,000 in the current period due to the tax treatment of certain costs associated
with the proposed L.B. Foster merger transaction. Our consolidated effective tax rate reflects the
benefit of Canadian research and development tax credits, which reduced income tax expense by
$149,000 and $51,000, or 8.2% and 1.9% for the three months ended September 30, 2010 and 2009,
respectively. Our consolidated effective tax rate is impacted by our divisions pro-rata share of
consolidated income before taxes and related tax expense or benefit.
Net Income.
Net income decreased to $1.2 million for the three months ended September 30,
2010, a decrease of $782,000 or 38.7%, from $2.0 million for the comparable period in 2009. Our
basic and diluted net income decreased to $0.13 per share for the three months ended September 30,
2010, from $0.21 per share for the comparable period in 2009, on average basic and diluted shares
outstanding of 9.6 million for each of the three months ended September 30, 2010 and 2009. Our
current period net income includes expenses of $895,000 or $0.09 per share for acquisition costs
related to the proposed merger with L.B. Foster Company.
22
Nine Months Ended September 30, 2010 compared to Nine Months Ended September 30, 2009
Net Sales.
Net sales increased to $83.7 million for the nine months ended September 30, 2010,
an increase of $10.7 million or 14.6%, from $73.0 million for the comparable period in 2009. The
increase is attributable to higher net sales of $5.6 million at our Canadian operations, $2.5
million at SSD, $1.5 million at our United Kingdom operations and $1.1 million at RMP. The
increase in net sales of $5.6 million at our Canadian operations is a combination of a foreign
currency translation of $3.2 million that positively impacted net sales, along with higher net
sales of Kelsan friction management products and rail anchors at our Montreal location, partially
offset by lower sales of rail spikes and friction management products at our Montreal location.
Net sales increased $2.5 million at SSD, primarily due to higher sales of chain securement systems
and automotive products, driven primarily by increased rail traffic in the North American
heavy-haul freight rail industry that has resulted in railcars being moved from storage back into
production. The increase in net sales at our United Kingdom operations of $1.5 million in the
current period is primarily due to higher sales of material handling and track component products,
partially offset by lower sales of friction management products. Net sales increased at RMP by
$1.1 million primarily due to higher sales of track components, in particular our
Bonded to Rail Joints (BTRs), partially offset by lower net sales of friction management products and other
products and services.
Cost of Goods Sold.
Cost of goods sold (COGS) increased to $55.9 million for the nine months
ended September 30, 2010, an increase of $7.2 million or 14.9%, from $48.7 million during the
comparable period in 2009. Our COGS as a percentage of net sales for the nine months ended
September 30, 2010 was 66.8%, an increase of 10 basis points, from 66.7% for the prior period in
2009. Our consolidated direct material, direct labor and overhead costs as a percentage of net
sales remained consistent when compared to the prior period. On a period to period basis, our COGS
is primarily driven by product mix, as our diverse product groups have significantly different cost
components.
Gross Profit.
Gross profit increased to $27.7 million for the nine months ended September 30,
2010, an increase of $3.4 million or 14.2%, from $24.3 million for the comparable period in 2009.
The increase in gross profit is attributable to higher gross profit of $1.4 million at our Canadian
operations, $996,000 at SSD, $721,000 at our United Kingdom operations and $265,000 at RMP. Higher
gross profit of $1.4 million at our Canadian operations is primarily
due to foreign currency translation of $1.0 million, which positively impacted gross profit
during the current period, along with higher gross profit of $436,000 from higher sales volume of
Kelsan friction management products. Gross profit at SSD increased $996,000, primarily due to
higher sales volume of chain securement and automotive securement products in the current period,
driven largely by increased rail traffic in the North American rail transportation industry.
Higher gross profit of $721,000 at our United Kingdom operations is primarily due to higher sales
volume of material handling and track component products, partially offset by lower gross profit on
lower sales volume of friction management products.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses
(SG&A) increased to $21.6 million for the nine months ended September 30, 2010, an increase of $5.3
million or 32.5%, from $16.3 million for the comparable period in 2009. This increase is primarily
due to higher SG&A of $4.0 million within corporate shared services and $1.1 million at our
Canadian operations. The increase of $4.0 million at corporate shared services is primarily due to
acquisition costs pertaining to the Agreement and Plan of Merger with L.B. Foster Company (See Note
14: Merger with L.B. Foster Company, Page 19). The majority of the acquisition costs are legal
fees associated with the effort to comply with the U.S. Hart-Scott-Rodino Act, along with defense
costs that relate to the shareholder lawsuits (See Note 9: Commitments and Contingencies, Page 12).
The increase of $1.1 million at our Canadian operations is a combination of foreign currency
translation of $485,000 that negatively impacted SG&A, thus increasing expenses, along with an
increase in SG&A of $635,000 due to higher employee salaries from employee headcount additions,
higher commission expense due to higher sales of friction management products at our Vancouver
location and higher professional fees and consulting expenses in the current period.
Interest Expense.
Interest expense decreased to $185,000 for the nine months ended September
30, 2010, a decrease of $32,000 or 14.7%, from $217,000 for the comparable period in 2009. The
lower interest expense reflects lower debt balances, as our total debt obligations decreased to
$8.7 million at September 30, 2010, from $11.1 million at September 30, 2009.
Other Expense.
