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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
 
     
(Mark One)    
 
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For The Fiscal Year Ended December 31, 2009
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
Commission File Number 0-22462
GIBRALTAR INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
 
     
Delaware
  16-1445150
(State or other jurisdiction
of incorporation organization)
  (I.R.S. Employer
Identification No.)
3556 Lake Shore Road, P.O. Box 2028, Buffalo, New York
  14219-0228
(address of principal executive offices)
  (zip code)
 
Registrant’s telephone number, including area code:
(716) 826-6500
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, $0.01 par value
  NASDAQ Stock Exchange Global Select Market®
 
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 reports 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 checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     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):
 
             
Large accelerated filer o
  Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
 
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 held by non-affiliates computed by reference to the price the Common Stock was last sold on the NASDAQ Stock Exchange Global Select Market® on June 30, 2009, the last business day of the registrant’s most recently completed second quarter, was approximately $170.7 million.
 
As of February 22, 2010, the number of common shares outstanding was: 30,238,310.
 
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 (2009 Proxy Statement), which will be filed no later than 120 days after the end of the registrant’s 2009 fiscal year.
 
Exhibit Index begins on Page 96
 


 

 
 
             
        Page
    Form 10-K Index   Number
 
  Business     3  
  Risk Factors     11  
  Unresolved Staff Comments     20  
  Description of Properties     20  
  Legal Proceedings     21  
  Submission of Matters to a Vote of Security Holders     21  
 
PART II
  Market for Common Stock and Related Stockholder Matters     22  
  Selected Financial Data     24  
  Management’s Discussion and Analysis of Financial Condition and Results of Operation     25  
  Quantitative and Qualitative Disclosures About Market Risk     43  
  Financial Statements and Supplementary Data     44  
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     90  
  Controls and Procedures     90  
 
PART III
  Directors and Executive Officers and Corporate Governance     92  
  Executive Compensation     92  
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     92  
  Certain Relationships and Related Transactions and Director Independence     92  
  Principal Accountant’s Fees and Services     92  
 
PART IV
  Exhibits and Financial Statement Schedules     93  
 EX-21
 EX-23.1
 EX-31.1
 EX-31.2
 EX-31.3
 EX-32.1
 EX-32.2
 EX-32.3
 
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, other than historical statements, contains forward-looking statements within the meaning of the Act that are based, in whole or in part, 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 are subject to a number of risk factors, uncertainties, and assumptions. Risk factors that could affect these statements include, but are not limited to, the following: the availability of raw materials and the effects of changing raw material prices on the Company’s results of operations; energy prices and usage; changing demand for the Company’s products and services; changes in the liquidity of the capital and credit markets; 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 and political conditions. The Company undertakes no obligation to update 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.


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PART I
 
Item 1.   Business
 
General
 
In 2009 and prior years, we have been 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. As of December 31, 2009, we operated 53 facilities in 23 states, Canada, England, Germany, and Poland, giving us a broad platform for just-in-time delivery and support to our customers.
 
Subsequent to year-end, we disposed of the majority of the assets of our Processed Metal Products segment. See the discussion of this disposition below under the heading “Recent Developments”. As a result of this disposition, the Company will no longer report results of the Processed Metal Products segment beginning in 2010. Unless the context otherwise requires, all information herein regarding the Processed Metal Products segment is as of December 31, 2009.
 
Our strategy is to position Gibraltar as the low-cost provider and market share leader in niche product areas that offer the opportunity for margin enhancement and sales growth over the long-term. We focus on operational excellence including lean initiatives throughout the Company to position Gibraltar as our customer’s low-cost provider of products. We also strive to develop new products, enter new markets, and better penetrate existing markets to strengthen our niche product leadership positions. In 2009, Gibraltar reported two business segments: Building Products and Processed Metal Products.
 
Our Building Products segment focuses on expanding market share in the residential markets, further penetrating domestic and international commercial building, industrial, and architectural markets, participating as a buyer in our industry consolidation, and improving its productivity and efficiency through both operational excellence and facility consolidation. The majority of the products offered by the Building Products segment have a leading market share in niche markets. Our Building Products segment distributes its products to customers in North America and Europe by operating 48 facilities in 21 states, Canada, England, Germany, and Poland.
 
Our Processed Metal Products segment focuses on increasing penetration with domestic automotive manufacturers, expanding international market opportunities, serving the global shift toward automatic transmissions which require more components manufactured using products offered by our business, and increasing its productivity and efficiency through operational excellence. The Processed Metal Products segment is a supplier to “Blue Chip” customers in North America, which are served from the segment’s four facilities operating in four states.
 
The following table sets forth the selected products, industries served and customers for each segment:
 
         
   
Building Products
 
Processed Metal Products
 
Selected Products
 
•   Ventilation Products
  •   Cold-Rolled Strip Steel for:
   
•   Mailboxes
 
  •   Clutch Plates
   
•   Gutter Protection
 
  •   Weather Stripping
   
•   Structural Connectors
 
  •   Tools
   
•   Bar Grating
 
  •   Coinage
   
•   Expanded Metal
   
   
•   Metal Building Accessories
   
Selected Markets Served
 
•   Home Improvement
  •   Automotive
   
•   Residential, Commercial,
and Industrial Construction
  •   Power and Hand Tool
Hardware Coinage
   
•   Building Materials
   
   
•   Architectural
   


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Building Products
 
Processed Metal Products
 
Selected Customers
 
•   The Home Depot
  •   Ford Motor Company
   
•   Lowe’s Companies
  •   Honda
   
•   Menard Cashway Lumber
  •   General Motors
   
•   U.S. Postal Service
  •   Chrysler
 
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
 
Throughout 2008 and intensifying during 2009, prolonged financial market and economic turmoil impacting the United States and the rest of the world caused a significant downturn in the key markets we serve, building and construction, industrial, and automotive. During the past two years, continued illiquidity in the financial markets contributed to the significant downturn in key markets we serve. The United States Government offered incentive programs during 2009 to increase consumer spending in these markets, including the new home buyer and cash for clunker programs. However, as shown below, the residential construction and automotive markets in North America continued to experience significant declines in volume:
 
                         
    For the Years Ended December 31,
    2009   2008   2007
 
Residential Housing Starts
    0.6 million       0.9 million       1.3 million  
Light Vehicle Sales
    10.3 million       13.2 million       16.1 million  
 
The decrease in residential housing starts and light vehicle sales 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.
 
Additionally, commodity raw material prices for materials such as steel, aluminum, and resins, have fluctuated significantly during the past two years. These raw material prices impact the cost of raw materials we purchase and also impact the pricing we offer to customers on sales of our products. During the first three quarters of 2008, we were able to successfully manage significant increases in raw material costs. However, commodity prices fell precipitously during the fourth quarter of 2008 and continued to fall during the first two quarters of 2009. The rapid decrease in commodity prices led to lower sales prices offered to customers and falling margins on our product sales during the fourth quarter of 2008 and the first half of 2009. Commodity prices stabilized over the last six months of 2009 and the effect commodity raw material prices had on our operating results lessened. We expect our gross margins to improve in 2010 if commodity prices continue to stabilize.
 
In an effort to respond to these market forces, we have focused on operational excellence and continued to take steps to position the Company as a low-cost provider of our products. Our efforts have resulted in the closing or consolidation of 25 facilities since January 2008, including six during 2009. We have also aggressively reduced operating costs to adjust to the decreased sales volume and maximize cash flows generated from operating activities. Actions implemented during 2009 included further staff reductions of 25%, 10% reductions in the salaries of the Chief Executive Officer and Chief Operation Officer, 10% reduction in fees paid to the Board of Directors, suspension of salary increases and the Company’s match on 401(k) contributions, furloughs at many business units, limitations on capital expenditures, travel restrictions, and many other discretionary spending reductions. We believe these actions have helped us meet our priorities for 2009: serving our customers and maximizing our liquidity.
 
Many of our lean manufacturing initiatives for 2009 focused on reducing the working capital required to manage our business. Our achievements in this effort and reduced sales volume resulted in an $81 million reduction in working capital from $223 million as of December 31, 2008 to $142 million as of December 31, 2009. This reduction in working capital has allowed us to reduce our total debt outstanding by approximately $99 million from $356 million as of December 31, 2008 to $257 million as of December 31, 2009.

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As a result of our efforts to reduce costs, operating income for our most recent three month period ended December 31, 2009 improved from the same period in the prior year excluding the non-cash intangible asset impairment charges of $35 million in the fourth quarter of 2009. The following summarizes results of operation for the three months ended December 31 (in thousands):
 
                         
                Percentage
 
    2009     2008     Change  
 
Net sales
  $ 187,168     $ 249,374       (25 )%
Cost of sales
    153,597       221,397       (31 )%
                         
Gross profit
    33,571       27,977       20 %
Selling, general, and administrative expense
    32,990       35,756       (8 )%
Intangible asset impairment
    34,597             100 %
                         
Loss from operations
  $ (34,016 )   $ (7,779 )     337 %
                         
 
Net sales for the three months ended December 31, 2009 declined by 25% compared to the three months ended December 31, 2008 due to a significant decline in volume plus lower pricing as a result of the economic conditions described above which have severely impacted the markets we serve and the price of products we sell. Despite the decrease in net sales, we were able to increase the Company’s gross margin percentage from 11% in fourth quarter of 2008 to 18% during the last three months of 2009. The increase in gross margin percentage was a result of stability of costs within the commodity markets and operating cost reductions the Company made during 2009. Selling, general, and administrative expenses also decreased by 8% as a result of the cost reductions we made during 2009. Excluding the non-cash intangible impairment charges, we generated income from operations in the fourth quarter of $0.6 million compared to the significant loss from operations in the prior year.
 
Additionally, we entered into the Third Amended and Restated Credit Agreement (the Senior Credit Agreement) on July 24, 2009 to convert our previous credit arrangement into a secured asset-based credit facility that allowed us to remove many financial covenants contained in the Second Amended and Restated Credit Agreement before it was amended and restated. The Senior Credit Agreement provides for a revolving credit facility and letters of credit in an aggregate amount that does not exceed the lesser of (i) $200 million or (ii) a borrowing base determined by reference to the trade receivables, inventories, and property, plant, and equipment of the Company’s significant domestic subsidiaries. The Senior Credit Agreement also provided for a term loan that originally aggregated $58.7 million, which has subsequently been repaid in full. We believe the availability of funds under our Senior Credit Agreement together with cash generated from operations provide the Company with sufficient liquidity to meet our goal of positioning Gibraltar as the low-cost provider and market share leader in niche product areas that offer the opportunity for margin enhancement and sales growth.
 
Subsequent to year-end, we entered into an asset purchase agreement to sell the majority of the assets of our Processed Metal Products segment. The completion of this transaction on February 1, 2010 finalized our exit from the steel processing business. This asset sale was part of our ongoing strategic plan to build a company with optimal operating characteristics and improved shareholder value. Our strategic transition included four other divestitures of steel processing businesses over the last four years including our former thermal processing, steel strapping, steel service center, and powdered metal businesses. We used the proceeds from the sale of these assets to further reduce our outstanding debt.
 
Industry Overview
 
Building products manufacturers occupy an intermediate market between the primary steel, aluminum, resin, 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 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, retailers, and industrial manufacturers.


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Steel and other metal processors occupy a market niche that exists between the primary steel and metal producers and end-user manufacturers, such as automotive manufacturers. 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-user manufacturers require steel with closer tolerances and with shorter lead times than the primary steel and metal producers can provide efficiently. Steel processors like our Processed Metal Products segment, 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-user manufacturers incorporate this processed steel into finished goods.
 
Products and Services
 
Building Products
 
The Building Products segment is primarily, but not exclusively composed of manufacturers of metal products used in the residential and commercial building and industrial manufacturing markets. We operate 48 facilities in 21 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 through a number of sales channels including lumber and building material wholesalers, buying groups, discount and major retail home centers, major home builders, heating, ventilation and air conditioning 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 improve our offerings of building products by launching new products, enhancing existing products and adjusting product specifications to respond to building code and regulatory changes. During 2009, our USP subsidiary launched new products, including the Deck Tie Back and Lumber Lok Screw, to provide solutions for contractors involved in the installation of decks. Our Florence Corporation (Florence) subsidiary added new accessories to its versatile 4C mailbox line and now offers additional modules that complement the use of this product line. We also continued to develop new mailbox and post products that were first marketed to our retail customers during 2009. Our Expanded Metal Company subsidiary developed window guard and roof tile clips marketed to the European markets we serve. Another subsidiary, Southeastern Metals Manufacturing Company, Inc. began offering a commercial series gutter protection system called the Micro-CStm system, which is marketed under our Gutter Helmet® product line. 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 projects in geographic locations subject to severe weather or seismic activity, and facilitate compliance with increasingly stringent building codes and insurance requirements. Our building products are manufactured primarily from galvanized and painted steel, anodized and painted aluminum, copper, brass, zinc, and various plastic compounds. These metal purchases, when added to our existing Processed Metal Products segment purchases of cold-rolled steel, enhance our purchasing position due to the increased total volume and value-added component of these purchases.


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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
 
Our Processed Metal Products segment manufactures cold-rolled strip steel and provides materials management. Through a joint venture, the segment also offers steel pickling services. We operate this segment 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 typically 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, coinage, and other industries.
 
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 high convection annealing furnaces, which allow for shorter annealing times than conventional annealers. Our furnaces 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 a 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, few 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 the 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.


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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 many 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 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.
 
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 resins for use in our 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 2009, we purchased all of our aluminum requirements from several domestic mills with a small amount sourced with off-shore mills. Our resin purchases are all domestic, primarily 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.


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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 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 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.
 
The Home Depot represented 13%, 8%, and 10% of our consolidated net sales for 2009, 2008, and 2007, respectively. No other customer accounted for more than 10% of our net sales.
 
During 2009, 2008, and 2007, The Home Depot accounted for approximately 16%, 10%, and 13%, respectively, of the net sales of our Building Products segment. No other customer accounted for more than 10% of our Building Products segment’s net sales during these periods.
 
During 2009, Ford Motor Company accounted for 18% of the net sales of the Processed Metal Products segment. No customer represented 10% or more of this segment’s net sales in 2008. And, General Motors accounted for 11% of the net sales of this segment in 2007. 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, 2009 will be shipped prior to the end of the first quarter of 2010.
 
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 the competitive conditions for both segments in detail below.
 
Building Products
 
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.


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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, high product quality, and sustained ability to meet exacting customer delivery requirements gives us a competitive advantage over many competitors in this segment.
 
Processed Metal Products
 
The metal processing market is highly competitive. We compete with a small number of other metal processors, including Worthington Industries and Steel Technologies. These processors 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 pricing on certain customer orders to steel costs 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 metal products give us a competitive advantage over competitors in this segment.
 
Employees
 
At December 31, 2009, we employed approximately 2,450 people, of which 2,190 and 230 were employed in the Building Products and Processed Metal Products segments, respectively. Approximately 22% of our workforce was represented by unions through various collective bargaining agreements (CBAs) as of December 31, 2009. Unions represent 62% and 18% of our Processed Metal Products and Building Products employees, respectively. Three CBAs, representing 4% of our workforce, expire during 2010. Our other CBAs expire between January 31, 2011 and March 31, 2012. 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 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.


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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 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.
 
Item 1A.   Risk Factors
 
As noted above in the “Recent Developments” section of Item 1 of this Annual Report on Form 10-K, we sold the majority of the assets of our Processed Metal Products segment on February 1, 2010, and have exited this business subsequent to year-end. The risk factors below include risks related to the Processed Metal Products segment as this business was owned and operated as a continuing operation for all relevant periods covered by this Annual Report on Form 10-K. These risk factors may not be relevant to the Company in future periods as a result of our sale of assets of the Processed Metal Products segment.
 
The United States and worldwide capital and credit markets have 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.


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The diminished availability of credit and other capital is also affecting the key end markets we serve including the residential and commercial construction and North American automotive markets. There is continued uncertainty as to sustained 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 effects of the U.S. Government’s measures to aid economic recovery including economic stimulus legislation and financial assistance to automotive original equipment manufacturers (OEMs) continue to be 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 2008 and continuing throughout 2009:
 
                         
    For the Years Ended December 31,
    2009   2008   2007
 
Residential Housing Starts
    0.6 million       0.9 million       1.3 million  
Light Vehicle Sales
    10.3 million       13.2 million       16.1 million  
 
Net sales of our Building Products segment, which primarily sells products for use in the building and construction industry, accounted for approximately 83%, 80%, and 78% of our net sales in 2009, 2008, and 2007, respectively. The majority of these sales are made to retail home improvement centers and wholesale distributors. In 2009, 2008, and 2007, The Home Depot accounted for approximately 13%, 8%, and 10% 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 throughout the year ended December 31, 2009. Our sales of building products decreased during 2009 and 2008 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 availability of credit, 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 17%, 20%, and 22% of our net sales in 2009, 2008, and 2007, respectively. We estimate that net sales of our products for use in the automotive industry accounted for approximately 74%, 67%, and 77% of our Processed Metal Products segment’s net sales in 2009, 2008, and 2007, respectively. Such sales include shipments directly to automotive manufacturers and to manufacturers of automotive components and parts. We had accounts receivable balances of $20.7 million and $18.0 million from these customers as of December 31, 2009 and 2008, respectively. The automotive industry experiences significant fluctuations in demand based on numerous factors such as general economic conditions, availability of credit, consumer confidence, and other factors beyond their control. The domestic automotive industry is currently experiencing a difficult operating environment that has resulted and may continue to result in lower levels of vehicle production and continued decreases in demand for the products sold by our Processed Metal Products segment.
 
