GIBRALTAR INDUSTRIES, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) 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.

Company Overview Gibraltar is a leading manufacturer and distributor of products for the building and industrial markets. Our products provide structural and architectural enhancements for residential homes, low-rise retail, other commercial and professional buildings, industrial plants, bridges and a wide variety of other structures. These products include ventilation products, mail storage solutions including mailboxes and package delivery products, rain dispersion products and accessories, bar grating, expanded metal, metal lath and expansion joints and structural bearings. We believe Gibraltar has strong brand recognition in these product categories which provides us with product leadership positions. We serve customers throughout North America, Europe, Asia, and Central and South America including major home improvement retailers, distributors and contractors. As of December 31, 2012, we operated 44 facilities in 21 states, Canada, England and Germany, giving us a broad platform for just-in-time delivery and support to our customers. Our common stock is trading on the NASDAQ stock market under the ticker symbol "ROCK." Our customers principally serve the home improvement; new residential, low-rise commercial; bridge and highway construction and a variety of industrial markets.

A majority of our products are sold through sales channels. Major customers include The Home Depot, other big box retailers, national building products wholesalers, industrial equipment manufacturers and contractors.

We believe that we have established a reputation as an industry leader in quality, service and innovation and have achieved strong competitive positions in our markets. We attribute our standing in the market primarily to the following competitive strengths: Leading market share. We have a leading market position in many of the products and services we offer, and we estimate that a majority of our net sales for the year ended December 31, 2012 were derived from the sale of products in which we had one of the leading U.S. market shares. We believe we have leading market shares in six distinct product families.

Diversified product mix and manufacturing base. We manufacture an extensive variety of products that are sold through building material wholesalers, buying groups, discount and major retail home centers, roofing distributors, residential, industrial, commercial, and transportation contractors and industrial manufacturers. We operate 34 manufacturing facilities and eight distribution centers throughout the United States, Canada, England and Germany, 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. Despite our global reach, our capital expenditures have remained low. During each of the last three years, our capital expenditures have averaged 1.5% or less of net sales. The following table outlines many of our key products sold to both residential and non-residential end markets: Product End market Residential end markets Roof & foundation ventilation products New build; repair and remodel Mail storage (single and cluster) New build; repair and remodel Rain dispersion, flashing, soffits and New build; repair and remodel trim, metal lath Non-residential end markets Bar grating Oil, gas and mining; industrial; wastewater and water treatment; leisure and sports parks Expanded metal and perforated metal Mining; steel mills; transportation; petro-chemical; architectural facades; security Engineered public infrastructure Bridge construction; highway products construction; airport runways 20 -------------------------------------------------------------------------------- Table of Contents Provider of value-added products and services. We increasingly focus on value-added products and services, such as mail storage solutions, infrastructure products, and ventilation products, to improve our margins and profitability. We use complex and demanding production and treatment processes that require advanced production equipment, sophisticated technology and exacting quality control measures. We have also targeted our acquisition strategy on producers of value-added products, including, but not limited to, our recent acquisitions of The D.S. Brown Company ("D.S. Brown"), the largest U.S. manufacturer of specialty components for the transportation infrastructure industry, Pacific Award Metals, Inc. ("Award Metals"), a leading regional manufacturer of roof ventilation, roof trims, flashing and rain ware, drywall trims and specialty clips and connectors for concrete forms used in the new construction and repair and remodel markets. The Company also acquired the assets of four businesses in 2012: • Metal grating products for the oil sands region of Western Canada; • Function-critical components for public infrastructure construction and maintenance; • Perforated metal products for industrial applications; and • Sun protection products for new residential construction and home remodeling.

These acquisitions have increased our portfolio of value-added products. We also strive to develop and launch new products, expand our geographic market coverage and penetrate new end markets to strengthen our product leadership positions.

Strength in non-residential end markets. Since 2007, we have sought to bolster our presence in non-residential end markets through both strategic acquisitions and organic growth, and we estimate that sales from these markets now account for approximately half of the net sales for the company. Our presence in this diverse end market, which serves industries such as oil & gas, mining, transportation and industrial, complements our residential end markets business and provides additional stability.

Solid relationships with blue-chip customers. We have strong relationships with many of the largest customers in the markets we serve, including the building and construction, machinery and general manufacturing industries. Through acquisitions, we have gained new longstanding relationships and we have maintained and developed those relationships by offering an increasing range of products and providing quality customer support. We have long-standing relationships with many large market leaders such as The Home Depot, other big box retailers, national building products wholesalers, industrial equipment manufacturers and contractors.

Commitment to quality. We place great importance on providing our customers with high quality products for use in critical construction applications. We carefully select our raw material vendors and use inspection and analysis to maintain our quality standards so our products meet critical customer specifications. To meet customer specifications, we use documented procedures utilizing statistical process control systems linked directly to processing equipment to monitor many stages of production. A number of our facilities' quality systems are registered under ISO 9001, an internationally recognized set of quality-assurance standards, and other industry standards.

History of substantial debt reduction and strong liquidity profile. Since 2007, we have been committed to debt reduction and used cash generated from operations, as well as certain proceeds of asset sales, to make significant repayments against our outstanding debt. Our total debt declined from $487.5 million at December 31, 2007 to $207.8 million as of December 31, 2012. We had no borrowings under our revolving credit facility during the year ended December 31, 2012, and our liquidity as of December 31, 2012 was $165 million, including $48 million of cash and $117 million of availability under our revolving credit facility. We believe that our low leverage and substantial liquidity allows us to successfully manage our business, meet the demands of our customers and weather the cyclicality of certain end markets.

Proven acquisition track record. Over the last eight years, we have successfully acquired and integrated over fifteen businesses, including D.S. Brown, Florence Manufacturing and Alabama Metal Industries Corporation. These acquisitions have helped to diversify our products and customers while growing our net sales and earnings.

Experienced management team. Brian J. Lipke has been our Chief Executive Officer since 1987, the Chairman of our Board since 1992 and a director since our formation. Henning N. Kornbrekke, President and Chief Operating Officer, has been with us for nine years and has extensive experience in manufacturing, marketing and distribution from his previous employment at Rexam, PLC and The Stanley Works. Kenneth W. Smith, our Chief Financial Officer, joined our company in 2008 with extensive experience at Circor International, North Safety Products and Digital Equipment Corporation. Our executive management team is supported by a talented and experienced divisional management team. Overall, our management team has broad experience in operational excellence, quality and merchandising gained over multiple business cycles.

