UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

Commission File Number: 000-50543

PORTEC RAIL PRODUCTS, INC.

(Exact Name of Registrant as Specified in its Charter)

West Virginia		55-0755271
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
900 Old Freeport Road, Pittsburgh, Pennsylvania		15238-8250
(Address of Principal Executive Offices)		(Zip Code)

(412) 782-6000

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES þ   NO o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o   NO o

     Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o		Accelerated Filer o		Non-Accelerated Filer o		Smaller Reporting Company þ
				(Do not check if a Smaller Reporting Company)

     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o   NO þ

     As of October 31, 2009, there were 9,602,029 shares issued and outstanding of the Registrant’s Common Stock.

 

 

PORTEC RAIL PRODUCTS, INC.

INDEX TO FORM 10-Q

Item
Number				Page Number
		PART I - FINANCIAL INFORMATION
1.		Financial Statements:
		Condensed Consolidated Balance Sheets September 30, 2009 (Unaudited) and December 31, 2008		3
		Condensed Consolidated Statements of Income (Unaudited) Three and nine months ended September 30, 2009 and 2008		4
		Condensed Consolidated Statements of Cash Flows (Unaudited) Nine months ended September 30, 2009 and 2008		5
		Notes to Condensed Consolidated Financial Statements (Unaudited)		6
2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
3.		Quantitative and Qualitative Disclosures About Market Risk		30
4T.		Controls and Procedures		30
		PART II - OTHER INFORMATION
1.		Legal Proceedings		30
1A.		Risk Factors		31
2.		Unregistered Sales of Equity Securities and Use of Proceeds		31
3.		Defaults Upon Senior Securities		31
4.		Submission of Matters to a Vote of Security Holders		31
5.		Other Information		31
6.		Exhibits		31
		Signatures		32
EX-31.1
EX-31.2
EX-32

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Portec Rail Products, Inc.

		September 30				December 31
		2009				2008
		(Unaudited)				(Audited)
		(In Thousands)
Assets
Current assets
Cash and cash equivalents		$	10,786			$	5,371
Accounts receivable, net			14,700				14,553
Inventories, net			21,430				23,856
Prepaid expenses and other current assets			1,055				489
Deferred income taxes			287				369
Total current assets		$	48,258			$	44,638
Property, plant and equipment, net of accumulated depreciation of $14,594 and $12,445 at September 30, 2009 and December 31, 2008, respectively.			10,370				10,203
Intangible assets, net of accumulated amortization of $4,805 and $3,557 at September 30, 2009 and December 31, 2008, respectively			28,499				27,732
Goodwill			14,312				13,413
Other assets			956				837
Total assets		$	102,395			$	96,823
Liabilities and Shareholders’ Equity
Current liabilities
Current maturities of long-term debt		$	7,266			$	6,500
Accounts payable			6,319				7,155
Accrued income taxes			128				513
Customer deposits			839				1,935
Accrued compensation			2,012				2,641
Other accrued liabilities			2,785				2,088
Total current liabilities			19,349				20,832
Long-term debt, less current maturities			3,739				6,110
Deferred income taxes			9,929				7,224
Accrued pension costs			3,646				3,583
Other long-term liabilities			1,005				898
Total liabilities			37,668				38,647
Commitments and Contingencies			—				—
Shareholders’ equity:
Common stock, $1 par value, 50,000,000 shares authorized, 9,602,029 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively			9,602				9,602
Additional paid-in capital			25,521				25,443
Retained earnings			32,269				28,635
Accumulated other comprehensive loss			(2,665	)			(5,504	)
Total shareholders’ equity			64,727				58,176
Total liabilities and shareholders’ equity		$	102,395			$	96,823

     See Notes to Condensed Consolidated Financial Statements

Portec Rail Products, Inc.

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2009				2008				2009				2008
		(Dollars in Thousands, Except Per Share Data)
Net sales		$	24,285			$	29,644			$	72,979			$	84,681
Cost of sales			15,849				19,731				48,674				57,140
Gross profit			8,436				9,913				24,305				27,541
Selling, general and administrative			5,411				5,872				16,271				17,267
Amortization expense			283				296				806				891
Operating income			2,742				3,745				7,228				9,383
Interest expense			64				205				217				640
Other expense (income), net			37				44				(83	)			(77	)
Income before income taxes			2,641				3,496				7,094				8,820
Provision for income taxes			618				980				1,732				2,556
Net income		$	2,023			$	2,516			$	5,362			$	6,264
Earnings per share
Basic and diluted		$	0.21			$	0.26			$	0.56			$	0.65
Weighted average shares outstanding
Basic and diluted			9,602,029				9,602,029				9,602,029				9,601,894
Dividends per share		$	0.06			$	0.06			$	0.18			$	0.18

See Notes to Condensed Consolidated Financial Statements

Portec Rail Products, Inc.

		Nine Months Ended
		September 30
		2009				2008
		(In Thousands)
Operating Activities
Net income		$	5,362			$	6,264
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense			1,309				1,367
Amortization expense			806				891
Provision for doubtful accounts			78				132
Deferred income taxes			597				291
Pension expense (income)			157				(30	)
Defined benefit pension plan contributions			(176	)			(814	)
Loss on disposal of assets			2				48
Stock-based compensation expense			78				73
Changes in operating assets and liabilities:
Accounts receivable			672				(1,739	)
Inventories			3,854				(3,923	)
Prepaid expenses and other current assets			(685	)			(851	)
Accounts payable			(1,361	)			2,286
Income taxes payable			(450	)			324
Accrued expenses			(1,190	)			406
Net cash provided by operating activities			9,053				4,725
Investing Activities
Purchases of property, plant and equipment			(718	)			(2,304	)
Proceeds from sale of assets			—				12
Contingent consideration — business acquisition			(96	)			(148	)
Net cash used in investing activities			(814	)			(2,440	)
Financing Activities
Net increase in working capital facilities			800				3,087
Book overdrafts			(261	)			(245	)
Principal payments on promissory notes			(280	)			(280	)
Proceeds from term loans			300				1,800
Principal payments on term loans			(2,522	)			(2,731	)
Fees paid to obtain new financing			(17	)			(21	)
Issuance of common stock			—				2
Cash dividends paid to shareholders			(1,728	)			(1,728	)
Net cash used in financing activities			(3,708	)			(116	)
Effect of exchange rate changes on cash and cash equivalents			884				(327	)
Increase in cash and cash equivalents			5,415				1,842
Cash and cash equivalents at beginning of period			5,371				4,273
Cash and cash equivalents at end of period		$	10,786			$	6,115
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest		$	297			$	676
Income taxes		$	1,666			$	2,145

See Notes to Condensed Consolidated Financial Statements

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, 2009 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 2008 Annual Report on Form 10-K. The balance sheet information as of December 31, 2008 was derived from our audited balance sheet included in our 2008 Annual Report on Form 10-K. Unless otherwise indicated, all dollar amounts are in United States dollars. Certain amounts in the prior year’s consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on net earnings.

Note 3: Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method for all inventories. Inventory costs include material, labor and manufacturing overhead.

The major components of inventories are as follows:

		September 30				December 31
		2009				2008
		(In Thousands)
Raw materials		$	8,822			$	10,617
Work in process			313				411
Finished goods			13,087				13,727
			22,222				24,755
Less reserve for slow-moving and obsolete inventory			792				899
Net inventory		$	21,430			$	23,856

Note 4: Long-Term Debt

Long-term debt consists of the following:

		September 30				December 31
		2009				2008
		(In Thousands)
National City Bank Credit Facility: (a)
Term loan — Kelsan acquisition		$	3,489			$	4,884
Term loan — Vulcan asset acquisition			1,250				1,700
Revolving credit facility — United States			3,600				2,800
Revolving credit facility — Canada			—				—
United Kingdom loans: (b)
Term loan — Coronet Rail acquisition			840				1,131
Working capital facility			—				—
Term loans — vehicles			6				15
Promissory notes — Salient Systems acquisition (c)			—				280
Credit facility — Boone County Bank, Inc. (d)			1,820				1,800
			11,005				12,610
Less current maturities			7,266				6,500
		$	3,739			$	6,110

In December 2008, PNC Financial Services Group, Inc. (PNC) of Pittsburgh, Pennsylvania completed its acquisition of National City Corp. of Cleveland, Ohio. We have several credit facilities with National City Bank. PNC is currently in the process of integrating National City Bank into its operations. We are unsure what impact, if any, that the acquisition of National City by PNC may have on our existing credit facilities.

