The following discussion should be read in conjunction with the condensed consolidated financial statements of Portec Rail Products, Inc. and the related notes beginning on page 3. Unless otherwise specified, any reference to the "three months ended" or "nine months ended" is to the three or nine months ended September 30. Additionally, when used in this Form 10-Q, unless the context requires otherwise, the terms "we," "our" and "us" refer to Portec Rail Products, Inc. and its business segments.
Cautionary Statement Relevant to Forward-looking Statements This Form 10-Q contains or incorporates by reference forward-looking statements relating to the Company. Forward-looking statements typically are identified by the use of terms, such as "may," "will," "plan," "should," "expect," "anticipate," "believe," "if," "estimate," "intend," and similar words, although some forward-looking statements are expressed differently. You should consider statements that contain these and similar words carefully because they describe our expectations, plans, strategies, goals and beliefs concerning future business conditions, our results of operations, our financial position, and our business outlook, or state other "forward-looking" information based on currently available information. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors. We undertake no obligation to update publicly or revise any forward-looking statements. You should not place undue reliance on the forward-looking statements.
The Company identifies important factors that could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. In particular, the Company's future results could be affected by a variety of factors, such as:
• customer demand;

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

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

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

• product development and the success of new products;

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

• changes in laws and regulations;

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

• limited international protection of our intellectual property;

• the loss of key personnel;

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

• foreign economic conditions, including currency rate fluctuations;

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

• exposure to pension liabilities;

• seasonal fluctuations in our sales;

• technological innovations by our competitors; and

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

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

Overview
In the United States, Canada and the United Kingdom, we are a manufacturer, supplier and distributor of a broad range of rail products, including rail joints, rail anchors, rail spikes, railway friction management products and systems, railway wayside data collection and data management systems and load securement products. End users of our rail products include Class I railroads, regional railroads, short-line railroads and transit systems. Our North American business segments along with the rail division of our United Kingdom business segment serve these end users. In addition, our United Kingdom business segment also manufactures and supplies material handling products for industries outside the rail transportation sector, primarily to end users within the United Kingdom. These products include overhead and floor conveyor systems, expandable boom conveyors, racking systems and mezzanine flooring systems. The end users of our material handling products are primarily in the manufacturing, distribution, garment and food industries.
Our operations are organized into four business segments consisting of the Railway Maintenance Products Division (RMP), the Shipping Systems Division (SSD), Portec Rail Nova Scotia Company (Canada) and Portec Rail Products (UK) Ltd. (United Kingdom), along with corporate shared services. The presentation of segment information reflects the manner in which we organize and manage our segments by geographic areas for making operating decisions, assessing performance and allocating resources. Intersegment sales do not have an impact on our consolidated financial condition or results of operations.
The demand for some of our products is subject to seasonal fluctuations. Our railroad product lines normally experience strong sales during the second and third quarters as a result of seasonal pick-up in construction and trackwork due to favorable weather conditions. In contrast, our railroad product lines experience normal downturns in sales during the first and fourth quarters due in part to reductions in construction and trackwork during the winter months, particularly in the northern United States and Canada. This reduction in sales generally has a negative impact on our first and fourth quarter results. Notwithstanding seasonal trends, quarterly fluctuations in railroad spending for capital programs and routine maintenance can alter the expected seasonal impact on our business.
During the fourth quarter of 2008, the exchange rate of the Canadian dollar and British pound sterling compared to the United States dollar began to weaken considerably. During 2009, the exchange rate of the British pound sterling to the U.S. dollar has remained considerably lower from a recent historical comparison, but the Canadian dollar has been somewhat inconsistent. Lower exchange rates compared to the U.S. dollar could have a negative impact on our results of operations, as the net sales and net income, if they are profitable, of our Canadian and United Kingdom operating locations would be lower in U.S. dollars. We have no control over exchange rates, as these are largely driven by worldwide economic factors.
Results of Operations
Three Months Ended September 30, 2009 compared to Three Months Ended September 30, 2008
Net Sales. Net sales decreased to $24.3 million for the three months ended September 30, 2009, a decrease of $5.4 million or 18.1%, from $29.6 million during the comparable period in 2008. Net sales decreased $2.5 million, $1.1 million, $991,000 and $796,000 at our United Kingdom operations, SSD, Canada and RMP, respectively. The decrease in net sales of $2.5 million at our United Kingdom operations reflects a sales volume decline of $1.7 million, comprised mostly of our material handling products. Our United Kingdom net sales also reflect foreign currency translation in the amount of $777,000 that negatively impacted net sales. SSD's decline in net sales of $1.1 million is a result of lower sales across all major product lines as a result of the economic recession, which has negatively impacted the demand for these products. The decrease in net sales of $991,000 at our Canadian operations is primarily due to a volume decline of $499,000, primarily track component products, in addition to a foreign currency translation of $492,000 that negatively impacted net sales. The $796,000 decrease in net sales at RMP is primarily due to lower sales of track component products, partially offset by higher sales of friction management and wayside detection products.
Cost of Goods Sold. Cost of goods sold (COGS) decreased to $15.8 million for the three months ended September 30, 2009, a decrease of $3.9 million or 19.7%, from $19.7 million during the comparable period in 2008, primarily due to lower sales volume. Our COGS as a percentage of net sales for the three months ended September 30, 2009 was 65.3%, a decrease of 1.3%, from 66.6% for the prior period in 2008. The components of COGS, including direct material, direct labor and overhead, remained consistent as a percentage of net sales during the current period compared to the prior period. On a period to period basis, our COGS is primarily driven by product mix, as our diverse product groups have different cost components.

