Information regarding the business and markets of A. M. Castle & Co. and its subsidiaries (the "Company"), including its reportable segments, is included in Item 1 "Business" of this annual report on Form 10-K.
The following discussion should be read in conjunction with Item 6 "Selected Financial Data" and the Company's consolidated financial statements and related notes thereto in Item 8 "Financial Statements and Supplementary Data".
EXECUTIVE OVERVIEW
The Company's long-term strategy is to become the foremost global provider of specialty metals products and services and specialized supply chain solutions to targeted global industries.
During 2008, the following significant events occurred which impacted the Company's operating results:
• Record sales of $1,501.0 million and third highest operating income in the Company's history of $63.0 million (before non-cash goodwill impairment charge of $58.9 million in the fourth quarter of 2008);

• Non-cash goodwill impairment charge of $58.9 million in the fourth quarter of 2008;

• Acquisition of Metals U.K. in the first quarter of 2008;

• Amendment to the Company's Amended Senior Credit Facility during the first quarter 2008; and

• Completion of the first scheduled phase of the Metals segment ERP implementation during the second quarter of 2008 and completion of implementation of a stand alone ERP system in the Plastics segment during the third quarter of 2008.

The Company achieved record sales of $1,501.0 million in 2008, which was an increase of $80.6 million, or 5.7% versus 2007. Excluding the impact of the Metals U.K. acquisition, sales were $31.9 million or 2.3% higher than 2007 primarily due to an increase in Metals segment sales. For the full year 2008, excluding the impact of the Metals U.K. acquisition, Metals segment sales were $31.3 million or 2.4% higher than 2007 sales on sales volume that was 2.1% higher than 2007. Metals segment sales volume growth in 2008 was driven by strength in plate and alloy bar products sold into energy, mining and power generation markets. The Company experienced higher prices in 2008 for its carbon-related products; however, those price increases were somewhat mitigated by a changing sales mix that included lower sales levels on higher-priced aluminum, stainless and nickel based products as compared to 2007.
During the fourth quarter, the Company determined that the weakening of the U.S. economy and the global credit crisis resulted in a reduction of the Company's market capitalization below its total shareholder's equity value for a sustained period of time, which was an indication that its goodwill may be impaired. As a result, the Company performed an interim goodwill impairment analysis as of December 31, 2008 and a non-cash charge of $58.9 million for goodwill impairment was recorded in 2008. The charge is non-deductible for tax purposes.
On January 3, 2008, the Company acquired 100 percent of the outstanding capital stock of Metals U.K. The acquisition of Metals U.K. was accounted for using the purchase method in accordance with SFAS No. 141, "Business Combinations" ("SFAS 141"). Metals U.K. is a distributor and processor of specialty metals primarily serving the oil and gas, aerospace, petrochemical and power generation markets worldwide. Metals U.K. has processing facilities in Blackburn, England, Hoddesdon, England and Bilbao, Spain. The acquisition of Metals U.K. is expected to allow the Company to expand its global reach and service potential high growth industries.

In conjunction with the January 2008 acquisition of Metals U.K., the Company amended its existing revolving line of credit, expanding it to $230 million, which includes a $50 million multi-currency facility to fund the Metals U.K. acquisition and provide for future working capital needs of European operations. The multi-currency facility allows for funding in either British pounds or euros.
The first scheduled phase of the Metals segment ERP implementation occurred in the second quarter of 2008 at certain of the Company's domestic aerospace locations. The facilities included in the initial ERP implementation represent less than 20% of the Company's consolidated net sales. During the second quarter of 2008, the majority of the legacy operating systems and financial systems of these locations were migrated to the new ERP system. The Company also implemented the human resource functionality of the new ERP system company-wide at that time. Total capital expenditures for this ERP implementation through the end of 2008 were $17.8 million. The Company plans to replace its legacy systems with the new ERP system functionality across many of its remaining locations and business operations in fiscal 2009, allowing the Metals business to operate under a common technology platform. This integrated system will provide the opportunity to improve decision-making, provide support for doing business globally, and support future acquisitions, which are all critical components in executing the Company's strategy.
During the third quarter of 2008, the Plastics business completed the implementation of its stand alone ERP system. The ERP system is designed to support make-to-order and mixed-mode manufacturing companies and has built-in workflow processes that enable companies to manage the entire order cycle. The new ERP system provided the capability for the Plastics business to build a tool to manage the many dimensional sizes of plastic sheet stock in its inventory and build executive and management level dashboards to manage daily operations. Total capital expenditures for this ERP implementation through the end of 2008 were $1.9 million.
Recent Market and Pricing Trends
During 2008, average market prices for the Company's products, primarily carbon-based, significantly increased during the first three quarters and declined considerably in the fourth quarter.
Changes in pricing can have a more direct impact on the Company's operating results than changes in volume due to certain factors including but not limited to:
• Changes in volume typically result in corresponding changes to the Company's variable costs. However, as pricing changes occur, variable expenses are not impacted.