Our credit facility with National City Bank is a term loan and revolving credit facility that provided the financing for the Kelsan acquisition in November 2004 and the Vulcan asset acquisition in October 2006, and also supports the working capital requirements of our United States and Canadian business units. The components of this facility are as follows: 1) a $7.0 million United States revolving credit facility; 2) a $4.1 million ($5.0 million CDN) revolving credit facility for our Canadian operations; 3) an outstanding term loan in the original amount of $4.9 million that replaced the term loan in the original amount of $14.9 million ($17.6 million CND) provided for the Kelsan acquisition in November 2004; and 4) an outstanding term loan in the original amount of $3.0 million provided in November 2006 for the Vulcan Chain product line acquisition. As of September 30, 2009, we had the ability to borrow an additional $7.1 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 tangible net worth. This credit facility further limits capital expenditures, sales of assets, and additional indebtedness. At September 30, 2009, we were in compliance with all of these financial covenants.

Term Loan — Kelsan Acquisition:

In December 2008, we borrowed $4.9 million from National City Bank to refinance the Kelsan acquisition loan, which had an outstanding principal balance of $4.9 million ($5.9 million CDN). Portec Rail Products, Inc. is the borrower and sole guarantor of the term loan with substantially all of our United States assets pledged as collateral. The monthly principal payment on this loan is approximately $174,000. Interest on the outstanding balance accrues at a LIBOR-based

rate plus 1.75% to 2.25% and is paid monthly. As of September 30, 2009, the principal balance outstanding was $3.5 million, and accrued interest at a rate of 2.00%. This term loan is scheduled to mature on May 1, 2011.

Term Loan — Vulcan Asset Acquisition:

In November 2006, we borrowed $3.0 million from National City Bank to finance the Vulcan product line acquisition. Portec Rail Products, Inc. is the sole guarantor of the term loan with substantially all of our United States assets pledged as collateral. Under this five-year term loan, our monthly principal payments are $50,000. The outstanding principal balance accrues interest based upon the 30-day LIBOR rate plus 1.5%. As of September 30, 2009, we had outstanding borrowings of $1.3 million, which accrued interest at 1.75%. This term loan is scheduled to mature on October 31, 2011.

Revolving Credit Facility — United States:

Our United States revolving credit facility permits borrowings up to $7.0 million to support the working capital requirements of our United States operations. Included in the $7.0 million is a sub-limit of $1.6 million for standby and commercial letters-of-credit. Outstanding borrowings under this facility can be priced at a prime-based rate or a LIBOR-based rate. As of September 30, 2009, outstanding borrowings under this facility were $3.6 million and accrued interest at 1.75%. As of September 30, 2009, two commercial letters-of-credit were outstanding in the amount of $372,000. This credit facility is scheduled to expire on September 30, 2011.

Revolving Credit Facility — Canada:

The working capital requirements for our Canadian operations are supported by a $4.1 million ($5.0 million CDN) revolving credit facility. Included within the $4.1 million is a sub-limit of $335,000 ($400,000 CDN) for standby and commercial letters of credit. The interest rate is the Canadian prime rate plus 1.0%. Borrowings on this facility accrued interest at 3.25% at September 30, 2009. As of September 30, 2009, 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 has an outstanding balance of approximately $840,000 (£526,000 pounds sterling) as of September 30, 2009, and accrues interest at 2.25%. The monthly principal and interest payment is approximately $46,000 (£29,000 pounds sterling). This term loan is scheduled to mature on April 12, 2011.

Working Capital Facility:

The working capital facility for our United Kingdom operations includes an overdraft availability of $1.3 million (£900,000 pounds sterling), $255,000 (£175,000 pounds sterling) for the issuance of performance bonds, and $58,000 (£40,000 pounds sterling) for the negotiation of foreign checks. This credit facility supports the working capital requirements of Portec Rail Products (UK) Ltd. and its wholly-owned subsidiaries, including Coronet Rail, Ltd. Interest accrues on the outstanding borrowings at the United Kingdom base rate plus 1.5%. The interest rate on the overdraft facility as of September 30, 2009 is 1.5%. Our availability under this credit facility was reduced due to performance bonds outstanding in the amount of $227,000 (£156,000 pounds sterling) as of September 30, 2009. There are no outstanding borrowings on this facility as of September 30, 2009. This facility is scheduled to expire on August 31, 2010.

Our United Kingdom loan agreements contain certain financial covenants that require us to maintain senior interest and cash flow coverage ratios. We were in compliance with these financial covenants as of September 30, 2009.

(c) Salient Systems Promissory Notes

In connection with the acquisition of Salient Systems on September 30, 2004, we executed two promissory notes in the aggregate amount of $1.1 million. The original note holders were Harold Harrison, the founder and former President and Chief Executive Officer of Salient Systems, and Falls River Group, LLC, which acted as a financial advisor to Salient Systems. The final principal and interest payments on these notes were made in January 2009. As of September 30, 2009, there was no balance outstanding on these debt obligations.

(d) Credit Facility — 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 August 2008, we borrowed an initial $1.8 million from this facility. In February 2009, we borrowed another $300,000 from this facility, increasing the balance outstanding to $2.1 million, and converted it to a 60-month term loan with monthly principal payments of $35,000 beginning in February 2009. As of September 30, 2009, the outstanding balance on this facility was $1.8 million, and the interest rate was 3.0%. This facility has a maturity date of January 14, 2014.

Boone County Bank, Inc. is a wholly-owned subsidiary of Premier Financial Bancorp, Inc., located in Madison, West Virginia. Our Chairman of the Board is the Chairman of the Board and a shareholder of Premier Financial Bancorp, Inc. We believe that our credit facility with Boone County Bank, Inc. is on terms comparable to those obtained by a non-affiliated third party.

Note 5: Income Taxes

We evaluated uncertain tax provisions pursuant to the guidance found within Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) FASB ASC 740-10-55. A reconciliation of the beginning and ending amount of unrecognized tax positions is as follows:

		Nine Months Ended
		September 30
		2009				2008
		(In Thousands)
Balance at January 1		$	313			$	313
Additions based on tax positions related to the current year			44				76
Additions for tax positions of prior years			116				—
Reductions for tax positions of prior years			(65	)			(50	)
Settlements			31				—
Balance at September 30		$	439			$	339

We recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company or one of its subsidiaries files income tax returns in the United States federal jurisdiction, and various state and foreign jurisdictions. The Company believes that it is no longer subject to U.S. state and local, or non- U.S. income tax examinations by tax authorities for the years before 2003 and for years before 2007 for the United States federal jurisdiction. An examination began during the second quarter 2009 for the 2005 to 2007 provincial tax returns of our subsidiary in Quebec, Montreal. Our Kelsan Technologies business unit is currently being reviewed by Canadian Revenue Agency for the Scientific Research and Experimental Development tax credit for the tax year ended November 30, 2008. We are currently unable to assess whether any significant change in the unrecognized tax position will be necessary during the next twelve months.

Note 6: Retirement Plans

The components of net periodic pension (benefit) cost of our United States defined benefit pension plan are as follows for the three and nine months ended September 30, 2009 and 2008:

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2009				2008				2009				2008
						(In Thousands)
Interest cost		$	144			$	138			$	432			$	414
Expected return on plan assets			(162	)			(166	)			(486	)			(496	)
Amortization of unrecognized loss			26				18				76				53
Pension (benefit) cost		$	8			$	(10	)		$	22			$	(29	)

We anticipate making total contributions of $202,000 to this pension plan during 2009, of which $102,000 was funded through September 30, 2009. For the nine months ended September 30, 2008, we made contributions to this pension plan totaling $615,000.

