SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




(Mark One)


xANNUALREPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934




FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008




OR




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


EXCHANGE
ACT OF 1934




FOR
THE TRANSITION PERIOD FROM __________ TO __________.




COMMISSION
FILE NUMBER 1-3920







NORTH
AMERICAN GALVANIZING & COATINGS, INC.


(Exact
name of registrant as specified in its charter)




Delaware


(State or
other jurisdiction of incorporation or organization)




71-0268502


(I.R.S.Employer Identification
No.)





5314 South Yale Avenue, Suite 1000,Tulsa, Oklahoma
74135


(Address
of principal executive offices)(Zip Code)




(918) 494-0964


(Registrant’s telephone
number, including area code)





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




TITLE OF EACH
CLASS   NAME OF EACH EXCHANGE ON
WHICH REGISTERED




Common
Stock, $0.10 par value NASDAQ Stock Market





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







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





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





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





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).







Large accelerated
      filer   o
            Accelerated
      filer   x
            Non-accelerated
      filer   o
            Smaller Reporting
      Company   o






Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes  
o      No  
x





The
aggregate market value of Common Stock held by non-affiliates on June 30, 2008
was approximately $81.8 million.  As of January 29, 2009
there were 16,240,651 shares of North American Galvanizing & Coatings, Inc.
Common Stock, $0.10 par value, outstanding.





Documents
Incorporated by Reference




Portions
of the registrant’s definitive proxy statement to be filed not later than 120
days after the end of the fiscal year covered by this report are incorporated by
reference in Part III.












NORTH
AMERICAN GALVANIZING & COATINGS, INC.
  Annual
Report Pursuant to Section 13 or 15(d)
 of
the Securities Exchange Act of 1934
 For
the Fiscal Year Ended December 31, 2008
   TABLE OF
      CONTENTS
                PageFORWARD
      LOOKING STATEMENTS OR INFORMATION
                2PART
      IItem 1.
                Business
                3Item 1A.
                Risk
      Factors
                6Item 1B.
                Unresolved
      Staff Comments
                8Item 2.
                Properties
                8Item 3.
                Legal
      Proceedings
                8Item 4.
                Submission
      of Matters to a Vote of Security Holders
                9PART
      IIItem 5.
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                9Item 6.
                Selected
      Financial Data
                11Item 7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                11Item 7A.
                Quantitative
      and Qualitative Disclosures About Market Risk
                11Item 8.
                Financial
      Statements and Supplementary Data
                11Item 9.
                Changes
      in Disagreements with Accountants on Accounting and Financial
      Disclosure
                11Item 9A.
                Controls
      and Procedures
                11Item 9B.
                Other
      Information
                11PART
      IIIItem 10.
                Directors,
      Executive Officers and Corporate Governance
                12Item 11.
                Executive
      Compensation
                12Item 12.
                Security
      Ownership of Certain Beneficial Owners and Management  and
      Related Stockholder Matters
                12Item 13.
                Certain
      Relationships and Related Transactions, and Director
      Independence
                12Item 14.
                Principal
      Accounting Fees and Services
                12PART
      IVItem 15.
                Exhibits,
      Financial Statement Schedules
                13
  1


FORWARD
LOOKING STATEMENTS OR INFORMATION




Certain
statements in this Annual Report on Form 10-K, including information set forth
under the caption “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” constitute “Forward-Looking Statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Such statements are typically punctuated by words or phrases such as
“anticipate,” “estimate,” “should,” “may,” “management believes,” and words or
phrases of similar import. The Company cautions investors that such
forward-looking statements included in this Form 10-K, or hereafter included in
other publicly available documents filed with the Securities and Exchange
Commission, reports to the Company’s stockholders and other publicly available
statements issued or released by the Company involve significant risks,
uncertainties, and other factors which could cause the Company’s actual results,
performance (financial or operating) or achievements to differ materially from
the future results, performance (financial or operating) or achievements
expressed or implied by such forward-looking statements. Factors that could
cause or contribute to such differences could include, but are not limited to,
changes in demand, prices, the raw materials cost of zinc, access to capital,
the cost of natural gas, and changes in economic conditions of the various
markets the Company serves, as well as the other risks detailed herein and in
the Company’s reports filed with the Securities and Exchange
Commission.










































2


PART
I




ITEM
1. BUSINESS




The
Company’s corporate headquarters are located in Tulsa, Oklahoma. As used in this
report, except where otherwise stated or indicated by the context, “North
American Galvanizing,” the “Company” and the “Registrant” means North American
Galvanizing & Coatings, Inc. and its consolidated subsidiary. At the
Company’s Annual Meeting held May 14, 2003, stockholders approved an amendment
of the Company’s certificate of incorporation to change the Company’s name from
Kinark Corporation to North American Galvanizing & Coatings, Inc., effective
July 1, 2003. The former Kinark Corporation was incorporated under the laws of
the State of Delaware in January 1955.




North
American Galvanizing is a manufacturing services holding company currently
conducting business in galvanizing and coatings through its wholly-owned
subsidiary, North American Galvanizing Company and its wholly-owned subsidiaries
(“NAGC”).




In the
third quarter of 2002, at certain of its plants, NAGC introduced
INFRASHIELDsm
coating, aspecialty multi-part
polymer coating system designed to be applied over hot dip galvanized material.
The resultant superior corrosion protection offered by combining cathodic
protection through the hot dip galvanizing process with a non-conductive coating
is applicable to many environments that have unique corrosion
issues.




Available
Information




The
Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, the Statements of Beneficial Ownership of Securities on
Forms 3, 4 and 5 for Directors and Officers of the Company and all amendments to
such reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act, are available free of charge at the Securities and Exchange
Commission (“SEC”) website at
www.sec.gov.  The Company’s website at www.nagalv.com contains a link to
the SEC website.  The Company has also posted on the website its
(1) Corporate Governance Guidelines, (2) Code of Business Conduct and
Ethics, and (3) the charters for the Audit Committee, the Compensation
Committee, and the Corporate Governance and Nominating Committee.





Galvanizing




The
Company conducts a service, galvanizing and coating operations, through its NAGC
subsidiary. NAGC is principally engaged in hot dip galvanizing of metal products
and components fabricated and owned by its customers. All of NAGC’s revenue is
generated from the value-added galvanizing and coating of customer-owned
products. NAGC galvanizes iron and steel products by immersing them in molten
zinc. This bonding process produces an alloyed metal surface that provides an
effective barrier (“cathodic protection”) against oxidation and corrosion from
exposure to the elements, for up to 50 years. Additional coating services
provided by NAGC include sandblasting, quenching, metalizing (flame sprayed),
centrifuge spinner galvanizing, Corrocote Classic II painting and
INFRASHIELDsm Coating.




Plants




NAGC
operates ten galvanizing plants in seven states. These strategically located
plants enable NAGC to compete effectively by providing galvanizing to
manufacturers representing a broad range of basic industries throughout the mid
and south-central United States, and beyond. Its galvanizing plants are located
in Tulsa, Oklahoma; Kansas City, Missouri; St. Louis, Missouri; Nashville,
Tennessee; Louisville, Kentucky; Denver, Colorado; Canton, Ohio; Hurst, Texas
and Houston, Texas.


3


NAGC is
constructing a new hot dip galvanizing plant in Benwood, West
Virginia.  The new operation, which is expected to be operational in
late April 2009, will utilize a 30 foot kettle and becomes the Company’s
eleventh hot dip galvanizing plant.




In
January 2008, NAGC opened the Technical Center located in Tulsa, Oklahoma. The
Technical Center houses the Company’s engineering department and offers
customers expanded technical service and guidance on their product design and
performance criteria as they pertain to hot dip galvanizing.  In
addition, the Technical Center is focused on internal Company support activities
and projects to enhance plant operating efficiencies, reduce energy usage and
improve product quality.




Raw
Material




Zinc, the
primary raw material and largest cost component in the Company’s galvanizing
process, is the fourth most widely used metal in the world.  Its
resistance to non-acidic atmospheric corrosion means that zinc is instrumental
in prolonging the life of buildings, vehicles, ships and steel goods and
structures of every kind.  Accordingly, galvanizing accounts for more
than half of all present day applications of zinc.  During 2007 and
2008, there were no major supply disruptions in the zinc market.




Over the
past several years, the market price of zinc, as quoted on the London Metal
Exchange (“LME”), has been volatile.  During 2006, the LME spot price
of zinc was as high as $2.10 per pound and as low as $0.87 per pound. During
2007, the LME spot price of zinc was as high as $1.93 per pound and as low as
$1.00 per pound.  During 2008, the LME spot price of zinc was as high
as $1.28 per pound and as low as $0.47 per pound, ending the year at
$0.51.




Customers




NAGC’s
ten largest customers, on a combined basis, accounted for approximately 32% of
the Company’s consolidated sales in 2008, compared with 37% in
2007.  No single customer comprised 10% or more of the Company’s
consolidated net sales in 2008, 2007 or 2006.  The backlog of orders
at NAGC is generally nominal due to the short turn-around time requirement of
customers, which is generally demanded in the galvanizing industry.




Principal
Markets




The
galvanizing process provides effective corrosion protection of fabricated steel,
which is used in numerous markets such as petrochemical, highway and
transportation, energy, utilities, communications, irrigation, pulp and paper,
waste water treatment, food processing, recreation and the manufacture of
original equipment.




The
Company maintains a sales and service network coupled with its galvanizing
plants, supplemented by national account business development at the corporate
level. In 2008, NAGC galvanized steel products for approximately 1,800 customers
nationwide.




All of
the Company’s sales are generated through domestic customers whose end markets
are principally in the United States. The Company markets its galvanizing and
coating services directly to its customers and does not utilize agents or
distributors. Although hot dip galvanizing is considered a mature service
industry, the Company is actively engaged in developing new markets through
participation in industry trade shows, metals trade associations and
presentation of technical seminars by its national marketing service
team.




4


Hot dip
galvanizing is highly competitive. NAGC competes with other publicly and
privately owned independent galvanizing companies, captive galvanizing
facilities operated by manufacturers, and alternative forms of corrosion
protection such as paint. The type and number of competitors vary throughout the geographic
areas in which NAGC does business. Competition is driven primarily by price,
rapid turn-around service time, and the quality of the finished galvanized
product. Management believes that the broad geographic disbursement of its
galvanizing plants and the reliable quality of its service enables NAGC to
compete on a favorable basis. The Company continues to develop and implement
operating and market strategies to maintain its competitive position and to
develop new markets.  These strategies are demonstrated by the
purchase of the hot-dip galvanizing assets of a galvanizing facility in Canton,
Ohio (2005) and the construction of the new operation in Benwood, West Virginia
which is expected to be operational in late April 2009, as well as expanded
service capabilities at its existing plants.




The
Company’s management does not generally consider the Company’s business to be
seasonal due to the breadth and diversity of markets served.  NAGC’s
average galvanizing volume per operating day was approximately the same for each
calendar quarter in 2008 and 2007.  Sales volumes typically are lower
in the fourth quarter by approximately 3% due to a higher number of
non-operating days.




Environmental




The
Company’s facilities are subject to environmental legislation and regulation
affecting their operations and the discharge of wastes. The cost of compliance
with such regulations was approximately $1.9 million in both 2008 and 2007 and
$1.4 million in 2006 for the disposal and recycling of wastes generated by the
galvanizing operations.  The Company settled the Lake River litigation
for $1.4 million on December 17, 2008.  (See item 3.  LEGAL
PROCEEDINGS).  The majority of the $1.4 million payment ($1.05
million; $0.7 million, net of tax) was included in discontinued operations in
the fourth quarter of 2008.  The remaining $0.35 million was recorded
in cost of sales in the first quarter of 2007 and is included in the $1.9
million in environmental costs for 2007 mentioned above.




In
September 2008, the United States Environmental Protection Agency (the “EPA”)
notified the Company of a claim against the Company as a
potentially responsible party related to a Superfund site in Texas City,
Texas.  This matter pertains to galvanizing facilities of a
Company subsidiary and its disposal of waste, which was handled
by their supplier in the early 1980’s.  The EPA offered the Company a
special de minimis
party settlement to resolve potential liability that the Company and its
subsidiaries may have under the Comprehensive Environmental Response,
Compensation and Liability Act (“CERCLA”) at this site.  The Company
accrued the $112,145 de
minimis settlement amount during the third quarter of 2008 and accepted
the EPA’s offer before the deadline of December 30, 2008.




Employee
Relations




NAGC’s
labor agreement with the United Steel, Paper and Forestry, Rubber,
Manufacturing, Energy Allied Industrial and Service Workers International Union
covering production workers at its Tulsa, Oklahoma galvanizing plants expired
during 2006.  The union ratified a two-year extension of the expiring
agreement, with minor modifications, extending the expiration date of the
agreement to October 31, 2008.  The extension of the agreement brought
union employee contributions to the group health plan more closely in line with
contributions made by non-union employees of the Company.  In 2008,
after several of the employees who were covered by the agreement petitioned the
National Labor Relations Board for a decertification vote, a decertification
election was scheduled to be held on September 25, 2008.  However, on
September 22, 2008, the union filed a “disclaimer of interest” with the National
Labor Relations Board, which denotes that the union is withdrawing its
representation of the Company’s Tulsa, Oklahoma employees. Thus, the union has
been decertified and the employees covered by that agreement are no longer
represented by the union.




5


The
United Steel, Paper and Forestry, Rubber, Manufacturing, Energy Allied
Industrial and Service Workers International Union represented the labor force
at the galvanizing facility purchased in Canton, Ohio in




Nationwide,
the Company had approximately 400 employees in 2008 and 2007.






ITEM
1A. RISK FACTORS




In
addition to important factors described elsewhere in this report, North American
Galvanizing cautions current and potential investors that the following risk
factors, among others, sometimes have affected, and in the future could affect,
the Company’s actual results and could cause such results during fiscal 2009,
and beyond, to differ materially from those expressed in any forward-looking
statements made by or on behalf of North American Galvanizing.  If any of
the following risks actually occurs, the Company’s business, financial condition
or results of operations could be materially adversely affected and you may lose
all of your investment.




Galvanizing is a
business sensitive to economic downturns, which could cause the Company’s
revenues to decrease.  NAGC is principally engaged in hot dip
galvanizing of metal products and components fabricated by its customers. All of
the Company’s revenue is generated from the value-added galvanizing and coating
of its customer’s products. The galvanizing process provides effective corrosion
protection of fabricated steel, which is used in numerous markets such as
petrochemical, highway and transportation, energy, utilities, communications,
irrigation, pulp and paper, waste water treatment, food processing, recreation
and the manufacture of original equipment. The demand for these products and, in
turn, for the Company’s galvanizing, is dependent on the general economy, the
industries listed, and other factors affecting domestic goods
activity.  If there is a reduction in demand, there could be a
material adverse effect on price levels, the quantity of galvanizing services
provided by the Company and the Company’s revenues.





The price
volatility and availability of raw material and natural gas could reduce the
Company’s profits.  Purchased zinc and natural gas, combined,
represent the largest portion of cost of goods sold.  The price and
availability of zinc and natural gas that is used in the galvanizing process is
highly competitive and cyclical.  The following factors, most of which are
beyond the Company’s control, affect the price of zinc and natural
gas:





•                 
      supply and demand factors;


•                 
      freight costs and transportation
availability;


•                 
      inventory levels;


•                 
      trade duties and taxes; and


•                 
      labor disputes.






In
response to increase in costs, the Company may seek to maintain its profit
margin by attempting to increase the price of its services, but may not be
successful in passing these price increases through to its
customers.





