Portec Rail Products 10Q 2008 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, 2008


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

For the transition period from to

Commission File Number:000-50543

PORTEC RAIL PRODUCTS, INC.

(Exact Name of Registrant as Specified in its Charter)


West Virginia		55-0755271

(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

900 Old Freeport Road, Pittsburgh, Pennsylvania		15238-8250

(Address of Principal Executive Offices)		(Zip Code)

(412) 782-6000

(Registrant’s Telephone Number)

(Former Name, Former Address and Former Fiscal Year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days.

YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the 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 Exchange Act). YES o NO þ

As of April 30, 2008, there were 9,601,779 shares issued and outstanding of the Registrant’s Common Stock.

PORTEC RAIL PRODUCTS, INC.

INDEX TO FORM 10-Q


Item
Number		Page Number

	PART I — FINANCIAL INFORMATION

1.	Financial Statements:

	Condensed Consolidated Balance Sheets March 31, 2008 (Unaudited) and December 31, 2007	3

	Condensed Consolidated Statements of Income (Unaudited) Three months ended March 31, 2008 and 2007	4

	Condensed Consolidated Statements of Cash Flows (Unaudited) Three months ended March 31, 2008 and 2007	5

	Notes to Condensed Consolidated Financial Statements (Unaudited)	6

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

3.	Quantitative and Qualitative Disclosures About Market Risk	28

4.	Controls and Procedures	28

	PART II — OTHER INFORMATION

1.	Legal Proceedings	29

1A.	Risk Factors	29

2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

3.	Defaults Upon Senior Securities	29

4.	Submission of Matters to a Vote of Security Holders	29

5.	Other Information	29

6.	Exhibits	30

	Signatures	31
EX-31.1
EX-31.2
EX-32

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Portec Rail Products, Inc.
Condensed Consolidated Balance Sheets


	March 31		December 31
	2008		2007
	(Unaudited)		(Audited)
	(In Thousands)

Assets
Current assets
Cash and cash equivalents	$	3,645	$	4,273
Accounts receivable, net		14,779		17,411
Inventories, net		24,367		22,990
Prepaid expenses and other current assets		1,616		586
Deferred income taxes		268		375

Total current assets	$	44,675	$	45,635

Property, plant and equipment, net of accumulated depreciation of $12,996 and $13,540 at March 31, 2008 and December 31, 2007, respectively.		11,392		11,121
Intangible assets, net of accumulated amortization of $3,583 and $3,140 at March 31, 2008 and December 31, 2007, respectively		31,318		31,542
Goodwill		14,565		15,059
Other assets		883		869


Total assets	$	102,833	$	104,226


Liabilities and Shareholders’ Equity
Current liabilities
Current maturities of long-term debt	$	9,016	$	6,865
Accounts payable		7,766		6,167
Accrued income taxes		239		706
Customer deposits		739		1,380
Accrued compensation		993		2,979
Other accrued liabilities		2,584		2,795
Deferred purchase price — current portion		149		298

Total current liabilities		21,486		21,190

Long-term debt, less current maturities		8,076		9,463
Accrued pension costs		1,032		1,175
Deferred income taxes		11,087		11,524
Other long-term liabilities		953		977

Total liabilities		42,634		44,329


Commitments and Contingencies		—		—

Shareholders’ equity:
Common stock, $1 par value, 50,000,000 shares authorized, 9,601,779 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively		9,602		9,602
Additional paid-in capital		25,364		25,342
Retained earnings		23,929		23,161
Accumulated other comprehensive gain		1,304		1,792

Total shareholders’ equity		60,199		59,897

Total liabilities and shareholders’ equity	$	102,833	$	104,226

See Notes to Condensed Consolidated Financial Statements

Portec Rail Products, Inc.
Condensed Consolidated Statements of Income
(Unaudited)


	Three Months Ended
	March 31
	2008			2007
	(Dollars in Thousands, Except Per
	Share Data)

Net sales	$	24,843		$	27,484
Cost of sales		17,133			19,438

Gross profit		7,710			8,046

Selling, general and administrative		5,409			5,663
Amortization expense		298			306

Operating income		2,003			2,077

Interest expense		226			317
Other income, net		(78	)		(70	)

Income before income taxes		1,855			1,830
Provision for income taxes		511			625


Net income	$	1,344		$	1,205


Earnings per share
Basic and diluted	$	0.14		$	0.13

Weighted average shares outstanding
Basic and diluted		9,601,779			9,601,779

Dividends per share	$	0.06		$	0.06

See Notes to Condensed Consolidated Financial Statements

Portec Rail Products, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)


	Three Months Ended
	March 31
	2008			2007
	(In Thousands)
Operating Activities
Net income	$	1,344		$	1,205
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense		390			555
Amortization expense		298			306
Provision for doubtful accounts		—			27
Deferred income taxes		34			(66	)
Pension (income) expense		(9	)		18
Loss on sale of fixed assets		7			43
Stock based compensation expense		22			11
Changes in operating assets and liabilities:
Accounts receivable		2,521			(2,797	)
Inventories		(1,572	)		1,254
Prepaid expenses and other current assets		(1,137	)		(1,472	)
Accounts payable		1,832			1,812
Income taxes payable		(469	)		(343	)
Accrued expenses		(3,170	)		(510	)

Net cash provided by operating activities		91			43


Investing Activities
Purchase of property, plant and equipment		(904	)		(592	)
Proceeds from sale of assets		12			1,988
Contingent consideration — business acquisition		(52	)		(31	)

Net cash (used in) provided by investing activities		(944	)		1,365


Financing Activities
Net increase in working capital facilities		2,234			561
Book overdrafts		(193	)		1,159
Principal payments on promissory notes		(280	)		(280	)
Proceeds from term loans		—			54
Principal payments on term loans		(933	)		(2,594	)
Principal payments on capital leases		—			(17	)
Cash dividends paid to shareholders		(576	)		(576	)

Net cash provided by (used in) financing activities		252			(1,693	)


Effect of exchange rate changes on cash and cash equivalents		(27	)		(58	)

Decrease in cash and cash equivalents		(628	)		(343	)
Cash and cash equivalents at beginning of period		4,273			1,822


Cash and cash equivalents at end of period	$	3,645		$	1,479


Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest	$	255		$	370

Income taxes	$	929		$	1,019

See Notes to Condensed Consolidated Financial Statements

Portec Rail Products, Inc.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1: Organization

Portec Rail Products, Inc. (sometimes herein referred to as “we”, “our”, “us”, the “Company”, or “Portec Rail Products”) was incorporated in West Virginia in 1997, in conjunction with the purchase of rail-related assets and select material handling assets of Portec, Inc. We along with our predecessor, Portec Inc., have served the railroad industry since 1906 by manufacturing, supplying and distributing a broad range of rail products, including rail joints, rail anchors, rail spikes, railway friction management products and systems, railway wayside data collection and data management systems and freight car securement devices. We also manufacture material handling equipment at our Leicester, England operation. We serve both the domestic and international markets. Our manufacturing facilities are located in Huntington, West Virginia; St. Jean, Quebec, Canada; Vancouver, British Columbia, Canada; Leicester, England, United Kingdom; and Sheffield, England, United Kingdom. We operate an engineering and assembly facility located in Dublin, Ohio, and have offices near Chicago, Illinois, and Montreal, Quebec, Canada. Our corporate headquarters is located near Pittsburgh, Pennsylvania.