Other expense increased to $414,000 for the nine months ended September 30,
2010, an increase of $497,000, from other income of $83,000 for the comparable period in 2009.
Other expense in the current period includes foreign currency transaction losses of $488,000,
partially offset by interest income of $64,000. Other income in the prior period includes foreign
currency transaction gains of $17,000, interest income of $29,000 and royalty income of $23,000.
Provision for Income Taxes.
Provision for income taxes increased to $2.1 million for the nine
months ended September 30, 2010 from $1.7 million for the comparable period in 2009. Our provision
for income taxes increased in the
23
current period despite a decrease in income before taxes from
$7.1 million for the nine months ended September 30, 2009 to $4.7 million for the nine months ended
September 30, 2010. Our effective tax rates on taxable income were 45.0% and 24.4% for the nine
months ended September 30, 2010 and 2009, respectively. Income tax expense is higher by
approximately $1.4 million in the current period due to the tax treatment of certain costs
associated with the proposed L.B. Foster merger transaction. Our consolidated effective tax rate
reflects the benefit of Canadian research and development tax credits, which reduced income tax
expense by $294,000 and $219,000, or 6.3% and 3.1% for the nine months ended September 30, 2010 and
2009, respectively. Our consolidated effective tax rate is impacted by our divisions pro-rata
share of consolidated income before taxes and related tax expense or benefit.
Net Income.
Net income decreased to $2.6 million for the nine months ended September 30,
2010, a decrease of $2.8 million or 52.2%, from $5.4 million for the comparable period in 2009.
Our basic and diluted net income per share decreased to $0.27 for the nine months ended September
30, 2010, from $0.56 per share for the comparable period in 2009, on average basic and diluted
shares outstanding of 9.6 million for both periods. Our current period net income includes
expenses of $4.1 million or $0.43 per share for acquisition costs related to the proposed merger
with L.B. Foster Company.
24
Business Segment Review
Railway Maintenance Products Division RMP
.
Our RMP business segment manufactures and
assembles track components and related products, friction management products, and wayside data
collection and data management systems. We also provide services to railroads, transit systems and
railroad contractors, and 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.
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Three Months Ended
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Nine Months Ended
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September 30
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September 30
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2010
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2009
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2010
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2009
|
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(In Thousands)
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External sales
|
|
$
|
12,678
|
|
|
$
|
11,556
|
|
|
$
|
36,444
|
|
|
$
|
35,394
|
|
Intersegment sales
|
|
|
422
|
|
|
|
377
|
|
|
|
1,050
|
|
|
|
1,218
|
|
Operating income
|
|
|
1,650
|
|
|
|
1,571
|
|
|
|
5,006
|
|
|
|
4,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by product line (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Track component products
|
|
$
|
6,391
|
|
|
$
|
4,650
|
|
|
$
|
19,646
|
|
|
$
|
16,355
|
|
Friction management products and services
|
|
|
4,857
|
|
|
|
5,343
|
|
|
|
12,314
|
|
|
|
14,091
|
|
Wayside data collection and data management systems
|
|
|
1,392
|
|
|
|
1,367
|
|
|
|
3,794
|
|
|
|
3,933
|
|
Other products and services
|
|
|
460
|
|
|
|
573
|
|
|
|
1,740
|
|
|
|
2,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product and service sales
|
|
$
|
13,100
|
|
|
$
|
11,933
|
|
|
$
|
37,494
|
|
|
$
|
36,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes intersegment sales.
|
For the three months ended September 30, 2010, external sales for RMP increased by $1.1
million, or 9.7%, to $12.7 million from $11.6 million during the comparable period in 2009. The
$1.1 million increase in external sales at RMP is primarily due to higher sales of track component
products, partially offset by lower sales of friction management and other products and services.
Cost of goods sold, including direct material, direct labor and overhead, as a percentage of net
external sales was consistent with the prior period for RMP. Operating income for the three months
ended September 30, 2010 increased to $1.7 million from $1.6 million for the comparable period in
2009, an increase of $79,000 or 5.0%, primarily due to higher gross profit from higher sales of
track component products in the current period.
For the nine months ended September 30, 2010, external sales for RMP increased by $1.1 million
or 3.0%, to $36.4 million from $35.4 million during the comparable period in 2009. The increase in
external sales is primarily due to higher sales of track components, partially offset by lower
sales of friction management products and other products and services. Cost of goods sold,
including direct material, direct labor and overhead, as a percentage of net external sales for the
current period was consistent with the prior period for RMP. Operating income for the nine months
ended September 30, 2010 increased to $5.0 million from $4.9 million for the comparable period in
2009, an increase of $122,000 or 2.5%, primarily due to higher gross profit from higher sales of
track components.
25
Shipping Systems Division SSD
.
SSD engineers and sells load securement systems and
related products to the railroad freight car market. These systems are used to secure a wide
variety of products and lading onto freight cars. SSD is also a major supplier of new and
reconditioned tie-down systems for the shipment of new automobiles and vans by the rail industry.