The Company’s
business, operating results and financial condition could be impacted by future
acquisitions or by a lack of potential acquisition
candidates.From
time to time, the Company evaluates potential acquisition opportunities to
support and strengthen its business.  NAGC may not be able to locate suitable
acquisition candidates, acquire candidates on acceptable terms or at all or
integrate acquired businesses successfully.  In addition, NAGC may be
required to incur additional debt and contingent liabilities, or to issue shares
of its common stock in order to consummate future acquisitions.  Such
issuances might have a dilutive effect on current equity
holders.


6


Limited access to
capital for internal growth and strategic acquisitions could adversely affect
the Company’s business, operating results and financial condition.The Company’s operating
and market strategies to maintain competitive position and to develop new
markets include investments in internal growth and strategic
acquisitions.  If the Company is unable to access capital through its
current credit facility or raise capital, on favorable terms or at all, the
Company may not be able to invest in internal growth and strategic acquisitions,
which could adversely affect the Company’s business, operating results and
financial condition.





Difficulties in
integrating potential acquisitions could adversely affect the Company’s
business, operating results and financial condition.  The process of
integrating acquired businesses effectively involves the following
risks:




•                 
      assimilating operations and products may be unexpectedly
      difficult;


•                 
      management’s attention may be diverted from other business
      concerns;


•                 
      the Company may enter markets in which it has limited or no direct
      experience; and•                 
      the Company may lose key employees of an acquired
  business.





Difficulties
in integrating potential acquisitions could adversely affect the Company’s
business operating results and financial condition.




The Company may
not have sufficient management resources if there is turnover in key
personnel.  Providing a competitive service acceptable in
quality and price requires a management team that is technically skilled in
providing galvanizing services.  In past years, the Company has
downsized administrative and management positions as a result of cost-cutting
initiatives.  If there is turnover in key personnel, the Company may
not have sufficient management resources.  Lack of management
resources could impact the Company’s ability to operate and compete in the
galvanizing industry.





The addition of
hot dip galvanizing capacity could reduce demand for galvanizing services and
adversely affect revenues.  Galvanizing is a highly competitive
business with relatively low barriers to entry.  NAGC competes with
other galvanizing companies, captive galvanizing facilities operated by
manufacturers and alternate forms of corrosion protection such as
paint.  Excessive capacity in hot dip galvanizing could have a
material adverse effect on price levels and the quantity of galvanized services
provided by the Company.





Various
governmental regulations and environmental risks applicable to the galvanizing
business may require the Company to take actions which will adversely affect its
results of operations.The Company’sbusiness is subject to numerous
federal, state, provincial, local and foreign laws and regulations, including
regulations with respect to air emissions, storm water and the generation,
handling, storage, transportation, treatment and disposal of waste
materials.  Although NAGC believes it is in substantial compliance with all
applicable laws and regulations, legal requirements are frequently changed and
subject to interpretation, and the presently unpredictable ultimate cost of
compliance with these requirements could affect operations.  The Company
may be required to make significant expenditures to comply with governmental
laws and regulations.  Existing laws or regulations, as currently
interpreted or reinterpreted in the future, or future laws or regulations, could
have a material adverse effect on the results of operations and financial
condition.




7


ITEM
1B. UNRESOLVED STAFF COMMENTS




No
unresolved staff comments were open as of the date of this report, February 20,
2009.






ITEM
2. PROPERTIES




NAGC
operates ten hot dip galvanizing plants located in Ohio, Oklahoma, Missouri,
Texas, Colorado, Tennessee and Kentucky.  The Company is constructing
a new plant in Benwood, West Virginia which is expected to be operational in
late April 2009.  One of the Company’s plants, located in Kansas City,
Missouri is leased under terms which give NAGC the option to extend the lease
for up to 15 years. NAGC’s galvanizing plants average 20,000 square feet in
size, with the largest approximately 55,000 square feet, and it operates zinc
kettles ranging in length from 16 to 62 feet. The Company owns all of its
galvanizing plants, except for the Kansas City plant noted above.  All
of the Company’s owned galvanizing plants are pledged as collateral to a bank
pursuant to a credit agreement scheduled to expire May 16, 2012, under which the
Company is provided a $25 million revolving credit facility with future
increases of up to an aggregate principal amount of $10 million at the
discretion of the lender.





The
Company’s headquarters office is located in Tulsa, Oklahoma, in approximately
4,600 square feet of office space leased through February 2012.






ITEM
3. LEGAL PROCEEDINGS




On
December 17, 2008, the board of directors of North American Galvanizing &
Coatings, Inc. approved a Mutual Release of Claims and Settlement Agreement,
(the “Settlement Agreement”) with the Metropolitan Water Reclamation District of
Greater Chicago (“MWRD”).




The MWRD,
the owner of the former Lake River Terminals Site (the “Site”), filed a lawsuit
in the United States District Court for the Northern District of Illinois
against NAGC and others (the “case”). NAGC is a former parent company of the
Lake River Corporation. The Lake River Corporation occupied and conducted
business at the Site for approximately 50 years under the terms of five (5)
lease agreements and a general permit with MWRD, which have since been
terminated. The MWRD alleged in its lawsuit that NAGC was either directly or
indirectly liable for certain cleanup costs, including the removal of certain
buildings and other structures and the remediation of environmental conditions
at the Site. Although NAGC denied that it was directly or indirectly liable for
any such costs, both parties agreed that it would be mutually advantageous and
cost-effective to settle the matter without further litigation.




According
to the terms of the Settlement Agreement, in December, 2008 NAGC paid MWRD $1.4
million.  In consideration of the payment, MWRD released NAGC and its
affiliates from any and all claims which are, were, or could have been included
in the case, and from any and all payment obligations to MWRD, whether pursuant
to CERCLA, other law, contract, or tort, arising from the leases or on account
of the condition of the Site. In consideration of the above, NAGC released MWRD
and its affiliates from all claims of NAGC arising from the leases or on account
of the condition of the Site, and from any and all claims that could have been
asserted against MWRD or its affiliates as counterclaims in the case. In
addition, MWRD agreed to indemnify and hold NAGC harmless from any claims
against NAGC by third parties for certain claims that arise out of or relate to
the subject matter of the case.




The
Settlement Agreement relates to NAGC’s exit from the chemical storage and
related businesses at the Site and is a cost of the sale in 2000 of the
Company’s former subsidiary, Lake River Corporation. In March of 2007, NAGC
recorded a liability for $350,000 related to the MWRD claim. The additional
liability of $1.05 million was recorded by NAGC during the fourth quarter of
2008 in discontinued operations ($0.7 million, net of income
taxes).  The Company recorded this additional charge in discontinued
operations in 2008 to be consistent with the similar classification presented
when the Company disposed of Lake River.




8


In
September 2008, the EPA notified the Company of a claim against the
Company as a potentially responsible party related to a Superfund site
in Texas City, Texas.  This matter pertains to galvanizing
facilities of a Company subsidiary and its disposal of waste, which
was handled by their supplier in the early 1980’s.  The EPA offered
the Company a special de
minimis party settlement to resolve potential liability that the Company
and its subsidiaries may have under CERCLA at this Site.  The Company
accrued the $112,145 de
minimis settlement amount during the third quarter of 2008 and accepted
the EPA’s offer before the deadline of December 30, 2008.




NAGC was
notified in 1997 by the Illinois Environmental Protection Agency (“IEPA”) that
it was one of approximately 60 potentially responsible parties under the
Comprehensive Environmental Response, Compensation, and Liability Information
System (“CERCLIS”) in connection with cleanup of an abandoned site formerly
owned by Sandoval Zinc Co., an entity unrelated to NAGC.  The IEPA
notice includes NACG as one of the organizations which arranged for the
treatment and disposal of hazardous substances at Sandoval.  The
estimated timeframe for resolution of the IEPA contingency is
unknown.  The IEPA has yet to respond to a proposed work plan
submitted in August 2000 by a group of the potentially responsible parties or
suggest any other course of action, and there has been no activity in regards to
this issue since 2001. Until the work plan is approved and completed, the range
of potential loss or remediation, if any, is unknown, and in addition, the
allocation of potential loss between the 60 potentially responsible parties is
unknown and not reasonably estimable.  Therefore, the Company has no
basis for determining potential exposure and estimated remediation costs at this
time and no liability has been accrued.





North
American Galvanizing & Coatings, Inc. and its subsidiary are parties to a
number of other lawsuits, which are not discussed herein.  Management
of the Company, based upon their analysis of known facts and circumstances and
reports from legal counsel, does not believe that any such matter will have a
material adverse effect on the results of operations, financial conditions or
cash flows of the Company.






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




No
matters were submitted to a vote of stockholders during the fourth quarter of
2008.








PART
II




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




Stock
Information




The
Company’s common stock traded under the symbol “NGA” on the American Stock
Exchange through August 1, 2007 and began trading under the same three-digit
symbol on the NASDAQ Stock Market on August 2, 2007. The Company does not expect
to pay a dividend on its common stock and has not done so in the past. The
Company expects to continue that policy in order to reinvest earnings to support
and expand its business operations. The Company’s board of directors may review
the dividend policy in the future, recognizing that dividends may be a desirable
form of return on the investment made by many of its stockholders. Stockholders
of record at February 18, 2009 numbered approximately 1,203.




The board
of directors declared a four-for-three stock split effected by a stock dividend
for all stockholders of record on August 31, 2008, payable on September 14,
2008. All share and per share data (except par value) have been adjusted to
reflect the effect of the stock split for all periods presented. In addition,
the number of shares of common stock issuable upon the exercise of outstanding
stock options and the vesting of other stock awards, as well as the number of
shares of common stock reserved for issuance under the Company’s share-based
compensation plans, were proportionately increased in accordance with the terms
of those respective agreements and plans.


9


Quarterly
Stock Prices




First
            
            
            Second
            
            
            Third
            
            
            Fourth2007High
            
            $
            3.00
            
            
            $
            8.98
            
            
            $
            7.64
            
            
            $
            7.22Low
            
            $
            2.22
            
            
            $
            2.51
            
            
            $
            3.75
            
            
            $
            4.432008High
            
            $
            4.95
            
            
            $
            6.95
            
            
            $
            8.66
            
            
            $
            5.41Low
            
            $
            3.20
            
            
            $
            3.88
            
            
            $
            4.21
            
            
            $
            2.36







In August
1998, the Board of Directors authorized the Company to repurchase up to
$1,000,000 of its common stock in private or open market
transactions.  In March 2008, the Board of Directors authorized the
Company to buy back an additional $2,000,000 of its common stock, subject to
market conditions.  The Company has completed the August 1998 and
March 2008 share repurchase programs.  In August 2008, the Board of
Directors authorized the Company to buy back an additional $3,000,000 of its
common stock, subject to market conditions.  Unless terminated earlier
by resolution of the Board of Directors, the program will expire when the
Company has purchased shares with an aggregate purchase price of no more than
the $474,374 remaining under the program at December 31, 2008.  The
shares and per share amounts for all periods have been adjusted to reflect the
Company’s four-for-three stock split effected in the form of a stock dividend on
September 14, 2008.








Issuer
Purchases of Equity Securities




Total
            
            
            ApproximateNumber
      of
            
            
            Dollar
      ValueShares
            
            
            of
      SharesTotal
            
            
            
            
            
            Purchased
            
            
            that
      May YetNumber
      of
            
            
            Average
            
            
            as
      Part of
            
            
            be
      PurchasedPeriod
            
            Shares
            
            
            Price
      Paid
            
            
            Publicly
            
            
            Under(from/to)
            
            Purchased
            
            
            per
      Share
            
            
            Announced
      Plan
            
            
            the
      PlanMarch
      1, 2008 – March 31,
      2008
            
            
            256,391
            
            
            $
            4.25
            
            
            
            560,483
            
            
            $
            1,518,708June
      1, 2008 – June 30, 2008
            
            
            96,115
            
            
            $
            5.82
            
            
            
            656,598
            
            
            $
            959,529July
      1, 2008 – July 31, 2008
            
            
            37,219
            
            
            $
            5.78
            
            
            
            693,817
            
            
            $
            744,278Sept.
      1, 2008 – Sept. 30, 2008
            
            
            240,433
            
            
            $
            6.46
            
            
            
            934,250
            
            
            $
            2,191,395Oct.
      1, 2008 – Oct. 31, 2008
            
            
            60,000
            
            
            $
            3.50
            
            
            
            994,250
            
            
            $
            1,981,152Nov.
      1, 2008 – Nov. 30, 2008
            
            
            69,643
            
            
            $
            2.98
            
            
            
            1,063,893
            
            
            $
            1,773,296Dec.
      1, 2008 – Dec. 31, 2008
            
            
            357,834
            
            
            $
            3.63
            
            
            
            1,421,727
            
            
            $
            474,374Total
            
            
            1,117,635
            
            
            $
            4.59
            
            
            
            1,421,727
            
            
            $
            474,374








10


The
information required by this item concerning securities authorized for issuance
under equity compensation plans appears under the heading “Equity Compensation
Plan Information in the Company’s Proxy Statement (the “2009 Proxy Statement”)
or the Company’s Annual Report to Stockholders (the “2008 Annual Report”) for
its annual meeting of stockholders to be held on May 29, 2009 and is
incorporated herein by reference.






ITEM
6. SELECTED FINANCIAL DATA




The
selected financial data for years 2004 through 2008 are presented on page 16 of
this Annual Report on Form 10-K.






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




The index
to Management’s Discussion and Analysis of Financial Condition and Results of
Operations is presented on page 18 of this Annual Report on Form
10-K.






ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Management’s
discussion of quantitative and qualitative disclosures about market risk is
presented on page FS-11 and FS-12.






ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




The index
to Financial Statements and Supplementary Data is presented on page 13 of this
Annual Report on Form 10-K.






ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE




None.






ITEM
9A. CONTROLS AND PROCEDURES




(a)        
      Evaluation of disclosure controls and
  procedures.




Under
supervision and with the participation of management, including the Company’s
principal executive officer and principal financial officer, the Company
conducted an evaluation of the effectiveness of the design and operation of its
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act, as of the end of the period covered by this Annual
Report on Form 10-K (the “Evaluation Date”); and whether any change has occurred
in the Company’s internal control over financial reporting pursuant to Exchange
Act Rules 13a-15(d) and 15d-15(d).  Based on this evaluation, the
Company’s principal executive officer and principal financial officer concluded
as of the Evaluation Date that the Company’s disclosure controls and procedures
were effective.




(b)        
      Management’s report on internal control over financial
      reporting.




Management’s
report on internal control over financial reporting, which appears on page FS-13
of this Annual Report, is incorporated herein by reference.




(c)        
      Changes in internal control over financial
  reporting.




There was
no change in the Company’s internal control over financial reporting that
occurred in the fourth quarter of 2008 that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
   ITEM
9B. OTHER INFORMATION
  None.


11


PART
III




ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE




The
information contained under the headings “Directors and Executive Officers,” and
“Company Information Available on Website” in the 2008 Proxy Statement is
incorporated herein by reference.






ITEM
11. EXECUTIVE COMPENSATION




The
information required by this item appears in the 2008 Proxy Statement under the
headings “Compensation of Directors and Executive Officers” and “Compensation
Plans” and is incorporated herein by reference. Information regarding the
Company’s stock option plans appears herein on pages FS-21 to FS-24, Footnotes
to Consolidated Financial Statements.






ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS




The
information required by this item concerning security ownership of certain
beneficial owners and management appears in the 2008 Proxy Statement under the
heading “Security Ownership of Principal Stockholders and Management” and is
incorporated herein by reference.






ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE




The
information required by this item concerning certain relationships and related
transactions and director independence appears in the 2008 Proxy Statement under
the heading “Certain Relationships and Related Transactions and Director
Independence” and is incorporated herein by reference.






ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES




Information
required by this item is incorporated herein by reference from the 2008 Proxy
Statement under the caption “Independent Public Accountants.”