21-------------------------------------------------------------------------------- Table of Contents Operational excellence. Our strategy is to position Gibraltar as a low-cost provider and a market share leader in product areas that offer the opportunity for sales growth and margin enhancement over the long-term. We focus on operational excellence, including lean initiatives throughout the company to position Gibraltar as our customers' low-cost provider of the products we offer.

We continuously seek to improve our on-time delivery, quality and service to position Gibraltar as a preferred supplier to our customers. During recent years, Gibraltar invested in new enterprise resource planning ("ERP") systems which, among other things, have enabled us to more effectively manage our inventory, forecast customer orders, improve supply chain management and respond more timely to volatile raw material costs. At the same time, we have significantly reduced our working capital levels while maintaining a high level of customer service.

Acquisitions During 2012, Gibraltar purchased the assets of four businesses in separate transactions. The acquired product lines complement and expand the Company's product portfolio and customer base in four key U.S. and Canadian markets: • Metal grating products for the oil sands region of Western Canada ; • Function-critical components for public infrastructure construction and maintenance; • Perforated metal products for industrial applications; and • Sun protection products for new residential construction and home remodeling.

Gibraltar funded the aggregate investment of $43 million from existing cash on hand.

Gibraltar acquired D.S. Brown on April 1, 2011 for $98 million. D.S. Brown is the largest U.S. manufacturer of specialty components for the transportation infrastructure industry and has established a leading market position for many of the products offered. Products manufactured and distributed by D.S. Brown include expansion joint systems, structural bearing assemblies, pavement sealing systems, and other specialty components for bridges, highways, and other infrastructure projects.

On June 3, 2011, the Company acquired Award Metals for $13 million. Award Metals is a leading regional manufacturer of roof ventilation, roof trims, flashing and rain ware, drywall trims, and specialty clips and connectors for concrete forms used in the new construction and repair and remodel markets.

The D.S. Brown and Award Metals acquisitions were financed through cash on hand and debt available under our revolving credit facility. Gibraltar's results from operations included acquisitions from the respective dates of acquisition.

Divestitures Gibraltar sold its United Steel Products subsidiary (USP) in March 2011 for $59 million. The sale of USP, along with the acquisitions completed in 2011 and 2012 provide Gibraltar with a broader product offering to construction markets and greater potential for revenue and earnings growth. These transactions are consistent with management's strategy to position Gibraltar as a market leader in the product areas offered by our business and to expand our offering of value-added products.

On February 1, 2010, Gibraltar completed the sale of the majority of the assets of the Processed Metal Products business. This transaction finalized our exit from steel processing. This strategic initiative began in 2005 and included the 2006 sale of our steel strapping business, the 2007 sale of the Hubbell Steel business, and the 2008 sale of the SCM powdered metal business. These divestitures were an ongoing part of our objective to build a company with optimal operating characteristics and improve shareholder value. We now are focused on the manufacture and distribution of building products where the Company has historically generated its highest operating margins. The divestitures described above were recognized as components of discontinued operations in the Company's consolidated financial statements and notes thereto.

Economic Trends The end markets served by our business are subject to economic conditions influenced by outside factors which include but are not limited to interest rates, commodity costs, demand for residential construction, the level of non-residential construction and infrastructure projects, and demand within the repair and remodel market. The United States construction markets continued an uneven recovery from an unprecedented recession that began in 2008 and led to reduced demand for the products we manufacture and distribute. In addition, tightened credit markets over the same period may have limited the ability of the end users of our products to obtain financing for construction projects.

While the U.S. economy has grown since the recession, the construction markets continue to face significant challenges. Construction markets have only recovered modestly from the recession and many economic indicators remain at levels well below long-term averages. As an example, the table below shows housing starts in the United States continued to remain significantly below the long-term average of 1.5 million starts per year: 2012 2011 2010 Residential Housing Starts 767,000 607,000 585,000 22 -------------------------------------------------------------------------------- Table of Contents The decrease in residential housing starts and non-residential construction had a significant impact on the operations of our business by contributing to decreased sales volume and profitability. To respond to current economic conditions facing Gibraltar, including weakened end market conditions and volatile commodity costs, we continue to focus on providing a high level of customer service along with maintaining our position as a market share leader and low-cost provider of our products. We strive for operational excellence through lean initiatives and the consolidation of facilities to reduce costs. As a result, we have closed or consolidated 11 facilities over the past three years, including two during 2012. We have also aggressively reduced operating costs throughout the Company to maximize cash flows generated from operating activities. As a result of these restructuring activities, our break-even point has decreased significantly since 2008.

As noted above, commodity raw material prices for materials such as steel, aluminum, and resins, have also fluctuated significantly during the past three years. These fluctuations impact the cost of raw materials we purchase and the pricing we offer to our customers. 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 much of 2009. Commodity prices rose in 2010 and have somewhat stabilized since such time. We believe our investment in ERP systems and decreased inventory requirements allow us to react better to these fluctuations and have improved our margins.

As a result of the steps we have taken throughout the economic downturn, we have increased liquidity to a strong position. Using cash generated from operations, we have made significant repayments against our outstanding debt and no longer have any amounts outstanding against our revolving credit facility as of year-end. Our liquidity as of December 31, 2012 was $165 million including $48 million of cash and $117 million of availability under our revolving credit facility.

Additionally, the steps taken since the economic downturn in 2008 allowed us to return to and sustain profitability for the past two years. We believe our reduced cost structure and lean manufacturing process will allow us to continue growing our revenue and profitability as the economy continues to improve.