Many automotive manufacturers and their suppliers have received additional capital to continue operations from the U.S. Government and filed bankruptcy within the past twelve months. 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 additional bankruptcies, 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 would continue to, adversely impact our financial results.


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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 $257.3 million as of December 31, 2009. The following chart shows our level of indebtedness and certain other information as of December 31, 2009 (dollars in millions):
 
         
    As of
 
    December 31, 2009  
 
Revolving credit facility
  $ 50.0  
Senior subordinated notes
    201.7  
Other
    5.6  
         
Total debt
  $ 257.3  
         
Shareholders’ equity
  $ 528.2  
         
Ratio of earnings to fixed charges(1)
    0.4 x
         
 
 
(1) For purposes of calculating the ratio of earnings to fixed charges, earnings consist of income before taxes minus net undistributed equity earnings minus capitalized interest plus intangible asset impairment charges plus fixed charges. Fixed charges include interest expense (including amortization of debt issuance costs), capitalized interest, and the portion of operating rental expense that management believes is representative of the interest component of rent expense.
 
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 Third Amended and Restated Credit Agreement dated July 24, 2009 (the Senior Credit Agreement) and our indenture agreement for our Senior Subordinated 8% 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:
 
  •  our debt holders could declare all outstanding principal and interest to be due and payable;
 
  •  the lenders under our Senior Credit Agreement could terminate their commitments to lend us money and foreclose against the assets securing their borrowings; and
 
  •  we could be forced into bankruptcy or liquidation.


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Relative to current indebtedness levels, we may still be able to incur substantially more debt. This could further exacerbate the risks described above.
 
The terms of the indenture for our Senior Subordinated 8% Notes do not fully prohibit us or our subsidiaries from incurring additional debt. Additionally, our Senior Credit Agreement provides us with a revolving credit facility commitment of $200 million with borrowings limited to the lesser of (i) $200 million or (ii) a borrowing base determined by reference to the trade receivables, inventories, and property, plant, and equipment of our significant domestic subsidiaries. At December 31, 2009, we had $69.7 million of availability under our revolving credit facility. Under the terms of our Senior Credit Agreement, we are required to repay all amounts outstanding under the revolving credit facility by August 30, 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:
 
  •  it may limit our ability to obtain additional debt or equity financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, and general corporate or other purposes;
 
  •  a substantial portion of our cash flows from operations have been and are expected to be dedicated to the payment of principal and interest on our indebtedness and may not be available for other purposes, including our operations, capital expenditures, and future business opportunities;
 
  •  certain of our borrowings, including borrowings under our Senior Credit Agreement, are at variable rates of interest, exposing us to the risk of increased interest rates; and
 
  •  it may limit our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to our competitors that have less debt.
 
Restrictive covenants may adversely affect our operations.
 
Our Senior Credit Agreement and the indenture governing our Senior Subordinated 8% Notes contain various covenants that limit our ability to, among other things:
 
  •  incur additional debt or provide guarantees in respect of obligations of other persons;
 
  •  pay dividends or distributions or redeem or repurchase capital stock;
 
  •  prepay, redeem, or repurchase debt;
 
  •  make loans, investments, and capital expenditures;
 
  •  incur debt that is senior to our Senior Subordinated 8% Notes but junior to our indebtedness under our Senior Credit Agreement and other senior indebtedness;
 
  •  incur liens;
 
  •  restrict distributions from our subsidiaries;
 
  •  sell assets and capital stock of our subsidiaries;
 
  •  consolidate or merge with or into, or sell substantially all of our assets to, another person; and
 
  •  enter into new lines of business.


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In addition, the restrictive covenants in the Senior Credit Agreement require us to maintain minimum Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA as defined in the Senior Credit Agreement) levels, or a specified financial ratio. In 2009, the Senior Credit Agreement required us to maintain the following minimum EBITDA levels for the following periods:
 
         
    Minimum EBITDA
 
Six-months ended June 30, 2009
  $ 0  
Nine-months ended September 30, 2009
  $ 13,000,000  
Year ended December 31, 2009
  $ 28,000,000  
 
The minimum EBITDA level covenant will not be tested after December 31, 2009. Beginning on March 31, 2010 and quarterly thereafter on a trailing four-quarter basis, the Senior Credit Agreement includes a single financial covenant that requires the Company to maintain a minimum fixed charge coverage ratio of 1.25 to 1.00.
 
Our ability to meet these restrictive covenants in the future 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 the Senior Credit Agreement would be entitled to be paid before current Senior Subordinated 8% 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 8% Notes, or borrow sufficient funds to refinance such indebtedness. An acceleration of the amounts outstanding under the Senior Credit Agreement would result in an event of default under our Senior Subordinated 8% Notes which would then entitle the holders thereof to accelerate and demand repayment of the notes as well. Even if we are able to obtain new financing to pay the amounts due under the Senior Credit Agreement and Senior Subordinate 8% Notes, 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.
 
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 were fully drawn or funded on December 31, 2009, as applicable, each 25 basis point change in interest rates would result in a $0.5 million change in annual interest expense on debt outstanding under our Senior Credit Agreement.


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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 2009, 2008, and 2007, our ten largest customers accounted for approximately 34%, 27%, and 28% of our net sales, respectively. Our percentage of net 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 net 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 influences 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 has had and would continue to 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 cash flow.
 
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 costs. We may not be able to pass on increases in raw material costs to our customers.
 
Our principal raw materials are steel, aluminum, and resins, which we purchase from multiple primary suppliers. 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. Our other significant raw materials, including aluminum and resins, are also subject to price volatility.
 
Global consolidation of the primary steel producers and increased demand from other nations such as China and India continue to put upward pressure on market prices for steel and other commodities. 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, which occurred in the fourth quarter of 2008 and during the first half of 2009, we may be left to absorb the cost of higher cost inventory as customers receive reduced pricing related to decreases in raw material costs. To the extent we are unable to match our costs to purchase raw materials to prices given to our customers, the profitability of our business and resulting cash flows could be adversely affected.


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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 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 36% of our purchases during 2009. 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 would 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 growth in net sales or profitability 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 liabilities that were not anticipated. Further, failure to integrate any acquisition successfully 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 flow 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 code, such as worms, viruses and Trojan horses, security breaches, and defects in design. The implementation of new information technology solutions could lead to interruptions of information flow internally and to our customers and suppliers while the implementation project is being completed. We implemented new systems in 2009 and plan to continue with new system implementations in 2010 at several additional business units. Various measures have been taken to manage our risks related to information system and network disruptions, but a security breach, system failure, or failure to implement new systems properly could negatively impact our operations and financial results.


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Our principal stockholders have the ability to exert significant influence 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 of the Board and Chief Executive Officer of the 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 the interests of 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 executing 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, even with respect to contamination for which we are not responsible. 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 customers 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.


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In addition, approximately 22% of our own employees are represented by unions through various collective bargaining agreements that are scheduled to expire between June 30, 2010 and March 31, 2012. Unions represent 62% and 18% of our Processed Metal Products and Building Products employees, respectively. 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 during the year ended December 31, 2009. We have facilities in Canada, England, Germany, and Poland. We believe that our business activities outside of the United States involve a higher degree of risk than our domestic activities. 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.
 
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.


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Item 1B.   Unresolved Staff Comments
 
None
 
Item 2.   Description of Properties
 
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, and Poland.
 
We believe the facilities we operate, listed below, and their equipment are effectively utilized, well maintained, in good condition, and will be able to accommodate our capacity needs through 2010.
 
             
Location
 
Utilization
  Square Footage
 
Corporate
           
Buffalo, New York
  Headquarters     24,490 (1)
Processed Metal Products
           
Woodhaven, Michigan
  Materials management facility     100,000 (2)
Cheektowaga, New York
  Administrative office and strip steel processing     148,000  
Cleveland, Ohio
  Administrative office and strip steel processing     259,000 (2)
Brownsville, Texas
  Warehouse     15,000 (1,2)
Building Products
           
U.S. Locations
           
Birmingham, Alabama
  Administrative office and building products manufacturing     202,000  
Fontana, California
  Building products manufacturing     80,000  
Fontana, California
  Administrative office and warehouse     69,720 (1)
Livermore, California
  Building products manufacturing     103,470 (1)
Stockton, California
  Administrative office and building products manufacturing     318,320  
Visalia, California
  Building products manufacturing     80,000  
Denver, Colorado
  Administrative office and building products manufacturing     119,442 (1)
Wilmington, Delaware
  Building products manufacturing and warehouse     27,500 (1)
Jacksonville, Florida
  Administrative office and building products manufacturing     261,400 (1)
Lakeland, Florida
  Warehouse     90,835  
Largo, Florida
  Administrative office and building products manufacturing     100,000  
Miami, Florida
  Warehouse     48,893 (1)
Honolulu, Hawaii
  Warehouse     18,200 (1)
Bourbonnais, Illinois
  Building products manufacturing     280,000 (1)
Peoria, Illinois
  Administrative office     1,610 (1)
Clinton, Iowa
  Building products manufacturing     100,000  
Junction City, Kansas
  Warehouse     20,000 (1)
Manhattan, Kansas
  Administrative office and building products manufacturing     192,000  
Lafayette, Louisiana
  Building products manufacturing     34,000  
Burnsville, Minnesota
  Administrative office     21,009 (1)
Montgomery, Minnesota
  Administrative office and building products manufacturing     170,000  
Taylorsville, Mississippi
  Administrative office and building products manufacturing     397,484  
North Kansas City, Missouri
  Building products manufacturing     26,365 (1)
Orrick, Missouri
  Building products manufacturing     127,000  
Lumberton, New Jersey
  Warehouse     25,805 (1)
Youngstown, Ohio
  Administrative office and building products manufacturing     32,424  
Portland, Oregon
  Administrative office and building products manufacturing     10,000  


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Location
 
Utilization
  Square Footage
 
Greenville, South Carolina
  Warehouse     18,000 (1)
Dallas, Texas
  Administrative office and building products manufacturing     175,000 (1)
Dayton, Texas
  Building products manufacturing     45,000  
Houston, Texas
  Building products manufacturing     48,000 (1)
Houston, Texas
  Warehouse/Distribution     25,000 (1)
San Antonio, Texas
  Administrative office and building products manufacturing     120,050 (1)
Orem, Utah
  Building products manufacturing     88,685  
Salt Lake City, Utah
  Warehouse     30,040 (1)
Fife, Washington
  Administrative office and building products manufacturing     324,220  
Kent, Washington
  Warehouse     9,600 (1)
Appleton, Wisconsin
  Administrative office and building products manufacturing     100,262  
Appleton, Wisconsin
  Warehouse     42,582  
Canadian Locations
           
Langley, British Columbia
  Building products manufacturing     41,000 (1)
Burlington, Ontario
  Administrative office and building products manufacturing     78,000 (1)
Thornhill, Ontario
  Administrative office and building products manufacturing     60,500 (1)
Iberville, Quebec
  Administrative office and building products manufacturing     32,172  
Iberville, Quebec
  Warehouse     15,000 (1)
European Locations
           
Hannover, Germany
  Administrative office and building products manufacturing     81,453 (1)
Poznan, Poland
  Administrative office and warehouse     3,120 (1)
Hartlepool, United Kingdom
  Administrative office and building products manufacturing     258,907 (1)
Redditch, United Kingdom
  Administrative office     18,151 (1)
 
 
(1) Leased. All other facilities owned.
 
(2) These facilities were sold or the lease was assigned as a result of the February 1, 2010 agreement to sell the majority of the assets of our Processed Metal Products segment.
 
Item 3.   Legal Proceedings
 
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.
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2009.

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PART II
 
Item 5.   Market for Common Equity and Related Stockholder Matters
 
As of December 31, 2009 there were 150 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 2009 and 2008 as reported on the NASDAQ Stock Exchange.
 
                                 
    2009   2008
    High   Low   High   Low
 
Fourth Quarter
  $ 16.74     $ 10.51     $ 18.98     $ 8.40  
Third Quarter
  $ 15.65     $ 5.62     $ 24.63     $ 11.82  
Second Quarter
  $ 8.55     $ 4.32     $ 17.33     $ 10.35  
First Quarter
  $ 12.95     $ 3.41     $ 15.53     $ 9.59  
 
The Company did not declare cash dividends during 2009 and declared dividends of $0.05 per share in each of the first, second, third, and fourth quarters of 2008.
 
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 rate of any dividend it determines to pay based upon such factors as the Company’s earnings, financial condition, capital requirements, debt covenant requirements, and other relevant conditions. During the first quarter of 2009, the Board of Directors approved management’s suggestion to suspend quarterly dividends indefinitely as a result of the impact of economic conditions on the Company and the markets it serves. The Company expects to continue to declare and pay cash dividends on its common stock in the future when earnings are available. However, 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.
 
Equity Compensation Plan Information
 
The following table summarizes information concerning securities authorized for issuance under the Company’s stock option plans:
 
                         
            Number of Securities
    Number of Securities
      Remaining Available
    to be Issued Upon
  Weighted-Average
  for Future
    Exercise of
  Exercise Price of
  Issuance Under Equity
Plan Category
  Outstanding Options   Outstanding Options   Compensation Plans(1)
 
Equity Compensation Plans Approved by Security Holders
    630,889     $ 17.88       1,434,736  
                         
Total
    630,889     $ 17.88       1,434,736  
                         
 
 
(1) Consists of the Company’s Third Amendment and Restatement of the Gibraltar Industries, Inc. 2005 Equity Incentive Plan (the Plan). Note 12 of the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K provides additional information regarding the Plan and securities issuable upon exercise of options. The Company has no currently effective equity compensation plans not approved by its shareholders.


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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, 2009. The comparison of total return assumes that a fixed investment of $100 was invested on December 31, 2004 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
 
(PERFORMANCE GRAPH)
 
 
* $100 invested on 12/31/04 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
 
Copyright© 2010 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.


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Item 6.   Selected Financial Data
 
The following selected historical consolidated financial data for each of the five years in the period ended December 31, 2009 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.
 
                                         
    Year Ended December 31,
    2009   2008   2007   2006   2005
    (In thousands, except per share data)
 
Net sales
  $ 834,218     $ 1,232,299     $ 1,198,715     $ 1,125,864     $ 902,781  
(Loss) income from operations
    (52,034 )     81,469       75,741       111,690       77,416  
Interest expense
    25,915       29,235       32,498       26,226       19,485  
(Loss) income before income taxes
    (77,633 )     52,958       44,415       72,564       58,197  
(Benefit of) provision for income taxes
    (25,761 )     19,553       17,476       27,436       22,248  
(Loss) income from continuing operations
    (51,872 )     33,405       26,939       45,128       35,949  
                                         
(Loss) income from continuing operations per share — Basic
  $ (1.72 )   $ 1.11     $ 0.90     $ 1.52     $ 1.21  
Weighted average shares outstanding — Basic
    30,135       29,981       29,867       29,712       29,608  
                                         
(Loss) income from continuing operations per share — Diluted
  $ (1.72 )   $ 1.11     $ 0.89     $ 1.50     $ 1.21  
Weighted average shares outstanding — Diluted
    30,135       30,193       30,116       30,006       29,810  
                                         
Cash dividends declared per common share
  $ 0.00     $ 0.20     $ 0.25     $ 0.15     $ 0.20  
Current assets
  $ 251,151     $ 348,229     $ 440,745     $ 455,780     $ 424,004  
Current liabilities
    109,016       125,201       134,225       124,415       157,248  
Total assets
    973,968       1,146,359       1,281,408       1,152,868       1,205,012  
Total debt
    257,282       356,372       487,545       399,313       461,513  
Shareholders’ equity
    528,226       568,487       567,760       550,228       494,025  
                                         
Capital expenditures
  $ 10,813     $ 21,595     $ 17,691     $ 20,579     $ 16,566  
Depreciation
    27,228       26,560       25,472       20,726       15,943  
Amortization
    5,185       7,347       5,480       3,896       2,314  
 
During the year ended December 31, 2009, the Company recorded intangible asset impairment charges of $60.1 million, which contributed to $1.34 of the loss from continuing operations per diluted share. No intangible asset impairment charges were recognized during any other period presented in the table above.