Note 2: Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Portec Rail Products, Inc.; Salient Systems, Inc. (Salient Systems), our wholly-owned United States subsidiary; Portec Rail Nova Scotia Company, our wholly-owned Canadian subsidiary; and Portec Rail Products (UK) Ltd., our wholly-owned United Kingdom subsidiary (United Kingdom). All significant intercompany balances and transactions have been eliminated in consolidation. The foregoing financial information has been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) and rules and regulations of the Securities and Exchange Commission for interim financial reporting. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. The results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results to be expected for the full year. The accompanying interim financial information is unaudited; however, we believe that the financial information reflects all adjustments (consisting of items of a normal recurring nature) necessary for a fair presentation of financial position, results of operations and cash flows in conformity with GAAP. Certain information and note disclosures normally included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted. These interim financial statements should be read in conjunction with the 2007 Annual Report on Form 10-K. The balance sheet information as of December 31, 2007 was derived from our audited balance sheet included in our 2007 Annual Report on Form 10-K. Unless otherwise indicated, all dollar amounts are in U.S. dollars. Certain amounts in the prior year’s consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on net earnings.

Portec Rail Products, Inc.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 3: Inventories

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

The major components of inventories are as follows:


	March 31		December 31
	2008		2007
	(In Thousands)

Raw materials	$	10,571	$	9,849
Work in process		446		521
Finished goods		13,898		13,017

		24,915		23,387
Less reserve for slow-moving and obsolete inventory		548		397


Net inventory	$	24,367	$	22,990

Note 4: Long-Term Debt

Long-term debt consists of the following:


	March 31		December 31
	2008		2007
	(In Thousands)

National City Bank Credit Facility:(a)
Term loan — Kelsan acquisition	$	7,551	$	8,435
Term loan — Vulcan asset acquisition		2,150		2,300
Revolving credit facility — United States		4,775		2,300
Revolving credit facility — Canada		—		—

United Kingdom loans:(b)
Term loan — Coronet Rail acquisition		1,972		2,119
Working capital facility — invoice discounting		335		575
Working capital facility — overdraft		—		—
Term loans — vehicles		29		39

Promissory notes — Salient Systems acquisition(c)		280		560
Revolving credit facility — Boone County Bank, Inc.(d)		—		—

		17,092		16,328
Less current maturities		9,016		6,865


	$	8,076	$	9,463

(a) National City Bank Credit Facility

Our credit facility with National City Bank is a term loan and revolving credit facility that provided the financing for the Kelsan acquisition in November 2004 and the Vulcan asset acquisition in October 2006, and also supports the working capital requirements of our United States and Canadian business units. The components of this facility are as follows: 1) a $7.0 million United States revolving credit facility; 2) a $4.2 million ($5.0 million CDN) revolving credit facility for our Canadian operations; 3) an outstanding term loan in the original amount of $14.9 million ($17.6 million CDN) provided

Portec Rail Products, Inc.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

for the Kelsan acquisition in November 2004; and 4) an outstanding term loan in the original amount of $3.0 million provided in November 2006 for the Vulcan Chain product line acquisition. As of March 31, 2008, we had the ability to borrow an additional $6.3 million under the U.S. and Canadian revolving credit facilities.

This agreement contains certain financial covenants that require us to maintain a current ratio, cash flow coverage and leverage ratios, and to maintain minimum amounts of tangible net worth. This credit facility further limits capital expenditures, sales of assets, and additional indebtedness. At March 31, 2008, we were in compliance with all of these financial covenants.

Term Loan — Kelsan Acquisition:

To finance the acquisition of Kelsan on November 30, 2004 we borrowed $14.9 million ($17.6 million CDN) from National City Bank (Canada) through Portec Rail Nova Scotia Company, a wholly-owned subsidiary of Portec Rail Products, Inc. Portec Rail Nova Scotia Company is the borrower of the funds under the credit agreement, and Portec Rail Products, Inc. is the sole guarantor of the term loan with substantially all of our United States assets pledged as collateral. Under this seven-year term loan, our monthly principal payments are approximately $205,000 ($210,050 CDN). We have the option to direct outstanding borrowings under a Canadian prime lending rate option, a Canadian Banker’s Acceptance Equivalent Note (“BA Note”) option, or utilize a combination of both of these options at our discretion. Interest rates under these options are the prevailing Canadian prime rate plus an applicable margin of 0.75% to 1.75% (prime rate option), or the BA Note interest rate plus an applicable margin of 1.75% to 2.75% (BA Note option). As of March 31, 2008, we had outstanding borrowings of approximately $7.6 million ($7.8 million CDN) that were priced under the BA Note rate option at 5.82%. This term loan is scheduled to mature on November 30, 2011.

Term Loan — Vulcan Asset Acquisition:

On November 7, 2006, we borrowed $3.0 million from National City Bank to finance the Vulcan product line acquisition. Portec Rail Products, Inc. is the sole guarantor of the term loan with substantially all of our United States assets pledged as collateral. Under this five-year term loan, our monthly principal payments are $50,000. The outstanding principal balance accrues interest based upon the 30-day LIBOR rate plus 1.5%. As of March 31, 2008, we had outstanding borrowings of $2.2 million, which accrued interest at 4.04%. This term loan is scheduled to mature on October 31, 2011.

Revolving Credit Facility — United States:

Our U.S. revolving credit facility permits borrowings up to $7.0 million to support the working capital requirements of our United States operations. Included in the $7.0 million is a sub-limit of $1.6 million for standby and commercial letters-of-credit. Outstanding borrowings under this facility can be priced at a prime-based rate or a LIBOR-based rate. As of March 31, 2008, outstanding borrowings under this facility were approximately $4.8 million and accrued interest at 4.04%. As of March 31, 2008, two commercial letters-of-credit were outstanding in the total amount of $130,000. This credit facility expires on September 30, 2010.

Revolving Credit Facility — Canada:

The working capital requirements for our Canadian operations are supported by a $4.2 million ($5.0 million CDN) revolving credit facility. Included within the $4.2 million is a sub-limit of $335,000 ($400,000 CDN) for standby and commercial letters of credit. The interest rate is the Canadian prime rate plus 1.0%. Borrowings on this facility accrued interest at 6.25% at March 31, 2008. As of March 31, 2008, there were no outstanding borrowings under this facility. This facility is scheduled to expire on December 31, 2008.

Portec Rail Products, Inc.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

(b) United Kingdom Loans

Term Loan — Coronet Rail Acquisition:

To finance the acquisition of Coronet Rail on April 12, 2006, our United Kingdom subsidiary borrowed $4.2 million (£2.4 million pounds sterling) from a United Kingdom financial institution in the form of: 1) a $2.6 million (£1.5 million pounds sterling) five-year term loan at an interest rate equal to the financial institution’s base rate plus 1.75% and 2) a $1.6 million (£900,000 pounds sterling) fifteen-year term loan at an interest rate equal to the financial institution’s base rate plus 1.25%. Portec Rail Products (UK) Ltd. is the guarantor of the term loans with substantially all of our United Kingdom assets pledged as collateral. Monthly principal payments are approximately $47,000 (£23,000 pounds sterling) for the five-year term loan and $6,000 (£3,000 pounds sterling) for the fifteen-year term loan. On March 30, 2007 the fifteen-year term loan in the original amount of $1.6 million (£900,000 pounds sterling) was repaid in full with proceeds from the sale of the Wrexham, Wales property (See Note 11 for additional information). As of March 31, 2008, the outstanding principal balance of the remaining term loan was approximately $2.0 million (£994,000 pounds sterling). As of March 31, 2008, the interest rate on the principal balance outstanding was 7.00%. The term loan in the original amount of $2.6 million is scheduled to mature on April 12, 2011. This agreement contains certain financial covenants that require us to maintain senior interest and cash flow coverage ratios. We were in compliance with these financial covenants as of March 31, 2008.

