UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (412) 782-6000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, $1.00 par value		The NASDAQ Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO þ

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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 Act). YES o NO þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on June 30, 2009, as reported by the NASDAQ Global Market, was $64.5 million.

As of February 28, 2010, there were issued and outstanding 9,602,029 shares of the Registrant’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE:

     (1) Proxy Statement for the 2010 Annual Meeting of Shareholders of the Registrant (Part III).

     (2) Annual Report to Shareholders (Part II and IV).

 

 

PORTEC RAIL PRODUCTS, INC.

INDEX TO FORM 10-K

Item
Number				Page Number
—		Cautionary Statement Relevant to Forward-Looking Statements			3
PART I
1.		Business			4
1A.		Risk Factors			14
1B.		Unresolved Staff Comments			17
2.		Properties			18
3.		Legal Proceedings			19
4.		Submission of Matters to a Vote of Security Holders			21
PART II
5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			21
6.		Selected Financial Data			23
7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
7A.		Quantitative and Qualitative Disclosures About Market Risk			37
8.		Financial Statements and Supplementary Data			38
9.		Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			83
9A.		Controls and Procedures			83
9B.		Other Information			83
PART III
10.		Directors and Executive Officers of the Registrant			83
11.		Executive Compensation			83
12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			84
13.		Certain Relationships and Related Transactions			84
14.		Principal Accountant Fees and Services			84
PART IV
15.		Exhibits, Financial Statement Schedules			85
Signatures					87
EX-21
EX-23.1
EX-23.2
EX-31.1
EX-31.2
EX-32

Cautionary Statement Relevant to Forward-looking Statements

     This Form 10-K contains or incorporates by reference forward-looking statements relating to the Company. These statements may be found throughout this Form 10-K, particularly under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” among others. Forward-looking statements typically are identified by the use of terms, such as “may,” “will,” “plan,” “should,” “expect,” “anticipate,” “believe,” “if,” “estimate,” “intend,” and similar words, although some forward-looking statements are expressed differently. You should consider statements that contain these and similar words carefully because they describe our expectations, plans, strategies, goals and beliefs concerning future business conditions, our results of operations, our financial position, and our business outlook, or state other “forward-looking” information based on currently available information. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors. We undertake no obligation to update publicly or revise any forward-looking statements. You should not place undue reliance on the forward-looking statements.

     The Company identifies below important factors that could affect the 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:

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the length and severity of the current worldwide recession;

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customer demand;

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competitive dynamics in the North American and worldwide railroad and railway supply industries;

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capital expenditures and maintenance spending by the railway industry in North America and worldwide;

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economic conditions, including changes in inflation rates or interest rates;

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climate change, including the risks and opportunities in laws and regulations, development of new technologies, legal and political trends, as well as scientific developments

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product development and the success of new products;

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our ability to successfully pursue, consummate and integrate attractive acquisition opportunities;

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changes in laws and regulations;

•

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.

PART I

ITEM 1. BUSINESS

Overview

     Portec Rail Products, Inc. (sometimes herein referred to as “we,” the Company,” or “Portec Rail Products”) was incorporated in West Virginia in 1997, in conjunction with the purchase of rail-related assets and select material handling assets of Portec, Inc. We along with our predecessor, Portec, Inc., have served the railroad industry since 1906 by manufacturing, supplying and distributing a broad range of rail products, including rail joints, rail anchors, rail spikes, railway friction management products and systems, railway wayside data collection and data management systems and freight car securement systems. We also manufacture material handling equipment for industries outside the rail transportation sector at our United Kingdom operation. We serve both the domestic and international markets.

     We operate through four global business segments consisting of Railway Maintenance Products Division (“RMP”), Shipping Systems Division (“SSD”), Portec Rail Nova Scotia Company (“Canada”) and Portec Rail Products (UK) Ltd. (“United Kingdom”). The presentation of segment information reflects the manner in which we organize and manage our segments by geographic areas for making operating decisions, assessing performance and allocating resources. Sales and operating income by segment are presented in Management’s Discussion and Analysis set forth in Item 7 in this annual report on Form 10-K and Note 11: on page 68 “Segments, Geographic and Major Customer Financial Information” of our consolidated financial statements set forth in Item 8 in this annual report on Form 10-K.

     Our corporate headquarters is located at 900 Old Freeport Road, Pittsburgh, Pennsylvania 15238. Our telephone number is (412) 782-6000.

Recent Developments

     On February 16, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with L.B. Foster Company, a Pennsylvania corporation (“Foster”), and Foster Thomas Company, a West Virginia corporation and a wholly-owned subsidiary of Foster (“Purchaser”). Pursuant to the Merger Agreement, Purchaser will conduct a tender offer to purchase all of the outstanding shares of common stock of Portec (the “Shares”) at a price of $11.71 per Share (the “Offer”), net to the seller in cash (without interest and subject to applicable withholding taxes). Subsequent to the tender offer, Portec will be merged with Purchaser, with Portec as the surviving corporation, with Portec surviving as a wholly-owned subsidiary of Foster (the “Merger”). Consummation of the Offer by Purchaser is subject to certain conditions, including (1) the condition that the number of Shares that have been validly tendered and not withdrawn, together with the number of Shares then owned by Foster or any of its subsidiaries represents at least 65% of the total number of outstanding Shares, on a fully diluted basis (the “Minimum Condition”), (2) the expiration or termination of applicable waiting periods under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976 and (3) and other required regulatory approvals and customary closing conditions.

     On February 24, 2010, the United States Court of Appeals for the Second Circuit issued its decision, reversing the order of the United States District Court for the Northern District of New York, which dismissed Portec Rail Products, Inc., from certain litigation that related to the Niagara Mohawk Power Corporation v. Chevron U.S.A, Inc., et al. stating that there were genuine issues of material fact. In addition, the Second Circuit reinstated the plaintiff’s claims under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), stating that the plaintiff is entitled to bring a claim for contribution under Section 113(f)(3)(B) of CERCLA. Ongoing litigation may be protracted, and we may incur additional ongoing legal expenses, which are not estimable at this time. Should we ultimately be held liable, damages may be assessed by the Court in accordance with CERCLA.

     On February 19, 2010, and through March 3, 2010, a total of five lawsuits initiated by purported shareholders of Portec Rail have been filed against several named defendants. These lawsuits are directly related to the Agreement and Plan of Merger with L.B. Foster Company and Foster Thomas Company. We are currently

working with legal counsel to prepare our response to, and defense against these claims. Following is a summary of these lawsuits:

Date
Filed		Court		Plaintiff		Defendants
2/19/2010		Circuit Court of Kanawha County, West Virginia		Barbara Petkus, individually and on behalf of all others similarly situated.		Portec Rail Products, Inc., Richard J. Jarosinski, Marshall T. Reynolds, John S. Cooper, Louis J. Akers, Philip E. Cline, Daniel P. Harrington, A. Michael Perry, Douglas V. Reynolds, Neal W. Scaggs, Philip Todd Shell, Kirby J. Taylor, and Thomas W. Wright
2/24/2010		Court of Common Pleas, Allegheny County, Pennsylvania		Everett Harper, on behalf of himself and others similarly situated.		Marshall T. Reynolds, John S. Cooper, Louis J. Akers, Philip E. Cline, Daniel P. Harrington, A. Michael Perry, Douglas V. Reynolds, Neal W. Scaggs, Philip Todd Shell, Kirby J. Taylor, Thomas W. Wright, Portec Rail Products, Inc., L.B. Foster Company and Foster Thomas Company
2/24/2010		Court of Common Pleas, Allegheny County, Pennsylvania		Richard S. Gesoff		Marshall T. Reynolds, John S. Cooper, Louis J. Akers, Philip E. Cline, Daniel P. Harrington, A. Michael Perry, Douglas V. Reynolds, Neal W. Scaggs, Philip Todd Shell, Kirby J. Taylor, Thomas W. Wright, Portec Rail Products, Inc., L.B. Foster Company and Foster Thomas Company
3/02/2010		Court of Common Pleas, Allegheny County, Pennsylvania		Scott Phillips, individually and on behalf of all others similarly situated.		L.B. Foster Company, Marshall T. Reynolds, John S. Cooper, Louis J. Akers, Philip E. Cline, Daniel P. Harrington, A. Michael Perry, Douglas V. Reynolds, Neal W. Scaggs, Philip Todd Shell, Kirby J. Taylor, Thomas W. Wright, Portec Rail Products, Inc., and Foster Thomas Company
3/03/2010		Circuit Court of Kanawha County, West Virginia		John Furman, individually and on behalf of all others similarly situated.		Marshall T. Reynolds, John S. Cooper, Louis J. Akers, Philip E. Cline, Daniel P. Harrington, A. Michael Perry, Douglas V. Reynolds, Neal W. Scaggs, Philip Todd Shell, Kirby J. Taylor, Thomas W. Wright, Portec Rail Products, Inc., L.B. Foster Company and Foster Thomas Company

     The lawsuits allege, among other things, that Portec Rail’s directors breached their fiduciary duties and L.B. Foster and Purchaser aided and abetted such alleged breaches of fiduciary duties. Based on these allegations, the lawsuits seek, among other relief, injunctive relief enjoining the defendants from consummating the Offer and the Merger. They also purport to seek recovery of the costs of the action, including reasonable legal fees. Ongoing litigation may be protracted, and we may incur additional ongoing legal expenses, which are not able to be estimated at this time.

Railway Maintenance Products Division — “RMP”

     RMP, our largest business segment, provides track component and friction management products and services to railroads, transit systems and railroad contractors from our manufacturing and assembly plant located in Huntington, West Virginia. Our wholly-owned subsidiary, Salient Systems, Inc. (Salient Systems), provides our railroad customers with railway wayside detection and operating asset data management systems from its engineering and assembly operation in Dublin, Ohio. Approximately 90% to 95% of our sales from this business segment are to our United States and Canadian customers while approximately 5% to 10% of our sales from this

segment are to other customers. RMP’s administrative functions such as customer service, engineering, purchasing and accounting are preformed in Pittsburgh, Pennsylvania in the same office location as our corporate headquarters.

     Track Component Products. We sell a variety of products used on new or existing rail for repair. The primary customers for these products are Class I railroads, regional railroads, local railroads, railroad contractors and transit systems. These products include standard and insulated rail joints, gauge plates, and curve blocks.

     RMP is a major supplier of rail joints in the North American market. Rail joints are high strength steel bars, designed to join rails together while maintaining rail strength and continuity. Many joints are designed to be insulated from the rail to facilitate the railway signal system. Low voltage current is transmitted through the rail and segments of the track are electrically isolated through the use of insulated rail joints. We furnish our customers epoxy-bonded insulated joints, polyurethane-encapsulated insulated joints and epoxy fiberglass (non-steel) insulated joints.

     As railroads have increased axle loads, train speeds and utilization of main lines, the demands placed upon the rail joint also have increased. To meet these demands, we have expanded and improved our product line of standard joints, bonded insulated joints, polyurethane-encapsulated insulated joints and fiberglass epoxy insulated joints. Continued technological advancements in metallurgy and adhesives in addition to engineering tools such as computer aided design analysis and advanced product testing processes enable us to provide a higher level of product performance.

     Friction Management Products and Services. As the North American market leader, our friction management products and services control the coefficient-of-friction at the rail/wheel interface thus improving train-operating efficiency, reducing track stresses and lowering related maintenance costs for our customers. Friction management includes gauge face lubrication with rail curve greases and top-of-rail applications with friction modifiers such as our KELTRACK® Trackside. A friction modifier is designed to maintain friction levels that help provide for efficient train control and dynamics. Lubricants and friction modifiers can be applied by a fixed station at the side of the track (wayside application), by a specifically equipped truck as it moves along the rails (hi-rail application), or by units mounted on a locomotive, a special rail car inside the train, or transit system car (on-board application). The dominant technology of applying lubricants or friction modifiers to the rail is a wayside assembly of a tank housing a pump which feeds special distribution bars fastened to the rail. As railroads increase axle loads and utilization of main lines, friction management becomes increasingly more important. RMP designs, manufactures and sells the equipment for our friction management applications, and acts as a distributor for various other lubricants used in gauge face lubrication applications. RMP also has exclusive distributor rights for utilizing a mobile rail-mounted tribometer for use in monitoring friction levels of rail.

     Our most advanced wayside friction management system is the Protector® IV application system which we began producing and selling in August 2000. The Protector® IV is suitable for transit and freight railroad solutions. It reduces rail wear, lateral forces and noise, and is in service in North America, South America, Europe and Asia. The Protector® IV is the most complete wayside system developed to function in the wide array of operating conditions found in these markets.

     We believe we offer our customers the widest choice of railway friction management products and services for most applications and have a dominant share of the North American market for railway friction management products.

     Wayside Data Collection and Data Management Systems. Salient Systems designs, manufactures and provides wayside measurement and detection products, services and support for both the domestic and the international railway transportation industry. Salient Systems’ products are engineered to enhance our rail customers’ equipment utilization by improving reliability and reducing maintenance expense.

     Salient Systems’ three major product lines fall under its comprehensive set of solutions for the global railroad market as its IntelliTrack® technologies.

Wayside Data Collection Systems. The wayside data collection systems focus on the health of rolling stock:

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Wheel Impact Load Detector — continually monitors locomotive and rail car wheel health by measuring and reporting the impact loads from moving trains allowing for the targeted removal of defective wheels from service.

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Hunting Truck Detector — Provides alarms for excessive lateral forces caused by hunting trucks before they significantly contribute to the rapid wear of rail and rail cars.

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Truck Performance Detector — Provides alarms for rail cars whose suspension systems are not tracking properly along curved track due to worn or defective undercarriages.

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Automatic Vehicle Overload & Imbalance Detector — Provides alarms for overloaded or imbalanced rail cars at track speeds with an additional high speed weigh-in-motion capability.

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Low Hose Detector — Provides alarms for low or dragging coupling hoses on rail cars by means of an optical sensing approach to minimize false alarms common to mechanically-based systems.

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Railstress Monitor — Provides rail-neutral temperature and rail stress readings in order to allow proper management of rail laying and maintenance procedures.

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StressNet® — A strategic network of proprietary Railstress Monitors installed along the rail that routinely measure and record a region’s longitudinal stress and temperature history. The data can then be uploaded for analysis and reporting by the StressNet® Data Management System.

     Database Management Systems. Salient Systems also markets two database management systems that provide extensive trend analysis to proactively identify potential safety problems and optimize maintenance planning:

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Wheel Data Management System — Presents fleet performance and actionable maintenance information in a customer readable form.

