UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-K

 

 

Commission File Number 0-22462

 

GIBRALTAR INDUSTRIES, INC.

(Exact name of Registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:

(716) 826-6500

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

 

 

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

NONE

 

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

 

Indicate by checkmark if the registrant is not required to file report pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ.

 

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 þ     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 the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K.   þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

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

 

The aggregate market value of the Common Stock outstanding and held by non-affiliates (as defined in Rule 405 under the Securities Act of 1933) of the registrant, based upon the closing sale price of the Common Stock on the NASDAQ Stock Exchange Global Select Market^® on June 30, 2008, the last business day of the registrant’s most recently completed second quarter, was approximately $394.9 million.

 

As of February 23, 2009, the number of common shares outstanding was: 29,951,598.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The information required to be furnished pursuant to Part III of this Annual Report on Form 10-K will be set forth in, and is incorporated by reference to, the registrant’s Definitive Proxy Statement for the Annual Meeting of Stockholders (2008 Proxy Statement), which will be filed no later than 120 days after the end of the registrant’s 2008 fiscal year.

 

Exhibit Index begins on Page 92

 

 

 

Safe Harbor Statement

 

The Company wishes to take advantage of the Safe Harbor provisions included in the Private Securities Litigation Reform Act of 1995 (the “Act”). Certain information set forth herein contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about the Company’s business, and management’s beliefs about future operations, results and financial position. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions. Statements by the Company, other than historical information, constitute “forward looking statements” within the meaning of the Act and may be subject to a number of risk factors and uncertainty. Risk factors that could affect these statements include, but are not limited to, the following: general economic conditions; the impact of the availability and the effects of changing raw material prices on the Company’s results of operations; energy prices and usage ; the ability to pass through cost increases to customers; changing demand for the Company’s products and services; risks associated with the integration of acquisitions; and changes in interest or tax rates. In addition, such forward-looking statements could also be affected by general industry and market conditions, as well as general economic, regulatory and political conditions. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable law or regulation.

 

 

General

 

We are a leading manufacturer, processor and distributor of residential and commercial building products and processed metal products for the building and construction, industrial, and automotive markets. Our building products are used by homeowners and builders to provide structural and architectural enhancements for residential and commercial building projects. Our processed metal products are comprised primarily of steel shaped to specific widths and hardened to certain tolerances as required by our customers. We serve customers in a variety of industries in all 50 states and throughout the world. We operate 59 facilities in 26 states, Canada, England, Germany, and Poland, giving us a broad platform for just-in-time delivery and support to our customers.

 

We sell our products both domestically and internationally. We operate in the following two business segments:

 

 

The following table sets forth the selected products, industries served and customers for each segment.

 

 

Note 19 of the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K provides information related to the Company’s business segments in accordance with accounting principles generally accepted in the United States of America.

Recent Developments

 

The residential construction and automotive markets in North America experienced the following declines in volume beginning in 2007 and continuing throughout 2008, with greater deceleration in the fourth quarter of 2008:

 

 

The decrease in residential housing starts and North American auto builds had a significant impact on the operations of our Building Products and Processed Metal Products segments, respectively, by contributing to decreased sales volumes in each segment. In an effort to respond to these market forces, we have focused on operational excellence through lean manufacturing initiatives and facility consolidations. Our efforts have resulted in the closing or consolidation of fifteen facilities during 2008 including the relocation of the manufacturing capabilities of six plants to other manufacturing facilities operated by the Company.

 

Our efforts to consolidate facilities and streamline operations to match the current demand for our products have resulted in a 17% decrease in our work force from approximately 3,950 employees as of December 31, 2007 to 3,270 employees as of December 31, 2008. We have focused on reducing costs in an effort to remain as a low cost supplier to our customers.

 

Many of our lean manufacturing initiatives have also focused on reducing the working capital required to manage our business. Our achievements in this effort during 2008 have resulted in a $84 million reduction in working capital from $307 million as of December 31, 2007 to $223 million as of December 31, 2008. This reduction in working capital plus other cash flows generated from operating and investing activities has allowed us to reduce our total debt outstanding by approximately $132 million from $488 million as of December 31, 2007 to $356 million as of December 31, 2008.

 

During 2008, we evaluated the past performance and probable future benefits of our companies and determined that our copper powder metals business, SCM Metal Products (SCM), no longer fit our long-term strategic goals. Effective October 3, 2008, we sold the outstanding and issued capital stock of our SCM subsidiaries. The results of operations of SCM have been classified as discontinued operations in our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

 

The steps management took during the past two years led to much improved operating results during the first three quarters of the year. We generated diluted earnings per share from continuing operations of $1.44 for the nine months ended September 30, 2008 compared to $0.96 in the same period of 2007. However, the worldwide economic turmoil that heightened during the fourth quarter of 2008 led to a significant decrease in the Company’s sales volume which helped contribute to a loss from continuing operations for the three months ended December 31, 2008 of $0.33 per diluted share compared to a loss of $0.06 in the fourth quarter of 2007.

 

As in the fourth quarter of 2008, there is little forward visibility on either the economy or our industry, therefore, we are not providing numerical guidance for 2009. We see the first quarter of 2009 as again being very challenging, with only marginally better results than the fourth quarter of 2008 and we are expecting an operating loss in the first quarter as results continue to reflect the extremely difficult global economic environment. In the meantime, we continue aggressive efforts to increase liquidity and reduce costs and will take additional actions as market conditions warrant. We believe that the aggressive actions taken during the past two years to streamline and improve the efficiency of our business will position our company to generate marked improvements in performance when economic and end market conditions return to more normal levels.

 

Industry Overview

 

Building products manufacturers occupy an intermediate market between the primary steel, metal and other material producers and the wholesale, retail building supply and industrial manufacturing markets. The

primary producers typically focus on producing high volumes of their product. We purchase raw materials from these producers and, through various production processes, convert these steel raw materials into specialized products for use in the construction or repair of residential and commercial buildings and industrial products. We distribute our products through wholesale distributors, which focus their efforts on contractors, large retail chains, which have captured the majority of the retail building products market, and industrial manufacturers.

 

Steel and metal processors occupy a market niche that exists between the primary steel and metal producers, end-users and others. Primary steel and metal producers typically focus on the sale of standard size and tolerance of steel and other metals to large volume purchasers, including steel and metal processors. End-users require steel with closer tolerances and with shorter lead times than the primary steel and metal producers can provide efficiently. Steel processors like our company, through the application of various higher value-added processes such as cold-rolling and specialized heat-treating methods, process steel to a precise grade, temper, tolerance and finish. End product manufacturers incorporate this processed steel into finished goods.

 

Products and Services

 

Building Products segment

 

The Building Products segment is composed of primarily, but not exclusively, manufacturers of metal products used in the residential and commercial building and industrial manufacturing markets. We operate 54 facilities in 24 states, Canada, England, Germany and Poland, giving us a base of operations to provide customer support, delivery, service and quality to a number of regional and national customers, and providing us with manufacturing and distribution efficiencies in North America, as well as a presence in the European market.

 

We manufacture an extensive variety of products that are sold to lumber and building material wholesalers, buying groups, discount and major retail home centers, major home builders, heating, ventilation and air conditioning (HVAC) and roofing distributors, residential, industrial and commercial contractors, and industrial manufacturers. Our product offerings include a full line of bar grating and safety/plank grating used in walkways, platforms, safety barriers, drainage covers, and ventilation grates; expanded metal used in walkways, shelving, barriers, patio furniture, and other applications where both visibility and security are necessary; perforated metal and metal lath products; fiberglass grating used in areas where high strength, light weight, low maintenance and corrosion resistance are required; ventilation products and accessories; storage solutions, including mailboxes and package delivery products; roof edging, underlayment and flashing; soffit; drywall corner bead; structural support products; coated coil stock; metal roofing and accessories; steel framing; rain-carrying systems, including gutters and accessories; builders’ hardware, shelving and closet rods; lawn and garden products; diffusers and fasteners, each of which can be sold separately or as an integral part of a package or program sale.

 

We update our building products by launching new products, enhancing existing products and adjusting product specifications to respond to building code and regulatory changes. During 2008, our Alabama Metal Industries Corporation (AMICO) subsidiary continued to develop its stainless steel lath product to include accessories such as corner beads, casing beads, and expansion joints. Our Florence Corporation (Florence) subsidiary added to its versatile 4C mailbox line and now offers 38 different modules that have been approved by the U.S. Postal Service. Also in 2008, another subsidiary, Southeastern Metals Manufacturing Company, Inc. (SEMCO) began offering two new products. SEMCO developed a commercial series gutter protection system called the “Micro-CS” system, which is marketed under our Gutter Helmet^® product line. During 2008, SEMCO also began marketing its “Diamond Steel Framing” product which provides increased strength along with features allowing faster, more accurate installation. Our Building Products segment continues to develop

new products and offerings to expand its product lines and to provide additional solutions to homeowners and contractors.

 

Many of our building products are used by home owners and builders to provide structural and architectural enhancements for residential and commercial building projects, including in geographic locations subject to severe weather or seismic activity, and facilitate compliance with increasingly stringent building codes and insurance company requirements. Our building products are manufactured primarily from galvanized, galvalume and painted steel, anodized and painted aluminum, copper, brass, zinc and various plastic compounds. These additional metal purchases, when added to our existing Processed Metal Products segment purchases, enhance our purchasing position due to the increased total volume and value-added component of these purchases.

 

Our production capabilities allow us to process the wide range of metals and plastics necessary for manufacturing building products. Our equipment includes automatic roll forming machines, stamping presses, shears, press brakes, paint lines, milling, welding, injection molding and numerous automated assembly machines. We maintain our equipment through a thorough preventive maintenance program, including in-house tool and die shops, allowing us to meet the demanding service requirements of many of our customers.

 

Processed Metal Products segment

 

We manufacture cold-rolled strip steel. In addition, we provide materials management and, through a joint venture, steel pickling. We operate through four locations in four states.

 

Our cold-rolled strip steel is used in applications that demand more precise widths, improved surface conditions and tighter gauge tolerances than are supplied by primary producers of flat-rolled steel products. Consistent with our strategy of focusing on value-added products and services, we produce a broad range of fully processed cold-rolled strip steel products. We buy wide sheet steel in coils from primary producers and process it to specific customer orders by performing computer-aided processes such as cold reduction, annealing, edge rolling and slitting. Cold reduction is the rolling of steel to a specified thickness, tolerance and finish. Annealing is a thermal process that changes hardness and certain metallurgical characteristics of steel. Edge rolling involves conditioning edges of processed steel into square, full round or partially round shapes. Slitting is the cutting of steel to specified widths. Depending on customer specifications, we use one or more of these processes to produce steel strip of a precise grade, temper, tolerance and finish. Customers for our strip steel products include manufacturers in the automotive, automotive supply, power and hand tool, hardware and other industries.

 

We have the capability to process coils up to a maximum outside diameter of 72 inches and roll widths of up to 50 inches. Our rolling mills include automatic gauge control systems with hydraulic screw downs allowing for micro-second adjustments during processing. Our computerized mills enable us to satisfy an industry demand for a wide range of steel from heavier gauge and special alloy steels to low carbon and light gauge steels, in each case having a high quality finish and precision gauge tolerance.