Working Capital Facility — Invoice Discounting:

In conjunction with the acquisition of Coronet Rail on April 12, 2006, we entered into an accounts receivable factoring facility (“invoice discounting”) with a United Kingdom financial institution that permits Coronet Rail to borrow up to 85% of its eligible accounts receivable, to a maximum of $1.5 million (£750,000 pounds sterling) for its working capital requirements. The interest rate on this working capital facility is the financial institution’s base rate plus 1.85% as of March 31, 2008. At March 31, 2008, the interest rate on this facility was 7.25%. As of March 31, 2008, the outstanding borrowings under this facility were $335,000 (£169,000 pounds sterling). The initial term of this facility was one year; however in April 2007 the financial institution extended the agreement on a month-to-month basis. In February 2008, we submitted formal notice of termination to the financial institution, and we will be exiting this facility during the second quarter 2008.

Working Capital Facility — Overdraft:

The working capital facility for Portec Rail Products (UK) Ltd. includes an overdraft availability of $1.4 million (£700,000 pounds sterling); $344,000 (£175,000 pounds sterling) for the issuance of performance bonds, and $79,000 (£40,000 pounds sterling) for the negotiation of foreign checks. This credit facility supports the working capital requirements of Portec Rail Products (UK) Ltd. and is collateralized by substantially all of the assets of Portec Rail Products (UK) Ltd. and its wholly-owned subsidiaries, including Coronet Rail, Ltd. The interest rate on this overdraft facility is the financial institution’s base rate plus 1.5%. For any borrowings in excess of $1.5 million (£750,000 pounds sterling) that the financial institution approves, the interest rate is the financial institution’s base rate plus 3.5%. There were no outstanding borrowings as of March 31, 2008; however, our availability under this credit facility was reduced due to outstanding performance bonds in the amount of $309,000 (£156,000 pounds sterling) as of March 31, 2008. This facility expired in April 2008; however we received a 30-day extension on this facility in April 2008 and are working with the financial institution on a new credit facility, which we expect to finalize during the second quarter 2008.

(c) Salient Systems Promissory Notes

In connection with the acquisition of Salient Systems on September 30, 2004, we executed two promissory notes. One promissory note was executed with Harold Harrison, the founder and former President and Chief Executive Officer of

Portec Rail Products, Inc.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Salient Systems. This promissory note, in the aggregate principal amount of $1,064,000 is due to Mr. Harrison in four equal, annual installments of $266,000 beginning January 3, 2006 and ending January 3, 2009. A second promissory note was executed with Falls River Group, LLC, which acted as a financial advisor to Salient Systems. This promissory note, in the aggregate principal amount of $56,000 is due to Falls River Group, LLC in four equal, annual installments of $14,000 beginning January 3, 2006 and ending January 3, 2009. Principal payments of $266,000 and $14,000, and accrued interest of $46,000, were made to the note holders in January 2008. The unpaid principal balance of the promissory notes accrues interest at the prime rate as published in theWall Street Journal. All accrued and unpaid interest is payable annually beginning January 3, 2006. The outstanding balance on the promissory notes accrued interest at 5.25% as of March 31, 2008. As of March 31, 2008 we had accrued interest of $4,000 related to these promissory notes.

(d) Revolving Credit Facility — Boone County Bank, Inc.

We previously had a $2.0 million line of credit with Boone County Bank, Inc. for our United States business segments. Any advances on this line are made to term notes and the line availability is reduced by that amount. As of March 31, 2008, we had no outstanding borrowings under this facility. In April 2008 we terminated this credit facility.

Note 5: Income Taxes

Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109(FIN 48) became effective for us on January 1, 2007. The adoption of FIN 48 during the first quarter 2007 resulted in a transition adjustment reducing beginning retained earnings by $313,000; $195,000 in taxes and $118,000 in interest and penalties. This potential liability resulted from an analysis of services performed in certain states where tax returns had not previously been filed.

We evaluated uncertain tax provisions pursuant to the guidance found within FIN 48 for the quarter ended March 31, 2008. The Company is not aware of any changes to our assessment of positions taken in the U.S. Federal and Foreign jurisdictions and therefore continues to identify no potential exposure to the financial statements in these areas.

We also reviewed the state tax liability calculation as of March 31, 2008. This analysis has resulted in an additional liability of $76,000 as well as reductions for tax positions in previous years of $50,000. A reconciliation of the beginning and ending amount of unrecognized tax positions is as follows:


	Three Months Ended
	March 31, 2008
	(In Thousands)

Balance at January 1, 2008	$	313
Additions based on tax positions related to the current year		76
Additions for tax positions of prior years		—
Reductions for tax positions of prior years		(50	)
Settlements		—

Balance at March 31, 2008	$	339

We continue to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2003.

Portec Rail Products, Inc.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 6: Retirement Plans

The components of our net periodic pension (benefit) expense of our United States defined benefit pension plan are as follows for the three months ended March 31, 2008 and 2007:


	Three Months Ended
	March 31
	2008			2007
	(In Thousands)
Interest cost	$	138		$	134
Expected return on plan assets		(165	)		(157	)
Amortization of unrecognized loss		18			32


Pension (benefit) expense	$	(9	)	$	9

We anticipate making contributions of $615,000 to this pension plan during 2008, of which $123,000 is related to the 2008 plan year and $492,000 is related to the 2007 plan year. During April 2008, we made a contribution of $287,000 towards the total required minimum contribution of $615,000. No contributions were made to this pension plan during calendar year 2007.

The components of net periodic pension expense (benefit) of our United Kingdom defined benefit pension plans (the Portec Rail Plan and Conveyors Plan) are as follows for the three months ended March 31, 2008 and 2007:


	Portec Rail Plan			Conveyors Plan			Portec Rail Plan			Conveyors Plan

	2008			2008			2007			2007
	(In Thousands)

Service cost	$	11		$	1		$	—		$	—
Interest cost		84			19			79			18
Expected return on plan assets		(98	)		(20	)		(86	)		(18	)
Amortization of transition amount		(15	)		(3	)		(15	)		(3	)
Amortization of unrecognized loss		21			—			33			1


Pension expense (benefit)	$	3		$	(3	)	$	11		$	(2	)

United Kingdom regulations require trustees to adopt a prudent approach to funding required contributions to defined benefit pension plans. We contributed $146,000 (£74,000 pounds sterling) and $38,000 (£19,000 pounds sterling) to the Portec Rail Plan and the Conveyors Plan, respectively, for the three months ended March 31, 2008. We expect to contribute an additional $43,000 (£22,000 pounds sterling) and $4,000 (£2,000 pounds sterling) to the Portec Rail Plan and the Conveyors Plan, respectively, during 2008. Our contributions to the Portec Rail Plan totaled $6,000 (£3,000 pounds sterling) for the three months ended March 31, 2007. No contributions were made to the Conveyors Plan during the three months ended March 31, 2007.

Portec Rail Products, Inc.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 7: Comprehensive Income

Comprehensive income for the three months ended March 31, 2008 and 2007 is as follows:


	Three Months Ended
	March 31
	2008			2007
	(In Thousands)

Net income	$	1,344		$	1,205
Minimum pension liability adjustment, net of tax		4			(9	)
Foreign currency translation adjustments, net of tax		(492	)		112


Comprehensive income	$	856		$	1,308

Note 8: Earnings Per Share

Basic earnings per share (EPS) is 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 Statement of Financial Accounting Standards No. 128,Earnings per Share(SFAS 128), and determined that our stock options have an anti-dilutive effect on earnings per share, as the incremental shares related to the 2007 stock option grant would reduce our average shares outstanding by 8,045 shares and 15,566 shares, respectively, for the three months ended March 31, 2008 and 2007, and the 2008 stock option grant (see Note 13, Stock Options, Page 18) would reduce our average shares outstanding by 13,253 shares for the three months ended March 31, 2008. As such, the anti-dilutive shares are not included in the calculation of diluted earnings per share.

Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 9: Commitments and Contingencies

Contractual Obligations

The following is a summary of our contractual obligations as of March 31, 2008, due on a calendar year basis:


									More
			Less		1 — 3		3 — 5		than 5
Contractual Obligations	Total		than 1 year		years		years		years
	(In Thousands)

Long-term debt obligations	$	11,982	$	2,726	$	7,666	$	1,590	$	—
Purchase obligations		7,604		5,226		2,378		—		—
Operating leases (1) Capital leases		5,747		1,016		2,260		1,121		1,350
Working capital facilities		5,110		5,110		—		—		—
Future interest payments (2)		1,054		435		593		26		—
Pension contributions (3)		951		662		289		—		—
Deferred purchase price (4)		149		149		—		—		—

Total contractual obligations (5)	$	32,597	$	15,324	$	13,186	$	2,737	$	1,350


(1)		The majority of our future operating lease obligations are for property leases at our operating locations. There are no unusual terms or conditions within these leases.

(2)		Represents future interest payments on long-term debt obligations as of March 31, 2008. Assumes that the interest rates on our long-term debt agreements at March 31, 2008 (See Note 4, Long-Term Debt, Page 7) will continue for the life of the agreements.

(3)		Pension plan contributions that may be required more than one year from March 31, 2008 will be dependent upon the performance of plan assets. Of the $662,000 to be funded in 2008, $287,000 was funded to the U.S. pension plan in April 2008.

(4)		Represents the deferred purchase price obligation related to the purchase of Coronet Rail in April 2006.

(5)		During the first quarter 2007, we recognized a liability of $313,000 for uncertain tax positions in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 (FIN 48). During the first quarter 2008, we recognized $26,000 of additional liability. See Note 5, Income Taxes, Page 10. The total amount of $339,000 is included within other long-term liabilities on the March 31, 2008 consolidated balance sheet. However, because of the high degree of uncertainty regarding the timing of future cash outflows associated with this FIN 48 liability, we cannot reasonably estimate the periods of related future payments, and as such, we have excluded the FIN 48 liability from the contractual obligations table.

Contingencies

We became aware of a problem during the second quarter 2007 with RMP’s Bonded to Rail (BTR) joint bars in which the epoxy that is used as the primary method of adhesion to the rail appeared to fail in certain instances. The BTR is a finished good which includes two sections of rail, two joint bars and necessary hardware, and is sold as a final assembled product. We notified our BTR customers of this problem as soon as we became aware of it. We have extensively investigated the cause of the epoxy failure and performed field inspections of BTRs that may have been affected. We have identified the potential time period during which these BTRs were assembled and have continued to correct any possible deficiencies. We feel reasonably certain that we have identified the causes of the problem and that we have corrected these deficiencies from recurring.

The BTR products manufactured by RMP are covered by a standard one-year replacement warranty. Accordingly, we have accounted for any contingent costs associated with the remediation of the BTRs under Statement of Financial Accounting Standards No. 5,Accounting for Contingencies, specifically Accrual for Loss Contingencies and Obligations Related to Product Warranties and Product Defects (SFAS 5). For the year ended December 31, 2007, we recognized warranty expense of $1.3 million related to defective BTRs. This amount is included in cost of

Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

goods sold for the RMP business segment. No additional warranty expense was recognized during the three months ended March 31, 2008 or March 31, 2007. The balance in the BTR warranty reserve at March 31, 2008 is $429,000, which management expects to be adequate to cover expected future costs associated with potentially defective BTRs. Although we believe that $429,000 is a reasonable estimate of our potential exposure for warranty claims on BTRs as of March 31, 2008, changes in the components of our estimate due to new information and future events could cause this estimate to vary significantly. There can be no assurance at this point that future costs pertaining to this issue will not have a material impact on our financial condition or results of operations.

Litigation

We are involved from time to time in lawsuits that arise in the normal course of business. We actively and vigorously defend all lawsuits. We have been named with numerous other defendants in an environmental lawsuit. The plaintiff seeks to recover costs which it has incurred, and may continue to incur, to investigate and remediate its former property as required by the New York State Department of Environmental Conservation (NYSDEC). We have not been named as a liable party by the NYSDEC and we believe we have no liability to the plaintiff in the case. We filed a motion for summary judgment seeking a ruling to have us dismissed from the case. In November 2003, the motion for summary judgment was granted and we were dismissed from the case by the United States District Court for the Northern District of New York. In March 2004, the plaintiff filed a notice of appeal to the United States Court of Appeals for the Second Circuit, appealing, in part, the District Court’s decision to dismiss all claims against us. In April 2005, the plaintiff’s appeal was dismissed by the Second Circuit Court without prejudice, and the matter was remanded to the United States District Court for the Northern District of New York for consideration in light of a then-recent United States Supreme Court decision. As a result, in June 2006, the District Court dismissed all claims brought by the plaintiff pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund). On July 24, 2006, the plaintiff filed a notice of appeal to the Second Circuit. However, in January 2008, the plaintiff’s appeal was dismissed again by the Second Circuit Court without prejudice, and the matter was remanded to the District Court for consideration in light of a recent United States Supreme Court decision. Ongoing litigation may be protracted, and we may incur additional ongoing legal expenses, which are not estimable at this time.

Note 10: Segment Information

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


	Three Months Ended
	March 31
	2008		2007
	(In Thousands)
External Sales
RMP	$	10,043	$	11,114
SSD		2,365		2,148
Canada		6,415		7,346
United Kingdom		6,020		6,876


Total	$	24,843	$	27,484

Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


	Three Months Ended
	March 31
	2008			2007
	(In Thousands)
Intersegment Sales
RMP	$	532		$	491
SSD		—			(3	)
Canada		1,459			1,791
United Kingdom		—			—


Total	$	1,991		$	2,279


Total Sales
RMP	$	10,575		$	11,605
SSD		2,365			2,145
Canada		7,874			9,137
United Kingdom		6,020			6,876


Total	$	26,834		$	29,763


Operating Income (Loss)
RMP	$	1,243		$	1,024
SSD		518			294
Canada		496			1,116
United Kingdom		572			698
Corporate shared services		(826	)		(1,055	)

Total		2,003			2,077

Interest Expense		226			317

Other Income, net		(78	)		(70	)


Income Before Income Taxes	$	1,855		$	1,830


Depreciation Expense
RMP	$	120		$	201
SSD		49			27
Canada		197			175
United Kingdom		7			126
Corporate shared services		17			26


Total	$	390		$	555


Amortization Expense
RMP	$	2		$	1
SSD		54			53
Canada		180			174
United Kingdom		62			78


Total	$	298		$	306

Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


	Three Months Ended
	March 31
	2008		2007
	(In Thousands)
Capital Expenditures
RMP	$	771	$	66
SSD		8		333
Canada		59		68
United Kingdom		58		111
Corporate shared services		8		14


Total	$	904	$	592


	March 31		December 31
	2008		2007
	(In Thousands)
Total Assets
RMP	$	39,473	$	40,360
SSD		8,166		7,862
Canada		35,331		36,014
United Kingdom		19,657		19,775
Corporate shared services		206		215


Total	$	102,833	$	104,226

Note 11: Restructuring Costs

United Kingdom

In 2006, as part of a reorganization plan at Portec Rail Products (UK) Ltd., we consolidated our rail and material handling operations in the United Kingdom by closing our Wrexham, Wales and Stone, England facilities. As part of the reorganization plan, we incurred costs associated with exit and disposal activities, which we recognized in accordance with Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). All restructuring expenses were included within selling, general and administrative expenses on the consolidated income statement. For the three months ended March 31, 2007, we incurred $14,000 (£7,000 pounds sterling) of expense related to employee termination benefits. During the three months ended March 31, 2007, we did not incur any expense for contract termination costs or for other expenses related to the reorganization. We paid termination benefits of $54,000 (£28,000 pounds sterling) during the first quarter 2007. As the reorganization plan was completed during the first quarter 2007, no additional restructuring costs were incurred for the remainder of 2007 or during the first quarter 2008.