12


PART
IV


ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
  The
following documents are filed as part of this report:
 (1)
                FINANCIAL
      STATEMENTS
                
                PageReports
      of Independent Registered Public Accounting Firm
                
                FS-14
      to FS-15Consolidated
      Balance Sheets at December 31, 2008 and 2007
                
                FS-16Consolidated
      Statements of Income and Comprehensive Income for the Years Ended December
      31, 2008, 2007 and 2006
                
                FS-17Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
      2006
                
                FS-18Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31, 2008,
      2007 and 2006
                
                FS-19Notes
      to Consolidated Financial Statements
                
                FS-20
      to FS-31(2)
                FINANCIAL
      STATEMENT SCHEDULESSchedule
      II – Valuation and Qualifying Accounts
                
                15All
      schedules omitted are inapplicable or the information required is included
      in either the consolidated financial statements or the related notes to
      the consolidated financial statements.Selected
      Financial Data
                
                16(3)
                EXHIBITSThe
      Exhibits filed with or incorporated by reference into this report are
      listed in the following Index to Exhibits.
   EXHIBIT
INDEX
 No.
                Description3.1
                Restated
      Certificate of Incorporation of Kinark Corporation, as amended on June 6,
      1996 (incorporated by reference to Exhibit 3.1 of the Company’s
      Pre-Effective Amendment No. 1 to Registration Statement on Form S-3,
      Registration No. 333-4937, filed with the Commission on June 7,
      1996).3.2
                Amended
      and Restated Bylaws of Kinark Corporation (incorporated by reference to
      Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q dated March 31,
      1996)10.1
                Credit
      Agreement, dated May 17, 2007, between North American Galvanizing &
      Coatings, Inc., a Delaware corporation, and Bank of America, N.A., a
      national banking association.10.2**
                2004
      Incentive Stock Plan, as amended (incorporated by reference to the
      Company’s Form 8-K filed with the Commission on October 3,
      2006).
  13
 10.2.1**
                Form
      of Stock Option Agreement (incorporated by reference to the Company’s Form
      8-K filed with the Commission on March 18, 2005).10.2.2**
                Schedule
      A to Stock Option Agreement (incorporated by reference to the Company’s
      Form 8-K filed with the Commission on March 18, 2005).10.3**
                Director
      Stock Unit Program, as amended (incorporated by reference to the Company’s
      Form 8-K filed with the Commission on February 17,
  2006).21*
                Subsidiaries
      of the Registrant.23*
                Consent
      of Independent Registered Public Accounting Firm.24.1***
                Power
      ofattorney
      from Directors:Linwood J. Bundy,
      Ronald J. Evans, Janice K. Henry, Gilbert L. Klemann, II, Patrick J.
      Lynch, Joseph J. Morrow and John H. Sununu.31.1*
                Certification
      pursuant to Section 302 of the Sarbanes, Oxley Act of
  2002.31.2*
                Certification
      pursuant to Section 302 of the Sarbanes, Oxley Act of
  2002.32*
                Certifications
      pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the
      Sarbanes-Oxley Act of 2002.
  *  Filed
      Herewith.**  Indicates
      management contract or compensation plan.***
      Included on the signature page of this
report.
 
 14


SCHEDULE
II


VALUATION
AND QUALIFYING ACCOUNTS
   Allowance
for doubtful accounts receivable
   Years
Ended December 31, 2008, 2007 and 2006:
  Balance
      at
              
              
              
              
              
              
              
              
              Balance
      atBeginning
              
              
              
              
              
              
              
              
              EndDescription
              
              of Year
              
              
              Additions
              
              
              Deductions
              
              
              of Year2008
              
              $
              154,000
              
              
              $
              37,000
              
              
              $
              89,000
              
              
              $
              102,0002007
              
              $
              197,000
              
              
              $
              15,000
              
              
              $
              58,000
              
              
              $
              154,0002006
              
              $
              124,000
              
              
              $
              100,000
              
              
              $
              27,000
              
              
              $
              197,000
 
                               15
 SELECTED
FINANCIAL DATA
  The
summary financial data provided for the five years ended December 31, 2004 to
December 31, 2008 was derived from the audited Consolidated Financial
Statements.
  (Dollars
      in thousands except per share amounts)For
      The Years Ended December 31,
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004Sales
              
              $
              86,134
              
              
              $
              88,396
              
              
              $
              74,054
              
              
              $
              47,870
              
              
              $
              35,822Operating
      Income
              
              $
              19,347
              
              
              $
              15,405
              
              
              $
              8,359
              
              
              $
              2,173
              
              
              $
              1,390Percent
      of sales
              
              
              22.5%
              
              
              
              17.4%
              
              
              
              11.3%
              
              
              
              4.5%
              
              
              
              3.9%Income
      from Continuing Operations
              
              $
              12,532
              
              
              $
              9,232
              
              
              $
              4,535
              
              
              $
              644
              
              
              $
              403Loss
      from Discontinued Operations, net of income taxes
              
              $
              (662
              )Net
      Income (Loss)
              
              $
              11,870
              
              
              $
              9,232
              
              
              $
              4,535
              
              
              $
              644
              
              
              $
              403Basic
      Earnings per common share (a)
              
              $
              0.73
              
              
              $
              0.56
              
              
              $
              0.30
              
              
              $
              0.05
              
              
              $
              0.03Diluted
      Earnings  per common share (a)
              
              $
              0.70
              
              
              $
              0.54
              
              
              $
              0.29
              
              
              $
              0.04
              
              
              $
              0.02Capital
      Expenditures
              
              $
              3,228
              
              
              $
              4,430
              
              
              $
              1,414
              
              
              $
              1,016
              
              
              $
              1,230Depreciation
      and Amortization
              
              $
              3,529
              
              
              $
              3,519
              
              
              $
              2,975
              
              
              $
              2,532
              
              
              $
              2,701Weighted
      Average Shares Outstanding (a) (b)
              
              
              16,876,559
              
              
              
              17,027,847
              
              
              
              15,563,255
              
              
              
              15,216,568
              
              
              
              14,982,391At
      December 31,
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004Working
      Capital
              
              $
              17,689
              
              
              $
              10,664
              
              
              $
              9,296
              
              
              $
              7,026
              
              
              $
              8,621Total
      Assets
              
              $
              54,772
              
              
              $
              47,572
              
              
              $
              48,211
              
              
              $
              41,055
              
              
              $
              37,114Long-Term
      Obligations
              
              $
              —
              
              
              $
              14
              
              
              $
              7,753
              
              
              $
              12,275
              
              
              $
              14,257Stockholders’
      Equity
              
              $
              44,390
              
              
              $
              36,029
              
              
              $
              25,566
              
              
              $
              19,298
              
              
              $
              18,309Book
      Value Per Share (a)
              
              $
              2.69
              
              
              $
              2.19
              
              
              $
              1.58
              
              
              $
              1.41
              
              
              $
              1.35Common
      Shares Outstanding (a)
              
              
              16,507,813
              
              
              
              16,434,648
              
              
              
              16,223,344
              
              
              
              13,693,896
              
              
              
              13,594,024
  (a)
                All
      periods adjusted for four-for-three stock split on September 14,
      2008.
 (b)
                Weighted
      average shares outstanding include the dilutive effect of stock options
      and warrants, if
applicable.
  16
 
 SIGNATURES
  Pursuant
to the requirements of Section 13 and 15(d) of the Securities and Exchange Act
of 1934, as amended, the registrant has duly caused this report to be signed on
its behalf by the undersigned, as duly authorized.
   NORTH AMERICAN GALVANIZING& COATINGS, INC.(Registrant)Date: 
      February 20, 2009
                    By:
                    /s/ Beth
      B. HoodBeth
      B. HoodVice
      President and Chief
      Financial Officer
 
  Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed below on February 20, 2009, by the following persons on
behalf of the Registrant and in the capacities indicated.
   /s/ Joseph J.
      Morrow*
                    
                    
                    /s/
      Patrick J. Lynch*Joseph
      J. Morrow, Non-Executive
                    
                    
                    Patrick
      J. Lynch, DirectorChairman
      of the Board
  /s/
      Ronald J. Evans*
                    
                    
                    /s/
      Gilbert L. Klemann, II*Ronald
      J. Evans, President and
                    
                    
                    Gilbert
      L. Klemann, II. DirectorChief
      Executive Officer (Principal
                      Executive Officer), and Director
  /s/
      Beth B. Hood
                    
                    
                    /s/
      John H. Sununu*Beth
      B. Hood, Vice President,
                      Chief
      Financial Officer (Principal
                        Financial
      and Accounting Officer),
                        and
      Secretary
                    
                    
                    John
      H. Sununu, Director
 
 /s/
      Linwood J. Bundy*
                    
                    
                    /s/
      Janice K. Henry*Linwood
      J. Bundy, Director
                    
                    
                    Janice
      K. Henry, Director
   *Beth B.
Hood, by signing her name hereto, does hereby sign this Annual Report on Form
10-K on behalf of each of the directors and officers of the Registrant after
whose typed names asterisks appear pursuant to powers of attorney duly executed
by such directors and officers and filed with the Securities and Exchange
Commission as exhibits to this report.
 By: 
      /s/  Beth B. HoodBeth
      B. Hood, Attorney-in-fact
 17
 INDEX
TO MANAGEMENT’S DISCUSSION AND ANALYSIS, CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
  
 
 PageManagement’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                FS-1
      to FS-12Management’s
      Report on Internal Control over Financial Reporting
                FS-13Reports
      of Independent Registered Public Accounting Firm
                FS-14
      to FS-15Consolidated
      Balance Sheets
                FS-16Consolidated
      Statements of Income and Comprehensive Income
                FS-17Consolidated
      Statements of Cash Flows
                FS-18Consolidated
      Statements of Stockholders’ Equity
                FS-19Notes
      to Consolidated Financial Statements
                FS-20
      to FS-31Quarterly
      Results
                FS-32
  
  18
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS






General




North
American Galvanizing is a leading provider of corrosion protection for iron and
steel components fabricated and owned by its customers. Hot dip galvanizing is
the process of applying a zinc coating to fabricated iron or steel material by
immersing the material in a bath consisting primarily of molten
zinc.




Overview




The
Company’s galvanizing plants offer a broad line of services, including
centrifuge galvanizing for small threaded products, sandblasting, chromate
quenching, polymeric coatings, and its proprietary INFRASHIELDsm Coating
Application Systems, which provides polyurethane protective linings and coatings
over galvanized surfaces. The Company’s structural and chemical engineers
provide customized assistance with initial fabrication design, project estimates
and steel chemistry selection.




The
Company’s galvanizing and coating operations are composed of ten facilities
located in Colorado, Kentucky, Missouri, Ohio, Oklahoma, Tennessee and Texas. In
addition, the Company is constructing a new hot dip galvanizing plant in
Benwood, West Virginia which is expected to be operational in late April,
2009.  These facilities operate galvanizing kettles ranging in length
from 16 feet to 62 feet, and have lifting capacities ranging from 12,000 pounds
to 40,000 pounds.





The
Company maintains a sales and service network coupled with its galvanizing
plants, supplemented by national account business development at the corporate
level. In 2008, the Company galvanized steel products for approximately 1,800
customers nationwide.





All of
the Company’s sales are generated for customers whose end markets are
principally in the United States.  The Company markets its galvanizing
and coating services directly to its customers and does not utilize agents or
distributors.  Although hot dip galvanizing is considered a mature
service industry, the Company is actively engaged in developing new markets
through participation in industry trade shows, metals trade associations and
presentation of technical seminars by its national marketing service
team.





Hot dip
galvanizing provides metals corrosion protection for many product applications
used in commercial, construction and industrial markets. The Company’s
galvanizing can be found in almost every major application and industry that
requires corrosion protection where iron or steel is used, including the
following end user markets:




·
            highway
      and transportation;




·
            power
      transmission and distribution;




·
            wireless
      and telecommunications;




·
            utilities;




·
            petrochemical
      processing;




·
            industrial
      grating;




·
            infrastructure,
      including buildings, airports, bridges and power
    generation;




FS-1


·
            wastewater
      treatment;




·
            fresh
      water storage and transportation;




·
            pulp
      and paper;




·
            pipe
      and tube;




·
            food
      processing;




·
            agricultural,
      including irrigation systems;




·
            recreation,
      including boat trailers, marine docks, stadium
  scaffolds;




·
            bridge
      and pedestrian handrail; and




·
            original
      equipment manufactured products, including general
      fabrication.




As a
value-added service provider, the Company’s revenues are directly influenced by
the level of economic activity in the various end markets that it serves.
Economic activity in those markets that results in the expansion and/or
upgrading of physical facilities (i.e., construction) may involve a time-lag
factor of several months before translating into a demand for galvanizing
fabricated components. Despite the inherent seasonality associated with large
project construction work, the Company maintains a relatively stable revenue
stream throughout the year by offering large and small fabricators reliable and
rapid turn-around service.




The
Company records revenues when the galvanizing processes and inspection utilizing
industry-specified standards are completed. The Company generates all of its
operating cash from such revenues and has a line of credit available, which is
secured by its underlying accounts receivable and zinc inventory, to facilitate
working capital needs.




Each of
the Company’s galvanizing plants operates in a highly competitive environment
underscored by pricing pressures, primarily from other public and
privately-owned galvanizers and alternative forms of corrosion protection, such
as paint. The Company’s long-term response to these challenges has been a
sustained strategy focusing on providing a reliable quality of galvanizing to
standard industry technical specifications and rapid turn-around time on every
project, large and small. Key to the success of this strategy is the Company’s
continuing commitment and long-term record of reinvesting earnings to upgrade
its galvanizing facilities, implement technical innovations to improve
production efficiencies and construct new facilities when market conditions
present opportunities for growth. The Company is addressing long-term
opportunities to expand its galvanizing and coatings business through programs
designed to increase industry awareness of the proven and unique benefits of
galvanizing for metals corrosion protection. Each of the Company’s independently
operated galvanizing plants is linked to a centralized system involving sales
order entry, facility maintenance and operating procedures, quality assurance,
purchasing and credit and accounting that enable each plant to focus on
providing galvanizing and coating services in the most cost-effective
manner.




The
principal raw materials essential to the Company’s galvanizing and coating
operations are zinc and various chemicals which are normally available for
purchase in the open market.






Key
Indicators




Key
industries which historically have provided the Company some indication of the
potential demand for galvanizing in the near-term, (i.e., primarily within a
year) include highway and transportation, power transmission and distribution,
telecommunications and the level of quoting activity for regional metal


FS-2


fabricators.
In general, growth in the commercial and industrial sectors of the economy
generates new construction and capital spending, which ultimately impacts the
demand for galvanizing.




Key
operating measures utilized by the Company include new orders, zinc inventory,
tons of steel galvanized, revenue, pounds and labor costs per hour, zinc usage
related to tonnage galvanized and lost-time safety performance. These measures
are reported and analyzed on various cycles, including daily, weekly and
monthly.




The
Company utilizes a number of key financial measures to evaluate the operations
at each of its galvanizing plants and to identify trends and variables impacting
operating productivity and current and future business results, which include
return on capital employed, sales, gross profit, fixed and variable costs,
selling and general administrative expenses, operating cash flows, capital
expenditures, interest expense and a number of ratios such as profit from
operations and accounts receivable turnover. These measures are reviewed by the
Company’s operating and executive management each month, or more frequently, and
compared to prior periods, the current business plan and to standard performance
criteria, as applicable.






Key
Developments




The
Company has reported a number of developments supporting its strategic program
to reposition its galvanizing business in the national market.




NAGC is
constructing a new hot dip galvanizing plant in Benwood, West
Virginia.  The new operation, which is expected to be operational in
late April 2009, will utilize a 30 foot kettle and becomes the Company’s
eleventh hot dip galvanizing plant.