 

Our rolling facilities are further complemented by 16 high convection annealing furnaces, which allow for shorter annealing times than conventional annealers. Fourteen of our furnaces and bases employ advanced technology that incorporates the use of a hydrogen atmosphere for the production of cleaner and more uniform steel. As a result of our annealing capabilities, we are able to produce cold-rolled strip steel with improved consistency in terms of thickness, hardness, and molecular grain structure and surface.

 

We can produce certain strip steel products on oscillated coils, which wind strip steel similar to the way fishing line is wound on a reel. Oscillating the strip steel enables us to put at least six times greater volume of finished product on a coil than standard ribbon winding, allowing customers to achieve longer production runs by reducing the number of equipment shut-downs to change coils. Customers are thus able to increase productivity, reduce downtime, improve yield and lengthen die life. These benefits to customers allow us to achieve higher margins on oscillated products. To our knowledge, only a few other steel producers are able to produce oscillated coils, and we are not aware of any competitor that can produce 6,000-pound oscillated coils, the maximum size we produce.

We also operate a materials management facility in Michigan that links primary steel producers and end-user manufacturers by integrating the inventory purchasing, receiving, inspection, billing, storage and shipping functions and producing just-in-time delivery of materials.

 

We have a 31% interest in Samuel Steel Pickling Company, a joint venture with Samuel Manu-Tech, Inc. that has two steel pickling operations in Ohio. After the hot rolling process, the surface of sheet steel is left with a residue known as scale, which must be removed prior to further processing by a cleaning process known as pickling. This joint venture pickles steel on a toll basis, receiving fees for pickling services without acquiring ownership of the steel.

 

Quality Assurance

 

We place great importance on providing our customers with high-quality products for use in critical applications. We carefully select our raw material vendors and use computerized inspection and analysis to maintain our quality standards so that our products will meet critical customer specifications. To meet customer specifications, we use documented procedures utilizing statistical process control systems linked directly to processing equipment to monitor all stages of production. Physical, chemical and metallographic analyses are performed during the production process to verify that mechanical and dimensional properties, cleanliness, surface characteristics and chemical content are within specification. In addition, all of our facilities that provide services or products to the automotive industry are either TS 16949-2002 or ISO 9001-2000 registered and ten of our building products facilities are ISO 9001-2000 registered.

 

Technical Services

 

We employ a staff of engineers, metallurgists and other technical personnel and maintain fully-equipped, modern laboratories to support our operations. These laboratories enable us to verify, analyze and document the physical, chemical, metallurgical and mechanical properties of our raw materials and products. In addition, our engineering staff also employs a range of CAD/CAM programs to design highly specialized and technically precise products. Technical service personnel also work in conjunction with our sales force to determine the types of products and services required for the particular needs of our customers.

 

We have over 80 technical service employees spread throughout our businesses. In each segment, the technical staff monitors our operations to satisfy customer specifications for the product being produced.

 

Our Vice President of Operations oversees our manufacturing operations and works with our operational leadership to implement programs and procedures that enables us to source, manufacture and distribute products as efficiently and as cost-effectively as possible.

 

Suppliers and Raw Materials

 

Steel and metal processing companies are required to maintain substantial inventories of raw material in order to accommodate the short lead times and just-in-time delivery requirements of their customers. Accordingly, we plan our purchases to maintain an inventory of raw materials at sufficient levels to satisfy the anticipated needs of our customers. We manage our inventory levels through forecasts of customer orders, efficient supply chain management and an ongoing assessment of market conditions.

 

The primary raw material we purchase is flat-rolled steel which is used in our Building Products and Processed Metal Products segments. To a lesser extent, we purchase aluminum and resin for use in the Building Products segment.

 

We purchase flat-rolled steel at regular intervals on an as-needed basis, primarily from the major North American suppliers, as well as a limited amount from foreign steel producers. Because of our strategy to develop longstanding relationships in our supply chain, we have been able to adjust our deliveries of flat-rolled steel to match our required inventory position.

In 2008, we purchased a majority of our aluminum requirements from several domestic mills with a small amount sourced with off-shore mills. Our resin purchases are all domestic through distributors with a small amount direct from the manufacturer. Supply has been adequate from these sources to fulfill our needs.

 

We purchase natural gas and electricity from suppliers in proximity to our operations.

 

We have no long-term contractual commitments with our suppliers. Our Vice President of Supply Chain Management continually examines and improves our purchasing practices across our geographically dispersed facilities in order to streamline purchasing across like commodities.

 

Intellectual Property

 

We protect our intellectual property by trademark, copyright and patent registrations and use our intellectual property in the business activities of each operating segment. While no individual item of our intellectual property is considered material, we do believe our trademarks, copyrights and patents provide us with a competitive advantage when marketing our products to customers.

 

Sales and Marketing

 

Our products and services are sold primarily by our sales personnel and outside sales representatives located throughout the United States, Canada, Mexico and Europe. We had over 270 sales personnel as of December 31, 2008. We have organized sales teams to focus on specific customers and national accounts to allow us to provide enhanced supply solutions, and enhance our ability to increase the number of products that we provide to those customers and accounts. Our sales staff works with certain retail customers to optimize shelf space for our products which is expected to increase sales at these locations.

 

Customers and Distribution

 

We have numerous customers located throughout the United States, Canada, Mexico, Europe and Central and South America principally in the building and construction, general manufacturing, automotive, automotive supply, steel and machinery industries. Major customers include home improvement retailers, building product distributors, automobile manufacturers and suppliers and commercial and residential contractors.

 

No customer represented 10% or more of our consolidated net sales for 2008. The Home Depot represented 10% and 11% of our consolidated net sales for 2007 and 2006, respectively.

 

During 2008, 2007 and 2006, one customer (The Home Depot) of our Building Products segment accounted for approximately 10%, 13% and 14%, respectively, of this segment’s net sales. No other customer accounted for more than 10% of our Building Products segment gross sales during these periods.

 

No customer represented 10% or more of our Processed Metal Products segment’s net sales in 2008. During 2007 and 2006, one customer (General Motors) accounted for 11% and 12% of this segments net sales. No other customer accounted for more than 10% of our Processed Metal Products segment’s net sales during these periods.

 

Although we negotiate annual sales orders with the majority of our customers, these orders are subject to customer confirmation as to product amounts and delivery dates. We do not have long-term contracts with any of our customers.

 

Backlog

 

Because of the nature of our products and the short lead time order cycle, backlog is not a significant factor in our business. We believe that substantially all of our firm orders existing on December 31, 2008 will be shipped prior to the end of the first quarter of 2009.

Competition

 

Both segments operate in highly competitive markets. We compete in the building products and processed metal products markets with several domestic suppliers and, in the case of processed metal products, some foreign manufacturers. A few of our competitors in the Building Products and Processed Metal Products segments may be larger, have greater financial resources or have less financial leverage than we do. As a result, these competitors may be better positioned to respond to any downward pricing pressure or other adverse economic or industry conditions or to identify and acquire companies or product lines compatible with their businesses. Our competition in both segments differs according to unique characteristics of each segment. We describe both segments in detail below.

 

Building Products segment

 

We compete with numerous suppliers of building products based on the range of products offered, quality, price and delivery. Although some of these competing suppliers are large companies, the majority are small to medium-sized and do not offer the range of building products we do.

 

The prices for the raw materials we use in our Building Products operations, primarily steel, aluminum and plastic, are volatile due to a number of factors beyond our control, including supply shortages, general industry and economic conditions, labor costs, import duties, tariffs and currency exchange rates. Although we have strategies to deal with volatility in raw material costs such as reducing inventory levels, other competitors in this segment who do not have to maintain inventories as large as ours may be better able to mitigate the effects of this volatility and thereby compete effectively against us on product price.

 

We believe our broad range of products, product quality and ability to meet exacting customer delivery requirements gives us a competitive advantage over many competitors in this segment.

 

Processed Metal Products segment

 

The metal processing market is highly competitive. We compete with a small number of other metal processors, including Worthington Industries and Steel Technologies. Some of these processors, like Worthington, also focus on fully processed, high value-added metal products like we do. We compete in this market on the basis of precision and range of achievable tolerances, quality, price and the ability to meet delivery schedules dictated by customers.

 

The prices for the raw materials we use in our Processed Metal Products operations, primarily steel, are volatile due to the same factors described above with respect to our Building Products segment. Although we have strategies to deal with volatility in raw material costs such as indexing certain customer orders to steel market pricing to reduce the impact of market volatility on our margins and matching purchase commitments with sales orders, other competitors in this segment which do not have to maintain inventories as large as ours may be better able to mitigate the effects of this volatility and thereby compete effectively against us on product price during times of price volatility.

 

We believe our ability to meet stringent process specifications and the quality of our processed metals give us a competitive advantage over some competitors in this segment.

 

Employees

 

At December 31, 2008, we employed approximately 3,270 people, of which approximately 21% were represented by unions through various collective bargaining agreements (CBAs). One CBA, representing 1% of our workforce, expired February 19, 2009 and we are currently negotiating a new agreement with the union. Three other CBAs, representing 3% of our workforce, expire during 2009. Our other CBAs expire between June 30, 2010 and July 31, 2011. We historically have had good relationships with our unions. We expect the current and future negotiations with our unions to result in contracts that provide benefits that are consistent with those provided in our current and expired agreements.

Seasonality

 

Our net sales are generally lower in the first and fourth quarters primarily due to customer plant shutdowns in the automotive industry due to holidays and model changeovers, as well as reduced activity in the building and construction industry due to colder and more inclement weather.

 

Governmental Regulation

 

Our processing centers and manufacturing facilities are subject to many federal, state and local requirements relating to the protection of the environment and we use environmentally sensitive materials in our production processes. For example, we lubricate our machines with oil and use oil baths to treat some of our products. We believe that we operate our business in material compliance with all environmental laws and regulations, do not anticipate any material expenditures in order to meet environmental requirements and do not believe that future compliance with such laws and regulations will have a material adverse effect on our financial condition or results of operations. However, we could incur operating costs or capital expenditures in complying with new or more stringent environmental requirements in the future or with current requirements if they are applied to our facilities in a way we do not anticipate. In addition, new or more stringent regulation of our energy suppliers could cause them to increase the cost of energy they supply us.

 

Our operations are also governed by many other laws and regulations covering our labor relationships, the zoning of our facilities, our general business practices and other matters. We believe that we are in material compliance with these laws and regulations and do not believe that future compliance with such laws and regulations will have a material adverse effect on our financial condition or results of operations.

 

Internet Information

 

Copies of the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through the Company’s Web site (www.gibraltar1.com) as soon as reasonably practicable after the Company electronically files the material with, or furnishes it to, the Securities and Exchange Commission.

 

 

The United States and worldwide capital and credit markets have recently experienced significant price and credit availability volatility, dislocations and disruptions.

 

These events have caused market prices of many stocks to fluctuate substantially, the spreads on prospective debt financings to widen considerably and have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in some cases have resulted in the unavailability of financing. Continued uncertainty in the capital and credit markets may negatively impact our business, including our ability to access additional financing at reasonable terms, which may negatively affect our ability to make future acquisitions. A prolonged downturn in the financial markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to further adjust our business plan accordingly. These events may also make it more difficult or costly for us to raise capital through the issuance of our equity securities and could reduce our net income by increasing our interest expense and other costs of capital. The disruptions in the financial markets may have a material adverse effect on the market value of our common stock.