In conjunction with the closing of the Wrexham facility, the property (which included land, building, and building improvements) was sold on March 29, 2007. The selling price of the property was approximately $2.0 million (£1,025,000 pounds sterling), which approximated its net book value. The majority of the proceeds of the sale were used to repay an outstanding mortgage loan on the property on March 30, 2007.

Kelsan

On November 16, 2006, we restructured the Kelsan organization, which resulted in employee headcount reductions. The restructuring plan was substantially completed as of December 31, 2006, with all expenses related to the restructuring plan incurred during 2006; as such, no restructuring costs were incurred during the three months ended March 31, 2008 and 2007. We recognized these costs in accordance with SFAS 146. All restructuring costs were included within selling,

Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

general and administrative expenses on the consolidated income statement. During the first quarter 2007, we paid termination benefits of $51,000 ($59,000 Canadian dollars).

Note 12: Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141R,Business Combinations — a revision of SFAS 141(SFAS 141R), which will significantly alter the way that companies account for business combinations under the acquisition method. Under SFAS 141R, 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, SFAS 141R prospectively applies to business combinations for which the acquisition date is on or after January 1, 2009. The adoption of SFAS 141R 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.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement 115(SFAS 159) that provides companies with an option to report certain financial assets and liabilities in their entirety at fair value. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The fair value option may be applied instrument by instrument, and may be applied only to entire instruments. A business entity would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The adoption of this statement did not materially impact our consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,Fair Value Measurements(SFAS 157), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. The expanded disclosures in this statement about the use of fair value to measure assets and liabilities should provide users of financial statements with better information about the extent to which fair value is used to measure recognized assets and liabilities, the inputs used to develop the measurements, and the effect of certain of the measurements on earnings (or changes in net assets) for the period. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of this statement did not materially impact our consolidated financial statements.

Note 13: Stock Options

On January 30, 2008 and January 16, 2007, the Company granted 72,750 and 79,250 stock options, respectively, to certain employees with an exercise price of $9.68 and $9.65 per stock option, respectively, which is equal to the closing stock price on the date of grant. The stock options will vest ratably over a 5-year period and will expire on January 30, 2018 and January 16, 2017, respectively. These options were granted under the Portec Rail Products, Inc. 2006 Stock Option Plan (the Option Plan), which authorizes the issuance of up to 150,000 shares of common stock of Portec Rail Products, Inc. pursuant to grants of incentive and non-statutory stock options and will remain in effect for a period of ten years. We adopted Statement of Financial Accounting Standards No. 123(R),Share-Based Payments(SFAS 123(R)), effective January 1, 2006; however, we did not incur any compensation expense during 2006. For the three months ended March 31, 2008 and 2007, we recognized compensation expense of approximately $14,000 and $11,000, respectively, related to

Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

the 2007 stock option grant. For the three months ended March 31, 2008, we recognized compensation expense of approximately $8,000 related to the 2008 stock option grant. We expect to recognize additional compensation expense of approximately $234,000 and $204,000 over the remaining vesting periods of the 2008 and 2007 stock option grants, respectively. During the three months ended March 31, 2008, 750 and 1,000 stock options from the 2008 and 2007 grants, respectively, were forfeited. In 2007, 2,000 stock options from the 2007 stock option grant were forfeited; these were re-granted on January 30, 2008. The 1,750 stock options which were forfeited in 2008 have not been re-granted.

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


		Stock Price on	Exercise Price per	Annual Dividend			Expected Term (in
Grant Date	Fair Value Price	Grant Date	Stock Option	Yield	Risk-free Rate	Expected Volatility	years)

1/30/08	$3.67	$9.68	$9.68	2.48%	4.00%	38.87%	7.5
1/16/07	$3.61	$9.65	$9.65	2.50%	4.73%	39.40%	6.5

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

The following discussion should be read in conjunction with the condensed consolidated financial statements of Portec Rail Products, Inc. and the related notes beginning on page 3. Unless otherwise specified, any reference to the “three months ended” is to the three months ended March 31. Additionally, when used in this Form 10-Q, unless the context requires otherwise, the terms “we,” “our” and “us” refer to Portec Rail Products, Inc. and its business segments.

Cautionary Statement Relevant to Forward-looking Statements

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

The Company identifies important factors that could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. In particular, the Company’s future results could be affected by a variety of factors, such as:

	•		customer demand;

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

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

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

	•		product development and the success of new products;

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

	•		changes in laws and regulations;

	•		the development and retention of sales representation and distribution agreements with third parties;

	•		limited international protection of our intellectual property;

	•		the loss of key personnel;

	•		fluctuations in the cost and availability of raw materials and supplies, and any significant disruption of supplies;

	•		foreign economic conditions, including currency rate fluctuations;

	•		political unrest in foreign markets and economic uncertainty due to terrorism or war;

	•		exposure to pension liabilities;

	•		seasonal fluctuations in our sales;

	•		technological innovations by our competitors; and

	•		the importation of lower cost competitive products into our markets.

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

Overview

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

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

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

During 2007, the exchange rate of the U.S. dollar deteriorated significantly compared to foreign currencies of the countries in which we have operating locations. The increase in value of the Canadian dollar compared to the U.S. dollar could result in an economic disadvantage for our Canadian operating locations, as lower cost products from the United States may become more economically viable alternatives to the products we offer. During the first quarter 2008, foreign exchange rates between the U.S. dollar and Canadian dollar remained at relatively the same levels as they were during the fourth quarter 2007, which are historically high, with a ratio of approximately 1:1. If the value of the U.S. dollar continues to deteriorate, or remain at the current levels for an extended period of time, this could result in negative business consequences for our Canadian operations. Alternatively, products that we produce in the United States may be more competitive in foreign markets that we serve. We do not have any control over exchange rates, as these are largely driven by worldwide economic factors.

Results of Operations

Three Months Ended March 31, 2008 compared to Three Months Ended March 31, 2007

Net Sales.Net sales decreased to $24.8 million for the three months ended March 31, 2008, a decrease of $2.7 million or 9.6%, from $27.5 million for the comparable period in 2007. The decrease in net sales is primarily attributable to lower sales of $1.1 million at RMP, $931,000 at our Canadian operations, and $856,000 at our United Kingdom operations, partially offset by increased sales of $217,000 at SSD. The $1.1 million decrease in net sales at RMP is a combination of a $1.8 million volume decrease in sales of both track components and our friction management product groups, partially offset by higher sales of $811,000 due to increased sales of Salient Systems’ products. Net sales at our Canadian operations declined $931,000, reflecting lower sales of $1.8 million primarily due to lower sales of rail anchors and spikes and friction management products, partially offset by $907,000 of foreign currency translation that positively impacted net sales. The decrease in sales at our United Kingdom operations is primarily due to lower sales of material handling and track component products, partially offset by higher sales of friction management products. Increased net sales of $217,000 at SSD primarily reflect higher sales of automotive products.