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StressNet® Data Management System — Provides long-term trend analysis of shifts in neutral rail temperature to reveal track regions increasingly at risk of rail buckling or pull-aparts.

     Rail Friction Management Systems. The rail industry recognizes the benefits of proper system-wide lubrication and the effects of poor or improper lubrication on fuel consumption, rail wear and noise. Salient Systems’ product line includes a tribometer product to assist in rail friction management that we will utilize as part of our approach of providing a total solution to a customer’s friction management problems:

•

Portable Tribometer — An effective, user-friendly method to spot-check the coefficient of friction of rail/wheel interfaces and validate the quality of rail lubrication methods.

Shipping Systems Division — “SSD”

        Our SSD business segment engineers and sells load securement systems to the railroad industry. These systems secure a wide variety of products and lading onto freight cars. Our customers include railroads, railcar builders, railcar repair shops and railcar lessors. We believe that we possess a significant share of the North American railroad load securement systems market. Most of the assembly work for SSD is performed at RMP’s Huntington, West Virginia manufacturing plant, although some manufacturing is subcontracted to independent third parties. SSD is headquartered near Chicago, in Oak Brook, Illinois.

     In October 2006, we acquired the railroad product line assets of Vulcan Chain Corporation (Vulcan), a Detroit, Michigan manufacturer of load securement products for the railroad industry. Since the acquisition date, the Vulcan assets and results of operations have been included in the SSC business segment and the consolidated financial statements.

     SSD continues to work closely with railcar owners and shippers to promote its patented WinChock^TM securement system for transporting heavy-duty highway truck tractors. SSD has also developed and successfully passed the Association of American Railroads’ (AAR) established criteria for a new higher-capacity bridge plate.

Portec Rail Nova Scotia Company, our wholly-owned Canadian subsidiary — “Canada”

     In conjunction with the acquisition of Kelsan Technologies Corp. in November 2004, we established a new Canadian subsidiary, Portec Rail Nova Scotia Company, and transferred ownership of Portec, Rail Products Ltd. to Portec Rail Nova Scotia Company. This subsidiary was initially established to provide a legal structure for our Canadian entities that would provide the most advantageous tax benefits under both Canadian and United States income tax laws. In 2007, the United States Internal Revenue Service (IRS) enacted new regulations that had a potentially adverse impact on our previous favorable tax position, and resulted in a restructuring of the debt obligations of the Portec Rail Nova Scotia entity in December 2008. We evaluated the tax structure of our Canadian business segment and implemented a plan that we believe will preserve the tax benefits under this new debt structure. As a result, during 2009 we recognized intercompany foreign exchange gains which we do not expect to continue in future years due to the repayment of an outstanding debt obligation as of December 31, 2009.

     Our Canadian operations produce rail anchors and rail spikes at our manufacturing plant in St. Jean, Quebec, primarily for the Canadian railroads, with some products exported to the United States and for other international customers. Rail anchors and rail spikes are devices used to secure rails to wooden ties to restrain the movement of the rail. We also design, manufacture, and sell friction management products from our facility in Pointe-Claire, Quebec, a suburb of Montreal.

     Our Kelsan Technologies operation is headquartered in Vancouver, British Columbia. Kelsan is an innovative developer of friction control solutions, which control friction at the wheel/rail interface in order to reduce costs and improve performance. Used by transit and freight rail companies around the world, Kelsan’s patented friction control solutions extend rail and wheel life, improve fuel efficiency, reduce green house gas emissions, and also reduce noise, lateral forces, and short pitch corrugations. Kelsan markets the environmentally friendly technology to customers in both liquid and solid sticks through a variety of delivery systems.

     For its liquid products Kelsan manufactures KELTRACK®, which is a patented water-based liquid friction modifier. KELTRACK® is applied using a Portec Rail Products Protector® IV Top-Of-Rail application system, or through a variety of other application methods for hi-rail or on-board systems. When applied, KELTRACK® leaves a dry thin film on the top of the rail surface. The thin film is then transferred to the vehicles from the top of the rail and provides friction control between the wheel/rail interface. KELTRACK® is manufactured in different formulas matched to a variety of applications in both freight and transit systems.

     For its solid stick products, Kelsan manufactures a spring-applied solid lubricant stick made of unique ingredients that when applied to a rail wheel flange or tread, help improve the lubrication and traction qualities of the rail/wheel interface.

     There are two major Canadian transcontinental railroads, the Canadian Pacific Railway and the Canadian National Railway, that we serve from our Canadian operations, and a number of regional railroads. Kelsan also has an established network of agents and distributors throughout the world, in particular Europe, Asia and Australia, to supplement its sales team. This network is now used to aggressively promote our friction management equipment into these key markets, while realizing continuing ongoing sales of the friction modifier solutions being pumped onto the rails through our equipment.

Portec Rail Products (UK) Ltd., our wholly-owned United Kingdom subsidiary — “United Kingdom”

     In the United Kingdom, we operate and serve our customers in two different markets. Our Portec Rail Group in Sheffield, England serves our United Kingdom and European customers. Product lines include friction management products and services and track component products similar to those of our North American divisions. We design and manufacture a complete line of rail joints including the Coronet epoxy (glue) insulated rail joints, a Coronet nylon-encapsulated insulated joint, and also distribute a complete line of track fasteners to the United Kingdom railways as well as to international customers. The Portec Rail Group in Sheffield also designs and sells friction management products for the United Kingdom and European markets and distributes KELTRACK® trackside friction modifiers and Protector® IV application systems.

     In the material handling market, we operate and serve our customers from our location in Leicester, England, under the trade name of Conveyors International (CI Logistics). Our material handling operation designs, manufactures and sells various products, such as overhead and floor conveyors, expandable boom conveyors, racking systems and mezzanine flooring systems. Our material handling systems are designed to provide our customers with a total solution to moving products throughout their factory, offloading their products from trucks and moving their goods in other types of applications. Our Quodeck product line is a line of racking systems, mezzanine floor systems and turnkey equipment mainly used in the garment distribution industry.

     As a result of a business restructuring which began in 2006, we closed our Stone, England and Wrexham, Wales locations in the United Kingdom, and sold our Wrexham facility for approximately $2.0 million (£1,025,000 pounds sterling) in March 2007. The business restructuring was finalized in the first quarter 2007.

Alliances

     We have created alliances with independent strategic partners within our industry to broaden the scope of the existing friction management products and services that we provide to our customers. In 2000, we formed an informal alliance of technology companies to enhance friction management solutions for the wheel/rail interface; however, since 2000, some of the original members such as Kelsan Technologies and Salient Systems have become wholly-owned subsidiaries of our company. Except for these wholly-owned subsidiaries and two other independent members, there are no formal written agreements among all the other members of the alliance. Under the Friction Force^® registered trademark brand of products and services, the alliance strengthens our market position in lubrication and friction management and enables us to deliver improved solutions with enhanced value to our customers. For one independent alliance member, we have a written agreement that names us as the exclusive North American distributor for the SoyTrak™ Rail Curve Lubricant, a biodegradable, environmentally-friendly soy-based lubricant developed and manufactured by Environmental Lubricants Manufacturing, Inc. For the other independent alliance member, we have a written exclusive distributorship for DMF (Diversified Metal Fabricators) to market and use a mobile rail-mounted tribometer which measures rail friction in order to help manage our friction management application methods. These alliances evolve as market opportunities arise, as well as to effectively serve our customers.

Industry Overview

     We provide products and services primarily for the railway industry, which includes freight railroads and transit systems. However, the demand for our products could be impacted by the continuing fluctuation in energy costs, global climate changes, and economic conditions. We service the railway industry, which is dependent on the rising and falling costs of energy. Rail traffic, car loadings, new freight-car builds, capital expenditures and maintenance spending are factors that impact the demand for our products and services. The global railway industry is a capital intensive industry, and our sales may be impacted by the industry’s capital expenditures and maintenance spending for programs designed to increase the efficiency and productivity of rail operations and for routine maintenance of rail operations. Deregulation and consolidation in the railroad industry, market competition between railroads and trucking and the impact of the global economy continue to impact the railway industry, including the railway supply market. We believe the railway industry is in a long-term growth trend despite the current global economic crisis.

     The Surface Transportation Board, the federal agency responsible for the economic regulation of the railroad industry, designates United States freight railroads into three classes based upon their operating revenues. “Class I” railroads are defined as those with operating revenue of at least $401.4 million in 2008; “Class II” railroads had between $32.1 million and $401.4 million of operating revenue in 2008; “Class III” railroads had less than $32.1 million of operating revenues in 2008.

     The Association of American Railroads (AAR) identifies two groups of non-Class I railroads based upon their revenue and mileage characteristics. “Regional” railroads are defined as line-haul railroads that operate at least 350 miles of road and/or earned revenue between $40 million and the Class I revenue threshold. “Local” railroads include freight railroads, which are not Class I or regional. Local railroads operate less than 350 miles of road and earn less than $40 million of revenue annually.

     Since 1979, consolidation in the North American railroad industry has resulted in 36 Class I railroads being reduced to seven. In particular, several mergers of large U.S. railroads have occurred in the last 20 years. We believe that the improved efficiency and service capability of the larger railroads ultimately tends to boost rail traffic, which is an important driver of the demand for our products.

Business Strategy

     Our business strategy is to (i) increase the market share of our track component products that serve as the foundation for our railway business; (ii) advance the technology and expand the friction management products and services along with our wayside detection and data operating management systems that we offer to railroads and transit system companies in North America while expanding our geographic footprint globally, with a primary focus on Europe, South America and Asia; (iii) increase our offering of products and services to assist businesses in loading, securing and transporting materials on railcars; (iv) increase the sales and profitability of our material handling products; and (v) continue to seek accretive acquisition opportunities that can assist in growing our business by complementing or expanding our existing products and services.

Sales and Marketing

     Each of our business units initiates their individual sales programs, which vary due to the different product lines and geographic locations. Our marketing efforts include promoting our business through trade show presentations, industry research/application papers, trade magazine advertising, a worldwide sales distribution network and through our website. In addition, our managers and engineers participate in various industry conferences and industry professional organizations to interface with customer engineers and end users of our products. The business units also use an in-house sales department to sell replacement parts and field service and a combination of employee sales personnel, third party sales representatives and distributors to call on customer purchasing managers, engineers and operations managers. Internationally, we also utilize a network of agents across Europe, South America and Asia and our internal sales employees to reach current customers and cultivate potential customers in these areas.

Sources and Availability of Raw Materials and Supplies

     The products we manufacture and sell require a supply of raw materials, including steel and steel fabrications and numerous specialty components, such as pumps, distribution bars and electronic controls. There are at least two suppliers for most components. Inventory levels are continually monitored to ensure adequate supplies are available to meet our production requirements. Periodically, advance purchases are made to avoid possible shortages of material due to capacity limitations of component suppliers and possible price increases. We rely on established relationships with major suppliers to ensure the availability of raw materials and specialty items rather than long term supply contracts. However, when raw material prices are volatile we will consider the use of multi-year supply agreements. Our goal is to maintain good relationships with our suppliers and we have not experienced any significant interruptions in recent years in the supply of raw materials or specialty components.

     The fluctuating costs of our raw materials and supplies could negatively impact our profits. As the volatility of the markets continues to change, so does the pricing of our raw materials and supplies. We may not have the ability to incorporate these price changes into the marketing of our products due to contract constraints and competitive pricing pressures. Accordingly, this may limit our ability to maintain existing margins, and may also have a material effect on our operating profits.

     Although there are a large number of domestic and foreign suppliers of steel and steel fabricators, our RMP segment relies upon three primary steel suppliers for a substantial amount of its joint bar steel, but also has two other domestic steel suppliers. The steel that we purchase is priced via combination of prevailing market prices and previously negotiated customer prices. RMP has utilized steel suppliers in China for some of its domestic steel requirements. This provides an additional steel source as we continue to monitor the prices and availability from our domestic steel suppliers. Our Montreal operation obtains the bulk of its steel supply for rail spikes and rail anchors from three steel suppliers. There is an informal agreement with one of these suppliers and we purchase steel at prevailing market prices. Our Kelsan operation has one year remaining on a three-year supply agreement with a supplier of its primary raw material. This agreement provides fixed pricing and monthly minimum and maximum purchase quantities.

Principal Customers

     Our business depends largely upon sales to United States, Canadian and United Kingdom railroads and transit systems. For year ended December 31, 2009 sales to our two largest customers, Canadian National Railway and Norfolk Southern Corporation, accounted for 12% and 11% of our consolidated sales. For the year ended December 31, 2008, sales to our two largest customers, Canadian Pacific Railway and Canadian National Railway were 15% and 7% of our consolidated sales. For additional information on our principal customers, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business Segment Review.”

Backlog

     Our backlog is based on customer purchase orders that we believe are firm. Customer orders, however, may be subject to cancellation and other customary industry terms and conditions. Historically, little variation has been experienced between the number of products ordered and the number of products actually sold. A significant portion of our sales have very short lead terms of 30 to 60 days that may not be recorded on any quarter or year end backlog summary. The backlog is not necessarily indicative of future results of operations. The railroad industry, in general, has historically been subject to fluctuations due to overall economic conditions.

     The following table sets forth the dollar amount of backlog for our business segments at the dates indicated.

		At December 31,
		2009				2008				2007
		(In thousands)
RMP		$	5,688			$	6,665			$	8,911
SSD			674				780				1,190
Canada			3,687				3,800				1,755
United Kingdom			2,192				2,861				4,510
Total backlog			12,241				14,106				16,366
Less: Intra-company backlog			736				1,135				323
Net external backlog		$	11,505			$	12,971			$	16,043

Seasonality of Business

     The demand for some of our products is subject to seasonal fluctuations. Our railroad product lines normally experience strong sales during the second and third quarters as a result of seasonal pick-up in construction and trackwork due to favorable weather conditions. In contrast, our railroad product lines experience normal downturns in sales during the first and fourth quarters due in part to reductions in construction and trackwork during the winter months, particularly in the northern United States and Canada. This reduction in sales generally has a negative impact on our first and fourth quarter results. Notwithstanding seasonal trends, quarterly fluctuations in railroad spending for capital programs and routine maintenance can alter the expected seasonal impact on our business.

Patents and Trademarks

     We own a number of United States, Canadian and international patents and trademarks including those acquired with the purchase of Salient Systems, Kelsan and the Vulcan Chain railroad product line. We have several patents on our friction management products, such as the Protector® IV application system, along with a significant number of patents related to our friction modifier product lines at Kelsan, which we believe are of material importance to the business as a whole. We believe that, in the aggregate, our patents and trademarks give us a competitive advantage. We also rely on a combination of trade secrets and other intellectual property laws, non-disclosure agreements and other protective measures to establish and protect our proprietary rights in intellectual property.