The components of net periodic pension cost (benefit) 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, 2009 and 2008:

		Portec Rail Plan
		Three Months Ended								Nine Months Ended
		September 30								September 30
		2009				2008				2009				2008
						(In Thousands)
Service cost		$	—			$	10			$	—			$	31
Interest cost			67				80				193				248
Expected return on plan assets			(49	)			(94	)			(143	)			(290	)
Amortization of transition amount			(12	)			(14	)			(35	)			(44	)
Amortization of unrecognized loss			31				20				91				63
Pension cost		$	37			$	2			$	106			$	8

		Conveyors Plan
		Three Months Ended								Nine Months Ended
		September 30								September 30
		2009				2008				2009				2008
						(In Thousands)
Service cost		$	—			$	1			$	—			$	3
Interest cost			13				18				39				56
Expected return on plan assets			(8	)			(19	)			(25	)			(59	)
Amortization of transition amount			(2	)			(3	)			(7	)			(9	)
Amortization of unrecognized loss			8				—				22				—
Pension (benefit)/cost		$	11			$	(3	)		$	29			$	(9	)

United Kingdom regulations require trustees to adopt a prudent approach to funding required contributions to defined benefit pension plans. We anticipate making contributions of $110,000 (£77,000 pounds sterling) and $27,000 (£19,000 pounds sterling) to the Portec Rail and Conveyors pension plans, respectively, during 2009. For the nine months ended September 30, 2009, contributions in the amount of $62,000 (£40,000 pounds sterling) and $12,000 (£8,000 pounds sterling) have been made to the Portec Rail Plan and Conveyors Plan, respectively. For the nine months ended September

30, 2008, we contributed $161,000 (£83,000 pounds sterling) and $38,000 (£19,000 pounds sterling) to the Portec Rail Plan and the Conveyors Plan, respectively.

Note 7: Comprehensive Income

Comprehensive income for the three and nine months ended September 30, 2009 and 2008 is as follows:

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2009				2008				2009				2008
						(In Thousands)
Net income		$	2,023			$	2,516			$	5,362			$	6,264
Minimum pension liability adjustment, net of tax			36				94				(67	)			94
Foreign currency translation adjustments, net of tax			1,399				(1,584	)			2,906				(1,974	)
Comprehensive income		$	3,458			$	1,026			$	8,201			$	4,384

Note 8: Earnings Per Share

Basic earnings per share (EPS) are computed as net income available to common shareholders divided by the weighted average common shares outstanding. Diluted earnings per share considers the potential dilution that occurs related to issuance of common stock under stock option plans. We calculated the dilutive effect of our stock options in accordance with FASB ASC Topic 260, Earnings per Share.

For the third quarter of 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 option grants would reduce our average shares outstanding by 8,450 shares and 2,120 shares, respectively. For the 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 option grants would reduce our average shares outstanding by 19,417 shares and 12,436 shares, respectively. The anti-dilutive shares are not included in the calculation of diluted earnings per share.

For the third quarter of 2008, 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 option grants would reduce our average shares outstanding by 7,600 shares and 2,072 shares, respectively. For the nine months ended September 30, 2008, 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 option grants would reduce our average shares outstanding by 8,319 shares and 3,014 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, 2009, due on a calendar year basis:

																		More
						Less				1 – 3				3 – 5				than 5
Contractual Obligations		Total				than 1 year				years				years				years
						(In Thousands)
Term loans		$	7,405			$	3,666			$	2,864			$	840			$	35
Purchase obligations			3,497				2,253				1,244				—				—
Operating leases			4,420				664				1,981				853				922
Working capital facilities			3,600				3,600				—				—				—
Future interest payments (1)			217				39				149				29				—
Pension plan contributions (2)			3,697				176				1,709				1,381				431
Total contractual obligations (3)		$	22,836			$	10,398			$	7,947			$	3,103			$	1,388

Litigation

We are involved from time to time in lawsuits that arise in the normal course of business. We actively and vigorously defend all lawsuits. We have been named with numerous other defendants in an environmental lawsuit. The plaintiff seeks to recover costs which it has incurred, and may continue to incur, to investigate and remediate its former property as required by the New York State Department of Environmental Conservation (NYSDEC). We have not been named as a liable party by the NYSDEC and we believe we have no liability to the plaintiff in the case. We filed a motion for summary judgment seeking a ruling to have us dismissed from the case. In November 2003, the motion for summary judgment was granted and we were dismissed from the case by the United States District Court for the Northern District of New York. In March 2004, the plaintiff filed a notice of appeal to the United States Court of Appeals for the Second Circuit, appealing, in part, the District Court’s decision to dismiss all claims against us. In April 2005, the plaintiff’s appeal was dismissed by the Second Circuit Court without prejudice, and the matter was remanded to the United States District Court for the Northern District of New York for consideration in light of a then-recent United States Supreme Court decision. As a result, in June 2006, the District Court dismissed all claims brought by the plaintiff pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund). In July 2006, the plaintiff filed a notice of appeal to the Second Circuit. However, in early 2008, the plaintiff’s appeal was dismissed again by the Second Circuit Court without prejudice, and the matter was remanded to the District Court for consideration in light of a recent United States Supreme Court decision. In July 2008, The District Court decided that the United States Supreme Court decision did not necessitate any changes in the District Court’s prior determinations in this case and held that all of its prior rulings stand. In August 2008, the plaintiff filed a third notice of appeal to the Second Circuit Court. The briefing process has been completed and the case has been argued. We are awaiting the Second Circuit’s decision. Ongoing litigation may be protracted, and we may incur additional ongoing legal expenses, which are not able to be estimated at this time.

In August 2009, Portec Rail Products, Inc. and Kelsan Technologies Corp. were named as defendants in a civil lawsuit by Snyder Equipment Co. Inc. alleging breach of contract and other claims related to a non-disclosure agreement. The plaintiff filed the complaint with the United States District Court for the Western District of Missouri Southern Division and seeks to recover compensatory and punitive damages on four counts. Management believes the claims in the lawsuit are without merit and intends to vigorously defend against the claims. Ongoing litigation may be protracted, and we may incur additional ongoing legal expenses, which are not able to be estimated at this time.

Note 10: Segment Information

We operate four business segments consisting of the Railway Maintenance Products Division (RMP), the Shipping Systems Division (SSD), Portec Rail Nova Scotia Company (Canada) and Portec Rail Products (UK) Ltd. (United Kingdom), along with corporate functional shared service. The presentation of segment information reflects the manner in which we organize and manage our segments by geographic areas for making operating decisions, assessing performance and allocating resources. Intersegment sales are conducted at arm’s-length prices, reflecting prevailing market conditions within the United States, Canada and the United Kingdom. Such sales and associated costs are eliminated in the consolidated financial statements.

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2009				2008				2009				2008
						(In Thousands)
External Sales
RMP		$	11,556			$	12,352			$	35,394			$	34,929
SSD			1,293				2,345				4,054				8,287
Canada			6,511				7,502				20,824				21,457
United Kingdom			4,925				7,445				12,707				20,008
Total		$	24,285			$	29,644			$	72,979			$	84,681
Intersegment Sales
RMP		$	377			$	1,092			$	1,218			$	2,489
SSD			—				—				—				—
Canada			2,252				1,875				6,107				5,358
United Kingdom			1				—				1				—
Total		$	2,630			$	2,967			$	7,326			$	7,847
Total Sales
RMP		$	11,933			$	13,444			$	36,612			$	37,418
SSD			1,293				2,345				4,054				8,287
Canada			8,763				9,377				26,931				26,815
United Kingdom			4,926				7,445				12,708				20,008
Total		$	26,915			$	32,611			$	80,305			$	92,528
Operating Income (Loss)
RMP		$	1,571			$	1,960			$	4,884			$	5,066
SSD			(6	)			238				(24	)			1,609
Canada			1,522				1,486				4,510				3,165
United Kingdom			517				872				508				2,059
Corporate Shared Services			(862	)			(811	)			(2,650	)			(2,516	)
Total			2,742				3,745				7,228				9,383

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2009				2008				2009				2008
						(In Thousands)
Interest Expense			64				205				217				640
Other Expense (Income), net			37				44				(83	)			(77	)
Income Before Income Taxes		$	2,641			$	3,496			$	7,094			$	8,820
Depreciation
RMP		$	157			$	154			$	498			$	408
SSD			49				54				147				153
Canada			170				199				469				597
United Kingdom			53				70				148				160
Corporate Shared Services			20				15				47				49
Total		$	449			$	492			$	1,309			$	1,367
Amortization
RMP		$	8			$	6			$	26			$	12
SSD			53				55				160				163
Canada			170				176				475				533
United Kingdom			52				59				145				183
Corporate Shared Services			—				—				—				—
Total		$	283			$	296			$	806			$	891
Capital Expenditures
RMP		$	—			$	157			$	180			$	1,891
SSD			9				26				33				72
Canada			136				24				371				117
United Kingdom			5				34				26				187
Corporate Shared Services			66				17				108				37
Total		$	216			$	258			$	718			$	2,304

		September 30				December 31
		2009				2008
		(In Thousands)
Total Assets
RMP		$	37,900			$	40,870
SSD			7,037				7,882
Canada			42,544				32,990
United Kingdom			14,709				14,938
Corporate Shared Services			205				143
Total		$	102,395			$	96,823

Note 11: Fair Value of Financial Instruments

Effective January 1, 2008, we adopted FASB ASC Topic 820, Fair Value Measurements and Disclosure. FASB ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to

measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The FASB issued two FASB Staff Positions (FSP) addressing concerns and giving 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 FSP’s increase the frequency of fair value disclosure requirements from annual to quarterly and requires disclosure of any changes to inputs and valuation techniques used to measure fair value. The FSP’s also require reporting entities 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. All of the Company’s financial instruments are Level 1 and are traded openly in an active market.