Gross Profit.Our consolidated gross profit percent increased to 31.0% for the three months ended March 31, 2008 from 29.3% for the comparable period of the prior year, primarily due to product mix experienced in the current period. However, gross profit dollars decreased to $7.7 million for the three months ended March 31, 2008, a decrease of $336,000 or 4.2%, from $8.0 million for the comparable period in 2007. The decrease in gross profit is attributable to lower gross profit of $647,000 at our Canadian operations and $219,000 at our United Kingdom operations, partially offset by higher gross profit of $304,000 at SSD and $226,000 at RMP. Lower gross profit of $647,000 at our Canadian operations includes $889,000 of lower gross profit primarily due to lower overall sales volume, along with development

costs incurred for a new rail anchor design. Gross profit at our Canadian operations was also favorably impacted by $242,000 of foreign currency translation during the current period. At our United Kingdom operations, gross profit decreased $219,000 in the current period, primarily due to lower sales volume of material handling and track component products, partially offset by higher gross profit on friction management products due to higher sales volume. The increase in gross profit of $304,000 at SSD is primarily due to higher gross profit from automotive products, primarily due to a more favorable product mix and sales of our new WinChock^TM product. The increase in gross profit of $226,000 at RMP is primarily due to higher gross profit on Salient Systems’ products, reflecting higher sales volume.

Selling, General and Administrative Expenses.Selling, general and administrative expenses decreased to $5.4 million for the three months ended March 31, 2008, a decrease of $254,000 or 4.5%, from $5.7 million for the comparable period in 2007. The decrease in selling, general and administrative expenses is primarily due to lower expenses of $230,000 from corporate shared services, primarily due to lower professional fees related to Sarbanes-Oxley compliance efforts.

Interest Expense.Interest expense decreased to $226,000 for the three months ended March 31, 2008, a decrease of $91,000 or 28.7%, from $317,000 for the comparable period in 2007. Total debt obligations decreased to $17.1 million at March 31, 2008 from $17.2 million at March 31, 2007, reflecting a decrease in long-term debt of $2.8 million, partially offset by higher short-term borrowings of $2.7 million.

Provision for Income Taxes.Provision for income taxes decreased to $511,000 for the three months ended March 31, 2008, from $625,000 for the comparable period in 2007; however, income before taxes increased to $1.9 million for the three months ended March 31, 2008 compared to $1.8 million for the comparable period of the prior year. Our effective tax rates on taxable income were 27.5% and 34.2% for the three months ended March 31, 2008 and 2007, respectively. Income tax during the prior period was higher by $128,000 due to the income tax on the gain recorded in the United Kingdom on the sale of the Wrexham facility in March 2007, which adversely affected our consolidated effective tax rate during the prior period by 7.0%. In conjunction with the recording of 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 as a result of the purchase of the Company in 1997.

Net Income.Net income increased to $1.3 million for the three months ended March 31, 2008, an increase of $139,000 or 11.5%, from $1.2 million for the comparable period in 2007. Our basic and diluted net income increased to $0.14 per share for the three months ended March 31, 2008, from $0.13 per share for the comparable period in 2007, on average shares outstanding of 9,601,779 for both periods.

Business Segment Review

Railway Maintenance Products Division — “RMP”.Our RMP business segment manufactures and assembles track components and related products, friction management products, and wayside data collection and data management systems. We also provide services to railroads, transit systems and railroad contractors, and we are a distributor and reseller of purchased track components, and lubricants manufactured by third parties. Our manufactured and assembled track component and friction management products consist primarily of standard and insulated rail joints, friction management systems, and wayside data collection and data management systems. Our purchased and distributed products consist primarily of various lubricants.


	Three Months Ended
	March 31
	2008		2007
	(In Thousands)
External sales	$	10,043	$	11,114
Intersegment sales		532		491
Operating income		1,243		1,024

Sales by product line(1)
Track component products	$	5,593	$	7,356
Friction management products and services		2,663		3,351
Wayside data collection and data management systems		1,401		577
Other products and services		918		321

Total product and service sales	$	10,575	$	11,605


(1)		Includes intersegment sales.

For the three months ended March 31, 2008, external sales for RMP decreased by $1.1 million or 9.6%, to $10.0 million from $11.1 million during the comparable period in 2007. The decrease in external sales is a combination of a $1.8 million volume decrease in sales of both track component and friction management products, partially offset by higher sales of $811,000 due to increased sales of Salient Systems’ products. Operating income for the three months ended March 31, 2008 increased to $1.2 million from $1.0 million for the comparable period in 2007, an increase of $219,000 or 21.4%. The increase in operating income is primarily attributable to higher gross profit on higher sales volume of Salient Systems’ products.

Shipping Systems Division — “SSD”.SSD engineers and sells load securement systems and related products to the railroad freight car market. These systems are used to secure a wide variety of products and lading onto freight cars. SSD is also a major supplier of new and reconditioned tie-down systems for the shipment of new automobiles and vans by the rail industry. The assembly work for SSD is primarily performed at RMP’s Huntington, West Virginia manufacturing plant.


	Three Months Ended
	March 31
	2008		2007
	(In Thousands)
External sales	$	2,365	$	2,148
Intersegment sales		—		(3	)
Operating income		518		294

Sales by product line(1)
Automotive products	$	1,188	$	929
Chain securement systems		826		740
Strap securement systems		82		246
All other load securement systems		269		230

Total product and service sales	$	2,365	$	2,145


(1)		Includes intersegment sales.

For the three months ended March 31, 2008, external sales for SSD increased by $217,000 or 10.1%, to $2.4 million from $2.1 million during the comparable period in 2007. The increase in external sales is primarily due to higher sales of automotive products. Although overall sales of automotive products increased, a temporary shutdown at one of our customer’s plants due to a supplier strike adversely affected sales of our G-Van product, a vehicle restraint mechanism used to secure large commercial vans to railcars. For the comparable period of the prior year, sales to this customer were the second highest for SSD overall. At this time, we cannot predict the impact that this will have on our future results; however, a prolonged shutdown of our customer’s plant will continue to negatively impact sales of our G-Van product. Operating income for the three months ended March 31, 2008 increased to $518,000 from $294,000 during the comparable period in 2007, an increase of $224,000 or 76.2%, primarily due to higher gross profit from automotive products, primarily due to a more favorable product mix, and sales of our new WinChock^TM product.

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


	Three Months Ended
	March 31
	2008		2007
	(In Thousands, Except
	Translation Rate)
External sales	$	6,415	$	7,346
Intersegment sales		1,459		1,791
Operating income		496		1,116
Average translation rate of Canadian dollar to United States dollar		0.9980		0.8569

Sales by product line(1)
Rail anchors and spikes	$	4,850	$	5,489
Friction management products and services		2,611		3,424
Other products and services		413		224

Total product and service sales	$	7,874	$	9,137


(1)		Includes intersegment sales.

For the three months ended March 31, 2008, external sales for Canada decreased by $931,000 or 12.7%, to $6.4 million from $7.3 million during the comparable period in 2007. The decrease in external sales reflects a $1.8 million volume decrease, primarily due to lower sales of rail anchors and spikes and friction management products, partially offset by $907,000 of foreign currency translation that positively impacted net sales. Operating income for the three months ended March 31, 2008 decreased to $496,000 from $1.1 million during the comparable period in 2007, a decrease of $620,000 or 55.6%. The decrease is attributable to lower gross profit of $647,000, primarily due to an unfavorable product mix, lower sales of rail anchors and friction management products, and development costs incurred for a new rail anchor design.

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


	Three Months Ended
	March 31
	2008		2007
	(In Thousands, Except
	Translation Rate)
External sales	$	6,020	$	6,876
Operating income		572		698
Average translation rate of British pound sterling to United States dollar		1.9883		1.9656

Sales by product line
Material handling products	$	2,000	$	3,244
Friction management products and services		2,640		2,098
Track component products		1,380		1,534

Total product and service sales	$	6,020	$	6,876

For the three months ended March 31, 2008, external sales at our United Kingdom operations decreased by $856,000 or 12.4%, to $6.0 million from $6.9 million during the comparable period in 2007. The decrease in external sales is primarily due to lower sales of material handling and track component products, partially offset by an increase in sales of friction management products. Operating income for the three months ended March 31, 2008 decreased to $572,000 from $698,000 during the comparable period in 2007, a decrease of $126,000 or 18.1%. The decrease is primarily attributable to lower gross profit from material handling and track component products due to lower sales volume, partially offset by higher gross profit from higher friction management product sales. During the comparative periods there were no intersegment sales.

