In the last two months of 2008 and continuing in the first three months of 2009, the continued economic turmoil impacting the United States and the rest of the world resulted in significant downturns in all of the key end markets we serve, building and construction, industrial, and automotive. Sales volumes for both of our segments were reduced more significantly than expected during the first quarter of 2009. The downturns in the residential building and automotive markets worsened during first quarter of 2009 and the continued collapse of the credit markets led to a severe slowdown in the commercial building and industrial markets during this same period. Our sales, earnings, and cash flow were also negatively impacted by volatile commodity prices, including steel, our most significant raw material cost.
Steel prices impact the cost of raw materials we purchase and also impact the pricing we offer to customers on sales of our products. During 2008, we were able to successfully manage dramatic increases in steel prices during the first three quarters of the year. Steel prices fell precipitously during the fourth quarter of 2008 and continued to fall during the first quarter of 2009. The rapid decrease in steel prices has led to an increase in material costs as a percentage of sales during the three months ended March 31, 2009 compared to prior periods. Accordingly, we recorded a $2 million lower-of-cost-or-market adjustment to value inventory on hand to its proper value during the first quarter of 2009.
During the three months ended March 31, 2009, we recorded a $25.5 million goodwill impairment charge. The impairment was recorded as a result of an expected decrease in our long-term projections of revenues and cash flows to be generated by a reporting unit reported within our Building Products segment. We have taken a number of steps to position the Company as a low-cost provider of our products. Over the past two years our focus has been on achieving operational excellence through lean initiatives and the consolidation of facilities. We have closed or consolidated a total of 15 facilities since January 2008. Due to the negative impact the significant economic downturn has had on our end markets, we have continued to aggressively reduce costs throughout the Company to adjust to the decreased sales volumes and maximize cash flows generated from operating activities. Actions implemented during the first quarter of 2009 to reduce costs and maximize cash included further staff reductions of 17% (staff levels have been reduced 36% since September 2007), 10% reductions in the salaries of the Chief Executive Officer and Chief Operating Officer, 10% reduction in fees paid to the Board of Directors, elimination of salary increases, suspension of the company match on 401(k) contributions, furloughs at many business units, limitations on capital expenditures, travel restrictions, and many other discretionary spending reductions. We believe these actions will help us to meet our priorities for 2009: serving our customers and maximizing our liquidity.

Results of Operations
Three Months Ended March 31, 2009 Compared to the Three Months Ended March 31,
2008
The following table sets forth selected results of operations data and its
percentage of net sales for the three months ended March 31(in thousands):

                                                         2009                                2008
Net sales                                      $ 204,843            100.0 %        $ 293,938            100.0    %
Cost of sales                                    191,830             93.6            241,822             82.3

Gross profit                                      13,013              6.4             52,116             17.7
Selling, general and administrative
expense                                           30,680             15.0             35,088             11.9
Goodwill and other intangible asset
impairment                                        25,501             12.5                  -              0.0

(Loss) income from operations                    (43,168 )          (21.1 )           17,028              5.8
Interest expense                                   5,967              2.9              8,062              2.7
Equity in partnerships' loss (income)
(1)                                                   19              0.0               (153 )           (0.0 )

(Loss) income before taxes                       (49,154 )          (24.0 )            9,119              3.1
(Benefit from) provision for income
taxes                                            (21,602 )          (10.5 )            3,095              1.1

(Loss) income from continuing operations         (27,552 )          (13.5 )            6,024              2.0
Discontinued operations, net of taxes
(2)                                                  (64 )           (0.0 )              676              0.3

Net (loss) income                              $ (27,616 )          (13.5 )%       $   6,700              2.3            %

(1) Equity in partnerships' loss (income) represents our proportional interest in the income of our steel pickling joint venture and other income.

(2) Discontinued operations represent the
(loss) or income, net of income taxes, attributable to our powder metals and bath cabinet manufacturing businesses which we sold in October 2008 and August 2007, respectively.