Note 12: Recent Accounting Pronouncements

In June 2009, the FASB approved Topic 105, The FASB Accounting Standards Codification, or the Codification, as the single source of authoritative nongovernmental Generally Accepted Accounting Principles, or GAAP, in the United States. The Codification is effective for interim and annual periods ending after September 15, 2009. Upon the effective date, the Codification will be the single source of authoritative accounting principles to be applied by all nongovernmental U.S. entities. All other accounting literature not included in the Codification will be non-authoritative. We currently have adopted this standard and do not expect the adoption of the Codification to have an impact on our financial position or results of operations.

In May 2009, FASB issued FASB ASC Topic 855, Subsequent Events, which is effective for annual and interim financial periods ending after June 15, 2009. FASB ASC 855 establishes the accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. The adoption of the standard does not have a significant impact on the Company’s results of operations, financial condition or liquidity.

In March 2008, the FASB issued Statement of Financial Accounting Standards Topic 815, Derivative and Hedging. Topic 815 requires enhanced disclosures about the Company’s derivative and hedging activities. The Company is required to provide enhanced disclosures about (a) how and why it uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Topic 815 and its related interpretations, and (c) how derivative instruments and related hedged items affect the Company’s financial position, results of operations, and cash flows. FASB ASC 815 is effective prospectively, with comparative disclosures of earlier periods encouraged upon initial adoption. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statement footnote disclosures.

In December 2007, FASB issued Topic 805, Business Combinations, which will significantly alter the way that companies account for business combinations under the acquisition method. Under FASB ASC 805, an acquiring entity will be

required to recognize the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. In addition, the following specific changes will be made: (1) all acquisition costs will be expensed as incurred; (2) any restructuring charges related to the business combination will generally be expensed subsequent to the acquisition date; (3) non-controlling interests will be recorded at fair value at the acquisition date; (4) acquired contingent liabilities will be recorded at fair value at acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies; (5) in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; and (6) changes in the deferred tax asset valuation allowances and income tax uncertainties after the acquisition date will generally affect income tax expense. For calendar year companies, FASB ASC 805 prospectively applies to business combinations for which the acquisition date is on or after January 1, 2009. The adoption of FASB ASC 805 will have an impact on future business combinations which we may engage in; however, at this time, we cannot determine the impact to the Company.

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.

For the three and nine months ended September 30, 2009, we recognized compensation expense of $26,000 and $78,000, respectively, related to stock option grants. For the three and nine months ended September 30, 2008, we recognized compensation expense of $26,000 and $73,000, respectively, related to stock option grants. These amounts are included in selling, general and administrative expense on the consolidated income statement. We expect to recognize additional compensation expense of approximately $167,000 and $123,000 over the remaining vesting periods of the 2008 and 2007 stock option grants, respectively.

During the three months ended September 30, 2009 no options were forfeited. For the three months ended September 30, 2008, 1,750 and 2,200 stock options were forfeited from the 2008 and 2007 grants. For the nine months ended September 30, 2009, 1,000 and 2,800 stock options were forfeited from the 2008 and 2007 grants. For the nine months ended September 30, 2008, 2,500 and 3,200 stock options were forfeited from the 2008 and 2007 grants. During the second quarter 2008, 250 stock options were exercised.

To calculate our fair value price per stock option, we utilized a Black-Scholes Model. The following inputs were used in our Black-Scholes Model calculation:

						Stock		Exercise
		# of		Fair		Price on		Price per		Annual
Grant		Shares		Value		Grant		Stock		Dividend		Risk-free		Expected		Expected Term
Date		Granted		Price		Date		Option		Yield		Rate		Volatility		(in years)
7/02/08		1,750		$4.56		$12.01		$12.01		2.00%		4.25%		36.36%		7.5
1/30/08		72,750		$3.67		$  9.68		$  9.68		2.48%		4.00%		38.87%		7.5
1/16/07		79,250		$3.61		$  9.65		$  9.65		2.50%		4.73%		39.40%		6.5

Note 14: Subsequent Events

The Company has evaluated, accounted for and disclosed, as necessary, all subsequent events from the balance sheet date through November 6, 2009 at the date of issuance of the financial statements.

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          The following discussion should be read in conjunction with the condensed consolidated financial statements of Portec Rail Products, Inc. and the related notes beginning on page 3. Unless otherwise specified, any reference to the “three months ended” 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 Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. In particular, the Company’s future results could be affected by a variety of factors, such as:

	•		customer demand;
	•		competitive dynamics in the North American and worldwide railroad and railway supply industries;
	•		capital expenditures by the railway industry in North America and worldwide;
	•		economic conditions, including changes in inflation rates or interest rates;
	•		product development and the success of new products;
	•		our ability to successfully pursue, consummate and integrate attractive acquisition opportunities;
	•		changes in laws and regulations;
	•		the development and retention of sales representation and distribution agreements with third parties;
	•		limited international protection of our intellectual property;
	•		the loss of key personnel;
	•		fluctuations in the cost and availability of raw materials and supplies, and any significant disruption of supplies;
	•		foreign economic conditions, including currency rate fluctuations;
	•		political unrest in foreign markets and economic uncertainty due to terrorism or war;
	•		exposure to pension liabilities;
	•		seasonal fluctuations in our sales;
	•		technological innovations by our competitors; and
	•		the importation of lower cost competitive products into our markets.

          The Company specifically declines to undertake any obligation to publicly revise any forward-looking statements that have been made to reflect events or circumstances after the date of those statements or to reflect the occurrence of anticipated or unanticipated events.

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, 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.

          During the fourth quarter of 2008, the exchange rate of the Canadian dollar and British pound sterling compared to the United States dollar began to weaken considerably. During 2009, the exchange rate of the British pound sterling to the U.S. dollar has remained considerably lower from a recent historical comparison, but the Canadian dollar has been somewhat inconsistent. Lower exchange rates compared to the U.S. dollar could have a negative impact on our results of operations, as the net sales and net income, if they are profitable, of our Canadian and United Kingdom operating locations would be lower in U.S. dollars. We have no control over exchange rates, as these are largely driven by worldwide economic factors.

Results of Operations

Three Months Ended September 30, 2009 compared to Three Months Ended September 30, 2008

          Net Sales. Net sales decreased to $24.3 million for the three months ended September 30, 2009, a decrease of $5.4 million or 18.1%, from $29.6 million during the comparable period in 2008. Net sales decreased $2.5 million, $1.1 million, $991,000 and $796,000 at our United Kingdom operations, SSD, Canada and RMP, respectively. The decrease in net sales of $2.5 million at our United Kingdom operations reflects a sales volume decline of $1.7 million, comprised mostly of our material handling products. Our United Kingdom net sales also reflect foreign currency translation in the amount of $777,000 that negatively impacted net sales. SSD’s decline in net sales of $1.1 million is a result of lower sales across all major product lines as a result of the economic recession, which has negatively impacted the demand for these products. The decrease in net sales of $991,000 at our Canadian operations is primarily due to a volume decline of $499,000, primarily track component products, in addition to a foreign currency translation of $492,000 that negatively impacted net sales. The $796,000 decrease in net sales at RMP is primarily due to lower sales of track component products, partially offset by higher sales of friction management and wayside detection products.