The majority of assembly work for SSD is performed at RMPs manufacturing facility located in
Huntington, West Virginia.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In Thousands)
|
|
External sales
|
|
$
|
1,820
|
|
|
$
|
1,293
|
|
|
$
|
6,574
|
|
|
$
|
4,054
|
|
Intersegment sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss)
|
|
|
119
|
|
|
|
(6
|
)
|
|
|
840
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by product line
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive products
|
|
$
|
773
|
|
|
$
|
703
|
|
|
$
|
2,679
|
|
|
$
|
1,928
|
|
Chain securement systems
|
|
|
897
|
|
|
|
469
|
|
|
|
3,520
|
|
|
|
1,669
|
|
Strap securement systems
|
|
|
27
|
|
|
|
22
|
|
|
|
84
|
|
|
|
142
|
|
Other load securement systems
|
|
|
123
|
|
|
|
99
|
|
|
|
291
|
|
|
|
315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product and service sales
|
|
$
|
1,820
|
|
|
$
|
1,293
|
|
|
$
|
6,574
|
|
|
$
|
4,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2010, external sales for SSD increased by $527,000 or
40.8%, to $1.8 million from $1.3 million during the comparable period in 2009. SSDs increase in
external sales of $527,000 is primarily a reflection of higher sales of chain securement systems,
driven primarily by increased rail traffic in the North American heavy-haul freight rail industry
that has resulted in railcars being moved from storage back into production. Cost of goods sold,
including direct material, direct labor and overhead, as a percentage of net external sales for the
current period was consistent with the comparable period in the prior year for SSD. Operating
income for the three months ended September 30, 2010 increased to $119,000 from a loss of $6,000
during the comparable period in 2009, an increase of $125,000, primarily due to an increase in
gross profit on higher sales volume across most major product lines.
For the nine months ended September 30, 2010, external sales for SSD increased by $2.5 million
or 62.2%, to $6.6 million from $4.1 million during the comparable period in 2009. The increase in
external sales is primarily due to higher sales of chain securement systems and automotive products
in the current period, driven primarily by increased rail traffic in the North American heavy-haul
freight rail industry that has resulted in railcars being moved from storage back into production.
Direct labor and overhead costs as a percentage of net external sales declined slightly in the
current period, primarily due to product mix and better overall absorption rates of overhead, while
direct material as a percentage of net external sales increased over the comparable period in the
prior year due to the product mix within automotive products group. Operating income for the nine
months ended September 30, 2010 increased to $840,000 from an operating loss of $24,000 from the
comparable period in 2009, an increase of $864,000, primarily due to an increase in gross profit on
higher overall sales volume across most major product lines.
26
Portec Rail Nova Scotia Company Canada
.
Our Canadian operations include a
manufacturing operation near Montreal, Quebec, and a manufacturing and technology facility in
Vancouver, British Columbia (Kelsan Technologies Corp. Kelsan). At our Canadian operation
near Montreal, we manufacture rail anchors and rail spikes and assemble friction management
products primarily for the two largest Canadian railroads. Rail anchors and spikes are devices to
secure rails to the ties to restrain the movement of the rail tracks. Kelsans two primary product
lines are stick lubrication and application systems and a liquid friction modifier,
Keltrack
®
. Kelsan manufactures its stick and applicator systems in Vancouver and
subcontracts the manufacturing of the Keltrack
®
product line.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In Thousands, Except Translation Rate)
|
|
External sales
|
|
$
|
7,914
|
|
|
$
|
6,511
|
|
|
$
|
26,407
|
|
|
$
|
20,824
|
|
Intersegment sales
|
|
|
2,324
|
|
|
|
2,252
|
|
|
|
6,163
|
|
|
|
6,107
|
|
Operating income
|
|
|
1,321
|
|
|
|
1,522
|
|
|
|
4,773
|
|
|
|
4,510
|
|
Average translation rate of Canadian dollar to
United States dollar
|
|
|
0.9554
|
|
|
|
0.9088
|
|
|
|
0.9585
|
|
|
|
0.8649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by product line (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Track component products
|
|
$
|
3,601
|
|
|
$
|
3,352
|
|
|
$
|
13,531
|
|
|
$
|
12,478
|
|
Friction management products and services
|
|
|
6,451
|
|
|
|
5,152
|
|
|
|
18,385
|
|
|
|
13,366
|
|
Other products and services
|
|
|
186
|
|
|
|
259
|
|
|
|
654
|
|
|
|
1,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product and service sales
|
|
$
|
10,238
|
|
|
$
|
8,763
|
|
|
$
|
32,570
|
|
|
$
|
26,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes intersegment sales.
|
For the three months ended September 30, 2010, external sales for Canada increased by $1.4
million or 21.5%, to $7.9 million from $6.5 million during the comparable period in 2009. The
increase in external sales reflects higher sales of Kelsan friction management products, certain
track components, primarily rail anchors, and a foreign currency translation of $499,000 that
positively impacted net sales, partially offset by lower net sales of some friction management
products at our Montreal location. Direct material cost as a percentage of net external sales
increased in the current period, due to higher material costs related to Kelsan friction management
products and some Montreal track component products, primarily related to product mix within each
product group. Direct labor cost as a percentage of net external sales was consistent with the
comparable period in the prior year. Overhead cost as a percentage of net external sales increased
in the current period, primarily due to lower efficiency and absorption rates for certain track
components at our Montreal location. Operating income for the three months ended September 30,
2010 decreased to $1.3 million from $1.5 million during the comparable period in 2009, a decrease
of $201,000 or 13.2%. The decrease is primarily due to higher SG&A resulting from higher employee
salaries and benefits costs at our Vancouver location, along with a foreign currency translation of
$76,000 which negatively impacted SG&A and thus increased expenses.