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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
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
 
In 2009 and prior years, we have been 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. As of December 31, 2009, we operate 53 facilities in 23 states, Canada, England, Germany, and Poland, giving us a broad platform for just-in-time delivery and support to our customers.
 
Subsequent to year-end, we disposed of the majority of the assets of our Processed Metal Products segment. See the discussion of this disposition below under the heading “Divestitures”. As a result of this disposition, the Company will no longer report results of the Processed Metal Products segment beginning in 2010. Unless the context otherwise requires, all information herein regarding the Processed Metal Products segment is as of December 31, 2009.
 
Throughout 2008 and intensifying during 2009, prolonged financial market and economic turmoil impacting the United States and the rest of the world caused a significant downturn in the key markets we serve, building and construction, industrial, and automotive. During the past two years, continued illiquidity in the financial market contributed to the significant downturn in key markets we serve. The United States Government offered incentive programs during 2009 to increase consumer spending in these markets, including the new home buyer and cash for clunker programs. However, as shown below, the residential construction and automotive markets in North America continued to experience significant declines in volume:
 
                         
    For the Years Ended December 31,
    2009   2008   2007
 
Residential Housing Starts
    0.6 million       0.9 million       1.3 million  
Light Vehicle Sales
    10.3 million       13.2 million       16.1 million  
 
The decrease in residential housing starts and light vehicle sales 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.
 
Additionally, commodity raw material prices for materials such as steel, aluminum, and resins, have fluctuated significantly during the past two years. These raw material prices impact the cost of raw materials we purchase and also impact the pricing we offer to customers on sales of our products. During the first three quarters of 2008, we were able to successfully manage significant increases in raw material costs. However, commodity prices fell precipitously during the fourth quarter of 2008 and continued to fall during the first two quarters of 2009. The rapid decrease in commodity prices led to lower sales prices offered to customers and falling margins on our product sales during the fourth quarter of 2008 and the first half of 2009. Commodity prices stabilized over the last six months of 2009 and the effect commodity raw material prices had on our operating results lessened. We expect our gross margins to improve in 2010 if commodity prices continue to stabilize.


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In an effort to respond to these market forces, we have focused on operational excellence and continued to take steps to position the Company as a low-cost provider of our products. Our efforts have resulted in the closing or consolidation of 25 facilities since January 2008, including six during 2009. We have also aggressively reduced operating costs to adjust to the decreased sales volume and maximize cash flows generated from operating activities. Actions implemented during 2009 included further staff reductions of 25%, 10% reductions in the salaries of the Chief Executive Officer and Chief Operation Officer, 10% reduction in fees paid to the Board of Directors, suspension of salary increases and the Company’s match on 401(k) contributions, furloughs at many business units, limitations on capital expenditures, travel restrictions, and many other discretionary spending reductions. We believe these actions have helped us meet our priorities for 2009: serving our customers and maximizing our liquidity.
 
Many of our lean manufacturing initiatives for 2009 focused on reducing the working capital required to manage our business. Our achievements in this effort and reduced sales volume resulted in an $81 million reduction in working capital from $223 million as of December 31, 2008 to $142 million as of December 31, 2009. This reduction in working capital has allowed us to reduce our total debt outstanding by approximately $99 million from $356 million as of December 31, 2008 to $257 million as of December 31, 2009.
 
As a result of our efforts to reduce costs, operating income for our most recent three month period ended December 31, 2009 improved from the same period in the prior year excluding non-cash intangible asset impairment charges of $35 million. The following summarizes results of operation for the three months ended December 31 (in thousands):
 
                         
                Percentage
 
    2009     2008     Change  
 
Net sales
  $ 187,168     $ 249,374       (25 )%
Cost of sales
    153,597       221,397       (31 )%
                         
Gross profit
    33,571       27,977       20 %
Selling, general, and administrative expense
    32,990       35,756       (8 )%
Intangible asset impairment
    34,597             100 %
                         
Income (loss) from operations
  $ (34,016 )   $ (7,779 )     337 %
                         
 
Net sales for the three months ended December 31, 2009 declined by 25% compared to the three months ended December 31, 2008 due to a significant decline in volume plus lower pricing as a result of the economic conditions described above which have severely impacted the markets we serve and the price of products we sell. Despite the decrease in net sales, we were able to increase the Company’s gross margin percentage from 11% in fourth quarter of 2008 to 18% during the last three months of 2009. The increase in gross margin percentage was a result of stability of costs within the commodity markets and operating cost reductions the Company made during 2009. Selling, general, and administrative expenses also decreased by 8% as a result of the cost reductions we made during 2009. Excluding the non-cash intangible impairment charges, we generated income from operations in the fourth quarter of $0.6 million compared to the significant loss from operations in the prior year.
 
Divestitures
 
Subsequent to year-end, we entered into an asset purchase agreement to sell the majority of the assets of our Processed Metal Products segment. The completion of this transaction on February 1, 2010 finalized our exit from the steel processing business. This asset sale was part of our ongoing strategic plan to build a company with optimal operating characteristics and improved shareholder value. Our strategic transition included four other divestitures of steel processing businesses over the last four years including our former thermal processing, steel strapping, steel service center, and powdered metal businesses. We used the proceeds from the sale of these assets to further reduce our outstanding debt.
 
As noted above, we sold our powdered metal business, SCM Metal Products (SCM) October 2008. SCM was previously reported as a part of our Processed Metal Products segment.


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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.
 
We expect to continue evaluating our businesses to focus our resources and capital on those areas that we expect will provide the best long-term strategic fit.
 
The divestitures of our powdered metal business, steel service center, and cabinet manufacturing businesses as described above are properly classified as discontinued operations in the Company’s consolidated financial statements and notes thereto. See Note 14 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. The February 1, 2010 sale of the majority of the assets of Processed Metal Products segment will be treated as discontinued operations in our consolidated financial statements beginning with the first quarter of 2010.
 
Acquisitions
 
We did not acquire any new businesses during 2009 and 2008. We acquired three businesses with complementary market positions in 2007. In March 2007, we acquired the stock of the Dramex Corporation, 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, a manufacturer, marketer, and distributor of products for the heating, ventilation, and air conditioning, building, 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, a Kansas manufacturer of storage products for mail and package delivery.
 
All the acquisitions described above are reported as a part of our Building Products segment. See Note 4 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, 2009 Compared to Year Ended December 31, 2008
 
The following table sets forth selected results of operations data (in thousands) and its percentages of net sales for the years ended December 31:
 
                                 
    2009     2008  
 
Net sales
  $ 834,218       100.0 %   $ 1,232,299       100.0 %
Cost of sales
    709,239       85.0       1,003,513       81.4  
                                 
Gross profit
    124,979       15.0       228,786       18.6  
Selling, general, and administrative expense
    116,915       14.0       147,317       12.0  
Intangible asset impairment
    60,098       7.2             0.0  
                                 
(Loss) income from operations
    (52,034 )     (6.2 )     81,469       6.6  
Interest expense
    (25,915 )     (3.1 )     (29,235 )     (2.4 )
Equity in partnerships’ income(1)
    316       0.0       724       0.1  
                                 
(Loss) income before taxes
    (77,633 )     (9.3 )     52,958       4.3  
(Benefit of) provision for income taxes
    (25,761 )     (3.1 )     19,553       1.6  
                                 
(Loss) income from continuing operations
    (51,872 )     (6.2 )     33,405       2.7  
Discontinued operations, net of taxes(2)
    (153 )     (0.0 )     (9,337 )     (0.7 )
                                 
Net (loss) income
  $ (52,025 )     (6.2 )%   $ 24,068       2.0 %
                                 


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(1) Equity in partnerships’ income represents our proportional interest in the income of our steel pickling joint venture and other income.
 
(2) Discontinued operations represent the income or (loss), net of income taxes, attributable to our powdered metal and bath cabinet manufacturing businesses, which we sold in October 2008 and August 2007, respectively.
 
The following table sets forth the Company’s net sales by reportable segment for the years ended December 31 (in thousands):
 
                                         
                      Change Due To  
                Total
    Foreign
       
    2009     2008     Change     Currency     Operations  
 
Net sales:
                                       
Building Products
  $ 691,771     $ 986,840     $ (295,069 )   $ (14,324 )   $ (280,745 )
Processed Metal Products
    142,447       245,459       (103,012 )           (103,012 )
                                         
Consolidated
  $ 834,218     $ 1,232,299     $ (398,081 )   $ (14,324 )   $ (383,757 )
                                         
 
Net sales decreased by $398.1 million, or 32.3%, to $834.2 million in 2009 compared to 1,232.3 million in 2008. The severe economic downturn during the past five quarters and its effect on the key end markets we serve led to the significant drop in net sales as demand for our products decreased and volume fell. A decline in customer selling prices also contributed to the decrease in net sales as customer selling prices are based, in part, on raw material costs, which fell significantly during the fourth quarter of 2008 and the first half of 2009. Foreign currency also contributed to a $14.3 million decline in net sales during 2009 compared to the prior year.
 
Net sales in our Building Products segment decreased 29.9%, or $295.1 million, to $691.8 million in 2009 compared to 2008. Excluding the $14.3 million impact of exchange rate fluctuations, the decrease in net sales was $280.8 million, or 28.4%, from the prior year. The decrease in net sales from our recurring operations was primarily the net result of declining volumes due to a significant slowdown in the residential building, commercial construction, architectural, and industrial markets. Declining customer selling prices also contributed to the decline in net sales during 2009 compared to 2008.
 
Net sales in our Processed Metal Products segment decreased $103.0 million, or 42.0%, to $142.4 million in 2009 compared to 2008. The decrease in net sales was primarily a result of a 31% decrease in tons sold due to the significant slowdown in the automotive markets. Sales volume generated by this segment was significantly impacted by Chapter 11 filings of two of our automotive customers, Chrysler and General Motors, and the resulting plant shut-downs that occurred during the second and third quarters of 2009. The Processed Metal Products segment was also impacted by the decline in steel prices in the commodity market, which contributed to a decrease in customer selling prices.
 
Gross margin decreased to 15.0% in 2009 from 18.6% in 2008. The decrease in gross margin was primarily the result of the significant decline in sales volume as fixed costs were spread over less volume. The decrease in sales volume more than offset our cost cutting initiatives. The precipitous decline in raw material commodity costs also led to a decline in gross margin as high cost inventory was sold at lowered customer selling prices causing material costs as a percentage of net sales to increase, primarily during the first three quarters of 2009. We estimate that the misalignment of customer selling prices to raw material costs from our Processed Metal Products segment resulted in gross margin decreasing by approximately 2%.


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Selling, general, and administrative expenses decreased by $30.4 million, or 20.6%, to $116.9 million in 2009 compared to $147.3 million in 2008. The $30.4 million decrease is primarily a result of a $16.9 million decrease in payroll-related expenses resulting from staffing reductions and lower incentive compensation costs, $5.7 million of cost reductions from lower travel, marketing, and outside professional fees, and the impact of our other cost reduction initiatives. Our bad debt expense also decreased by $2.2 million as a result of a charge recorded to reserve for a Tier 1 automotive supplier that went bankrupt in the fourth quarter of 2008. Despite our effort to reduce costs, our selling, general, and administrative expenses as a percentage of net sales increased to 14.0% during 2009 from 12.0% in 2008 as a result of the 32.3% reduction in net sales during 2009 compared to the prior year.
 
In 2009, due to a change in the estimated fair value of three of our reporting units resulting from a significant decrease in sales projections, we recorded intangible asset impairment charges of $60.1 million.
 
The following table sets forth the Company’s income from operations and income from operations as a percentage of net sales by reportable segment for the years ended December 31 (in thousands):
 
                                                 
                      Change Due To  
                Total
    Foreign
    Intangible
       
    2009     2008     Change     Currency     Impairment     Operations  
 
Income from operations:
                                               
Building Products
  $ (16,809 )   $ 94,522     $ (111,331 )   $ (1,740 )   $ (60,098 )   $ (49,493 )
Processed Metal Products
    (14,341 )     17,655       (31,996 )                 (31,996 )
Corporate
    (20,884 )     (30,708 )     9,824                   9,824  
                                                 
Consolidated
  $ (52,034 )   $ 81,469     $ (133,503 )   $ (1,740 )   $ (60,098 )   $ (71,665 )
                                                 
 
                         
            Total
    2009   2008   Change
 
Income from operations as a percentage of sales:
                       
Building Products
    (2.4 )%     9.6 %     (12.0 )%
Processed Metal Products
    (10.1 )%     7.2 %     (17.3 )%
Consolidated
    (6.2 )%     6.6 %     (12.8 )%
 
Our Building Products segment generated a negative operating margin of 2.4% during 2009 compared to a positive operating margin of 9.6% during 2008. Excluding $60.1 million of intangible asset impairment charges and $1.7 million of foreign currency fluctuations, the Building Products segment generated operating income of $45.0 million during 2009, a decrease of $49.5 million, or 52.4%, from $94.5 million in the prior year. The decrease in operating income was a result of the significant decline in sales volume. The reduction in sales volume resulted in a decrease in operating margin as fixed costs were spread over lower sales volume partially offset by aggressive operating cost reduction initiatives that reduced the impact of declining sales volume.
 
Our Processed Metal Products segment incurred a negative operating margin of 10.1% during 2009 compared to a positive operating margin of 7.2% during 2008. The Processed Metal Products segment was most significantly impacted by higher raw material costs compared to customer selling prices and low sales volume. The precipitous decline in commodity costs, particularly in the first six months of 2009, led to high cost inventory being sold at lowered customer selling prices causing the operating margin of the Processed Metal Products segment to decrease 13.0 percentage points during 2009 compared to the prior year. Operating margin during 2009 was also negatively impacted as a result of fixed costs being spread over significantly lower sales volume. These factors more than offset our cost cutting initiatives and a $2.6 million decrease in bad debt expense from 2008 when we recorded a significant reserve for a bankrupt customer’s accounts receivable.


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Corporate expenses decreased $9.8 million, or 31.9%, to $20.9 million for 2009 from $30.7 million for 2008. The decrease in corporate expenses was primarily due to a $5.2 million decrease in compensation costs as a result of staffing reductions and lower incentive compensation costs. Corporate expenses also decreased as a result of cost cutting measures and due to a $1.1 million asset impairment charge recorded during 2008 for software no longer in use.
 
Interest expense decreased $3.3 million, or 11.3%, to $25.9 million in 2009 from $29.2 million in 2008. Interest expense decreased $5.5 million due to lower average borrowings during 2009 compared to the prior year. We reduced debt outstanding by $99.1 million, or 27.8%, to $257.3 million as of December 31, 2009 from $356.4 million as of December 31, 2008 through debt repayments. The decrease in interest expense was partially offset by $1.4 million of charges incurred to write-off a portion of deferred financing fees arising from our amendment and restatement of the Senior Credit Agreement on July 24, 2009 and early repayment of our term loan under the Senior Credit Agreement along with a $0.8 million increase in losses generated from fair value fluctuations from our interest rate swap.
 
The benefit of income taxes for 2009 was $25.8 million, an effective tax rate of 33.2%, compared with a provision for income taxes of $19.6 million, an effective tax rate of 36.9%, for 2008. The effective tax rate for 2009 was lower than the U.S. federal statutory tax rate of 35% due to the effect of non-deductible permanent differences and recording intangible asset impairment charges, a portion of which was not deductible for tax purposes. These items were offset by state taxes which partially offset the reduction in the effective tax rate during 2009. The effective tax rate of 36.9% for 2008 exceeded the statutory rate primarily due to the impact of state taxes partially offset by lower rates paid on foreign-sourced income.
 
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:
 
                                 
    2008     2007  
 
Net sales
  $ 1,232,299       100.0 %   $ 1,198,715       100.0 %
Cost of sales
    1,003,513       81.4       989,925       82.6  
                                 
Gross profit
    228,786       18.6       208,790       17.4  
Selling, general, and administrative expense
    147,317       12.0       133,049       11.1  
                                 
Income from operations
    81,469       6.6       75,741       6.3  
Interest expense
    (29,235 )     (2.4 )     (32,498 )     (2.7 )
Equity in partnerships’ income(1)
    724       0.1       1,172       0.1  
                                 
Income before taxes
    52,958       4.3       44,415       3.7  
Provision for income taxes
    19,553       1.6       17,476       1.5  
                                 
Income from continuing operations
    33,405       2.7       26,939       2.2  
Discontinued operations, net of taxes(2)
    (9,337 )     (0.7 )     (13,715 )     (1.1 )
                                 
Net income
  $ 24,068       2.0 %   $ 13,224       1.1 %
                                 
 
 
(1) Equity in partnerships’ income represents our proportional interest in the income of our steel pickling joint venture and other income.
 
(2) Discontinued operations represents the loss, net of income taxes, attributable to our SCM subsidiaries, our steel service center, cabinet manufacturing business, and our strapping business, which we sold in October 2008, December 2007, and August 2007, respectively.