 

The diminished availability of credit and other capital is also affecting the key end markets we serve including the residential construction and North American automotive markets. There is continued uncertainty as to the recovery of the worldwide capital and credit markets and the impact this period of volatility will continue to have on our key end markets. The results of the U.S. Government’s proposed measures to aid economic recovery including economic stimulus legislation and financial assistance to automotive original equipment manufacturers (OEMs) are also unknown. Further volatility in the worldwide capital and credit markets may continue to significantly impact the key end markets we serve and could result in further

reductions in sales volumes, increased credit and collection risks and may have other adverse effects on our business.

 

The building and construction industry and the automotive industry account for a significant portion of our sales, and reduced demand from these industries is likely to adversely affect our profitability and cash flow.

 

The residential construction and automotive markets in North America experienced the following declines in volume beginning in 2007 and continuing throughout 2008, with greater deceleration in the fourth quarter of 2008:

 

 

Net sales of our Building Products segment, which primarily sells products for use in the building and construction industry, accounted for approximately 80%, 78% and 77% of our net sales in 2008, 2007 and 2006, respectively. The majority of these sales are made to retail home improvement centers and wholesale distributors. In 2008, 2007 and 2006, The Home Depot accounted for approximately 8%, 10% and 11% of our net sales, respectively. A loss of sales to the building and construction industry, or to the specified customer, would adversely affect our profitability and cash flow as it did in the fourth quarter of 2008 and as expected in the first quarter of 2009. For example, excluding the effects of acquisitions, our sales of building products decreased during 2008 and 2007 due to a decline in demand in the new build residential building industry, causing a decrease in net sales in our historic building products businesses. This reduction in volume caused a decrease in our operating margins in that segment compared to prior years. This industry is cyclical, with product demand based on numerous factors such as interest rates, general economic conditions, consumer confidence and other factors beyond our control.

 

Net sales of our Processed Metal Products segment, which primarily sells products for use in the automotive industry, accounted for approximately 20%, 22% and 23% of our net sales in 2008, 2007 and 2006, respectively. We estimate that net sales of our products for use in the automotive industry accounted for approximately 67%, 77% and 79% of our Processed Metal Products segment’s net sales in 2008, 2007 and 2006, respectively. Such sales include shipments directly to auto manufacturers and to manufacturers of automotive components and parts. We had accounts receivable balances of $18.0 million from these customers as of December 31, 2008. The automotive industry experiences significant fluctuations in demand based on numerous factors such as general economic conditions, consumer confidence and other factors beyond their control. The domestic auto industry is currently experiencing a very difficult operating environment that has resulted and may continue to result in lower levels of vehicle production and therefore, continuing decreased demand for the products sold by our Processed Metal Products segment.

 

Many automotive manufacturers and their suppliers have publicly announced reduced production levels and elimination of excess manufacturing capacity including shut downs for extended periods, jobs eliminations and other cost reductions. Certain of our customers are currently in need of additional capital to continue operations and are seeking financial assistance from the U.S. Government. The financial difficulties of certain customers and any failed efforts under way by our customers to improve their overall financial condition could result in numerous changes that are beyond our control, including bankruptcies, additional customer plant closings, decreased production, changes in the product mix or distribution patterns, labor disruptions, unfavorable changes in our pricing, terms or service conditions, as well as other changes we may not currently anticipate. The occurrence of any of these events have and could continue to adversely impact our financial results.

 

Downturns in demand from the building and construction industry, the automotive industry or any of the other industries we serve, or a decrease in the prices that we can realize from sales of our products to customers in any of these industries, could continue to adversely affect our profitability and cash flows.

Our level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting our obligations.

 

We have total indebtedness of $356.4 million as of December 31, 2008. The following chart shows our level of indebtedness and certain other information as of December 31, 2008 (dollars in millions):

 

 

 

 

We may not be able to generate sufficient cash flow from profitability and other sources to service all of our indebtedness and we could be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

 

Our ability to make scheduled payments or to refinance our debt obligations depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

 

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We cannot assure you that we would be able to take any of these actions, that these actions would be successful and permit us to meet our scheduled debt service obligations or that these actions would be permitted under the terms of our existing or future debt agreements. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our Second Amended and Restated Credit Agreement dated August 31, 2007 (the Senior Credit Agreement) and our indenture agreement for our senior subordinated notes restrict our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds which we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due.

 

If we cannot make scheduled payments on our debt, we will be in default and, as a result:

 

 

Despite current indebtedness levels, we may still be able to incur substantially more debt. This could further exacerbate the risks described above.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the indenture for our senior subordinated notes do not fully prohibit us or our subsidiaries from doing so. Additionally, the Senior Credit Agreement provides commitments of up to $497.7 million in the aggregate, including a revolving credit facility of up to $375.0 million. At December 31, 2008, outstanding borrowings under the revolving credit facility were $89.1 million, $14.2 million of letters of credit were outstanding and $271.7 million was available to be borrowed. Under the terms of this agreement, we are required to repay all amounts outstanding under the revolving credit facility by August 30, 2012 and to repay $0.6 million on the term note each quarter until the balance is due on December 8, 2012. Our principal operating subsidiary, Gibraltar Steel Corporation of New York, is also a borrower under our Senior Credit Agreement and the full amount of our commitments under the revolving credit facility may be borrowed by that subsidiary.

 

In addition our substantial degree of indebtedness could have other important consequences, including the following:

 

 

Restrictive covenants may adversely affect our operations.

 

Our Second Amended and Restated Credit Agreement dated as of August 31, 2007 (the Senior Credit Agreement) and the indenture governing our senior subordinated notes contain various covenants that limit our ability to, among other things:

 

 

In addition, the restrictive covenants in the Senior Credit Agreement (which includes our $375.0 million revolving credit facility and our $122.7 million term loan facility) require us to maintain specified financial ratios and satisfy other financial condition tests. We must maintain a total funded debt to consolidated Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA as defined in the Senior Credit Agreement) ratio (total leverage ratio) not to exceed 4.25 to 1.00. Our interest coverage ratio, defined as the ratio of consolidated EBITDA to consolidated interest expense, must not be less than 2.75 to 1.00 and our net

worth must be at least $400.0 million plus 50% of cumulative net income in each fiscal quarter beginning with the quarter ended September 30, 2007.

 

Our total leverage ratio as defined in our Senior Credit Agreement approximated 3.05 to 1.00 as of December 31, 2008. Our interest coverage ratio as of December 31, 2008 approximated 4.06 to 1.00 and our net worth exceeded the minimum requirement as of the same date. As of December 31, 2008, we could have borrowed approximately $140 million more under our revolving credit facility without violating our total leverage ratio covenant or any other financial covenant. The total leverage ratio will increase during periods where EBITDA declines compared to the comparable prior year period. We experienced a larger loss from operations during the fourth quarter of 2008 compared to the fourth quarter of 2007, which resulted in less EBITDA being generated in fourth quarter of 2008. We are expecting EBITDA generated during the first quarter of 2009 to be lower than the first quarter of 2008. Therefore, permitted borrowings allowed under the financial covenants included in the Senior Credit Agreement could be less than actual borrowings at quarter ends during 2009.

 

Our ability to meet those financial ratios and tests can be affected by events beyond our control and we cannot assure you that we will meet those financial ratios and tests. A breach of any of these covenants 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 could result in us incurring additional financing fees that would be costly and adversely affect our profitability and cash flows. If a waiver was not provided, the lenders could elect to declare all amounts outstanding under such facility to be immediately due and payable and terminate all commitments to extend further credit. If such event of default and election occurs, the lenders under our Senior Credit Agreement would be entitled to be paid before current senior subordinated note holders receive any payment under our notes. In addition, if we were unable to repay those amounts, the lenders under the Senior Credit Agreement could proceed against the collateral granted to them to secure that indebtedness. We have pledged substantially all our assets as collateral under our Senior Credit Agreement. If the lenders under our Senior Credit Agreement accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay debt outstanding under our Senior Credit Agreement and our other indebtedness, including our senior subordinated notes, or borrow sufficient funds to refinance such indebtedness. Even if we are able to obtain new financing, it may not be on commercially reasonable terms, or terms that are acceptable to us. A breach of any of our covenants would have an adverse effect on our business, results of operations and cash flow.

 

We rely on a few customers for a significant portion of our net sales, and the loss of those customers would adversely affect us.

 

Some of our customers are material to our business and results of operations. In 2008, 2007 and 2006, our ten largest customers accounted for approximately 27%, 28% and 30% of our net sales. Our percentage of gross sales to our major customers may increase if we are successful in pursuing our strategy of broadening the range of products we sell to existing customers. In such an event, or in the event of any consolidation in the markets we serve, including retailers selling building products and the automotive industry, our gross sales may be increasingly sensitive to deterioration in the financial condition of, or other adverse developments with, one or more of our top customers. These customers are also able to exert pricing and other influence on us, requiring us to market, deliver and promote our products in a manner that may be more costly to us. Moreover, we generally do not have long-term contracts with our customers. As a result, although our customers periodically provide indications of their product needs and purchases, they generally purchase our products on an order-by-order basis, and the relationship, as well as particular orders, can be terminated at any time. The loss, bankruptcy, or significant decrease in business from any of our major customers would have a material adverse effect on our business, results of operations and cash flow.

 

Our business is highly competitive, and increased competition could reduce our gross profit, net income and cashflows.

 

The principal markets that we serve are highly competitive. Competition is based primarily on the precision and range of achievable tolerances, quality, price, raw materials and inventory availability and the ability to meet delivery schedules dictated by customers. Our competition in the markets in which we

participate comes from companies of various sizes, some of which have greater financial and other resources than we do and some of which have more established brand names in the markets we serve. Increased competition could force us to lower our prices or to offer additional services or enhanced products at a higher cost to us, which could reduce our gross profit, net income and cash flow and cause us to lose market share.

 

Our future operating results may be affected by fluctuations in raw material prices. We may not be able to pass on increases in raw material costs to our customers.

 

Our principal raw material is flat-rolled steel, which we purchase from multiple primary steel producers. The steel industry as a whole is cyclical, and at times availability and pricing can be volatile due to a number of factors beyond our control, including general economic conditions, domestic and worldwide demand, labor costs, competition, import duties, tariffs and currency exchange rates. This volatility can significantly affect our steel costs. Other significant raw materials we use include aluminum and resins which are also subject to volatility.

 

Global consolidation of the primary steel producers and increased demand from other nations such as China have continued to put upward pressure on market prices for steel. Additionally, we are required to maintain substantial inventories to accommodate the short lead times and just-in-time delivery requirements of our customers. Accordingly, we purchase raw materials on a regular basis in an effort to maintain our inventory at levels that we believe are sufficient to satisfy the anticipated needs of our customers based upon historic buying practices and market conditions. In an environment of increasing raw material prices, competitive conditions will impact how much of the steel price increases we can pass on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our customers, the profitability of our business and resulting cash flows could be adversely affected. In the event of rapidly decreasing raw material prices, we may be left to absorb the cost of higher cost inventory as customers receive reduced pricing upon the change in raw material costs. To the extent we are unable to match our costs to purchase raw materials to price reductions given to customers, the profitability of our business and resulting cash flows could be adversely affected.