• If surcharges are passed through to the customer without a mark-up, gross material margins will decrease.

• The ability to pass surcharges on to customers immediately is limited due to contractual provisions with certain customers. Therefore, a lag exists between when the surcharge impacts net sales and cost-of-sales.

Current Business Outlook
Management uses the Purchaser's Managers Index ("PMI") provided by the Institute of Supply Management (website is www.ism.ws) as an external indicator for tracking the demand outlook and possible trends in its general manufacturing markets. The table below shows PMI trends from the first quarter of 2006 through the fourth quarter of 2008. Generally speaking, an index above 50.0 indicates growth in the manufacturing sector of the U.S. economy, while readings under 50.0 indicate contraction. As the data indicates, the index experienced a significant decrease from the third quarter of 2008 and has been below 50 for the last five quarters.

                        YEAR    Qtr 1      Qtr 2      Qtr 3      Qtr 4

                        2006     54.7       54.1       52.9       50.8
                        2007     50.5       53.0       51.3       49.6
                        2008     49.2       49.5       47.8       36.1

An unfavorable PMI trend suggests that demand for some of the Company's products and services, in particular those that are sold to the general manufacturing customer base in the U.S., could potentially be at a lower level in the near-term. The Company believes that its revenue trends typically correlate to the changes in PMI on a lag basis. Therefore, management forecasts a decline in 2009 net sales due to a combination of demand and pricing uncertainties that the industry is expected to experience in the upcoming year. The long-term outlook on demand for the Company's end-markets is less predictable. However, the Company expanded its international presence with the acquisition of Metals U.K. in early 2008 and the early second quarter 2008 start-up of its Shanghai, China service center, which reduces the dependency of results on the U.S. economy.
Material pricing and demand in both the Metals and Plastics segments of the Company's business have historically proven to be difficult to predict with any degree of accuracy. However, two of the areas of the U.S. economy which are currently experiencing significant decline, the automotive and residential construction markets, are areas in which the Company's market presence is minimal. The Company has also not seen any effect of the recent credit market squeeze resulting from the residential mortgage lending crisis in its demand for products and services or in its own credit or lending structure.
RESULTS OF OPERATIONS: YEAR-TO-YEAR COMPARISONS AND COMMENTARY Our discussion of comparative period results is based upon the following components of the Company's consolidated statements of operations. Net Sales -The Company derives its sales from the processing and delivery of metals and plastics. Pricing is established with each customer order and includes charges for the material, processing activities and delivery. The pricing varies by product line and type of processing. From time to time the Company may enter into fixed price arrangements with customers while simultaneously obtaining similar agreements with its suppliers.
Cost of Materials - Cost of materials consists of the costs we pay suppliers for metals, plastics and related inbound freight charges, excluding depreciation and amortization which are included in operating costs and expenses discussed below. The Company accounts for inventory primarily on a last-in-first-out ("LIFO") basis. LIFO adjustments are calculated as of December 31 of each year. Operating Costs and Expenses - Operating costs and expenses primarily consist of:
• Warehouse, processing and delivery expenses, including occupancy costs, compensation and employee benefits for warehouse personnel, processing, shipping and handling costs;

• Sales expenses, including compensation and employee benefits for sales personnel;

• General and administrative expenses, including compensation for executive officers and general management, expenses for professional services primarily related to accounting and legal advisory services, data communication and computer hardware and maintenance; and

• Depreciation and amortization expenses, including depreciation for all owned property and equipment, and amortization of various intangible assets.

2008 Results Compared to 2007
Consolidated results by business segment are summarized in the following table
for years 2008 and 2007.
Operating Results by Segment

                                         Year Ended December 31,           Fav / (Unfav)
                                           2008            2007        $ Change     % Change

   Net Sales
   Metals                              $   1,384.8      $ 1,304.8      $  80.0         6.1 %
   Plastics                                  116.2          115.6          0.6         0.5 %

   Total Net Sales                     $   1,501.0      $ 1,420.4      $  80.6         5.7 %
   Cost of Materials
   Metals                              $   1,044.4      $   954.4      $ (90.0 )      (9.4 )%
   % of Metals Sales                          75.4 %         73.1 %                   (2.3 )%
   Plastics                                   79.6           78.0         (1.6 )      (2.1 )%
   % of Plastics Sales                        68.5 %         67.5 %                   (1.0 )%

