Document

Table of Contents

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

 https://cdn.kscope.io/cd2c97e437fb9e9bdc360c69c632ff65-gibindcolorlogonotaga03.gif
 
FORM 10-Q
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22462
 
 
GIBRALTAR INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
 
 
 
Delaware
 
16-1445150
(State or incorporation )
 
(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
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  x    No  ¨ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No  x

As of July 25, 2018, the number of common shares outstanding was: 31,998,477.



Table of Contents

GIBRALTAR INDUSTRIES, INC.
INDEX
 
 
PAGE 
NUMBER
PART I.
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
PART II.
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 
 


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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GIBRALTAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Net Sales
$
266,036

 
$
247,627

 
$
481,373

 
$
454,232

Cost of sales
195,533

 
185,802

 
362,552

 
343,152

Gross profit
70,503

 
61,825

 
118,821

 
111,080

Selling, general, and administrative expense
38,229

 
36,895

 
72,704

 
76,471

Income from operations
32,274

 
24,930

 
46,117

 
34,609

Interest expense
3,130

 
3,550

 
6,399

 
7,126

Other expense (income)
13

 
353

 
(572
)
 
407

Income before taxes
29,131

 
21,027

 
40,290

 
27,076

Provision for income taxes
6,294

 
7,853

 
9,101

 
9,906

Income from continuing operations
22,837

 
13,174

 
31,189

 
17,170

Discontinued operations:
 
 
 
 
 
 
 
Loss before taxes

 
(644
)
 

 
(644
)
Benefit of income taxes

 
(239
)
 

 
(239
)
Loss from discontinued operations

 
(405
)
 

 
(405
)
Net income
$
22,837

 
$
12,769

 
$
31,189

 
$
16,765

Net earnings per share – Basic:
 
 
 
 
 
 
 
Income from continuing operations
$
0.72

 
$
0.41

 
$
0.98

 
$
0.54

Loss from discontinued operations

 
(0.01
)
 

 
(0.01
)
Net income
$
0.72

 
$
0.40

 
$
0.98

 
$
0.53

Weighted average shares outstanding -- Basic
31,862

 
31,709

 
31,824

 
31,698

Net earnings per share – Diluted:
 
 
 
 
 
 
 
Income from continuing operations
$
0.70

 
$
0.41

 
$
0.96

 
$
0.53

Loss from discontinued operations

 
(0.01
)
 

 
(0.01
)
Net income
$
0.70

 
$
0.40

 
$
0.96

 
$
0.52

Weighted average shares outstanding -- Diluted
32,553

 
32,183

 
32,498

 
32,219

See accompanying notes to consolidated financial statements.

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GIBRALTAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
22,837

 
$
12,769

 
$
31,189

 
$
16,765

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(1,787
)
 
1,091

 
(1,677
)
 
1,770

Cumulative effect of accounting change (see Note 2)

 

 
(350
)
 

Adjustment to retirement benefit liability, net of tax
(5
)
 
(3
)
 
(10
)
 
(6
)
Adjustment to post employment health care benefit liability, net of tax
31

 
30

 
63

 
59

Other comprehensive (loss) income
(1,761
)
 
1,118

 
(1,974
)
 
1,823

Total comprehensive income
$
21,076

 
$
13,887

 
$
29,215

 
$
18,588

See accompanying notes to consolidated financial statements.

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GIBRALTAR INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)

 
June 30,
2018
 
December 31,
2017
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
210,743

 
$
222,280

Accounts receivable, net
171,642

 
145,385

Inventories
95,694

 
86,372

Other current assets
11,594

 
8,727

Total current assets
489,673

 
462,764

Property, plant, and equipment, net
93,221

 
97,098

Goodwill
320,875

 
321,074

Acquired intangibles
101,554

 
105,768

Other assets
4,597

 
4,681

 
$
1,009,920

 
$
991,385

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
88,547

 
$
82,387

Accrued expenses
65,174

 
75,467

Billings in excess of cost
15,527

 
12,779

Current maturities of long-term debt
400

 
400

Total current liabilities
169,648

 
171,033

Long-term debt
209,613

 
209,621

Deferred income taxes
31,196

 
31,237

Other non-current liabilities
38,567

 
47,775

Shareholders’ equity:
 
 
 
Preferred stock, $0.01 par value; authorized 10,000 shares; none outstanding

 

Common stock, $0.01 par value; authorized 50,000 shares; 32,755 shares and 32,332 shares issued and outstanding in 2018 and 2017
327

 
323

Additional paid-in capital
277,307

 
271,957

Retained earnings
306,375

 
274,562

Accumulated other comprehensive loss
(6,340
)
 
(4,366
)
Cost of 767 and 615 common shares held in treasury in 2018 and 2017
(16,773
)
 
(10,757
)
Total shareholders’ equity
560,896

 
531,719

 
$
1,009,920

 
$
991,385

See accompanying notes to consolidated financial statements.