Gross Profit. Gross profit decreased to $8.4 million for the three months ended September 30, 2009, a decrease of $1.5 million or 14.9%, from $9.9 million for the comparable period in 2008. The decrease in gross profit is attributable to lower gross profit of $711,000 at our United Kingdom operations, $520,000 at RMP and $295,000 at SSD. Lower gross profit at our United Kingdom operations is primarily a result of lower sales volume of our material handling products, along with $254,000 of negative impact from foreign currency translation. Gross profit at RMP decreased $520,000 in the current period, primarily due to lower sales volume of track component products. Gross profit at SSD declined $295,000 in the current period, primarily due to lower sales volume across all major product lines.
Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses decreased to $5.4 million for the three months ended September 30, 2009, a decrease of $461,000 or 7.9%, from $5.9 million for the comparable period in 2008. The decrease is primarily due to lower expenses of $349,000 at our United Kingdom operations and $132,000 at RMP. The $349,000 decrease in SG&A expenses at our United Kingdom operations is a combination of a foreign currency translation of $169,000 that positively impacted SG&A expenses and thus lowered expenses, and lower overall SG&A spending of $180,000 due primarily to lower employee salaries resulting from a lower overall headcount, lower business travel expenses and lower professional fees in the current period. The decrease in SG&A expenses of $132,000 at RMP is primarily due to lower business travel expenses, reduced incentive plan expense due to lower profitability, lower trade show expense and lower depreciation expense, partially offset by an increase in consulting fees.
Interest Expense. Interest expense decreased to $64,000 for the three months ended September 30, 2009, a decrease of $141,000 or 68.8%, from $205,000 for the comparable period in 2008. This lower interest expense reflects lower overall interest rates along with lower debt balances. Total debt obligations decreased to $11.0 million at September 30, 2009, from $17.5 million at September 30, 2008.
Provision for Income Taxes. Provision for income taxes decreased to $618,000 for the three months ended September 30, 2009, from $980,000 for the comparable period in 2008, reflecting the decrease in income before taxes from $3.5 million for the three months ended September 30, 2008 to $2.6 million for the three months ended September 30, 2009. The effective tax rates on taxable income were 23.4% and 28.0% for the three months ended September 30, 2009 and 2008, respectively. Our consolidated effective tax rate is impacted by our divisions' pro-rata share of consolidated income before taxes and related tax expense or benefit. Additionally, our consolidated effective tax rate reflects the benefit of Canadian research and development tax credits, which reduced income tax expense by $51,000 and $169,000, or 1.9% and 4.8% for the three months ended September 30, 2009 and 2008, respectively.
Net Income. Net income decreased to $2.0 million for the three months ended September 30, 2009, a decrease of $493,000 or 19.6%, from $2.5 million for the comparable period in 2008. Our basic and diluted net income decreased to $0.21 per share for the three months ended September 30, 2009, from $0.26 per share for the comparable period in 2008, on average basic and diluted shares outstanding of 9.6 million for each of the three months ended September 30, 2009 and 2008.
Nine Months Ended September 30, 2009 compared to Nine Months Ended September 30, 2008
Net Sales. Net sales decreased to $73.0 million for the nine months ended September 30, 2009, a decrease of $11.7 million or 13.8%, from $84.7 million for the comparable period in 2008. Lower sales of $7.3 million, $4.2 million and $633,000 at our United Kingdom operations, SSD and our Canadian operations, respectively, were partially offset by a net sales increase of $465,000 at RMP. The decrease in net sales of $7.3 million at our United Kingdom operations is a combination of $4.1 million in lower sales volume, primarily material handling products, and foreign currency translation of $3.2 million that negatively impacted net sales. Net sales declined $4.2 million at SSD, primarily due to lower sales across all major product lines as a result of the economic recession, which has negatively impacted the demand for these products. Net sales at our Canadian operations declined $633,000 in the current period, primarily due to the negative impact of foreign currency translation in the amount of $3.6 million, partially offset by $3.0 million in higher sales of friction management and track component products. The increase in net sales of $465,000 at RMP is a combination of an increase in sales volume of $3.4 million on friction management products and $189,000 of higher wayside detection systems, partially offset by $3.2 million in lower sales of track component and other products and services.
Cost of Goods Sold. Cost of goods sold (COGS) decreased to $48.7 million for the nine months ended September 30, 2009, a decrease of $8.5 million or 14.8%, from $57.1 million for the comparable period in 2008. Our COGS as a percentage of net sales for the nine months ended September 30, 2009 was 66.7%, a decrease of 0.8%, compared to 67.5% for the prior period in 2008. The components of COGS, including direct material, direct labor and overhead, remained consistent as a percentage of net sales during the current period compared to the prior period. On a period to period basis, our COGS is primarily driven by product mix, as our diverse product groups have different cost components.