Research and Development

     Our research and development programs focus on improving the effectiveness of our existing products and innovating new products and technologies for our customers. During the years ended December 31, 2009, 2008 and 2007, we spent approximately $2.8 million, $3.0 million and $2.4 million, respectively, on research and development programs.

     A large portion of our research and development efforts have been devoted to developing friction management products, particularly the Protector® IV electronic lubricator, as well as the associated distribution bars for both gauge face lubrication and top-of-rail friction modifiers. In addition to the wayside Protector® IV system, we have committed resources to various application methods of our friction modifiers. We will continue to dedicate resources to commercialize the Salient Systems’ Railstress Monitor, and to fund technological advancements of Kelsan’s stick lubrication and liquid friction modifier product lines. Development efforts also continue on niche items for our track component group, as heavier axle loads and higher speeds continue to require more reliability and longer life of some products in this product group.

Competition

     Competition on some of our product lines has been strong. We feel that the diversity of our product lines and product offerings strengthens our competitive position and provides better products and services to our customers.

     For our track component product lines, price competition is strong mostly due to the fact that this product group is recognized as a commodity group. However, opportunities to obtain better pricing for a portion of this product group reflects specialized designs being developed due to heavier axle loads, higher rail traffic volumes and higher train speeds causing the need for longer lasting and overall better performing products. Competition comes primarily from various long time suppliers. Foreign suppliers continue to attempt to enter the larger North American market for some products, but with higher transportation costs, higher material costs worldwide and potentially difficult testing and approval requirements, foreign competition has not been a significant threat in 2009 for most of this product group.

     For our friction management and wayside detection systems, our highly engineered products offer opportunities for competing on a value-added basis. Price is a factor, but it can be less significant when this product group sells on the merits of total value provided to the customer. Product performance, technological leadership, quality, reliability of delivery and strong customer service and support are all valued by our customers and are all significant factors when evaluating the price of our products. We believe we have significant market share positions with both of these product groups, but the need is always there to use our research and development efforts to penetrate new market segments. Competitors in these product groups have not changed over the last year. We believe that our competitors remain committed to enter our markets. Consequently, we continue to attempt to provide the best value for our customers by supplying a quality product at the most affordable price. Intellectual property rights also continue to be used to maintain our market share in North America and in growing our penetration levels into new markets.

     For our load securement systems, we have an established position in the marketplace. The acquisition of the Vulcan Chain product line in October 2006 eliminated a significant competitor. The integration of this product line into our Huntington, West Virginia manufacturing facility has positioned us to capitalize on improved cost efficiencies.

     For our material handling group, which is located in Leicester, England, the competitive environment has not changed significantly. This is a project-type product group that is bid against a variety of competitors depending on the type of project. To compete and be successful, we must sustain a competent technical workforce and strive for the lowest cost of production.

Environmental Matters

     We are subject to foreign, national, state, provincial, and local environmental laws and regulations concerning, among other matters, air emissions, wastewater discharge, solid and hazardous waste disposal, and employee health and safety. We believe that our current operations are in compliance with all applicable environmental laws and regulations. See “Legal Proceedings” for information relating to a proceeding in which we are involved regarding environmental matters.

Regulation

     In the course of our operations we furnish products and services which are required to meet industry specifications. The American Railway Engineering and Maintenance of Way Association (AREMA) publishes standards and recommended practices applicable to our track component product line. Our customers use the AREMA standards and from time to time include their own specifications for the products and services that they purchase. The Association of American Railroads (AAR) promulgates a wide variety of rules and regulations governing the safety and design of equipment. Our securement system designs require AAR approval as well as our customer’s approval and often the approval of the shipper. In the United Kingdom, our products must gain approval and meet the specifications of Network Rail, the national United Kingdom rail infrastructure system.

     We maintain quality assurance programs at all of our locations. With two exceptions, all of our locations are all certified under ISO 9001:2000.

Employees

     We employed 262 people at December 31, 2009, of which 122 were located in the United States, 88 were located in Canada, and 52 were located in the United Kingdom. We consider the relationship with our employees to be good. Our employees in the United States, the United Kingdom and our Canadian employees in Vancouver, British Columbia are not subject to any collective bargaining agreement. Approximately 11% of our employees, all of whom are employed at our manufacturing facility in St. Jean, Quebec, Canada, are subject to a collective bargaining agreement. This agreement is effective through August 31, 2010.

Available Information

     Availability of Reports. Portec Rail Products, Inc. is a reporting company under the Securities Exchange Act of 1934, as amended (the “1934 Act”), and files reports, proxy statements and other information with the Securities and Exchange Commission (the “Commission”). The public may read and copy any Company filings at the Commission’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. Because the Company makes filings to the Commission electronically, you may access this information at the Commission’s internet site: www.sec.gov. This site contains reports, proxies and information statements and other information regarding issuers that file electronically with the Commission.

     Web Site Access. Our internet web site address is www.portecrail.com. We make available, free of charge at this web site, access to annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the 1934 Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Commission. Access to reports of beneficial ownership filed pursuant to Section 16(a) of the 1934 Act are also available on our web site.

ITEM 1A. RISK FACTORS

Risk Factors Relating to Our Business

Currency fluctuations between the U.S. dollar, Canadian dollar and British pound sterling can adversely affect our reported financial results.

     The majority of our products and services are sold in the United States, Canada and the United Kingdom. Fluctuations in the relative values of the United States dollar, Canadian dollar and British pound sterling could significantly increase the cost of our products to the ultimate purchaser. Under such circumstances our sales may decrease or we may have to reduce the prices for our products and services, thereby reducing our income.

     We report our financial condition and results of operations in United States dollars. Fluctuations in the relative values of the United States dollar, Canadian dollar and British pound sterling will require adjustments in our reported earnings and operations to reflect exchange rate translation in our Canadian and United Kingdom sales and operations. Our reported financial results will be impacted in response to such currency fluctuations. If the United States dollar strengthens in value as compared to the value of the Canadian dollar or British pound sterling, our reported earnings in dollars from sales in those currencies will be unfavorable. Conversely, we will have a favorable result if the United States dollar weakens in value as compared to the value of the Canadian dollar or British pound sterling.

     We do not have any control over exchange rates, as these are largely driven by worldwide economic factors. Beginning in approximately the fourth quarter 2008, the exchange rates of the Canadian dollar and British pound sterling compared to the United States dollar have been volatile. During 2009, the exchange rate of the British pound sterling compared to the United States dollar has remained somewhat lower from a recent historical perspective.

New legislation or regulatory changes could impact the Company’s earnings or restrict its ability to independently negotiate prices.

     Political changes could result in legislative or regulatory changes that impose new burdens on the Company and its customers, increase operating costs, reduce operating efficiency or limit revenues. Legislation passed by Congress or new regulations issued by federal agencies could potentially have a significant impact on the revenues, costs and profitability of the business of the Company’s railroad customers resulting in a potential adverse impact on our business. The railroad industry is vulnerable to economic re-regulation by Congress, which could have a significant negative impact on rail services and would likely force a reduction in capital spending by the Company’s primary customers. For example, statutes imposing price or labor constraints or affecting rail-to-rail competition could adversely affect the profitability of railroads which in turn may reduce their expenditures. Also, additional regulations related to environmental matters such as greenhouse gas emissions, and climate changes legislation could increase operating costs or reduce operating efficiencies of railroads thereby affecting the business of our customers and reducing the income we receive from the railroad industry.

We have limited international protection of our intellectual property.

     We own a number of patents and trademarks under the intellectual property laws of the United States, Canada and the United Kingdom. Our patent protections begin expiring in 2014. However, we have not perfected patent and trademark protection of our proprietary intellectual property in other countries. The failure to obtain patent and trademark protection in other countries may result in other companies copying and marketing products that are based upon our proprietary intellectual property. This could impede our growth into new markets where we do not have such protections and result in greater supplies of similar products, which in turn could result in a loss of pricing power and reduced revenue.

Disruption of our relationships with key suppliers would adversely affect our business.

     We rely upon third party steel mills to manufacture steel for our track component products based upon specifications that we provide. In 2009, approximately 90% of our domestic requirements for steel were purchased from three primary suppliers, and approximately 97% of our Canadian requirements were purchased from two primary Canadian suppliers. In the event our steel suppliers for railroad track products were to go out of business, refuse to continue their business relationship with us or become subject to work stoppages, our business could be disrupted. While management believes that it could secure alternative manufacturing sources, there can be no assurance that we would not incur substantial delays and significant expense in securing such alternative suppliers. Furthermore, alternative suppliers might charge significantly higher prices than we currently pay. Under such circumstances, the disruption to our business may have a material adverse impact on our financial condition or results of operations.

If we lose key personnel or qualified technical staff, our ability to manage the day-to-day aspects of our business will be adversely affected.

     We believe that the attraction and retention of qualified personnel is critical to our success. If we lose key personnel or are unable to recruit qualified personnel, our ability to manage the day-to-day aspects of our business will be adversely affected. Our operations and prospects depend in large part on the performance of our senior management team, which includes Richard J. Jarosinski, our President and Chief Executive Officer, Konstantinos Papazoglou, our Executive Vice President and Chief Operating Officer, and John N. Pesarsick, our Chief Financial Officer. The loss of the services of one or all members of our senior management team could have a material adverse effect on our business, financial condition or results of operations. Because our senior management team has many years experience with our company and within the industries in which we operate, it would be difficult to replace them without adversely affecting our business operations. We do not have employment or non-compete agreements with any members of our senior management team.

As we expand our sales of products and services internationally, we will increase our exposure to international economic and political risks.

     Historically, substantially all of our business has been conducted in the United States, Canada and the United Kingdom. International revenues outside of our core United States, Canada and United Kingdom markets accounted for 15% and 12% of our revenues for the years ended December 31, 2009 and 2008, respectively. We are placing increased emphasis on the expansion of our international sales opportunities. Doing business outside the United States subjects us to various risks, including changing economic, climate and political conditions, work stoppages, exchange controls, currency fluctuations, armed conflicts and unexpected changes in United States and foreign laws relating to tariffs, trade restrictions, transportation regulations, foreign investments and taxation. Increasing sales to foreign countries will expose us to increased risk of loss from foreign currency fluctuations and exchange controls as well as longer accounts receivable payment cycles. We have no control over most of these risks and may be unable to anticipate changes in international economic and political conditions and, therefore, unable to alter our business practices in time to avoid the adverse effect of any of these possible changes.

We have significant pension liabilities, which may significantly increase our funding requirements under ERISA and other applicable regulations.

     We maintain defined benefit pension plans in the United States and United Kingdom that cover a significant number of our current employees, former employees and retirees. These defined benefit pension plans were frozen effective December 31, 2003. Our actuaries currently project that our obligations to the pension plans’ beneficiaries exceed plan assets. The shortfall in plan assets may cause us to fund significant amounts of cash into these plans to cover any minimum funding requirements under regulatory requirements. As a result, in 2010, we will be required to make minimum contributions to our U.S. defined benefit plan of approximately $400,000, and to our United Kingdom defined benefit plans of $168,000 (£104,000 pounds sterling).

     Our retirement benefit plan liability is inversely impacted by the interest rate used in our actuary’s calculation. As a result, when interest rates decline, our actuarially calculated benefit plan liability increases. Conversely, as interest rates increase, the actuarially calculated retirement benefit plan liability decreases. In 2009, lower interest rates resulted in an increase in our actuarially calculated retirement benefit plan liability at December

31, 2009, which lowered our shareholders’ equity by $340,000. In 2008 interest rates decreased which caused higher actuarially calculated benefit plan liability and the retirement benefit plan liability exceeding the fair value of plan assets. At December 31, 2008, our shareholders’ equity was decreased by $1,839,000 in order to reflect an increase in our minimum pension liability. Further declines in the market value of these defined benefit pension plan assets will have an adverse impact on our shareholder’s equity and uses of cash for other investment opportunities.

We may be required to record a significant charge to earnings if our goodwill or intangible assets become impaired.

     We are required under generally accepted accounting principles to review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered to be a change in circumstances indicating that the carrying value of our intangible assets may not be recoverable include a decline in stock price and market capitalization, a significant decrease in the market value of an asset, and slower growth rates in our industry. We may be required to record a significant charge to earnings during the period in which any impairment of our goodwill or intangible assets is determined. This may adversely impact our results of operations or financial condition.

We are subject to physical and financial risks associated with climate change.

     There is a growing concern that emissions of greenhouse gases are linked to global climate change. Climate change creates physical and financial risk. Physical risks from climate change could include an increase in sea level and changes in weather conditions, such as an increase in changes in precipitation and extreme weather events. The Company’s operations are not sensitive to potential future sea-level rise as it does not operate in coastal areas. However, the Company’s manufacturing facilities and office locations are vulnerable to damage from extreme weather events, such as ice and heavy snow storms, tornadoes and severe thunderstorms. To the extent the frequency of extreme weather events increases, this could increase the Company’s cost of providing the products and services we provide. If climate change results in temperature increases the Company could expect increased electricity demand due to the increase in temperature and longer warm seasons which this increase in demand could lead to increased energy consumption and higher operating costs, which may negatively impact our results of operations.

Risk Factors Relating to Our Industry

General economic conditions could negatively impact demand for our products and services.

     The current economic environment has impacted demand for rail and rail commodities. Further decline in general domestic and global economic conditions could further affect demand for our products, which in turn could reduce our revenues, increase bad debt expense, significantly reduce our cash flow, or have other adverse effects. Continued weakness of the economy or further downturns could adversely affect our Company’s operating results.

Our sales can fluctuate from quarter to quarter due to seasonal factors or our railroad customers’ capital expenditure or routine maintenance spending programs.

     Our sales can fluctuate from quarter to quarter because of several factors. First, the demand for certain of our railroad product lines, including rail joints, rail anchors and spikes, is subject to seasonal fluctuations. We generally experience strong sales in the second and third quarters as a result of seasonal pick-up in construction and trackwork due to favorable weather conditions, compared with an expected downturn in the first and fourth quarter of each year due largely to reductions in construction and trackwork in the winter months. Notwithstanding expected seasonal fluctuations, many of our customers are large companies which, as a matter of routine purchasing practices, place large orders for our products and services that can have a disproportionate impact on our revenues in a particular quarter. Such large orders in any given quarter improve the sales performance of that quarter. Conversely, if a major customer delays spending in a particular quarter, our revenue decreases in that quarter.

A decrease in rail traffic or rail capital expenditures due to weakness in the general economy or competitive factors could adversely affect our operating results.