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The following table sets forth the Company’s net sales by reportable segment for the years ended December 31 (in thousands):
 
                                                 
                      Change Due To  
                Total
    Foreign
             
    2008     2007     Change     Currency     Acquisitions     Operations  
 
Net sales:
                                               
Building Products
  $ 986,840     $ 929,022     $ 57,818     $ 3,561     $ 72,783     $ (18,526 )
Processed Metal Products
    245,459       269,693       (24,234 )                 (24,234 )
                                                 
Consolidated
  $ 1,232,299     $ 1,198,715     $ 33,584     $ 3,561     $ 72,783     $ (42,760 )
                                                 
 
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 primarily attributable to the 2007 acquisitions of Dramex, Noll, and Florence which provided incremental net sales of $72.8 million during 2008. Excluding foreign currency fluctuations, net sales by our historic businesses decreased $42.8 million, or 3.6%. 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 foreign currency fluctuations and the incremental net sales provided by the 2007 acquisitions of Dramex, Noll, and Florence, net sales decreased $18.5 million, or 2.0%, 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 18.6% in 2008 from 17.4% 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 $3.3 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 $14.3 million, or 10.8%, to $147.3 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 $5.8 million, or 4.4%, over the prior year. Selling, general, and administrative expense as a percentage of net sales increased 0.9%, to 12.0%, in 2008 from 11.1% in 2007 as a result of a $2.7 million charge to bad debt expense due to an automotive customer filing for bankruptcy, a $0.5 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.


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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):
 
                                                 
                      Change Due To  
                Total
    Foreign
             
    2008     2007     Change     Currency     Acquisitions     Operations  
 
Income from operations:
                                               
Building Products
  $ 94,522     $ 91,589     $ 2,933     $ 2,758     $ 8,873     $ (8,698 )
Processed Metal Products
    17,655       13,265       4,390                   4,390  
Corporate
    (30,708 )     (29,113 )     (1,595 )                 (1,595 )
                                                 
Consolidated
  $ 81,469     $ 75,741     $ 5,728     $ 2,758     $ 8,873     $ (5,903 )
                                                 
 
                         
            Total
    2008   2007   Change
 
Income from operations as a percentage of sales:
                       
Building Products
    9.6 %     9.9 %     (0.3 )%
Processed Metal Products
    7.2 %     4.9 %     2.3 %
Consolidated
    6.6 %     6.3 %     0.3 %
 
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. 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.
 
The provision for 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.
 
Outlook
 
Due to the volatility and uncertainty of economic and market conditions, we will not be providing definitive earnings per common share guidance. Instead, we will provide our expectations of general trends in the key markets we serve. Regarding 2010, we expect economic conditions to improve over 2009, but we are cautious on the pace of recovery. For U.S. new housing starts, we are concerned about the impact of current unemployment levels, foreclosure activity, and access to financing. Therefore, we expect a modest improvement in 2010 to approximately 740,000 units from a trough of 552,000 units in 2009. We anticipate expenditures on repair and remodel activity will improve modestly in 2010 from 2009 levels, with pockets of growth in energy-efficient markets while big-ticket items will continue to be deferred, in the short-term, until general economic conditions, credit availability and home prices improve. We also expect commercial construction to lag behind upturns in the residential housing construction market. Thus, in the near-term, our financial results will be highly correlated to changes in customer demand. Over the long term, we are confident that the fundamentals for new home construction, home improvement, and commercial and industrial markets are positive.


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Liquidity and Capital Resources
 
General
 
Our principal capital requirements are to fund our operations, including working capital, the purchase and funding of capital improvements to our businesses and their facilities, and to fund acquisitions. During the next twelve months, with the uncertainty in the general economy and the related negative effects on the building and construction, industrial, and automotive markets, we will continue to focus on liquidity preservation to meet our principal capital requirements. As noted below in the “Cash Flows” section of Item 7 of this Annual Report on Form 10-K, we have been successful in generating positive cash flows from our operating activities to fund our capital requirements during the past. In the future, we expect to continue our cost reduction initiatives and sustain strong working capital management to continue to generate positive cash flow.
 
On July 24, 2009, we entered into the Third Amended and Restated Credit Agreement (the Senior Credit Agreement) to convert our previous credit arrangement into a secured asset-based credit facility that allowed us to remove many of the restrictive financial covenants contained in the Second Amended and Restated Credit Agreement before it was amended and restated. We believe that availability of funds under our Senior Credit Agreement together with the cash generated from operations should be sufficient to provide the Company with the liquidity and capital resources necessary to support our principal capital requirements during the next twelve months.
 
Our Senior Credit Agreement provides the Company with liquidity and capital resources for use by our U.S. operations. Historically, our foreign operations generated cash flow from operations sufficient to invest in working capital and to purchase and fund capital improvements to their businesses and facilities. As of December 31, 2009, our foreign subsidiaries held $13.5 million of cash. We believe cash held by our foreign subsidiaries provides our foreign operations with the necessary liquidity to meet its future obligations and allows the foreign business units to reinvest in their operations and could eventually be used to grow our business internationally through additional acquisitions.
 
As a result of the turmoil experienced within the credit and equity markets, we continue to closely monitor the counter party risk of all of our creditors as a part of our focus on maintaining adequate liquidity 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 all 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 2010.
 
Over the longer term, we expect that future obligations, including strategic business opportunities such as acquisitions, 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. Any potential acquisitions are evaluated 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. 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, or other circumstances change. To the extent that operating cash flows are lower than current levels or sources of financing are not available or available at acceptable terms, our future liquidity may be adversely affected.


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Cash Flows
 
The following table sets forth selected cash flow data for the year ended December 31 (in millions):
 
                 
    2009     2008  
 
Cash Provided By/(Used In):
               
Operating Activities from Continuing Operations
  $ 131.0     $ 98.1  
Investing Activities from Continuing Operations
    (15.5 )     7.6  
Financing Activities from Continuing Operations
    (103.8 )     (137.9 )
Discontinued Operations
    0.6       8.2  
                 
Net Increase/(Decrease) in Cash and Cash Equivalents
  $ 12.3     $ (24.0 )
                 
 
During the year ended December 31, 2009, the Company’s cash flow from continuing operations totaled $131.0 million, primarily the result of a net decrease in assets and liabilities of $99.9 million and depreciation and amortization of $32.4 million. Net cash provided by operating activities for 2008 was $98.1 million and was primarily the result of net 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.
 
As noted above, the Company generated $99.9 million of cash flow from a net decrease in assets and liabilities. This cash flow was primarily a result of a reduction in working capital. The following table summarizes the changes in working capital during 2009 (in thousands):
 
                         
    December 31,        
    2009     2008     Change  
 
Cash
  $ 23,596     $ 11,308     $ 12,288  
Accounts receivable, net
    93,421       123,272       (29,851 )
Inventory
    107,770       189,935       (82,165 )
Other current assets
    25,709       22,228       3,481  
Assets from discontinued operations
    655       1,486       (831 )
                         
Total current assets
    251,151       348,229       (97,078 )
Accounts payable
    68,464       76,168       7,704  
Accrued expenses
    40,144       46,305       6,161  
Current portion of long-term debt
    408       2,728       2,320  
                         
Total current liabilities
    109,016       125,201       16,185  
                         
Working capital
  $ 142,135     $ 223,028     $ (80,893 )
                         
 
The 36.3% decrease in working capital during 2009 was primarily driven by our focus on working capital efficiency and inventory management. The accounts receivable balance decreased as a result of the decline in sales volume during the fourth quarter of 2009 compared to the comparable period in 2008. The significant decrease in inventory was the result of decreased raw material costs along with initiatives to reduce raw material purchases, reduce our investment in inventories on hand, and maximize liquidity. Accounts payable decreased $7.7 million as a result of our initiatives to reduce our investment in inventories. The decrease in accrued expenses is primarily a result of lower accruals for annual incentive compensation awards and other compensation. The current portion of debt decreased as a result of the early repayment of all amounts outstanding under the term loan included in the Senior Credit Agreement.


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Net cash used in investing activities from continuing operations during 2009 was $15.5 million. During 2009, investing activities primarily consisted of capital expenditures of $10.8 million and $4.9 million of additional consideration for prior acquisitions. Cash flow from investing activities of $7.6 million during 2008 primarily resulted from cash proceeds of $35.2 million received from the sale of SCM partially offset by capital expenditures of $21.6 million and additional consideration for prior acquisitions of $8.7 million. Capital expenditures decreased $10.8 million, or 50.0%, during 2009 compared to the prior year as a result of our focus on preserving capital and liquidity throughout 2009.
 
Net cash used in financing activities from continuing operations during 2009 was $103.8 million, consisting primarily of net payments of $99.4 million on long-term debt, payments of deferred financing costs of $2.4 million related to the amendment and restatement of the Senior Credit Agreement, and dividend payments of $1.5 million. Net cash used in financing activities from continuing operations for 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 2009 and 2008 were the result of cash flows generated from operations offset by investing activities.
 
Senior Credit Agreement and Senior Subordinated Notes
 
Borrowings under the Senior Credit Agreement are secured by the trade receivables, inventory, personal property and equipment, and certain real property of the Company’s significant domestic subsidiaries. The Senior Credit Agreement provides for a revolving credit facility and letters of credit in an aggregate amount that does not exceed the lesser of (i) $200 million or (ii) a borrowing base determined by reference to the trade receivables, inventories, and property, plant, and equipment of the Company’s significant domestic subsidiaries. The Senior Credit Agreement also provided a term loan originally aggregating $58.7 million, which has been subsequently repaid in full during the fourth quarter of 2009. The revolving credit facility is committed through August 30, 2012. Borrowings on the revolving credit facility and term loan bear interest at a variable interest rate based upon the London Interbank Offered Rate (LIBOR), with a LIBOR floor of 1.50%, plus 3.25% and 3.75%, respectively, or at the Company’s option, an alternate base rate. The revolving credit facility also carries an annual facility fee of 0.50% on the entire facility, whether drawn or undrawn, and fees on outstanding letters of credit which are payable quarterly. As of December 31, 2009, we had $69.7 million of availability under the revolving credit facility.
 
As of December 31, 2009, the only amounts outstanding under the Senior Credit Agreement included borrowings of $50.0 million under the revolving credit facility and outstanding letters of credit of $14.2 million as all amounts outstanding under the term loan were repaid by the end of 2009. During 2009, we borrowed $83.0 million and repaid $122.1 million on the revolving credit facility and made payments of $59.9 million on the term loan.
 
The Company’s $204.0 million of Senior Subordinated 8% Notes (8% Notes) were issued in December 2005 at a discount to yield 8.25%. Provisions of the 8% Notes include, without limitation, restrictions on indebtedness, liens, and distributions from restricted subsidiaries, asset sales, affiliate transactions, dividends and other restricted payments. Dividend payments are subject to annual limits of $0.25 per share and $10 million. After December 1, 2010, the 8% Notes are redeemable at the option of the Company, in whole or in part, at the redemption price (as defined in the Senior Subordinated 8% Notes Indenture), which declines annually from 104% to 100% on and after December 1, 2013. In the event of a Change in Control (as defined in the Senior Subordinated 8% Notes Indenture), each holder of the 8% Notes may require the Company to repurchase all or a portion of such holder’s 8% Notes at a purchase price equal to 101% of the principal amount thereof. At December 31, 2009, we had $201.7 million, net of discount, of our 8% Notes outstanding.


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Each of our significant domestic subsidiaries has guaranteed the obligations under the Senior Credit Agreement. 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 Senior Credit 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 100% of the stock of our significant domestic subsidiaries and a pledge of 65% of the voting stock of our foreign subsidiaries. The 8% Notes are guaranteed by each of our significant domestic subsidiaries.
 
The Senior Credit Agreement includes a financial covenant that requires the Company to maintain a minimum Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA as defined in the 2009 Senior Credit Agreement) for the year-to-date periods ending June 30, 2009, September 30, 2009, and December 31, 2009. This covenant will not be tested after December 31, 2009. As of December 31, 2009, the Company was in compliance with the minimum EBITDA covenant. Beginning on March 31, 2010 and quarterly thereafter on a trailing four-quarter basis, the Senior Credit Agreement includes a single financial covenant that requires the Company to maintain a minimum fixed charge coverage ratio of 1.25 to 1.00. Management expects to be in compliance with the fixed charge ratio throughout 2010. The Senior Credit Agreement contains other provisions and events of default that are customary for similar agreements and may limit the Company’s ability to take various actions. The Senior Subordinated 8% Notes Indenture also contains provisions that limit additional borrowings based on the Company’s consolidated coverage ratio.
 
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, 2009 (in thousands):
 
                                         
    Payments Due by Period  
          Less Than
                More Than
 
Contractual Obligation
  Total     1 Year     1-3 Years     3-5 Years     5 Years  
 
Variable rate debt
  $ 55,632     $ 428     $ 50,804     $ 800     $ 3,600  
Interest on variable rate debt(1)
    6,471       2,394       3,992       28       57  
Fixed rate debt
    201,650                         201,650  
Interest on fixed rate debt
    96,560       16,320       32,640       32,640       14,960  
Operating lease obligations
    46,394       11,990       18,014       9,514       6,876  
Pension and other post-retirement obligations
    6,578       537       1,265       1,365       3,411  
Performance stock unit awards(2)
    1,601             1,601              
Management stock purchase plan(3)
    890       233       466       191        
Employment agreements
    550       550                    
                                         
Total(4)
  $ 416,326     $ 32,452     $ 108,782     $ 44,538     $ 230,554  
                                         
 
 
(1) Calculated using the interest rate in effect at December 31, 2009, assuming no payments were made to reduce the revolving credit facility until its maturity date.
 
(2) Equals the liability accrued as of December 31, 2009 which equals the portion of the awards that have recognized under US GAAP based on a the fair value of the awards, the vesting period of the awards, and the amount of the vesting period that has expired since the grant date.
 
(3) Includes amounts due to retired participants of the Management Stock Purchase Plan (MSPP). Excludes the future payments due to active participants of the MSPP, which represents a liability of approximately $3.1 million as of December 31, 2009. Future payments to active participants cannot be accurately estimated as we are uncertain of when active participants’ service to the Company will terminate.
 
(4) Excludes liabilities for uncertain tax positions of $2.2 million. We have not included the liabilities for uncertain tax positions as we cannot make reliable estimates of the period of cash settlement.


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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:
 
  •  valuation of accounts receivable, which impacts selling, general, and administrative expense;
 
  •  valuation of inventory, which impacts cost of sales and gross margin;
 
  •  the allocation of the purchase price of our acquisition-related assets and liabilities, which affects our depreciation and amortization costs;
 
  •  the assessment of recoverability of goodwill and other intangible and long-lived assets, which impacts write-offs of goodwill, intangibles, and long-lived assets; and
 
  •  accounting for income taxes and deferred tax assets and liabilities, which impacts the provision for income taxes.
 
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, 2009 and 2008, allowances for doubtful accounts of $7.2 million and $6.7 million, or 7% and 5% 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.
 
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. We recorded charges of $2.3 million and $0.3 million during the years ended December 31, 2009 and 2008, respectively, to value our inventory at the lower of cost or market. No charges to value inventory at the lower of cost or market were recorded during the year ended December 31, 2007.
 
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 $5.2 million and $5.0 million, or 5% and 3% of gross inventories, as of December 31, 2009 and 2008, 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.


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Allocation of Purchase Price to 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 most recently in 2007 (in millions):
 
                                         
    Initial
  Property,
  Identified
       
    Purchase
  Plant, and
  Intangible
      Other Net
Acquisition
  Price   Equipment   Assets   Goodwill   Assets
 
Dramex Corporation
  $ 22.7     $ 5.2     $ 3.7     $ 11.5     $ 2.3  
Noll Manufacturing Company and affiliates
  $ 63.7     $ 34.0     $ 7.0     $     $ 22.7  
Florence Corporation
  $ 125.9     $ 12.5     $ 31.8     $ 67.0     $ 14.6  
 
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 exceed 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, 2009 (in millions):
 
         
    Balance as of
    December 31, 2009
 
Property, plant, and equipment, net
  $ 227.4  
Acquired intangibles with estimable useful lives
  $ 41.6  
Other assets
  $ 18.0  
 
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 value as determined by discounted cash flow method, an independent market appraisal of the asset, or another acceptable valuation technique.
 
Goodwill and Other Indefinite-lived Intangible Asset Impairment Testing.  Our goodwill and indefinite-lived intangible asset balances of $392.7 million and $40.6 million as of December 31, 2009, respectively, are subject to impairment testing. We test goodwill and indefinite-lived intangible assets for impairment at least annually, as of October 31, and more frequently whenever events occur or circumstances change that indicate the assets may be impaired. 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 2009, we tested goodwill and other indefinite-lived intangible assets for impairment as of March 31 and June 30 based on lower than forecasted sales volume, revised long-term growth expectations, and a book value of equity in excess of market capitalization. We also continued to test for impairment as of our annual assessment date of October 31.