For the nine months ended September 30, 2010, external sales for Canada increased by $5.6
million or 26.8%, to $26.4 million from $20.8 million during the comparable period in 2009. The
increase in external sales of $5.6 million is a combination of a foreign currency translation of
$3.2 million which positively impacted net external sales, along with an increase in sales volume
of Kelsan friction management products at our Vancouver location and higher sales volume of track
components, primarily rail anchors at our Montreal location. Direct material cost as a percentage
of net external sales declined in the current period, reflecting lower raw material costs for some
products at our Montreal location. Direct labor cost as a percentage of net external sales in the
current period was consistent with the prior period. Overhead cost as a percentage of net external
sales increased in the current period, primarily due to lower efficiency and absorption rates for
certain track components at our Montreal location. Operating income for the nine months ended
September 30, 2010 increased to $4.8 million from $4.5 million during the comparable period in
2009, an increase of $263,000 or 5.8%. This increase is primarily due to higher gross profit on
higher sales of Kelsan friction management products, along with a foreign currency translation of
$485,000 that positively impacted operating income, partially offset by higher SG&A expense due to
higher employee salaries from employee headcount additions, higher commission expenses and higher
professional fees and consulting expense.
27
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 includes friction
management products and services and track component products such as insulated rail joints and
track fasteners. The rail products are primarily sold to the United Kingdom passenger rail network
and international customers. The United Kingdoms material handling business includes product
lines such as overhead and floor conveyor systems, expandable boom conveyors, racking systems and
mezzanine flooring systems. The end users of our material handling products are primarily United
Kingdom-based companies in the manufacturing, distribution, garment and food industries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In Thousands, Except Translation Rate)
|
|
External sales
|
|
$
|
5,494
|
|
|
$
|
4,925
|
|
|
$
|
14,238
|
|
|
$
|
12,707
|
|
Intersegment sales
|
|
|
26
|
|
|
|
1
|
|
|
|
79
|
|
|
|
1
|
|
Operating income
|
|
|
657
|
|
|
|
517
|
|
|
|
1,335
|
|
|
|
508
|
|
Average translation rate of
British pound sterling to
United States dollar
|
|
|
1.5419
|
|
|
|
1.6355
|
|
|
|
1.5315
|
|
|
|
1.5504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by product line (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Friction management products
and services
|
|
$
|
1,806
|
|
|
$
|
2,728
|
|
|
$
|
5,509
|
|
|
$
|
6,852
|
|
Material handling products
|
|
|
2,446
|
|
|
|
1,001
|
|
|
|
5,364
|
|
|
|
3,132
|
|
Track component products
|
|
|
1,268
|
|
|
|
1,197
|
|
|
|
3,444
|
|
|
|
2,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product and service sales
|
|
$
|
5,520
|
|
|
$
|
4,926
|
|
|
$
|
14,317
|
|
|
$
|
12,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes intersegment sales.
|
For the three months ended September 30, 2010, external sales at our United Kingdom operations
increased by $569,000 or 11.6%, to $5.5 million from $4.9 million during the comparable period in
2009. The increase in external sales of $569,000 is primarily due to higher sales of material
handling products, partially offset by lower friction management product sales and a foreign
currency translation in the amount of $335,000 that negatively impacted net sales. Direct
material, direct labor and overhead costs as a percentage of net external sales in the current
period were consistent with the prior period. Operating income for the three months ended
September 30, 2010 increased to $657,000 from $517,000 in the prior period, an increase of $140,000
or 27.1%. The increase in operating income is primarily due to higher gross profit on higher sales
of material handling products, partially offset by lower gross profit on lower sales of friction
management products and services.
For the nine months ended September 30, 2010, external sales at our United Kingdom operations
increased by $1.5 million or 12.0%, to $14.2 million from $12.7 million during the comparable
period in 2009. The increase in external sales is due to higher sales of material handling and
track component products, partially offset by lower sales of friction management products and a
foreign currency translation of $177,000 that negatively impacted net external sales in the current
period. Direct material and direct labor costs as a percentage of net external sales in the current
period were consistent with the prior period, while overhead costs as a percentage of net external
sales declined due to better absorption rates on the higher sales volume of material handling and
tack component products. Operating income for the nine months ended September 30, 2010 increased
to $1.3 million from $508,000 during the comparable period in 2009, an increase of $827,000 or
162.8%. The increase in operating income is primarily due to higher gross profit from higher sales
of material handling products, partially offset by lower gross profit from lower sales of friction
management products.
28
Liquidity and Capital Resources
Our cash flow from operations is the primary source of financing for internal growth,
capital expenditures, repayment of long-term obligations, dividends to our shareholders, and other
commercial commitments. The most significant risk associated with our ability to generate
sufficient cash flow from operations is the overall level of demand for our products. Our total
cash balance was $16.9 million at September 30, 2010. In addition to cash generated from
operations, we have revolving and overdraft credit facilities in place to support the working
capital needs of each of our business segments. We believe that our cash flow from operations and
the ability to borrow additional cash under our working capital facilities along with our existing
cash balances will be sufficient to meet our cash flow requirements and growth objectives over the
next twelve months.
For the nine months ended September 30, 2010, we have incurred $4.1 million of expenses
(acquisition costs) related to the proposed merger
agreement with L.B. Foster Company (see Note 14:
Merger with L.B. Foster Company, Page 19).