In
January 2008, NAGC opened the Technical Center located in Tulsa, Oklahoma. The
Technical Center houses the Company’s engineering department and offers
customers expanded technical service and guidance on their product design and
performance criteria as they pertain to hot dip galvanizing.  In
addition, the Technical Center is focused on internal Company support activities
and projects to enhance plant operating efficiencies, reduce energy usage and
improve product quality.




On
February 28, 2005, NAGalv-Ohio, Inc., a subsidiary of North American Galvanizing
Company, purchased the hot dip galvanizing assets of a galvanizing facility
located in Canton, Ohio.  The transaction was structured as an asset
purchase, pursuant to an Asset Purchase Agreement dated February 28, 2005 by and
between NAGalv-Ohio, Inc. and the privately owned Gregory Industries, Inc. for
all of the plant, property, and equipment of Gregory Industries’
after-fabrication hot dip galvanizing operation.




This
strategic expansion provided NAGC with an important and established customer
base of major fabricators serving industrial, original equipment manufacturer
and highway markets as well as residential and commercial markets for lighting
poles.   In July 2007, the Company replaced the existing kettle
in Canton with a new 51 foot kettle, which is designed to handle large steel
structures, such as bridge beams, utility poles and other steel structural
components that require galvanizing for extended-life corrosion
protection.


FS-3


Results
of Operations




The
following table shows the Company’s results of operations:




(Dollars
      in thousands)Year
      Ended December 31,2008
            
            
            2007
            
            
            2006%
      of
            
            
            
            
            
            %
      of
            
            
            
            
            
            %
      ofAmount
            
            
            Sales
            
            
            Amount
            
            
            Sales
            
            
            Amount
            
            
            SalesSales
            
            $
            86,134
            
            
            
            100.0
            %
            
            $
            88,396
            
            
            
            100.0
            %
            
            $
            74,054
            
            
            
            100.0
            %Cost
      of sales
            
            
            53,219
            
            
            
            61.8
            %
            
            
            60,329
            
            
            
            68.3
            %
            
            
            54,662
            
            
            
            73.8
            %Selling,
      general andadministrative
      expenses
            
            
            10,039
            
            
            
            11.6
            %
            
            
            9,143
            
            
            
            10.4
            %
            
            
            8,058
            
            
            
            10.9
            %Depreciation
      andAmortization
            
            
            3,529
            
            
            
            4.1
            %
            
            
            3,519
            
            
            
            4.0
            %
            
            
            2,975
            
            
            
            4.0
            %Operating
      income
            
            
            19,347
            
            
            
            22.5
            %
            
            
            15,405
            
            
            
            17.3
            %
            
            
            8,359
            
            
            
            11.3
            %Interest
      expense
            
            
            –
            
            
            
            –
            
            
            
            553
            
            
            
            0.6
            %
            
            
            867
            
            
            
            1.2
            %Interest
      income and other
            
            
            247
            
            
            
            .3
            %
            
            
            ( 81
            )
            
            
            (0.1
            )%
            
            
            (62
            )
            
            
            (0.1
            )%Income
      from operationsbefore
      income taxes
            
            
            19,594
            
            
            
            22.8
            %
            
            
            14,933
            
            
            
            16.8
            %
            
            
            7,554
            
            
            
            10.2
            %Income
      tax expense
            
            
            7,062
            
            
            
            8.2
            %
            
            
            5,701
            
            
            
            6.4
            %
            
            
            3,019
            
            
            
            4.1
            %Income
      from operations
            
            
            12,532
            
            
            
            14.6
            %
            
            
            9,232
            
            
            
            10.4
            %
            
            
            4,535
            
            
            
            6.1
            %Loss
      from discontinued
              Operations
      (net of tax)
            
            
            (662
            )
            
            
            (0.8
            )%
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Net
      income
            
            $
            11,870
            
            
            
            13.8
            %
            
            $
            9,232
            
            
            
            10.4
            %
            
            $
            4,535
            
            
            
            6.1
            %







FS-4


2008
COMPARED TO 2007




Sales--Sales volumes for the
year ended December 31, 2008 increased 7% over the prior year due to an overall
increase in demand from existing customers and incremental project
work.  The average selling price for 2008 was 9% lower than the
average selling price for 2007, as a result of decreased zinc
costs.  The decrease in 2008 revenues of 2.6% was due to a combination
of an increase in volume and a lower average sales price compared to
2007.  Sales prices have decreased related to decreases in zinc
costs.




Cost of
Sales-- The $7.1 million decrease in cost of goods sold from 2007 to 2008
was mainly to due to a decrease in zinc costs of 39.3%.  Excluding the
effect of increased volumes, other plant overhead costs increased $1.3 million,
or 17% from 2007 to 2008, due in part to increases in repairs and
maintenance spending and supplies.  Excluding the effect of increased
volumes, the Company’s labor costs increased $0.6 million, or 3%, from 2007 to
2008 mainly due to higher wages.  Excluding the effect of increased
volume, utilities costs increased $0.4 million, or 10%, for the year ended
December 31, 2008, compared to the prior year due in large part to higher gas
prices.





Selling, General
and Administrative (SG&A) Expenses--SG&A increased $0.9
million, or 9.8%, in 2008 compared to 2007.  The increase was due to
increases in personnel costs, primarily in the form of non-cash share-based
compensation.





Operating
Income--For
the year ended December 31, 2008, operating income was $19.3 million, compared
to $15.4 million for 2007.  The increase in operating income is due to
the factors described above.





Income
Taxes--The
Company’s effective income tax rates for 2008 and 2007 were 36.0% and 38.2%,
respectively.   The effective tax rates differ from the federal
statutory rate primarily due to state income taxes and adjustments to previous
tax estimates based on actual tax returns filed.





Loss from
Discontinued Operations, net of income taxes-- For the year ended
December 31, 2008, the loss from discontinued operations of $0.7 million is due
to the final settlement with Metropolitan Water District of Greater Chicago,
related to the Company’s former subsidiary, Lake River Corporation (See item
3.  LEGAL PROCEEDINGS and Note 6 to the consolidated financial
statements).





Net
Income--For
2008, the Company reported net income of $11.9 million compared to net income of
$9.2 million for 2007.  The increase in net income is due to the
factors described above.






2007
COMPARED TO 2006




Sales--Sales for the year ended
December 31, 2007 increased 19.4% over the prior year due to increased sales
prices in response to increases in zinc costs.  The average selling
price for 2007 was 24.2% higher than the average selling price for
2006.  Although the price of zinc and galvanizing declined in the
second half of 2007, the Company’s ability to capitalize on high quality, timely
customer service and the generally high demand for galvanizing services provided
for an increase in sales prices.





Sales
volumes for 2007 were 3.9% lower than 2006.  Lower volumes are a
result of the Company’s review and acceptance of customer orders only at
adequate margin levels and the scheduled shutdown of the Canton, Ohio plant to
replace the kettle and furnace during the month of July 2007.




Cost of
Sales-- The increase in cost of goods sold from 2006 to 2007 was
mainly due to an increase in zinc costs of 19.1%.  Although the
average LME zinc cost for both 2007 and 2006 was the same, the Company’s zinc
cost for the first half of 2006 was lower than the market at that time due to
the favorable impact from forward purchases
of zinc.  The Company’s labor costs increased 6.3% from 2006 to 2007
due to wage and incentive pay increases and increased overtime
pay.  Other plant overhead costs increased 11% from 2006 to
2007.  While total cost of sales increased year-over-year, as a
percentage of sales, total cost of sales decreased compared to 2006 due
primarily to the decline in the cost of zinc during the second half of 2007, as
discussed in Sales, above.


FS-5


Selling, General
and Administrative (SG&A) Expenses--SG&A increased $1.1
million, or 13.4%, in 2007 compared to the prior year, but decreased as a
percentage of revenues from 10.9% in 2006 to 10.3% in 2007.  Increases
were due to increases in personnel costs, primarily non-cash share-based
compensation, and legal, audit and tax services expenses, including expenses
related to compliance with Section 404 of the Sarbanes-Oxley Act of
2002.





Depreciation
Expense--Depreciation expense for
2007 increased $0.6 million over the prior year, of which $0.4 million was due
to a 2006 change in depreciation method for two newer galvanizing
facilities.  2007 reflects a full year under the new method, compared
to six months under the new method in 2006.  The Company previously
used the units of production method of depreciation for machinery and equipment
at these facilities.  Effective July 1, 2006, the Company changed to
the straight-line method of depreciation.





Operating
Income--For
the year ended December 31, 2007, operating income was $15.4 million, compared
to $8.4 million for 2006.  The increase in operating income is due to
the factors described above.





Income
Taxes--The
Company’s effective income tax rates for 2007 and 2006 were 38.2% and 40.0%,
respectively.   The effective tax rates differ from the federal
statutory rate primarily due to state income taxes and minor adjustments to
previous tax estimates based on actual tax returns filed.





Net
Income--For
2007, the Company reported net income of $9.2 million compared to net income of
$4.5 million for 2006.  The increase in net income is due to the
factors described above.




Liquidity
and Capital Resources




The
Company’s cash flow from operations and borrowings under credit facilities have
consistently been adequate to fund its current facilities working capital and
capital spending requirements.  During 2008, 2007  and 2006,
operating cash flow and borrowings under credit facilities have been the primary
sources of liquidity.  The Company monitors working capital and
planned capital spending to assess liquidity and minimize cyclical cash
flow.





Cash flow
from operating activities was $14.2 million in 2008, $14.5 million in 2007 and
$6.6 million in 2006.  In 2008, cash flow from operating activities
reflected higher net income and a $1.9 million cash outflow from other operating
assets and liabilities.  In 2007, cash flow from operating activities
reflected a net cash inflow of $0.8 million from other operating assets and
liabilities.  In 2006, cash flow from operating activities reflected a
net cash outflow of $0.7 million from other operating assets and
liabilities.





Capital
expenditures for equipment and upgrade of existing galvanizing facilities
totaled $3.2 million in 2008,  $4.4 million in 2007 and $1.4 million
in 2006.  The Company continues to have a commitment to invest cash
flow in improving plant operations.  The Company expects base capital
expenditures for 2009 to approximate $6.9 million including $3.3 million for the
new plant in Benwood, West Virginia.





In 2008,
cash used in financing activities totaled $4.6 million, including purchase of
common stock for the treasury of $5.1 million, which was offset by proceeds from
exercise of stock options and tax benefits from stock option exercises and
Director Stock Units distributed of $0.5 million.  Cash used in
financing activities for the year ended December 31, 2007 totaled $9.1,
including net payments on long-term obligations and bonds of $9.3 million and
purchase of common stock for the treasury of $0.2 million, which was offset by proceeds
from stock options exercised and tax benefits from stock options exercises of
$0.4 million.  Cash used in financing activities for the year ended
December 31, 2006 totaled $4.5 million primarily due to the payment on long-term
obligations of $4.7 million and early redemption of the $1.0 million in
subordinated notes payable scheduled to mature in February of 2007, which was
offset by $0.8 million received from the exercise of stock options.




FS-6


On May
17, 2007, the Company entered into a new credit agreement between the Company as
borrower and Bank of America, N.A. as administrative agent, swing line lender
and letter of credit issuer.  The new credit agreement provides for a
revolving credit facility in the aggregate principal amount of $25 million with
future increases of up to an aggregate principal amount of $10 million at the
discretion of the lender.  The credit facility matures on May 16,
2012, with no principal payments required before the maturity date and no
prepayment penalty.  The purpose of the new facility is to refinance a
former credit agreement, term debt and bond debt, provide for issuance of
standby letters of credit, acquisitions, and for other general corporate
purposes.





At
December 31, 2008, the Company had unused borrowing capacity of  $24.8
million, based on no borrowings outstanding under the revolving credit facility,
and $0.2 million of letters of credit to secure payment of current and future
workers’ compensation claims.





Substantially
all of the Company’s accounts receivable, inventories, fixed assets and the
common stock of its subsidiary are pledged as collateral under the agreement,
and the credit agreement is secured by a full and unconditional guaranty from
NAGC.  The credit agreement provides for an applicable margin ranging
from 0.75% to 2.00% over LIBOR and commitment fees ranging from 0.10% to 0.25%
depending on the Company’s Funded Debt to EBITDA Ratio (as
defined).  If the Company would have had borrowings outstanding under
the revolving credit facility at December 31, 2008, the applicable margin would
have been 0.75% and the variable interest rate including the applicable margin
would have been 1.22%.  The credit agreement requires the Company to
maintain compliance with covenant limits.  If the Company would have
had borrowings at year end, all covenant requirements would have been
met.





The
Company has various commitments primarily related to vehicle and equipment
operating leases, capital lease obligations, facilities operating leases and
zinc purchase commitments. The Company’s off-balance sheet contractual
obligations at December 31, 2008, consist of $0.4 million for vehicle and
equipment operating leases, $3.7 million for zinc purchase commitments, $1.4
million for long-term operating leases for galvanizing and office facilities and
$1.4 million for machinery, equipment and building improvement
commitments.  The various leases for galvanizing facilities expire
through 2017. The vehicle leases expire annually on various schedules through
2012. NAGC periodically enters into fixed price purchase commitments with
domestic and foreign zinc producers to purchase a portion of its requirements
for its hot dip galvanizing operations; commitments for the future delivery of
zinc can be for up to one year.


















FS-7


The
Company expects to fund these commitments with cash generated from operations
and continuation of existing bank credit agreements as they mature. The
Company’s contractual obligations and commercial commitments as of December 31,
2008, are as follows (in thousands):




Less
      than
            
            
            1-3
            
            
            4-5
            
            
            More
      thanTotal
            
            
            One
      Year
            
            
            Years
            
            
            Years
            
            
            5
      YearsFacilities
      operating leases
            
            $
            1,423
            
            
            $
            361
            
            
            $
            728
            
            
            $
            207
            
            
            $
            127Vehicle
      and equipment operating leases
            
            
            366
            
            
            
            260
            
            
            
            106
            
            
            
            –
            
            
            
            –Zinc
      purchase commitments
            
            
            3,746
            
            
            
            3,746
            
            
            
            –
            
            
            
            –
            
            
            
            –Other
      purchase commitments
            
            
            1,365
            
            
            
            1,365
            
            
            
            –
            
            
            
            –
            
            
            
            –Total
      contractual cash obligations
            
            $
            6,900
            
            
            $
            5,732
            
            
            $
            834
            
            
            $
            207
            
            
            $
            127Other
      contingent commitment:Letters
      of credit
            
            $
            164
            
            
            $
            164
            
            
            $
            –
            
            
            $
            –
            
            
            $
            –




The
company has no outstanding debt and, therefore, has no committed interest
payments.  Fees for maintenance of the Company’s credit agreement are
not significant




Share
Repurchase Program




In August
1998, the Board of Directors authorized the Company to repurchase up to
$1,000,000 of its common stock in private or open market
transactions.  In March 2008, the Board of Directors authorized the
Company to buy back an additional $2,000,000 of its common stock, subject to
market conditions. In August 2008, the Board of Directors authorized the Company
to buy back an additional $3,000,000 of its common stock, subject to market
conditions.  Unless terminated earlier by resolution of the Board of
Directors, the program will expire when the Company has purchased shares with an
aggregate purchase price of no more than $6,000,000.  In 2008, the
Company repurchased 1,117,635 shares at an average price per share of $4.59,
bringing the total number of shares repurchased through December 31, 2008 to
1,421,727 at an average price of $3.89 per share, totaling $5,525,626. The
number of shares repurchased and average price was adjusted to reflect the
Company’s four-for-three stock split effected in the form of a stock dividend on
September 14, 2008.  In 2008, the stock repurchases had an approximate
$.04 per share positive impact on diluted earnings per share.