     Weakness in the general economy, or factors such as work stoppage or competition from other modes of transportation, can cause a decrease in rail transportation or rail capital expenditures, which could have an adverse impact on our financial condition or results of operations. For example, railroads directly compete with the trucking industry for the transportation of freight. In the event that the transportation of freight by truck becomes preferable as a result of pricing, legislative developments or other factors, the profitability of railroads would be adversely affected, resulting in a decrease in capital spending or routine maintenance spending. A decrease in capital spending or routine maintenance spending by our railroad customers could result in lower sales of our products and decreased revenue.

Competition and innovation by our competitors may adversely affect our business.

     The markets for our products are highly competitive. Competition is based on price, product performance, technological leadership, customer service and other factors. Technological innovation in the railroad and railroad supply industry has evolved and continues to evolve. Technological innovation by any of our existing competitors, or new competitors entering any of the markets in which we do business, could put us at a competitive disadvantage. In particular, our business would be adversely affected if any existing or new competitors developed improved or less expensive products.

New or existing competitors may import track component products for sale in the North American market at reduced prices.

     Our rail joint, rail anchor, rail spike and other track component market share could be reduced by new or existing competitors importing either raw material steel for these products or finished products from lower cost foreign sources. Standard rail joints are currently available, imported from Asia, and have been approved for use and are being purchased by some Class I and short line railroads.

Further consolidation of the railroad industry may adversely affect our business.

     Over the past 10 years there has been a consolidation of railroad carriers operating in North America. Currently, seven Class I railroads operate in North America, which includes two major railroads in Canada. Future consolidation of the railroad industry may affect our sales and result in reduced income because the loss of a Class I account to competitors would have a greater impact on our operations.

Risk Factors Relating to Our Stock Ownership

Potential voting control by directors, management and employees could make a takeover attempt more difficult to achieve.

     Our directors, management and employees control a significant percentage of our common stock. Executive officers and directors as a group own 2.9 million shares, or 30% of the outstanding shares as of December 31, 2009. If these individuals were to act together, they could have significant influence over or control the outcome of any shareholder vote. This voting power may discourage takeover attempts that other shareholders may desire.

ITEM 1B. UNRESOLVED STAFF COMMENTS

     None.

ITEM 2. PROPERTIES

     We conduct our business through our corporate and business unit offices, and through our manufacturing facilities. Our offices and manufacturing facilities are suitable and adequate to meet our current and future production requirements. The following table sets forth information about our offices and manufacturing facilities as of December 31, 2009.

Corporate Office		Owned or Leased
900 Old Freeport Road Pittsburgh, Pennsylvania 15238		Leased
Business Unit Offices
Railway Maintenance Products Division 900 Old Freeport Road Pittsburgh, Pennsylvania 15238		Leased
Salient Systems, Inc. 4393-K Tuller Road Dublin, Ohio 43017 (1)		Leased
Shipping Systems Division 120 West 22nd Street Oak Brook, Illinois 60523		Leased
Portec, Rail Products Ltd. 172 Brunswick Blvd. Pointe-Claire, Québec, H9R 5P9 Canada (1)		Leased
Manufacturing Facilities
Portec Rail Products, Inc. 900 Ninth Avenue West Huntington, West Virginia 25701		Leased
Portec, Rail Products Ltd. 350 Boulevard Industriel Saint-Jean-sur-Richelieu, Québec, J3B 4S6 Canada		Owned
Kelsan Technologies Corp. 1140 West 15th Street North Vancouver, B.C. V7P 1M9 Canada (1)		Leased
Portec Rail Products (UK) Ltd. 43 Wenlock Way Troon Industrial Area Leicester LE4 9HU United Kingdom (1)		Leased
Coronet Rail, Ltd. Portec Rail Products (UK) Ltd. Stamford Street Sheffield S9 2TL United Kingdom (1)		Leased

ITEM 3. LEGAL PROCEEDINGS

     We are involved periodically in various claims and lawsuits that arise in connection with our business. Other than as set forth below, these are routine legal proceedings that, in the aggregate, are not material to our financial condition and results of operations.

     In July 1999, Portec, Inc., the predecessor of Portec Rail Products, was named as a defendant in Niagara Mohawk Power Corporation v. Chevron, et al. venued in the United States District Court, Northern District of New York. The plaintiff, Niagara Mohawk Power Corporation (“Niagara Mohawk”) is seeking contribution from nine named defendants for costs it has incurred, and is expected to incur, in connection with the environmental remediation of property located in Troy, New York under the Comprehensive Environmental Response, Compensation and Liability Act, also known as “CERCLA” or “Superfund,” and other causes of action. The basis of the action stems from Niagara Mohawk’s agreement with the New York State Department of Environmental Conservation, pursuant to an Order on Consent, to environmentally remediate property identified as the Troy Water Street Site. The defendants consist of companies that at the time were industrial in nature, or owners of companies industrial in nature, and who owned or operated their businesses on portions of the Troy Water Street site or on properties contiguous, or otherwise in close proximity, to the Troy Water Street Site. Niagara Mohawk alleges that the defendants either released hazardous materials directly to the Troy Water Street site or released hazardous materials that migrated onto the Troy Water Street Site, and therefore the defendants should be responsible for a portion of the costs of remediation.

     The plaintiff seeks to recover costs, which it has incurred, and may continue to incur, to investigate and remediate its former property as required by the New York State Department of Environmental Conservation (NYSDEC). We have not been named as a liable party by the NYSDEC and we believe we have no liability to the plaintiff in the case. We filed a motion for summary judgment seeking a ruling to have us dismissed from the case. In November 2003, the motion for summary judgment was granted and we were dismissed from the case by the United States District Court for the Northern District of New York. In March 2004, the plaintiff filed a notice of appeal to the United States Court of Appeals for the Second Circuit, appealing, in part, the District 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 recent United States Supreme Court decision. As a result, in June 2006, the District Court dismissed all claims brought by the plaintiff pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund). In July 2006, the plaintiff filed a notice of appeal to the Second Circuit. However, in early 2008, the plaintiff’s appeal was dismissed again by the Second Circuit Court without prejudice, and the matter was remanded to the District Court for consideration in light of another recent United States Supreme Court decision. In July 2008, The District Count decided that the United States Supreme Court decision did not necessitate any change in the District Court’s prior determinations in this case and held that all of its prior rulings stand. In August 2008, the plaintiff filed a third notice of appeal to the Second Circuit Court. On February 24, 2010, the Second Circuit issued its decision, reversing the order of the District Court which dismissed Portec Rail from the litigation, stating that there were genuine issues of material fact. In addition, the Second Circuit reinstated the plaintiff’s CERCLA claims, stating that the plaintiff is entitled to bring a claim for contribution under Section 113(f)(3)(B) of CERCLA. Ongoing litigation may be protracted, and we may incur additional ongoing legal expenses, which are not estimable at this time. Should we ultimately be held liable, damages may be assessed by the Court in accordance with CERCLA.

     We believe that Niagara Mohawk’s case against Portec, Inc. is without merit. Because Niagara Mohawk is seeking unspecified monetary contribution from the defendants, we are unable to determine, if Niagara Mohawk were to prevail on appeal, the extent to which we would have to make a contribution, or whether such contribution would have a material adverse effect on our financial condition or results of operations. However, total clean up costs at the Troy Water Street site are expected to be substantial and may approach $50 million. If liability for a portion of these costs is attributed to us, such liability could be material. Furthermore, if Niagara Mohawk wins on appeal, ongoing litigation may be protracted and legal expenses may be material to our results of operations.

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

     On February 19, 2010, and through March 3, 2010, a total of five lawsuits initiated by purported shareholders of Portec Rail have been filed against several named defendants. These lawsuits are directly related to the Agreement and Plan of Merger with L.B. Foster Company and Foster Thomas Company. We are currently working with legal counsel to prepare our response to, and defense against these claims. Following is a summary of these lawsuits:

Date
Filed		Court		Plaintiff		Defendants
2/19/2010		Circuit Court of Kanawha County, West Virginia		Barbara Petkus, individually and on behalf of all others similarly situated.		Portec Rail Products, Inc., Richard J. Jarosinski, Marshall T. Reynolds, John S. Cooper, Louis J. Akers, Philip E. Cline, Daniel P. Harrington, A. Michael Perry, Douglas V. Reynolds, Neal W. Scaggs, Philip Todd Shell, Kirby J. Taylor, and Thomas W. Wright
2/24/2010		Court of Common Pleas, Allegheny County, Pennsylvania		Everett Harper, on behalf of himself and others similarly situated.		Marshall T. Reynolds, John S. Cooper, Louis J. Akers, Philip E. Cline, Daniel P. Harrington, A. Michael Perry, Douglas V. Reynolds, Neal W. Scaggs, Philip Todd Shell, Kirby J. Taylor, Thomas W. Wright, Portec Rail Products, Inc., L.B. Foster Company and Foster Thomas Company
2/24/2010		Court of Common Pleas, Allegheny County, Pennsylvania		Richard S. Gesoff		Marshall T. Reynolds, John S. Cooper, Louis J. Akers, Philip E. Cline, Daniel P. Harrington, A. Michael Perry, Douglas V. Reynolds, Neal W. Scaggs, Philip Todd Shell, Kirby J. Taylor, Thomas W. Wright, Portec Rail Products, Inc., L.B. Foster Company and Foster Thomas Company
3/02/2010		Court of Common Pleas, Allegheny County, Pennsylvania		Scott Phillips, individually and on behalf of all others similarly situated.		L.B. Foster Company, Marshall T. Reynolds, John S. Cooper, Louis J. Akers, Philip E. Cline, Daniel P. Harrington, A. Michael Perry, Douglas V. Reynolds, Neal W. Scaggs, Philip Todd Shell, Kirby J. Taylor, Thomas W. Wright, Portec Rail Products, Inc., and Foster Thomas Company
3/03/2010		Circuit Court of Kanawha County, West Virginia		John Furman, individually and on behalf of all others similarly situated.		Marshall T. Reynolds, John S. Cooper, Louis J. Akers, Philip E. Cline, Daniel P. Harrington, A. Michael Perry, Douglas V. Reynolds, Neal W. Scaggs, Philip Todd Shell, Kirby J. Taylor, Thomas W. Wright, Portec Rail Products, Inc., L.B. Foster Company and Foster Thomas Company

     The lawsuits allege, among other things, that Portec Rail’s directors breached their fiduciary duties and L.B. Foster and Purchaser aided and abetted such alleged breaches of fiduciary duties. Based on these allegations, the lawsuits seek, among other relief, injunctive relief enjoining the defendants from consummating the Offer and the Merger. They also purport to seek recovery of the costs of the action, including reasonable legal fees. Ongoing litigation may be protracted, and we may incur additional ongoing legal expenses, which are not able to be estimated at this time.

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

     No matters were submitted during the fourth quarter of the year ended December 31, 2009 to a vote of security holders.

PART II

ITEM 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     Portec Rail Products, Inc. common stock is currently listed on the NASDAQ Global Market under the symbol “PRPX.” Trading in the Company’s common stock on the NASDAQ Global Market commenced in January 2004. As of February 28, 2010, there were 9,602,029 shares of Portec Rail Products, Inc. common stock issued and outstanding and approximately 184 shareholders of record, which does not include shares held by shareholders in broker accounts.

     Set forth below is information regarding the payment of dividends and our high and low bid and asked price for each quarter of 2009 and 2008.

Quarter Ended- 2009		High				Low				Dividends
March 31		$	7.75			$	4.65			$	0.06
June 30			10.25				5.91				0.06
September 30			10.71				8.51				0.06
December 31			10.89				8.55				0.06

Quarter Ended- 2008		High				Low				Dividends
March 31		$	11.64			$	8.21			$	0.06
June 30			12.90				10.50				0.06
September 30			12.44				8.25				0.06
December 31			9.09				4.08				0.06

     Under West Virginia law, we may pay dividends and make other capital distributions to our shareholders provided that no distribution may be made if, after giving it effect: (i) we would not be able to pay our debts as they become due in the usual course of business; or (ii) our total assets would be less than the sum of our total liabilities plus the amount that would be needed, if we were to be dissolved at the time of the distribution, or to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those of our common stockholders.

     No securities were repurchased by the Company during the year ended December 31, 2009.

Stock Performance Graph

     The following graph demonstrates a comparison of total cumulative returns for the Company’s common stock, the Dow Jones U.S. Industrial Transportation Index, and the NASDAQ Composite Index. The graph assumes an investment of $100 on January 1, 2005 in the Company’s common stock and in each of the stocks comprising the indices. Each of the indices assumes that all dividends were reinvested and that the investment was maintained to and including December 31, 2009, the end of the Company’s 2009 fiscal year.

				Period Ending
	Index			12/31/04					12/31/05					12/31/06					12/31/07					12/31/08					12/31/09
	Portec Rail Products, Inc.				100.00					128.36					100.25					112.09					75.74					115.39
	NASDAQ Composite				100.00					101.37					111.03					121.92					72.49					104.31
	Dow Jones Transportation Index				100.00					111.66					122.61					124.55					76.91					91.20

Compensation Plans

     Set forth below is information as of December 31, 2009 regarding equity compensation plans that have been approved by shareholders. We have no equity based benefit plans that were not approved by shareholders.

														Number of
		Number of securities												securities
		to be issued upon												remaining
		exercise of				Number of securities								available for
		outstanding options				issued on exercise of				Weighted average				issuance under
Plan		and rights				options and rights				exercise price				plan
Equity compensation plans approved by shareholders			139,000	(1)			250			$	9.69				10,750	(2)
Equity compensation plans not approved by shareholders			-0-				-0-				N/A				-0-
Total			139,000				250			$	9.69				10,750

ITEM 6. SELECTED FINANCIAL DATA

     The following tables set forth selected consolidated historical financial data of Portec Rail Products, Inc. for the periods and at the dates indicated. The information is derived in part from, and should be read together with, the audited consolidated financial statements and notes thereto of Portec Rail Products, Inc.

