GENERAL

North American Galvanizing is a leading provider of corrosion protection for iron and steel components fabricated 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. Based on the number of its operating plants, the Company is one of the largest merchant market hot dip galvanizing companies in the United States.

During the nine-month period ended September 30, 2009, there were no significant changes to the Company's critical accounting policies previously disclosed in Form 10-K for the year ended December 31, 2008.

The Company's galvanizing plants offer a broad line of services including centrifuge galvanizing for small threaded products, sandblasting, chromate quenching, polymeric coatings, and proprietary INFRASHIELDSM Coating Application Systems for polyurethane protective linings and coatings over galvanized surfaces. The Company's mechanical 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 eleven facilities located in Colorado, Kentucky, Missouri, Ohio, Oklahoma, Tennessee, Texas and West Virginia. The West Virginia facility began operating in the second quarter, 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

· wastewater treatment

· fresh water storage and transportation

· pipe and tube

· food processing

· agricultural (irrigation systems)

· recreation (boat trailers, marine docks, stadium scaffolds)

· bridge and pedestrian handrail

· commercial and residential lighting poles

· 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 fabricators, large and small, 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 utilizes a line of credit secured by the underlying accounts receivable and zinc inventory to facilitate working capital needs.

Each of the Company's galvanizing plants operate 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 and provide technical innovations to improve production efficiencies; and to 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 to increase industry awareness of the proven, unique benefits of galvanizing for metals corrosion protection. Each of the Company's 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 the 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 fabricators. In general, growth in the commercial/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, to identify trends and variables impacting operating productivity and current and future business results,

RESULTS OF OPERATIONS

The following table shows the Company's results of operations for the three- and
nine-month periods ended September 30, 2009 and 2008:

                                                      (Dollars in thousands)
                                                 Three Months Ended September 30,
                                                2009                          2008
                                                        % of                          % of
                                        Amount         Sales          Amount         Sales

Sales                                 $   20,051          100.0 %   $   21,845          100.0 %

Cost of sales excluding
depreciation and amortization             12,944           64.6 %       13,879           63.5 %
Selling, general and administrative
expenses                                   2,182           10.9 %        2,699           12.4 %
Depreciation and amortization                972            4.8 %          847            3.9 %
Operating income                           3,953           19.7 %        4,420           20.2 %

Interest expense                            (128 )         -0.6 %            -            0.0 %
Interest income                                5            0.0 %           70            0.4 %
Income before income taxes                 3,830           19.1 %        4,490           20.6 %

Income tax expense                         1,255            6.3 %        1,453            6.7 %

Net income                            $    2,575           12.8 %   $    3,037           13.9 %



                                                      (Dollars in thousands)
                                                  Nine Months Ended September 30,
                                                2009                          2008
                                                        % of                          % of
                                        Amount         Sales          Amount         Sales

Sales                                 $   58,803          100.0 %   $   64,525          100.0 %

Cost of sales excluding
depreciation and amortization             36,311           61.8 %       39,656           61.4 %
Selling, general and administrative
expenses                                   7,351           12.5 %        7,548           11.7 %
Depreciation and amortization              2,743            4.7 %        2,556            4.0 %
Operating income                          12,398           21.0 %       14,765           22.9 %

Interest expense                            (128 )         -0.1 %            -            0.0 %
Interest income                               24            0.0 %          217            0.3 %
Income before income taxes                12,294           20.9 %       14,982           23.2 %

Income tax expense                         4,038            6.9 %        5,447            8.4 %

Net income                            $    8,256           14.0 %   $    9,535           14.8 %

Sales. Third quarter 2009 volumes were 2.7% higher than volumes in the third quarter of 2008. First nine months' 2009 volumes were 5.6% higher than volumes in the first nine months of 2008. Third quarter 2008 volume was negatively impacted by the nine day shutdown of the Company's Houston, Texas plant due to Hurricane Ike.