Environmental
Matters




The
Company’s facilities are subject to environmental legislation and regulation
affecting their operations and the discharge of wastes. The cost of compliance
with such regulations was approximately $1.9 million in both 2008 and 2007 and
$1.3 million in 2006 for the disposal and recycling of wastes generated by the
galvanizing operations.  The Company settled the Lake River litigation
for $1.4 million on December 17, 2008.  (See item 3.  LEGAL
PROCEEDINGS).  The majority of the $1.4 million payment ($1.05
million; $0.7 million, net of tax) was included in discontinued operations in
the fourth quarter of 2008.  The remaining $0.35 million was recorded
in cost of sales in the first quarter of 2007 and is included in the $1.9
million in environmental costs for 2007 mentioned above.




On
December 17, 2008, the board of directors of North American Galvanizing &
Coatings, Inc. (“NAGC”) approved a Mutual Release of Claims and Settlement
Agreement, (the “Settlement Agreement”) with the Metropolitan Water Reclamation
District of Greater Chicago (“MWRD”).




FS-8


The MWRD,
the owner of the former Lake River Terminals Site (“Site”), filed a lawsuit in
the United States District Court for the Northern District of Illinois against
NAGC and others (“case”). NAGC is a former parent company of the Lake River
Corporation. The Lake River Corporation occupied and conducted business at the
Site for approximately 50 years under the terms of five (5) lease agreements and
a General Permit with MWRD, which have since been terminated. The MWRD had
alleged in its lawsuit that NAGC was either directly or indirectly liable for
certain cleanup costs, including the removal of certain buildings and other
structures and the remediation of environmental conditions at the Site. Although
NAGC denied that it was directly or indirectly liable for any such costs, both
parties agreed that it would be mutually advantageous and cost-effective to
settle the matter without further litigation.




According
to the terms of the Settlement Agreement, in December 2008 NAGC paid MWRD $1.4
million.  In consideration of the payment, MWRD has released NAGC and
its affiliates from any and all claims which are, were, or could have been
included in the case, and from any and all payment obligations to MWRD, whether
pursuant to CERCLA, other law, contract, or tort, arising from the leases or on
account of the condition of the Site. In consideration of the above, NAGC
released MWRD and its affiliates from all claims of NAGC arising from the leases
or on account of the condition of the Site, and from any and all claims that
could have been asserted against MWRD or its affiliates as counterclaims in the
case. In addition, MWRD agreed to indemnify and hold NAGC harmless from any
claims against NAGC by third parties for certain claims that arise out of or
relate to the subject matter of the case.




The
Settlement Agreement relates to NAGC’s exit from the chemical storage and
related businesses at the Site and is a cost of the sale in 2000 of the
Company’s former subsidiary Lake River Corporation. In March of 2007, NAGC
recorded a liability for $350,000 related to the MWRD claim. The additional
liability of $1.05 million was recorded by NAGC during the fourth quarter of
2008 in discontinued operations ($0.7 million, net of income
taxes).  The Company recorded this additional charge in discontinued
operations in 2008 to be consistent with the similar classification presented in
2000 when the Company disposed of Lake River.




In
September 2008, the United States Environmental Protection Agency (the “EPA”)
notified the Company of a claim against the Company as a
potentially responsible party related to a Superfund site in Texas City,
Texas.  This matter pertains to galvanizing facilities of a
Company subsidiary and its disposal of waste, which was handled
by their supplier in the early 1980’s.  The EPA offered the Company a
special de minimis
party settlement to resolve potential liability that the Company and its
subsidiaries may have under CERCLA at this site.  The Company has accrued
the $112,145 de minimis
settlement amount during the third quarter of 2008 and accepted the EPA’s
offer  before the deadline of December 30, 2008.




NAGC was
notified in 1997 by the Illinois Environmental Protection Agency (“IEPA”) that
it was one of approximately 60 potentially responsible parties (“PRPs”) under
the Comprehensive Environmental Response, Compensation, and Liability
Information System (“CERCLIS”) in connection with cleanup of an abandoned site
formerly owned by Sandoval Zinc Co., an entity unrelated to NAGC.  The
IEPA notice includes NACG as one of the organizations which arranged for the
treatment and disposal of hazardous substances at Sandoval.  The
estimated timeframe for resolution of the IEPA contingency is
unknown.  The IEPA has yet to respond to a proposed work plan
submitted in August 2000 by a group of the potentially responsible parties or
suggest any other course of action, and there has been no activity in regards to
this issue since 2001. Until the work plan is approved and completed, the range
of potential loss or remediation, if any, is unknown, and in addition, the
allocation of potential loss between the 60 potentially responsible parties is
unknown and not reasonably estimable.  Therefore, the Company has no
basis for determining potential exposure and estimated remediation costs at this
time and no liability has been accrued.





FS-9


The
Company is committed to complying with all federal, state and local
environmental laws and regulations and using its best management practices to
anticipate and satisfy future requirements. As is typical in the




Critical
Accounting Policies




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires that management
apply accounting policies and make estimates and assumptions that affect results
of operations and the reported amounts of assets and liabilities. The following
areas are those that management believes are important to the financial
statements because they require significant judgment and
estimation.




Revenue
Recognition—Revenue is recognized when earned and realized or realizable
in accordance with Staff Accounting Bulletin “SAB” 104 Revenue Recognition, which
requires satisfying the following criteria:  the arrangement with the
customer is evident through the receipt of a purchase order or a written
agreement; the sales price is fixed or determinable; coating services have been
completed, including inspection by the Company according to American Society for
Testing and Materials (“ASTM”) standards; and collectability is reasonably
assured.  The Company does not accept title to customers’ products,
thus, revenue does not include the value of the customers’
products.  Although most customers make arrangements for
transportation, if the Company makes transportation arrangements, freight and
shipping billed to customers is included in sales, and the cost of freight and
shipping is included in cost of sales.




The
Company works to price its services based on the cost of zinc and the cost of
services performed.  The market price of zinc, as quoted on the London
Metal Exchange (“LME”), has been volatile.  During the last three
years, the LME spot price of zinc was as high as $2.10 and as low as $0.47 per
pound, ending 2008 at $0.51.  Thus, the Company’s revenue can be
impacted positively or negatively based on changes in zinc prices.




Inventories—Inventories
are stated at the lower of cost last in, first out (“LIFO”) basis or market.
Since substantially the Company’s entire inventory is raw zinc used in the
galvanizing of customers’ products, market value is based on an estimate of the
value added to the cost of raw zinc as a result of the galvanizing
service.  The price of zinc has been volatile.  See revenue
recognition discussion above.




Self-Insurance
Reserves—The reserves for the self-insured portion of workers
compensation and health insurance coverage are based on historical data and
current trends. Estimates for reported claims and for claims incurred but not
reported are included in the reserves. These estimates may be subject to
adjustment if the Company’s actual claims are significantly different than its
historical experience. The Company has obtained insurance coverage for medical
claims exceeding $75,000 and workers’ compensation claims exceeding $150,000 per
occurrence and has implemented safety training and other programs to reduce
workplace accidents.




Impairment of
Long-Lived Assets—The Company reviews long-lived assets for impairment
using forecasts of future cash flows to be generated by those assets. These cash
flow forecasts are based upon expected tonnage to be galvanized and the margin
to be earned by providing that service to customers. These assumptions are
susceptible to the actions of competitors and changes in economic conditions in
the industries and geographic markets the Company serves.




Environmental—The
Company expenses or capitalizes, where appropriate, environmental expenditures
that relate to current operations as they are incurred. Such expenditures are
expensed when they are attributable to past operations and are not expected to
contribute to current or future revenue generation. The Company records
liabilities when remediation or other environmental assessment or clean-up
efforts are probable and the cost can be reasonably
estimated.


FS-10


Goodwill—Pursuant
to the provisions of Statement of Financial Accounting Standards (“SFAS”) No.
141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets, which requires management to estimate the fair value of the
Company’s reporting units, the Company conducts an annual impairment test of
goodwill during the second quarter of each year, unless circumstances arise that
require more frequent testing. The determination of fair value is dependent upon
many factors including, but not limited to, management’s estimate of future cash
flows of the reporting units and discount rates. Any one of a number of future
events could cause management to conclude that impairment indicators exist and
that the carrying value of these assets will not be recovered. The Company
completed the annual impairment test of goodwill for 2008 and concluded goodwill
was not impaired.  Management monitored the Company’s operations and
the general economic environment including the Company’s market capitalization
through year end and is not aware of any triggering events that could require an
additional test of goodwill for possible impairment.




New Accounting
Standards—In September 2006, the Financial Accounting Standards Board
(‘FASB”) issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring
fair value under GAAP and expands disclosures about fair value measurements. The
Company adopted the provisions of SFAS 157 on January 1, 2008, and
the  adoption had no impact on the Company’s financial position,
consolidated results of operations or cash flows.




In
September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans (“SFAS 158”). The Company
has no defined benefit or other postretirement plans.  Accordingly,
SFAS 158 had no impact on the Company’s financial position, consolidated results
of operations or cash flows.




In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities –Including an amendment of FASB Statement No.
115 (“SFAS 159”). SFAS 159  permits entities to choose to
measure many financial instruments and certain other items at fair value. The
Company adopted the provisions of SFAS 159 on January 1, 2008, and did not elect
to use the fair value option.  The  adoption had no impact
on the Company’s financial position, consolidated results of operations or cash
flows.




In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements –an amendment of ARB No. 51 (“SFAS
160”). A noncontrolling interest, sometimes called a minority interest, is the
portion of equity in a subsidiary not attributable, directly or indirectly, to a
parent. SFAS 160 is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. Earlier adoption is
prohibited.  The objective of SFAS 160 is to improve the relevance,
comparability, and transparency of the financial information that a reporting
entity provides in its consolidated financial statements.  The Company
currently has no noncontrolling interests,  thus the adoption of SFAS
160 is expected to have no impact on the Company’s financial position,
consolidated results of operations or cash flows.




In  March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities—an amendment of FASB Statement No. 133 (“SFAS
161”).  SFAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. The Company currently has no financial
instruments that require marking to fair value as
derivatives.  Accordingly, SFAS 161 has no impact on the Company’s
financial statement disclosures.




Quantitative
and Qualitative Disclosures About Market Risks




The
Company’s operations include managing market risks related to changes in
interest rates and zinc commodity prices.


FS-11


Interest Rate
Risk— Changing interest rates will affect interest paid on the Company’s
variable rate debt.  The Company does not have any variable rate debt
as of December 31, 2008.




Zinc Price
Risk—NAGC periodically enters into fixed price purchase commitments for
physical delivery with domestic and foreign zinc producers to purchase a portion
of its zinc requirements for its hot dip galvanizing operations. Commitments for
the future delivery of zinc, typically up to one year, reflect rates quoted on
the London Metals Exchange. At December 31, 2008 and 2007, the aggregate fixed
price commitments for the procurement of zinc were approximately $3.7 million
and $1.5 million, respectively. With respect to the zinc fixed price purchase
commitments, a hypothetical decrease of 10% in the market price of zinc from the
December 31, 2008 and 2007 levels would represent a potential lost gross margin
opportunity of approximately $0.37 million and $0.15 million,
respectively.




The
Company’s financial strategy includes evaluating the selective use of derivative
financial instruments to manage zinc and interest costs. As part of its
inventory management strategy, the Company expects to continue evaluating
hedging instruments to minimize the impact of zinc price fluctuations. The
Company’s current zinc forward purchase commitments are considered derivatives,
but the Company has elected to account for these purchase commitments as normal
purchases.




































FS-12


MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING




The
Management of North American Galvanizing Company (the “Company”) and its
wholly-owned subsidiaries are responsible for establishing and maintaining
adequate internal control over financial reporting. The Company’s internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles. Internal control over financial reporting
includes policies and procedures that: (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the financial
statements.




All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective may not
prevent or detect misstatements.




The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2008. In making this
assessment, the Company’s management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal
Control-Integrated Framework.




Management’s
assessment included an evaluation of such elements as the design and operating
effectiveness of key financial reporting controls, process documentation,
accounting policies, and overall control environment. Based on this assessment,
the Company’s management has concluded that the Company’s internal control over
financial reporting as of December 31, 2008 was effective.





/s/
      Ronald J. Evans
                Ronald
      J. Evans
                President
      and
                Chief
      Executive Officer
              /s/ Beth
      B. Hood
                Beth B. Hood
                Vice President and
                Chief Financial
Officer


FS-13


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To
the Board of Directors and Stockholders of


North
American Galvanizing & Coatings, Inc.




We have
audited the internal control over financial reporting of North American
Galvanizing & Coatings, Inc. and subsidiary (the “Company”) as of December
31, 2008, based on criteria established in Internal Control — Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission.  The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control over
Financial Reporting.  Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects.  Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances.  We believe
that our audit provides a reasonable basis for our opinion.




A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.  A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.




Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis.  Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.




In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the criteria
established in Internal
Control — Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission.




We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedule as of and for the year ended December 31, 2008 of
the Company and our report dated February 20, 2009 expressed an unqualified
opinion on those financial statements and the financial statement schedule
listed in the Index at Item 15.




/s/
Deloitte & Touche LLP


Tulsa,
Oklahoma


February
20, 2009






FS-14


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To
the Board of Directors and Stockholders of


North
American Galvanizing & Coatings, Inc.




We have
audited the accompanying consolidated balance sheets of North American
Galvanizing & Coatings, Inc. and subsidiary (the “Company”) as of December
31, 2008 and 2007, and the related consolidated statements of income,
stockholders’ equity and cash flows for each of the three years in the period
ended December 31, 2008. Our audits also included the financial statement
schedule listed in the Index at Item 15. These financial statements and the
financial statement schedule are the responsibility of the Company’s management.
Our responsibility is to express an opinion on the financial statements and the
financial statement schedule based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.




In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of North American Galvanizing & Coatings,
Inc. and subsidiary at December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.




We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 20, 2009 expressed an
unqualified opinion on the Company’s internal control over financial
reporting.