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GIBRALTAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)(unaudited) 
 
Six Months Ended 
 June 30,
 
2018
 
2017
Cash Flows from Operating Activities
 
 
 
Net income
$
31,189

 
$
16,765

Loss from discontinued operations

 
(405
)
Income from continuing operations
31,189

 
17,170

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
10,345

 
11,006

Stock compensation expense
4,828

 
3,191

Net gain on sale of assets
(52
)
 
(39
)
Exit activity recoveries, non-cash
(662
)
 
(2,737
)
Other, net
709

 
628

Changes in operating assets and liabilities, excluding the effects of acquisitions:
 
 
 
Accounts receivable
(22,048
)
 
(14,446
)
Inventories
(14,985
)
 
2,245

Other current assets and other assets
(2,840
)
 
(2,174
)
Accounts payable
6,064

 
16,962

Accrued expenses and other non-current liabilities
(16,351
)
 
(10,086
)
Net cash (used in) provided by operating activities of continuing operations
(3,803
)
 
21,720

Cash Flows from Investing Activities
 
 
 
Cash paid for acquisitions, net of cash acquired

 
(18,494
)
Net proceeds from sale of property and equipment
2,929

 
12,778

Purchases of property, plant, and equipment
(3,704
)
 
(3,274
)
Net cash used in investing activities
(775
)
 
(8,990
)
Cash Flows from Financing Activities
 
 
 
Long-term debt payments
(400
)
 
(400
)
Purchase of treasury stock at market prices
(6,016
)
 
(1,003
)
Net proceeds from issuance of common stock
526

 
247

Net cash used in financing activities
(5,890
)
 
(1,156
)
Effect of exchange rate changes on cash
(1,069
)
 
628

Net (decrease) increase in cash and cash equivalents
(11,537
)
 
12,202

Cash and cash equivalents at beginning of year
222,280

 
170,177

Cash and cash equivalents at end of period
$
210,743

 
$
182,379

See accompanying notes to consolidated financial statements.

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GIBRALTAR INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
 
Common Stock
 
Additional
Paid-In Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive Loss
 
Treasury Stock
 
Total
Shareholders’ Equity
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
Balance at December 31, 2017
32,332

 
$
323

 
$
271,957

 
$
274,562

 
$
(4,366
)
 
615

 
$
(10,757
)
 
$
531,719

Net income

 

 

 
31,189

 

 

 

 
31,189

Foreign currency translation adjustment

 

 

 

 
(1,677
)
 

 

 
(1,677
)
Adjustment to retirement benefit liability, net of taxes of $(4)

 

 

 

 
(10
)
 

 

 
(10
)
Adjustment to post employment health care benefit liability, net of taxes of $25

 

 

 

 
63

 

 

 
63

Stock compensation expense

 

 
4,828

 

 

 

 

 
4,828

Cumulative effect of accounting changes (see Note 2)

 

 

 
624

 
(350
)
 

 

 
274

Stock options exercised
34

 

 
526

 

 

 

 

 
526

Issuance of restricted stock
2

 

 

 

 

 

 

 

Net settlement of restricted stock units
387

 
4

 
(4
)
 

 

 
152

 
(6,016
)
 
(6,016
)
Balance at June 30, 2018
32,755

 
$
327

 
$
277,307

 
$
306,375

 
$
(6,340
)
 
767

 
$
(16,773
)
 
$
560,896

See accompanying notes to consolidated financial statements.

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GIBRALTAR INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(1)
CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments consisting of normal recurring adjustments considered necessary for the fair presentation of results for the interim period have been included. The Company's operations are seasonal; for this and other reasons, financial results for any interim period are not necessarily indicative of the results expected for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our annual Form 10-K for the year ended December 31, 2017.

The balance sheet at December 31, 2017 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.


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(2)
RECENT ACCOUNTING PRONOUNCEMENTS

Recent Accounting Pronouncements Adopted
Standard
 
Description
 
Financial Statement Effect or Other Significant Matters
ASU No. 2014-09
Revenue from Contracts with Customers (Topic 606) And All Related ASUs
 
The standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires additional disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and assets recognized from costs incurred to obtain or fulfill a contract. The provisions of the standard, as well as all subsequently issued clarifications to the standard, are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The standard can be adopted using either a full retrospective or modified retrospective approach.
 
The Company has adopted this standard using the modified retrospective method. The Company recognized the cumulative- effect adjustment of initially applying this standard of $274,000 to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standard in effect for that period. Refer to Note 4 for further disclosure of the financial statement effect and other significant matters as a result of the adoption of this standard.




Date of adoption: Q1 2018
ASU No. 2016-15
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
 
The standard provides guidance on eight specific cash flow issues to reduce diversity in reporting. The provisions of this standard are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted.
 
The Company has adopted this standard and it did not have any impact on the Company's consolidated financial statements.


Date of adoption: Q1 2018
ASU No. 2016-16
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
 
The standard allows an entity to recognize income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The provisions of this standard are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance.
 
The Company has adopted this standard and it did not have any impact on the Company's consolidated financial statements.





Date of adoption: Q1 2018
ASU No. 2018-02 Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
 
The standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The provisions of this standard are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the standard is permitted, including adoption in any interim period.
 