   Total Cost of Materials             $   1,124.0      $ 1,032.4      $ (91.6 )      (8.9 )%
   % of Total Sales                           74.9 %         72.7 %                   (2.2 )%

   Operating Costs and Expenses
   Metals                              $     328.9      $   256.0      $ (72.9 )     (28.5 )%
   Plastics                                   33.4           32.7         (0.7 )      (2.1 )%
   Other                                      10.6            8.6         (2.0 )     (23.3 )%

   Total Operating Costs & Expenses    $     372.9      $   297.3      $ (75.6 )     (25.4 )%
   % of Total Sales                           24.8 %         20.9 %                   (3.9 )%

   Operating Income
   Metals                              $      11.5      $    94.4      $ (82.9 )     (87.8 )%
   % of Metals Sales                           0.8 %          7.2 %                   (6.4 )%
   Plastics                                    3.2            4.9         (1.7 )     (34.7 )%
   % of Plastics Sales                         2.8 %          4.2 %                   (1.4 )%
   Other                                     (10.6 )         (8.6 )       (2.0 )     (23.3 )%

   Total Operating Income              $       4.1      $    90.7      $ (86.6 )     (95.5 )%
   % of Total Sales                            0.3 %          6.4 %                   (6.1 )%

"Other" includes costs of executive, legal and finance departments which are shared by both segments of the Company.
Net Sales:
The Company achieved record sales of $1,501.0 million in 2008, which was an increase of $80.6 million, or 5.7%, versus 2007. Excluding the impact of the Metals U.K. acquisition, sales were $31.9 million or 2.3% higher than 2007 primarily due to an increase in Metals segment sales.
Metals segment sales during 2008 of $1,384.8 million were $80.0 million, or 6.1%, higher than 2007. Excluding the impact of the Metals U.K. acquisition, Metals segment sales were $31.3 million or 2.4% higher than 2007 sales on sales volume that was 2.1% higher than 2007. Metals segment sales volume growth in 2008 was driven by strength in plate and alloy bar products sold into energy, mining and power generation markets. The Company experienced higher prices in 2008 for its carbon-related products; however, those price increases were somewhat mitigated by a changing sales mix that included lower sales levels on higher-priced aluminum, stainless and nickel based products as compared to 2007.
Plastics segment sales during 2008 of $116.2 million were $0.6 million, or 0.5%, higher than 2007. Higher overall pricing contributed a 5.5% increase, which was offset by a 5.0% decline in sales volume compared to last year. Decreased sales volume was primarily a result of softer demand in the marine and boat builder and automotive industries during the second half of 2008. Cost of Materials:
Cost of materials (exclusive of depreciation and amortization) were $1,124.0 million, an increase of $91.6 million, or 8.9%, compared to 2007. Material costs for the Metals segment were 75.4% of sales in 2008 as compared to 73.1% in 2007. Higher material costs in carbon-based products were the primary driver of increased Metals segment material costs as a percent of sales.
Material costs for the Plastics segment were 68.5% of sales in 2008 as compared to 67.5% in 2007. Higher material costs in the Plastics segment were primarily driven by increased acrylic prices, due to rising resin prices, in 2008 as compared to 2007.