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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 have identified 11 reporting units with goodwill.
 
The goodwill impairment test consists of comparing the fair value of a reporting unit, determined using two valuation methods, 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.
 
The two valuation methods used to determine the fair value of each reporting unit consist of an income approach and a market approach. The income approach includes a discounted cash flow model which requires us to use significant estimates and judgmental factors. The key estimates and factors used in our discounted cash flow model 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. The market approach consists of applying an EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) multiple to the forecasted EBITDA to be generated by each reporting unit in 2009 and 2010. This approach also relies on key estimates and judgmental factors including revenue growth rates and profit margins based on internal forecasts and the EBITDA multiple selected from an analysis of peer companies.
 
Revenue growth forecasted for 2010 ranged from a 40% increase to a 2% decline compared to 2009 revenue amounts with further increases in revenues forecasted in 2011 and beyond for all reporting units. The compound annual growth rate for revenue during the first five years of our projections ranged between 3% and 18%, 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 3.0% 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 2014 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 between 11.9% and 12.9% based upon an analysis of similar companies including their debt-to-equity ratio, related volatility, and the size of their market capitalization. The multiples were estimated between 4.6 and 6.1 times 2009 EBITDA and between 6.0 and 7.5 times 2010 EBITDA based on an analysis of peer companies, including their EBITDA, market capitalization, and net debt balance. Each reporting unit was assigned a different weighted-average cost of capital and EBITDA multiple based on our perceived risk of each reporting unit reaching its forecasted cash flow targets. Future changes in these estimates and assumptions could materially affect the results of our goodwill impairment tests.
 
As a result of the significant decline in expected future sales volume, we determined goodwill was impaired as of our March 31, 2009 and October 31, 2009 impairment tests and recorded $59.0 million of goodwill impairment charges during 2009. We projected a decrease in future sales for three reporting units, which led to a decreased fair value for each of these reporting units. If our reporting units do not experience forecasted revenue growth or do not generate higher operating margins when economic conditions improve, an additional goodwill impairment charge could be recorded. The remaining goodwill assigned to these reporting units equaled $42.9 million as of December 31, 2009. No goodwill impairments were recorded during the years ended December 31, 2008 and 2007.
 
Other than the three reporting which recorded goodwill impairment charges as a result of our October 31, 2009 test, the fair value of each reporting unit exceeded its carrying value by more than 10% except for two reporting units reported as components of our Building Products segment. The fair value of these reporting units exceeded their carrying values by 9% and 4%, respectively. Goodwill assigned to these reporting units equaled $21.7 million and $18.3 million as of December 31, 2009.


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While any assumption could reasonably differ from those we used, we believe the overall fair values of our reporting units are reasonable as the values are derived from reasonable assumptions. The following table provides a sensitivity analysis regarding the eight reporting units with a fair value in excess of their carrying value as of our October 31, 2009 goodwill impairment test:
 
                     
        Number of Reporting Units
        With Fair Value
   
        Exceeding
  With Carrying Value
    Change in
  Carrying Value by Less
  in Excess of Fair
Assumption
 
Assumption
  Than 10%   Value
 
Weighted-average Cost of Capital   100 Basis Point Increase     4       1  
Terminal Growth
  100 Basis Point Decrease     3       1  
EBITDA Multiple
  1.0 Decrease     4       1  
 
We test our indefinite-lived intangible assets for impairment by 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. We recognized impairment charges of $1.1 million for indefinite-lived intangible assets as a result of our October 31, 2009 impairment test. No impairment of our indefinite-lived intangible assets was recorded for the years ended December 31, 2008 and 2007.
 
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 33.2%, 36.9%, and 39.3%, for 2009, 2008, and 2007, 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.
 
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.
 
During the year ended December 31, 2009, deferred income tax liabilities decreased primarily as a result of the tax effect of the $60.1 million intangible asset impairment charges. Deferred income tax assets increased primarily due to additional equity compensation recognized during 2009. Regarding deferred income tax assets, we maintained valuation allowances of $1.7 million and $2.6 million for the years ended December 31, 2009 and 2008, 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.
 
It is the Company’s policy to record estimated interest and penalties to the tax authorities as income tax expense and tax credits as a reduction in income tax expense. During the years ended December 31, 2009, 2008, and 2007, we recognized $0.2 million, $0.1 million, and $0.1 million of interest (net of federal tax benefit) and penalties, respectively.


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In June 2006, the Financial Accounting Standards Board issued guidance now codified in the Accounting Standards Codification Topic 740, “Income Taxes,” related to “Accounting for Uncertainty in Income Taxes”, which we adopted January 1, 2007. The guidance addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Accordingly, 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 upon adoption of the guidance resulted in a $0.8 million increase in tax liabilities with a corresponding reduction in retained earnings as of January 1, 2007. As of December 31, 2009 and 2008, the liability for uncertain income tax positions was $2.2 million and $2.5 million, respectively. We reduced our reserve for uncertain tax positions after the Internal Revenue Service concluded their examination of our income tax returns for 2007, 2006, and 2005 and Her Majesty’s Revenue and Customs (United Kingdom) concluded their examination of our tax returns for 2007 and 2006. 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.
 
Related Party Transactions
 
Two members of the Company’s Board of Directors, Gerald S. Lippes and Arthur A. Russ, Jr., are partners in law firms that provide legal services to the Company. During the years ended December 31, 2009, 2008, and 2007, the Company incurred $1.2 million, $1.7 million, and $2.2 million for legal services from these firms, respectively. Of the amounts incurred $0.1 million and $0.7 million were capitalized as deferred debt issuance costs and acquisition costs during 2009 and 2007, respectively. All other amounts were recorded as expenses when incurred. At December 31, 2009 and 2008, the Company had $0.2 million and $0.3 million recorded in accounts payable for these law firms, respectively.
 
A member of the Company’s Board of Directors, Robert E. Sadler, Jr., is Vice Chairman of the Board of M&T Bank Corporation, one of the 11 participating lenders which have committed capital to our $200 million revolving credit facility in the Company’s Third Amended and Restated Credit Agreement dated July 24, 2009 (the Senior Credit Agreement). The Senior Credit Agreement provides a revolving credit facility and a term loan. At December 31, 2009, $50.0 million was outstanding on the revolving credit facility. All amounts outstanding under the term loan were repaid as of December 31, 2009. At December 31, 2008, $89.1 million and $59.9 million were outstanding on the revolving credit facility and term loan, respectively. During 2009, the largest aggregate amount of principal outstanding under the revolving credit facility was $99.0 million. The aggregate amount of principal and interest paid during the year ended December 31, 2009 was $182.0 million and $4.3 million, respectively, for amounts outstanding under the revolving credit facility and term loan.
 
Borrowings under the Senior Credit Agreement bear interest at a variable rate based upon the London Interbank Offered Rate (LIBOR), with a LIBOR floor of 1.50%, plus 3.25% for revolving credit facility borrowings and 3.75% for term loan borrowings or, at the Company’s option, an alternate base rate. The revolving credit facility also carries an annual facility fee of 0.50% on the entire facility, whether drawn or undrawn, and fees on outstanding letters of credit which are payable quarterly.
 
The Company was 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 Brian J. Lipke, a Director and Officer of the Company, in effect through December 2007. Under this consulting agreement, 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. During the year ended December 31, 2007, the Company paid Neil E. Lipke $0.1 million to provide him with these benefits.


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Recent Accounting Pronouncements
 
In April 2009, the FASB issued guidance now codified as FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” which provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This guidance also includes provisions for identifying circumstances that indicate a transaction is not orderly. The provisions of this guidance are effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. The Company adopted the provisions of this guidance during the year ended December 31, 2009 and its impact on the Company’s consolidated financial position, cash flows, and results of operations was not significant.
 
In April 2009, the FASB issued guidance now codified as FASB ASC Topic 825, “Financial Instruments,” which amends previous Topic 825 guidance to require disclosures about the fair value of financial instruments for interim periods of publicly traded companies as well as in annual financial statements. This guidance also amends previous guidance in FASB ASC Topic 270, “Interim Reporting,” to require those disclosures in summarized financial information at interim reporting periods. The Company adopted the provisions of this guidance during the year ended December 31, 2009 and its impact on the Company’s disclosures was not significant.
 
In May 2009, the FASB issued guidance now codified as FASB ASC Topic 855, “Subsequent Events,” to establish principles and requirements for subsequent events. The guidance sets forth the date after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements. The guidance also identifies the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date. The guidance is effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively. The Company adopted the provisions of the guidance during the year ended December 31, 2009 and its impact on the Company’s disclosures was not significant.
 
In June 2009, the FASB issued guidance now codified as FASB ASC Topic 810, “Consolidation,” which amends previous Topic 810 guidance to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This guidance shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The Company does not believe the provisions of this guidance will have a significant impact on the Company’s consolidated financial position, cash flows, or results of operations.
 
In June 2009, the FASB issued guidance now codified as FASB ASC Topic 125, “Generally Accepted Accounting Principles,” identifying the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This guidance does not change current US generally accepted accounting principles, but is intended to simplify user access to all authoritative US generally accepted accounting principles by providing all authoritative literature related to a particular topic in one place. The provisions of FASB ASC Topic 125 are effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted the provisions of this guidance during the year ended December 31, 2009, which did not have a significant impact on the Company’s consolidated financial statements other than changing the method used to refer to U.S. generally accepted accounting principles with the Company’s disclosures.
 
In August 2009, the FASB issued Accounting Standards Update (Update) 2009-05, “Fair Value Measurements and Disclosures (Topic 820)”. Update 2009-05 provides amendments to Topic 820, “Fair Value Measurements and Disclosures,” for the fair value measurement of liabilities. Update 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance. The Company adopted the provisions of Update 2009-05 during the year ended December 31, 2009 and its impact on the Company’s consolidated financial positions, cash flows, and results of operations was not significant.


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Item 7A.   Quantitative and Qualitative Disclosures about Market Risk
 
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. During December 31, 2009, we de-designated borrowings as being hedged under our $57.5 million interest rate swap agreement as a result of entering into our Third Amended and Restated Credit Agreement dated July 24, 2009. Accordingly, beginning in the third quarter of 2009 and continuing prospectively, changes in the fair value of the interest rate swap are recorded as gains and losses through our consolidated statement of operations 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, 2009 by expected maturity dates. The weighted average interest rates are based on the actual rates that existed at December 31, 2009. The variable rate debt consists primarily of the revolving credit facility, of which $50.0 million is outstanding at December 31, 2009. A hypothetical 1% increase or decrease in interest rates would have changed the 2009 interest expense by approximately $1.1 million. Dollar amounts in the following are in thousands:
 
                                                         
    2010   2011   2012   2013   2014   Thereafter   Total
 
Long-term debt (fixed)(1)
  $     $     $     $     $     $ 201,650     $ 201,650  
Weighted average interest rate
    8.25 %     8.25 %     8.25 %     8.25 %     8.25 %     8.25 %        
Long-term debt (variable)(1)
  $ 428     $ 404     $ 50,400     $ 400     $ 400     $ 3,600     $ 55,632  
Weighted average interest rate
    4.32 %     4.35 %     4.22 %     0.35 %     0.35 %     0.35 %        
Interest rate swap (notional amount)(2)
  $ 57,500     $     $     $     $     $     $ 57,500  
Interest pay rate
    5.03 %                                      
Interest receive rate
    0.29 %                                      
 
 
(1) The fair value of the Company’s long-term debt was $252.5 million at December 31, 2009.
 
(2) Represents the notional amount on which interest payments and receipts are determined under the interest rate swap, there is no exchange of principal under the interest rate swap agreement.


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Item 8.   Financial Statements and Supplementary Data
 
         
    Page
    Number
 
Financial Statements
       
    45  
    46  
    47  
    48  
    49  
    50  
Supplementary Data:
       
    89  


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Report of Independent Registered Public Accounting Firm
 
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, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gibraltar Industries, Inc. at December 31, 2009 and 2008 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
As discussed in Notes 1 and 16 to the consolidated financial statements, 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, 2009, 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, 2010 expressed an unqualified opinion thereon.
 
/s/  Ernst & Young LLP
 
Buffalo, New York
February 25, 2010


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GIBRALTAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
                         
    Year Ended December 31,  
    2009     2008     2007  
 
Net sales
  $ 834,218     $ 1,232,299     $ 1,198,715  
Cost of sales
    709,239       1,003,513       989,925  
                         
Gross profit
    124,979       228,786       208,790  
Selling, general, and administrative expense
    116,915       147,317       133,049  
Intangible asset impairment
    60,098              
                         
(Loss) income from operations
    (52,034 )     81,469       75,741  
Interest expense
    (25,915 )     (29,235 )     (32,498 )
Equity in partnerships’ income and other income
    316       724       1,172  
                         
(Loss) income before taxes
    (77,633 )     52,958       44,415  
(Benefit of) provision for income taxes
    (25,761 )     19,553       17,476  
                         
(Loss) income from continuing operations
    (51,872 )     33,405       26,939  
Discontinued operations:
                       
Loss from discontinued operations before taxes
    (731 )     (10,948 )     (16,235 )
Benefit of income taxes
    (578 )     (1,611 )     (2,520 )
                         
Loss from discontinued operations
    (153 )     (9,337 )     (13,715 )
                         
Net (loss) income
  $ (52,025 )   $ 24,068     $ 13,224  
                         
Net (loss) income per share — Basic:
                       
(Loss) income from continuing operations
  $ (1.72 )   $ 1.11     $ 0.90  
Loss from discontinued operations
    (0.01 )     (0.31 )     (0.46 )
                         
Net (loss) income per share — Basic
  $ (1.73 )   $ 0.80     $ 0.44  
                         
Weighted average shares outstanding — Basic
    30,135       29,981       29,867  
                         
                         
Net (loss) income per share — Diluted:
                       
(Loss) income from continuing operations
  $ (1.72 )   $ 1.11     $ 0.89  
Loss from discontinued operations
    (0.01 )     (0.31 )     (0.46 )
                         
Net (loss) income per share — Diluted
  $ (1.73 )   $ 0.80     $ 0.43  
                         
Weighted average shares outstanding — Diluted
    30,135       30,193       30,116  
                         
 
The accompanying notes are an integral part of these consolidated financial statements


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GIBRALTAR INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 
                 
    December 31,  
    2009     2008  
 
Assets
Current assets:
               
Cash and cash equivalents
  $ 23,596     $ 11,308  
Accounts receivable, net
    93,421       123,272  
Inventories
    107,770       189,935  
Other current assets
    25,709       22,228  
Assets of discontinued operations
    655       1,486  
                 
Total current assets
    251,151       348,229  
Property, plant, and equipment, net
    227,420       243,619  
Goodwill
    392,704       443,925  
Acquired intangibles
    82,182       87,373  
Investment in partnership
    2,474       2,477  
Other assets
    18,037       20,736  
                 
    $ 973,968     $ 1,146,359  
                 
 
Liabilities and Shareholders’ Equity
Current liabilities:
               
Accounts payable
  $ 68,464     $ 76,168  
Accrued expenses
    40,144       46,305  
Current maturities of long-term debt
    408       2,728  
                 
Total current liabilities
    109,016       125,201  
Long-term debt
    256,874       353,644  
Deferred income taxes
    62,832       79,514  
Other non-current liabilities
    17,020       19,513  
Shareholders’ equity:
               
Preferred stock $.01 par value; authorized 10,000,000 shares; none outstanding
           
Common stock, $.01 par value; authorized 50,000,000 shares; 30,295,084 and 30,061,550 shares issued at December 31, 2009 and 2008, respectively
    303       301  
Additional paid-in capital
    227,362       223,561  
Retained earnings
    303,982       356,007  
Accumulated other comprehensive (loss) income
    (2,230 )     (10,825 )
Cost of 150,903 and 75,050 common shares held in treasury at December 31, 2009 and 2008, respectively
    (1,191 )     (557 )
                 
Total shareholders’ equity
    528,226       568,487  
                 
    $ 973,968     $ 1,146,359  
                 
 
The accompanying notes are an integral part of these consolidated financial statements


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GIBRALTAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
                         
    Year Ended December 31,  
    2009     2008     2007  
 
Cash Flows from Operating Activities
                       
Net (loss) income
  $ (52,025 )   $ 24,068     $ 13,224  
Loss from discontinued operations
    (153 )     (9,337 )     (13,715 )
                         
(Loss) income from continuing operations
    (51,872 )     33,405       26,939  
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
                       
Depreciation and amortization
    32,413       33,907       30,952  
Intangible asset impairment
    60,098              
Provision for deferred income taxes
    (17,671 )     1,574       5,328  
Equity in partnerships’ (income) loss
    (153 )     (447 )     (911 )
Distributions from partnerships’ income
    156       609       712  
Stock compensation expense
    4,407       4,586       2,886  
Non-cash charges to interest expense
    3,382       2,007       1,750  
Other non-cash adjustments
    335       4,105       116  
Increase (decrease) in cash from changes in (net of acquisitions):
                       