The majority of these acquisition costs relate to legal fees associated with the effort to proceed
with the merger under the U.S. Hart-Scott-Rodino Act, as well as legal fees and expenses related to
the shareholder lawsuits (see Note 9: Commitments and Contingencies,
Page 12). These acquisition costs have negatively impacted our cash flow
during 2010, and at times our borrowing availability under our domestic revolving credit facility.
In October 2010, we increased our U.S. revolving line of credit facility with PNC Financial to
$11.0 million from $7.0 million and reduced our Canadian
revolving line of credit facility from $4.8 million ($5.0 million
CDN) to $2.4 million ($2.5 million CDN). Please see Note 4: Long-Term Debt on
page 7 for more information.
Cash Flow Analysis
.
During the nine months ended September 30, 2010, we generated
$5.6 million in cash from operating activities compared to generating $9.1 million in cash from
operating activities during the same period in 2009. Cash generated from operations is due to net
income of $2.6 million in the current period, compared to $5.4 million during the same period of
2009, a decrease of $2.8 million. Cash used in operations during the nine months ended September
30, 2010 includes higher accounts receivable of $5.3 million due an increase in net sales. Cash
provided by operations during the nine months ended September 30, 2010 includes $651,000 in lower
inventory balances, primarily due to efforts to reduce inventory levels. Cash provided by
operations during the nine months ended September 30, 2010 includes $3.3 million in higher accounts
payable balances, primarily due to the timing of payments to vendors and service providers, along
with acquisition costs related to the proposed merger with L.B. Foster Company. Cash provided by
operations during the nine months ended September 30, 2010 includes a $2.4 million increase in
accrued expenses, primarily due to an increase in accrued liabilities associated with the proposed
merger with L.B. Foster Company, higher accrued liabilities at our Leicester, United Kingdom
location due to accruals associated with ongoing project costs and higher accrued liabilities at
our Vancouver location due to higher purchasing volumes as a result of the increased sales. Cash
used by operations for the nine months ended September 30, 2010 also reflects defined benefit
pension plan contributions of $441,000.
Net cash used in investing activities was $498,000 for the nine months ended September 30,
2010, compared to cash used in investing activities of $814,000 during the same period in 2009.
Cash used in investing activities in the current period is primarily due to capital expenditures of
$657,000. We believe that the overall level of capital spending for our business segments is
sufficient to remain competitive.
Net cash used in financing activities was $3.0 million for the nine months ended September 30,
2010, compared to $3.7 million of cash used in financing activities during the comparable period in
2009. Cash used for financing activities in 2010 includes repayments of long-term debt obligations
of $2.8 million and cash dividends of $1.7 million on common stock paid to shareholders. Cash
provided by financing activities in 2010 includes $792,000 of net borrowings from working capital
facilities.
Financial Condition
At September 30, 2010, total assets were $108.5 million, an increase of $6.0 million or
5.8%, from $102.5 million at December 31, 2009. The increase at September 30, 2010 is primarily
due to an increase in accounts receivable of $5.3 million from higher sales volume in the current
period and higher cash balances of $2.7 million, partially offset by lower inventory balances of
$604,000. Fluctuation in the foreign currency translation rates of the British pound sterling and
the Canadian dollar in relation to the United States dollar as of September 30, 2010 compared to
December 31, 2009 resulted in lower net property plant and equipment balances and lower net
intangible asset balances as of September 30, 2010 compared to December 31, 2009. Utilization of
long-term
29
investment tax credits accounted for the reduction of $454,000 in other assets, due to an
increase in profitability at our Vancouver location.
Total outstanding debt obligations were $8.7 million at September 30, 2010, a decrease of $2.1
million or 19.3% from $10.8 million at December 31, 2009. The decrease primarily reflects $2.8
million in repayments of long term debt, partially offset by an increase of $792,000 in net
borrowings from working capital facilities during the current period.
The majority of our track component products that we manufacture and sell, such as our rail
joints, rail anchors and rail spikes, require steel as a major element in the production process.
Worldwide steel prices have been volatile in the last few years, which has resulted in surcharges
at times being added to raw material costs, and other times resulting in higher base prices for
certain steel. We have been successful in passing on higher steel prices to our customers in most
circumstances over the last few years. The volatility in the global steel markets has continued
throughout 2009 and into 2010, resulting in periods of both high and low prices depending on demand
at that time. We continue to monitor the price of our primary raw materials. Any prolonged
increase in steel prices in which we are unable to pass along the additional costs to our customers
could negatively impact our future earnings.
Discussion of Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based
upon our audited and unaudited consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. We review
the accounting policies that we use to report 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
relating the actual costs of work performed to date, to the current estimated total costs of the
respective contracts. Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, repairs and depreciation
costs.
When the estimate on a contract indicates a loss, the entire loss is immediately recorded in
the accounting period that the loss is determined. The cumulative effect of revisions in estimates
of total costs or revenue during the course of the work is reflected in the accounting period in
which the facts that caused the revision first become known.
Allowances for Doubtful Accounts.
We maintain a reserve to absorb potential losses relating
to bad debts arising from uncollectible accounts receivable. The allowance for doubtful accounts is
maintained at a level that we consider adequate to absorb potential bad debts inherent in the
accounts receivable balance and is based on ongoing assessments and evaluations of the
collectability, historical loss experience of accounts receivable and the financial status of
customers with accounts receivable balances. Bad debts are charged and recoveries are credited to
the reserve when incurred.