Results of Operations Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 The following table sets forth selected results of operations data (in thousands) and its percentages of net sales for the years ended December 31: 2012 2011 Net sales $ 790,058 100.0 % $ 766,607 100.0 % Cost of sales 640,498 81.1 % 621,492 81.1 % Gross profit 149,560 18.9 % 145,115 18.9 % Selling, general, and administrative expense 104,671 13.2 % 108,957 14.2 % Intangible asset impairment 4,628 0.6 % - 0.0 % Income from operations 40,261 5.1 % 36,158 4.7 % Interest expense 18,582 2.4 % 19,363 2.5 % Other income (488 ) -0.1 % (90 ) 0.0 % Income before taxes 22,167 2.8 % 16,885 2.2 % Provision for income taxes 9,517 1.2 % 7,669 1.0 % Income from continuing operations 12,650 1.6 % 9,216 1.2 % (Loss) income from discontinued operations (5 ) 0.0 % 7,307 1.0 % Net income $ 12,645 1.6 % $ 16,523 2.2 % The following table sets forth the impact of the Company's acquisitions on net sales and operating income for the year ended December 31 (in thousands): Total Change Due To 2012 2011 Change Acquisitions Operations Net sales $ 790,058 $ 766,607 $ 23,451 $ 29,106 $ (5,655 ) Operating income $ 40,261 $ 36,158 $ 4,103 $ 600 $ 3,503 23 -------------------------------------------------------------------------------- Table of Contents Net sales increased by $23.5 million, or 3.1%, to $790.1 million for 2012 from net sales of $766.6 million for 2011. The increase from prior year was primarily the result of incremental sales generated by the two acquisitions completed in the second quarter of 2011 which contributed $25.0 million or 3.3% of the increase in net sales for 2012. Acquisitions completed in 2012 contributed additional net sales of $4.1 million or an increase of 0.5%. Net sales from businesses operating in both periods decreased 0.7% or $5.7 million, the result of a 1.4% decrease in pricing to customers offset by a 0.7% increase in volume.

While volume increased modestly compared to 2011 for our products sold into the majority of our geographic markets, this increase was net of declines in volume sold in the West Coast residential market and European market. Lower demand for roofing materials resulting from unusually dry weather this year contributed to the lower volumes in the West Coast residential market, while weak economic conditions in Europe suppressed demand for our industrial and vehicle filtration products. The lower selling prices were primarily the result of a decline in commodity costs for steel and aluminum and meeting selective competitive situations.

Despite our increase in net sales, our gross margin remained unchanged at 18.9% for both 2012 and 2011. As we continue consolidating certain of our West Coast locations with similar products and market characteristics, we have incurred costs related to this consolidation in 2012. We believe completing the initiatives to restructure the West Coast locations will lead to improved gross margins in future periods. The impact to our gross margin from these consolidation costs was offset equally by a more favorable alignment of material costs to customer selling prices and cost reductions.

Selling, general, and administrative (SG&A) expenses decreased by $4.3 million, or 3.9%, to $104.7 million for 2012 from $109.0 million for 2011. The $4.3 million decrease was the net result of a $3.3 million decrease in equity compensation, $2.7 million in cost reductions due to consolidation of facilities, a $1 million decrease in other variable incentive compensation and in restructuring and acquisition related costs from 2011. The decreases were partially offset by an increase of $4.5 million in SG&A expense as a result of businesses acquired in 2012 and from having a full year of SG&A expenses from business acquired in 2011. SG&A expenses as a percentage of net sales decreased to 13.2% for 2012 compared to 14.2% for 2011.

During 2012, due to changes in the estimated fair value of a certain reporting unit resulting from a decrease in sales projections, along with continued underperformance in the operations of that reporting unit, we recognized intangible asset impairment charges of $4.6 million. No impairment charges were recognized for 2011.

Interest expense decreased $0.8 million, or 4.0%, to $18.6 million for 2012 from $19.4 million for 2011. The interest expense incurred in both periods primarily relates to our $204.0 million of Senior Subordinated 8% Notes. Net interest expense for 2011 was higher due to funds borrowed under our revolving credit facility to finance the acquisitions of D.S. Brown and Award Metals along with a $0.3 million charge to write-off deferred financing fees in 2011. These expenses were partially offset by $0.7 million of interest income earned on the $8.5 million note held resulting from the sale of SCM Metal Products in 2008. This note receivable was collected in full during November 2011. No amounts were outstanding under our revolving credit facility during 2012.

We recognized a provision for income taxes of $9.5 million for 2012, an effective tax rate of 42.9%, compared with a provision for income taxes of $7.7 million, an effective tax rate of 45.4% for 2011. The effective tax rate for 2012 was reduced by 9.3 percentage points from the 2011 rate largely due to lower non-deductible expenses incurred during 2012. This reduction was partially offset by an increase of 6.8 percentage points over 2011 due to the effect of intangible asset impairment charges, the majority of which was not deductible for tax purposes. The effective tax rate for 2012 and 2011 exceeded the U.S.

federal statutory rate due to state taxes and non-deductible permanent differences.

24 -------------------------------------------------------------------------------- Table of Contents Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 The following table sets forth selected results of operations data (in thousands) and its percentages of net sales for the years ended December 31: 2011 2010 Net sales $ 766,607 100.0 % $ 637,454 100.0 % Cost of sales 621,492 81.1 % 533,586 83.7 % Gross profit 145,115 18.9 % 103,868 16.3 % Selling, general, and administrative expense 108,957 14.2 % 99,546 15.6 % Intangible asset impairment - 0.0 % 76,964 12.1 % Income (loss) from operations 36,158 4.7 % (72,642 ) -11.4 % Interest expense 19,363 2.5 % 19,714 3.1 % Other income (90 ) 0.0 % (77 ) 0.0 % Income (loss) before taxes 16,885 2.2 % (92,279 ) -14.5 % Provision for (benefit of) income taxes 7,669 1.0 % (16,923 ) -2.7 % Income (loss) from continuing operations 9,216 1.2 % (75,356 ) -11.8 % Income (loss) from discontinued operations 7,307 1.0 % (15,712 ) -2.5 % Net income (loss) $ 16,523 2.2 % $ (91,068 ) -14.3 % Total Change Due To 2011 2010 Change Acquisitions Operations Net sales $ 766,607 $ 637,454 $ 129,153 $ 71,422 $ 57,731 Operating income (loss) $ 36,158 $ (72,642 ) $ 108,800 $ 5,462 $ 103,338 Net sales increased by $129.1 million, or 20.3%, to $766.6 million for 2011 from net sales of $637.5 million for 2010. The most significant portion of the increase in net sales was from two acquisitions in 2011 which provided an additional $71.4 million of net sales for 2011. The remaining increase in net sales was impacted by an 8.0% increase in the pricing offered to customers and a 1.1% increase in volume. Our selling prices increased from the prior year as a result of the higher costs we paid for steel, aluminum, and resins which impacted the selling prices offered to our customers. Sales volume improved from the previous year as a result of repairs for spring storm damage and some improved macroeconomic conditions in the industrial construction markets which offset the uneven recovery in the new build housing and commercial construction markets.

Our gross margin also increased to 18.9% for 2011 compared to 16.3% for 2010.

The improvement in gross margin was primarily due to a better alignment of material costs with customer selling prices and the impact of our 2011 acquisitions which contributed sales of products with higher gross margins. Cost reductions, increased volume, and a $2.4 million reduction in restructuring costs also contributed to our improved gross margin.

