Riding the rails Featured

7:00pm EDT March 22, 2005
Marshall Reynolds, chairman of Portec Rail Products Inc., told the board in the fall of 2003 that he thought the time was right to take the company public.

When Reynolds talks, people tend to listen, and not just because he's the company's chairman of the board. Reynolds, a colorful self-made millionaire and philanthropist from Huntington, W.Va., who bought a bank that had once turned him down for a loan, has taken multiple companies -- in industries as diverse as banking, printing and agriculture -- successfully down the IPO aisle.

Portec Rail Products went public in January 2003, six years after its management, backed by an investor group with Reynolds in the lead, bought the railroad products portion, one of three parcels sold off by Portec Inc. in a $26.5 million deal.

John Cooper, the company's president and CEO, says management's plan from the outset was to take Portec Rail Products public once it had gotten its financial house in order and had a solid story for potential investors.

But, Cooper says, there was a problem. And it had nothing to do with the company's operations or its finances and everything to do with timing.

Portec was successful in bolstering its balance sheet, but market conditions delayed the IPO. During the dot-com boom, billions flowed into Internet and other technology ventures, often at the expense of old-line industries. When the dot-com boom turned into a bust, venture capitalists and investment bankers pulled back on funding and shored up their portfolios. So for a time, while Portec Rail Products was ready for the market, a railroad products company wasn't showing up on the radar screens of potential investors.

"Nobody really wanted to talk to an old metal bender about a public offering," says Cooper, who joined Portec 25 years ago and led the management buyout team.

But by late 2003, the stars and planets were in alignment for Portec Rail Products. Its financial house was in order, and it had identified a strong market for its friction management products that reduce wear on rails and rolling stock and cut fuel costs. And, somewhat ironically, while the tech boom and bust had played a part in keeping Portec Rail Products out of the IPO market for a time, the company determined that information technology was going to play a critical role in its future.

A strategy for growth

Since going public, the 290-employee Portec Rail Products has wasted no time executing its growth strategy. It has since closed on two strategic acquisitions that promise to enhance its existing growth business and leverage high technology that can be applied to rail transportation. Those acquisitions helped to boost 2004 net sales to $69.4 million, a 20 percent increase over 2003's $57.6 million. And it still has $7.5 million in its coffers to pursue additional acquisitions.

"We want to keep our eyes open for ways to improve our track components business, either with added, related product lines or increasing market share or improving their designs, giving more value to the customer," says Cooper. "The second (strategy) is to grow the company and stake its future on the higher-margin, higher-tech product lines associated with friction management and new kinds of wayside management."

While it may not be the glamour industry it was when larger-than-life business barons amassed huge fortunes in its fast-growth days, it's one that's not going away any time soon. There remains no better way to ship large commodities such as coal, grain and ore long distances over land.

Railways are an efficient means of conveyance but require constant maintenance. That's good news for companies such as Portec Rail Products that supply maintenance items including spikes, connectors and retainers.

"Even when the economy's not real strong, the railways still have to be maintained," Cooper says. "There's a certain base level of maintenance and replacement that goes on, even in relatively weak economies."

Portec Rail Products is counting on its traditional strength in commodity rail products, a growing interest in the rail industry in friction management products that reduce noise and wear on rails and railcars, and the application of information technology to increase rail safety, reduce wear and control and monitor railroad wayside equipment remotely.

Portec Rail Products does well with its commodity products, says Cooper, and it is the platform from which it can introduce other items to the railroad industry, but the company is putting much of its emphasis on its friction management segment. It makes equipment that applies lubricants to rail lines to reduce friction, and thereby wear and noise.

While rail lubrication isn't new, there have been recent advances in application systems and lubricants. Manual application, the earliest method, gave way to automatic systems controlled by gears and levers, and later to hydraulic systems.

Today, precise amounts of lubricant can be applied to the rails, based on the weight and speed of the cars as they pass through a curve, for instance, where stress is the greatest. Some are so sophisticated that they can be applied to the top surface of the rail, extending its usable life and reducing noise without affecting braking efficiency.

High-tech acquisitions

Portec Rail Products' acquisition of Salient Systems Inc. last year, a Dublin, Ohio, producer of electronic data collection and data management systems, opens additional doors for the company. Salient Systems' products can be coupled with Portec Rail Products' equipment to offer additional friction management and data collection capabilities, as well as entirely new product lines.

For example, Cooper says, Salient Systems is developing a stress monitor that can detect inside a rail a weakness that isn't detectable in a visual inspection, yet might cause a failure. And the data collection and processing power that Salient Systems offers can improve rail lubrication services. Lubrication equipment can be monitored remotely to sense equipment malfunctions or low lubricant levels.

Cooper says the acquisition of Salient Systems in a $12.8 million deal for cash and stock was a relatively easy transaction, given that the owners of the family-held business were looking for an exit.

In December, Portec Rail Products acquired Kelsan Technologies Corp., a Canadian firm in the friction control business. Portec Rail Products had been a distributor of Kelsan Technologies' friction management products, and Cooper saw the company as a good acquisition candidate that could add to Portec Rail Products' global reach and product offerings.

The North Vancouver-based company, which had fiscal 2004 sales of nearly $8 million, sold approximately 70 percent of its products outside North America the same year. With a strong presence in Europe and Asia, says Cooper, Kelsan Technologies' network of distributors and agents can help Portec Rail Products expand globally.

Kelsan Technologies and Portec Rail Products had a long business relationship, and talk of combining the two companies had come up in the past, Cooper says. The deal was much harder to make than the Salient Systems acquisition, which was initiated much later but completed before the Kelsan Technologies purchase.

"We would have liked to get together a number of years ago, but we were on two different tr acks," says Cooper.

While Portec Rail Products had spent several years paying down its debt in anticipation of its IPO, Kelsan Technologies had taken on considerable debt over the same period to develop and market its products. With Kelsan Technologies' debt load and a stock deal with a Canadian company too difficult to put together, merging the companies was at first out of the question.

But by 2003, Kelsan Technologies had reached breakeven, and it became clear that it would turn a profit in 2004.

"We had just raised our capital, and they were no longer a cash drain," Cooper says.

A seasoned team

An advantage that Portec Rail Products has is that it's a long-time player in the railroad industry. It's no simple task, apparently, for upstarts to break in. The industry relies, says Cooper, on trusted suppliers with long reputations for quality and service.

In that respect, Portec Rail Products has a real edge. Its history in the railroad industry dates back nearly a century with Portec Inc.

"It's not easy for a newcomer in the rail business," says Cooper. "You can't walk in as a new guy in a railroad engineering office and say, 'Try my product.' You've got to have a reputation for being able to get it done."

As part of Cooper's long-range plan, Portec Rail Products reshuffled responsibilities of its top managers in February to accommodate the recent acquisitions and manage its anticipated growth.

The management team boasts several long-term employees, with the six senior managers included in the revamping averaging 21 years with Portec Rail Products and its predecessor. The member of the team with the shortest tenure, Michael Bornak, vice president of finance and CFO, has been with the company since 1998. That level of experience in the ranks of top management should offer no small level of comfort and confidence to investors.

"I keep telling them they don't need me, they keep telling me they do," Cooper says.

While he says that he has no immediate plans to hand over the reins, the management's bench strength ensures that there is plenty of talent in the executive suite. When he is ready to move on, Cooper says, it won't be hard to find someone within the company for the top job.

Says Cooper: "Any one of them can run this company."

How to reach: Portec Rail Products, www.portecrail.com; Salient Systems Inc., www.salientsystems.com; Kelsan Technologies Corp., www.kelsan.com