		For the Year Ended December 31,
		2009				2008				2007				2006				2005
		(Dollars In thousands, except per share data)
Income Statement Data:
Net sales		$	92,221			$	109,017			$	109,503			$	99,225			$	90,793
Cost of sales			60,871				73,445				74,995				68,848				61,235
Gross profit			31,350				35,572				34,508				30,377				29,558
Selling, general and administrative			21,626				22,635				22,781				22,117				19,641
Amortization expense			1,116				1,199				1,241				926				698
Operating income			8,608				11,738				10,486				7,334				9,219
Interest expense			298				805				1,247				1,105				856
Other (income)/expense, net			(191	)			(87	)			246				140				248
Income before income taxes			8,501				11,020				8,993				6,089				8,115
Provision for income tax			1,696				3,241				2,862				1,469				2,288
Net income		$	6,805			$	7,779			$	6,131			$	4,620			$	5,827
Earnings per share:
Basic & Diluted		$	0.71			$	0.81			$	0.64			$	0.48			$	0.61
Cash dividends paid per share		$	0.24			$	0.24			$	0.24			$	0.24			$	0.21
Weighted average shares outstanding:
Basic & Diluted			9,602,029				9,601,928				9,601,779				9,601,779				9,601,779

		At December 31,
		2009				2008				2007				2006				2005
		(In thousands)
Balance Sheet Data:
Working capital(1)		$	29,110			$	23,804			$	24,445			$	24,771			$	25,415
Total assets			102,542				96,823				104,226				101,682				88,869
Short-term debt			8,086				6,500				6,865				5,655				3,847
Long-term debt and capital lease obligations, net of current portion			2,667				6,110				9,463				13,737				10,402
Total shareholders’ equity			65,748				58,176				59,897				53,096				50,448

ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion should be read in conjunction with the consolidated financial statements of Portec Rail Products, Inc. and the related notes beginning on page 38. Unless otherwise specified, any reference to a “year” is to a year ended December 31. Additionally, when used in this Form 10-K, unless the context requires otherwise, the terms “we,” “our” and “us” refer to Portec Rail Products, Inc. and its business segments.

Overview

     In the United States, Canada and the United Kingdom, we are a manufacturer, supplier and distributor of a broad range of rail products, including rail joints, rail anchors, rail spikes, railway friction management products and systems, railway wayside data collection and data management systems and load securement systems. End users of our rail products include Class I railroads, short-line and regional railroads and transit systems. Our North American business segments along with the rail division of our United Kingdom business segment serve these end users. Our United Kingdom business segment also manufactures and supplies material handling products for industries outside the rail transportation sector, primarily to end users within the United Kingdom. These products include overhead and floor conveyor systems, expandable boom conveyors, racking systems and mezzanine flooring systems. The end users of our material handling products are primarily in the manufacturing, distribution, garment and food industries.

Results of Operations

Year Ended December 31, 2009 compared to the Year Ended December 31, 2008

     Net Sales. Net sales for the year ended December 31, 2009 were $92.2 million compared to $109.0 million for the year ended December 31, 2008, a decrease of $16.8 million, or 15.4% from the previous year. Net sales at our United Kingdom segment declined $9.1 million; net sales at our SSD segment were lower by $5.4 million, net sales from our RMP segment declined $2.0 million and net sales from our Canada segment declined $311,000 in 2009. The decrease in sales of $9.1 million at our United Kingdom segment is due to a combination of lower demand for material handling products resulting from economic conditions within the United Kingdom, lower sales of friction management products, and an unfavorable foreign currency translation of $2.9 million that negatively impacted net sales across all major product lines. The decrease of $5.4 million in net sales at our SSD segment is primarily due to weakened demand across most major product lines, in particular the automotive product group, resulting from difficult economic conditions in 2009. The net sales decrease of $2.0 million for our RMP segment is due to lower sales of track components and other products and services, partially offset by higher sales of friction management products. The decline in net sales of $311,000 at our Canada segment is a result of an unfavorable foreign currency translation of $2.2 million that negatively impacted net sales across all major product lines, partially offset by an increase of $1.9 million in higher sales of both Kelsan friction management products and our track component products.

     Cost of Goods Sold. Cost of goods sold (COGS) decreased to $60.9 million for the year ended December 31, 2009, a decrease of $12.6 million or 17.1%, from $73.4 million during the comparable period in 2008, primarily due to lower sales volume. Our COGS as a percentage of net sales for the year ended December 31, 2009 was 66.0%, a decrease of 1.4%, from 67.4% for the prior period in 2008. The components of COGS, including direct material, direct labor and overhead, remained relatively consistent as a percentage of net sales during 2009 compared to 2008. On a period to period basis, our COGS is primarily driven by product mix, as our diverse product groups have different cost components.

     Gross Profit. Our consolidated gross profit decreased to $31.4 million for the year ended December 31, 2009, a decrease of $4.2 million or 11.9%, from $35.6 million for the comparable period in the prior year. This decrease is due to lower gross profit of $3.1 million at our United Kingdom operations, $2.1 million at SSD and $443,000 at RMP, partially offset by higher gross profit at our Canadian operations of $1.4 million. The $3.1 million decrease at our United Kingdom operations is primarily due to an unfavorable foreign currency translation of $2.3 million that negatively impacted gross profit across all major product lines, along with lower gross profit from lower material handling product sales. Gross profit at SSD declined $2.1 million in the current period, primarily due to lower sales volume across all major product lines. Gross profit at RMP declined $443,000 in the current period, primarily due to lower gross profit on lower sales volume of track component products, partially offset by higher gross profit on higher sales of friction management products. The increase in gross profit at our Canadian operations of $1.4 million is a combination of a $2.1 million increase in gross profit on higher sales of both Kelsan friction management and Montreal track component products, partially offset by an unfavorable foreign currency translation of $726,000 that negatively impacted gross profit.

     Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expense decreased to $21.6 million for the year ended December 31, 2009, a decrease of $1.0 million or 4.5% from $22.6 million for the year ended December 31, 2008. This decrease is due to lower SG&A expenses of $1.2 million at our United Kingdom operations and $284,000 at SSD, partially offset by higher SG&A expenses of $301,000 at our Canadian operations and $212,000 in corporate shared services in the current period. The lower SG&A expense of $1.2 million at our United Kingdom operations is primarily due to a favorable foreign currency translation of $734,000 that positively impacted SG&A expense and thus lowered expenses, along with a decrease of $491,000 due to lower employee salaries, benefit costs and incentive expense. SG&A expense for SSD decreased $284,000 in the current period, primarily due to lower employee salaries, benefit costs and incentive expense and business travel expenses in the current period. SG&A expense for our Canadian operations increased $301,000 in the current period due to a combination of $647,000 of higher employee salaries and benefit costs, higher incentive expense due to higher profitability, increased research and development expense due to product development efforts, partially offset by lower business travel expense and lower franchise taxes due to provincial tax law changes. Our Canadian operations’ SG&A expense was also affected by a foreign currency translation in the amount of $346,000 which lowered SG&A expense. The $212,000 increase in SG&A at corporate shared services is primarily due to higher consulting expenses in 2009, and increased actuarial expense related to our domestic defined benefit pension plan.

     Interest Expense. Interest expense decreased to $298,000 for the year ended December 31, 2009, a decrease of $507,000 or 63.0%, from $805,000 for the comparable period in 2008. The decrease is primarily due to lower interest rates on our debt obligations and the reduction of outstanding debt from $12.6 million at December 31, 2008 to $10.8 million at December 31, 2009.

     Provision for Income Taxes. The provision for income taxes decreased to $1.7 million for the year ended December 31, 2009 from $3.2 million for the comparable period in 2008, reflecting a decrease in income before taxes from $11.0 million for the year ended December 31, 2008 to $8.5 million for the year ended December 31, 2009. The effective tax rates on reported taxable income were 19.9% and 29.4% for the years ended December 31, 2009 and 2008, respectively. Tax rates in our foreign jurisdictions range from 30.0% to 35.5%. As such, our consolidated effective tax rate is impacted by our foreign locations pro-rata share of consolidated income before taxes and related tax expense or benefit. Our consolidated effective tax rate also reflects research and development tax credits at our Canadian operations, which reduced income tax expense by $369,000 and $465,000, or 4.3% and 4.2% for the years ended December 31, 2009 and 2008, respectively. Additionally, income tax expense for the year ended December 31, 2009 is lower by approximately $342,000 or 4.0%, due to additional research and development credits for RMP, SSD and our United Kingdom operations that relate to benefits claimed in the current and prior years and extraterritorial income (ETI) provisions for RMP and SSD that relate to benefits from prior years. Of this $342,000, approximately $200,000 or $0.02 per share of income tax benefits were recognized in the fourth quarter 2009.

     Net Income. Net income decreased to $6.8 million for the year ended December 31, 2009, a decrease of $974,000 or 12.5%, from $7.8 million for the comparable period in 2008. Our basic and diluted net income per share decreased to $0.71 for the year ended December 31, 2009, from $0.81 per share for the comparable period in 2008, on average shares outstanding of 9,602,029, and 9,601,928 for the years ended December 31, 2009 and 2008, respectively.

Year Ended December 31, 2008 compared to the Year Ended December 31, 2007

     Net Sales. Net sales for the year ended December 31, 2008 were $109.0 million compared to $109.5 million for the year ended December 31, 2007, a decrease of $486,000 or 0.4% from the previous year. Net sales within our RMP segment were lower by $4.1 million, while net sales at our United Kingdom segment declined $1.7 million in 2008. Partially offsetting these sales declines in the current year were net sales increases of $3.4 million at our Canada segment and $1.9 million at our SSD segment. The decrease in sales of $4.1 million at RMP is primarily due to lower demand for our track components and Salient Systems’ products. The decrease of $1.7 million in net sales at our United Kingdom operations is a combination of unfavorable foreign currency translation of $2.2 million that negatively impacted net sales across all product lines, and lower demand for material handling products of approximately $1.6 million due to a weaker market for these products brought on by economic conditions in the United Kingdom. These decreases were partially offset by an increase in demand for friction management products of approximately $1.7 million, along with an increase in sales of track component products. The increase in sales of $3.4 million at our Canadian operations is primarily due to higher sales of our friction management products due to securing a contract from a large customer for the implementation of a Total Friction Management ™ program. Foreign currency translation of Canadian dollars into U.S. dollars did not have a significant impact on our net sales for the year ended December 31, 2008. The increase in net sales of $1.9 million at SSD is primarily due to increased sales of our automotive products and chain securement systems.

     Gross Profit. Our consolidated gross profit increased to $35.6 million for the year ended December 31, 2008, an increase of $1.1 million or 3.1%, from $34.5 million for the comparable period in the prior year. This increase is due to increases of $2.1 million at our Canadian operations and $383,000 at SSD, partially offset by lower gross profit at our United Kingdom operations of $1.0 million and $414,000 at RMP. The $2.1 million increase at our Canadian operations is due to a favorable product mix, as sales of our friction management products were significantly higher in the current period. Gross profit at our United Kingdom operations declined $1.0 million, reflecting a combination of an unfavorable foreign currency translation of $717,000 that negatively impacted gross profit, lower gross profit on material handling product sales of approximately $690,000, and higher gross profit of $413,000 on sales of friction management products. The decrease of $414,000 in gross profit at RMP is a combination of lower gross profit of $1.3 million on lower sales of Salient Systems’ products due to weaker demand in the current period, higher gross profit of $449,000 contributed by the track component product line due to lower warranty expense associated with defective BTRs in 2008 than in 2007 (See Note 10: Commitments and Contingencies, Page 66), and higher gross profit on sales of friction management products in 2008.

     Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expense decreased to $22.6 million for the year ended December 31, 2008, a decrease of $146,000 or 0.6% from $22.8 million for the year ended December 31, 2007. This decrease is due to lower SG&A expenses of $423,000 at our United Kingdom operations and $373,000 within Corporate shared services in the current period. These decreases were partially offset by higher SG&A expenses of $285,000 at our Canadian operations, $196,000 at RMP and $169,000 at SSD. The lower SG&A expense at our United Kingdom operations is primarily due to a favorable foreign currency translation of $490,000 that positively impacted SG&A expense and thus lowered expenses, partially offset by an increase of $67,000 due to higher professional fees and employee salary and benefit costs. SG&A expense for Corporate shared service decreased $373,000 in the current period, primarily due to lower professional fees, employee salary and benefit costs and depreciation expense, partially offset by higher legal fees, contractual services and research and development expenses. SG&A expense for our Canadian operations increased $285,000 in the current period due to higher employee salary and benefit costs, higher incentive expense due to higher profitability, and higher professional fees, partially offset by lower insurance expense. The $196,000 increase in SG&A at RMP is primarily due to increased professional fees and higher employee salary and benefit costs. The $169,000 increase in SG&A at SSD is primarily due to higher employee salary and benefit costs due to new hires and higher incentive expense due to increased profitability and higher trade show expense in the current period.

     Interest Expense. Interest expense decreased to $805,000 for the year ended December 31, 2008, a decrease of $442,000 or 35.5%, from $1.2 million for the comparable period in 2007. The decrease is primarily due to lower interest rates on our debt obligations and the reduction of outstanding debt from $16.3 million at December 31, 2007 to $12.6 million at December 31, 2008.

     Other (Income)/Expense. Other income of $87,000 for the year ended December 31, 2008, includes foreign currency transaction gains of $206,000, interest income of $68,000 and an insurance policy deductible recovery of $25,000, partially offset by losses on disposals of fixed assets of $236,000. Other expense of $246,000 for the year ended December 31, 2007 includes foreign currency transaction losses of $354,000 and an impairment charge of $50,000 related to the sale of our Troy, NY property in May 2007 (See Note 13: Impairment of Long-Lived Assets, Page 71). These expenses for the year ended December 31, 2007 were partially offset by an insurance policy recovery of $114,000 and rental income of $18,000 on our Troy, NY property prior to its sale in May 2007.

     Provision for Income Taxes. The provision for income taxes increased to $3.2 million for the year ended December 31, 2008 from $2.9 million for the comparable period in 2007, reflecting an increase in income before taxes from $9.0 million for the year ended December 31, 2007 to $11.0 million for the year ended December 31, 2008. The effective tax rates on reported taxable income were 29.4% and 31.8% for the years ended December 31, 2008 and 2007, respectively. Tax rates in our foreign jurisdictions range from 30.0% to 35.5%. As such, our consolidated effective tax rate is impacted by our foreign locations pro-rata share of consolidated income before taxes and related tax expense or benefit. Our consolidated effective tax rate also reflects research and development tax credits at our Canadian operations, which reduced income tax expense by $465,000 and $314,000, or 4.2% and 3.5% for the years ended December 31, 2008 and 2007, respectively. Income tax expense for the year ended December 31, 2007 is higher by approximately $128,000 or 1.4%, due to the income tax on the gain recorded in the United Kingdom on the sale in March 2007 of our Wrexham, Wales, United Kingdom facility. In conjunction with this transaction, the gain reported in the United Kingdom was effectively eliminated in the U.S. by the write-off of the remaining step-up basis, which originated in connection with the purchase of the Company in 1997.