Sales for the three-months and nine-months ended September 30, 2009 decreased 8.2% and 8.9%, respectively, over the prior year. The decrease in third quarter and first nine month revenues was due primarily to a lower average sales price compared to the same periods in 2008. Due to the economic downturn and anticipated drop in overall demand for hot-dip galvanizing, the Company focused on gaining larger volume work which resulted in lower priced project work in recent months. For 2009, average selling prices for galvanizing and related coating services were 10.7% lower than the prior year third quarter and 13.7% lower than the first nine months of 2008.

Cost of Goods Sold. Cost of goods sold for the three-months ended September 30, 2009 decreased $1.0 million over the same prior year period due to a decrease in zinc and utility costs. For the first nine months of 2009, cost of goods sold decreased $3.4 million over the same period in 2008 due primarily to decreases in zinc and utility costs, offset by increases in repairs and maintenance spending of $0.4 million.

Selling, General and Administrative (SG&A) Expenses. SG&A decreased $0.5 million in the third quarter of 2009 compared to the same prior year period due to decreases in legal fees. SG&A expenses for the first nine months of 2009 decreased $0.2 million over the same prior year period.

Interest Expense. Interest expense of $0.1 million was recorded in the third quarter of 2009 due to the issuance of $7.3 million in subordinated notes.

Operating Income. For the quarter ended September 30, 2009, operating income was $4.0 million compared to $4.4 million for the third quarter of 2008. The operating income for the nine-months ended September 30, 2009 was $12.4 million compared to $14.8 million for the same 2008 period. The decrease in operating income is primarily due to a decrease in average selling prices.

Income Taxes. The Company's effective income tax rates for the third quarter of 2009 and 2008 were 32.8% and 32.4%, respectively. For the nine months ended September 30, 2009 and 2008, the effective tax rates were 32.8% and 36.4%, respectively. The effective tax rates differ from the federal statutory rate primarily due to state income taxes and minor adjustments to previous tax estimates.

Net Income. For the third quarter of 2009, the Company reported net income of $2.6 million compared to net income of $3.0 million for the third quarter of 2008. For the nine months ended September 30, 2009, the net income was $8.3 million compared to $9.5 million for the nine months ended September 30, 2008. The decrease in net income is primarily due to a decrease in average selling prices.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash flow from operations and borrowings under credit facilities have been adequate to fund its current facilities' working capital and capital spending requirements and is expected to be sufficient to fund the recurring level of operations for the next twelve months. During 2009 and 2008, operating cash flow has been the primary source of liquidity. The Company monitors working capital and planned capital spending to assess liquidity and minimize cyclical cash flow.

Cash from operations decreased $0.1 million in the first nine months of 2009 versus the first nine months of 2008. The lower net income in 2008 and the increase in inventory were offset by the positive effect from receivables, deferred income taxes and share based compensation.

Capital expenditures for the first nine months of 2009 were $8.0 million. Expenditures in the first nine months of 2009 include the construction of the new facility in Benwood, West Virginia ($3.5 million) and upgrading facilities at the Hurst, Texas plant ($3.6 million). In the first nine months of 2008, the Company spent $2.1 million for capital expenditures.

During the first nine months of 2009 and 2008, the company repurchased common stock for the treasury totaling $0.2 million and $3.4 million, respectively. The Company has no outstanding bank debt as of September 30, 2009.

The Company has various commitments primarily related to vehicle and equipment operating leases, facilities operating leases, and zinc purchase commitments. The Company's off-balance sheet contractual obligations at September 30, 2009, consist of $1.4 million for long-term operating leases for vehicles, office space, office equipment, galvanizing facilities and galvanizing equipment and approximately and approximately $0.1 million for zinc purchase commitments. In addition, at September 30, 2009 the Company has approximately $1.0 million in outstanding purchase commitments for various machinery, equipment and building improvements and $1.3 million in outstanding commitments for other operating obligations. The various leases for galvanizing facilities, including option renewals, expire from 2009 to 2023. 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.

ENVIRONMENTAL MATTERS

The Company's facilities are subject to extensive environmental legislation and regulations affecting their operations and the discharge of wastes. The cost of compliance with such regulations in the first nine months of 2009 and 2008 was approximately $1.4 million and $1.3 million, respectively, for the disposal and recycling of wastes generated by the galvanizing operations.

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.

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.