/s/
Deloitte & Touche LLP


Tulsa,
Oklahoma


February
20, 2009










FS-15


NORTH
      AMERICAN GALVANIZING & COATINGS, INC.CONSOLIDATED
      BALANCE SHEETS(In
      thousands, except share amounts)December
      31,ASSETS
              
              2008
              
              
              2007CURRENT
      ASSETS:Cash
      and cash equivalents
              
              $
              9,322
              
              
              $
              2,966Trade
      receivables—less allowances of $102 for 2008 and $154 for
    2007
              
              
              10,880
              
              
              
              10,294Inventories
              
              
              5,839
              
              
              
              6,399Prepaid
      expenses and other assets
              
              
              478
              
              
              
              1,096Deferred
      tax asset—net
              
              
              1,048
              
              
              
              741Total
      current assets
              
              
              27,567
              
              
              
              21,496PROPERTY,
      PLANT AND EQUIPMENT—AT COSTS:Land
              
              
              2,167
              
              
              
              2,167Galvanizing
      plants and equipment
              
              
              40,135
              
              
              
              41,33742,302
              
              
              
              43,504Less—allowance
      for depreciation
              
              
              (22,481
              )
              
              
              (22,413
              )Construction
      in progress
              
              
              2,379
              
              
              
              1,396Total
      property, plant and equipment—net
              
              
              22,200
              
              
              
              22,487GOODWILL—Net
              
              
              3,448
              
              
              
              3,448OTHER
      ASSETS
              
              
              1,557
              
              
              
              141TOTAL
      ASSETS
              
              $
              54,772
              
              
              $
              47,572LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIES:Current
      maturities of long—term obligations
              
              $
              —
              
              
              $
              1Trade
      accounts payable
              
              
              4,088
              
              
              
              5,296Accrued
      payroll and employee benefits
              
              
              1,853
              
              
              
              1,513Accrued
      taxes
              
              
              607
              
              
              
              1,112Customer
      deposits
              
              
              538
              
              
              
              —Other
      accrued liabilities
              
              
              2,792
              
              
              
              2,910Total
      current liabilities
              
              
              9,878
              
              
              
              10,832DEFERRED
      TAX LIABILITY—Net
              
              
              504
              
              
              
              697LONG—TERM
      OBLIGATIONS
              
              
              —
              
              
              
              14Total
      liabilities
              
              
              10,382
              
              
              
              11,543COMMITMENTS
      AND CONTINGENCIES (NOTES 6 AND 7)STOCKHOLDERS’
      EQUITY(all shares for all periods adjusted for
    four-for-threestock
      split on September 14, 2008)Common
      stock—$.10 par value, 18,000,000 shares authorized:Issued—16,507,813
      shares in 2008 and 16,489,005 in 2007
              
              
              1,651
              
              
              
              1,237Additional
      paid-in capital
              
              
              12,281
              
              
              
              14,549Retained
      earnings
              
              
              32,180
              
              
              
              20,310Common
      shares in treasury at cost— 488,212 in 2008 and 16,787 in
    2007
              
              
              (1,722
              )
              
              
              (67
              )Total
      stockholders’ equity
              
              
              44,390
              
              
              
              36,029TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              54,772
              
              
              $
              47,572
  See notes
to consolidated financial statements.
  FS-16
 NORTH
      AMERICAN GALVANIZING & COATINGS, INC.CONSOLIDATED
      STATEMENTS OF INCOME(In
      thousands, except per share amounts)Years
      Ended December 31,2008
              
              
              2007
              
              
              2006SALES
              
              $
              86,134
              
              
              $
              88,396
              
              
              $
              74,054COSTS
      AND EXPENSES:Cost
      of sales excluding depreciation and amortization
              
              
              53,219
              
              
              
              60,329
              
              
              
              54,662Selling,
      general and administrative expenses
              
              
              10,039
              
              
              
              9,143
              
              
              
              8,058Depreciation
      and amortization
              
              
              3,529
              
              
              
              3,519
              
              
              
              2,975Total
      costs and expenses
              
              
              66,787
              
              
              
              72,991
              
              
              
              65,695OPERATING
      INCOME
              
              
              19,347
              
              
              
              15,405
              
              
              
              8,359Interest
      expense
              
              
              —
              
              
              
              (553
              )
              
              
              (867
              )Interest
      income and other
              
              
              247
              
              
              
              81
              
              
              
              62INCOME
      FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
              
              
              19,594
              
              
              
              14,933
              
              
              
              7,554INCOME
      TAX EXPENSE
              
              
              7,062
              
              
              
              5,701
              
              
              
              3,019INCOME
      FROM CONTINUING OPERATIONS
              
              
              12,532
              
              
              
              9,232
              
              
              
              4,535LOSS
      FROM DISCONTINUED OPERATIONS, net of income taxes (Note 6)
              
              
              (662
              )
              
              
              —
              
              
              
              —NET
      INCOME
              
              $
              11,870
              
              
              $
              9,232
              
              
              $
              4,535INCOME
      PER COMMON SHARE:Continuing
      OperationsBasic
              
              $
              0.77
              
              
              $
              0.56
              
              
              $
              0.30Diluted
              
              $
              0.74
              
              
              $
              0.54
              
              
              $
              0.29Discontinued
      OperationsBasic
              
              $
              (0.04
              )
              
              $
              —
              
              
              $
              —Diluted
              
              $
              (0.04
              )
              
              $
              —
              
              
              $
              —Net
      IncomeBasic
              
              $
              0.73
              
              
              $
              0.56
              
              
              $
              0.30Diluted
              
              $
              0.70
              
              
              $
              0.54
              
              
              $
              0.29
  See notes
to consolidated financial statements.
 
 FS-17
 NORTH AMERICAN GALVANIZING & COATINGS,
      INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(In
      thousands)Years
      Ended December 31,2008
              
              
              2007
              
              
              2006OPERATING
      ACTIVITIES:Net
      income
              
              $
              11,870
              
              
              $
              9,232
              
              
              $
              4,535Loss
      on disposal of assets
              
              
              105
              
              
              
              —
              
              
              
              (6
              )Depreciation
      and amortization
              
              
              3,529
              
              
              
              3,519
              
              
              
              2,975Deferred
      income taxes
              
              
              (500
              )
              
              
              (62
              )
              
              
              (786
              )Non-cash
      share-based compensation
              
              
              704
              
              
              
              531
              
              
              
              99Non-cash
      directors’ fees
              
              
              413
              
              
              
              429
              
              
              
              459Changes
      in operating assets and liabilities:Accounts
      receivable—net
              
              
              (586
              )
              
              
              2,738
              
              
              
              (6,224
              )Inventories
      and other assets
              
              
              (238
              )
              
              
              197
              
              
              
              (512
              )Accounts
      payable, accrued liabilities and other
              
              
              (1,094
              )
              
              
              (2,092
              )
              
              
              6,029Cash
      provided by operating activities
              
              
              14,203
              
              
              
              14,492
              
              
              
              6,569INVESTING
      ACTIVITIES:Capital
      expenditures
              
              
              (3,228
              )
              
              
              (4,430
              )
              
              
              (1,414
              )Proceeds
      from sale of assets
              
              
              22
              
              
              
              —
              
              
              
              5Cash
      used in investing activities
              
              
              (3,206
              )
              
              
              (4,430
              )
              
              
              (1,409
              )FINANCING
      ACTIVITIES:Purchase
      of common stock for the treasury
              
              
              (5,134
              )
              
              
              (153
              )
              
              
              (3
              )Proceeds
      from exercise of stock options
              
              
              343
              
              
              
              194
              
              
              
              771Tax
      benefits realized from stock options exercised and Director Stock Units
      distributed
              
              
              172
              
              
              
              232
              
              
              
              350Payments
      on long-term obligations
              
              
              (15
              )
              
              
              (18,954
              )
              
              
              (20,143
              )Cash
      paid for fractional shares pursuant to stock split effected by stock
      dividend
              
              
              (7
              )
              
              
              (2
              )
              
              
              —Proceeds
      from long-term obligations
              
              
              —
              
              
              
              14,873
              
              
              
              16,089Payments
      on bonds
              
              
              —
              
              
              
              (5,265
              )
              
              
              (669
              )Payment
      of subordinated notes payable
              
              
              —
              
              
              
              —
              
              
              
              (1,000
              )Proceeds
      from exercise of warrants
              
              
              —
              
              
              
              —
              
              
              
              57Cash
      used in financing activities
              
              
              (4,641
              )
              
              
              (9,075
              )
              
              
              (4,548
              )INCREASE
      IN CASH AND CASH EQUIVALENTS
              
              
              6,356
              
              
              
              987
              
              
              
              612CASH
      AND CASH EQUIVALENTS:Beginning
      of year
              
              
              2,966
              
              
              
              1,979
              
              
              
              1,367End
      of year
              
              $
              9,322
              
              
              $
              2,966
              
              
              $
              1,979CASH
      PAID DURING THE YEAR FOR:Interest
              
              $
              —
              
              
              $
              494
              
              
              $
              880Income
      taxes
              
              $
              5,166
              
              
              $
              5,604
              
              
              $
              3,419NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Acquisitions
      of fixed assets under capital lease obligations
              
              $
              —
              
              
              $
              —
              
              
              $
              363Acquisitions
      of fixed assets included in payables at period end
              
              $
              141
              
              
              $
              441
              
              
              $
              464
 
 See notes
to consolidated financial statements.
  FS-18
 NORTH
      AMERICAN GALVANIZING & COATINGS, INC.CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY FOR EACH OF THE THREE YEARS
      ENDEDDECEMBER
      31, 2008, 2007 AND 2006(In
      thousands, except share amounts)Common
      Stock
                
                
                Additional$.10
      Par Value
                
                
                Paid-in
                
                
                Retained
                
                
                Treasury
      StockShares
                
                
                Amount
                
                
                Capital
                
                
                Earnings
                
                
                Shares
                
                
                Amount
                
                
                TotalBALANCE—January
      1, 2006
                
                
                8,209,925
                
                
                $
                821
                
                
                $
                17,391
                
                
                $
                6,543
                
                
                
                1,362,977
                
                
                $
                (5,457
                )
                
                $
                19,298Net
      income
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                4,535
                
                
                
                —
                
                
                
                —
                
                
                
                4,535Stock
      units for Director Stock Unit Program
                
                
                —
                
                
                
                —
                
                
                
                459
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                459Incentive
      Stock Plan Compensation
                
                
                —
                
                
                
                —
                
                
                
                99
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                99Purchase
      of common stock for the treasury
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                735
                
                
                
                (3
                )
                
                
                (3
                )Issuance
      of treasury shares for Director Stock UnitProgram
      transactions, including tax benefit
                
                
                —
                
                
                
                —
                
                
                
                (1,006
                )
                
                
                —
                
                
                
                (259,001
                )
                
                
                1,036
                
                
                
                30Issuance
      of treasury shares for warrant transactions,net of shares
      tendered for payment
                
                
                —
                
                
                
                —
                
                
                
                (2,324
                )
                
                
                —
                
                
                
                (594,635
                )
                
                
                2,381
                
                
                
                57Issuance
      of treasury shares for stock option transactions, net
      ofshares tendered for
      payment and including tax benefit
                
                
                —
                
                
                
                —
                
                
                
                (558
                )
                
                
                —
                
                
                
                (411,823
                )
                
                
                1,649
                
                
                
                1,091BALANCE—January
      1, 2007
                
                
                8,209,925
                
                
                $
                821
                
                
                $
                14,061
                
                
                $
                11,078
                
                
                
                98,253
                
                
                $
                (394
                )
                
                $
                25,566Net
      income
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                9,232
                
                
                
                —
                
                
                
                —
                
                
                
                9,232Issuance
      of treasury shares for stock optiontransactions, netof shares tendered
      forpayment and including tax benefit
                
                
                —
                
                
                
                —
                
                
                
                63
                
                
                
                —
                
                
                
                (77,500
                )
                
                
                310
                
                
                
                373Incentive
      Stock Plan Compensation
                
                
                —
                
                
                
                —
                
                
                
                531
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                531Stock
      units for Director Stock Unit Program
                
                
                —
                
                
                
                —
                
                
                
                429
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                429Issuance
      of common stock for stock option transactions,including tax
      benefit
                
                
                7,500
                
                
                
                1
                
                
                
                52
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                53Stock
      split effected by a Three for Two Stock Dividend,including cash
      paid for fractional shares
                
                
                4,118,200
                
                
                
                411
                
                
                
                (413
                )
                
                
                —
                
                
                
                184
                
                
                
                —
                
                
                
                (2
                )Issuance
      of common stock for Director Stock UnitProgram
      transactions
                
                
                31,129
                
                
                
                4
                
                
                
                (4
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Issuance
      of treasury shares for Director Stock UnitProgram
      transactions
                
                
                —
                
                
                
                —
                
                
                
                (170
                )
                
                
                —
                
                
                
                (36,897
                )
                
                
                170
                
                
                
                —Purchase
      of common stock for the treasury
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                28,550
                
                
                
                (153
                )
                
                
                (153
                )BALANCE—January
      1, 2008
                
                
                12,366,754
                
                
                $
                1,237
                
                
                $
                14,549
                
                
                $
                20,310
                
                
                
                12,590
                
                
                $
                (67
                )
                
                $
                36,029Net
      income
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                11,870
                
                
                
                —
                
                
                
                —
                
                
                
                11,870Purchase
      of common stock for the treasury
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                979,770
                
                
                
                (5,134
                )
                
                
                (5,134
                )Stock
      split effected by a four for three stock dividend,including cash paid
      for fractional shares
                
                
                4,126,263
                
                
                
                413
                
                
                
                (420
                )
                
                
                —
                
                
                
                53,500
                
                
                
                —
                
                
                
                (7
                )Issuance
      of common stock for Director Stock UnitProgram
      transactions
                
                
                14,796
                
                
                
                1
                
                
                
                (1
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Issuance
      of treasury shares for nonvested stock awards
                
                
                —
                
                
                
                —
                
                
                
                (1,701
                )
                
                
                —
                
                
                
                (273,326
                )
                
                
                1,701
                
                
                
                —Issuance
      of treasury shares for stock optiontransactions,
      net of shares
      tendered for payment and including tax
      benefit
                
                
                —
                
                
                
                —
                
                
                
                (1,064
                )
                
                
                —
                
                
                
                (233,712
                )
                
                
                1,469
                
                
                
                405Incentive
      Stock Plan Compensation
                
                
                —
                
                
                
                —
                
                
                
                704
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                704Stock
      units for Director Stock Unit Program, net of tax benefits
                
                
                —
                
                
                
                —
                
                
                
                523
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                523Issuance
      of treasury shares for Director Stock UnitProgram
      transactions
                
                
                —
                
                
                
                —
                
                
                
                (309
                )
                
                
                —
                
                
                
                (50,610
                )
                
                
                309
                
                
                
                —BALANCE—December
      31, 2008
                
                
                16,507,813
                
                
                $
                1,651
                
                
                $
                12,281
                
                
                $
                32,180
                
                
                
                488,212
                
                
                $
                (1,722
                )
                
                $
                44,390
  See
notes to consolidated financial statements.
  FS-19


NORTH
AMERICAN GALVANIZING AND COATINGS, INC.






NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Years
Ended December 31, 2008, 2007 and 2006




Description
of Business




North
American Galvanizing & Coatings, Inc. (“North American Galvanizing” or the
“Company”) is engaged in hot dip galvanizing and coatings for corrosion
protection of customer-owned fabricated steel products through its wholly owned
subsidiary, North American Galvanizing Company (“NAGC”). NAGC provides metals
corrosion protection with 10 regionally located galvanizing plants.






(1)
Summary of Significant Accounting Policies




Principles of
Consolidation—The consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary. All inter-company transactions
are eliminated in consolidation.




Estimates—The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the balance sheet dates and
the reported amounts of revenues and expenses for each of the years. Actual
results will be determined based on the outcome of future events and could
differ significantly from the estimates.




Cash and Cash
Equivalents—Cash and cash equivalents include interest bearing deposits
with original maturities of three months or less.




Inventories—Inventories
consist of raw zinc “pigs,” molten zinc in galvanizing kettles and other
chemicals and materials used in the galvanizing process. Inventories are stated
at the lower of cost or market with market value based on estimated realizable
value from the galvanizing process. Zinc cost is determined on a last-in
first-out (“LIFO”) basis. Other inventories are valued primarily on an average
cost basis. Inventories consist of the following:




(Dollars
      in thousands)2008
              
              
              2007Zinc
              
              $
              5,369
              
              
              $
              5,873Other
              
              
              470
              
              
              
              526$
              5,839
              
              
              $
              6,399


Had the
Company used first-in-first-out (“FIFO”) basis for valuing its zinc inventories,
at December 31, 2008 and 2007, inventories would have been higher by
approximately $1,300,000 and $8,300,000, respectively. The Company’s LIFO
inventories represented approximately 92% of total inventories at December 31,
2008 and 92% of total inventories at December 31, 2007. Raw zinc replacement
cost based on year-end market prices was approximately $5,100,000 and
$11,400,000 at December 31, 2008 and 2007, respectively.  In 2008,
inventory quantities were reduced, resulting in liquidation of LIFO inventory
layers which decreased the Company’s net income by approximately
$109,000.


FS-20


Goodwill—Goodwill
represents the excess of purchase price over the fair value of net assets
acquired in business combinations. Goodwill is not amortized but is reviewed at
least annually for impairment. Management selected May 31 as the date of its
annual goodwill impairment test. Based upon the impairment test performed as of
May 31, 2008, management determined that goodwill was not impaired.