     Net Income. Net income increased to $7.8 million for the year ended December 31, 2008, an increase of $1.6 million or 26.8%, from $6.1 million for the comparable period in 2007. Our basic and diluted net income per share increased to $0.81 for the year ended December 31, 2008, from $0.64 per share for the comparable period in 2007, on average shares outstanding of 9,601,928, and 9,601,779 for the years ended December 31, 2008 and 2007, respectively.

Business Segment Review

     Our operations are organized into four business segments consisting of the Railway Maintenance Products Division (RMP), the Shipping Systems Division (SSD), Portec Rail Nova Scotia Company (Canada) and Portec Rail Products (UK) Ltd. (United Kingdom), along with corporate shared services. The presentation of segment information reflects the manner in which we organize and manage our segments by geographic areas for making operating decisions, assessing performance and allocating resources. Intersegment sales do not have an impact on our consolidated financial condition or results of operations. Coronet Rail’s results of operations and its assets and liabilities have been included in the United Kingdom segment and the consolidated financial statements since the date of the acquisition. Assets acquired from Vulcan Chain are included in the Shipping Systems business segment and our consolidated financial statements since the acquisition date.

     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. RMP’s largest customers are Class I railroads in North America. For the years ended December 31, 2009, 2008 and 2007, RMP’s consolidated external sales to its two largest customers represented 38%, 28% and 32%, respectively.

		Year Ended December 31,
		2009				2008				2007
						(In thousands)
External sales		$	44,247			$	46,268			$	50,327
Intersegment sales			1,669				2,969				1,993
Operating income			5,998				6,447				7,071
Sales by product line (1)
Track component products		$	19,849			$	24,175			$	28,063
Friction management products and services			17,687				15,720				14,977
Wayside data collection and data management systems			5,087				5,170				6,685
Other products and services			3,293				4,172				2,595
Total product and service sales		$	45,916			$	49,237			$	52,320

     For the year ended December 31, 2009, external sales for RMP decreased by $2.0 million or 4.4%, to $44.2 million from $46.3 million during the comparable period in 2008. The decrease in external sales is primarily due to lower sales of track components and other products and services, partially offset by higher sales of friction management products. Freight railway traffic volumes in North America were lower in 2009 compared to 2008 by approximately an average of 20%, which directly impacted demand for our track component products. Cost of goods sold, including direct material, direct labor and overhead, as a percentage of net external sales for RMP remained consistent between 2008 and 2009. Operating income for the year ended December 31, 2009 decreased to $6.0 million from $6.4 million for the comparable period in 2008, a decrease of $449,000 or 7.0%. The decrease in operating income is primarily due to lower gross profit on lower sales of track components and other products and services, partially offset by higher gross profit on higher sales of friction management products.

     For the year ended December 31, 2008, external sales for RMP decreased by $4.1 million or 8.1%, to $46.3 million from $50.3 million during the comparable period in 2007. The decrease in external sales is primarily due to lower sales of Salient Systems’ products and track component products, reflecting weaker demand, partially offset by higher sales of friction management products, and sales of our locomotive car repair products and services, which are included in other products and services. Operating income for the year ended December 31, 2008 decreased to $6.4 million from $7.1 million for the comparable period in 2007, a decrease of $624,000 or 8.8%. The decrease in operating income is primarily due to lower gross profit on lower sales of our Salient Systems’ products, partially offset by higher gross profit on higher sales of friction management products and other products and services. Additionally, we incurred $1.3 million of warranty expense in 2007 related to defective BTR’s. During 2008, we did not incur any warranty expense related to this issue (See Note 10: Commitments and Contingencies, Page 66). Also contributing to the lower operating income is an increase of $196,000 in selling, general and administrative expenses at RMP, primarily due to higher professional fees and higher employee salary and benefit costs.

     Shipping Systems Division —“SSD”. Our SSD segment engineers and sells load securement systems and related products to the railroad freight car market. These systems are used to secure a wide variety of products and lading onto freight cars. Most of the assembly work for SSD is performed at RMP’s Huntington, West Virginia manufacturing plant, although some manufacturing is subcontracted to independent third parties. The results of operations for the SSD segment include the results from our Vulcan load securement products, which were purchased from Vulcan Chain Corporation in October 2006. For the years ended December 31, 2009, 2008 and 2007, SSD’s two largest customers represented 44%, 44% and 33% of external sales, respectively.

		Year Ended December 31,
		2009				2008				2007
						(In thousands)
External sales		$	5,292			$	10,679			$	8,817
Intersegment sales			—				—				(3	)
Operating income			43				1,836				1,624
Sales by product line (1)
Chain securement systems		$	2,050			$	3,087			$	2,331
Automotive products			2,682				6,298				4,939
Strap securement systems			176				419				759
All other load securement systems			384				875				785
Total product and service sales		$	5,292			$	10,679			$	8,814

     For the year ended December 31, 2009, external sales for SSD decreased by $5.4 million or 50.4%, to $5.3 million from $10.7 million during the comparable period in 2008. The $5.4 million decrease in external sales is primarily due to lower sales across all major product lines, in particular the automotive products, due to the economic recession, which has weakened demand for the products supplied by SSD. Cost of goods sold, including direct material, direct labor and overhead, as a percentage of net sales was unfavorably impacted by a lower absorption rate of overhead costs in the current period, primarily due to lower sales volume in the current period. Operating income for the year ended December 31, 2009 decreased to $43,000 from $1.8 million during the comparable period in 2008, a decrease of $1.8 million or 97.7%, primarily due to a $2.0 million decrease in gross profit resulting from lower sales of all SSD products, partially offset by lower SG&A expense of $284,000, due to lower incentive expense on lower profitability and lower business travel expenses in the current period.

     For the year ended December 31, 2008, external sales for SSD increased by $1.9 million or 21.1%, to $10.7 million from $8.8 million during the comparable period in 2007. The $1.9 million increase in external sales is primarily due to higher sales of automotive products and chain securement systems. Operating income for the year ended December 31, 2008 increased to $1.8 million from $1.6 million during the comparable period in 2007, an increase of $212,000 or 13.1%, primarily due to increased gross profit on higher sales of automotive products and chain securement systems, partially offset by higher selling, general and administrative expense of $169,000, due to higher employee salaries and benefit expenses, increased incentive expense and higher trade show expense in the current period.

     Portec Rail Nova Scotia Company — “Canada”. Our Canadian operations include a manufacturing operation near Montreal, Quebec, and a manufacturing and technology facility in Vancouver, British Columbia (Kelsan Technologies Corp. – “Kelsan”). Our Montreal operation manufactures rail anchors and rail spikes and assembles friction management products primarily for the two largest Canadian railroads. Rail anchors and spikes are devices to secure rails to the ties to restrain the movement of the rail tracks. 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. For the years ended December 31, 2009, 2008 and 2007, Canada’s consolidated external sales to its two largest customers represented 61%, 54% and 64%, respectively.

		Year Ended December 31,
		2009				2008				2007
		(In thousands, except translation rate)
External sales		$	26,176			$	26,486			$	23,059
Intersegment sales			7,657				7,472				7,065
Operating income (1)			5,521				4,323				2,470
Average translation rate of Canadian dollar to United States dollar			0.8839				0.9411				0.9419
Sales by product line (2)
Track component products (3)		$	15,236			$	14,954			$	15,406
Friction management products and services			17,623				17,257				13,520
Other products and services			974				1,747				1,198
Total product and service sales		$	33,833			$	33,958			$	30,124

     For the year ended December 31, 2009, external sales for Canada decreased by $310,000 or 1.2%, to $26.2 million from $26.5 million during the comparable period in 2008. The decrease in external sales of $310,000 is a result of an unfavorable foreign currency translation of $2.2 million that negatively impacted net sales across all major product lines, partially offset by an increase of $1.9 million in higher sales of both Kelsan friction management products and our track component products. Direct material and direct labor costs, which are components of Cost of Good Sold (COGS), as a percentage of net sales remained consistent in the current period compared to the prior year; however, overhead costs as a percentage of net sales declined in the current period due primarily to improved manufacturing productivity on our track components at our Montreal location. Operating income for the year ended December 31, 2009 increased to $5.5 million from $4.3 million during the comparable period in 2008, an increase of $1.2 million or 27.7%. The increase in operating income is primarily due to higher gross profit of $2.1 million due to higher sales volume of our friction management and track component products, partially offset by a foreign currency translation which reduced operating income by $338,000. Operating income was also reduced by an increase in SG&A expense of $647,000 due to higher employee salaries and benefit costs, higher incentive expense due to higher profitability and increased research and development expense due to product development efforts, partially offset by lower business travel expense and lower franchise taxes due to provincial tax law changes.

     For the year ended December 31, 2008, external sales for Canada increased by $3.4 million or 14.9%, to $26.5 million from $23.1 million during the comparable period in 2007. The increase in external sales is primarily due to higher sales of friction management products and services. Operating income for the year ended December 31, 2008 increased to $4.3 million from $2.5 million during the comparable period in 2007, an increase of $1.9 million or 75.0%. The increase in operating income is primarily due to higher gross profit of $2.1 million due to higher sales volume of our friction management products, partially offset by an increase in selling, general, and administrative expense of $285,000, primarily due to higher employee salaries and incentive expense, and increased professional fees.

     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, which comprised approximately 76%, 64% and 58% of total segment sales for the years ended 2009, 2008 and 2007, respectively, includes sales of friction management and track component products and services to the United Kingdom passenger rail network. For the years ended December 31, 2009, 2008 and 2007, our two largest rail customers represented 20%, 31% and 24% of total external sales, respectively.

     Over the same time period described above, our material handling business represented approximately 24%, 36% and 42%, respectively, of the total sales generated by our United Kingdom segment. Our major product lines in this market include overhead and floor conveyor systems, boom conveyors, racking systems and mezzanine flooring systems. The end users of our products are primarily United Kingdom-based companies in the manufacturing, distribution, garment and food industries. As our material handling products are primarily dependent upon the capital spending plans of manufacturers, our largest customers vary each year depending upon the contracts that are secured. For the years ended December 31, 2009, 2008 and 2007, our two largest material handling customers represented 5%, 8% and 8% of total external sales, respectively.

     During the third quarter 2006, we announced a business reorganization plan, which consolidated our rail and material handling operations in the United Kingdom from four locations into two; one at our Sheffield, England facility (Rail) and the other at our Leicester, England facility (Material Handling). This reorganization was completed during the first quarter 2007 with the sale of our Wrexham, Wales facility.

		Year Ended December 31,
		2009				2008				2007
		(In thousands, except translation rate)
External sales		$	16,506			$	25,584			$	27,300
Intersegment sales			2				—				146
Operating income			518				2,394				2,956
Average translation rate of British pound sterling to United States dollar			1.5714				1.8432				2.0086
Sales by product line (1)
Friction management products and services		$	8,388			$	11,172			$	10,407
Track component products			4,153				5,218				5,519
Material handling products			3,967				9,194				11,520
Total product and service sales		$	16,508			$	25,584			$	27,446

     For the year ended December 31, 2009, external sales at our United Kingdom operations decreased $9.1 million or 35.5%, to $16.5 million from $25.6 million during the comparable period in 2008. The decrease in external sales of $9.1 million at our United Kingdom segment is due to a combination of lower demand for primarily material handling products resulting from economic conditions within the United Kingdom, lower sales of friction management products, and an unfavorable foreign currency translation of $2.9 million that negatively impacted net sales across all product lines. Cost of good sold, including direct material, direct labor and overhead, as a percentage of net sales increased slightly due to a lower overhead absorption rate in the current period, primarily due to lower sales volume. Operating income for the year ended December 31, 2009 decreased to $518,000 from $2.4 million during the comparable period in 2008, a decrease of $1.9 million or 78.4%. The decrease in operating income is primarily due to lower gross profit on lower sales volume across all major product lines, along with a foreign currency translation of $71,000 that negatively impacted operating income in the current period. Partially offsetting the lower gross profit are lower SG&A expenses of $491,000 due to lower employee salary and benefit costs and incentive expense in the current period.

     For the year ended December 31, 2008, external sales at our United Kingdom operations decreased $1.7 million or 6.3%, to $25.6 million from $27.3 million during the comparable period in 2007. The decrease of $1.7 million in external sales is a combination of unfavorable foreign currency translation of $2.2 million that negatively impacted net sales across all product lines and lower demand for material handling products of approximately $1.6 million, due to a weaker market for these products brought on by economic conditions in the United Kingdom.

These decreases were partially offset by an increase in demand for friction management products of approximately $1.7 million, along with an increase in sales of track component products. Operating income for the year ended December 31, 2008 decreased to $2.4 million from $3.0 million during the comparable period in 2007, a decrease of $562,000 or 19.0%. The decrease in operating income is a combination of an unfavorable foreign currency translation of $717,000 that negatively impacted gross profit, lower gross profit on material handling product sales of approximately $690,000, and higher gross profit of $413,000 on sales of fiction management products. In addition to lower gross profit, selling general and administrative expense declined $423,000 in the current period, which positively impacted operating income. This decrease of $423,000 is primarily due to a favorable foreign currency translation of $490,000 that positively impacted SG&A expense and thus lowered expenses, partially offset by an increase of $67,000 due to higher professional fees and employee salary and benefit costs.

Liquidity and Capital Resources

     Our cash flow from operations is the primary source of financing for internal growth, capital expenditures, repayments of long-term contractual obligations, dividends to our shareholders and other commercial commitments. The most significant risk associated with our ability to generate sufficient cash flow from operations is the overall level of demand for our products. Our total cash balance is $14.3 million at December 31, 2009. We may use this cash for acquisitions, product line expansions or general corporate purposes. In addition to cash generated from operations, we have revolving and overdraft credit facilities in place to support the working capital needs of each of our business segments. We believe that cash flow from operations and the ability to borrow additional cash under our working capital credit facilities along with our existing cash balances will be sufficient to meet our cash flow needs over the next twelve months.

Cash Flow Analysis.

     For the year ended December 31, 2009, we generated $13.5 million in cash from operating activities compared to $10.1 million for the year ended December 31, 2008. Cash generated from operating activities during the year ended December 31, 2009 includes net income of $6.8 million, a decrease of $974,000 from 2008. Depreciation and amortization expense totaled $2.9 million in 2009 compared to $3.1 million in 2008, a decrease of $171,000. Lower inventory balances generated $4.0 million of cash during the current period, primarily due to efforts to reduce inventory levels, while lower accounts payable balances used $2.7 million of cash during the current period, primarily due to lower overall purchasing activity and the timing of vendor payments. Lower accounts receivable balances generated $4.6 million of cash, primarily due to lower sales volumes. Lower accrued expenses used $1.3 million of cash, due to lower company-wide incentive plan accruals, and lower customer deposits at RMP and our Untied Kingdom operations. Additionally, minimum funding requirements of our defined benefit pension plans required cash contributions into the plans of $398,000 during 2009.