Accounts receivable
    34,845       12,273       22,230  
Inventories
    83,920       1,770       45,625  
Other current assets and other assets
    (6,782 )     3,913       1,832  
Accounts payable
    (7,539 )     (8,722 )     7,748  
Accrued expenses and other non-current liabilities
    (4,525 )     9,149       (10,952 )
                         
Net cash provided by continuing operations
    131,014       98,129       134,255  
Net cash provided by discontinued operations
    585       9,745       24,558  
                         
Net cash provided by operating activities
    131,599       107,874       158,813  
                         
Cash Flows from Investing Activities
                       
Acquisitions and additional considerations for acquisitions
    (4,949 )     (8,724 )     (206,608 )
Net proceeds from sale of business
          35,202       11,859  
Purchases of property, plant, and equipment
    (10,813 )     (21,595 )     (17,691 )
Net proceeds from sale of property, plant, and equipment
    299       2,692       3,477  
                         
Net cash (used in) provided by investing activities from continuing operations
    (15,463 )     7,575       (208,963 )
Net cash used in investing activities for discontinued operations
          (501 )     (950 )
                         
Net cash (used in) provided by investing activities
    (15,463 )     7,074       (209,913 )
                         
Cash Flows from Financing Activities
                       
Long-term debt payments
    (182,401 )     (184,937 )     (119,306 )
Proceeds from long-term debt
    83,022       53,439       200,074  
Payment of deferred financing costs
    (2,383 )     (104 )     (1,498 )
Payment of dividends
    (1,499 )     (5,985 )     (5,971 )
Net proceeds from issuance of common stock
    47       250       137  
Tax benefit from equity compensation
          (362 )     121  
Purchase of treasury stock at market prices
    (634 )     (164 )     (393 )
                         
Net cash (used in) provided by financing activities from continuing operations
    (103,848 )     (137,863 )     73,164  
Net cash used in financing activities from discontinued operations
          (1,064 )     (252 )
                         
Net cash (used in) provided by financing activities
    (103,848 )     (138,927 )     72,912  
                         
Net increase (decrease) in cash and cash equivalents
    12,288       (23,979 )     21,812  
Cash and cash equivalents at beginning of year
    11,308       35,287       13,475  
                         
Cash and cash equivalents at end of year
  $ 23,596     $ 11,308     $ 35,287  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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GIBRALTAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(In thousands, except per share data)
 
                                                                         
                                  Accumulated
                   
                      Additional
          Other
                Total
 
    Comprehensive
    Common Stock     Paid-in
    Retained
    Comprehensive
    Treasury Stock     Shareholder
 
    Income (Loss)     Shares     Amount     Capital     Earnings     Income (Loss)     Shares     Amount     Equity  
 
Balance at January 1, 2007
            29,884     $ 299     $ 215,944     $ 332,920     $ 1,065       43     $     $ 550,228  
Cumulative effect of adoption of FIN 48
                              (750 )                       (750 )
Comprehensive income (loss):
                                                                       
Net income
  $ 13,224                         13,224                         13,224  
Other comprehensive income (loss):
                                                                       
Adjustment for OPEB liability, net of tax of $227
    365                                                                  
Foreign currency translation adjustment
    10,633                                                                  
Retirement liability adjustment, net of tax of $25
    39                                                                  
Unrealized loss on interest rate swaps, net of tax of $735
    (1,265 )                                                                
                                                                         
Other comprehensive income
    9,772                               9,772                   9,772  
                                                                         
Total comprehensive income
  $ 22,996                                                                  
                                                                         
Issuance of restricted stock
            6                                            
Net settlement of restricted stock units
            35       1                         12       (276 )     (275 )
Stock compensation expense
                        2,886                               2,886  
Stock options exercised
            24             136                   5       (117 )     19  
Tax benefit from equity compensation
                        121                               121  
Cash dividends-$0.25 per share
                              (7,465 )                       (7,465 )
Forfeiture of restricted stock awards
                                          1              
                                                                         
Balance at December 31, 2007
            29,949       300       219,087       337,929       10,837       61       (393 )     567,760  
Comprehensive income (loss):
                                                                       
Net income
  $ 24,068                         24,068                         24,068  
Other comprehensive loss:
                                                                       
Adjustment for OPEB liability, net of tax of $45
    (79 )                                                                
Foreign currency translation adjustment
    (20,290 )                                                                
Retirement liability adjustment, net of tax of $45
    (78 )                                                                
Unrealized loss on interest rate swaps, net of tax of $669
    (1,215 )                                                                
                                                                         
Other comprehensive loss
    (21,662 )                             (21,662 )                 (21,662 )
                                                                         
Total comprehensive income
  $ 2,406                                                                  
                                                                         
Issuance of restricted stock
            6                                            
Net settlement of restricted stock units
            85       1       (1 )                 14       (164 )     (164 )
Stock compensation expense
                        4,586                               4,586  
Stock options exercised
            22             201                               201  
Tax adjustment from equity compensation
                        (312 )                             (312 )
Cash dividends-$0.20 per share
                              (5,990 )                       (5,990 )
                                                                         
Balance at December 31, 2008
            30,062       301       223,561       356,007       (10,825 )     75       (557 )     568,487  
Comprehensive income (loss):
                                                                       
Net loss
  $ (52,025 )                       (52,025 )                       (52,025 )
Other comprehensive income:
                                                                       
Adjustment for OPEB liability, net of tax of $174
    301                                                                  
Foreign currency translation adjustment
    7,057                                                                  
Retirement liability adjustment, net of tax of $12
    17                                                                  
Unrealized gain on interest rate swaps, net of tax of $719
    1,220                                                                  
                                                                         
Other comprehensive income
    8,595                               8,595                   8,595  
                                                                         
Total comprehensive loss
  $ (43,430 )                                                                
                                                                         
Issuance of restricted stock
            6                                            
Net settlement of restricted stock units
            222       2       (2 )                 76       (634 )     (634 )
Stock compensation expense
                        4,407                               4,407  
Stock options exercised
            5             47                               47  
Tax adjustment from equity compensation
                        (651 )                             (651 )
                                                                         
Balance at December 31, 2009
            30,295     $ 303     $ 227,362     $ 303,982     $ (2,230 )     151     $ (1,191 )   $ 528,226  
                                                                         
 
The accompanying notes are an integral part of these consolidated financial statements


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GIBRALTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Principles of consolidation
 
The consolidated financial statements include the accounts of Gibraltar Industries, Inc. and subsidiaries (the Company). The financial position and results of operations of SCM Asia, a discontinued operation as of October 3, 2008, are consolidated for the appropriate periods based on its fiscal year ended November 30. All significant intercompany accounts and transactions have been eliminated in consolidation.
 
Use of estimates
 
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
 
Revenue recognition
 
Revenue is recognized when products are shipped or service is provided, the customer takes ownership and assumes the risk of loss, collection of the corresponding receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. Sales returns, allowances, and customer incentives are treated as reductions to sales and are provided for based on historical experience and current estimates.
 
Promotional allowances
 
The Company promotes its branded products through cooperative advertising programs with retailers. Retailers also are offered in-store promotional allowances and rebates based on sales volumes. Promotion costs (including allowances and rebates) incurred during the year are expensed to interim periods in relation to revenues and is recorded as a reduction of net sales.
 
Cash and cash equivalents
 
Cash and cash equivalents include cash on hand, checking accounts and all highly liquid investments with a maturity of three months or less.
 
Accounts receivable
 
Accounts receivable are composed of trade receivables recorded at the invoiced amount, are expected to be collected within one year, and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable uncollectible amounts in the Company’s existing accounts receivable. The Company determines the allowance based on a number of factors, including historical experience, credit worthiness of customers, and current market and economic conditions. The Company reviews the allowance for doubtful accounts on a regular basis. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The following table summarizes activity recorded within the allowance for doubtful accounts for the years ended December 31 (in thousands):
 
                         
    2009     2008     2007  
 
Beginning balance
  $ 6,713     $ 3,338     $ 2,419  
Bad debt expense
    2,562       5,162       768  
Acquired reserves
                344  
Accounts written-off, net of recoveries and other adjustments
    (2,092 )     (1,787 )     (193 )
                         
Ending balance
  $ 7,183     $ 6,713     $ 3,338  
                         


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GIBRALTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
 
Amounts charged to bad debt expense increased in 2008 compared to 2009 and 2007 due to the bankruptcy of a customer within our Processed Metal Products segment which led to a $2,700,000 charge to bad debt expense.
 
Concentrations of credit risk on accounts receivable are limited to those from significant customers that are believed to be financially sound. Accounts receivable from The Home Depot were 18.0% and 14.7% of consolidated accounts receivable at December 31, 2009 and 2008, respectively. Net sales to the Home Depot, which are solely generated from our Building Products segment, were 13.0%, 8.2%, and 10.2% of consolidated net sales for the years ended December 31, 2009, 2008, and 2007, respectively. The Company typically does not require collateral.
 
Inventories
 
Inventories are valued at the lower of cost or market. For the years ended December 31, 2009 and 2008, the Company recognized charges of $2,344,000 and $258,000, respectively, within cost of sales to adjust inventory to the lower of cost or market because inventory at cost exceeded the Company’s estimate of net realizable value less normal profit margins. There was no charge to adjust inventory to the lower of cost or market for the year ended December 31, 2007.
 
The cost basis of the inventory is determined on a first-in, first-out basis using either actual costs or a standard cost methodology which approximates actual cost. Inventory on hand is regularly reviewed and provisions for excess, obsolete, and slow-moving inventory based on historical and current sales trends are recorded. The following table summarizes activity recorded within the reserves for excess, obsolete, and slow moving inventory for the years ended December 31 (in thousands):
 
                                 
    2009     2008     2007  
 
Beginning balance
  $ 4,985     $ 6,044             $ 5,422  
Excess, obsolete, and slow-moving inventory expense
    1,266       2,345               1,315  
Acquired reserves
                        527  
Scrapped inventory, net of recoveries and other adjustments
    (1,040 )     (3,404 )             (1,220 )
                                 
Ending balance
  $ 5,211     $ 4,985             $ 6,044  
                                 
 
Property, plant, and equipment
 
Property, plant, and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Expenditures that extend the useful lives of assets are capitalized, while repair and maintenance costs are expensed as incurred. The estimated useful lives of land improvements, buildings, and building improvements are 15 to 40 years, while the estimated useful lives for machinery and equipment are 3 to 20 years. Accelerated depreciation methods are used for income tax purposes. Depreciation expense aggregated $27,228,000, $26,560,000, and $25,472,000 in 2009, 2008, and 2007, respectively.
 
Interest is capitalized in connection with construction of qualified assets. Interest of $671,000, $430,000, and $561,000 was capitalized in 2009, 2008, and 2007, respectively.
 
Acquisition related assets and liabilities
 
Accounting for the acquisition of a business as a purchase transaction requires an allocation of the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective estimated fair values. The most difficult estimations of individual fair values are those involving long-lived assets, such as property, plant and equipment and intangible assets. The Company uses all available information to make these fair value determinations and, for major business acquisitions, engages independent valuation specialists to assist in the fair value determination of the acquired long-lived assets.


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GIBRALTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
 
Goodwill and other intangible assets
 
The Company tests goodwill and other indefinite-lived intangible assets for impairment at the reporting unit level on an annual basis at October 31 or more frequently if an event occurs or circumstances change that indicate that the fair value of a reporting unit could be below its carrying amount. During 2009, the Company tested goodwill and other indefinite-lived intangible assets for impairment as of March 31 and June 30 based on lower than forecasted sales volume, revised long-term growth expectations, and a book value of equity in excess of market capitalization, as well as its annual assessment date of October 31. The reporting units are at the component level, or one level below the reporting segment level. Goodwill is assigned to each reporting unit as of the date the reporting unit is acquired and based upon the expected synergies of the acquisition. The impairment test consists of comparing the fair value of a reporting unit, determined using two valuation techniques, with its carrying amount including goodwill, and, if the carrying amount of the reporting unit exceeds its fair value, comparing the implied fair value of goodwill with its carrying amount. An impairment loss would be recognized for the carrying amount of goodwill in excess of its implied fair value. Goodwill impairment charges of $59,008,000 were recognized during the year ended December 31, 2009. There were no goodwill impairment charges recorded in 2008 and 2007.
 
The Company tests its indefinite-lived intangible assets for impairment on an annual basis during at 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 on a relief of royalty basis, with its carrying amount. An impairment loss would be recognized for the carrying amount in excess of its fair value. Indefinite-lived intangible asset impairment charges of $1,090,000 were recognized during the year ended December 31, 2009. No impairments of indefinite-lived intangible assets were recognized during the years ended December 31, 2008, and 2007.
 
Acquired identifiable intangible assets are recorded at estimated cost. Identifiable intangible assets with finite useful lives are amortized over their estimated useful lives.
 
Deferred charges
 
Deferred charges associated with initial costs incurred to enter into new debt arrangements are included in other assets and are amortized as a part of interest expense over the terms of the associated debt agreements. During 2009, a portion of these deferred financing charges were written off as a result of entering into the Third Amended and Restated Credit Agreement dated July 24, 2009 (Senior Credit Agreement) and the early payment of debt outstanding under a term loan under the Senior Credit Agreement as discussed in Note 8 of the consolidated financial statements.
 
Impairment of long-lived assets
 
Long-lived assets, including acquired identifiable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. The Company uses undiscounted cash flows to determine whether impairment exists and measures any impairment loss by approximating fair value using acceptable valuation techniques, including discounted cash flow models and third-party appraisals.
 
Investments in partnerships
 
The Company’s investment in partnership is accounted for using the equity method of accounting, under which the Company’s share of the earnings of the partnership is recognized in income as earned, and distributions are credited against the investment when received.


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GIBRALTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
 
Interest rate exchange agreements
 
The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is interest rate risk. Interest rate swaps are entered into to manage interest rate risk associated with the Company’s variable-rate borrowings. During the years ended December 31, 2009, 2008, and 2007, the Company had an interest rate swap outstanding with a notional amount $57,500,000, which expires on December 22, 2010. Additionally, the Company had an interest rate swap with a notional amount of $57,500,000 expire in 2007.
 
In connection with the execution of the Company’s Third Amended and Restated Credit Agreement dated July 24, 2009 and based on the Company’s prospective assessment of the effectiveness of the remaining interest rate swap, the Company deemed the swap to be ineffective in offsetting variability in future interest payments on $57,500,000 of the Company’s variable-rate borrowings during the year ended December 31, 2009. Changes in the fair value of the swap were recorded in earnings during the six months ended December 31, 2009 and will continue to be on a prospective basis. Commencing in the fourth quarter of 2008, 4.3% of the interest rate swap was determined to be ineffective. During the nine months ended September 30, 2008 and all of 2007, no ineffectiveness existed and the Company determined the interest rate swap effectively converted $57,500,000 of variable-rate borrowings to a fixed rate of 6.78%. No ineffectiveness existed for the interest rate swap that expired during the year ended December 31, 2007 and the Company determined that the interest rate swap effectively converted another $57,500,000 of variable-rate borrowings to a fixed rate during this period.
 
Assets or liabilities are recognized in the consolidated balance sheet at fair value for all derivative instruments. The Company designated its interest rate swap as a cash flow hedge at inception. The determination of the fair value of the interest rate swap is disclosed in Note 13. As of December 31, 2009, the Company recorded a liability of $2,564,000 as an accrued expense on the consolidated balance sheet. As of December 31, 2008, the Company recorded a liability of $3,998,000 as an other non-current liability on the consolidated balance sheet.
 
The effective portion of the gain or loss on the interest rate swap was reported as a component of other comprehensive income and reclassified into earnings as interest expense accrued on the applicable variable-rate borrowings. The remaining amounts reported within accumulated other comprehensive income will be reclassified into earnings on a straight-line basis throughout the remaining term of the instrument. As of December 31, 2009, all losses will be reclassified from accumulated other comprehensive income to interest expense within the next twelve months. Gains or losses on the interest rate swap representing hedge ineffectiveness were recognized in current earnings as interest expense or income. The following table summarizes the gains and losses recorded in interest expense and other comprehensive income as a result of the interest rate swap for the years ended December 31 (in thousands):
 
                         
    2009     2008     2007  
 
Adjustments to interest expense:
                       
Loss (gain) reclassified from accumulated other comprehensive income
  $ 2,010     $ 1,032     $ (195 )
Loss from changes in the fair value of the ineffective portion of the interest rate swap
    896       131        
                         
Total loss (gain) included in interest expense
  $ 2,906     $ 1,163     $ (195 )
                         
Adjustments to other comprehensive income (loss):
                       
Realized loss (gain) reclassified to interest expense, net of taxes
  $ 1,264     $ 646     $ (123 )
Unrealized loss from changes in the fair value of the effective portion of the interest rate swap, net of taxes
    (44 )     (1,861 )     (1,142 )
                         
Gain (loss) included in other comprehensive income (loss)
  $ 1,220     $ (1,215 )   $ (1,265 )
                         


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GIBRALTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
 
Translation of foreign currency
 
The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. Gains and losses resulting from foreign currency transactions are recognized currently in income and those resulting from the translation of financial statements are accumulated as a separate component of comprehensive income. During 2009, the Company recorded a foreign currency transaction loss of $192,000. During 2008 and 2007, the Company recorded foreign currency transaction income of $404,000 and $425,000, respectively.
 