30
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.
We establish obsolescence reserves for slow-moving and obsolete inventories.
Obsolescence reserves reduce the carrying value of slow moving and obsolete inventories to their
estimated net realizable value, which generally approximates the recoverable scrap value. We
utilize historical usage, our experience, current backlog and forecasted usage to evaluate our
reserve amounts. We also periodically evaluate our inventory carrying value to ensure that the
amounts are stated at the lower of cost or market. If actual market conditions are less favorable
than those projected by us, additional inventory reserves may be required.
Goodwill and Other Intangible Assets.
We assess the impairment of goodwill and other
intangible assets at least annually and whenever events or significant changes in circumstances
indicate that the carrying value may not be recoverable. We evaluate the goodwill of each of our
reporting units and our indefinite-lived intangible assets for impairment as required under FASB
ASC Topic 350,
Intangible, Goodwill and Other.
FASB ASC 350 requires that goodwill be tested for
impairment using a two-step process. The first step is to identify a potential impairment and the
second step measures the amount of an impairment loss, if any. Goodwill is deemed to be impaired if
the carrying amount of a reporting units goodwill exceeds its estimated fair value. The fair
values of our reporting units are determined using a discounted cash flow analysis based upon
historical and projected financial information. The intangible assets of Salient Systems are
tested following the same process. The estimates of future cash flows, discount rates, and
long-term growth rates, based on reasonable and supportable assumptions and projections, require
our judgment. Factors that could change the result of our goodwill and intangible asset impairment
test include, but are not limited to, different assumptions used to forecast future revenue,
expenses, capital expenditures and working capital requirements used in our cash flow models. In
addition, selection of a risk adjusted discount rate on the estimated undiscounted cash flow is
susceptible to future changes in market conditions and when unfavorable, can adversely affect our
original estimates of fair values. As such, to account for the uncertainty inherent in our
estimates and future projections, we perform sensitivity analyses to determine our margin of error.
Since adoption of FASB ASC 350, we have not recognized any impairment of goodwill or other
intangible assets.
Our amortizable intangible assets are evaluated for impairment in accordance with FASB 360
Accounting for Impairment or Disposal of Long-Lived Assets.
FASB ASC 360 requires amortizable
intangible assets to be tested for impairment when events or circumstances indicate that the
carrying value of the asset may not be recoverable. Furthermore, FASB ASC 360 presents six factors
that should be considered in conjunction with a companys intangible assets as the presence of any
one of these factors might indicate that the asset is impaired. Since the adoption of FASB ASC
360, we have not recognized any impairment of intangible assets.
In conjunction with the acquisitions of Coronet Rail and the assets of Vulcan, we recorded the
fair value of the acquired tangible and intangible assets in accordance with FASB ASC 360. As part
of our procedures to assign fair values to all acquired assets, we engaged an independent valuation
expert to evaluate the technology and intellectual property along with other intangible assets that
could be assigned a fair value under these acquisitions. We supplied the independent valuation
expert with the historical and estimated cash flows of the companies along with an estimate of
future costs to maintain these technologies. The independent valuation expert used these estimates
and other assumptions to determine the present value of the discounted cash flows of these various
technologies. In addition, we evaluated the future lives of the identified intangible assets to
determine if they have definite or indefinite lives.
Warranty Reserves.
Most of our products are covered by a replacement warranty. We establish
warranty reserves for expected warranty claims based upon our historical experience, or for known
warranty issues and their estimable replacement costs. We feel our estimates are appropriate to
cover any known warranty issues. However, any changes in estimates may have an impact on our
results of operations.
Retirement Benefit Plans.
We maintain defined benefit pension plans that cover a significant
number of our active employees, former employees and retirees. We account for these plans as
required under FASB ASC Topic 715,
Compensation Retirement Benefits.
The liabilities and
expenses for pensions require significant judgments and estimates. These amounts are determined
using actuarial methodologies and incorporate significant
31
assumptions, including the rate used to
discount the future estimated liability, inflation, the long-term rate of return on plan assets and
mortality tables. Management has mitigated the future liability for active employees by freezing
all defined benefit pension plans effective December 31, 2003. The rate used to discount future
estimated liabilities is determined based upon a hypothetical double A yield curve represented by a
series of annualized individual discount rates from one-half to thirty years. Our inflation
assumption is based on an evaluation of external market indicators. The long-term rate of return is
estimated by considering historical returns and expected returns on current and projected asset
allocations. The effects of actual results that differ from these assumptions are accumulated and
amortized over future periods and, therefore, generally affect recognized expense and the recorded
obligations in future periods. While management believes that the assumptions used are appropriate,
differences in actual experience or changes in assumptions may affect our obligations and future
expense.
As interest rates decline, the actuarially calculated retirement benefit plan liability
increases. Conversely, as interest rates increase, the actuarially calculated retirement benefit
plan liability decreases. Past declines in interest rates and equity markets have had a negative
impact on the retirement benefit plan liability and fair value of our plan assets. As a result,
the accumulated benefit obligation exceeded the fair value of plan assets at December 31, 2009.
Our liability at December 31, 2009 is more than the liability at December 31, 2008, which resulted
in a $340,000, net of tax, decrease in shareholders equity.