     Net cash used in investing activities was $1.1 million in 2009, compared to $2.9 million of cash used in investing activities during 2008. Net cash used in investing activities during 2009 includes $989,000 for capital expenditures. In 2008, we completed two significant capital projects that had begun in 2007 and which totaled $1.9 million. These capital projects pertain to our Bonded-to-Rail (BTRs) joint bar products at our Huntington, West Virginia manufacturing facility, and were previously approved by our Board of Directors. Cash used in investing activities includes contingent consideration paid to the former owners of Vulcan in the amounts of $130,000 and $202,000 for 2009 and 2008, respectively.

     Net cash used in financing activities was $4.6 million in 2009 compared to net cash used in financing activities of $4.9 million in 2008. Net cash used in financing activities during 2009 includes repayment of long-term debt obligations of $4.0 million and cash dividends of $2.3 million on common stock paid to shareholders. Cash provided by financing activities in 2009 includes $1.7 million in net borrowings on our working capital credit facilities, and $300,000 borrowed in February 2009 from Boone County Bank, a related party, to support the capital improvements made to our Huntington, West Virginia manufacturing facility.

Credit Facilities.

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

     Our credit facility with PNC is a term loan and revolving credit facility that provided the financing for the Kelsan acquisition in November 2004 and the Vulcan asset acquisition in October 2006, and also supports the working capital requirements of our United States and Canadian business units. The components of this facility are as follows: 1) a $7.0 million United States revolving credit facility; 2) a $4.8 million ($5.0 million CDN) revolving credit facility for our Canadian operations; 3) an outstanding term loan in the original amount of $4.9 million that replaced the term loan in the original amount of $14.9 million ($17.6 million CDN) provided for the Kelsan acquisition in November 2004; and 4) an outstanding term loan in the original amount of $3.0 million provided in November 2006 for the Vulcan asset acquisition. As of December 31, 2009 we had two outstanding letters of credit in the amount of $372,000 under our United States revolving credit facility, and we had the ability to borrow an additional $6.9 million under the United States and Canadian revolving credit facilities. This agreement contains financial covenants that require us to maintain a current ratio, cash flow coverage and leverage ratios, and maintain minimum amounts of tangible net worth. This credit facility further limits capital expenditures, sales of assets, and additional indebtedness. We were in compliance with all of these financial covenants as of December 31, 2009. For additional details on our debt obligations and credit facilities, see Note 6: Long-Term Debt, Page 52.

     As of December 31, 2009, the balance outstanding on the U.S. revolving credit facility was $4.5 million. The balance outstanding on the Kelsan acquisition loan was $3.0 million at December 31, 2009. The balance outstanding on the Vulcan acquisition loan was $1.1 million at December 31, 2009. Our Canadian revolving credit facility had no outstanding borrowings as of December 31, 2009.

     We have a working capital facility with a United Kingdom financial institution that supports the working capital requirements of our United Kingdom operations and includes an overdraft availability of $1.5 million (£900,000 pounds sterling), $283,000 (£175,000 pounds sterling) for the issuance of performance bonds, and $65,000 (£40,000 pounds sterling) for the negotiation of foreign checks. There were no outstanding borrowings on the facility or any outstanding performance bonds as of December 31, 2009. The balance outstanding on the Coronet Rail acquisition loan was $471,000 (£291,000 pounds sterling) at December 31, 2009.

     In July 2008, we entered into a loan agreement with Boone County Bank, Inc. for a line of credit in the maximum amount of $2.1 million to finance capital expenditures at our manufacturing facility in Huntington, West Virginia. In February 2009 this credit facility was converted to a 60-month term loan at the United States prime rate less 0.25%, and began to amortize at a monthly principal payment of $35,000. As of December 31, 2009 and 2008, the outstanding balance on this facility was $1.7 million and $1.8 million, respectively, and interest accrued at a rate of 3.00% and 3.25%, respectively. This facility has a current maturity date of January 14, 2014. Boone County Bank, Inc. is a related-party (see Note 6: Long-Term Debt, Page 52).

Summary of Contractual Obligations

     The following is a summary of our contractual obligations as of December 31, 2009:

		Payments due by period
						Less												More
						than 1				1 – 3				3 – 5				than 5
Contractual Obligations		Total				year				years				years				years
										(In thousands)
Term loans		$	6,253			$	3,586			$	2,212			$	455			$	—
Purchase obligations			2,700				2,700				—				—				—
Operating leases (1)			4,585				1,279				1,622				877				807
Working capital facilities			4,500				4,500				—				—				—
Future interest payments (2)			171				102				61				8				—
Pension contributions (3)			3,241				563				1,460				1,218				—
Total contractual obligations (4)		$	21,450			$	12,730			$	5,355			$	2,558			$	807

Financial Condition

     Higher foreign currency translation rates had a significant impact on our consolidated balance sheet as of December 31, 2009, as the conversion of our foreign subsidiaries’ balance sheets into U.S. dollars is at a higher rate as of December 31, 2009 than at December 31, 2008. At December 31, 2009 total assets were $102.5 million, an increase of $5.7 million from $96.8 million as of December 31, 2008. The increase in assets at December 31, 2009 is primarily due to an $8.9 million increase in cash and cash equivalents, which is a primarily a result of $13.5 million of cash generated by operating activities in 2009. Additionally, higher intangible assets and goodwill balances of $1.8 million contributed to the total asset increase, and are primarily due to higher foreign currency translation rates at December 31, 2009 compared to December 31, 2008.

     Total outstanding debt obligations at December 31, 2009 decreased by $1.9 million or 14.7%, to $10.8 million as of December 31, 2009, from $12.6 million at December 31, 2008. The decrease in total outstanding debt obligations is primarily due to the repayment of long-term debt obligations during 2009.

     Our consolidated shareholders’ equity was positively impacted by $7.6 million during 2009, of which $3.3 million is due to the impact of higher foreign currency translation rates in converting our foreign subsidiary balance sheets into U.S. dollars at December 31, 2009. Actuarial losses on our defined benefit pension plans and post-retirement benefit plan in 2009 negatively impacted our December 31, 2009 shareholders’ equity by $340,000.

     The majority of our track components products that we manufacture and sell, such as our rail joints, rail anchors and rail spikes require steel as a major element in the production process. Worldwide steel prices have been volatile in the last few years, which resulted in surcharges at times being added to raw material costs, and other

times resulting in higher base prices for certain steel. We have been successful in passing on higher steel prices to our customers in most circumstances over the last few years. In 2009, steel prices for the most part have been lower than in recent years. We continue to monitor the price of our primary raw materials. If a prolonged increase in steel prices occurred and we are unable to pass on these higher costs to our customers, our future earnings could be negatively impacted.

Discussion of Critical Accounting Policies

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

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

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

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

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

     We believe the accounting estimate related to the allowance for doubtful accounts is a “critical accounting estimate” because we have a significant concentration of accounts receivable in the rail industry. The economic conditions could affect our customers’ ability to pay and changes in the estimate could have a material effect on net income.

     Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method for all inventories. Inventory costs include material, labor and manufacturing overhead. We establish obsolescence reserves for slow-moving and obsolete inventories. Obsolescence reserves reduce the carrying value of slow moving and obsolete inventories to their estimated net realizable value, which generally approximates the recoverable scrap value. We utilize historical usage, our experience, current backlog and forecasted usage to evaluate our reserve amounts. We also periodically evaluate our inventory carrying value to ensure that the amounts are stated at the lower of cost or market. If actual market conditions are less favorable than those projected by us, additional inventory reserves may be required.

     Goodwill and Other Intangible Assets. In accordance with FASB ASC Topic 350, Goodwill and Other Intangible Assets, we classify intangible assets into three categories: (1) intangible assets with definite lives subject to amortization; (2) intangible assets with indefinite lives not subject to amortization; and (3) goodwill. We assess the impairment of goodwill and other intangible assets at least annually and whenever events or significant changes in circumstances indicate that the carrying value may not be recoverable. We evaluate the goodwill of each of our reporting units and our indefinite-lived intangible assets for impairment as required under FASB ASC 350. FASB accounting standards require that goodwill be tested for impairment using a two-step process. The first step is to test for a potential impairment and the second step measures the amount of an impairment loss, if any. Goodwill is deemed to be impaired if the carrying amount of a reporting 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 our business segments are tested following the same process. The estimates of future cash flows, discount rates, and long-term growth rates, based on reasonable and supportable assumptions and projections, require our judgment. Factors that could change the result of our goodwill and intangible asset impairment tests include, but are not limited to, different assumptions used to forecast future revenue, expenses, capital expenditures and working capital requirements used in our cash flow models. In addition, selection of a risk-adjusted discount rate on the estimated undiscounted cash flow is susceptible to future changes in market conditions and when unfavorable, can adversely affect our original estimates of fair values. As such, to account for the uncertainty inherent in our estimates and future projections, we perform sensitivity analyses to determine our margin of error. Since adoption of FASB ASC 350, we have not recognized any impairment of goodwill or other intangible assets.

     Our amortizable intangible assets are evaluated for impairment in accordance with FASB ASC Topic 360, Accounting for Impairment or Disposal of Long-Lived Assets. FASB ASC 360 requires amortizable intangible assets to be tested for impairment when events or circumstances indicate that the carrying value of the asset may not be recoverable. Furthermore, FASB ASC 360 presents six factors that should be considered in conjunction with a 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.

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

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

     We maintain a post-retirement benefit plan at our Canadian operation near Montreal, which provides retiree life insurance, health care benefits and, for a closed group of employees, dental care. We account for this plan under FASB ASC 715, Compensation – Retirement Benefits. Actuarial estimates are determined using the projected benefit method pro rated on service and significant management assumptions, including salary escalation, retirement ages of employees and expected health care costs. Retirement benefit plan adjustments and changes in

assumptions are amortized to earnings over the estimated average remaining service life of the members and, therefore, generally affect recognized expense and the recorded obligations in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our obligations and future expense.

     Our retirement benefit plan liability is inversely impacted by the interest rate used in our actuarial calculation. As a result, when interest rates decline, the actuarially calculated retirement benefit plan liability increases. Conversely, as interest rates increase, the actuarially calculated retirement benefit plan liability decreases.

     Income Taxes. Significant judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any necessary valuation allowance recorded against net deferred tax assets. As a company with international operations, we record an estimated liability or benefit for our current income tax provision and other taxes based on what we determine will likely be paid in various jurisdictions in which we operate. We use our best judgment in the determination of these amounts. However, the liabilities ultimately realized and paid are dependent on various matters including the resolution of the tax audits in the various affected tax jurisdictions and may differ from the amounts recorded. An adjustment to the estimated liability would be recorded through income in the period in which it becomes probable that the amount of the actual liability differs from the recorded amount. We do not believe that such a charge would be material.

     The process of recording deferred tax assets and liabilities involves summarizing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet. We must then assess the likelihood that deferred tax assets will be recovered from future taxable income and to the extent that we believe that recovery is not likely, a valuation allowance is established. If a valuation allowance is established in a period, an expense is recorded. The valuation allowance is based on our experience and current economic situation. We believe that operations will provide taxable income levels to recover deferred tax assets on our consolidated balance sheet as of December 31, 2009.

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are exposed to interest rate risk on our contractual long-term debt obligations and our working capital facilities are under floating interest rate arrangements. However, we have determined that these risks are not significant enough to warrant hedging programs. If interest rates increase, we will be exposed to higher interest rates and we will be required to use more cash to settle our long-term debt obligations. As interest rates increase on our variable long-term debt, it will have a negative impact on future earnings because the increased rates will increase our interest expense. Conversely, if interest rates decrease on our variable long-term debt, it will have a positive impact on future earnings because the lower rates will decrease our interest expense. Based upon the long-term debt amount as of December 31, 2009, for every 100 basis point increase or decrease in the interest rate on our long-term debt, our annual interest expense will fluctuate by approximately $108,000.

     In addition, we are exposed to foreign currency translation fluctuations with our international operations. We do not have any foreign exchange derivative contracts to hedge against foreign currency exposures. Therefore, we are exposed to the related effects when the foreign currency exchange rates fluctuate. If the U.S. dollar strengthens against the Canadian dollar and/or the British pound sterling, the translation rate for these foreign currencies will decrease, which will have a negative impact on our operating income. For the year ended December 31, 2009, for every 1/100 change in the exchange rate of the Canadian dollar to the U.S. dollar, our Canadian operation’s operating income would have changed by approximately $59,000. Further, for every 1/100 change in the exchange rate of the British pound sterling to the U.S. dollar, the impact on operating income for our United

Kingdom operations for the year ended December 31, 2009 would have been approximately $3,000. Foreign currency translation fluctuations have no impact on cash flows as long as we continue to reinvest any profits back into the respective foreign operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following are included in this item:
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2009 and 2008	39
Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007	40
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2009, 2008 and 2007	41
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007	42
Notes to Consolidated Financial Statements
Report of Management on Internal Control over Financial Reporting	77
Reports of Independent Registered Public Accounting Firms	78

The supplementary data required by this Item (selected quarterly financial data) is provided in Note 12: of the Notes to Consolidated Financial Statements.