Liquidity and Capital Resources

Our cash flow from operations is the primary source of financing for internal growth, capital expenditures, repayment of long-term obligations, dividends to our shareholders, and other commercial commitments. The most significant risk associated with our ability to generate sufficient cash flow from operations is the overall level of demand for our products. Our cash balance is $3.6 million at March 31, 2008. In addition to cash generated from operations, we have revolving and overdraft credit facilities in place to support the working capital needs of each of our business segments. We believe that our cash flow from operations and the ability to borrow additional cash under our working capital facilities along with our existing cash balances will be sufficient to meet our cash flow requirements and growth objectives over the next twelve months.

Cash Flow Analysis.During the three months ended March 31, 2008 we generated $91,000 in cash from operations compared to generating $43,000 in cash from operations during the same period in 2007. Cash generated from operations is due to net income of $1.3 million in the current period, compared to $1.2 million during the same period in 2007, an increase of $139,000. Additionally, we incurred depreciation and amortization expense of $688,000 in the current period compared to $861,000 in the same period in 2007, a decrease of $173,000, primarily because several assets related to the 1997 purchase of the Company were fully-depreciated as of December 31, 2007. As a result, we expect depreciation expense for 2008 to be approximately $340,000 lower than 2007, which will primarily affect the RMP segment. This decrease will be partially offset by depreciation expense on assets, which will be placed in service during 2008. Cash provided by operations during the three months ended March 31, 2008 includes lower accounts receivable balances of $2.5 million, primarily due to lower sales volumes, and higher accounts payable balances of $1.8 million, primarily due to the timing of payments to vendors. Cash used in operations during the three months ended March 31, 2008 includes lower accrued expenses of $3.2 million, primarily due to company-wide incentive plan payments during the first quarter of 2008 and lower customer deposits at Salient Systems; higher inventory balances of $1.6 million, primarily due to steel purchases during the first quarter of 2008 by RMP and lower sales; and higher prepaid expenses and other current assets of $1.1 million, primarily due to advance payments on Chinese steel purchases, prepaid insurance premiums, and refundable goods and services taxes paid at our Montreal location.

Net cash used in investing activities was $944,000 for the three months ended March 31, 2008, compared to $1.4 million provided by investing activities during the same period in 2007. Cash used in investing activities is primarily due to capital expenditures of $904,000. During the second quarter 2007, we obtained Board of Director approval for approximately $1.0 million of capital improvements, specifically related to our track component products, to be made to our Huntington, West Virginia manufacturing facility. In early 2008, as a result of design changes, additional equipment, and higher than anticipated equipment costs, the Board of Directors approved an increase to approximately $1.6 million for these projects. We anticipate that these projects will be finalized during the fourth quarter of 2008. As of March 31, 2008, we have spent approximately $1.2 million on these projects. Our capital expenditures upgrade our machinery and equipment, improve our facilities, support new strategic initiatives or develop new products. We believe that the overall level of capital spending for our business segments is sufficient to remain competitive.

Net cash provided by financing activities was $252,000 for the three months ended March 31, 2008, compared to $1.7 million of cash used in financing activities during the comparable period in 2007. Cash provided by financing activities in 2008 includes $2.2 million of net borrowings on working capital facilities. Cash used in financing activities in 2008 includes repayments of long-term debt obligations of $1.2 million and $576,000 in cash dividends paid to our common stockholders.

Financial Condition

At March 31, 2008, total assets were $102.8 million, a decrease of $1.4 million or 1.3%, from $104.2 million at December 31, 2007. The decrease at March 31, 2008 is primarily due to lower accounts receivable of $2.6 million on lower sales volume, and lower cash and cash equivalents of $628,000. Partially offsetting these decreases are increases primarily due to higher inventory of $1.4 million from first quarter 2008 steel purchases and lower sales volume, and higher prepaid expenses of $1.0 million due to advance payments on Chinese steel purchases, prepaid insurance premiums, and refundable goods and services taxes paid at our Montreal location.

Total outstanding debt obligations were $17.1 million at March 31, 2008, an increase of $763,000 or 4.5% from $16.3 million at December 31, 2007. The increase primarily reflects short-term borrowings which increased by $2.2 million during the current period. During the three months ended March 31, 2008, we repaid $1.5 million of long-term debt obligations.

The products that we manufacture and sell, such as our rail joints, rail anchors and rail spikes, require steel as a major element in the production process. Worldwide demand for steel began to significantly increase in 2004, which resulted in market price increases for steel along with surcharges being added to our raw material costs. Over the next few years we began to see a transition from surcharges on some purchases to higher base prices for steel used in our track component products. During the first quarter 2008, as steel prices have continued to increase to historic levels, we saw a combination of higher base prices and steel surcharges. We have been able to successfully pass on some higher material costs and steel surcharges to our customers, but these higher material costs have had an impact on our financial results. If a prolonged increase in steel prices should continue and we are unable to pass on these added costs to our customers, our future earnings could be negatively impacted.

Discussion of Critical Accounting Policies

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

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

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

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

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

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

Inventories.We establish obsolescence reserves for slow-moving and obsolete inventories. Obsolescence reserves reduce the carrying value of slow moving and obsolete inventories to their estimated net realizable value, which generally approximates the recoverable scrap value. We utilize historical usage, our experience, current backlog and forecasted usage to evaluate our reserve amounts. We also periodically evaluate our inventory carrying

value to ensure that the amounts are stated at the lower of cost or market. If actual market conditions are less favorable than those projected by us, additional inventory reserves may be required.

Goodwill and Other Intangible Assets.We assess the impairment of goodwill and other intangible assets at least annually and whenever events or significant changes in circumstances indicate that the carrying value may not be recoverable. We evaluate the goodwill of each of our reporting units and our indefinite-lived intangible assets for impairment as required under SFAS No. 142 “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that goodwill be tested for impairment using a two-step process. The first step is to identify a potential impairment and the second step measures the amount of an impairment loss, if any. Goodwill is deemed to be impaired if the carrying amount of a reporting unit’s goodwill exceeds its estimated fair value. The fair values of our reporting units are determined using a discounted cash flow analysis based upon historical and projected financial information. The intangible assets of Salient Systems are tested following the same process. The estimates of future cash flows, discount rates, and long-term growth rates, based on reasonable and supportable assumptions and projections, require our judgment. Factors that could change the result of our goodwill and intangible asset impairment test include, but are not limited to, different assumptions used to forecast future revenue, expenses, capital expenditures and working capital requirements used in our cash flow models. In addition, selection of a risk adjusted discount rate on the estimated undiscounted cash flow is susceptible to future changes in market conditions and when unfavorable, can adversely affect our original estimates of fair values. As such, to account for the uncertainty inherent in our estimates and future projections, we perform sensitivity analyses to determine our margin of error. Since adoption of SFAS No. 142, we have not recognized any impairment of goodwill or other intangible assets.

Our amortizable intangible assets are evaluated for impairment in accordance with SFAS No. 144 “Accounting for Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 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, SFAS No. 144 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 SFAS No. 144, we have not recognized any impairment of intangible assets.