Depreciation and
Amortization—Plant and equipment, including assets under capital leases,
are depreciated on the straight-line basis over their estimated useful lives,
generally at rates of 3% to 6% for buildings and 10% to 20% for equipment,
furnishings and fixtures.




Environmental
Expenditures—The Company expenses or capitalizes, where appropriate,
environmental expenditures that relate to current operations as they are
incurred. Such expenditures are expensed when they are attributable to past
operations and are not expected to contribute to current or future revenue
generation. The Company records liabilities when remediation or other
environmental assessment or clean-up efforts are probable and the cost can be
reasonably estimated.




Long-Lived
Assets—Long-lived assets and certain intangibles to be held and used or
disposed of are reviewed for impairment on an annual basis or when events or
circumstances indicate that such impairment may have occurred. The Company has
determined that no impairment loss need be recognized for the years ended
December 31, 2008, 2007 or 2006.




Self-Insurance—The
Company is self-insured for workers’ compensation and certain health care claims
for its active employees. The Company carries excess insurance providing
coverage for medical claims exceeding $75,000 and workers’ compensation claims
exceeding $150,000 per occurrence, respectively. The reserves for workers’
compensation benefits and health care claims represent estimates for reported
claims and for claims incurred but not reported using loss development factors.
Such estimates are generally based on historical trends and risk assessment
methodologies; however, the actual results may vary from these estimates since
the evaluation of losses is inherently subjective and susceptible to significant
changing factors.




Revenue
Recognition—Revenue is recognized when earned and realized or realizable
in accordance with Staff Accounting Bulletin (“SAB”) 104. This includes
satisfying the following criteria:  the arrangement with the customer is
evident, through the receipt of a purchase order or a written agreement; the
sales price is fixed or determinable; coating services have been completed,
including inspection by the Company according to American Society for Testing
and Materials (“ASTM”) standards; and collectability is reasonably
assured.  The Company does not accept title to customers’ products,
thus, revenue does not include the value of the customers’
products.  Although most customers make arrangements for
transportation, if the Company makes transportation arrangements, freight and
shipping billed to customers is included in sales, and the cost of freight and
shipping is included in cost of sales.




Derivative
Financial Instruments—The Company has previously utilized commodity
collar contracts as derivative instruments which are intended to offset the
impact of potential fluctuations in the market price of zinc. The Company had no
derivative instruments that were required to be reported at fair value at
December 31, 2008 and 2007, and did not utilize derivatives during the years
ended December 31, 2008, 2007 or 2006, except for the zinc forward purchase
commitments, which are accounted for as normal purchases (see Note
5).




Stock
Options— The Company adopted Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment (“SFAS No. 123(R)”) under the modified
prospective method on January 1, 2006.  Under the “modified
prospective” method, compensation cost is recognized in the financial statements
beginning with the effective date, based on the requirements of SFAS No. 123(R)
for all share-based payments granted after that date, and based on the
requirements of Statement of Financial Accounting Standards No.123, Accounting
for
Stock Based Compensation (“SFAS No. 123”) for all unvested awards granted prior
to the effective date of SFAS No. 123(R).


FS-21


SFAS No.
123(R) eliminates the intrinsic value measurement method of accounting in
Accounting Principles Board (“APB”) Opinion 25 and generally requires measuring
the cost of the employee services received in exchange for an award of equity
instruments based on the fair value of the award on the date of the grant. The
standard requires grant date fair value to be estimated using either an
option-pricing model which is consistent with the terms of the award or a market
observed price, if such a price exists. Such costs must be recognized over the
period during which an employee is required to provide service in exchange for
the award. The standard also requires estimating the number of instruments that
will ultimately be issued, rather than accounting for forfeitures as they
occur.





Income
Taxes—Net deferred income tax assets and liabilities on the consolidated
balance sheet reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes and the benefit of net operating loss
and other tax credit carry-forwards. Valuation allowances are established
against deferred tax assets to the extent management believes it is more likely
than not that the assets will not be realized. No valuation allowance was
considered necessary at December 31, 2008 and 2007.




The
Company adopted the provisions of the Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, (“FIN 48”), on January 1, 2007.  FIN 48 clarifies
whether or not to recognize assets or liabilities for tax positions taken that
may be challenged by a taxing authority. The Company did not identify any
uncertain tax positions at January 1, 2007.  The Company files income
tax returns in the Federal jurisdiction and various state jurisdictions. With
few exceptions, the Company is no longer subject to Federal and state income tax
examinations by tax authorities for years before 2003. In the second quarter of
2006, the Internal Revenue Service (“IRS”) commenced an examination of the
Company’s Federal income tax return for 2004 and subsequently added years 2003
and 2005 to the examination.  This examination was completed in the
second quarter of 2007, resulting in a required tax payment of $266,000,
primarily due to timing differences of deductions taken in prior year
returns.





As of
December 31, 2008, the Company updated its evaluation of all open tax years in
all jurisdictions, including an evaluation of the potential impact of additional
state taxes being assessed by jurisdictions in which the Company does not
currently consider itself liable. Based on this evaluation, the Company did not
identify any uncertain tax positions. In connection with the adoption of FIN 48,
the Company will include future interest and penalties, if any, related to
uncertain tax positions as a component of its provision for taxes.




Equity—The
board of directors declared a four-for-three stock split effected by a stock
dividend for all stockholders of record on August 31, 2008, payable on September
14, 2008. All share and per share data (except par value) have been adjusted to
reflect the effect of the stock split for all periods presented. In addition,
the number of shares of common stock issuable upon the exercise of outstanding
stock options and the vesting of other stock awards, as well as the number of
shares of common stock reserved for issuance under the Company’s share-based
compensation plans, were proportionately increased in accordance with the terms
of those respective agreements and plans.




(2)
Share-based Compensation




At
December 31, 2008, the Company had two share-based compensation plans, which are
stockholder-approved, the 2004 Incentive Stock Plan and the Director Stock Unit
Program.  The Company’s 2004 Incentive Stock Plan (the “Plan”) permits
the grant of share options and shares to its employees and directors for up to
2,500,000 shares of common stock, as adjusted to reflect the four-for-three
stock split on September 14,
2008.  Director Stock Unit Program shares are issued under the
plan.  The Company believes that such awards better align the
interests of its employees and directors with those of its
stockholders.




FS-22


The
compensation cost for the Plan, exclusive of the Director Stock Unit Program,
was $704,000 for the year ended December 31, 2008 and $531,000 for the year
ended December 31, 2007.  No tax benefit was recognized in income tax
expense for the 2008 or 2007 incentive stock plan compensation
cost.  There was no share-based compensation cost capitalized during
2007 or 2008.





Non-vested
Shares.During February and March 2008, the Compensation
Committee recommended and the Board of Directors approved a grant totaling
126,667 non-vested shares for management employees and 66,667 non-vested shares
for non-management directors.  During July 2008, the Compensation
Committee recommended and the Board of Directors approved a grant totaling
80,000 non-vested shares for non-management directors.  The
weighted-average grant price of restricted stock granted in 2008 was
$4.70.  Non-vested shares granted to management employees, including
management directors vest and become nonforfeitable on the date that is four
years after the date of grant; or if the participant is a non-employee director
of the Company at the time of the grant, the date that is two years after the
date of the grant. The Company is recognizing this compensation expense over the
two year or four year vesting period, as applicable, on a ratable
basis.  Non-vested shares are valued at market value on the grant
date.  The Company recognized $345,000 in amortization expense related
to restricted stock in 2008.





Stock
Options.Option awards are granted with an exercise
price equal to the market price of the Company’s stock at the date of grant;
those option awards usually vest based on 4 years of continuous service and have
10-year contractual terms.  For the years ended December 31, 2007 and
2006, the Company issued stock options for 670,000 shares at $2.60 per share and
335,000 shares at $1.07 per share, respectively, as adjusted to reflect the
four-for-three stock split.  No stock options were issued in
2008.  The Company recognized $359,000 and $533,000 in 2008 and 2007
respectively for amortization expense related to stock options.





The fair
value of options granted under the Company’s stock option plans was estimated
using the Black-Scholes option-pricing model with the following assumptions
used:


Years
      Ended December 31Dollars
      in Thousands, Except per Share Amounts
              2008
              2007
              2006Volatility
              –
              66%
              54%Discount
      rate
              –
              4.6%
              4.7%Dividend
      yield
              –
              –
              –Weighted
      average grant date fair value, as adjusted to reflect the four-for-three
      stock split
              –
              $1.77
              $0.75





The fair
value of options which became fully vested during 2008, 2007 and 2006 was
$522,000, $464,000, $32,550, respectively.  The intrinsic value of
options exercised during 2008, 2007 and 2006 was 1,550,000, $657,000 and
$1,479,000, respectively.




Number of
                Shares
              
              
              Weighted Average

                Exercise PriceOutstanding,
      December 31, 2007 ( 457,916  exercisable)
              
              
              1,354,167
              
              
              $     
                        
      1.78GrantedExercised
              
              
              (316,251)
              
              
              1.21Surrendered/expired/cancelledOutstanding,
      December 31, 2008 (461,416  exercisable)
              
              
              1,037,916
              
              
              $
              1.95
 
   FS-23


Information
about stock options as of December 31, 2008:




Options
      Outstanding
            
            
            Options
      ExercisableWeighted-
            
            
            
            
            
            
            
            
            Weighted-Weighted-
            
            
            Average
            
            
            
            
            
            Weighted-
            
            
            AverageAverage
            
            
            Remaining
            
            
            
            
            
            Average
            
            
            RemainingRange
      of
            
            
            Number
      of
            
            
            Exercise
            
            
            Contractual
            
            
            Number
      of
            
            
            Exercise
            
            
            ContractualExercise
      Prices
            
            
            Shares
            
            
            Price
            
            
            Life
      (Years)
            
            
            Shares
            
            
            Price
            
            
            Life
      (Years)$
            0.53
      to $0.99
            
            
            
            125,416
            
            
            $
            0.76
            
            
            
            4.4
            
            
            
            125,416
            
            
            $
            .76
            
            
            
            4.4$
            1.05
      to $1.43
            
            
            
            297,500
            
            
            
            1.12
            
            
            
            6.9
            
            
            
            117,500
            
            
            
            1.16
            
            
            
            6.6$
            2.60
            
            
            
            615,000
            
            
            
            2.60
            
            
            
            8.1
            
            
            
            218,500
            
            
            
            2.60
            
            
            
            8.11,037,916
            
            
            $
            1.95
            
            
            
            7.3
            
            
            
            461,416
            
            
            $
            1.73
            
            
            
            6.7




As of
December 31, 2008, the total compensation cost related to non-vested awards not
yet recognized was $1,511,000 which is expected to be recognized over a weighted
average period of 3 years. The aggregate intrinsic value of options outstanding
and options exercisable was $1,949,000 and $967,000, respectively, at December
31, 2008.




Director Stock Unit
Program.At the Company’s Annual Meeting held July 21, 2004,
stockholders approved a Director Stock Unit Program (the
“Program”).  Under the Program, effective January 1, 2005, each
non-management director is required to defer at least 50% ($17,500) of his or
her annual fee, and may elect to defer 75% ($26,250) or 100% ($35,000) of the
annual fee.  The director must make the annual deferral decision
before the start of the year. Amounts deferred under the Program are converted
into a deferred Stock Unit grant under the Company’s 2004 Incentive Stock Plan
at the average of the closing prices for a share of the Company’s Common Stock
for the ten trading days before the quarterly director fee payment
dates.




To
encourage deferral of fees by non-management directors, the Company makes a
matching Stock Unit grant ranging from 25% to 75% of the amount deferred by the
director as of the same quarterly payment dates.




Under the
Program, the Company automatically defers from the management director’s salary
a dollar amount equal to 50% ($17,500) of the director fees for outside
directors.  The management director may elect to defer an amount equal
to 75% ($26,250) or 100% ($35,000) of the director fees for non-management
directors from his or her compensation, and the Company matches deferrals by the
management director with Stock Units at the same rate as it matches deferrals
for non-management directors.





Deliveries
of the granted stock are made five calendar years following the year for which
the deferral is made subject to acceleration upon the resignation or retirement
of the director or a change in control.





All of
the Company’s non-management directors elected to defer 100% of the annual board
fee for 2008, 2007 and 2006, and the Company’s chief executive officer elected
to defer a corresponding amount of his salary in 2008, 2007 and
2006.  During 2008, fees, salary and Company matching deferred by the
directors represented a total of 80,994 stock unit grants valued at $5.10 per
stock unit, adjusted for the four-for-three stock split.  During 2007,
fees, salary and Company matching deferred by the directors represented a total
of 104,291
stock unit grants valued at $4.11 per stock unit, adjusted for the
four-for-three stock split.  During 2006, fees, salary and Company
match deferred by the directors represented a total of 292,323 stock unit grants
valued at $1.57 per stock unit, adjusted for the four-for-three stock
split.  Company matching contributions under this plan were $177,000
in 2008, $184,000 in 2007, and $197,000 in 2006.


FS-24


(3)
Earnings Per Share Reconciliation




At
December 31, 2008, 2007 and 2006 there are no options excluded from the
calculation of diluted earnings per share due to the option price exceeding the
share market price.




For
      the Year
                
                Income
      (Loss)
                
                
                Shares
                
                
                Per
      ShareEnded
      December 31
                
                (Numerator)
                
                
                (Denominator)
                
                
                Amount2008Income
      from Continuing Operations
                
                $
                12,532,000
                
                
                
                –
                
                
                $
                –Basic
      EPS from Continuing Operations
                
                
                –
                
                
                
                16,289,530
                
                
                
                0.77Effect
      of dilutive stock options
                
                
                –
                
                
                
                587,029
                
                
                
                (0.03
                )Diluted
      EPS from Continuting Operations
                
                $
                12,532,000
                
                
                
                16,876,559
                
                
                $
                0.742007Income
      from Continuing Operations
                
                $
                9,232,000
                
                
                
                –
                
                
                $
                –Basic
      EPS from Continuing Operations
                
                
                –
                
                
                
                16,409,647
                
                
                
                0.56Effect
      of dilutive stock options
                
                
                –
                
                
                
                618,200
                
                
                
                (0.02
                )Diluted
      EPS from Continuting Operations
                
                $
                9,232,000
                
                
                
                17,027,847
                
                
                $
                0.542006Income
      from Continuing Operations
                
                $
                4,535,000
                
                
                
                –
                
                
                $
                –Basic
      EPS from Continuing Operations
                
                
                –
                
                
                
                15,097,144
                
                
                
                0.30Effect
      of dilutive stock options
                
                
                –
                
                
                
                466,110
                
                
                
                (0.01
                )Diluted
      EPS from Continuting Operations
                
                $
                4,535,000
                
                
                
                15,563,254
                
                
                $
                0.29




FS-25


(4)
Long-Term Obligations






(Dollars
      in thousands)December
      312008
              
              
              2007Term
      loan
              
              $
              –
              
              
              $
              –Revolving
      line of credit
              
              
              –
              
              
              
              –Capital
      lease obligations
              
              
              –
              
              
              
              –Other
              
              
              –
              
              
              
              15$
              –
              
              
              $
              15Less
      current portion
              
              
              –
              
              
              
              (1
              )$
              –
              
              
              $
              14






On May
17, 2007, the Company entered into a new credit agreement between the Company as
borrower and Bank of America, N.A. as administrative agent, swing line lender
and letter of credit issuer.  The then-existing credit agreement,
which was scheduled to expire on February 28, 2008, was cancelled, and the term
loan of $3.5 million was prepaid without any penalty.





The new
credit agreement provides for a revolving credit facility in the aggregate
principal amount of $25 million with future increases of up to an aggregate
principal amount of $10 million at the discretion of the lender.  The
credit facility matures on May 16, 2012, with no principal payments required
before the maturity date and no prepayment penalty.  The purpose of
the new facility is to refinance a former credit agreement, term debt and bond
debt, provide for issuance of standby letters of credit, acquisitions, and for
other general corporate purposes.