Consolidated Balance Sheets

		December 31
		2009				2008
		(In Thousands)
Assets
Current assets
Cash and cash equivalents		$	14,279			$	5,371
Accounts receivable, net			10,667				14,553
Inventories, net			21,538				23,856
Prepaid expenses and other current assets			1,623				489
Deferred income taxes			160				369
Total current assets			48,267				44,638
Property, plant and equipment, net			10,260				10,203
Intangible assets, net			28,507				27,732
Goodwill			14,463				13,413
Other assets			1,045				837
Total assets		$	102,542			$	96,823
Liabilities and Shareholders’ Equity
Current liabilities
Current maturities of long-term debt		$	8,086			$	6,500
Accounts payable			4,940				7,155
Accrued income taxes			618				513
Customer deposits			873				1,935
Accrued compensation			2,424				2,641
Other accrued liabilities			2,216				2,088
Total current liabilities			19,157				20,832
Long-term debt, less current maturities			2,667				6,110
Deferred income taxes			10,070				7,224
Accrued pension costs			3,809				3,583
Other long-term liabilities			1,091				898
Total liabilities			36,794				38,647
Commitments and contingencies			—				—
Shareholders’ equity:
Common stock, $1 par value, 50,000,000 shares authorized, 9,602,029 shares issued and outstanding at December 31, 2009 and 2008			9,602				9,602
Additional paid-in capital			25,547				25,443
Retained earnings			33,136				28,635
Accumulated other comprehensive loss			(2,537	)			(5,504	)
Total shareholders’ equity			65,748				58,176
Total liabilities and shareholders’ equity		$	102,542			$	96,823

See Notes to Consolidated Financial Statements

Consolidated Statements of Income

		Years Ended December 31
		2009				2008				2007
		(Dollars in Thousands, Except Per Share Data)
Net sales		$	92,221			$	109,017			$	109,503
Cost of sales			60,871				73,445				74,995
Gross profit			31,350				35,572				34,508
Selling, general and administrative			21,626				22,635				22,781
Amortization expense			1,116				1,199				1,241
Operating income			8,608				11,738				10,486
Interest expense			298				805				1,247
Other (income)/expense, net			(191	)			(87	)			246
Income before income taxes			8,501				11,020				8,993
Provision for income taxes			1,696				3,241				2,862
Net income		$	6,805			$	7,779			$	6,131
Earnings per share
Basic and Diluted		$	0.71			$	0.81			$	0.64
Dividends per share		$	0.24			$	0.24			$	0.24

See Notes to Consolidated Financial Statements

Consolidated Statements of Shareholders’ Equity

																		Accumulated
																		Other
		Common Stock								Paid-in				Retained				Comprehensive
		Shares				Amount				Capital				Earnings				Income (Loss)				Total
										(Dollars in Thousands)
Balance at January 1, 2007			9,601,779			$	9,602			$	25,290			$	19,647			$	(1,443	)		$	53,096
Cash dividends on common stock paid to shareholders			—				—				—				(2,304	)			—				(2,304	)
Stock compensation expense			—				—				52				—				—				52
Cumulative effect of a change in accounting principle (FIN 48)			—				—				—				(313	)			—				(313	)
Comprehensive income:
Net income			—				—				—				6,131				—				6,131
Minimum pension liability adjustment, net of tax provision of $684			—				—				—				—				1,380				1,380
Foreign currency translation adjustment, net of tax provision of $1,137			—				—				—				—				1,855				1,855
Total comprehensive income																							9,366
Balance at December 31, 2007			9,601,779			$	9,602			$	25,342			$	23,161			$	1,792			$	59,897
Issuance of common stock			250				—				3				—				—				3
Cash dividends on common stock paid to shareholders			—				—				—				(2,305	)			—				(2,305	)
Stock compensation expense			—				—				98				—				—				98
Comprehensive income:
Net income			—				—				—				7,779				—				7,779
Minimum pension liability adjustment, net of tax benefit of $1,083			—				—				—				—				(1,839	)			(1,839	)
Foreign currency translation adjustment, net of tax benefit of $3,345			—				—				—				—				(5,457	)			(5,457	)
Total comprehensive income																							483
Balance at December 31, 2008			9,602,029			$	9,602			$	25,443			$	28,635			$	(5,504	)		$	58,176
Cash dividends on common stock paid to shareholders			—				—				—				(2,304	)			—				(2,304	)
Stock compensation expense			—				—				104				—				—				104
Comprehensive income:
Net income			—				—				—				6,805				—				6,805
Minimum pension liability adjustment, net of tax benefit of $141			—				—				—				—				(340	)			(340	)
Foreign currency translation adjustment, net of tax provision of $2,028			—				—				—				—				3,307				3,307
Total comprehensive income																							9,772
Balance at December 31, 2009			9,602,029			$	9,602			$	25,547			$	33,136			$	(2,537	)		$	65,748

See Notes to Consolidated Financial Statements

Consolidated Statements of Cash Flows

		Years Ended December 31
		2009				2008				2007
		(In Thousands)
Operating Activities
Net income		$	6,805			$	7,779			$	6,131
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense			1,764				1,852				2,343
Amortization expense			1,116				1,199				1,241
Provision for doubtful accounts			65				123				70
Deferred income taxes			708				838				(346	)
Pension expense (income)			210				(64	)			75
Loss on sale of fixed assets			24				271				81
Pension contributions			(398	)			(809	)			(207	)
Stock-based compensation expense			104				98				52
Impairment of long-lived assets			—				—				50
Changes in operating assets and liabilities:
Accounts receivable			4,604				630				(148	)
Inventories			3,991				(4,014	)			1,264
Prepaid expenses and other current assets			(657	)			(246	)			85
Accounts payable			(2,723	)			2,467				(1,745	)
Income taxes payable			(765	)			13				(281	)
Accrued expenses			(1,343	)			(30	)			269
Net cash provided by operating activities			13,505				10,107				8,934
Investing Activities
Purchases of property, plant and equipment			(989	)			(2,697	)			(2,348	)
Proceeds from sale of assets			14				32				2,514
Contingent consideration – business acquisition			(130	)			(202	)			(168	)
Net cash used in investing activities			(1,105	)			(2,867	)			(2	)
Financing Activities
Net increase (decrease) in working capital facilities			1,697				(33	)			898
Outstanding checks in excess of funds on deposit			(297	)			61				309
Principal payments on promissory notes			(280	)			(280	)			(280	)
Proceeds from term loans			300				6,684				55
Principal payments on term loans			(3,678	)			(9,043	)			(5,316	)
Principal payments on capital leases			—				—				(69	)
Issuance of common stock			—				2				—
Cash dividends paid to shareholders			(2,304	)			(2,305	)			(2,304	)
Fees paid to obtain new financing			(14	)			(20	)			—
Net cash used in by financing activities			(4,576	)			(4,934	)			(6,707	)
Effect of exchange rate changes on cash and cash equivalents			1,084				(1,208	)			226
Increase in cash and cash equivalents			8,908				1,098				2,451
Cash and cash equivalents at beginning of period			5,371				4,273				1,822
Cash and cash equivalents at end of period		$	14,279			$	5,371			$	4,273
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest		$	548			$	829			$	1,314
Income taxes		$	2,063			$	2,500			$	3,211

See Notes to Consolidated Financial Statements

Note 1: Nature of Operations and Significant Accounting Policies

Nature of Operations

We manufacture, supply and distribute a broad range of rail products, including rail joints, rail anchors, rail spikes, railway friction management products and systems, railway wayside data collection and data management systems and freight car securement systems. We also manufacture material handling equipment for industries outside the rail transportation sector at our Leicester, England operation. We serve both the domestic and international markets. Our manufacturing facilities are located in Huntington, West Virginia; St. Jean, Quebec, Canada; Vancouver, British Columbia, Canada; Leicester, England, United Kingdom; and Sheffield, England, United Kingdom. We operate engineering and assembly facilities in Dublin, Ohio and near Montreal, Quebec, and have an office near Chicago, Illinois. Our corporate headquarters is located near Pittsburgh, Pennsylvania.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Portec Rail Products, Inc.; Salient Systems, Inc. (Salient Systems), our wholly-owned United States subsidiary; Portec Rail Nova Scotia Company, our wholly-owned Canadian subsidiary; and Portec Rail Products (UK) Ltd., our wholly-owned United Kingdom subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. For further details regarding our subsidiaries, refer to Exhibit 21, Subsidiaries of the Registrant.

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of 90 days or less to be cash equivalents. Outstanding checks in excess of funds on deposit (book overdrafts) are shown as part of accounts payable on the consolidated balance sheet. The change in book overdrafts between periods is presented as a use or source of cash from financing activities on our consolidated statement of cash flows.

Accounts Receivable

Accounts receivable are stated at the amount billed to our customers. We provide an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Accounts receivable are generally due between 30 and 60 days after the issuance of the invoice. Accounts past due more than 90 days are considered delinquent. Delinquent receivables are written-off based on individual credit evaluation and specific customer circumstances.

Inventories

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

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is recorded by the straight-line method based on estimated useful lives as follows:

Buildings and improvements		10-25 years
Machinery and equipment		4-10 years
Office furniture and equipment		3-5 years

Leasehold improvements are amortized over the shorter of the useful life of the asset or the term of the lease. Expenses for repairs, maintenance and renewals are charged to operations as incurred. Expenditures that improve an asset or extend its useful life are capitalized.

Goodwill and Identifiable Intangible Assets

The Financial Accounting Standards Board (FASB) issued FASB ASC Topic 350, Goodwill and Other Intangible Assets. FASB ASC 350 ceased the amortization of goodwill and other intangible assets with indefinite useful lives. FASB ASC 350 also requires that these assets be reviewed for impairment at least annually. Intangible assets with definite lives will continue to be amortized over their estimated useful lives and will be reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. We adopted FASB ASC 350 effective January 1, 2002. We are required to test our goodwill for impairment using a two-step process described in FASB ASC 350 on an annual basis or whenever events or circumstances indicate that the fair value of our reporting units may have been affected. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. We have established October 1^st as our annual measurement date for impairment testing. We completed the annual impairment tests for 2009, 2008 and 2007, and determined that no impairment adjustment was required.

In accordance with FASB ASC Topic 360, Accounting for Impairment or Disposal of Long-Lived Assets, we evaluate the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. Such circumstances could include, but are not limited to: (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. We measure the carrying amount of the asset against the estimated discounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires that we make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts.

Patents

Patents consist of legal and filing costs incurred in obtaining patent protection for product technology. The accounting rules allow for patent costs to be amortized over the legal life or the useful life of the patent, whichever is shorter. We generally amortize patent costs on a straight-line basis over a period of five to twenty years.

Deferred Financing Costs

Deferred financing costs that relate to obtaining debt facilities are capitalized and amortized over the term of the facility using the straight-line method. When a loan is paid in full, any unamortized financing costs are removed from the related accounts and charged to operations.

Foreign Currency Translation

The assets and liabilities of our foreign subsidiaries are measured using the local currency as the functional currency and are translated into U.S. dollars at exchange rates as of the balance sheet date. Income statement amounts are translated at the weighted-average rates of exchange during the year. The translation adjustment is accumulated as a separate component of accumulated other comprehensive income (loss). Foreign currency transaction gains and losses are included in determining net income.

Revenue Recognition

Revenue from product sales is recognized at the time products are delivered and title has passed or when service is performed. Delivery is determined by our shipping terms, which are primarily FOB shipping point. Revenue is recognized net of returns, discounts and other allowances.

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

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

Applicable taxes assessed by governmental authorities, such as sales, use, value added, and some excise taxes are billed to customers at the time of sale and not included as a part of net sales. Theses taxes assessed are remitted as required by each governmental jurisdiction on a monthly, quarterly or annual basis.

Related Party Transactions

Related party transactions are conducted with companies under common control of our shareholders or directors. During 2008, we entered into a loan agreement with Boone County Bank, which is a related party. See Note 6: – Long-Term Debt, Page 52 for further details.

Warranty Obligations

Most of our products are covered by a replacement warranty. We record a liability for product warranty obligations based upon historical warranty claims experience or known warranty issues and their replacement costs. During 2007, we incurred $1.3 million of warranty expense related to RMP’s Bonded to Rail (BTR) joint bars manufactured in Huntington, WV, which are covered by a standard one-year replacement warranty. We did not incur any warranty expense during 2008 related to this issue. At December 31, 2009 and 2008, our BTR warranty accrual was $40,000 and $177,000, respectively. See Note 10: Commitments and Contingencies, Page 66 for further details.

Income Taxes

Deferred income taxes are provided for the tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.

As of January 1, 2007, we adopted FASB ASC Topic 740, Income Taxes, which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of uncertain tax positions to be taken or expected to be taken in a tax return.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires us to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Shipping and Handling

Shipping and handling costs that we incur are included in the cost of sales.

Financial Instruments

The carrying value of our financial instruments approximates their fair values as they are short term in nature.

Research and Development

Research and development costs are charged to expense as incurred. Research and development costs incurred during 2009, 2008 and 2007 were approximately $2.8 million, $3.0 million and $2.4 million, respectively.

Advertising Expense

Advertising expense is comprised of trade shows and other promotional expenses. Advertising expenses are charged to income during the period incurred. Advertising expenses charged to income totaled $316,000 in 2009, $299,000 in 2008 and $265,000 in 2007.

Recent Accounting Pronouncements

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

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

In December 2007, FASB issued Topic 805, Business Combinations, which will significantly alter the way that companies account for business combinations under the acquisition method. Under FASB ASC 805, an acquiring entity will be required to recognize the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. In addition, the following specific changes will be made: (1) all acquisition costs will be expensed as incurred; (2) any restructuring charges related to the business combination will generally be expensed subsequent to the acquisition date; (3) non-controlling interests will be recorded at fair value at the acquisition date; (4) acquired contingent liabilities will be recorded at fair value at acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies; (5) in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; and (6) changes in the deferred tax asset valuation allowances and income tax uncertainties after the acquisition date will generally affect income tax expense. For calendar year companies, FASB ASC 805 prospectively applies to business combinations for which the acquisition date is on or after January 1, 2009. The adoption of FASB ASC 805 will have an impact on future business combinations which we may engage in; however, at this time, we cannot determine the impact to the Company.

Earnings Per Share

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

For the years ended December 31, 2009 and 2008, we determined that our stock options have an anti-dilutive effect on earnings per share, as the incremental shares related to the 2007 and 2008 stock options grants (see Note 14: Stock Options, Page 71) would reduce our average shares outstanding by 26,599 and 24,004 shares, respectively. The incremental shares related to the 2007 stock option grant would reduce our average shares outstanding by 7,126 shares for the year ended December 31, 2007. As such, the anti-dilutive shares are not included in the calculation of diluted earnings per share.

		Years Ended December 31
		2009				2008				2007
		(Dollars in Thousands, Except Share and Per Share Data)
Net income available to common shareholders		$	6,805			$	7,779			$	6,131
Basic common shares:
Weighted average shares outstanding			9,602,029				9,601,928				9,601,779
Diluted average shares outstanding			9,602,029				9,601,928				9,601,779
Basic and diluted earnings per share		$	0.71			$	0.81			$	0.64

Reclassifications

Certain reclassifications have been made to the 2008 and 2007 financial statements to conform to the 2009 financial statement presentation. These reclassifications had no effect on net earnings.

Note 2: Accounts Receivable

Accounts receivable are presented net of an allowance for doubtful accounts. We generally do not require collateral for our trade accounts receivable. We continually evaluate our accounts receivable and adjust our allowance for doubtful accounts for changes in potential credit risk.

Accounts receivable consists of the following:

		December 31
		2009				2008
		(In Thousands)
Accounts receivable		$	10,820			$	14,671
Less allowance for doubtful accounts			153				118
Net accounts receivable		$	10,667			$	14,553