          Cost of Goods Sold. Cost of goods sold (COGS) decreased to $15.8 million for the three months ended September 30, 2009, a decrease of $3.9 million or 19.7%, from $19.7 million during the comparable period in 2008, primarily due to lower sales volume. Our COGS as a percentage of net sales for the three months ended September 30, 2009 was 65.3%, a decrease of 1.3%, from 66.6% for the prior period in 2008. The components of COGS, including direct material, direct labor and overhead, remained consistent as a percentage of net sales during the current period 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 decreased to $8.4 million for the three months ended September 30, 2009, a decrease of $1.5 million or 14.9%, from $9.9 million for the comparable period in 2008. The decrease in gross profit is attributable to lower gross profit of $711,000 at our United Kingdom operations, $520,000 at RMP and $295,000 at SSD. Lower gross profit at our United Kingdom operations is primarily a result of lower sales volume of our material handling products, along with $254,000 of negative impact from foreign currency translation. Gross profit at RMP decreased $520,000 in the current period, primarily due to lower sales volume of track component products. Gross profit at SSD declined $295,000 in the current period, primarily due to lower sales volume across all major product lines.

          Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses decreased to $5.4 million for the three months ended September 30, 2009, a decrease of $461,000 or 7.9%, from $5.9 million for the comparable period in 2008. The decrease is primarily due to lower expenses of $349,000 at our United Kingdom operations and $132,000 at RMP. The $349,000 decrease in SG&A expenses at our United Kingdom operations is a combination of a foreign currency translation of $169,000 that positively impacted SG&A expenses and thus lowered expenses, and lower overall SG&A spending of $180,000 due primarily to lower employee salaries resulting from a lower overall headcount, lower business travel expenses and lower professional fees in the current period. The decrease in SG&A expenses of $132,000 at RMP is primarily due to lower business travel expenses, reduced incentive plan expense due to lower profitability, lower trade show expense and lower depreciation expense, partially offset by an increase in consulting fees.

          Interest Expense. Interest expense decreased to $64,000 for the three months ended September 30, 2009, a decrease of $141,000 or 68.8%, from $205,000 for the comparable period in 2008. This lower interest expense reflects lower overall interest rates along with lower debt balances. Total debt obligations decreased to $11.0 million at September 30, 2009, from $17.5 million at September 30, 2008.

          Provision for Income Taxes. Provision for income taxes decreased to $618,000 for the three months ended September 30, 2009, from $980,000 for the comparable period in 2008, reflecting the decrease in income before taxes from $3.5 million for the three months ended September 30, 2008 to $2.6 million for the three months ended September 30, 2009. The effective tax rates on taxable income were 23.4% and 28.0% for the three months ended September 30, 2009 and 2008, 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. Additionally, our consolidated effective tax rate reflects the benefit of Canadian research and development tax credits, which reduced income tax expense by $51,000 and $169,000, or 1.9% and 4.8% for the three months ended September 30, 2009 and 2008, respectively.

          Net Income. Net income decreased to $2.0 million for the three months ended September 30, 2009, a decrease of $493,000 or 19.6%, from $2.5 million for the comparable period in 2008. Our basic and diluted net income decreased to $0.21 per share for the three months ended September 30, 2009, from $0.26 per share for the comparable period in 2008, on average basic and diluted shares outstanding of 9.6 million for each of the three months ended September 30, 2009 and 2008.

Nine Months Ended September 30, 2009 compared to Nine Months Ended September 30, 2008

          Net Sales. Net sales decreased to $73.0 million for the nine months ended September 30, 2009, a decrease of $11.7 million or 13.8%, from $84.7 million for the comparable period in 2008. Lower sales of $7.3 million, $4.2 million and $633,000 at our United Kingdom operations, SSD and our Canadian operations, respectively, were partially offset by a net sales increase of $465,000 at RMP. The decrease in net sales of $7.3 million at our United Kingdom operations is a combination of $4.1 million in lower sales volume, primarily material handling products, and foreign currency translation of $3.2 million that negatively impacted net sales. Net sales declined $4.2 million at SSD, primarily due to lower sales across all major product lines as a result of the economic recession, which has negatively impacted the demand for these products. Net sales at our Canadian operations declined $633,000 in the current period, primarily due to the negative impact of foreign currency translation in the amount of $3.6 million, partially offset by $3.0 million in higher sales of friction management and track component products. The increase in net sales of $465,000 at RMP is a combination of an increase in sales volume of $3.4 million on friction management products and $189,000 of higher wayside detection systems, partially offset by $3.2 million in lower sales of track component and other products and services.

          Cost of Goods Sold. Cost of goods sold (COGS) decreased to $48.7 million for the nine months ended September 30, 2009, a decrease of $8.5 million or 14.8%, from $57.1 million for the comparable period in 2008. Our COGS as a percentage of net sales for the nine months ended September 30, 2009 was 66.7%, a decrease of 0.8%, compared to 67.5% for the prior period in 2008. The components of COGS, including direct material, direct labor and overhead, remained consistent as a percentage of net sales during the current period 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 decreased to $24.3 million for the nine months ended September 30, 2009, a decrease of $3.2 million or 11.7%, from $27.5 million for the comparable period in 2008. The decrease in gross profit is attributable to lower gross profit of $2.6 million and $1.8 million at our United Kingdom operations and SSD, respectively, partially offset by higher gross profit of $1.2 million at our Canadian operations. Lower gross profit of $2.6 million at our United Kingdom operations is primarily due to lower sales of material handling products, along with a foreign currency translation of $971,000 that negatively impacted gross profit during the current period. Gross profit at SSD decreased $1.8 million primarily on lower sales volume across all major product lines as a result of the economic recession. The increase in gross profit of $1.2 million at our Canadian operations is a combination of higher gross profit of $2.4 million on higher sales of track components and friction management products, partially offset by a foreign currency translation of $1.2 million that negatively impacted gross profit.

          Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses decreased to $16.3 million for the nine months ended September 30, 2009, a decrease of $996,000 or 5.8%, from $17.3 million for the comparable period in 2008. This decrease is primarily due to lower SG&A expenses of $992,000 at our United Kingdom operations and $211,000 at SSD, partially offset by slightly higher expenses within our corporate shared services and our RMP segment. The decrease in SG&A expenses of $992,000 at our United Kingdom operations is primarily due to foreign currency translation, which reduced SG&A expenses by $825,000, along with lower SG&A spending of $167,000, primarily due to lower employee salaries due to a lower overall employee headcount, and lower incentive expense in the current period. SG&A expenses at SSD decreased $211,000, primarily due to lower incentive plan expense due to lower profitability and lower business travel expenses in the current period.

          Interest Expense. Interest expense decreased to $217,000 for the nine months ended September 30, 2009, a decrease of $423,000 or 66.1%, from $640,000 for the comparable period in 2008. The lower interest expense reflects lower overall interest rates along with lower debt balances. Total debt obligations decreased to $11.0 million at September 30, 2009, from $17.5 million at September 30, 2008.

          Provision for Income Taxes. Provision for income taxes decreased to $1.7 million for the nine months ended September 30, 2009 from $2.6 million for the comparable period in 2008, reflecting a decrease in income before taxes from $8.8 million for the nine months ended September 30, 2008 to $7.1 million for the nine months ended September 30, 2009. The effective tax rates on reported taxable income were 24.4% and 29.0% for the nine months ended September 30, 2009 and 2008, 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. Additionally, our consolidated effective tax rate reflects the benefit of Canadian research and development tax credits, which reduced income tax expense by $219,000 and $402,000, or 3.1% and 4.6% for the nine months ended September 30, 2009 and 2008, respectively.

          Net Income. Net income decreased to $5.4 million for the nine months ended September 30, 2009, a decrease of $902,000 or 14.4%, from $6.3 million for the comparable period in 2008. Our basic and diluted net income per share decreased to $0.56 for the nine months ended September 30, 2009, from $0.65 per share for the comparable period in 2008, on average basic and diluted shares outstanding of 9.6 million for both periods.

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.