 

Lead time and the cost of our products could increase if we were to lose one of our primary suppliers.

 

If, for any reason, our primary suppliers of flat-rolled steel, aluminum or other metals should curtail or discontinue deliveries to us in quantities we need and at prices that are competitive, our business could suffer. The number of available suppliers has been reduced in recent years due to industry consolidation and bankruptcies affecting steel and metal producers and this trend may continue. Our top ten suppliers accounted for 44% of our purchases during 2008. We could be significantly and adversely affected if delivery were disrupted from a major supplier or several suppliers. In addition, we do not have long-term contracts with any of our suppliers. If, in the future, we were unable to obtain sufficient amounts of the necessary metals at competitive prices and on a timely basis from our traditional suppliers, we may not be able to obtain such metals from alternative sources at competitive prices to meet our delivery schedules, which would have a material adverse effect on our results, profitability and cash flow.

 

Increases in energy and freight prices will increase our operating costs, and we may be unable to pass all these increases on to our customers in the form of higher prices for our products.

 

We use energy to manufacture and transport our products. In particular, our building products and processed metal products plants use considerable electricity. Our operating costs increase if energy costs rise. Although we do not believe we have experienced materially higher energy costs as a result of new or more stringent environmental regulations of our energy suppliers, such regulations could increase the cost of generating energy that is passed on to us. During periods of higher freight and energy costs, we may not be able to recover our operating cost increases through price increases without reducing demand for our products. In addition, we do not hedge our exposure to higher prices via energy futures contracts. Increases in energy prices will increase our operating costs and may reduce our profitability and cash flows if we are unable to pass all the increases on to our customers.

We may not be able to identify, manage and integrate future acquisitions successfully, and if we are unable to do so, we are unlikely to sustain our historical growth rates and our ability to repay our outstanding indebtedness may decline.

 

Historically, we have grown through a combination of internal growth plus external expansion through acquisitions. Although we intend to actively pursue our growth strategy in the future, we cannot provide any assurance that we will be able to identify appropriate acquisition candidates or, if we do, that we will be able to negotiate successfully the terms of an acquisition, finance the acquisition or integrate the acquired business profitably into our existing operations. Integration of an acquired business could disrupt our business by diverting management away from day-to-day operations and could result in contingent liabilities that were not anticipated. Further, failure to integrate successfully any acquisition may cause significant operating inefficiencies and could adversely affect our profitability and our ability to repay our outstanding indebtedness. Consummating an acquisition could require us to raise additional funds through additional equity or debt financing. Additional debt financing would increase our interest expense and reduce our cash flows otherwise available to reinvest in our business and neither debt nor equity financing may be available on satisfactory terms when required.

 

We are subject to information system security risks and systems integration issues could disrupt our internal operations.

 

We are dependent upon information technology for the distribution of information internally and also to our customers and suppliers. This information technology is subject to theft, damage or interruption from a variety of sources, including but not limited to malicious computer viruses and Trojan horses, security breaches and defects in design. Various measures have been implemented to manage our risks related to information system and network disruptions, but a system failure or failure to implement new systems properly could negatively impact our operations and financial results.

 

Our principal stockholders have the ability to exert significant control in matters requiring a stockholder vote and could delay, deter or prevent a change in control of the Company.

 

Approximately 17% of our outstanding common stock, including shares of common stock issuable under options and similar compensatory instruments granted which are exercisable, or which are vested or will vest within 60 days, are owned by Brian J. Lipke, who is the Chairman and Chief Executive Officer of our Company and Eric R. Lipke, Neil E. Lipke, Meredith A. Lipke and Curtis W. Lipke, all of whom are siblings, and certain trusts for the benefit of each of them. As a result, the Lipke family has influence over all actions requiring stockholder approval, including the election of our board of directors. Through their concentration of voting power, the Lipke family could delay, deter or prevent a change in control of our Company or other business combinations that might otherwise be beneficial to our Company. In deciding how to vote on such matters, the Lipke family may be influenced by interests that conflict with other shareholders. In addition, the Lipke family may have an interest in pursuing transactions that, in their judgment, enhance the value of their equity investment in the Company, even though those transactions may involve risks to our other shareholders.

 

We depend on our senior management team, and the loss of any member could adversely affect our operations.

 

Our success is dependent on the management and leadership skills of our senior management team. The loss of any of these individuals or an inability to attract, retain and maintain additional personnel could prevent us from successfully implementing our business strategy. We cannot assure you that we will be able to retain our existing senior management personnel or to attract additional qualified personnel when needed. We have not entered into employment agreements with any of our senior management personnel other than Brian J. Lipke, our Chairman of the Board and Chief Executive Officer, and Henning Kornbrekke, our President and Chief Operating Officer.

We could incur substantial costs in order to comply with, or to address any violations of, environmental laws.

 

Our operations and facilities are subject to a variety of federal, state, local and foreign laws and regulations relating to the protection of the environment and human health and safety. Failure to maintain or achieve compliance with these laws and regulations or with the permits required for our operations could result in substantial operating costs and capital expenditures, in addition to fines and civil or criminal sanctions, third-party claims for property damage or personal injury, cleanup costs or temporary or permanent discontinuance of operations. Certain of our facilities have been in operation for many years and, over time, we and other predecessor operators of these facilities have generated, used, handled and disposed of hazardous and other regulated wastes. Environmental liabilities could exist, including cleanup obligations at these facilities or at off-site locations where materials from our operations were disposed of or at facilities we divested, which could result in future expenditures that cannot be currently quantified and which could reduce our profits and cash flow. We may be held strictly liable for the contamination of these sites, and the amount of that liability could be material. Under the “joint and several” liability principle of certain environmental laws, we may be held liable for all remediation costs at a particular site. Changes in environmental laws, regulations or enforcement policies, including without limitation new or more stringent regulations affecting greenhouse gas emissions, could have a material adverse effect on our business, financial condition or results of operations.

 

Labor disruptions at any of our major customers or at our own manufacturing facilities could adversely affect our results of operations and cash flow.

 

Many of our important customers, including in the automotive industry, have heavily unionized workforces and have sometimes experienced significant labor disruptions such as work stoppages, slow-downs and strikes. A labor disruption at one or more of our major customers could interrupt production or sales by that customer and cause the customer to halt or limit orders for our products and services. Any such reduction in the demand for our products and services would adversely affect our net sales, results of operations and cash flow.

 

In addition, approximately 21% of our own employees are represented by unions through various collective bargaining agreements, one of which expired February 19, 2009 and others that are scheduled to expire between March 31, 2009 and July 31, 2011. It is likely that our unionized employees will seek an increase in wages and benefits at the expiration of these agreements, and we may be unable to negotiate new agreements without labor disruption. In addition, labor organizing activities could occur at any of our facilities. If any labor disruption were to occur at our facilities, we could lose sales due to interruptions in production and could incur additional costs, which would adversely affect our net sales, results of operations and cash flow.

 

Our operations are subject to seasonal fluctuations that may impact our cash flow.

 

Our net sales are generally lower in the first and fourth quarters primarily due to reduced activity in the building and construction industry due to colder, more inclement weather, as well as customer plant shutdowns in the automotive industry due to holidays and model changeovers. In addition, quarterly results may be affected by the timing of large customer orders. Therefore, our cash flow from operations may vary from quarter to quarter. If, as a result of any such fluctuation, our quarterly cash flows were significantly reduced, we may not be able to service our indebtedness or meet covenant compliance. A default under any of our indebtedness could prevent us from borrowing additional funds and limit our ability to pay interest or principal, and allow our senior secured lenders to enforce their liens against our personal property.

 

Economic, political and other risks associated with foreign operations could adversely affect our financial results.

 

Although the majority of our business activity takes place in the United States, we derive a portion of our revenues and earnings from operations in foreign countries, and are subject to risks associated with doing business internationally. Our sales originating outside the United States represented approximately 11% of our

consolidated net sales in fiscal 2008. We have facilities in Canada, Germany, Poland and England. The risks of doing business in foreign countries include the potential for adverse changes in the local political climate, in diplomatic relations between foreign countries and the United States or in governmental policies, laws or regulations, terrorist activity that may cause social disruption, logistical and communications challenges, costs of complying with a variety of laws and regulations, difficulty in staffing and managing geographically diverse operations, deterioration of foreign economic conditions, currency rate fluctuations, foreign exchange restrictions, differing local business practices and cultural considerations, restrictions on imports and exports or sources of supply and changes in duties or taxes. Adverse changes in any of these risks could adversely affect our net sales, results of operations and cash flows. We believe that our business activities outside of the United States involve a higher degree of risk than our domestic activities.

 

Disruptions to our business or the business of our customers or suppliers, could adversely impact our operations and financial results.

 

Business disruptions, including increased costs for or interruptions in the supply of energy or raw materials, resulting from severe weather events such as hurricanes, floods, blizzards, from casualty events, such as fires or material equipment breakdown, from acts of terrorism, from pandemic disease, from labor disruptions, or from other events such as required maintenance shutdowns, could cause interruptions to our businesses as well as the operations of our customers and suppliers. Such interruptions could have an adverse effect on our operations and financial results.

 

Variable rate indebtedness subjects us to interest rate risk which could cause our debt service obligations to increase significantly.

 

Certain of our borrowings, primarily borrowings under our Senior Credit Agreement, are, and are expected to continue to be, at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even if the amount borrowed remained the same, and our net income would decrease. Assuming all revolving loans and the term loan were fully drawn or funded on December 31, 2008, as applicable, each quarter point change in interest rates would result in a $1.2 million change in annual interest expense on debt outstanding under our Senior Credit Agreement.

 

 

None

 

We maintain our corporate headquarters in Buffalo, New York and conduct business operations in facilities located throughout the United States and in Canada, England, Germany, Poland and China.

 

We believe that our facilities, listed below, and their equipment are effectively utilized, well maintained, in good condition and will be able to accommodate our capacity needs through 2009.

 

 

 

 

 

From time to time, the Company is named a defendant in legal actions arising out of the normal course of business. The Company is not a party to any pending legal proceedings the resolution of which the management of the Company believes will have a material adverse effect on the Company’s results of operations or financial condition or to any other pending legal proceedings other than ordinary, routine litigation incidental to its business. The Company maintains liability insurance against risks arising out of the normal course of business.

 

 

No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2008.

 

 

As of December 31, 2008 there were 147 shareholders of record of the Company’s common stock. However, the Company believes that it has a significantly higher number of shareholders because of the number of shares that are held by nominees.

 

The Company’s common stock is traded in the over-the-counter market and quoted on the NASDAQ Stock Exchange — Global Select Market (“NASDAQ”) under the symbol “ROCK.” The following table sets forth the high and low sale prices per share for the Company’s common stock for each quarter of 2008 and 2007 as reported on the NASDAQ Stock Exchange.

 

 

The Company declared dividends of $0.05 per share in each of the first, second, third and fourth quarters of 2008 and $0.10 per share in the first quarter of 2007 and $0.05 per share in each of the second, third and fourth quarters of 2007.