Selling, general, and administrative (SG&A) expenses increased by $9.4 million, or 9.4%, to $108.9 million for 2011 from $99.5 million for 2010. The $9.4 million increase was the net result of $9.7 million of additional expense from acquired businesses, increased cost of variable incentive compensation from improved operating results, $1.0 million of acquisition-related costs, and a $0.9 million charge recognized as a result of time-based equity awards surrendered by Gibraltar's Chief Executive Officer partially offset by our cost reduction efforts that resulted in decreased spending on professional services, rent, and other operating expenses. Despite the increased costs, SG&A expenses as a percentage of net sales decreased to 14.2% for 2011 compared to 15.6% for 2010.

Due to changes in the estimated fair value of certain reporting units resulting from a significant decrease in sales projections, we recognized intangible asset impairment charges of $77.0 million for 2010. No impairment charges were recognized for 2011.

Interest expense decreased $0.3 million, or 1.5%, to $19.4 million for 2011 from $19.7 million for 2010. The reduction in interest expense was a result of incurring a $1.4 million charge in 2010 related to an ineffective interest rate swap. The reduction was offset by incurring a $0.3 million charge to write-off deferred financing fees in 2011 and having slightly higher levels of debt outstanding during 2011 compared to 2010. In the first quarter of 2010, we repaid $50 million of debt, which constituted all outstanding debt under our revolving credit facility. Subsequently, we borrowed funds under our revolving credit facility to finance the acquisitions of D.S. Brown and Award Metals during the second quarter of 2011 which were repaid in full during the third quarter of 2011.

25 -------------------------------------------------------------------------------- Table of Contents We recognized a provision for income taxes of $7.7 million for 2011, an effective tax rate of 45.4%. The effective tax rate for 2011 exceeded the U.S.

federal statutory tax rate of 35% due to state taxes and the impact of non-deductible permanent differences. During 2010, we recognized a tax benefit of $16.9 million, an effective tax rate of 18.3%. The effective tax rate differed from the statutory rate due to the effect of non-deductible permanent differences, a large portion of which related to the intangible asset impairment charges that were not deductible for tax purposes. In addition, we recognized a $2.4 million valuation allowance against deferred tax assets in 2010 for certain state net operating loss carryforwards which further reduced the effective tax rate.

Outlook For the first quarter of 2012, we expect revenues to increase approximately 3% primarily from incremental revenues of our most recent acquisitions. We believe the continued recovery in the residential and non-residential construction markets will provide stronger growth opportunities in the second half of 2013.

We expect the first quarter gross margin to approximate 19% as our cost reductions offset the margin impact of lower sales volume in a seasonally weak quarter. For 2013, we expect SG&A expense to approximate $29 million per quarter, or 13% of full year revenue. Our expectations for other financial measures for our continuing operations, excluding refinancing charges, include net interest at a run rate of $4 million per quarter, a full year effective tax rate of 37% and capital expenditures of $20 million for the year.

Over the long-term, we believe that the fundamentals of the building and industrial markets are positive and the aggressive actions taken to streamline and improve the efficiency of our business have reduced our break-even point and positioned Gibraltar to generate marked improvements in profitability when economic and market conditions return toward historical levels.

Liquidity and Capital Resources General Our principal capital requirements are to fund our operations with working capital, the purchase of capital improvements for our business and facilities, and to fund acquisitions. We will continue to invest in growth opportunities as appropriate while continuing to focus on working capital efficiency and profit improvement opportunities to minimize the cash invested to grow our business. We have successfully generated positive cash flows from operating activities during the past three years to fund our capital requirements and assist in the funding of our 2011 and 2012 acquisitions as noted below in the "Cash Flows" section of Item 7 of this Annual Report on Form 10-K. We generated positive operating cash flows during these periods despite the continued challenging economic conditions our business faced. In the future, we expect to continue profitable growth and sustain strong working capital management to continue to generate positive operating cash flow.

On October 11, 2011, we entered into the Senior Credit Agreement which includes a $200 million revolving credit facility and provides Gibraltar with access to capital and improved financial flexibility. As of December 31, 2012, our liquidity of $164.8 million consisted of $48.0 million of cash and $116.8 million of availability under our revolving credit facility as compared to liquidity of $169.7 million as of December 31, 2011. 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 have generated cash flow from operations sufficient to invest in working capital and fund their capital improvements. As of December 31, 2012, our foreign subsidiaries held $21.9 million of cash. We believe cash held by our foreign subsidiaries provides our foreign operations with the necessary liquidity to meet future obligations and allows the foreign business units to reinvest in their operations. These cash resources could eventually be used to grow our business internationally through transactions similar to our 2012 acquisition of the Western Canadian bar grating business.

Over the long-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, availability under our revolving credit facility, new debt financing, the issuance of equity securities, or any combination of the above. 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 and improve shareholder value. Our 2012 acquisitions were funded by cash on hand, while the 2011 acquisitions of D.S. Brown and Award Metals were financed through the use of cash on hand and debt available under our revolving credit facility.

26-------------------------------------------------------------------------------- Table of Contents Cash Flows The following table sets forth selected cash flow data for the years ended December 31 (in millions): 2012 2011 Cash provided by (used in): Operating activities of continuing operations $ 50,232 $ 49,828 Investing activities of continuing operations (55,763 ) (52,295 ) Financing activities of continuing operations (1,173 ) (2,775 ) Discontinued operations (151 ) (1,044 ) Effect of exchange rate changes 766 (463 ) Net decrease in cash and cash equivalents $ (6,089 ) $ (6,749 ) During the year ended December 31, 2012, net cash provided by continuing operations totaled $50.2 million, primarily driven by income from continuing operations of $12.7 million and non-cash charges totaling $40.8 million that included depreciation, amortization, deferred income taxes, stock compensation, and an intangible asset impairment. Net cash provided by continuing operations for 2011 was $49.8 million and was primarily driven by income from continuing operations of $9.2 million and $41.5 million from non-cash charges including depreciation, amortization, deferred income taxes, and stock compensation.

During the year ended December 31, 2012, the Company modestly increased its investment in working capital and other net assets from December 31, 2011 resulting in $3.3 million of cash outflow. Cash flow invested in working capital and other net assets included $6.3 million decrease in accounts receivable, partially offset by a $1.0 million increase in inventory and $3.8 million and $7.1 million decreases in accounts payable and accrued liabilities. The decrease in accounts receivable was a result of reduced net sales in the fourth quarter of 2012 compared to 2011 as customer pricing decreased year over year. Inventory levels saw a minor increase due to the timing of our receipts near year-end.