At
December 31, 2008, the Company had unused borrowing capacity of  $24.8
million, based on no borrowings outstanding under the revolving credit facility
and $0.2 million of letters of credit to secure payment of current and future
workers’ compensation claims.





Substantially
all of the Company’s accounts receivable, inventories, fixed assets and the
common stock of its subsidiary are pledged as collateral under the agreement,
and the credit agreement is secured by a full and unconditional guaranty from
NAGC.




(5)
Commitments




The
Company leases its headquarters office and certain manufacturing buildings and
equipment under non-cancelable operating leases. The Company also leases certain
facilities to third parties under non-cancelable operating leases. These
operating leases generally provide for renewal options and periodic rate
increases and are typically renewed in the normal course of business. Lease
expense was approximately $1.3 million in 2008, $1.3 million in 2007, and $1.4
million in 2006.


FS-26


Minimum
annual rental commitments at December 31, 2008 are payable as
follows:




(Dollars
      in thousands)Operating
      Leases2009
              
              $
              6212010
              
              
              3642011
              
              
              2762012
              
              
              1942013
              
              
              151Thereafter
              
              
              183$
              1,789






The
Company has commitments with domestic and foreign zinc producers to purchase
zinc used in its hot dip galvanizing operations. Commitments for the future
delivery of zinc reflect rates then quoted on the London Metals Exchange and are
not subject to price adjustment. These zinc purchase commitments are considered
to be derivatives and are accounted for as normal purchases. At December 31,
2008, aggregate commitments for the procurement of zinc at fixed prices were
$3,746,000. The Company reviews these fixed price contracts for losses using the
same methodology employed to estimate the market value of its zinc
inventory.  At December 31, 2008, the Company has approximately $1.4
million in outstanding commitments for various machinery, equipment and building
improvements.




(6)
Contingencies




NAGC was
notified in 1997 by the Illinois Environmental Protection Agency (“IEPA”) that
it was one of approximately 60 potentially responsible parties under the
Comprehensive Environmental Response, Compensation, and Liability Information
System (“CERCLIS”) in connection with cleanup of an abandoned site formerly
owned by Sandoval Zinc Co., an entity unrelated to NAGC.  The IEPA
notice includes NACG as one of the organizations which arranged for the
treatment and disposal of hazardous substances at Sandoval.  The
estimated timeframe for resolution of the IEPA contingency is
unknown.  The IEPA has yet to respond to a proposed work plan
submitted in August 2000 by a group of the potentially responsible parties or
suggest any other course of action, and there has been no activity in regards to
this issue since 2001. Until the work plan is approved and completed, the range
of potential loss or remediation, if any, is unknown, and in addition, the
allocation of potential loss between the 60 potentially responsible parties is
unknown and not reasonably estimable.  Therefore, the Company has no
basis for determining potential exposure and estimated remediation costs at this
time and no liability has been accrued.




In
September 2008, the United States Environmental Protection Agency (the “EPA”)
notified the Company of a claim against the Company as a
potentially responsible party related to a Superfund site in Texas City,
Texas.  This matter pertains to galvanizing facilities of a
Company subsidiary and its disposal of waste, which was handled
by their supplier in the early 1980’s.  The EPA offered the Company a
special de minimis
party settlement to resolve potential liability that the Company and its
subsidiaries may have under CERCLA at this Site.  The Company accrued the
$112,145 de minimis
settlement amount during the third quarter of 2008 and accepted the EPA’s offer
before the deadline of December 30, 2008.




On
December 17, 2008, the board of directors of North American Galvanizing &
Coatings, Inc. (“NAGC”) approved a Mutual Release of Claims and Settlement
Agreement, (the “Settlement Agreement”) with the Metropolitan Water Reclamation
District of Greater Chicago (“MWRD”).


FS-27


The MWRD,
the owner of the former Lake River Terminals Site (the “Site”), filed a lawsuit
in the United States District Court for the Northern District of Illinois
against NAGC and others (the “case”). NAGC is a former parent company of the
Lake River Corporation. The Lake River Corporation (“Lake River”) occupied and
conducted business at the Site for approximately 50 years under the terms of
five (5) lease agreements and a general permit with MWRD, which have since been
terminated. The MWRD alleged in its lawsuit that NAGC is either directly or
indirectly liable for certain cleanup costs, including the removal of certain
buildings and other structures and the remediation of environmental conditions
at the Site. Although NAGC denies that it is directly or indirectly liable for
any such costs, both parties agreed that it would be mutually advantageous and
cost-effective to settle the matter without further litigation.




According
to the terms of the Settlement Agreement, in December, 2008 NAGC paid MWRD $1.4
million.  In consideration of the payment, MWRD released NAGC and its
affiliates from any and all claims which are, were, or could have been included
in the case, and from any and all payment obligations to MWRD, whether pursuant
to CERCLA, other law, contract, or tort, arising from the leases or on account
of the condition of the Site. In consideration of the above, NAGC released MWRD
and its affiliates from all claims of NAGC arising from the leases or on account
of the condition of the Site, and from any and all claims that could have been
asserted against MWRD or its affiliates as counterclaims in the case. In
addition, MWRD agreed to indemnify and hold NAGC harmless from any claims
against NAGC by third parties for certain claims that arise out of or relate to
the subject matter of the case.




The
Settlement Agreement relates to NAGC’s exit from the chemical storage and
related businesses at the Site and is a cost of the sale in 2000 of the
Company’s former subsidiary, Lake River. In March of 2007, NAGC recorded a
liability for $350,000 related to the MWRD claim. The additional liability of
$1.05 million was recorded by NAGC during the fourth quarter of 2008 in
discontinued operations ($0.7 million, net of income taxes).  The
Company recorded this additional charge in discontinued operations in 2008 to be
consistent with the similar classification presented in 2000 when the Company
disposed of Lake River.




The
Company is committed to complying with all federal, state and local
environmental laws and regulations and using its best management practices to
anticipate and satisfy future requirements. As is typical in the galvanizing
business, the Company will have additional environmental compliance costs
associated with past, present and future operations. Management is committed to
discovering and eliminating environmental issues as they arise. Because of
frequent changes in environmental technology, laws and regulations management
cannot reasonably quantify the Company’s potential future costs in this
area.




North
American Galvanizing & Coatings, Inc. and its subsidiary are parties to a
number of other lawsuits and environmental matters which are not discussed
herein.  Management of the Company, based upon their analysis of known
facts and circumstances and reports from legal counsel, does not believe that
any such matter will have a material adverse effect on the results of
operations, financial conditions or cash flows of the Company.




(7)
Treasury Stock




In 2008,
the Company issued 311,616 shares from Treasury for stock option transactions,
273,326 for restricted stock, and 61,266 shares for Director Stock Unit Program
transactions (See Note 2).  In 2007, the Company issued 103,333 shares
from Treasury for stock option transactions and 49,196 shares from Treasury for
Director Stock Unit Program transactions.  During 2006, the Company
issued shares from Treasury for the following transactions:  792,847
shares issued for warrant exercises, 549,097 shares issued for stock option
exercises, and 345,335 shares issued for the Director Stock Unit
Program.





In March
2008, the Board of Directors authorized the Company to buy back an additional
$2,000,000 of its common stock, subject to market conditions.  The
Company has completed the August 1998 and March 2008 share repurchase
programs.  In August 2008, the Board of Directors authorized the
Company to buy back an additional $3,000,000 of its common stock, subject to
market conditions.




FS-28


In 2008,
the Company repurchased 1,117,635 shares at an average price per share of $4.59,
bringing the total number of shares repurchased through December 31, 2008 to
1,421,727 at an average price of $3.89 per share totaling
$5,525,626.  In 2007, the Company repurchased 38,100 shares at an
average price per share of $4.04 The number of shares repurchased and average
price was adjusted to reflect the Company’s four-for-three stock split effected
in the form of a stock dividend on September 14, 2008.




(8)
Certain Relationships and Related Transactions




A
subsidiary of North American Galvanizing Company (NAGalv-Ohio, Inc.) purchased
the after-fabrication hot dip galvanizing assets of Gregory Industries, Inc.
located in Canton, Ohio on February 28, 2005.  Gregory Industries,
Inc. is a manufacturer of products for the highway industry.  T.
Stephen Gregory, appointed a director of North American Galvanizing &
Coatings, Inc. on June 22, 2005, is the chief executive officer, chairman of the
board, and a shareholder of Gregory Industries, Inc.  Mr. Gregory
resigned from his position as director of the Company in December
2007.  Total sales to Gregory Industries, Inc. for the years ended
December 31, 2007, and 2006 were approximately $1,297,000 and $1,982,000,
respectively.  The amount due from Gregory Industries, Inc. included
in trade receivables at December 31, 2007 and 2006 was $142,000 and $278,000,
respectively.




(9)
Income Taxes




The
provision for income taxes consists of the following:




(Dollars
      in thousands)Year
      Ended December 312008
              
              
              2007
              
              
              2006Current
              
              $
              7,173
              
              
              $
              5,763
              
              
              $
              2,233Deferred
              
              
              (500
              )
              
              
              (62
              )
              
              
              786Income
      tax expense
              
              $
              6,673
              
              
              $
              5,701
              
              
              $
              3,019




The
reconciliation of income taxes at the federal statutory rate to the Company’s
effective tax rate is as follows:


(Dollars
      in thousands)Year
      ended December 312008
                
                
                2007
                
                
                2006Federal
      taxes at statutory rate
                
                $
                6,490
                
                
                $
                5,126
                
                
                $
                2,568State
      tax net of federal benefit
                
                
                463
                
                
                
                575
                
                
                
                296Other
                
                
                (280
                )
                
                
                –
                
                
                
                155Taxes
      at effective tax rate
                
                $
                6,673
                
                
                $
                5,701
                
                
                $
                3,019
  
 FS-29


The tax
effects of significant items comprising the Company’s net deferred tax asset
(liability) consist of the following:






(Dollars
      in thousands)Year
      Ended December 312008
              
              
              2007Deferred
      tax assets:Director Stock Units
              
              $
              516
              
              
              $
              431Restricted
      Stock
              
              
              131
              
              
              
              –Other
              
              
              401
              
              
              
              310Total
      Items not currently deductible
              
              $
              1,048
              
              
              $
              741Deferred
      tax liabilities:Differences between book and taxbasis of property
              
              $
              504
              
              
              $
              697544
              
              
              
              44




(10)
Employee Benefit Plan




The
Company offers one of two 401(k) defined contribution plans to its eligible
employees.  In 2005, a newly-created defined contribution plan was
offered to NAGalv-Ohio, Inc. employees, formerly covered by a bargaining
contract with Gregory Industries, Inc.  All other employees not
covered by a bargaining contract become eligible to enroll in the existing
benefit plan after one year of service with the Company. Aggregate Company
contributions under these benefit plans were $505,000 in 2008, $333,000 in 2007,
and $292,000 in 2006. Assets of the defined contribution plan consisted of
short-term investments, intermediate bonds, long-term bonds and listed
stocks.




(11)
Fair Value of Financial Instruments




The
carrying value of financial instruments included in current assets and
liabilities approximates fair value. The fair value of the Company’s long-term
debt at December 31, 2007 was estimated to approximate carrying value based on
the borrowing rates available to the Company for loans with similar terms and
average maturities.




(12)
Union Contracts




NAGC’s
labor agreement with the United Steel, Paper and Forestry, Rubber,
Manufacturing, Energy Allied Industrial and Service Workers International Union
covering production workers at its Tulsa, Oklahoma galvanizing plants expired
during 2006.  The union ratified a two-year extension of the expiring
agreement, with minor modifications, extending the expiration date of the
agreement to October 31, 2008.  The extension of the agreement brought
employee contributions to the group health plan more closely in line with
contributions made by non-union employees of the Company.  In 2008,
after several of the employees who were covered by the agreement petitioned the
National Labor Relations Board for a decertification vote, a decertification
election was scheduled to be held on September 25, 2008.  However, on
September 22, 2008, the union filed a “disclaimer of interest” with the National
Labor Relations Board, which denotes that the union is withdrawing its
representation of the Company’s Tulsa employees. Thus, the union has been
decertified and the employees covered by that agreement are no longer
represented by the union.




FS-30


The
United Steel, Paper and Forestry, Rubber, Manufacturing, Energy Allied
Industrial and Service Workers International Union represented the labor force
at the galvanizing facility purchased in Canton, Ohio in February 2005. At the
time of purchase, NAGalv-Ohio, Inc. did not assume the existing labor agreement
and implemented wage and benefit programs similar to those at the Company’s
other galvanizing facilities.  In the fourth quarter of 2006,
negotiations with the union were finalized.  The union ratified an
agreement effective from November 13, 2006 to November 12, 2009.  The
agreement contains wage and benefit programs similar to those implemented in
February, 2005.




(13) Segment
Disclosures




The
Company’s sole business is hot dip galvanizing and coatings, which is conducted
through its wholly owned subsidiary, North American Galvanizing
Company.






















































FS-31


QUARTERLY
RESULTS (UNAUDITED)




Quarterly
results of operations for the years ended December 31, 2008 and 2007 were as
follows:




(Dollars
      in thousands except per share amounts)200831-Mar
              
              
              30-Jun
              
              
              30-Sep
              
              
              31-Dec
              
              
              TotalSales
              
              $
              20,702
              
              
              $
              21,978
              
              
              $
              21,845
              
              
              $
              21,609
              
              
              $
              86,134Operating
      Income
              
              $
              4,883
              
              
              $
              5,462
              
              
              $
              4,420
              
              
              $
              4,582
              
              
              $
              19,347Income
      from Continuing Operations
              
              $
              3,075
              
              
              $
              3,423
              
              
              $
              3,037
              
              
              $
              2,997
              
              
              $
              12,532Loss
      from Discontinued  Operations (net of taxes) **
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              $
              (662
              )
              
              $
              (662
              )Net
      Income
              
              $
              3,075
              
              
              $
              3,423
              
              
              $
              3,037
              
              
              $
              2,335
              
              
              $
              11,870Net
      Income Per Common Share, adjusted for four-for-three stock
      splitBasic
      *
              
              $
              0.18
              
              
              $
              0.21
              
              
              $
              0.19
              
              
              $
              0.15
              
              
              $
              0.73Diluted
      *
              
              $
              0.18
              
              
              $
              0.20
              
              
              $
              0.18
              
              
              $
              0.14
              
              
              $
              0.70*
      Individual quarterly amounts do not add to the total due to
      rounding.
                **
      Refer to Note (6) to consolidated financial statements in Item 15 of this
      report.(Dollars
      in thousands except per share amounts)200731-Mar
              
              
              30-Jun
              
              
              30-Sep
              
              
              31-Dec
              
              
              TotalSales
              
              $
              23,499
              
              
              $
              23,121
              
              
              $
              21,541
              
              
              $
              20,235
              
              
              $
              88,396Operating
      Income
              
              $
              4,085
              
              
              $
              3,630
              
              
              $
              3,937
              
              
              $
              3,753
              
              
              $
              15,405Net
      Income
              
              $
              2,346
              
              
              $
              2,206
              
              
              $
              2,513
              
              
              $
              2,167
              
              
              $
              9,232Net
      Income Per Common Share, adjusted for  four-for-three stock
      splitBasic
      *
              
              $
              0.14
              
              
              $
              0.14
              
              
              $
              0.16
              
              
              $
              0.14
              
              
              $
              0.56Diluted
      *
              
              $
              0.14
              
              
              $
              0.13
              
              
              $
              0.15
              
              
              $
              0.13
              
              
              $
              0.54*
      Individual quarterly amounts do not add to the total due to
      rounding.
  
 FS-32