Gross Profit. Gross profit decreased to $24.3 million for the nine months ended September 30, 2009, a decrease of $3.2 million or 11.7%, from $27.5 million for the comparable period in 2008. The decrease in gross profit is attributable to lower gross profit of $2.6 million and $1.8 million at our United Kingdom operations and SSD, respectively, partially offset by higher gross profit of $1.2 million at our Canadian operations. Lower gross profit of $2.6 million at our United Kingdom operations is primarily due to lower sales of material handling products, along with a foreign currency translation of $971,000 that negatively impacted gross profit during the current period. Gross profit at SSD decreased $1.8 million primarily on lower sales volume across all major product lines as a result of the economic recession. The increase in gross profit of $1.2 million at our Canadian operations is a combination of higher gross profit of $2.4 million on higher sales of track components and friction management products, partially offset by a foreign currency translation of $1.2 million that negatively impacted gross profit.
Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses decreased to $16.3 million for the nine months ended September 30, 2009, a decrease of $996,000 or 5.8%, from $17.3 million for the comparable period in 2008. This decrease is primarily due to lower SG&A expenses of $992,000 at our United Kingdom operations and $211,000 at SSD, partially offset by slightly higher expenses within our corporate shared services and our RMP segment. The decrease in SG&A expenses of $992,000 at our United Kingdom operations is primarily due to foreign currency translation, which reduced SG&A expenses by $825,000, along with lower SG&A spending of $167,000, primarily due to lower employee salaries due to a lower overall employee headcount, and lower incentive expense in the current period. SG&A expenses at SSD decreased $211,000, primarily due to lower incentive plan expense due to lower profitability and lower business travel expenses in the current period.
Interest Expense. Interest expense decreased to $217,000 for the nine months ended September 30, 2009, a decrease of $423,000 or 66.1%, from $640,000 for the comparable period in 2008. The lower interest expense reflects lower overall interest rates along with lower debt balances. Total debt obligations decreased to $11.0 million at September 30, 2009, from $17.5 million at September 30, 2008.
Provision for Income Taxes. Provision for income taxes decreased to $1.7 million for the nine months ended September 30, 2009 from $2.6 million for the comparable period in 2008, reflecting a decrease in income before taxes from $8.8 million for the nine months ended September 30, 2008 to $7.1 million for the nine months ended September 30, 2009. The effective tax rates on reported taxable income were 24.4% and 29.0% for the nine months ended September 30, 2009 and 2008, respectively. Our consolidated effective tax rate is impacted by our divisions' pro-rata share of consolidated income before taxes and related tax expense or benefit. Additionally, our consolidated effective tax rate reflects the benefit of Canadian research and development tax credits, which reduced income tax expense by $219,000 and $402,000, or 3.1% and 4.6% for the nine months ended September 30, 2009 and 2008, respectively.
Net Income. Net income decreased to $5.4 million for the nine months ended September 30, 2009, a decrease of $902,000 or 14.4%, from $6.3 million for the comparable period in 2008. Our basic and diluted net income per share decreased to $0.56 for the nine months ended September 30, 2009, from $0.65 per share for the comparable period in 2008, on average basic and diluted shares outstanding of 9.6 million for both periods.