 

Cash dividends are declared at the discretion of the Company’s Board of Directors. The Board of Directors reviews the dividend quarterly and establishes the dividend rate based upon such factors as the Company’s earnings, financial condition, capital requirements, debt covenant requirements and/or other relevant conditions. Although the Company expects to continue to declare and pay cash dividends on its common stock in the future when earnings are available, the Company cannot assure that either cash or stock dividends will be paid in the future or that, if paid, the dividends will be paid in the same amount or at the same frequency as paid in the past. The Company believes the first quarter of 2009 will be a very challenging period given the uncertainty in the general economy and the related effect on the residential construction and North American automotive markets. Accordingly, the Company will focus on liquidity preservation to help ensure its ability to fund its business operations, growth opportunities that may arise and further reduce its indebtness. As a result, the Company’s Board of Directors has decided to suspend quarterly dividends with the expectation of reinstating payments when economic conditions and the Company’s profitability improve.

 

Equity Compensation Plan Information

 

The following table summarizes information concerning securities authorized for issuance under the Company’s stock option plans:

 

 

 

PERFORMANCE GRAPH

 

The following information in this Item of the Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934, as amended (the Exchange Act), or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that we specifically incorporate such information into such a filing.

 

The performance graph shown below compares the cumulative total shareholder return on the Company’s common stock, based on the market price of the common stock, with the total return of the S&P SmallCap 600 Index and the S&P SmallCap 600 Industrials Index for the five-year period ended December 31, 2008. The comparison of total return assumes that a fixed investment of $100 was invested on December 31, 2003 in common stock and in each of the foregoing indices and further assumes the reinvestment of dividends. The stock price performance shown on the graph is not necessarily indicative of future price performance.

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Gibraltar Industries Inc., The S&P Smallcap 600 Index
And The S&P SmallCap 600 Industrials

 

 

 

 

The following selected historical consolidated financial data for each of the five years in the period ended December 31, 2008 have been derived from the Company’s audited financial statements. The selected historical consolidated financial data presented in Item 6 are qualified in their entirety by, and should be read in conjunction with, the Company’s audited consolidated financial statements and notes thereto contained in Item 8 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in Item 7 of this Annual Report on Form 10-K.

 

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s risk factors and its consolidated financial statements and notes thereto included in Item 1A and Item 8, respectively, of this Annual Report on Form 10-K. Certain information set forth herein Item 7 constitutes “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based, in whole or in part, on management’s beliefs, estimates, assumptions and currently available information. For a more detailed discussion of what constitutes a forward-looking statement and of some of the factors that could cause actual results to differ materially from such forward-looking statements, please refer to the “Safe Harbor Statement” on page 2 of this Annual Report on Form 10-K.

 

Overview

 

We are a leading manufacturer, processor and distributor of residential and commercial building products and processed metal products for the building and construction, industrial, and automotive markets. Our building products are used by homeowners and builders to provide structural and architectural enhancements for residential and commercial building projects. Our processed metal products are comprised primarily of steel shaped to specific widths and hardened to certain tolerances as required by our customers. We serve customers in a variety of industries in all 50 states and throughout the world. We operate 59 facilities in 26 states, Canada, England, Germany, and Poland, giving us a broad platform for just-in-time delivery and support to our customers

 

Beginning in 2007 and continuing throughout 2008 with greater deceleration in the fourth quarter of 2008, the residential construction and automotive markets in North America experienced the following declines in volume:

 

 

The decrease in residential housing starts and North American auto builds had a significant impact on the operations of our Building Products and Processed Metal Products segments, respectively, by contributing to decreased sales volumes in each segment. In an effort to respond to these market forces during the past two years, we have focused on operational excellence through lean manufacturing initiatives and facility consolidations. Our efforts have resulted in the closing or consolidation of fifteen facilities and ten facilities during 2008 and 2007, respectively. These facility consolidations include the relocation of the manufacturing capabilities of six plants to the Company’s other manufacturing facilities during 2008. Two plants were shut down during 2007 and their manufacturing capabilities were moved to other facilities.

 

Our efforts to consolidate facilities and streamline operations to match the current demand for our products have resulted in a 17% decrease in our workforce from approximately 3,950 employees as of December 31, 2007 to 3,270 employees as of December 31, 2008. We have focused on controlling our spending in an effort to remain as a low cost supplier to our customers.

 

Many of our lean manufacturing initiatives have focused on reducing the working capital required to manage our business. During 2008, our achievements in this effort have resulted in an $83.5 million reduction in working capital from $306.5 million as of December 31, 2007 to $223.0 million as of December 31, 2008. This reduction in working capital plus other cash flows generated from operating and investing activities has allowed us to reduce our total debt outstanding by $131.5 million.

 

These lean manufacturing initiatives and facility consolidations plus other actions led to significant improvement in the first nine months of 2008 prior to when the banking and credit markets sharply deteriorated in October 2008. The steps management took during the past two years led to much improved

operating results during the first nine months of the year as evidenced below (amounts below were restated to reflect the results of SCM in discontinued operations and are in thousands except for per share data):

 

 

Our net sales and profits increased during 2008 due to the incremental contributions provided by the 2007 acquisitions of Dramex, Noll and Florence and better pricing on sales within our Processed Metal Products segment partially offset by declining volumes from our residential building products and automotive products due to the downturn in demand in these markets. We increased our profitability by better aligning our customer selling prices to our product costs and decreased spending through facility consolidation efforts and lean manufacturing initiatives.

 

However, the improved operating results did not carry over into the fourth quarter of 2008. The worldwide banking and credit turmoil in the fourth quarter of 2008 significantly contributed to a dramatic downturn of the global economy and the key end markets we serve. These factors led to a significant decrease in the Company’s sales volume and profitability as evidenced below (amounts in thousands except for per share data):

 

 

The decrease in net sales was a result of significant turmoil within the global economy and its negative impact on the new build housing and the North American auto markets. As a result of the lower sales volume experienced by the Company, gross profit as a percentage of sales declined to 11.9% from 15.5% for the fourth quarters of 2008 and 2007, respectively, due to fixed cost becoming a higher percentage of net sales and the FIFO (first-in, first-out inventory valuation method) effect on margins in some product lines as material costs and product pricing declined as a result of commodity raw material pricing declines. Our Processed Metal Products segment also recognized a $2.7 million charge to bad debt expense during the fourth quarter of 2008 due to an automotive customer filing for bankruptcy.

 

Outlook

 

As in the fourth quarter of 2008, there is little forward visibility on either the economy or our industry, therefore, we are not providing numerical guidance for 2009. We see the first quarter as again being very challenging, with only marginally better results than the fourth quarter of 2008 and we are expecting an operating loss in the first quarter as results continue to reflect the extremely difficult global economic environment. In the meantime, we continue aggressive efforts to increase liquidity and reduce costs and will take additional actions as market conditions warrant. We believe that the aggressive actions taken during the past two years to streamline and improve the efficiency of our business will position our company to generate marked improvements in performance when economic and end market conditions return to more normal levels.

Divestitures

 

As part of our continuing evaluation of our businesses’ past performance and probable future benefits of our companies, we determined that our copper powder metals business, SCM Metal Products (SCM), no longer fit our long-term strategic goals. Effective October 3, 2008, we sold the outstanding and issued capital stock of our SCM subsidiaries for a purchase price of $43,702,000. The final purchase price is net of working capital adjustments and transaction fees. SCM was formerly reported as a part of the Processed Metal Products segment.

 

During 2007, we determined that both our steel service center (formerly part of the Processed Metal Products segment) and cabinet manufacturing (formerly part of the Building Products segment) businesses no longer provided a strategic fit with our long-term growth and operational objectives. In August 2007, we sold the operating assets of our bath cabinet manufacturing business. In September 2007, we committed to a plan to dispose of the assets of our steel service center business. We sold the majority of the assets of these businesses during the remaining period of 2007 and 2008.

 

During 2006, we determined that our thermal processing (formerly reported as a reportable segment) and strapping (formerly part of the Processed Metal Products segment) businesses no longer provided a strategic fit with our long-term growth and operational objectives. In June 2006, in separate transactions, we sold certain assets and liabilities of both our thermal processing and strapping businesses.

 

All divestitures described above are properly classified as discontinued operations in the Company’s consolidated financial statements and notes thereto. See Note 10 of the Company’s consolidated financial statements for more information regarding the divestitures described above in Item 8 of this Annual Report on Form 10-K.

 

Acquisitions

 

We did not acquire any new businesses during 2008.

 

We acquired three businesses with complementary market positions in 2007. In March 2007, we acquired the stock of the Dramex Corporation (Dramex), a manufacturer, marketer and distributor of a diverse line of expanded metal products through its locations in the United States, Canada and England. In April 2007, we acquired certain assets and liabilities of Noll Manufacturing Company and affiliates (Noll), a manufacturer, marketer and distributor of products for the building, heating, ventilation and air conditioning (HVAC) and lawn and garden components of the building products market through its locations in California, Washington and Oregon. In August 2007, we acquired the stock of the Florence Corporation (Florence), a Kansas manufacturer of storage products for mail and package delivery.

 

We also acquired three businesses during 2006. In June 2006, we acquired Home Impressions, Inc. (Home Impressions) and certain assets of Steel City Hardware, LLC (Steel City) in separate transactions. Home Impressions markets and distributes mailboxes and accessories and the assets acquired from Steel City are used to manufacture mailboxes and postal accessories. In November 2006, we acquired all the outstanding stock of The Expanded Metal Company Limited and Sorst Streckmetell GmbH (EMC). EMC has locations in England, Germany and Poland and manufactures, markets and distributes a diverse line of expanded metal products used in the commercial and industrial sectors of the building products market.

 

All the acquisitions described above are reported as a part of our Building Products segment. See Note 6 of the Company’s consolidated financial statements for more information regarding the acquisitions described above in Item 8 of this Annual Report on Form 10-K.

Results of Operations

 

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

 

The following table sets forth selected results of operations data (in thousands) and its percentages of net sales for the years ended December 31:

 

 

 

 

The following table sets forth the Company’s net sales by reportable segment for the years ended December 31 (in thousands):

 

 

Net sales increased by $33.6 million, or 2.8%, to $1,232.3 million in 2008, compared to 2007. The increase in net sales was attributable to the 2007 acquisitions of Dramex, Noll and Florence which provided incremental net sales of $72.8 million during 2008. Net sales by our historic businesses decreased $39.2 million, or 3.3%. This decrease in net sales was primarily the result of volume decreases due to the downturn in residential building and North American auto markets.

 

Net sales in our Building Products segment increased 6.2%, or $57.8 million, to $986.8 million in 2008 compared to 2007. Excluding the $72.8 million in incremental net sales provided by the 2007 acquisitions of Dramex, Noll and Florence, net sales decreased $15.0 million, or 1.6%, from the prior year. The decrease in net sales from our recurring operations was the net result of declining volumes from our residential products due to the effects of the slowdown in the residential housing market which offset higher customer selling prices on products used in the commercial, industrial, architectural and international markets.