Accounts payable decreased due to the timing of vendor payments made near year-end. The decrease in accrued liabilities of $7.1 million was largely due to performance-based variable compensation awards earned in 2009 and 2011 that were paid during 2012, partially offset by accruals for long term incentive plans earned during 2012.

Net cash used in investing activities of continuing operations for 2012 of $55.8 million consisted primarily of $45.1 million of acquisitions and capital expenditures of $11.4 million. Net cash used in investing activities of continuing operations for 2011 of $52.3 million consisted primarily of $109.2 million of acquisitions and capital expenditures of $11.6 million offset by $67.5 million of proceeds from the sale of our USP business unit and the collection of a note receivable related to the 2008 sale of our SCM business unit.

Net cash used in financing activities for 2012 of $1.2 million primarily consisted of $1.0 million of treasury stock repurchases related to the net settlement of vested stock awards and repayments of $0.5 million on long-term debt. Net cash used in financing activities for 2011 of $2.8 million primarily consisted of $1.6 million of deferred financing fees related to the Senior Credit Agreement, $0.8 million of treasury stock repurchases related to the net settlement of vested stock awards, and net repayments of $0.4 million on long-term debt.

Cash used for discontinued operations was $0.2 million for the year ended December 31, 2012 compared to cash used for discontinued operations of $1.0 million for 2011. The 2011 cash flows related primarily to the USP business that was divested in 2011.

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 provides Gibraltar with flexibility by allowing us to request additional financing from the lenders to increase the revolving credit facility to $250 million. The Senior Credit Agreement also provided Gibraltar with a commitment to enter into a term loan subject to conditions that subsequently the Company decided not to satisfy. The Senior Credit Agreement is committed through October 10, 2016.

Borrowings under the Senior Credit Agreement bear interest at a variable interest rate based upon the London Interbank Offered Rate (LIBOR) plus an additional margin of 2.0% to 2.5%, based on the amount of borrowings available to Gibraltar. The Senior Credit Agreement also carries an annual facility fee of 0.375% on the undrawn portion of the facility and fees on outstanding letters of credit which are payable quarterly.

27-------------------------------------------------------------------------------- Table of Contents As of December 31, 2012, we had $116.8 million of availability under the Senior Credit Agreement and outstanding letters of credit of $13.6 million. Only one financial covenant is contained within the Senior Credit Agreement, which requires us to maintain a fixed charge ratio (as defined in the agreement) of 1.25 to 1.00 or higher on a trailing four-quarter basis at the end of each quarter. As of December 31, 2012, we were in compliance with the minimum fixed charge coverage ratio covenant. Management expects to be in compliance with the fixed coverage ratio covenant throughout the next twelve months.

To help finance the $109.2 million for the 2011 acquisitions of D.S. Brown and Award Metals in the second quarter of 2011, we borrowed $43.0 million under the revolving credit facility which was subsequently repaid during the third quarter of 2011. No amounts were outstanding under our revolving credit facility during 2012.

At December 31, 2012, the Company had $204.0 million of Senior Subordinate 8% Notes (8% Notes) outstanding which were issued in December 2005 at a discount to yield 8.25% and were due December 1, 2015.

Subsequent to December 31, 2012, the Company issued $210.0 million of 6.25% Senior Subordinated Notes (6.25% Notes) due February 1, 2021. In connection with the issuance of the 6.25% Notes, on January 16, 2013 the Company initiated a tender offer to purchase the outstanding 8% Notes. Simultaneously with the closing of the sale of the 6.25% Notes on January 31, 2013, the Company purchased the tendered 8% Notes. The 8% Notes that were not tendered and purchased were called for redemption. In connection with the purchase and subsequent redemption, the Company satisfied and discharged its obligations under the 8% Notes. Refer to Note 20 in the consolidated financial statements in Item 8 for more information regarding the issuance of the 6.25% Notes and redemption of the 8% Notes.

The provisions of the 6.25% 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 the greater of $0.25 per share or $25 million. The 6.25% Notes are redeemable at the option of the Company, in whole or in part, at any time on or after February 1, 2017, at the redemption price (as defined in the Senior Subordinated 6.25% Notes Indenture). The redemption prices will be 103.13%, and 101.56% of the principal amount thereof if the redemption occurs during the 12-month periods beginning February 1, of the years 2017 and 2018, respectively, and 100% of the principal amount thereof on and after February 1, 2019, in each case plus accrued and unpaid interest to the applicable redemption date. In addition, prior to February 1, 2016, the Company may redeem up to 35% of the aggregate principal amount of the Notes with the net cash proceeds of certain equity offerings by the Company at a redemption price of 106.25% of the principal amount thereof, plus accrued and unpaid interest to the redemption date. In the event of a Change in Control (as defined in the Senior Subordinated 6.25% Notes Indenture), each holder of the 6.25% Notes may require the Company to repurchase all or a portion of such holder's 6.25% Notes at a purchase price equal to 101% of the principal amount thereof.

Each of our significant domestic subsidiaries has guaranteed the obligations under the Senior Credit Agreement. The Senior Credit Agreement contains other provisions and events of default that are customary for similar agreements and may limit our ability to take various actions. The Senior Subordinate 6.25% 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, other than operating leases, that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

28 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations The following table summarizes by category our Company's expected future cash outflows associated with contractual obligations in effect at December 31, 2012 (in thousands): Payments Due by Period Less than One to Three Three to More Than Contractual Obligation Total One Year Years Five Years Five Years Fixed rate debt1 $ 203,395 $ 389 $ 202,939 $ 67 $ - Interest on fixed rate debt 47,664 16,355 31,305 4 - Variable rate debt 4,408 408 800 800 2,400 Interest on variable rate debt 2 51 9 15 12 15 Operating lease obligations 35,221 11,031 13,692 6,261 4,237 Performance stock unit awards 1,639 - 1,639 - - Pension and other post- retirement payments 8,933 742 1,484 1,438 5,269 Management stock purchase plan 3 1,046 530 488 28 - Total 4 $ 302,357 $ 29,464 $ 252,362 $ 8,610 $ 11,921 1 8% Notes were re-financed subsequent to December 31, 2012. See Note 20 2 Calculated using the interest rate in effect at December 31, 2012.