Shareholders’ equity
 
During the year ended December 31, 2009, the Company did not declare any dividends to maximize cash flows as a response to the economic turmoil impacting the markets the Company serves. During 2008 and 2007, the Company declared dividends of $5,990,000 and $7,465,000, respectively, of which $1,499,000 was accrued at December 31, 2008.
 
During 2009, 2008, and 2007, the Company acquired 75,853, 13,583, and 17,367 shares of stock, respectively, as satisfaction of statutory minimum tax withholdings related to equity compensation. The Company reacquired 1,500 shares of forfeited restricted common stock in 2007. These reacquired shares and related cost are reflected as treasury stock in the consolidated balance sheets at December 31, 2009 and 2008.
 
Comprehensive income (loss)
 
Comprehensive income (loss) includes net income (loss) as well as other comprehensive income (loss). The Company’s other comprehensive income (loss) consists of unrealized gains and losses on interest rate swaps and retirement liability adjustments, which are recorded net of related taxes, along with foreign currency translation adjustments.
 
Net income per share
 
Basic net income per share equals net income divided by the weighted average shares outstanding during the year. The computation of diluted net income per share includes all dilutive common stock equivalents in the weighted average shares outstanding. A reconciliation between basic net income per share and diluted net income per share for the years ended December 31, 2009, 2008, and 2007 is displayed in Note 17 of the consolidated financial statements.
 
Income taxes
 
The provision for income taxes is determined using the asset and liability approach. Under this approach, deferred income taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. The Company records a valuation allowance to reduce deferred tax assets when uncertainty exists regarding their being realized.
 
The Company adopted provisions now codified as Topic 740, “Income Taxes,” related to “Accounting for Uncertainty in Income Taxes” of the Financial Accounting Standard Board’s (FASB) Accounting standards codification (ASC), effective January 1, 2007 which effectively changed the accounting for uncertain tax positions and related disclosures. See Note 16 for further details relating to the impact adopting FIN 48 had on the Company’s consolidated financial statements.


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GIBRALTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
 
Equity-based compensation
 
In accordance with Statement of FASB ASC Topic 718, “Stock Compensation,” the Company measures the cost of equity-based compensation based on grant date fair value and recognizes the cost over the period in which the employee is required to provide service in exchange for the award. Equity-based compensation consists of grants of stock options, restricted stock, restricted stock units, and performance stock units. Equity-based compensation expense is included in selling, general, and administrative expenses. The Company’s equity-based compensation plans are discussed in more detail in Note 12 of the consolidated financial statements.
 
Collective bargaining agreements
 
At December 31, 2009, the Company employed approximately 2,450 people, of which approximately 22% were represented by unions through various collective bargaining agreements (CBAs). Unions represent 62% and 18% of our Processed Metal Products and Building Products employees, respectively. Three CBAs, representing 4% of our workforce, expire during 2010. The employees represented through CBAs expiring in 2010 are primarily from our Processed Metal Products segment. Our other CBAs expire between January 31, 2011 and March 31, 2012. 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.
 
Recent accounting pronouncements
 
In April 2009, the FASB issued guidance now codified as FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” which provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This guidance also includes provisions for identifying circumstances that indicate a transaction is not orderly. The provisions of this guidance are effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. The Company adopted the provisions of this guidance during the year ended December 31, 2009 and its impact on the Company’s consolidated financial position, cash flows, and results of operations was not significant.
 
In April 2009, the FASB issued guidance now codified as FASB ASC Topic 825, “Financial Instruments,” which amends previous Topic 825 guidance to require disclosures about the fair value of financial instruments for interim periods of publicly traded companies as well as in annual financial statements. This guidance also amends previous guidance in FASB ASC Topic 270, “Interim Reporting,” to require those disclosures in summarized financial information at interim reporting periods. The Company adopted the provisions of this guidance during the year ended December 31, 2009 and its impact on the Company’s disclosures was not significant.
 
In May 2009, the FASB issued guidance now codified as FASB ASC Topic 855, “Subsequent Events,” to establish principles and requirements for subsequent events. The guidance sets forth the date after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements. The guidance also identifies the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date. The guidance is effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively. The Company adopted the provisions of the guidance during the year ended December 31, 2009 and its impact on the Company’s disclosures was not significant.


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GIBRALTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
 
In June 2009, the FASB issued guidance now codified as FASB ASC Topic 810, “Consolidation,” which amends previous Topic 810 guidance to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This guidance shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The Company does not believe the provisions of this guidance will have a significant impact on the Company’s consolidated financial position, cash flows, or results of operations.
 
In June 2009, the FASB issued guidance now codified as FASB ASC Topic 125, “Generally Accepted Accounting Principles,” identifying the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This guidance does not change current US generally accepted accounting principles, but is intended to simplify user access to all authoritative US generally accepted accounting principles by providing all authoritative literature related to a particular topic in one place. The provisions of FASB ASC Topic 125 are effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted the provisions of this guidance during the year ended December 31, 2009, which did not have a significant impact on the Company’s consolidated financial statements other than changing the method used to refer to U.S. generally accepted accounting principles with the Company’s disclosures.
 
In August 2009, the FASB issued Accounting Standards Update (Update) 2009-05, “Fair Value Measurements and Disclosures (Topic 820)”. Update 2009-05 provides amendments to Topic 820, “Fair Value Measurements and Disclosures,” for the fair value measurement of liabilities. Update 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance. The Company adopted the provisions of Update 2009-05 during the year ended December 31, 2009 and its impact on the Company’s consolidated financial positions, cash flows, and results of operations was not significant.
 
Reclassifications
 
Certain 2008 and 2007 amounts have been reclassified to conform to the 2009 presentation. The Company reclassified warehousing costs from selling, general, and administrative expense to cost of sales for 2008 and 2007. The warehousing costs reclassified amounted to $7,320,000 and $6,430,000 for the years ended December 31, 2008 and 2007, respectively. Warehousing costs were also reclassified for the quarterly periods reported in our Quarterly Reports on Form 10-Q for each quarterly period in 2009. The quarterly information provided in Note 21 of the consolidated financial statements for the quarters ended March 31, 2009, June 30, 2009, and September 30, 2009 amounted to $1,741,000, $1,579,000, and $2,156,000, respectively.
 
2.   INVENTORIES
 
Inventories at December 31 consist of the following (in thousands):
 
                 
    2009     2008  
 
Raw material
  $ 37,605     $ 78,768  
Work-in-process
    16,224       25,966  
Finished goods
    53,941       85,201  
                 
Total inventory
  $ 107,770     $ 189,935  
                 


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GIBRALTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
 
 
3.   PROPERTY, PLANT, AND EQUIPMENT
 
Components of property, plant, and equipment at December 31 consisted of the following (in thousands):
 
                 
    2009     2008  
 
Land and land improvements
  $ 17,759     $ 17,889  
Building and improvements
    98,230       97,543  
Machinery and equipment
    306,510       287,978  
Construction in progress
    4,488       8,919  
                 
      426,987       412,329  
Less accumulated depreciation and amortization
    199,567       168,710  
                 
Property, plant and equipment, net
  $ 227,420     $ 243,619  
                 
 
4.   ACQUISITIONS
 
On June 8, 2006, the Company acquired all of the outstanding stock of Home Impressions, Inc. (Home Impressions). Home Impressions was based in Hickory, North Carolina and marketed and distributed mailboxes and postal accessories. The acquisition of Home Impressions served to strengthen the Company’s position in the mailbox and storage systems markets, and provided marketing, manufacturing, and distribution synergies with our existing operations. The results of Home Impressions (included in the Company’s Building Products segment) have been included in the Company’s consolidated financial results from the date of acquisition. The acquisition of Home Impressions is not considered significant to the Company’s consolidated results of operations.
 
As part of the purchase agreement with the former owners of Home Impressions, the Company was required to pay additional consideration based upon the operating results of Home Impressions. The Company paid $4,949,000, $923,000, and $159,000 of such additional consideration during the years ended December 31, 2009, 2008, and 2007, respectively. These payments were recorded as additional goodwill. No more additional consideration payments are necessary under the purchase agreement.
 
On March 9, 2007 the Company acquired all of the outstanding stock of Dramex Corporation (Dramex). Dramex had locations in Ohio, Canada, and England and manufactured, marketed and distributed a diverse line of expanded metal products used in the commercial building and industrial sectors of the building products market. The acquisition of Dramex strengthened the Company’s position in the expanded metal market and provided additional opportunity for both Dramex’s products and products manufactured by certain business units of the Company. The results of Dramex (included in the Company’s Building Products segment) are included in the Company’s consolidated financial results from the date of acquisition. The acquisition of Dramex was not considered significant to the Company’s consolidated results of operations.
 
The aggregate purchase consideration for the acquisition of Dramex was $22,677,000 in cash and acquisition costs. The purchase price was allocated to the assets acquired and liabilities assumed based upon respective fair values. The identifiable intangible assets consisted of a trademark with a value of $1,795,000 (indefinite useful life), a trademark with a value of $111,000 (5 year estimated useful life), and customer relationships with a value of $1,828,000 (10 year estimated useful life).


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GIBRALTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
 
The excess consideration over fair value was recorded as goodwill and aggregated approximately $11,514,000, none of which is deductible for tax purposes. The allocation of purchase consideration to the assets acquired and liabilities assumed is as follows (in thousands):
 
         
Working capital
  $ 5,566  
Property, plant and equipment
    5,175  
Other long term liabilities, net
    (3,313 )
Identifiable intangible assets
    3,735  
Goodwill
    11,514  
         
    $ 22,677  
         
 
On April 10, 2007, the Company acquired certain assets and liabilities of Noll Manufacturing Company and its affiliates (Noll) with locations in California, Oregon, and Washington. The assets the Company acquired from Noll are used to manufacture, market, and distribute products for the building; heating, ventilation, and air conditioning; and lawn and garden components of the building products market. The acquisition of Noll strengthened the Company’s manufacturing, marketing, and distribution capabilities and provided manufacturing and distribution synergies with the Company’s existing business units. The results of Noll (included in the Company’s Building Products segment) have been included in the Company’s consolidated financial results from the date of acquisition. The acquisition of Noll was not considered significant to the Company’s consolidated results of operations.
 
The aggregate purchase consideration was approximately $63,726,000 in cash and direct acquisition costs. The purchase price has been allocated to the assets acquired and liabilities assumed based upon respective fair values. The valuation resulted in negative goodwill of $9,491,000 which has been allocated to property, plant and equipment and intangibles on a pro rata basis. After giving effect to the allocation of the negative goodwill, the identifiable intangible assets consisted of patents with a value of $57,000 (8 year estimated useful life), customer relationships with a value of $2,679,000 (15 year estimated useful life), non-compete agreements valued at $726,000 (5 year estimated useful life), and trademarks with a value of $3,490,000 (indefinite useful life). The allocation of the purchase consideration to the assets acquired and liabilities assumed is as follows (in thousands):
 
         
Working capital
  $ 22,820  
Property, plant and equipment
    33,954  
Identifiable intangible assets
    6,952  
         
    $ 63,726  
         
 
On August 31, 2007, the Company acquired all of the outstanding stock of the Florence Corporation (Florence). Florence, located in Manhattan, Kansas, designed and manufactured storage solutions, including mail and package delivery products. The acquisition of Florence strengthened the Company’s position in the storage solutions market. The results of Florence (included in the Company’s Building Products segment) have been included in the Company’s consolidated financial results since the date of acquisition. The acquisition of Florence was not considered significant to the Company’s results of operations.


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GIBRALTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
 
The initial aggregate purchase consideration for the acquisition of Florence was $125,939,000, which included $119,443,000 of cash, including direct acquisition costs, and the assumption of a $6,496,000 capital lease. The purchase price was allocated to the assets acquired and liabilities assumed based upon respective fair values. The identifiable intangible assets consisted of unpatented technology and patents with a value of $2,200,000 (10 year estimated useful life), customer contracts with a value of $15,700,000 (13 year estimated useful life), customer relationships with a value of $7,200,000 (15 year estimated useful life) and trademarks with a value of $6,700,000 (indefinite useful life). The excess consideration was recorded as goodwill and approximated $66,977,000. The allocation of purchase consideration to the assets acquired and liabilities assumed is as follows (in thousands):
 
         
Working capital
  $ 20,451  
Property, plant and equipment
    12,514  
Other assets
    265  
Other long term liabilities
    (6,068 )
Identifiable intangible assets
    31,800  
Goodwill
    66,977  
         
    $ 125,939  
         
 
The Company and the former owners of Florence have made a joint election under Internal Revenue Code (IRC) Section 338(h)(10) which allowed the Company to treat the stock purchase as an asset purchase for tax purposes. In connection with the 338(h)(10) election, and pursuant to the terms of the Stock Purchase Agreement, the Company made additional cash payments to the former shareholders of Florence totaling $7,801,000 during the year ended December 31, 2008. This additional consideration was recorded as additional goodwill. As a result of the 338(h)(10) election, goodwill in the amount of $74,778,000 is fully deductible for tax purposes.
 
5.   GOODWILL AND RELATED INTANGIBLE ASSETS
 
Goodwill
 
All goodwill reported on the balance sheet relates to the Building Products segment. The changes in the carrying amount of goodwill for the years ended December 31, 2009 and 2008 are as follows (in thousands):
 
                 
    2009     2008  
 
Balance at beginning of year
  $ 443,925     $ 445,073  
Goodwill acquired/ acquisition adjustment
    4,838       5,411  
Impairment
    (59,008 )      
Foreign currency translation
    2,949       (6,559 )
                 
Balance at end of year
  $ 392,704     $ 443,925  
                 
 
The December 31, 2009 balance noted above is net of accumulated impairment losses of $59,008,000, which was generated as a result of the impairment charges noted below. No accumulated impairment losses were recognized prior to the year ended December 31, 2009.
 
As noted in Note 14, the Company disposed of its SCM Metal Products subsidiaries (SCM) during the year ended December 31, 2008. SCM was comprised of two reporting units with $8,418,000 of goodwill as of the date of disposal.


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GIBRALTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
 
Based on lower than forecasted sales volume, revised long-term growth expectations, and a book value of equity in excess of market capitalization, the Company concluded there were indicators of goodwill impairment requiring an interim impairment test for its eleven reporting units as of June 30, 2009 and March 31, 2009. The Company also performed its annual goodwill impairment test as of October 31, 2009.
 
Step one of the goodwill impairment test consists of comparing the fair value of a reporting unit, determined using two valuation techniques, with its carrying amount including goodwill. The fair value of each reporting unit with goodwill was estimated using assumptions including a weighted average cost of capital (WACC). The WACC is calculated based upon the capital structure of eight market participants in our peer group. The following table was used during the goodwill impairment tests performed during 2009 compared to the last impairment test performed in 2008:
 
     
Date of Impairment Test
  WACC
 
December 31, 2008
  11.0%
March 31, 2009
  11.50% to 12.00%
June 30, 2009
  12.2% to 12.6%
October 31, 2009
  11.9% to 12.9%
 
Other assumptions used to calculate a fair value for each reporting unit include projected revenue growth, forecasted cash flows, and earnings multiples based on the market value of the Company and eight market participants in our peer group. A third-party forecast of housing starts was utilized to prepare the estimated revenue growth for future periods. The reporting unit that serves the automotive market does not have goodwill.
 
During our goodwill impairment tests, we determined three reporting units had a carrying amount exceeding the reporting unit’s fair value due to a decrease in projected revenues to be generated by the reporting units. Therefore, the Company initiated step two of the goodwill impairment test which involves calculating the implied fair value of goodwill by allocating the fair value of the reporting unit to its assets and liabilities other than goodwill and comparing it to the carrying amount of goodwill. As a result of step two of the goodwill impairment test, the Company estimated that the implied fair value of goodwill for the reporting units was less than their carrying values by $59,008,000, which has been recorded as an impairment charge during 2009. The impairment charges recorded during the fourth quarter of 2009 were estimates based on the preliminary allocation of fair value in the second step of the goodwill impairment test. If any adjustment to these estimated impairment charges are required due to the final determination of fair value for intangible assets, it will be recorded during the first quarter of 2010. All other reporting units with goodwill had an estimated fair value in excess of their carrying value for all goodwill impairment tests performed during 2009. No goodwill impairment charges were recorded in 2008 and 2007.