In conjunction with the acquisitions of Coronet Rail and the assets of Vulcan, we recorded the fair value of the acquired tangible and intangible assets in accordance with SFAS No. 142. As part of our procedures to assign fair values to all acquired assets, we engaged an independent valuation expert to evaluate the technology and intellectual property along with other intangible assets that could be assigned a fair value under these acquisitions. We supplied the independent valuation expert with the historical and estimated cash flows of the companies along with an estimate of future costs to maintain these technologies. The independent valuation expert used these estimates and other assumptions to determine the present value of the discounted cash flows of these various technologies. In addition, we evaluated the future lives of the identified intangible assets to determine if they have definite or indefinite lives.

As a result of the Vulcan asset acquisition, we assigned fair values of $2.2 million to customer relationships, $890,000 to a unique customer relationship, $342,000 to vehicle restraint assembly technology (G-Van patent), $47,000 to a supply agreement and $5,000 to non-compete agreements. We also determined that there was $830,000 of goodwill to be recorded as part of this transaction. The goodwill balance increased to $1,043,000 at March 31, 2008, primarily due to accrued earn-out based upon sales volume, which is recorded as an increase of the total purchase price. During the three months ended March 31, 2008 and 2007, total earn-out payments of $98,000 and $0, respectively, were paid to the former owners of Vulcan. In addition, we have estimated that the customer relationships, a unique customer relationship, vehicle restraint assembly technology, supply agreement, and non-compete agreements have definite lives of 19 years, 17 years, 11 years, 3 years and 7 years, respectively, due to our estimates that the projected economic earnings associated with these intangible assets will begin to lapse after these time frames. We will monitor these assets to determine if certain events occur that could cause the lives assigned to these intangible assets to become shorter than originally assigned. We would then assign a shorter future estimated life based on the years that we feel that the product would have value in the marketplace and record an impairment charge in the proper accounting period.

During the first quarter 2008, our customer, on whom the value of our unique customer relationship intangible asset is based, was forced to temporarily shutdown operations at one of its plants due to a supplier strike. As a result of this shutdown, sales of our G-Van product to this customer were negatively impacted. Our G-Van product is designed by utilizing our patented vehicle restraint assembly technology (G-Van patent); as such, the value assigned to this patent is based upon the revenue stream from sales of the G-Van product. At this time, we cannot predict the impact that this will have on the value of our unique customer relationship intangible asset and our G-

Van patent; however a prolonged shutdown of our customer’s plant will continue to negatively impact sales of our G-Van product to this customer, which could negatively impact our financial projections associated with these intangible assets. Lower financial projections could result in lower fair values for these intangible assets, which could trigger an impairment charge.

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

Warranty Reserves.Most of our products are covered by a replacement warranty. We establish warranty reserves for expected warranty claims based upon our historical experience, or for known warranty issues and their estimable replacement costs. During 2007, we became aware of a problem with RMP’s Bonded to Rail (BTR) joint bars manufactured in Huntington, WV. Warranty expense incurred in 2007 for defective BTRs totaled $1.3 million. No warranty expense for potentially defective BTRs was recognized during the three months ended March 31, 2008. The balance in the BTR warranty reserve at March 31, 2008 is $429,000, which management expects to be adequate to cover expected future costs associated with potentially defective BTRs. Although we believe that $429,000 is a reasonable estimate of our potential exposure for warranty claims on BTRs as of March 31, 2008, changes in the components of our estimate due to new information and future events could cause this estimate to vary significantly. There can be no assurance at this point that future costs pertaining to this issue will not have a material impact on our financial condition or results of operations. See Note 9, Commitments and Contingencies, Page 13 for further details.

Retirement Benefit Plans.We maintain defined benefit pension plans that cover a significant number of our active employees, former employees and retirees. We account for these plans as required under SFAS No. 87, “Employers’ Accounting for Pensions” and SFAS No. 158 “Employer’s Accounting for Defined Benefit Plans and Other Postretirement Plans.” The liabilities and expenses for pensions require significant judgments and estimates. These amounts are determined using actuarial methodologies and incorporate significant assumptions, including the rate used to discount the future estimated liability, inflation, the long-term rate of return on plan assets and mortality tables. Management has mitigated the future liability for active employees by freezing all defined benefit pension plans effective December 31, 2003. The rate used to discount future estimated liabilities is determined based upon a hypothetical double A yield curve represented by a series of annualized individual discount rates from one-half to thirty years. Our inflation assumption is based on an evaluation of external market indicators. The long-term rate of return is estimated by considering historical returns and expected returns on current and projected asset allocations. The effects of actual results that differ from these assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligations in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our obligations and future expense.

As interest rates decline, the actuarially calculated retirement benefit plan liability increases. Conversely, as interest rates increase, the actuarially calculated retirement benefit plan liability decreases. Past declines in interest rates and equity markets have had a negative impact on the retirement benefit plan liability and fair value of our plan assets. As a result, the accumulated benefit obligation exceeded the fair value of plan assets at December 31, 2007; however, as a result of an increase in interest rates during 2007, which increased the discount rate used to calculate our 2007 retirement benefit plan liability, our liability at December 31, 2007 is less than the liability at December 31, 2006, which resulted in a $1,380,000, net of tax, increase in shareholder’s equity.

We maintain a post-retirement benefit plan at our Canadian operation near Montreal, which provides retiree life insurance, health care benefits and, for a closed group of employees, dental care. We account for this plan under SFAS No. 158. The liabilities and expenses for post-retirement benefit plans require significant judgments and estimates. These amounts are actuarially determined using the projected benefit method pro rated on service and significant management assumptions, including salary escalation, retirement ages of employees and expected health care costs. Retirement benefit plan adjustments and changes in assumptions are amortized to earnings over the

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

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

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

As of January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 (FIN 48), which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of uncertain tax positions to be taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The determination of the amount of benefits to be recognized and the sustainability of our tax positions upon examination require us to make certain estimates and to use our best judgment based upon historical experience.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to interest rate risk on our long-term debt obligations and our working capital facilities are under floating interest rate arrangements. We have determined that these risks are not significant enough to warrant hedging programs. If interest rates increase we will be exposed to higher interest rates and we will be required to use more cash to settle our long-term debt obligations. As interest rates increase on our variable long-term debt, it will have a negative impact on future earnings because the interest rates will increase our interest expense. Conversely, if interest rates decrease on our variable long-term debt, it will have a positive impact on future earnings because lower interest rates will decrease our interest expense. Based upon our long-term debt amounts as of March 31, 2008, for every 1% increase or decrease in the interest rate on our long-term debt, our annual interest expense will fluctuate by approximately $171,000.

In addition, we are exposed to foreign currency translation fluctuations with our international operations. We do not have any foreign exchange derivative contracts to hedge against foreign currency exposures. Therefore, we are exposed to the related effects when foreign currency exchange rates fluctuate. If the U.S. dollar strengthens against the Canadian dollar and/or the British pound sterling, the translation rate for these foreign currencies will decrease, which will have a negative impact on our operating income. For example, for the three months ended March 31, 2008, 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 $5,000. Further, for every 1/100 change in the exchange rate of the British pound sterling to the U.S. dollar, the impact on operating income for our United Kingdom operation for the three months ended March 31, 2008 would have been $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 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its

disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report on Form 10-Q (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. There has been no change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

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

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

Nothing to report under this item.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Nothing to report under this item.

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

Nothing to report under this item.

ITEM 5. OTHER INFORMATION

Nothing to report under this item.

ITEM 6. EXHIBITS

(a)

Exhibits filed as part of this Form 10-Q:

	31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	PORTEC RAIL PRODUCTS, INC.
Date: May 6, 2008	By:	/s/ Richard J. Jarosinski
		Richard J. Jarosinski, President and Chief
		Executive Officer


Date: May 6, 2008	By:	/s/ John N. Pesarsick
		John N. Pesarsick, Chief Financial Officer

EXHIBIT INDEX

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	8th grade Avg

Portec Rail Products (PRPX) Inactive 10-Q2008 Q1 Quarterly report

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