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 $9.2 million as of December 31, 2012. Future payments to active participants cannot be accurately estimated as we are uncertain of when active participants' service to the Company will terminate.

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 acquisitions to the fair value of acquired assets and liabilities, which impacts our depreciation and amortization costs; • the assessment of recoverability of depreciable and amortizable long-lived assets, which impacts the impairment of long-lived assets; • the assessment of recoverability of goodwill and other indefinite-lived intangible assets, which impacts the impairment of goodwill and intangible assets; and • accounting for income taxes and deferred tax assets and liabilities, which impact the provision for income taxes.

Management reviews these 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.

29 -------------------------------------------------------------------------------- Table of Contents 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, 2012 and 2011, allowances for doubtful accounts of $4.5 million and $4.6 million were recorded, respectively, or approximately 5% of gross accounts receivable for both periods.

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 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 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 insignificant charges during the three year period ended December 31, 2012 to value our inventory at the lower of cost or market.

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 $4.9 million and $4.1 million as of December 31, 2012 and 2011, respectively, or approximately 4% of gross inventories for both periods. Changes in product demand and our customer base may affect the value of inventory on hand, which may require higher provisions for obsolete inventory.

Accounting for Acquired Assets and Liabilities When we acquire a business, we allocate the purchase price to the assets acquired and liabilities assumed in the transaction at their respective estimated fair values. We record any premium over the fair value of 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 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 value of assets, the most subjective estimates involve valuations of long-lived assets, such as property, plant, and equipment as well as identified intangible assets. We use all available information to make these fair value determinations and engage independent valuation specialists to assist in the fair value determination of the acquired long-lived assets. The fair values of long-lived assets are determined using valuation techniques that use discounted cash flow methods, independent market appraisals, and other acceptable valuation techniques.

The following summarizes the amount of purchase price allocated to property, plant, and equipment, identifiable intangible assets, and goodwill for the acquisitions completed in 2012 (in millions): Initial Property, Identified Purchase Plant, and Intangible Other Net Price Equipment Assets Goodwill Assets $ 43.1 $ 9.9 $ 10.2 $ 15.0 $ 8.0 Due to the subjectivity inherent in determining the fair value of long-lived assets and the significant number of acquisitions we have completed, we believe the allocation of purchase price to 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 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, 2012 (in millions): Property, plant, and equipment, net $ 151.6 Acquired intangibles with useful lives $ 50.0 Other assets $ 6.2 30 -------------------------------------------------------------------------------- Table of Contents 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. We recognized impairment charges for property, plant, and equipment as a result of restructuring activities during the years ended December 31, 2012, 2011 and 2010.

Goodwill and Other Indefinite-lived Intangible Asset Impairment Testing Our goodwill and indefinite-lived intangible asset balances of $359.9 million and $48.8 million as of December 31, 2012, respectively, are subject to impairment testing. We test goodwill and indefinite-lived intangible assets for impairment on an annual basis as of October 31 and at interim dates when indicators of impairment are present. Indicators of impairment could include a significant long-term adverse change in business climate, poor indicators of operating performance, or a sale or disposition of a significant portion of a reporting unit.

During 2012, we concluded that no indicators of impairment existed at interim dates and did not perform any interim impairment tests related to goodwill and indefinite-lived intangible assets. We tested goodwill and other indefinite-lived intangible assets for impairment during the fourth quarter of 2012 at the annual test date. As a result of the October 31, 2012 impairment test, the Company recognized an intangible asset impairment charge of $4.6 million for the year ended December 31, 2012. No impairment charges were recognized for the year ended December 31, 2011. However, the Company recognized intangible asset impairment charges of $77.0 million for the year ended December 31, 2010.

We test goodwill for impairment at the reporting unit level. We identify our reporting units by assessing whether the components of our company constitute businesses for which discrete financial information is available and management regularly reviews the operating results of those components. As of the October 31, 2012 impairment test, we identified ten reporting units in total, of which all have goodwill. The number of reporting units declined from eleven to ten in the current year as we consolidated two reporting units due to restructuring activities that consolidated their operating activities.

The goodwill impairment test consists of comparing the fair value of a reporting unit 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 is recognized for the amount by which the carrying amount of goodwill exceeds the implied fair value of goodwill.

The following table sets forth the amount of goodwill allocated to each reporting unit tested for goodwill impairment and the percentage by which the estimated fair value of each reporting unit exceeded its carrying value as of the October 31, 2012 goodwill impairment test (in thousands): Percentage By Goodwill Allocated to Which Estimated Goodwill Goodwill Allocated To Reporting Unit Before Fair Value Exceeds Impairment Reporting Unit After Reporting Unit Impairment Charges Carrying Value Charges Impairment Charges #1 $ 111,499 37 % $ - $ 111,499 #2 89,279 33 % - 89,279 #3 46,198 29 % - 46,198 #4 27,332 57 % - 27,332 #5 20,578 7 % - 20,578 #6 19,569 45 % - 19,569 #7 18,261 25 % - 18,261 #8 8,256 35 % - 8,256 #9 4,328 N/A (4,328 ) - #10 3,589 233 % - 3,589 Total $ 348,889 $ (4,328 ) $ 344,561 The October 31, 2012 goodwill impairment test included significant assumptions.

To estimate the fair value of the reporting units as a part of step one of the impairment test, we used two valuation techniques: an income approach and a market approach. The income approach included a discounted cash flow model relying on significant assumptions consisting of revenue growth rates and profit margins based on internal forecasts, terminal value, and the weighted average cost of capital "WACC" used to discount future cash flows. The market approach consisted of applying an Earnings Before Interest, Taxes, Depreciation and Amortization "EBITDA" multiple to the forecasted EBITDA to be generated in 2012 and 2013. The market approach also relied on significant assumptions consisting of revenue growth rates and profit margins based on internal forecasts and the EBITDA multiple selected from an analysis of peer companies.

31-------------------------------------------------------------------------------- Table of Contents The following table sets forth the compound annual revenue growth rate for the five-year period used to forecast cash flows and the average operating margin for the forecasted periods compared to actual operating margins generated over the long-term: Compound Annual Revenue Growth Rate Operating Margins Actual Long-term For Forecasted For Forecasted Operating Margins Reporting Unit Periods Periods (a) #1 2 % 19 % 21 % #2 4 % 10 % 10 % #3 5 % 17 % 18 % #4 1 % 14 % 14 % #5 7 % 7 % 6 % #6 4 % 10 % 9 % #7 8 % 7 % 5 % #8 13 % 13 % 11 % #9 (b) 12 % 3 % 0 % #10 (c) 1 % 10 % 7 % (a) Operating margins presented exclude restructuring charges incurred by each reporting unit.