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2009				2008				2009				2008
						(In Thousands)
External sales		$	11,556			$	12,352			$	35,394			$	34,929
Intersegment sales			377				1,092				1,218				2,489
Operating income			1,571				1,960				4,884				5,066
Sales by product line(1)
Track component products		$	4,650			$	6,791			$	16,355			$	19,469
Friction management products and services			5,343				4,668				14,091				11,659
Wayside data collection and data management systems			1,367				1,039				3,933				3,764
Other products and services			573				946				2,233				2,526
Total product and service sales		$	11,933			$	13,444			$	36,612			$	37,418

          For the three months ended September 30, 2009, external sales for RMP decreased by $796,000 or 6.4%, to $11.6 million from $12.4 million during the comparable period in 2008. The $796,000 decrease in net sales at RMP is primarily due to lower sales of track components and other products and services, primarily car repair products, partially offset by higher sales of friction management products and wayside data collection and data management systems. Cost of goods sold, including direct material, direct labor and overhead, as a percentage of net external sales for RMP in the current period was unfavorably impacted by higher overhead costs in the current period, primarily related to the track component product group. Operating income for the three months ended September 30, 2009 decreased to $1.6 million from $2.0 million for the comparable period in 2008, a decrease of $389,000 or 19.8%. This decrease is primarily due to lower gross profit from lower sales of track components and other products and services, partially offset by lower SG&A expenses of $132,000, primarily related to lower business travel expenses, reduced incentive plan expense due to lower profitability, lower trade show expense and lower depreciation expense, offset by an increase in consulting fees.

          For the nine months ended September 30, 2009, external sales for RMP increased by $465,000 or 1.3%, to $35.4 million from $34.9 million during the comparable period in 2008. The increase in external sales is primarily due to higher sales of friction management products and wayside data collection and data management systems, partially offset by lower sales of track component products and other products and services. Cost of goods sold, including direct material, direct labor and overhead, as a percentage of net sales for RMP in the current period was consistent with the prior period. Operating income for the nine months ended September 30, 2009 decreased to $4.9 million from $5.1 million for the comparable period in 2008, a decrease of $182,000 or 3.6%, due primarily to higher SG&A expenses of $122,000, along with lower gross profit of $47,000 in the current period. SG&A expenses that increased in the current period include sales commission expenses related to product mix, and higher consulting fees, partially offset by lower business travel expenses and lower incentive plan expenses due to lower profitability.

          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 RMP’s manufacturing facility located in Huntington, West Virginia.

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2009				2008				2009				2008
						(In Thousands)
External sales		$	1,293			$	2,345			$	4,054			$	8,287
Intersegment sales			—				—				—				—
Operating (loss)/income			(6	)			238				(24	)			1,609
Sales by product line
Automotive products		$	703			$	1,326			$	1,928			$	5,125
Chain securement systems			469				730				1,669				2,285
Strap securement systems			22				113				142				260
Other load securement systems			99				176				315				617
Total product and service sales		$	1,293			$	2,345			$	4,054			$	8,287

          For the three months ended September 30, 2009, external sales for SSD decreased by $1.1 million or 44.9%, to $1.3 million from $2.3 million during the comparable period in 2008. The decrease in external sales reflects lower sales across all major product lines due to the economic recession, which has weakened demand for the products supplied by SSD. Cost of goods sold, including direct material, direct labor and overhead, as a percentage of net sales for the current period was consistent with the prior period for SSD. Operating loss for the three months ended September 30, 2009 was $6,000 compared to operating income of $238,000 during the comparable period in 2008, primarily due to lower gross profit on lower overall sales volume.

          For the nine months ended September 30, 2009, external sales for SSD decreased by $4.2 million or 51.1%, to $4.1 million from $8.3 million during the comparable period in 2008. The decrease in external sales is primarily due to lower sales across all major product lines due to the economic recession, which has weakened demand for the products supplied by SSD. Cost of goods sold, including direct material, direct labor and overhead, as a percentage of net sales was unfavorably impacted by a lower absorption rate of overhead costs in the current period, primarily due to lower sales volume in the current period. SSD incurred an operating loss of $24,000 for the nine months ended September 30, 2009, compared with operating income of $1.6 million during the comparable period in 2008. The operating loss primarily reflects lower gross profit due to lower overall sales volume, partially offset by lower selling, general and administrative expenses of $211,000, primarily due to lower incentive plan expense due to lower profitability and lower business travel expenses in the current period.

          Portec Rail Nova Scotia Company — “Canada”. Our Canadian operations include a manufacturing operation near Montreal, Quebec, and a manufacturing and technology facility in Vancouver, British Columbia (Kelsan Technologies Corp. — “Kelsan”). At our Canadian operation near Montreal, we manufacture rail anchors and rail spikes and assemble friction management products primarily for the two largest Canadian railroads. Rail anchors and spikes are devices to secure rails to the ties to restrain the movement of the rail tracks. Kelsan’s two primary product lines are stick lubrication and application systems and a liquid friction modifier, Keltrack^®. Kelsan manufactures its stick and applicator systems in Vancouver and subcontracts the manufacturing of the Keltrack^® product line.

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2009				2008				2009				2008
		(In Thousands, Except Translation Rate )
External sales		$	6,511			$	7,502			$	20,824			$	21,457
Intersegment sales			2,252				1,875				6,107				5,358
Operating income			1,522				1,486				4,510				3,165
Average translation rate of Canadian dollar to United States dollar			0.9088				0.9598				0.8649				0.9814
Sales by product line(1)
Track component products (2)		$	3,352			$	3,461			$	12,478			$	12,820
Friction management products and services			5,152				5,426				13,366				12,745
Other products and services			259				490				1,087				1,250
Total product and service sales		$	8,763			$	9,377			$	26,931			$	26,815

          For the three months ended September 30, 2009, external sales for Canada decreased by $991,000 or 13.2%, to $6.5 million from $7.5 million during the comparable period in 2008. This decrease in sales is primarily due to lower sales of track component products, primarily rail spikes, along with a foreign currency translation of $492,000 that negatively impacted net sales. Cost of goods sold, including direct material, direct labor and overhead, as a percentage of net sales declined slightly in the current period, due primarily to lower direct material costs on track component products. Operating income for the three months ended September 30, 2009 of $1.5 million is consistent with the prior period. Operating income in the current period was negatively impacted by foreign currency translation of $78,000.

          For the nine months ended September 30, 2009, external sales for Canada decreased by $633,000 or 3.0%, to $20.8 million from $21.5 million during the comparable period in 2008. The decrease in net sales of $633,000 is primarily due to the negative impact of foreign currency translation in the amount of $3.6 million, partially offset by $3.0 million in higher sales of friction management and track component products. Cost of goods sold, including direct material, direct labor and overhead, as a percentage of net sales declined in the current period, due primarily to lower direct material costs on track component products. Operating income for the nine months ended September 30, 2009 increased to $4.5 million from $3.2 million during the comparable period in 2008, an increase of $1.3 million or 42.5%. This increase is due to higher gross profit of $1.2 million due primarily to lower raw material costs on track component products at our Montreal location and higher gross profit on higher sales volume of friction management products at our Vancouver location. Partially offsetting this increase in operating income are a foreign currency translation of $569,000 that negatively impacted operating income, and higher SG&A expenses of $477,000, due primarily to higher employee salaries and benefit costs, along with higher incentive expense due to higher profitability in the current period.

          Portec Rail Products (UK) Ltd. — “United Kingdom”. In the United Kingdom, we operate and serve our customers in two different markets. The United Kingdom’s rail business includes friction management products and services and track component products such as insulated rail joints and track fasteners. The rail products are primarily sold to the United Kingdom passenger rail network and international customers. The United Kingdom’s material handling business includes product lines such as overhead and floor conveyor systems, expandable boom conveyors, racking systems and mezzanine flooring systems. The end users of our material handling products are primarily United Kingdom-based companies in the manufacturing, distribution, garment and food industries.

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2009				2008				2009				2008
		(In Thousands, Except Translation Rate)
External sales		$	4,925			$	7,445			$	12,707			$	20,008
Intersegment sales			1				—				1				—
Operating income			517				872				508				2,059
Average translation rate of British pound sterling to United States dollar			1.6355				1.8937				1.5504				1.9454
Sales by product line (1)
Friction management products and services		$	2,728			$	3,448			$	6,852			$	8,709
Material handling products			1,001				2,715				3,132				7,060
Track component products			1,197				1,282				2,724				4,239
Total product and service sales		$	4,926			$	7,445			$	12,708			$	20,008

          For the three months ended September 30, 2009, external sales at our United Kingdom operations decreased by $2.5 million or 33.8%, to $4.9 million from $7.4 million during the comparable period in 2008. The decrease in net sales of $2.5 million at our United Kingdom operations reflects a sales volume decline of $1.7 million, comprised mostly of our material handling products. Our United Kingdom net sales also reflect foreign currency translation in the amount of $777,000 that negatively impacted net sales. Cost of goods sold, including direct material, direct labor and overhead, as a percentage of net sales in the current period was consistent with the prior period. Operating income for the three months ended September 30, 2009 decreased to $517,000 from $872,000 during the comparable period in 2008, a decrease of $355,000. This decrease is largely due to lower gross profit on lower sales volume, primarily material handling products, partially offset by lower SG&A expenses of $180,000 due primarily to lower professional fees, business travel expenses, and lower employee salaries, mostly due to a lower overall employee headcount. Operating income in the current period also reflects a foreign currency translation of $77,000 that negatively impacted operating income.