Operating Expenses and Operating Income:
On a consolidated basis, operating costs and expenses increased $75.6 million, or 25.4%, compared to last year. Operating costs and expenses in 2008 were $372.9 million, or 24.8% of sales compared to $297.3 million, or 20.9% of sales last year. The results for 2008 include a $58.9 million non-cash goodwill impairment charge, $6.2 million of incremental operating expenses (excluding goodwill impairment charge) associated with the January 2008 acquisition of Metals U.K. (net of the Metal Express divestiture), as well as $2.2 million for costs related to the Transtar acquisition arbitration settlement during the third quarter of 2008. The remaining 2008 operating expense increase was $8.3 million, primarily related to $7.2 million of higher plant, transportation and selling costs associated with higher sales volumes, as well as $5.1 million for higher Oracle ERP implementation costs in 2008. Cost increases described above were partially offset by decreases primarily related to long-term incentive compensation and pension expense during 2008.
During the fourth quarter of 2008, the Company determined that the weakening of the U.S. economy and the global credit crisis resulted in a reduction of the Company's market capitalization below its total shareholder's equity value for a sustained period of time, which was an indication that its goodwill may be impaired. As a result, the Company performed an interim goodwill impairment analysis as of December 31, 2008 and a non-cash charge of $58.9 million for goodwill impairment was recorded in the fourth quarter of 2008. The charge is non-deductible for tax purposes. Of this amount, $49.8 million and $9.1 million relates to the Aerospace and Metals U.K. reporting units, respectively, within the Metals segment. See further discussion in Critical Accounting Policiesand Note 8 to the consolidated financial statements.
Consolidated operating income for 2008 of $4.1 million was $86.6 million, or 95.5%, lower than last year. The Company's 2008 operating income as a percent of net sales decreased to 0.3% from 6.4% in 2007, primarily due to higher cost of materials (discussed above) and the goodwill impairment charge. Other Income and Expense, Income Taxes and Net Income:
Interest expense was $9.4 million in 2008, a decrease of $3.5 million versus 2007. The decrease in interest expense in 2008 is a result of lower weighted average interest rates in 2008 compared to 2007 and lower debt levels since the pay down of debt following the secondary equity offering on May 24, 2007.
Income tax expense decreased to $20.7 million from $31.3 million in 2007 primarily due to lower taxable earnings. Excluding the impact of the $58.9 million goodwill impairment charge, the effective tax rate was 38.6% in 2008 and 40.2% in 2007. The Company's tax rate is affected by tax rates in foreign jurisdictions and the relative amount of income it earns in these jurisdictions, which has become a much larger percentage of the Company's overall income as the Company expands internationally. The effective tax rate is also affected by discrete items that may occur in any given year. The Company's calculation of its effective tax rate includes the tax expense on the equity in earnings of the Company's joint venture. The decrease in the effective tax rate from 2007 to 2008 is primarily attributed to two factors. First, the income tax rate differential on foreign income decreased the effective tax rate from the statutory rate of 35% by 1.2% in 2008 compared to a decrease of 0.3% in 2007. This additional decrease in 2008 was the result of a shift in the geographic distribution of income between domestic and foreign locations and reductions in tax rates in Canada and the United Kingdom. Second, state income taxes, net of the federal income tax benefit, only increased the effective tax rate from the statutory rate of 35% by 0.2% in 2008 compared to 3.9% 2007. The lower state tax rate in 2008 is primarily the result of a change in the geographic distribution of income amongst states and favorable state tax rate changes that occurred in 2008.
Equity in earnings of the Company's joint venture was $8.8 million in 2008, $3.5 million higher than 2007, reflecting the results of the joint venture's acquisition of a metal distribution company in April 2007 as well as improved operating results associated with higher metal price levels in 2008.
Consolidated net loss for 2008 was $17.1 million, a loss of $0.76 per diluted share, versus net income of $51.2 million, or $2.41 per diluted share, for 2007. Weighted average diluted shares outstanding increased 4.7% to 22.5 million for the year-ended December 31, 2008 as compared to 21.5 million shares for the same period in 2007. The increase in average diluted shares outstanding is primarily due to the additional shares issued during the Company's secondary equity offering in May 2007.

2007 Results Compared to 2006
Consolidated results by business segment are summarized in the following table
for years 2007 and 2006.
Operating Results by Segment

                                         Year Ended December 31,           Fav / (Unfav)
                                           2007            2006        $ Change     % Change

   Net Sales
   Metals                              $   1,304.8      $ 1,062.6     $  242.2        22.8 %
   Plastics                                  115.6          115.0          0.6         0.5 %

   Total Net Sales                     $   1,420.4      $ 1,177.6     $  242.8        20.6 %
   Cost of Materials
   Metals                              $     954.4      $   762.3     $ (192.1 )     (25.2 )%
   % of Metals Sales                          73.1 %         71.7 %                   (1.4 )%
   Plastics                                   78.0           76.9         (1.1 )      (1.4 )%
   % of Plastics Sales                        67.5 %         66.9 %                   (0.6 )%

   Total Cost of Materials             $   1,032.4      $   839.2     $ (193.2 )     (23.0 )%
   % of Total Sales                           72.7 %         71.3 %                   (1.4 )%

   Operating Costs and Expenses
   Metals                              $     256.0      $   205.3     $  (50.7 )     (24.7 )%
   Plastics                                   32.7           30.8         (1.9 )      (6.2 )%
   Other                                       8.6            9.8          1.2        12.2 %

   Total Operating Costs & Expenses    $     297.3      $   245.9     $  (51.4 )     (20.9 )%
   % of Total Sales                           20.9 %         20.9 %                    0.0 %