(b) The operating margins presented only include operating results generated since the dates these reporting units were acquired by Gibraltar. The reporting unit has undergone significant consolidation and restructuring activities in the past five years as locations were acquired, sold, and reorganized. Some of the acquisitions made occurred during the economic downturn. Significant changes have been made to downsize locations, realign operations, and change distribution patterns in order to turn the unit profitable and spur future economic growth.

(c) This reporting unit was restructured in 2007 and 2008 to increase the efficiency and reduce the cost of production. Operating margins have improved since the restructuring was completed. As a result, we believe forecasted operating margins will continue to exceed prior results.

We analyzed third-party forecasts of housing starts and other macroeconomic indicators that impact each reporting unit to provide a reasonable estimate of revenue growth in future periods. Our analysis of third-party forecasts noted that housing starts were projected to grow at a compound annual growth rate of 18% from 2012 to 2017. We considered these forecasts in developing each reporting unit's growth rates over the next five years depending on the level of correlation between housing starts and net sales for each reporting unit. The correlation between housing starts and net sales was based on an analysis of historical housing starts and our historical revenue. We concluded that this approach provided a reasonable estimate of long-term revenue growth and cash flows for each reporting unit.

Operating margins used to estimate future cash flows were consistent with long-term margins generated by the reporting units while they have been owned and operated by Gibraltar as shown in the table above. The reporting units where forecasted operating margins exceed long-term operating margins generated by the reporting unit were for reporting units that were recently acquired and, therefore, the long-term operating margins were more significantly impacted by the economic turmoil that began in 2008 or were more significantly impacted by the decline in the residential housing market. Additionally, we took strategic actions to consolidate facilities, reduce costs, and restructure these business units to become more profitable as the economy recovers. These actions led to increased costs and lower operating margins in the short term. Based on our understanding of these reporting units and the actions taken by management to restructure the businesses for improved growth and profitability, we concluded that the long-term cash flows forecasted for all of the Company's reporting units were reasonable.

In addition to revenue growth and operating margin forecasts, the discounted cash flow model used to estimate the fair value of each reporting unit also uses assumptions for the amount of working capital needed to support each reporting unit. We forecasted modest improvement in working capital management for future periods at each reporting unit based on past performance. The Company experienced a significant reduction in days of working capital from 77 days for the year ended December 31, 2008 to 65 days for the year ended December 31, 2012. We have been able to significantly improve our working capital management through lean initiatives, efficiency improvements, and facility consolidations.

We believe continued improvement in our ability to manage working capital will allow us to increase the cash flow generated from each reporting unit.

32-------------------------------------------------------------------------------- Table of Contents The terminal value of each reporting unit was based on a projected terminal year of forecasted cash flows in our discounted cash flow model. We made an assumption that cash flows would grow 3.0% each year thereafter in the North American markets, and 2.0% each year thereafter in the European markets served by the company, based on our approximation of gross domestic product growth.

This assumption was based on a third-party forecast of future economic growth over the long-term.

The discounted cash flow model uses the WACC to discount cash flows in the forecasted period and to discount the terminal value to present value. To determine the WACC, we used a standard valuation method, the capital asset pricing model, based on readily available and current market data of peer companies considered market participants. Acknowledging the risk inherent in each reporting units' ability to achieve long-term forecasted cash flows, in applying the income approach we increased the WACC of each reporting unit based upon each reporting unit's past operating performance and their relative ability to achieve the forecasted cash flows. As a result of these analyses, we assigned a WACC between 10.7% and 13.1% for each reporting unit.

The EBITDA multiple used in the market approach to determine the fair value of each reporting unit was applied to the forecasted EBITDA to be generated during 2012 and 2013. The market approach relies on significant assumptions consisting of revenue growth rates and profit margins based on internal forecasts and the EBITDA multiple selected from an analysis of peer companies considered market participants. The revenue growth rates and profit margins used in the market approach were the same projections used in the discounted cash flows model as described above. The EBITDA multiples were established by analyzing each peer companies' total invested capital in proportion to EBITDA derived from each peer companies' most recently reported earnings. Similar to the WACC analysis, we assessed the risk of each reporting unit achieving its forecasts with consideration given to how each reporting unit has performed historically compared to forecasts. As a result of these analyses, we assigned an EBITDA multiple between 7.7 and 9.2 for 2012 EBITDA forecasts and 7.1 and 8.6 for 2013 EBITDA forecasts.

As noted above, we used two commonly accepted valuation techniques to estimate a fair value for each reporting unit. The estimated fair value for each reporting unit was calculated using a weighted average between the calculated amounts determined under the income approach and the market approach. We weighted the income approach more heavily (67%) as the technique uses a long-term approach that considers the expected operating profit of each reporting unit during periods where housing starts and other macroeconomic indicators are nearer historical averages. The market approach (33%) values the reporting units using 2012 and 2013 EBITDA values which were forecasted using estimated housing starts of 761,000 and 935,000, respectively. Housing starts have historically approximated 1.5 million each year. We believe the income approach considers the expected recovery in the residential building market better than the market approach. Therefore, we concluded that the income approach more accurately estimated the fair value of the reporting units as it considers earnings potential during a longer term and does not use the short-term perspective used by the market approach. Accordingly, we concluded that the market participants who execute transactions to sell or buy a business in the current economic environment would place greater emphasis on the income approach.

The following table sets forth the Company's estimated fair value and carrying value for each reporting unit as of October 31, 2012 (in thousands): Estimated Carrying Reporting Unit Fair Value Value #1 $ 125,322 $ 91,230 #2 223,231 167,673 #3 113,375 87,639 #4 55,159 35,136 #5 36,096 33,715 #6 26,958 18,584 #7 31,022 24,856 #8 67,495 50,167 #9 67,586 80,787 #10 24,784 7,447 Corporate (132,623 ) 7,481 Total $ 638,406 $ 604,715 Net Debt $ 122,930 Equity (Net Book Value) 481,785 Total $ 604,715 33 -------------------------------------------------------------------------------- Table of Contents The "Corporate" category includes unallocated corporate cash out flows.