          For the nine months ended September 30, 2009, external sales at our United Kingdom operations decreased $7.3 million or 36.5%, to $12.7 million from $20.0 million during the comparable period in 2008. The decrease in net sales of $7.3 million is a combination of $4.1 million in lower sales volume, primarily material handling products, and foreign currency translation in the amount of $3.2 million that negatively impacted net sales. Cost of goods sold, including direct material, direct labor and overhead, as a percentage of net sales in the current period was consistent with the prior period. Operating income for the nine months ended September 30, 2009 decreased to $508,000 from $2.1 million during the comparable period in 2008, a decrease of $1.6 million or 75.3%. This decrease is primarily due to lower gross profit on lower sales volume, primarily material handling products, partially offset by a decrease of $167,000 in SG&A expenses, primarily related to lower employee salaries, due to a lower overall employee headcount, and lower incentive plan expense due to lower profitability. Operating income in the current period also reflects a foreign currency translation of $109,000 that negatively impacted operating income.

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 $10.8 million at September 30, 2009. In addition to cash generated from operations, we have revolving and overdraft credit facilities in place to support the working capital needs of each of our business segments. We believe that our cash flow from operations and the ability to borrow additional cash under our working capital facilities along with our existing cash balances will be sufficient to meet our cash flow requirements and growth objectives over the next twelve months.

          Cash Flow Analysis. During the nine months ended September 30, 2009, we generated $9.1 million in cash from operating activities compared to generating $4.7 million in cash from operating activities during the same period in 2008. Cash generated from operations is due to net income of $5.4 million in the current period, compared to $6.3 million during the same period of 2008, a decrease of $902,000. Cash provided by operations during the nine months ended September 30, 2009 includes $3.8 million from lower inventory balances, primarily due to efforts to reduce inventory levels and $672,000 resulting from lower accounts receivable balances due primarily to lower sales volume. Cash used by operations during the nine months ended September 30, 2009 includes $1.4 million in lower accounts payable balances, primarily due to lower overall purchasing activity and the timing of payments to vendors. Cash used by operations during the nine months ended September 30, 2009 includes $1.2 million from lower accrued expenses, primarily due to lower company-wide incentive plan accruals, lower customer deposits at Salient Systems and our United Kingdom operations, primarily related to material handling. Cash used by operations for the nine months ended September 30, 2009 also reflects defined benefit pension plan contributions of $176,000 and an increase in prepaid expenses and other current assets of $685,000, due primarily to the timing of prepaid insurance premiums at RMP and our United Kingdom operations and refundable goods and services taxes paid at our Montreal location.

          Net cash used in investing activities was $814,000 for the nine months ended September 30, 2009, compared to cash used in investing activities of $2.4 million during the same period in 2008. Cash used in investing activities in the current period is primarily due to capital expenditures of $718,000. 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 $3.7 million for the nine months ended September 30, 2009, compared to $116,000 of cash used in financing activities during the comparable period in 2008. Cash used for financing activities in 2009 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 2009 includes $800,000 of net borrowings on working capital facilities and $300,000 of additional borrowings on a term loan.

Financial Condition

          At September 30, 2009, total assets were $102.4 million, an increase of $5.6 million or 5.8%, from $96.8 million at December 31, 2008. The increase at September 30, 2009 is primarily due to an increase in cash and cash equivalents of $5.4 million. Also contributing to the increase in total assets are higher goodwill and net intangible assets of $1.7 million, which is primarily due to higher foreign currency translation rates of the Canadian dollar and the British pound sterling in relation to the United States dollar as of September, 30, 2009 compared to the December 31, 2008 exchange rate. Offsetting these increases are lower inventory balances of $2.4 million, which is a result of efforts to reduce inventory levels.

          Total outstanding debt obligations were $11.0 million at September 30, 2009, a decrease of $1.6 million or 12.7% from $12.6 million at December 31, 2008. The decrease primarily reflects short-term borrowings which increased by $766,000 during the current period, primarily due to higher borrowings from working capital facilities. During the nine months ended September 30, 2009, long-term debt obligations decreased by $2.4 million, which includes principal payments of $2.5 million, partially offset by additional borrowings of $300,000 on a term loan.

          The products that we manufacture and sell, such as our rail joints, rail anchors and rail spikes, require steel as a major element in the production process. Worldwide steel prices have been volatile in the last few years, which resulted in surcharges at times being added to raw material costs, and other 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 in 2008 and 2009, 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. If a prolonged increase in steel prices should continue and we are unable to pass on these added costs to our customers, our future earnings could be negatively impacted.

Discussion of Critical Accounting Policies

          Our discussion and analysis of our financial condition and results of operations is based upon our audited and unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We review the accounting policies we use in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. We evaluate the appropriateness of these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

          Revenue Recognition. Revenue from product sales is recognized at the time products are delivered and title has passed or when service is performed. Delivery is determined by our shipping terms, which are primarily FOB shipping point. Shipments are made only under a valid contract or purchase order where the sales price is fixed or determinable and collectability of the resulting receivable is reasonably assured. Revenue is recognized net of returns, discounts and other allowances.

          Revenue from installation of material handling equipment and railway wayside data collection and data management systems is generally recognized by applying percentages of completion for each contract to the total estimated profits for the respective contracts. The length of each contract varies, but is typically about two to five months. The percentages of completion are determined by relating the actual costs of work performed to date, to the current estimated total costs of the respective contracts. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, repairs and depreciation costs.

          When the estimate on a contract indicates a loss, the entire loss is immediately recorded in the accounting period that the loss is determined. The cumulative effect of revisions in estimates of total costs or revenue during the course of the work is reflected in the accounting period in which the facts that caused the revision first become known.

          Allowances for Doubtful Accounts. We maintain a reserve to absorb potential losses relating to bad debts arising from uncollectible accounts receivable. The allowance for doubtful accounts is maintained at a level that we consider adequate to absorb potential bad debts inherent in the accounts receivable balance and is based on ongoing assessments and evaluations of the collectability, historical loss experience of accounts receivable and the financial status of customers with accounts receivable balances. Bad debts are charged and recoveries are credited to the reserve when incurred.

          We believe the accounting estimate related to the allowance for doubtful accounts is a “critical accounting estimate” because we have a significant concentration of accounts receivable in the rail industry. 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 Topic 350, Intangibles, Goodwill and Other. FASB ASC 350 requires that goodwill be tested for impairment using a two-step process. The first step is to identify a potential impairment and the second step measures the amount of an impairment loss, if any. Goodwill is deemed to be impaired if the carrying amount of a reporting unit’s goodwill exceeds its estimated fair value. The fair values of our reporting units are determined using a discounted cash flow analysis based upon historical and projected financial information. The intangible assets of Salient Systems are tested following the same process. The estimates of future cash flows, discount rates, and long-term growth rates, based on reasonable and supportable assumptions and projections, require our judgment. Factors that could change the result of our goodwill and intangible asset impairment test include, but are not limited to, different assumptions used to forecast future revenue, expenses, capital expenditures and working capital requirements used in our cash flow models. In addition, selection of a risk adjusted discount rate on the estimated undiscounted cash flow is susceptible to future changes in market conditions and when unfavorable, can adversely affect our original estimates of fair values. As such, to account for the uncertainty inherent in our estimates and future projections, we perform sensitivity analyses to determine our margin of error. Since adoption of FASB ASC 350, we have not recognized any impairment of goodwill or other intangible assets.

          Our amortizable intangible assets are evaluated for impairment in accordance with FASB ASC 360, Accounting for Impairment or Disposal of Long-Lived Assets. FASB ASC 360 requires amortizable intangible assets to be tested for impairment when events or circumstances indicate that the carrying value of the asset may not be recoverable. Furthermore, FASB ASC 360 presents six factors that should be considered in conjunction with a company’s intangible assets as the presence of any one of these factors might indicate that the asset is impaired. Since the adoption of FASB ASC 360, we have not recognized any impairment of intangible assets.