   Operating Income
   Metals                              $      94.4      $    95.0     $   (0.6 )      (0.6 )%
   % of Metals Sales                           7.2 %          8.9 %                   (1.7 )%
   Plastics                                    4.9            7.3         (2.4 )     (32.9 )%
   % of Plastics Sales                         4.2 %          6.3 %                   (2.1 )%
   Other                                      (8.6 )         (9.8 )        1.2        12.2 %

   Total Operating Income              $      90.7      $    92.5     $   (1.8 )      (1.9 )%
   % of Total Sales                            6.4 %          7.9 %                   (1.5 )%

"Other" includes costs of executive, legal and finance departments which are shared by both segments of the Company.
Net Sales:
Consolidated 2007 net sales for the Company were $1,420.4 million, an increase of $242.8 million, or 20.6%, versus 2006. The acquisition of Transtar, in September 2006, contributed $191.7 million of the total net sales increase. Material price increases accounted for 13.1% of the growth, excluding Transtar, offset by 7.5% lower sales volume compared to 2006.
Metals segment sales during 2007 of $1,304.8 million were 22.8% or $242.2 million higher than 2006. Transtar accounted for $191.7 million or 79.1% of the increase. Material price increases accounted for 14.2% of the growth, excluding Transtar, with volume and product mix accounting for the balance of the year-over-year sales change.

Plastics segment sales during 2007 of $115.6 million were 0.5% or $0.6 million higher than 2006. Volume decreased approximately 2.3% during 2007, but material price increases more than offset the volume decline and resulted in slightly higher sales overall compared to 2006. Cost of Materials:
Consolidated 2007 cost of materials (exclusive of depreciation and amortization) increased $193.2 million, or 23.0%, to $1,032.4 million. The acquisition of Transtar contributed $139.3 million of the material cost increase. The balance of the increase reflected higher metal costs from suppliers and mix of products sold. Cost of materials was 72.7% of sales for 2007 versus 71.3% in 2006, reflecting a more competitive pricing environment due to lower demand levels across most markets.
Operating Expenses and Operating Income:
On a consolidated basis, operating costs and expenses increased $51.4 million, or 20.9%, over 2006. Operating expenses of $43.9 million associated with the Transtar acquisition were the primary factor in higher overall expenses in 2007. Costs associated with the Company's ERP implementation accounted for $2.0 million of the increase and the remaining increase reflected the Company's lean operations initiatives. Operating expense remained unchanged as a percent of sales at 20.9% for both 2007 and 2006.
2007 operating income of $90.7 million was $1.8 million, or 1.9%, lower than 2006. The Company's 2007 operating income as a percentage of net sales decreased to 6.4% from 7.9% in 2006, largely due to competitive market pricing and softer demand.
Other Income and Expense, Income Taxes and Net Income:
Interest expense was $12.9 million in 2007, an increase of $4.6 million versus 2006, primarily due to the debt financing of the Transtar acquisition. The acquisition debt incurred remained on the Company's financial statements until June, 2007 when it was repaid with proceeds from the Company's secondary public equity offering.
Income tax expense decreased to $31.3 million from $33.3 million in 2006 due to lower taxable earnings. The effective tax rate was 40.2% in 2007 and 39.6% in 2006.
Equity in earnings of the Company's joint venture was $5.3 million in 2007, $1.0 million higher than 2006, due largely to an acquisition that occurred in April 2007.
Consolidated net income (after preferred dividends of $0.6 million) was $51.2 million, or $2.41 per diluted share, versus $54.2 million, or $2.89 per diluted share, for the same period in 2006. Weighted average diluted shares outstanding increased 13.0% to 21.5 million for the year-ended December 31, 2007 as compared to 19.1 million shares for the same period in 2006. The increase in average diluted shares outstanding is primarily due to the additional shares issued during the Company's secondary equity offering in May 2007. The equity offering had a $0.30 per share dilutive impact on fiscal year 2007 earnings. Liquidity and Capital Resources
The Company's primary sources of liquidity include earnings from operations, management of working capital and available borrowing capacity to fund working capital needs and growth initiatives.
Net cash from operating activities in 2008 was $21.7 million, as cash generated by net income (excluding the $58.9 million non-cash goodwill impairment charge) was consumed by working capital required by the substantial increases in metal prices throughout 2008. Net cash from operating activities was $78.7 million in 2007.
Average receivable days outstanding was 47.6 days for 2008 as compared to 45.1 days for 2007, reflecting slower collections associated with a higher mix of international business and overall economic downturn. Average days sales in inventory was 129.7 days for 2008 versus 132.4 days for 2007. The weakening global economy which may impact many of our customers may hinder our ability to generate improvement in these turn rates in 2009.

Available revolving credit capacity is primarily used to fund working capital . . .