 

Net sales in our Processed Metal Products segment decreased $24.2 million, or 9.0%, to $245.5 million in 2008 compared to 2007. Although the cost of steel was higher for much of 2008 which led to increased selling

prices for our strip steel products, a significant decline in volume due to decreased North American automotive production led to a decrease in net sales for our Processed Metal Products segment.

 

Gross margin increased to 19.2% in 2008 from 18.0% in 2007. The increase in gross margin was a result of a better alignment of customer selling prices to raw material costs and lower costs due to lean manufacturing initiatives and facility consolidations, partially offset by the effects of a $2.5 million increase in exit activity and impairment charges, an increase in freight costs and reductions in volume. The 2007 acquisitions of Dramex and Florence also contributed to higher gross margins for the year ended December 31, 2008.

 

Selling, general and administrative expenses increased approximately $15.2 million, or 10.9%, to $154.6 million in 2008, compared to 2007. The 2007 acquisitions noted above caused an increase of $8.5 million in 2008. Excluding the effect of the acquisitions, selling, general and administrative costs increased $6.7 million, or 4.8% over the prior year. Selling, general and administrative expense as a percentage of net sales increased 0.9%, to 12.5% in 2008 from 11.6% in 2007 as a result of a $2.7 million charge to bad debt expense due to an automotive customer filing for bankruptcy, a $1.4 million increase in exit activity costs, a $1.1 million charge for software no longer in use, increased amortization of acquired intangible assets due to the 2007 acquisitions, and higher incentive compensation costs due to improved operating results.

 

The following table sets forth the Company’s income from operations and income from operations as a percentage of sales by reportable segment for the years ended December 31 (in thousands):

 

 

 

Income from operations as a percentage of net sales in our Building Products segment for the year ended December 31, 2008 decreased to 9.6% from 9.9% in 2007. Gross margin percentage remained flat year over year as result of our efforts to reduce manufacturing costs through lean manufacturing initiatives and facility consolidation. These cost reductions were offset by increased exit activity costs and impairment charges of $3.9 million. Selling, general and administrative costs also increased $1.8 million from the prior year due to increased amortization of acquired intangible assets from our 2007 acquisitions.

 

Income from operations from our Processed Metal Products segment increased to 7.2% of net sales for the year ended December 31, 2008 from 4.9% for the prior year period. The increase in operating margin percentage is a result of lower costs due to the completion of our consolidation of our strip steel business and a better alignment of customer selling prices to raw material costs.

 

Corporate expenses increased $1.6 million, or 5.5%, to $30.7 million for 2008 from $29.1 million for 2007. The increase in corporate expenses was largely due to a $1.1 million charge for software no longer in use and higher incentive compensation costs due to improved operating results.

Interest expense decreased 10.2% or $3.3 million, to $29.2 million in 2008 from $32.5 million in 2007. The decrease in interest was the result of a combination of lower average borrowings and lower average interest rates.

 

Income taxes related to continuing operations for 2008 approximated $19.6 million, an effective tax rate of 36.9% compared to $17.5 million and an effective tax rate of 39.3% in 2007. The lower effective tax rate for 2008 reflects the benefit of a decrease in our overall state income tax and foreign income tax as a percentage of pretax income due to adjustments recorded after completing state and foreign tax returns, an increase in income generated by foreign locations, and the result of a higher proportion of permanently non-deductible expenses as a percentage of pre-tax income in 2007.

 

Loss from discontinued operations decreased $4.4 million to $9.3 million in 2008 compared to a $13.7 million loss in 2007. The loss in the current year was primarily a result of a $11.0 million after-tax loss recorded from the sale of SCM. The loss in 2007 was primarily a result of losses recognized for the liquidation of our steel service center and bath cabinet manufacturing businesses.

 

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

 

The following table sets forth selected results of operations data (in thousands) and its percentages of net sales for the years ended December 31:

 

 

 

 

The following table sets forth the Company’s net sales by reportable segment for the years ended December 31 (in thousands):

 

 

Net sales increased by $72.9 million, or 6.5%, to $1,198.7 million in 2007 compared to 2006. The increase in net sales was attributable to the acquisitions of EMC in November 2006, Dramex in March 2007, Noll in April 2007 and Florence in August 2007, which provided an increase of $156.0 million in net sales in 2007. The decrease in net sales excluding the effect of these acquisitions was the result of volume decreases due to the downturn in the new build housing market, partially offset by a slight increase from our Processed Metal Products segment, primarily a function of higher steel costs causing an increase in selling price.

 

Net sales in our Building Products segment increased 7.7% or $66.7 million, to $929.0 million in 2007 compared to 2006. The increase was the result of the acquisitions discussed above, which provided an additional $156.0 million. The decrease in net sales excluding the effect of the acquisitions noted above was the result of sales declines in our historic building products business, the result of volume decreases due to the downturn in the new build housing market.

 

Net sales in our Processed Metal Products segment increased $6.1 million, or 2.3%, to $269.7 million in 2007 compared to 2006. The increase in net sales was the result of increased material costs that resulted in higher selling prices which offset volume decreases.

 

Gross margin decreased to 18.0% in 2007 from 21.4% in 2006. The decrease in gross margin is attributable to lower volumes from our Building Products segment which are not as efficient at lower volumes and higher material and freight costs as a percentage of sales in 2007 compared to 2006.

 

Selling, general and administrative expenses increased approximately $10.6 million, or 8.2%, to $139.5 million in 2007 compared to 2006. The acquisitions noted above caused an increase of $15.2 million in 2007. Excluding the effect of the acquisitions, selling, general and administrative costs decreased $4.6 million, or 3.6%. Selling, general and administrative expense as a percentage of net sales increased 0.1%, to 11.6% in 2007 from 11.5% in 2006, due mainly to higher compensation costs.

 

The following table sets forth the Company’s income from operations and income from operations as a percentage of sales by reportable segment for the years ended December 31 (in thousands):

 

 

Income from operations as a percentage of net sales in our Building Products segment decreased to 9.9% in 2007 from 14.8% in 2006. The decrease in income from operations as a percentage of net sales was mainly the result of lower sales volumes due to the slowdown in new housing starts. The Buildings Products segment is not as efficient at lower volumes. Higher material and freight costs as a percentage of sales also increased year over year.

 

Income from operations as a percentage of net sales in our Processed Metal Products segment declined to 4.9% in 2007 from 5.7% in 2006. The decrease was mainly the result of higher material costs as a percentage of net sales. We were able to increase our selling price to compensate for rising raw material costs, however, the rising costs drove our margin as a percentage of sales down.

 

Corporate expenses decreased $1.9 million, or 6.1%, to 29.1 million for 2007 from $31.0 million in 2006. The decrease in corporate expenses is due primarily to a decrease in incentive compensation due to achieving better operating results during 2006.

 

Interest expense increased 24.0% or $6.3 million, to $32.5 million in 2007 from $26.2 million in 2006. The increase in interest was the result of higher average borrowings in 2007. Borrowings were increased during 2007 to finance the acquisitions of Dramex, Noll and Florence.

 

In December 2006, we recognized an impairment of our investment in our Gibraltar DFC Strip Steel, LLC joint venture. We determined that our investment in this joint venture was other than temporarily impaired and recognized a $12.9 million charge related to the joint venture at the end of 2006. This impairment was the primary reason for the significant loss recorded in the equity in partnerships’ (income) loss during 2006. In 2007, we recognized a income from our equity in partnerships’ (income) loss as we no longer incurred losses from the joint venture noted above.

 

Income taxes related to continuing operations for 2007 approximated $17.5 million based upon an effective tax rate of 39.3% compared to 37.8% in 2006. The increase in the effective tax rate during 2007 was the result of a higher proportion of permanently non-deductible expenses as a percentage of pre-tax income.

 

We experienced a loss from discontinued operations of $13.7 million in 2007 compared to income from discontinued operations of $12.1 million in 2006. The loss in 2007 was primarily a result of losses recognized for the liquidation of our steel service center and bath cabinet manufacturing businesses.

 

Liquidity and Capital Resources

 

At December 31, 2008, the Company had total liquidity of $283.0 million consisting of $11.3 million of cash and cash equivalents and $271.7 million of availability under our $375.0 million revolving credit facility. Our liquidity increased $47.0 million from $236.0 million as of December 31, 2007 mainly due to increased availability under our revolving credit facility.

 

The restrictive covenants in our 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, require us to maintain specified financial ratios and satisfy other financial condition tests. Our total leverage ratio as defined in the Senior Credit Agreement approximated 3.05 to 1.00 as of December 31, 2008. The Senior Credit Agreement does not at any time permit our total leverage ratio to exceed 4.25 to 1.00. Our interest coverage ratio as of December 31, 2008 approximated 4.06 to 1.00. The Senior Credit Agreement requires our interest coverage (as defined with the agreement) to exceed 2.75 to 1.00. We also had net worth at December 31, 2008 that exceeded $400.0 million plus 50% of cumulative net income in each fiscal quarter beginning with the quarter ended September 30, 2007 as required per the Senior Credit Agreement.

 

As of December 31, 2008, we could have borrowed approximately $140 million more under our revolving credit facility without violating our total leverage ratio covenant or any other financial covenant. The total leverage ratio will increase during periods where Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA as defined in the Senior Credit Agreement) declines compared to the comparable prior year period. We experienced a larger loss from operations during the fourth quarter of 2008 compared to the

fourth quarter of 2007, which resulted in less EBITDA being generated in the fourth quarter of 2008. We are expecting EBITDA generated during the first quarter of 2009 to be lower than the first quarter of 2008. Therefore, permitted borrowings allowed under the financial covenants included in the Senior Credit Agreement could be less than actual borrowings at quarter ends during 2009. If this happens, we would be in breach of one of our restrictive debt covenants. A breach of any of the covenants 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 could result in us 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 covenants closely and currently expect to remain in compliance throughout 2009. A detailed description of our risks of default is included in the risk factors included in item 1A of this Annual Report on Form 10-K.

 

The world wide economic downturn during the second half of 2008 has had a significant impact on the liquidity in the financial markets. We continue to monitor the counter party risk of all of our creditors and focus on maintaining adequate liquity to fund our principal capital requirements. One of the banks in our syndicate was acquired by another bank in our syndicate in December 2008. We continue to monitor the financial condition of the members in our syndicate, and based on the monitoring, believe that our current banking relationships will continue to provide the liquidity needed to support our principal capital requirements throughout 2009.

 

Throughout 2008, we focused on increasing positive cash flow, working capital management and debt reduction. We see the first quarter of 2009 as being a very challenging period for our Company given the uncertainty in the general economy and the related effects on the residential construction and North American 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 decided to suspend quarterly dividends with the expectation of reinstating payments when economic conditions and our profitability improve. 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.

 

Our principal capital requirements are to fund our operations, including working capital, the purchase and funding of 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.

 

We regularly consider various strategic business opportunities including acquisitions. We evaluate such potential acquisitions on the basis of our ability to enhance our existing products, operations, or capabilities, as well as provide access to new products, markets and customers. Although no assurances can be given that any acquisition will be consummated, we may finance such acquisitions through a number of sources including internally available cash resources, new debt financing, the issuance of equity securities or any combination of the above if they are available at acceptable terms.