The following table sets forth the Company's net sales by reportable segment for the three months ended March 31 (in thousands):

                                                                            Change due to
                                                          Total        Foreign
                              2009          2008         Change       Currency       Operations
 Net sales:
 Building Products          $ 166,339     $ 229,323     $ (62,984 )   $  (7,822 )   $    (55,162 )
 Processed Metal Products      38,504        64,615       (26,111 )           -          (26,111 )

                            $ 204,843     $ 293,938     $ (89,095 )   $  (7,822 )   $    (81,273 )

Net sales decreased by $89.1 million, or 30.3% to $204.8 million for the quarter ended March 31, 2009, compared to the quarter ended March 31, 2008. The economic downturn and its effect on the key end markets we serve led to the significant drop in sales. Additionally, the significant decrease in steel prices in the commodity markets during the first quarter of 2009 contributed to the drop in net sales from the prior year as certain of our customer pricing is linked to commodity costs. Foreign currency fluctuations also contributed to a $7.8 million decrease in net sales during the first quarter of 2009 compared to the same period in the previous year.
Net sales in our Building Products segment decreased by $63.0 million, or 27.5%, to $166.3 million for the quarter ended March 31, 2009, from net sales of $229.3 million for the quarter ended March 31, 2008. Excluding the $7.8 million impact of exchange rate fluctuations, the decrease in net sales was $55.2 million, or 24.1% from the same period in the prior year, a result of a decrease in sales volume due to a slowdown in the residential building, commercial construction, architectural, and industrial markets along with lower customer sales prices as a result of decreased commodity costs for products with pricing tied to commodity costs.
Net sales in our Processed Metal Products segment decreased by $26.1 million, or 40%, to $38.5 million for the quarter ended March 31, 2009, from net sales of $64.6 million for the quarter ended March 31, 2008. The decrease in net sales was primarily a function of a 45% decrease in tons sold due to a slowdown in the automotive markets.

Gross margin decreased to 6.4% for the quarter ended March 31, 2009, from 17.7% for the quarter ended March 31, 2008. The decrease in gross margin was the result of decreasing customer selling prices as pricing for certain products are indexed to commodity costs and the significant drop in demand. The precipitous decrease in commodity costs has led to higher cost inventory being sold at lowered customer selling prices. The decrease in customer selling prices has resulted in material costs as a percentage of net sales increasing approximately 10% during the three months ended March 31, 2009, compared to the same period in 2008, resulting in a reduction in gross profit by approximately $20 million, including a $2.0 million lower-of-cost-or-market inventory valuation charge. Gross margin was also negatively impacted by a reduction in sales volume that resulted in an increase in the percentage of fixed costs to net sales as our costs were spread over less volume partially offset by our aggressive cost cutting initiatives that reduced the impact of reduced sales volume. Selling, general and administrative expenses decreased by approximately $4.4 million, or 12.5%, to $30.7 million for the quarter ended March 31, 2009, from $35.1 million for the quarter ended March 31, 2008. The $4.4 million decrease is net of a $2.4 million increase for foreign currency losses and $0.4 million of higher bad debt expense, both of which were more than offset by a $4.0 million decrease in payroll-related expenses resulting from our reduced headcount and another $3.2 million of cost reduction primarily from lower marketing and outside professional fees. Despite our efforts to reduce costs, selling, general and administrative expenses as a percentage of net sales increased to 15.0% for the quarter ended March 31, 2009, from 11.9% for the quarter ended March 31, 2008, as a result of a the 30.3% reduction in net sales during the first quarter of 2009.
Due to a change in the projected cash flows for one of our reporting units resulting from a significant decrease in long-term sales projections, we recorded a goodwill impairment charge of $25.5 million during the quarter ended March 31, 2009.

The following table sets forth the Company's income from operations and income from operations as a percentage of net sales by reportable segment for the three months ending March 31 (in thousands):

                                                                                               Change due to
                                                                              Intangible
                                                              Total             Asset             Foreign
                             2009             2008           Change           Impairment         Currency          Operations
(Loss) income from
operations:
Building Products          $ (28,621 )      $ 20,800        $ (49,421 )      $    (25,501 )      $    (813 )      $    (23,107 )
Processed Metal
Products                      (9,632 )         2,147          (11,779 )                 -                -             (11,779 )
Corporate                     (4,915 )        (5,919 )          1,004                   -                -               1,004

Consolidated               $ (43,168 )      $ 17,028        $ (60,196 )      $    (25,501 )      $    (813 )      $    (33,882 )

2009 2008
(Loss) income from operations as a percentage of net sales:

   Building Products                                               -17.2 %     9.1 %
   Processed Metal Products                                        -25.0 %     3.3 %
   Consolidated                                                    -21.1 %     5.8 %