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GIBRALTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
 
The following sensitivity analysis discloses the WACC that would lead to a reporting unit failing step one of the goodwill impairment test along with the amount of goodwill associated with the reporting unit:
 
                                                 
    March 31, 2009
  June 30, 2009
  October 31, 2009
    Impairment Test   Impairment Test   Impairment Test
    Number of
  Goodwill
  Number of
  Goodwill
  Number of
  Goodwill
    Reporting Units
  Associated
  Reporting Units
  Associated
  Reporting Units
  Associated With
    That Would Fail
  With These
  That Would
  With These
  That Would Fail
  These Reporting
WACC
  Step One(1)   Reporting Units   Fail Step One   Reporting Units   Step One(2)   Units
 
11.50%
    1     $ 74,778,000           $       1     $ 4,468,000  
11.75%
    1     $ 74,778,000           $       3     $ 76,376,000  
12.00%
    1     $ 74,778,000           $       3     $ 76,376,000  
12.25%
    3     $ 116,978,000           $       3     $ 76,376,000  
12.50%
    4     $ 136,677,000       1     $ 22,631,000       3     $ 76,376,000  
12.75%
    5     $ 248,176,000       3     $ 93,629,000       3     $ 76,376,000  
13.00%
    5     $ 248,176,000       6     $ 227,857,000       4     $ 94,637,000  
 
 
(1) The reporting unit shown above as failing the goodwill impairment test at a WACC of 11.50%, 11.75%, and 12.00% is the reporting unit that was impaired during the March 31, 2009 impairment test. The reporting unit had a goodwill balance of $74,778,000 prior to the impairment charge and $49,277,000 after the impairment charge.
 
(2) The reporting units shown above as failing the goodwill impairment test as of October 31, 2009 at a WACC lower than 13.00% were all impaired during the October 31, 2009 impairment test. The impaired reporting units had an aggregate goodwill balance of $76,376,000 prior to the impairment charges and an aggregate goodwill balance of $42,869,000 after the impairment charge.
 
The Company will continue to monitor impairment indicators and financial results in future periods. If cash flows change or if the market value of the Company’s stock does not increase, there may be additional impairment charges. Impairment charges could be based on factors such as the Company’s stock price, forecasted cash flows, assumptions used, control premiums or other variables.
 
Acquired Intangible Assets
 
Acquired intangible assets consist of the following (in thousands):
 
                                         
    2009     2008        
    Gross
          Gross
             
    Carrying
    Accumulated
    Carrying
    Accumulated
       
    Amount     Amortization     Amount     Amortization     Estimated Life  
 
Trademark
  $ 40,612     $     $ 41,119     $       indefinite  
Trademark
    2,115       (744 )     2,089       (562 )     2 to 15 years  
Unpatented technology/patent
    5,732       (1,795 )     5,731       (1,272 )     5 to 20 years  
Customer relationships
    48,086       (12,910 )     47,339       (8,511 )     5 to 15 years  
Non-competition agreements
    2,799       (1,713 )     3,624       (2,184 )     5 to 10 years  
                                         
    $ 99,344     $ (17,162 )   $ 99,902     $ (12,529 )        
                                         
 
Acquired intangible asset amortization expense for the years ended December 31, 2009, 2008, and 2007 aggregated approximately $5,185,000, $5,566,000, and $3,816,000, respectively. The Company also recognized a $1,090,000 impairment charge during the year ended December 31, 2009 related to the indefinite-lived intangible assets.


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GIBRALTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
 
Amortization expense related to acquired intangible assets subject to amortization at December 31, 2009 for the next five years ended December 31 is estimated as follows (in thousands):
 
         
2010
  $ 5,163  
2011
  $ 5,103  
2012
  $ 4,980  
2013
  $ 4,682  
2014
  $ 3,772  
 
6.   INVESTMENTS IN PARTNERSHIPS
 
The Company has a 31% partnership interest in a steel pickling joint venture with Samuel Manu-Tech, Inc. The partnership provides a steel cleaning process called “pickling” to steel mills and steel processors. The investment is included in the Company’s Processed Metal Products segment and is accounted for using the equity method of accounting. The Company’s investment in the partnership was approximately $2,474,000 and $2,477,000 at December 31, 2009 and 2008, respectively. As explained in Note 20 of the consolidated financial statements, on February 1, 2010, this investment and the majority of the other assets held by the Processed Metal Products segment were sold.
 
7.   ACCRUED EXPENSES
 
Accrued expenses at December 31 consist of the following (in thousands):
 
                 
    2009     2008  
 
Compensation
  $ 11,867     $ 16,798  
Insurance
    9,209       10,395  
Customer rebates
    7,724       6,840  
Other
    11,344       12,272  
                 
    $ 40,144     $ 46,305  
                 
 
8.   DEBT
 
Long-term debt at December 31 consists of the following (In thousands):
 
                 
    2009     2008  
 
Revolving credit facility
  $ 50,000     $ 89,079  
Term loan
          59,880  
8% Senior Subordinated Notes due December 1, 2015 with interest payable in semiannual installments at an 8.25% effective rate, recorded net of unamortized discount of $2,350 and $2,647 at December 31, 2009 and 2008, respectively
    201,650       201,353  
Other debt
    5,632       6,060  
                 
Total debt outstanding
    257,282       356,372  
Less current maturities
    408       2,728  
                 
Total long-term debt
  $ 256,874     $ 353,644  
                 


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GIBRALTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
 
The Company’s Third Amended and Restated Credit Agreement dated July 24, 2009 (the Senior Credit Agreement) provided a revolving credit facility and a term loan. The Senior Credit Agreement was amended and restated in order to convert it into a secured asset-based credit facility that allowed the Company to remove most of the restrictive covenants contained in the Second Amended and Restated Credit Agreement prior to its amendment and restatement. Borrowings under the Senior Credit Agreement are secured by the trade receivables, inventory, personal property and equipment, and certain real property of the Company’s significant domestic subsidiaries. The Senior Credit Agreement provides for a revolving credit facility and letters of credit in an aggregate amount that does not exceed the lesser of (i) $200 million or (ii) a borrowing base determined by reference to the trade receivables, inventories, and property, plant, and equipment of the Company’s significant domestic subsidiaries. The Senior Credit Agreement also provided a term loan originally aggregating $58,730,000. The revolving credit facility is committed through August 30, 2012 and the term loan was originally due December 8, 2012.
 
Borrowings under the revolving credit facility bear interest at a variable rate based upon the London Interbank Offered Rate (LIBOR), with a LIBOR floor of 1.50%, plus 3.25% or, at the Company’s option, an alternate base rate. The revolving credit facility also carries an annual facility fee of 0.50% on the entire facility, whether drawn or undrawn, and fees on outstanding letters of credit which are payable quarterly. At December 31, 2009, amounts outstanding under the revolving credit facility bore interest at an annual rate of 4.75%. At December 31, 2008, the Company had $85,000,000 outstanding under the revolving credit facility at interest rates of LIBOR plus a margin ranging from 2.075% to 3.075% and additional borrowings of $4,079,000 outstanding at 3.25%. Standby letters of credit of $14,153,000 have been issued under the Senior Credit Agreement to third parties on behalf of the Company at December 31, 2009. These letters of credit reduce the amount otherwise available under the revolving credit facility. At December 31, 2009, the Company had $69,726,000 of availability under the revolving credit facility.
 
Borrowings under the term loan bear interest at LIBOR, with a LIBOR floor of 1.50%, plus 3.75% or, at the Company’s option, an alternate base rate. The Company was required to repay $575,000 on the term loan each quarter until the remaining balance comes due in 2012. On October 30, 2009, the Company paid off its term loan balance with funds available under the revolving credit facility. During the three years ended December 31, 2009, the Company entered into interest rate swaps to fix a portion of the variable-rate debt outstanding under this term loan. See Note 1 for more information regarding these interest rate swaps. As a result of the interest rate swaps, at December 31, 2008, $55,000,000 of term loan borrowings were fixed at 6.78% and the remaining balance of $4,880,000 bore interest at a rate of 4.938%, LIBOR plus a fixed rate.
 
As a result of the modification of terms under the revolving credit facility and the early payment of the term loan, the Company incurred a $1,424,000 charge to write off deferred financing costs during the year ended December 31, 2009.
 
The Senior Credit Agreement includes a financial covenant that required the Company to maintain the following minimum Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA as defined in the Senior Credit Agreement) for the following periods:
 
         
    Minimum
    EBITDA
 
Six-months ended June 30, 2009
  $ 0  
Nine-months ended September 30, 2009
  $ 13,000,000  
Year ending December 31, 2009
  $ 28,000,000  


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GIBRALTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
 
As of December 31, 2009, the Company was in compliance with this financial covenant. This covenant will not be tested after December 31, 2009. Beginning on March 31, 2010, and quarterly thereafter on a trailing four-quarter basis, the Senior Credit Agreement includes a single financial covenant that requires the Company to maintain a minimum fixed charge coverage ratio of 1.25 to 1.00. The Senior Credit Agreement contains other provisions and events of default that are customary for similar agreements and may limit the Company’s ability to take various actions. The Company’s significant domestic subsidiaries have guaranteed the obligations under the Senior Credit Agreement.
 
On December 8, 2005, the Company issued $204,000,000 of Senior Subordinated 8% Notes (8% Notes), due December 1, 2015, at a discount to yield 8.25%. Provisions of the 8% Notes include, without limitation, restrictions on indebtedness liens, distributions from restricted subsidiaries, asset sales, affiliate transactions, dividends in excess of $10,000,000 in a fiscal year, and other restricted payments. After December 1, 2010, the 8% Notes are redeemable at the option of the Company, in whole or in part, at the redemption price, which declines annually from 104% to 100% on and after December 1, 2013. In the event of a Change of Control, 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. The 8% Notes are guaranteed by certain existing and future domestic subsidiaries and are not subject to any sinking fund requirements.
 
The aggregate maturities of long-term debt for the next five years and thereafter are as follows:
 
         
2010
  $ 428  
2011
  $ 404  
2012
  $ 50,400  
2013
  $ 400  
2014
  $ 400  
Thereafter
  $ 205,050  
 
Total cash paid for interest in the years ended December 31, 2009, 2008, and 2007, was $20,374,000, $32,528,000 and $36,628,000, respectively.


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GIBRALTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
 
 
9.   EMPLOYEE RETIREMENT PLANS
 
The Company has an unfunded supplemental pension plan which provides defined pension benefits to certain salaried employees upon retirement. Benefits under the plan are based on the salaries of individual plan participants in the year they were admitted into the plan. No additional participants will be added to the plan in the future. The following table presents the changes in the plan’s projected benefit obligation, fair value of plan assets, and funded status for the years ended December 31 (in thousands):
 
                         
    2009     2008     2007  
 
Change in projected benefit obligation:
                       
Projected benefit obligation at beginning of year
  $ 2,989     $ 2,609     $ 2,439  
Service cost
    111       147       165  
Interest cost
    175       162       139  
Prior service costs
    125       134        
Actuarial gain
    (87 )     (10 )     (64 )
Benefits paid
    (182 )     (53 )     (70 )
                         
Projected benefit obligation at end of year
    3,131       2,989       2,609  
Fair value of plan assets
                 
                         
Under funded status
    (3,131 )     (2,989 )     (2,609 )
                         
Unamortized prior service costs
    192       134        
Unrecognized actuarial gain
    (162 )     (75 )     (65 )
                         
Net amount recognized
  $ (3,101 )   $ (2,930 )   $ (2,674 )
                         
Amounts recognized in the consolidated financial statements consist of (in thousands):
                       
Accrued pension liability
  $ (3,131 )   $ (2,989 )   $ (2,609 )
Pre-tax accumulated other comprehensive income — retirement liability adjustment
    30       59       (65 )
                         
Net amount recognized
  $ (3,101 )   $ (2,930 )   $ (2,674 )
                         
 
The plan’s accumulated benefit obligation equaled the projected benefit obligation at December 31, 2009, 2008, and 2007. The measurement date used to determine pension benefit measures is December 31.
 
Components of net periodic pension cost for the years ended December 31 are as follows (in thousands):
 
                         
    2009     2008     2007  
 
Service cost
  $ 111     $ 147     $ 165  
Interest cost
    175       162       139  
Amortization of prior service costs
    67              
                         
Net periodic pension cost
  $ 353     $ 309     $ 304  
                         
Assumptions used to calculate the benefit obligation:
                       
Discount rate
    5.75 %     6.00 %     6.25 %


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GIBRALTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
 
Expected benefit payments from the plan for the years ended December 31 are as follows (in thousands):
 
         
2010
  $ 309  
2011
  $ 339  
2012
  $ 441  
2013
  $ 437  
2014
  $ 426  
Years 2015 — 2019
  $ 1,989  
 
All U.S. subsidiaries participate in the Company’s 401(k) Plan. In addition, certain subsidiaries have multi-employer non-contributory retirement plans providing for defined contributions to union retirement funds.
 
Total expense for all retirement plans was $1,780,000, $2,526,000, and $3,887,000 for the years ended December 31, 2009, 2008, and 2007, respectively. Total expense for all retirement plans decreased from the year ended December 31, 2008 to the year ended December 31, 2009 as a result of staffing reductions and the suspension of the Company’s matching contributions to the Gibraltar 401(k) Plan beginning on April 18, 2009.
 
10.   OTHER POSTEMPLOYMENT BENEFITS
 
The Company has an unfunded postretirement healthcare plan which provides health insurance to certain employees and their spouses upon retirement. This plan has been frozen and no additional participants will be added to the plan in the future. The following table presents the changes in the accumulated postretirement benefit obligation related to the Company’s unfunded postretirement healthcare benefits at December 31 (in thousands):
 
                         
    2009     2008     2007  
 
Benefit obligation at beginning of year
  $ 4,446     $ 4,172     $ 4,558  
Service cost
    65       71       72  
Interest cost
    269       255       246  
Plan amendments and curtailments
    (857 )           (318 )
Actuarial loss (gain)
    432       161       (222 )
Benefits paid
    (240 )     (213 )     (164 )
                         
Benefit obligation at end of year
    4,115       4,446       4,172  
Fair value of plan assets
                 
                         
Under funded status
    (4,115 )     (4,446 )     (4,172 )
Unrecognized prior service costs
    (17 )     (51 )     (70 )
Unrecognized actuarial loss
    621       1,130       1,035  
                         
Accumulated postretirement benefit obligation
  $ (3,511 )   $ (3,367 )   $ (3,207 )
                         
 
Amounts recognized in the consolidated financial statements at December 31 consist of (in thousands):
 
                         
    2009     2008     2007  
 
Accrued post retirement benefit liability
  $ (4,115 )   $ (4,446 )   $ (4,172 )
Pre-tax accumulated other comprehensive loss — retirement liability adjustment
    604       1,079       965  
                         
Net amount recognized
  $ (3,511 )   $ (3,367 )   $ (3,207 )
                         


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GIBRALTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
 
Components of net periodic postretirement benefit cost charged to expense for the years ended December 31 are as follows (in thousands):
 
                         
    2009     2008     2007  
 
Service cost
  $ 65     $ 71     $ 72  
Interest cost
    269       255       246  
Amortization of unrecognized prior service cost
    (18 )     (18 )     (20 )
Curtailment cost
    (17 )           (10 )
Loss amortization
    84       65       83  
                         
Net periodic post retirement benefit cost
  $ 383     $ 373     $ 371  
                         
Assumptions used to calculate the benefit obligation:
                       
Discount rate
    5.75 %     6.00 %     6.25 %
 
For measurement purposes, an 8.25%, 7.00% and 9.50% annual rate of increase in the per capita cost of medical costs before age 65, medical costs after age 65, and prescription drug costs, respectively, were assumed for 2010, gradually decreasing to 5.00% in 2016. The effect of a 1% increase or decrease in the annual medical inflation rate would increase or decrease the accumulated postretirement benefit obligation at December 31, 2009, by approximately $510,000 and $458,000, respectively, and increase or decrease the annual service and interest costs by approximately $50,000 and $43,000, respectively.
 
The measurement date used to determine postretirement benefit obligation measures is December 31.
 
Expected benefit payments from the plan for the years ended December 31 are as follows (in thousands):
 
         
2010
  $ 228  
2011
  $ 238  
2012
  $ 247  
2013
  $ 258  
2014
  $ 244  
Years 2015 — 2019
  $ 1,422  
 
11.   ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
The cumulative balance of each component of accumulated other comprehensive income (loss) is as follows(in thousands):
 
                                         
                Unamortized
    Unrealized
       
    Foreign
    Minimum
    Post
    (Loss)
    Accumulated
 
    Currency
    Pension
    Retirement
    Gain on
    Other
 
    Translation
    Liability
    Health Care
    Interest Rate
    Comprehensive
 
    Adjustment     Adjustment     Costs     Swaps     Income  
 
Balance at January 1, 2008
  $ 12,610     $ 42