Cash Flows

 

The following table sets forth selected cash flow data (in millions):

 

 

Net cash provided by continuing operations for the year ended December 31, 2008 was approximately $98.1 million compared to net cash provided by continuing operations of approximately $134.3 million for the year ended December 31, 2007. Net cash provided by continuing operations for the year ended December 31, 2008 was primarily the result of income from continuing operations of $33.4 million combined with depreciation and amortization of $33.9 million and a decrease in working capital requirements of $18.4 million. Net cash provided by continuing operations for the year ended December 31, 2007 was primarily the result of income from continuing operations of $26.9 million combined with depreciation and amortization of $31.0 million and a $68.0 million reduction in working capital.

 

During 2008, our working capital decreased by approximately $83.5 million, or 27.2%, to approximately $223.0 million at December 31, 2008 from $306.5 million at December 31, 2007. This decrease in working capital was primarily driven by our focus on working capital efficiency. The net change included a decrease in the net assets of discontinued operations of $35.4 million, a decrease in accounts receivable of $17.6 million, a decrease in cash and cash equivalents of $24.0 million, a decrease in other current assets of $2.2 million, a decrease in inventories of $4.2 million and an increase in accrued expenses of $5.9 million partially offset by a $5.6 million reduction in accounts payable.

 

Net cash provided by investing activities from continuing operations for the year ended December 31, 2008 was approximately $7.6 million, resulting primarily from cash proceeds received on the sale of our SCM subsidiaries of $35.2 million partially offset by capital expenditures of $21.6 million and additional acquisition costs of $8.7 million primarily related to a payment to the former owners of Florence for a 338(h)(10) tax election to make the goodwill acquired deductible in our tax return. Net cash used in investing activities from continuing operations for the year ended December 31, 2007 was approximately $209.0 million, resulting primarily from net cash paid for the acquisitions of Florence, Noll and Dramex in the amount of $206.6 million and capital expenditures of $17.7 million partially offset by net proceeds of $11.9 million from the sale of certain assets of our steel service center and bath cabinet manufacturing businesses.

 

Net cash used in financing activities from continuing operations for the year ended December 31, 2008 was $137.9 million, consisting primarily of net payments of $131.5 million on long-term debt and dividend payments of $6.0 million. Payments of long-term debt made during 2008 were the result of cash flows from operations and investing activities. Net cash provided by financing activities from continuing operations for the year ended December 31, 2007 was $73.2 million, consisting primarily of net borrowings of long-term debt of $80.8 million, partially offset by dividend payments of $6.0 million. The borrowings in 2007 were primarily used to fund acquisitions while the repayments were the result of cash flows from operations.

 

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 Second Amended and Restated Credit Agreement dated August 31, 2007 (the 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 December 31, 2008, outstanding borrowings under the revolving credit facility were $89.1 million, $14.3 million of letters of credit were outstanding and $271.6 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 2008, we borrowed $53.0 million and repaid $121.8 million on the revolving facility and made payments of $61.7 million on the term loan. At December 31, 2008, we had $59.9 million outstanding on the term loan.

 

The Company’s $204.0 million of 8% senior subordinated 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 notes agreement), 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 indenture for such notes), 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 December 31, 2008, we had $201.4 million, net of discount, of our 8% senior subordinated notes outstanding.

 

The Senior Credit Agreement includes a guarantee by each of our material domestic subsidiaries other than Gibraltar Steel Corporation of New York, which is a co-borrower. Debt outstanding under the Senior Credit Agreement and the related guarantees are secured by a first priority security interest (subject to permitted liens as defined in the agreement) in substantially all the tangible and intangible assets of our Company and our material domestic subsidiaries, subject to certain exceptions, and a pledge of 65% of the voting stock of our foreign subsidiaries. The 8% notes are guaranteed by each of our material domestic subsidiaries.

 

The Senior Credit Agreement contains various affirmative and negative covenants customary for similar working capital facilities, including, but not limited to, several financial covenants. We must maintain a total funded debt to consolidated Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA as defined in the Credit Agreement) ratio (total leverage ratio) not to exceed 4.25 to 1.00. We must also maintain a senior funded debt to consolidated EBITDA ratio not to exceed 3.25 to 1.00. Our interest coverage ratio, defined as the ratio of consolidated EBITDA to consolidated interest expense, must not be less than 2.75 to 1.00 and our net worth must be at least $400.0 million plus 50% of cumulative net income in each fiscal quarter beginning with the quarter ended September 30, 2007. The notes agreement for our 8% senior subordinated notes also contains provisions that limit additional borrowings and require minimum net worth and financial ratios. At December 31, 2008, the Company was in compliance with the terms and provisions of all its financing agreements. We will continue to monitor our compliance with our restrictive covenants closely as reductions in EBITDA generated during the fourth quarter of 2008 and potentially throughout 2009 could lead to tightness within our total leverage ratio debt covenant at quarters ended during 2009. We currently expect to remain in compliance with our restrictive covenants throughout 2009.

 

Off Balance Sheet Arrangements

 

The Company does not have any off balance sheet arrangements.

Contractual Obligations

 

The following table summarizes by category our Company’s expected future cash outflows associated with contractual obligations in effect at December 31, 2008:

 

 

 

 

Critical Accounting Policies

 

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make decisions based upon estimates, assumptions, and factors it considers relevant to the circumstances. Such decisions include the selection of applicable principles and the use of judgment in their application, the results of which could differ from those anticipated.

 

A summary of the Company’s significant accounting policies are described in Note 1 of the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

 

Our most critical accounting policies include:

 

 

Management reviews the estimates, including the allowance for doubtful accounts and inventory reserves on a regular basis and makes adjustments based on historical experience, current conditions and future expectations. Management believes these estimates are reasonable, but actual results could differ from these estimates.

 

Valuation of accounts receivable.  Our accounts receivable represent those amounts that have been billed to our customers but not yet collected. As of December 31, 2008 and 2007, allowances for doubtful accounts of $6.7 million and $3.3 million, or 5% and 2% of gross accounts receivable, were recorded, respectively. We record an allowance for doubtful accounts based on the portion of those accounts receivable that we believe are potentially uncollectible based on various factors, including historical experience, creditworthiness of customers and current market and economic conditions. If the financial condition of customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required. Changes in judgments on these factors could impact the timing of costs recognized. The allowance for doubtful accounts as of December 31, 2008 increased from the prior year primarily due to a $2.7 million charge to bad debts recorded in the fourth quarter of 2008 relating to an automotive customer filing for bankruptcy.

 

Valuation of inventories.  We state our inventories at the lower of cost or market. We determine the cost basis of our inventory on a first-in-first-out basis using either actual costs or a standard cost methodology that approximates actual cost. On a regular basis, we calculate an estimated market value of our inventory, considered to be the prevailing selling price for the inventory less the cost to complete and sell the product. We compare the current carrying value of our inventory to the estimated market value to determine whether a reserve to value inventory at the lower of cost or market is necessary. As of December 31, 2008 and 2007, no reserve to value our inventory to the lower of cost or market was considered necessary.

 

We regularly review inventory on hand and record provisions for excess, obsolete and slow-moving inventory based on historical and current sales trends. We recorded reserves for excess, obsolete and slow moving inventory of $5.0 million and $5.5 million, or 3% and 3% of gross inventories, as of December 31, 2008 and 2007, respectively. Changes in product demand and our customer base may affect the value of inventory on hand, which may require higher provisions for obsolete inventory.

 

Allocation to purchase price of acquired assets and liabilities.  When we acquire a new business, we must allocate the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective estimated fair market values. We record any premium over the fair market value of the net assets acquired as goodwill. The allocation of the purchase price involves judgments and estimates both in characterizing the assets and in determining their fair market value. The way we characterize the assets has important implications, as long-lived assets with definitive lives, for example, are depreciated or amortized, whereas goodwill is tested annually for impairment, as explained below. With respect to determining the fair market value of assets, the most difficult estimations of individual fair market values are those involving long-lived assets, such as property, plant and equipment and identified intangible assets. We use all available information to make these fair market value determinations and engage an independent valuation specialist to assist in the fair market value determination of the acquired long-lived assets. The following summarizes the amount of purchase price allocated to property, plant and equipment, identified intangible assets and goodwill for the acquisitions we completed in 2007 (in millions):

 

 

Due to the subjectivity inherent in determining the estimated fair market value of long-lived assets and the significant number of business acquisitions that we have completed, we believe that the recording of acquired assets and liabilities is a critical accounting policy.

Impairment of depreciable and amortizable long-lived assets.  We test long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable and exceeds their fair market value. The following summarizes the value of long-lived assets subject to impairment testing when events or circumstances indicate potential impairment as of December 31, 2008 (in millions):

 

 

Impairment exists if the carrying amount of the asset in question exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. The impairment loss would be measured as the amount by which the carrying amount of a long-lived asset exceeds its fair market value as determined by discounted cash flow method or in the case of negative cash flow, an independent market appraisal of the asset.

 

Goodwill and other indefinite-lived intangible asset impairment testing.  Our goodwill balance, $443.9 million as of December 31, 2008, is subject to impairment testing. We test goodwill for impairment at least annually, as of October 31, and more frequently whenever events occur or circumstances change that indicate there may be an impairment. These events or circumstances could include a significant long-term adverse change in the business climate, poor indicators of operating performance, or a sale or disposition of a significant portion of a reporting unit. During 2008, we tested goodwill for impairment as of December 31 as a result of the economic downturn and the decrease in our stock price in the fourth quarter, as well as our annual assessment date of October 31.

 

We test goodwill at the reporting unit level, which is one level below our operating segments. We identify our reporting units by assessing whether the components of our operating segments constitute businesses for which discrete financial information is available and segment management regularly reviews the operating results of those components. We currently have 11 reporting units as compared to 12 reporting units for the 2007 goodwill impairment test. The sale of SCM resulted in the divestiture of two reporting units and our 2007 acquisition of Florence resulted in the addition of a reporting unit. We aggregated the 2007 acquisitions of Dramex and Noll into other reporting units with similar economic characteristics.

 

The goodwill impairment test consists of comparing the fair value of a reporting unit, determined using discounted cash flows, with its carrying amount including goodwill. If the carrying amount of the reporting unit exceeds the reporting unit’s fair value, the implied fair value of goodwill is compared to the carrying amount of goodwill. An impairment loss would be recognized for the amount by which the carrying amount of goodwill exceeds the implied fair value of goodwill.

 

Testing goodwill for impairment requires us to estimate fair values of reporting units using significant estimates and judgmental factors. The key estimates and factors used in our discounted cash flow valuation include revenue growth rates and profit margins based on internal forecasts, terminal value, and the weighted-average cost of capital used to discount future cash flows. Revenue growth forecasted for 2009 ranged from a 2% increase to a 12% decline compared to the reporting units’ 2008 revenue amounts with increases in revenues beginning in 2010 for all but one reporting unit. The compound annual growth rate for revenue during the first five years of our projections ranged between -5% and 13%, with the higher growth rates in those businesses that have experienced sharp declines due to the downturn in the residential housing market. The terminal value was calculated assuming projected growth rates of 3.2% after five years which reflects our estimate of long-term gross domestic product growth. Operating profit margins were projected to return to historical norms by 2013 in the individual reporting units as we expect the residential housing industry to recover over the next few years. The estimated weighted-average cost of capital was determined to be 10.8% based upon an analysis of similar companies and their debt to equity mix and related volatility and the size of their market capitalization. Future changes in these estimates and assumptions could materially affect the results of our goodwill impairment tests. For example, a decline in the terminal growth rate greater than

125 basis points or an increase in the weighted-average cost of capital greater than 85 basis points would have indicated impairment in one reporting unit as of October 31, 2008 whose goodwill was $22.6 million.