We maintain a post-retirement benefit plan at our Canadian operation near Montreal, which
provides retiree life insurance, health care benefits and, for a closed group of employees, dental
care. We account for this plan under FASB ASC 715. The liabilities and expenses for
post-retirement benefit plans require significant judgments and estimates. These amounts are
actuarially determined using the projected benefit method pro rated on service and significant
management assumptions, including salary escalation, retirement ages of employees and expected
health care costs. Retirement benefit plan adjustments and changes in assumptions are amortized to
earnings over the estimated average remaining service life of the members and, therefore, generally
affect recognized expense and the recorded obligations in future periods. While management
believes that the assumptions used are appropriate, differences in actual experience or changes in
assumptions may affect our obligations and future expense.
Income Taxes.
Significant judgment is required in determining the provision for income taxes,
deferred tax assets and liabilities and any necessary valuation allowance recorded against net
deferred tax assets. As a company with international operations, we record an estimated liability
or benefit for our current income tax provision and
other taxes based on what we determine will likely be paid in various jurisdictions in which
we operate. We use our best judgment in the determination of these amounts. However, the
liabilities ultimately realized and paid are dependent on various matters including the resolution
of the tax audits in the various affected tax jurisdictions and may differ from the amounts
recorded. An adjustment to the estimated liability would be recorded through income in the period
in which it becomes probable that the amount of the actual liability differs from the recorded
amount. We do not believe that such a charge would be material.
The process of recording deferred tax assets and liabilities involves summarizing temporary
differences resulting from the different treatment of items for tax than for financial statement
purposes. These differences result in deferred tax assets and liabilities, which are included in
the consolidated balance sheet. We must then assess the likelihood that deferred tax assets will be
recovered from future taxable income and to the extent that we believe that recovery is not likely,
a valuation allowance is established. If a valuation allowance is established in a period, an
expense is recorded. The valuation allowance is based on our experience and current economic
situation. We believe that operations will provide taxable income levels to recover the deferred
tax assets.
As of January 1, 2007, we adopted FASB ASC Topic 740,
Income Taxes
(FIN 48), which prescribes
a recognition threshold and a measurement attribute for the financial statement recognition and
measurement of uncertain tax positions to be taken or expected to be taken in a tax return. For
those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon
examination by taxing authorities. The amount recognized is measured as the largest amount of
benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The
determination of the amount of benefits to be recognized and the sustainability of our tax
positions upon examination require us to make certain estimates and to use our best judgment based
upon historical experience.
32
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risk on our long-term debt obligations and our working capital
facilities are under floating interest rate arrangements. We have determined that these risks are
not significant enough to warrant hedging programs. If interest rates increase we will be exposed
to higher interest rates and we will be required to use more cash to settle our long-term debt
obligations. As interest rates increase on our variable long-term debt, it will have a negative
impact on future earnings because the higher interest rates will increase our interest expense.
Conversely, if interest rates decrease on our variable long-term debt, it will have a positive
impact on future earnings because lower interest rates will decrease our interest expense. Based
upon our long-term debt amounts as of September 30, 2010 for every 100 basis points increase or
decrease in the interest rate on our long-term debt, our annual interest expense will fluctuate by
approximately $87,000.
In addition, we are exposed to foreign currency translation fluctuations with our
international operations. We do not have any foreign exchange derivative contracts to hedge against
foreign currency exposures. Therefore, we are exposed to the related effects when foreign currency
exchange rates fluctuate. If the U.S. dollar strengthens against the Canadian dollar and/or the
British pound sterling, the translation rate for these foreign currencies will decrease, which will
have a negative impact on our operating income. For example, for the three and nine months ended
September 30, 2010, for every 1/100 change in the exchange rate of the Canadian dollar to the U.S.
dollar, our Canadian operations operating income would have changed by $15,000 and $52,000,
respectively. Further, for every 1/100 change in the exchange rate of the British pound sterling
to the U.S. dollar, the impact on operating income for our United Kingdom operation for the three
and nine months ended September 30, 2010 would have been $4,000 and $8,000, respectively. 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 4T.
CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Companys management, including the
Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of
the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e)
and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report
on Form 10-Q (the Evaluation Date). Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that, as of the Evaluation Date, the Companys disclosure
controls and procedures are effective to ensure that information required to be disclosed in the
reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the Securities and
Exchange Commissions rules and forms. There has been no change in the Companys internal control
over financial reporting during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting.
PART II OTHER INFORMATION
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ITEM 1.
LEGAL PROCEEDINGS
We are involved from time to time in lawsuits that arise in the normal course of business. We
actively and vigorously defend all lawsuits.
We have been named with numerous other defendants in an environmental lawsuit. The plaintiff
seeks to recover costs which it has incurred, and may continue to incur, to investigate and
remediate its former property as required by the New York State Department of Environmental
Conservation (NYSDEC). We have not been named as a liable party by the NYSDEC and we believe we
have no liability to the plaintiff in the case. We filed a motion for summary
judgment seeking a ruling to have us dismissed from the case. In November 2003, the motion
for summary judgment was granted and we were dismissed from the case by the United States District
Court for the Northern District of New York. In March 2004, the plaintiff filed a notice of appeal
to the United States Court of Appeals for the Second Circuit, appealing, in part, the District
Courts decision to dismiss all claims against us. In April 2005, the plaintiffs appeal was
dismissed by the Second Circuit Court without prejudice, and the matter was remanded to the United
States District Court for the Northern District of New York for consideration in light of a
then-recent United States Supreme Court decision.