Income from operations as a percentage of net sales in our Building Products segment for the quarter ended March 31, 2009, decreased to -17.2% from 9.1% in the quarter ended March 31, 2008. The decrease in operating margin was the result of decreasing customer selling prices as pricing for certain products are indexed to commodity costs, much lower sales volume, and the $25.5 million goodwill impairment charge. The precipitous decrease in commodity costs has led to higher cost inventory being sold at lowered customer selling prices. The decrease in customer selling prices has resulted in material costs as a percentage of net sales increasing approximately 7.3% during the three months ended March 31, 2009, compared to the same period in 2008, resulting in a reduction in income from operations by approximately $11 million. Operating margin was also negatively impacted by a reduction in sales volume that resulted in an increase in the percentage of fixed costs (in cost of sales and selling, general and administrative expenses) to net sales as our costs were spread over less volume. Despite aggressively reducing our costs to better align with net sales for the quarter, these fixed costs contributed to an additional 3.7% decrease in the Building Products segment's operating margin during the quarter ended March 31, 2009, compared to the quarter ended March 31, 2008. Income from operations as a percentage of net sales in our Processed Metal Products segment decreased to -25.0% of net sales for the quarter ended March 31, 2009, from 3.3% for the prior year's comparable period. Similarly to the Building Products segment, the Processed Metal Products segment was most significantly impacted by lower sales volume and reductions in selling prices which caused material costs as a percentage of net sales to increase by approximately 23.9% during the first quarter of 2009 compared to the first quarter of 2008. The increase in material costs as a percentage of sales led to an approximately $9 million reduction in income from operations, including a $2.0 million lower-of-cost-or-market inventory valuation charge. Operating margin was also negatively impacted by 3.0% points due to fixed costs (in cost of sales and selling, general and administrative expense) being spread over fewer sales due to the significant decline in net sales for the quarter ended March 31, 2009, compared to the comparable period of 2008. The Processed Metal Products segment also incurred a $0.3 million increase in bad debt expense due to the write-off of amounts receivable from a customer which filed for bankruptcy.
Corporate expenses decreased $1.0 million, or 16.9%, to $4.9 million for the quarter ended March 31, 2009 from $5.9 million in the quarter ended March 31, 2008. The decrease in corporate expenses is primarily due to lower compensation costs due to staffing reductions and lower incentive compensation expense. Interest expense decreased by approximately $2.1 million to $6.0 million for the quarter ended March 31, 2009, from $8.1 million for the quarter ended March 31, 2008. The decrease in interest expense was due to a combination of lower average borrowings and lower average interest rates during the quarter ended March 31, 2009, compared to the comparable period in the prior year.

The benefit from income taxes for the quarter ended March 31, 2009 was $21.6 million, an effective tax rate of 43.9%, compared with a provision for income taxes of $3.1 million, an effective rate of 33.9%, for the same period in 2008. The increase in the effective tax rate is the result of the impact of nondeductible permanent items on the tax rate when forecasted taxable income for the year ended December 31, 2009 is lower than the forecasts for the prior year comparable period.
Outlook
As with the past two quarters, there is little forward visibility on either the economy or our industry, therefore, we are not providing numerical guidance for 2009. Although we believe 2009 will continue to be challenging, we expect to sequentially improve to approximately breakeven for net income during the second quarter of 2009 despite the extremely difficult operating environment. We expect more stability in commodity steel pricing which would help us better align customer selling prices to our inventory costs during the remainder of 2009. In the meantime, we will continue our aggressive efforts to reduce costs and increase liquidity and will take additional actions as the market conditions warrant. We believe that the aggressive actions taken to streamline and improve the efficiency of our business will position our Company to generate marked improvements in profitability when economic and end market conditions return to more normal levels.
Liquidity and Capital Resources
General
We foresee 2009 as being a very challenging period for our Company given the uncertainty in the general economy and the related effects on the residential building and automotive markets. Accordingly, we will focus on liquidity preservation to meet our principal capital requirements during 2009. As a result, Gibraltar's Board of Directors has agreed with management's recommendation to suspend quarterly dividends with the expectation of reinstating payments when economic conditions and our profitability improve. We have also continued our aggressive efforts to cut costs and increase positive cash flow as discussed above. As noted below in the "Cash Flows" section of Item 7 of this Quarterly Report on Form 10-Q, we have been successful in generating positive cash flows from operating and investing activities. Since September 30, 2007, when borrowings were the highest due to three acquisitions in 2007, we have reduced long-term debt outstanding by $224.2 million, or 40.5%, including a reduction of $27 million in the first quarter of 2009. We believe that availability of funds under our existing Senior Credit Agreement together with the cash generated from operations will be sufficient to provide the Company with the liquidity and capital resources necessary to support our principal capital requirements for the remainder of 2009.
Our principal capital requirements are to fund our operations, including working capital, the purchase and funding of capital improvements to our facilities, machinery and equipment and to fund acquisitions. Despite the continuing downturn in the credit and equity markets, we believe that our liquidity will be adequate to satisfy our obligations throughout 2009. We expect that future obligations, including the funding of future acquisitions and capital expenditures, may be financed through a number of sources, including internally available cash resources, new debt financing, the issuance of equity securities or any combination of the above. This opinion is a forward-looking statement based upon currently available information and may change if conditions in the credit and equity markets further deteriorate. To the extent that operating cash flows are lower than current levels or sources of financing are not available or available at acceptable terms, future liquidity may be adversely affected.