 

The testing performed as of October 31, 2008 and December 31, 2008 indicated an excess of estimated fair market value over book value for each reporting unit. However, if the projected long-term revenue growth rates, profit margins, or terminal rates are considerably lower, and/ or the estimated weighted-average cost of capital is considerably higher, future testing may indicate an impairment of one or more of the Company’s reporting units and, as a result, the related goodwill would likely be impaired.

 

We also test our indefinite-lived intangible assets, which totaled $41.1 million as of December 31, 2008, for impairment on an annual basis as of October 31, or more frequently if an event occurs or circumstances change that indicate that the fair value of an indefinite-lived intangible asset could be below its carrying amount. The impairment test consists of comparing the fair value of the indefinite-lived intangible asset, determined using discounted cash flows, with its carrying amount. An impairment loss would be recognized for the carrying amount in excess of its fair value.

 

Accounting for income taxes and deferred tax assets and liabilities. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance. Our effective tax rates differ from the statutory rate due to the impact of permanent differences between financial statement and tax income, provisions for uncertain tax positions, state taxes and income generated by international operations. Our effective tax rate was 36.9%, 39.3%, and 37.8%, for 2008, 2007, and 2006, respectively. Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and vice versa. Changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws or interpretations thereof may also adversely affect our future effective tax rate. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

 

In 2008, deferred income tax liabilities increased primarily due to amortization recorded for tax purposes relating to goodwill. Deferred income tax assets increased primarily due to an increase in equity compensation. Regarding deferred income tax assets, we maintained valuation allowances of $2.6 million and $0.9 million for the years ended December 31, 2008 and 2007, respectively, due to uncertainties related to our ability to utilize these assets, primarily consisting of capital losses and state net operating losses. The valuation allowances are based on estimates of taxable income in each of the jurisdictions in which we operate and the period over which our deferred tax assets will be recoverable. If market conditions improve and future results of operations exceed our current expectations, our existing tax valuation allowances may be adjusted, resulting in future tax benefits. Alternatively, if market conditions deteriorate further or future results of operations are less than expected, future assessments may result in a determination that some or all of the deferred tax assets are not realizable. As a result, we may need to establish additional tax valuation allowances for all or a portion of the gross deferred tax assets, which may have a material adverse effect on our business, results of operations and financial condition.

 

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48), which we adopted January 1, 2007. FIN 48 addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The result of the Company’s reassessment of its tax positions in accordance with FIN 48 resulted in a $750,000 increase in tax liabilities, with a corresponding reduction in retained earnings. The recognition was caused by uncertain tax positions of $408,000 and the provision for related interest and penalties of $342,000.

 

It is the Company’s policy to record estimated interest and penalties as income tax expense and tax credits as a reduction in income tax expense. The Company recognizes both interest and penalties as part of

the income tax provision. During the years ended December 31, 2008 and 2007, we recognized $123,000 and $142,000 of interest (net of federal tax benefit) and penalties, respectively.

 

Deferred tax assets and liabilities are determined based upon the differences between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

 

As of December 31, 2008 and 2007, the liability for uncertain income tax positions was $2,499,000 and $1,894,000, respectively. Due to the high degree of uncertainty regarding the timing of potential future cash flows associated with these liabilities, we are unable to make a reasonably reliable estimate of the amount and period in which these liabilities might be paid.

 

For additional information regarding the adoption of FIN 48, see Note 16 of the consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

 

Related Party Transactions

 

On August 31, 2007, we entered into our Second Amended and Restated Credit Agreement (the Senior Credit Agreement) with KeyBank National Association serving as lead bank of a syndicate. The Senior Credit Agreement provides 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. With respect to the Senior Credit Agreement, during 2008 the largest aggregate amount of principal outstanding under the revolving credit facility was $171.6 million, the principal amount outstanding as of December 31, 2008 was $89.1 million and $59.9 million for the revolving credit facility and term loan, respectively. The aggregate principal and interest paid during 2008 under the Senior Credit Agreement was $130.5 million and $11.5 million, respectively. Loans under the Senior Credit Agreement bear interest at the borrower’s option at (i) LIBOR plus a margin ranging from 0.60% to 1.40%, depending on our consolidated leverage ratio or (ii) the higher of administrative agent’s prime rate or the federal funds effective rate plus 0.50%. Facility fees are payable to the lenders on their revolving commitments at a rate ranging from 0.150% to 0.350% and annual letter of credit fees from 0.60% to 1.40% of the stated amount of the letter of credit. Robert E. Sadler, Jr., a Director of the Company, is Vice Chairman of the Board of Manufacturers and Traders Trust Company, one of the lenders under that agreement.

 

The firm of Lippes Mathias Wexler Friedman, LLP, of which Gerald S. Lippes, a Director of the Company, is a partner, serves as counsel to the Company. During 2008 and 2007, we incurred $1,475,000 and $1,856,000, respectively, for legal services rendered to the Company. The firm of Phillips Lytle LLP, of which Arthur A. Russ, Jr., a Director of the Company, is a partner, also provided legal services to the Company in 2008 and 2007 and we incurred fees of $254,000 and $361,000, respectively. Of the amounts incurred, $1,729,000 and $1,565,000 was expensed in 2008 and 2007, respectively, and $652,000 was capitalized as acquisition costs and deferred debt issuance costs in 2007. At December 31, 2008 and 2007, the Company had $342,000 and $185,000, respectively, recorded in accounts payable for these law firms.

 

The Company was also a party to a consulting agreement it entered into January 1, 2003 with Neil E. Lipke, a former officer of the Company and a brother of Mr. Brian J. Lipke, a Director and Officer of the Company, in effect through December 2007. Under this consulting agreement, Mr. Neil E. Lipke received $125,000 per year in cash and insurance benefits at levels that were provided during his employment in exchange for providing consulting services to the Company. In 2007, the last year of the agreement, the Company paid Mr. Neil E. Lipke $125,000 in cash and incurred $6,000 to provide him with these insurance benefits.

 

Recent Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements”, which is effective for fiscal years beginning after November 15, 2007. SFAS No. 157 defines fair value, establishes a framework for measuring

fair value, and expands the related disclosure requirements. This statement applies under other accounting pronouncements that require or permit fair value measurements. This statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. SFAS No. 157 defines fair value based upon an exit price model.

 

Relative to SFAS No. 157, the FASB issued FASB Staff Positions (FSP) 157-1, 157-2 and 157-3. FSP 157-1 amends SFAS No. 157 to exclude SFAS No. 13, “Accounting for Leases,” and its related interpretive accounting pronouncements that address leasing transactions, while FSP 157-2 delayed the effective date of the application of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. FSP 157-3 addresses considerations in determining the fair value of a financial asset when the market for that asset is not active.

 

We adopted SFAS No. 157 as of January 1, 2008, with the exception of the application of the statement to nonfinancial assets and nonfinancial liabilities. Nonfinancial assets and nonfinancial liabilities for which we have not applied the provisions of SFAS No. 157 include those measured at fair value in goodwill impairment testing, indefinite lived intangible assets measured at fair value for impairment testing and those initially measured at fair value in a business combination. The impact of adopting SFAS No. 157 was not significant to our 2008 financial statements. The impact of adopting SFAS No. 157 for nonfinancial assets and liabilities in 2009 has been determined.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, which allows measurement of specified financial instruments, warranty and insurance contracts at fair value on a contract by contract basis, with changes in fair value recognized in earnings in each period. SFAS No. 159 is effective at the beginning of the fiscal year that begins after November 15, 2007. As of January 1, 2008, we did not elect to value any specified financial instruments or warranty or insurance contracts at fair value. Therefore, the adoption of SFAS No. 159 had no impact on our consolidated financial position, cash flows or results of operations.

 

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”, which requires most identifiable assets, liabilities, non-controlling interests and goodwill acquired in business combinations to be recorded at “full fair value”. SFAS No. 141(R) also requires that the direct costs of acquisitions be expensed as incurred and that the estimated fair value of contingent consideration be recorded at the date of purchase, with changes in the estimated fair value recorded in the income statement. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008 and will be effective for the Company in 2009. This standard may be adopted only on a prospective basis and may have a material impact upon our results of operations if we complete significant acquisitions in the future.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51”. The objective of SFAS No. 160 is to improve the relevance, comparability and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing additional accounting and reporting standards. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. Early adoption of this standard is prohibited. We do not expect that adoption of this standard will have a material impact on our consolidated financial statements.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”. SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Companies are required to provide disclosures about (a) how and why a company uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008 and will be effective for the Company in 2009. The standard requires comparative disclosures only for periods subsequent to initial adoption. The adoption of the provisions of SFAS No. 161 is not anticipated to significantly impact the Company’s disclosures.

 

In the ordinary course of business, the Company is exposed to various market risk factors, including changes in general economic conditions, competition and raw materials pricing and availability. In addition, the Company is exposed to market risk, primarily related to its long-term debt. To manage interest rate risk, the Company uses both fixed and variable interest rate debt. The Company also entered into an interest rate swap agreement that converted a portion of its variable rate debt to fixed rate debt. At December 31, 2008, the Company had $55.0 million of term loan borrowings that are effectively converted to fixed rate debt pursuant to the interest rate swap agreement. In 2008, we de-designated $2.5 million of term loan borrowings as being hedged under our interest rate swap agreement due to a payment made to reduce the amount of debt outstanding under our term loan. Changes in the fair value of the related unhedged portion of the interest rate swap are recorded as gains and losses through our consolidated income statement as opposed to accumulated other comprehensive income, a component of shareholders’ equity.

 

The following table summarizes the principal cash flows and related interest rates of the Company’s long-term debt at December 31, 2008 by expected maturity dates. The weighted average interest rates are based on the actual rates that existed at December 31, 2008. The variable rate debt consists primarily of the revolving credit facility and term loan, of which $149.0 million is outstanding at December 31, 2008. A hypothetical 1% increase or decrease in interest rates would have changed the 2008 interest expense by approximately $2.2 million.

 

 

 

 

 

The Board of Directors and Shareholders of Gibraltar Industries, Inc.

 

We have audited the accompanying consolidated balance sheets of Gibraltar Industries, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gibraltar Industries, Inc. at December 31, 2008 and 2007 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

 

As discussed in Notes 1, 3, 13, 14 and 16 to the consolidated financial statements, on January 1, 2006 the Company changed its method of accounting for stock-based compensation, on December 31, 2006 the Company changed its method of accounting for defined benefit pension and other postretirement benefits, and on January 1, 2007 the Company changed its method of accounting for uncertainty in income taxes.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Gibraltar Industries, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2009 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

 

Buffalo, New York

February 25, 2009

Gibraltar Industries, Inc.

 

Consolidated Balance Sheets

 

 

The accompanying notes are an integral part of these consolidated financial statements

Gibraltar Industries, Inc.

 

Consolidated Statements of Income