Unallocated corporate cash out flows include executive compensation and other administrative costs. Gibraltar has grown substantially through acquisitions and our strategy is to allow business unit management to operate the business units autonomous of corporate management. For example, each business unit has its own accounting, marketing, purchasing, information technology, and executive functions. As a result, we believe a market participant would not consider unallocated corporate cash flows when valuing each reporting unit and these cash flows have been properly excluded from the valuation of the reporting units.

Step two of the impairment analysis involved estimating the implied fair value of goodwill by allocating the fair value of each reporting unit to its assets and liabilities other than goodwill and comparing the implied fair value of goodwill to its carrying value. The step two analysis relied on a number of significant assumptions to determine the fair value of the reporting unit's net assets, including intangible assets. The fair value of intangible assets was determined using standard valuation methodologies including the "relief-from-royalty" method and "excess earnings" method. These methods primarily employed the use of future cash flows to determine the fair value of the applicable intangible assets. The future cash flows used to determine the fair vales of these intangible assets were derived from step one of the goodwill impairment analysis as described above. The discount rate used in the valuation of intangible assets was derived from the WACC used in step one of the goodwill impairment analysis. Based on the analysis described above, we concluded the assumptions underlying step two of our impairment analysis were reasonable and appropriate.

In addition to the analyses described above, we performed a reconciliation of the total estimated fair values of the reporting units to our market capitalization as of October 31, 2012 to support the reasonableness of the fair value estimates used in our goodwill impairment test. The following calculation provides this reconciliation and the resulting control premium determined as of our October 31, 2012 impairment analysis (in thousands): Estimated Estimated Market Fair Value Capitalization Estimated Fair Value of Reporting Units $ 638,406 Less: Net Debt as of October 31, 2012 (122,930 ) Shares Outstanding as of October 31, 2012 30,565 Average Stock Price from October 15, 2012 to November 7, 2012 $ 12.71 Value of Equity $ 515,476 $ 388,481 Control Premium 33 % During our annual goodwill impairment test for 2012, the Company identified one reporting unit with a carrying value in excess of fair value due to decreased revenue projections. The Company initiated step two of the goodwill impairment test which involved calculating the implied fair value of goodwill by allocating the fair value of the reporting unit to the fair value of its assets and liabilities other than goodwill, calculating an implied fair value of goodwill, and comparing the implied fair value 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 unit was less than its carrying value by $4,328,000, which has been recorded as an impairment charge for the year ended December 31, 2012. The remaining reporting units all had fair values in excess of their carrying value. The difference between the total carrying value of our reporting units and the estimated fair value of equity is the result of the negative future cash flows associated with our unallocated corporate net assets as described above. Although the book value of equity exceeds our market capitalization, we deemed the control premium as of the October 31, 2012 impairment analysis to be reasonable based upon recent comparable transactions to acquire the control of similar businesses in our industry. Accordingly, we concluded the estimated fair value of each reporting unit was reasonably estimated.

We test our intangible assets for impairment by comparing the fair value of the indefinite-lived intangible asset, determined using a discounted cash flow model, with its carrying amount. An impairment loss would be recognized for the carrying amount in excess of its fair value. We recognized impairment charges for indefinite-lived intangible assets as a result of our October 31, 2012 and 2010 impairment tests. No impairments charges were recognized as a result of the October 31, 2011 impairment test. The assumptions used to determine the fair value of our indefinite-lived intangible assets are consistent with the assumptions employed in the determination of the fair values of our reporting units.

34 -------------------------------------------------------------------------------- Table of Contents 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 allowances.

Our effective tax rates differ from the statutory rate due to the impact of permanent differences between income or loss reported for financial statement purposes and tax purposes, provisions for uncertain tax positions, state taxes, and income generated by international operations. Our effective tax rate was 43%, 45%, and 18%, for the years ended December 31, 2012, 2011, and 2010, 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.

Regarding deferred income tax assets, we maintained a valuation allowance of $2.6 million as of December 31, 2012 and 2011, respectively, due to uncertainties related to our ability to utilize these assets, primarily consisting of state net operating losses and other deferred tax assets. 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 operating results do not meet expectations, 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 results of operations and financial condition.

It is our policy to record estimated interest and penalties due to tax authorities as income tax expense and tax credits as a reduction in income tax expense. Insignificant amounts of interest and penalties were recognized in the provision for income taxes for the years ended December 31, 2012, 2011 and 2010.

The Company recognizes 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 tax authorities, based on the technical merits of each 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. As of December 31, 2012 and 2011, the liability for uncertain income tax positions was $1.7 million and $2.5 million, respectively. Due to the high degree of uncertainty regarding the timing of potential future cash flows associated with these liabilities, we are unable to make a reasonably reliable estimate of the amount and period in which these liabilities might be paid.

Related Party Transactions A member of our Board of Directors, Gerald S. Lippes, is a partner in a law firm that provides legal services to Gibraltar. For the years ended December 31, 2012, 2011, and 2010, the Company incurred costs of $1.5 million, $1.8 million, and $0.9 million, respectively, for legal services from this firm. Costs incurred increased significantly for 2011 as a result of additional legal services provided for the acquisitions completed in 2011 and our amendment of the Senior Credit Agreement. For 2012, costs included fees for four acquisitions completed during the year. At December 31, 2012 and 2011, we had $0.5 million and $0.3 million, respectively, recorded in accounts payable for amounts due to this law firm.

Another member of our Board of Directors, Robert E. Sadler, Jr., is a member of the Board of Directors of M&T Bank Corporation, one of the ten participating lenders which have committed capital to our $200 million revolving credit facility in our Senior Credit Agreement. All amounts outstanding under the revolving credit facility were repaid in full as of December 31, 2011. No amounts were outstanding on the revolving credit facility in 2012. Therefore, no principal or interest was paid to the lenders in 2012.

Borrowings under the Senior Credit Agreement bear interest at a variable interest rate based upon the London Interbank Offered Rate (LIBOR) plus an additional margin of 2.0% to 2.5%, based on the amount of borrowings available to Gibraltar. The revolving credit facility also carries an annual facility fee of 0.375% on the undrawn portion of the facility and fees on outstanding letters of credit which are payable quarterly.

35-------------------------------------------------------------------------------- Table of Contents Recent Accounting Pronouncements In July 2012, the Financial Accounting Standards Board "FASB" issued Accounting Standards Update "Update" 2012-02, "Intangibles - Goodwill and Other (Topic 350): Testing Indefinite Lived Intangible Assets for Impairment". Update 2012-02 states that an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative test. Gibraltar has elected not to perform the qualitative assessment and performed the full quantitative test as of October 31, 2012.

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