          In conjunction with the acquisitions of Coronet Rail and the assets of Vulcan, we recorded the fair value of the acquired tangible and intangible assets in accordance with FASB ASC 350. 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.

          As a result of the Vulcan asset acquisition, we assigned fair values of $2.2 million to customer relationships, $890,000 to a unique customer relationship, $342,000 to vehicle restraint assembly technology (G-Van patent), $47,000 to a supply agreement and $5,000 to non-compete agreements. We also determined that there was $830,000 of goodwill to be recorded as part of this transaction. The goodwill balance increased to $1.3 million at September 30, 2009 from $1.1 million at September 30 2008, primarily due to an accrued earn-out based upon sales volume, which is recorded as an increase of the total purchase price. During the three and nine months ended September 30, 2009, total earn-out payments of $60,000 and $165,000, respectively, were paid to the former owners of Vulcan. During the three and nine months ended September 30, 2008, total earn out payments of $97,000 and $195,000, respectively, were paid to the former owners of Vulcan. In addition, we have estimated that the customer relationships, a unique customer relationship, vehicle restraint assembly technology, supply agreement, and non-compete agreements have definite lives of 19 years, 17 years, 11 years, 3 years and 7 years, respectively, due to our estimates that the projected economic earnings associated with these intangible assets will begin to lapse after these time frames. We will monitor these assets to determine if certain events occur that could cause the lives assigned to these intangible assets to become shorter than originally assigned. We would then assign a shorter future estimated life based on the years that we feel that the product would have value in the marketplace and record an impairment charge in the proper accounting period.

          The current economic environment has significantly and adversely affected our customer with whom we have a unique customer relationship and in which an intangible asset is based. Our customer recently emerged from Chapter 11 bankruptcy and has made several organizational changes. Our sales volume with this customer has been negatively affected by the lower demand globally for new automobiles. During the third quarter 2009, we reviewed our intangible assets and tested the unique customer relationship and vehicle restraint assembly technology (G-Van patent) for impairment as of June 30, 2009. We also continue to monitor the sales, gross margins and operating cash flows associated with these intangible assets, along with reviewing the business forecasts and expected demand for

these products. Based upon our review and testing, we have determined that there is no impairment with any of these intangible assets as of June 30, 2009 or September 30, 2009.

          As a result of the Coronet Rail acquisition, we assigned a fair value of $3.3 million (£1.9 million pounds sterling) to customer relationships, $188,000 (£108,000 pounds sterling) to non-compete agreements, and $34,000 (£19,000 pounds sterling) to a supply agreement. We also determined that there was $1.9 million (£1.1 million pounds sterling) of goodwill to be recorded as part of this transaction. In addition, we have estimated that the customer relationships, non-compete agreements, and supply agreement have definite lives of 20 years, 5 years, and 10 years, respectively, due to our estimates that projected economic earnings associated with these intangible assets will begin to lapse after these time frames. We will monitor these intangible assets to determine if certain events occur that could cause the lives assigned to these intangible assets to become shorter than originally assigned. We would then assign a shorter estimated life based on the years that we feel that the product would have value in the marketplace and then record an impairment charge in the proper accounting period.

          Warranty Reserves. Most of our products are covered by a replacement warranty. We establish warranty reserves for expected warranty claims based upon our historical experience, or for known warranty issues and their estimable replacement costs. We feel our estimates are appropriate to cover any known warranty issues. However, any changes in estimates may have an impact on our results of operations.

          Retirement Benefit Plans. We maintain defined benefit pension plans that cover a significant number of our active employees, former employees and retirees. We account for these plans as required under FASB ASC Topic 715, Compensation—Retirement Benefits. The liabilities and expenses for pensions require significant judgments and estimates. These amounts are determined using actuarial methodologies and incorporate significant assumptions, including the rate used to discount the future estimated liability, inflation, the long-term rate of return on plan assets and mortality tables. Management has mitigated the future liability for active employees by freezing all defined benefit pension plans effective December 31, 2003. The rate used to discount future estimated liabilities is determined based upon a hypothetical double A yield curve represented by a series of annualized individual discount rates from one-half to thirty years. Our inflation assumption is based on an evaluation of external market indicators. The long-term rate of return is estimated by considering historical returns and expected returns on current and projected asset allocations. The effects of actual results that differ from these assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligations in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our obligations and future expense.

          As interest rates decline, the actuarially calculated retirement benefit plan liability increases. Conversely, as interest rates increase, the actuarially calculated retirement benefit plan liability decreases. Past declines in interest rates and equity markets have had a negative impact on the retirement benefit plan liability and fair value of our plan assets. As a result, the accumulated benefit obligation exceeded the fair value of plan assets at December 31, 2008. Our liability at December 31, 2008 is more than the liability at December 31, 2007, which resulted in a $1.8 million, 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 and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet. We must then assess the likelihood that deferred tax assets will be recovered from future taxable income and to the extent that we believe that recovery is not likely, a valuation allowance is established. If a valuation allowance is established in a period, an expense is recorded. The valuation allowance is based on our experience and current economic situation. We believe that operations will provide taxable income levels to recover the deferred tax assets.

          As of January 1, 2007, we adopted FASB ASC Topic 740, Income Taxes, which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of uncertain tax positions to be taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The determination of the amount of benefits to be recognized and the sustainability of our tax positions upon examination require us to make certain estimates and to use our best judgment based upon historical experience.

ITEM 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, 2009, 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 $110,000.

     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, 2009, for every 1/100 change in the exchange rate of the Canadian dollar to the U.S. dollar, our Canadian operation’s operating income would have changed by $16,000 and $49,000, 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, 2009 would have been $3,000 for both periods. 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 Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report on Form 10-Q (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. There has been no change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     We are involved from time to time in lawsuits that arise in the normal course of business. We actively and vigorously defend all lawsuits. We have been named with numerous other defendants in an environmental lawsuit. The plaintiff seeks to recover costs which it has incurred, and may continue to incur, to investigate and remediate its former property as required by the New York State Department of Environmental Conservation (NYSDEC). We have not been named as a liable party by the NYSDEC and we believe we have no liability to the plaintiff in the case. We filed a motion for summary judgment seeking a ruling to have us dismissed from the case. In November 2003, the motion for summary judgment was granted and we were dismissed from the case by the United States District Court for the Northern District of New York. In March 2004, the plaintiff filed a notice of appeal to the United States Court of Appeals for the Second Circuit, appealing, in part, the District Court’s decision to dismiss all claims against us. In April 2005, the plaintiff’s appeal was dismissed by the Second Circuit Court without prejudice, and the matter was remanded to the United States District Court for the Northern District of New York for consideration in light of a then-recent United States Supreme Court decision. As a result, in June 2006, the District Court dismissed all claims brought by the plaintiff pursuant to the

Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund). In July 2006, the plaintiff filed a notice of appeal to the Second Circuit. However, in early 2008, the plaintiff’s appeal was dismissed again by the Second Circuit Court without prejudice, and the matter was remanded to the District Court for consideration in light of a recent United States Supreme Court decision. In July 2008, The District Court decided that the United States Supreme Court decision did not necessitate any changes in the District Court’s prior determinations in this case and held that all of its prior rulings stand. In August 2008, the plaintiff filed a third notice of appeal to the Second Circuit Court. The briefing process has been completed and the case has been argued. We are awaiting the Second Circuit’s decision. Ongoing litigation may be protracted, and we may incur additional ongoing legal expenses, which are not estimable at this time.

     In August 2009, Portec Rail Products, Inc. and Kelsan Technologies Corp. were named as defendants in a civil lawsuit by Snyder Equipment Co. Inc. alleging breach of contract and other claims related to a non-disclosure agreement. The plaintiff filed the complaint with the United States District Court for the Western District of Missouri Southern Division and seeks to recover compensatory and punitive damages on four counts. Management believes the claims in the lawsuit are without merit and intends to vigorously defend against the claims. Ongoing litigation may be protracted, and we may incur additional ongoing legal expenses, which are not able to be estimated at this time.

ITEM 1A. RISK FACTORS

     There are no changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     Nothing to report under this item.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     Nothing to report under this item.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Nothing to report under this item.

ITEM 5. OTHER INFORMATION

     Nothing to report under this item.

ITEM 6. EXHIBITS

(a)

Exhibits filed as part of this Form 10-Q:

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

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.

EXHIBIT INDEX

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