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

                                                  Three Months Ended                Nine Months Ended
                                                     September 30                     September 30
                                                 2009             2008            2009             2008
                                                                     (In Thousands)
External sales                                $   11,556        $ 12,352        $  35,394        $ 34,929
Intersegment sales                                   377           1,092            1,218           2,489
Operating income                                   1,571           1,960            4,884           5,066

Sales by product line(1)
Track component products                      $    4,650        $  6,791        $  16,355        $ 19,469
Friction management products and
services                                           5,343           4,668           14,091          11,659
Wayside data collection and data
management systems                                 1,367           1,039            3,933           3,764
Other products and services                          573             946            2,233           2,526

Total product and service sales               $   11,933        $ 13,444        $  36,612        $ 37,418

(1) Includes intersegment sales.

For the three months ended September 30, 2009, external sales for RMP decreased by $796,000 or 6.4%, to $11.6 million from $12.4 million during the comparable period in 2008. The $796,000 decrease in net sales at RMP is primarily due to lower sales of track components and other products and services, primarily car repair products, partially offset by higher sales of friction management products and wayside data collection and data management systems. Cost of goods sold, including direct material, direct labor and overhead, as a percentage of net external sales for RMP in the current period was unfavorably impacted by higher overhead costs in the current period, primarily related to the track component product group. Operating income for the three months ended September 30, 2009 decreased to $1.6 million from $2.0 million for the comparable period in 2008, a decrease of $389,000 or 19.8%. This decrease is primarily due to lower gross profit from lower sales of track components and other products and services, partially offset by lower SG&A expenses of $132,000, primarily related to lower business travel expenses, reduced incentive plan expense due to lower profitability, lower trade show expense and lower depreciation expense, offset by an increase in consulting fees.
For the nine months ended September 30, 2009, external sales for RMP increased by $465,000 or 1.3%, to $35.4 million from $34.9 million during the comparable period in 2008. The increase in external sales is primarily due to higher sales of friction management products and wayside data collection and data management systems, partially offset by lower sales of track component products and other products and services. Cost of goods sold, including direct material, direct labor and overhead, as a percentage of net sales for RMP in the current period was consistent with the prior period. Operating income for the nine months ended September 30, 2009 decreased to $4.9 million from $5.1 million for the comparable period in 2008, a decrease of $182,000 or 3.6%, due primarily to higher SG&A expenses of $122,000, along with lower gross profit of $47,000 in the current period. SG&A expenses that increased in the current period include sales commission expenses related to product mix, and higher consulting fees, partially offset by lower business travel expenses and lower incentive plan expenses due to lower profitability.

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

                                         Three Months Ended          Nine Months Ended
                                            September 30                September 30
                                          2009          2008          2009         2008
                                                           (In Thousands)
     External sales                    $    1,293      $ 2,345     $    4,054     $ 8,287
     Intersegment sales                         -            -              -           -
     Operating (loss)/income                   (6 )        238            (24 )     1,609

     Sales by product line
     Automotive products               $      703      $ 1,326     $    1,928     $ 5,125
     Chain securement systems                 469          730          1,669       2,285
     Strap securement systems                  22          113            142         260
     Other load securement systems             99          176            315         617

     Total product and service sales   $    1,293      $ 2,345     $    4,054     $ 8,287

For the three months ended September 30, 2009, external sales for SSD decreased by $1.1 million or 44.9%, to $1.3 million from $2.3 million during the comparable period in 2008. The decrease in external sales reflects lower sales across all major product lines due to the economic recession, which has weakened demand for the products supplied by SSD. Cost of goods sold, including direct material, direct labor and overhead, as a percentage of net sales for the current period was consistent with the prior period for SSD. Operating loss for the three months ended September 30, 2009 was $6,000 compared to operating income of $238,000 during the comparable period in 2008, primarily due to lower gross profit on lower overall sales volume.
For the nine months ended September 30, 2009, external sales for SSD decreased by $4.2 million or 51.1%, to $4.1 million from $8.3 million during the comparable period in 2008. The decrease in external sales is primarily due to lower sales across all major product lines due to the economic recession, which has weakened demand for the products supplied by SSD. Cost of goods sold, including direct material, direct labor and overhead, as a percentage of net sales was unfavorably impacted by a lower absorption rate of overhead costs in the current period, primarily due to lower sales volume in the current period. SSD incurred an operating loss of $24,000 for the nine months ended September 30, 2009, compared with operating income of $1.6 million during the comparable period in 2008. The operating loss primarily reflects lower gross profit due to lower overall sales volume, partially offset by lower selling, general and administrative expenses of $211,000, primarily due to lower incentive plan expense due to lower profitability and lower business travel expenses in the current period.

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

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