At March 31, 2009, the Company had $8.5 million of cash and cash equivalents and $297.9 million available under our $375.0 million revolving credit facility. However, the Second Amended and Restated Credit Agreement dated August 31, 2007 (the Senior Credit Agreement), which includes our $375.0 million revolving credit facility and our $122.7 million term loan facility, includes restrictive debt covenants that require us to maintain specified financial ratios at each quarter-end and satisfy other financial condition tests. As of March 31, 2009, we are in compliance with all the restrictive debt covenants included in the Senior Credit Agreement. At the end of the first quarter of 2009, we could have borrowed approximately $21 million more under our revolving credit facility without violating our total leverage ratio covenant (as defined within the Senior Credit Agreement).
Given the continuing decrease in revenues generated from the residential building and automotive markets served by the Company resulting in operating losses during the past two quarters, there is increased likelihood of noncompliance with the financial covenants of the Senior Credit Agreement, specifically the total leverage ratio and interest coverage ratio, during periods ending on or after June 30, 2009. A breach of any debt covenant would result in a default under the Senior Credit Agreement. Upon the occurrence of an event of default under the Senior Credit Agreement, we would attempt to receive a waiver from our lenders, which would likely result in incurring additional financing costs consisting of upfront fees to our syndicate of lenders and increased interest rates used to determine interest due on amounts outstanding under the Senior Credit Agreement. We are monitoring our compliance with our restrictive debt covenants closely and have communicated our likely need for an amendment to our Senior Credit Agreement with our syndicate of lenders. We expect that our current banking relationships will continue to provide the liquidity needed to support our principal capital requirements. A detailed description of risks of default is included in the risk factors included in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2008.
Senior Credit Agreement and Senior Subordinated Notes The Company and its wholly-owned subsidiary, Gibraltar Steel Corporation of New York, are co-borrowers under our Senior Credit Agreement with a syndicate of lenders providing for (i) a revolving credit facility with aggregate commitments of up to $375.0 million including a $50.0 million sub-limit for letters of credit and a swing line loan sub-limit of $20.0 million and (ii) a term loan in the original principal amount of $122.7 million. At March 31, 2009, outstanding borrowings under the revolving credit facility were $62.7 million, $14.4 million of letters of credit were outstanding and $297.9 million was available to be borrowed. Under the terms of the Senior Credit Agreement, we are required to repay approximately $0.6 million on the term loan each quarter until its due date in 2012. During the three months ended March 31, 2009, we borrowed $12.1 million and repaid $38.5 million on the revolving facility and made payments of $0.6 million on the term loan. At March 31, 2009, we had $59.3 million outstanding on the term loan.
The Company's $204.0 million of Senior Subordinated 8% Notes (8% Notes) were issued in December 2005 at a discount to yield 8.25%. Provisions of the 8% Notes include, without limitation, restrictions on indebtedness, liens, and distributions from restricted subsidiaries, asset sales, affiliate transactions, dividends and other restricted payments. Dividend payments are subject to annual limits of $0.25 per share and $10 million. Prior to December 1, 2008, up to 35% of the 8% Notes were redeemable at the option of the Company from the proceeds of an equity offering at a premium of 108% of the face value, plus accrued and unpaid interest. After December 1, 2010, the 8% Notes are redeemable at the option of the Company, in whole or in part, at the redemption price (as defined in the Senior Subordinated 8% Notes Indenture), which declines annually from 104% to 100% on and after December 1, 2013. In the event of a Change in Control (as defined in the Senior Subordinated 8% Notes Indenture), each holder of the 8% Notes may require the Company to repurchase all or a portion of such holder's 8% Notes at a purchase price equal to 101% of the principal amount thereof. At March 31, 2009, we had $201.4 million, net of discount, of our 8% Notes outstanding.

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