33
As a result, in June 2006, the District Court
dismissed all claims brought by the plaintiff pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA or Superfund). In July 2006, the plaintiff filed a notice
of appeal to the Second Circuit. However, in early 2008, the plaintiffs appeal was dismissed
again by the Second Circuit Court without prejudice, and the matter was remanded to the District
Court for consideration in light of another then-recent United States Supreme Court decision. In
July 2008, The District Court decided that the United States Supreme Court decision did not
necessitate any changes in the District Courts prior determinations in this case and held that all
of its prior rulings stand. In August 2008, the plaintiff filed a third notice of appeal to the
Second Circuit Court. On February 24, 2010, the Second Circuit issued its decision, reversing the
order of the District Court which dismissed Portec from the litigation, stating that there were
genuine issues of material fact. In addition, the Second Circuit reinstated the plaintiffs CERCLA
claims, stating that the plaintiff is entitled to bring a claim for contribution under Section
113(f)(3)(B) of CERCLA. Ongoing litigation may be protracted, and we may incur additional ongoing
legal expenses, which are not estimable at this time.
We believe that plaintiffs case against Portec, Inc. is without merit. Because plaintiff is
seeking unspecified monetary contribution from the defendants, we are unable to determine, if
plaintiff were to prevail on its claims against Portec, the extent to which we would have to make a
contribution, or whether such contribution would have a material adverse effect on our financial
condition or results of operations. Furthermore, ongoing litigation may be protracted and legal
expenses may be material to our results of operations.
In August 2009, Portec Rail Products, Inc. and Kelsan Technologies Corp. were named as
defendants in a civil lawsuit by Snyder Equipment Co. Inc. alleging breach of contract and other
claims related to a non-disclosure agreement. The plaintiff filed the complaint with the United
States District Court for the Western District of Missouri, Southern Division and was seeking to
recover compensatory and punitive damages on four counts. In March 2010 the parties to this
lawsuit entered into a new agreement, and the lawsuit was dismissed with prejudice.
On February 19, 2010, and through March 3, 2010, a total of five lawsuits initiated by
purported shareholders of Portec Rail have been filed against several defendants including the
Company and certain members of its Board of Directors. These lawsuits are directly related to the
Agreement and Plan of Merger with L.B. Foster Company and Foster Thomas Company, which was signed
on February 16, 2010. Following is a summary of these lawsuits:
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Date 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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34
|
|
|
|
|
|
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Date Filed
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|
Court
|
|
Plaintiff
|
|
Defendants
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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
Cabell 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.
The three lawsuits in Allegheny County, Pennsylvania were consolidated and on March 22 and 23,
2010, hearings were held on Plaintiffs Motion for Preliminary Injunction, which seeks to enjoin
the transaction set forth in the Agreement and Plan of Merger. On April 21, 2010, the Court of
Common Pleas of Allegheny County, Pennsylvania (the Court) entered an order in the matter
captioned In re Portec Rail Products, Inc. Shareholders Litigation, preliminarily enjoining Foster
from completing the Offer until the Court determines that the Board of Directors of Portec has
cured the breach of fiduciary duties as found by the Court and disclosed certain material
information. A copy of the order was filed as an exhibit to the SC 14D-9/A filed by the Company on
April 22, 2010.
On June 24, 2010, the Court of Common Pleas of Allegheny County, Pennsylvania (the Court)
granted a Motion to Dissolve Preliminary Injunction in the case styled In Re Portec Rail Products,
Inc. Shareholders Litigation. A copy of the order was filed as an exhibit to the SC 14D-9/A filed
by the Company on June 29, 2010.
In the two lawsuits pending in West Virginia, Motions to Dismiss the lawsuits were filed April
2010 on behalf of the Company and the Director Defendants. In the Furman case, the parties agreed
to transfer the lawsuit to Cabell County, West Virginia. In the Petkus case, the Motion to Dismiss
also included a Motion to Transfer Venue from Kanawha
County, West Virginia to Cabell County, West Virginia. In both West Virginia cases,
Plaintiffs have filed Motions for Preliminary Injunctions, but as of the date of this filing, no
hearings have been scheduled.
Ongoing litigation in these matters may be protracted, and we may incur additional ongoing
legal expenses, which are not able to be estimated at this time.
35
ITEM 1A.
RISK FACTORS
There are no changes to the risk factors disclosed in the Companys Annual Report on Form
10-K.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Nothing to report under this item.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
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Nothing to report under this item.
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ITEM 4.
REMOVED & RESERVED
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Nothing to report under this item.
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ITEM 5.
EXHIBITS
(a) Exhibits filed as part of this Form 10-Q:
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31.1
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Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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31.2
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Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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32
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Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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PORTEC RAIL PRODUCTS, INC.
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Date: November 8, 2010
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By:
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/s/ Richard J. Jarosinski
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Richard J. Jarosinski, President and
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Chief Executive Officer and Principal
Executive Officer
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Date: November 8, 2010
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By:
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/s/ John N. Pesarsick
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John N. Pesarsick, Chief Financial
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Officer and Principal Accounting Officer
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37
EXHIBIT INDEX
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|
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31.1
|
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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31.2
|
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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|
|
|
32
|
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Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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38
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