The Company has early adopted this standard. As a result of adopting this standard, the Company recorded an adjustment of $350,000 from accumulated other comprehensive income to retained earnings in the consolidated statement of shareholders' equity as of the beginning of the January 1, 2018, and will record any subsequent period adjustments, if changes to provisional amounts result in additional amounts stranded in accumulated other comprehensive income.

Date of adoption: Q1 2018

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Recent Accounting Pronouncements Not Yet Adopted
Standard
 
Description
 
Financial Statement Effect or Other Significant Matters
ASU No. 2016-02
Leases (Topic 842)
 
The standard requires lessees to recognize most leases as assets and liabilities on the balance sheet, but record expenses on the statement of operations in a manner similar to current accounting. For lessors, the guidance modifies the classification criteria and accounting for sales-type and direct financing leases. The standard also requires additional disclosures about leasing arrangements and requires a modified retrospective transition approach for existing leases, whereby the standard will be applied to the earliest year presented. The provisions of the standard are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted.
 
The Company is currently evaluating the impact of this standard on the Company's consolidated financial statements and related disclosures, including the impact on the Company's current lease portfolio from both a lessor and lessee perspective. The adoption of this standard will primarily result in an increase in the assets and liabilities on the Company's consolidated balance sheet and related disclosures. The Company does not expect a material impact to our consolidated statement of operations as a result of the adoption.



Planned date of adoption: Q1 2019


(3)
ACCOUNTS RECEIVABLE, NET

Accounts receivable consists of the following (in thousands):
 
June 30, 2018
 
December 31, 2017
Trade accounts receivable
$
157,944

 
$
140,209

Costs in excess of billings
20,163

 
11,610

Total accounts receivables
178,107

 
151,819

Less allowance for doubtful accounts
(6,465
)
 
(6,434
)
Accounts receivable
$
171,642

 
$
145,385


Refer to Note 4 of the Company's consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q for additional information concerning the Company's costs in excess of billings.


(4)
REVENUE

Sales includes revenue from contracts with customers from roof and foundation ventilation products; centralized mail systems and electronic package solutions; rain dispersion products and roofing accessories; expanded and perforated metal; expansion joints and structural bearings; designing, engineering, manufacturing and installation of solar racking systems and greenhouse structures.

Revenue recognition

Revenue is recognized when, or as, the Company transfers control of promised products or service to a customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those products or service. Refer to Note 16 of this quarterly report on Form 10Q for additional information related to revenue recognized by timing of transfer of control by reportable segment.

Payment terms and conditions vary by contract, although terms generally include a requirement of payment within a range from 30 to 60 days, or in certain cases, up front deposits. In circumstances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that the Company's contracts generally

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do not include a significant financing component. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from sales.

Performance obligations satisfied at a point in time and significant judgments

The majority of the Company's revenue from contracts with customers is recognized when the Company transfers control of the promised product at a point in time, which is determined when the customer has legal title and the significant risks and rewards of ownership of the asset, and the Company has a present right to payment for the product. These contracts with customers include promised products, which are generally capable of being distinct and accounted for as separate performance obligations. Accordingly, the Company allocates the transaction price, which is generally the quoted price per terms of the contract and the consideration the Company excepts to receive, to each performance obligation in an amount based on an observable price of the products as the Company frequently sells these products separately in similar circumstances and to similar customers. These products are generally sold with rights of return and these contracts may provide other credits or incentives, which are accounted for as variable consideration. Variable consideration is estimated at the most likely amount to predict the consideration to which the Company will be entitled, and only to the extent it is probable that a subsequent change in estimate will not result in a significant revenue reversal when estimating the amount of revenue to recognize. Sales returns, allowances, and customer incentives, including rebates, are treated as reductions to the sales transaction price and based largely on an assessment of all information (i.e., historical, current and forecasted) that is reasonably available to the Company, and estimated at contract inception and updated at the end of each reporting period as additional information becomes available.

Performance obligations satisfied over time and significant judgments

For contracts with customers which the Company satisfies a promise to the customer to construct a certain asset that the customer controls as it is being created or enhanced, or a promise to provide a product that has no alternative use to the Company and the Company has enforceable rights to payment, the Company satisfies the performance obligation and recognizes revenue over time. For the contracts to construct a certain asset, the Company determines that the customer controls the asset while it is being constructed. For the contracts for products that have no alternative use and for which the Company has enforceable right to payment, the Company identifies these products as products that are not a standard inventory item or the Company cannot readily direct the product to another customer or use without incurring a significant economic loss, or significant costs to rework the product.

When the promised products and services are to construct a certain asset that the customer controls, the entire contract is accounted for as one performance obligation. The Company determines the transaction price for each contract based on the consideration the Company expects to receive for the promised products and services under the entire contract, which is generally the stated contract price based on an expected cost plus a margin approach.

When the promised products do not have an alternative use to the Company, and the Company has enforceable rights to payment, the transaction price is determined for each contract based on the consideration the Company expects to receive for the promised products under the contract and is generally the stated contract price based on an expected cost plus a margin approach for each performance obligation. These promised products are generally capable of being distinct and accounted for as separate performance obligations.

For the above contracts with customers with respect to which the Company satisfies a performance obligation over time, the Company recognizes revenue based on the extent of progress towards completion of the performance obligation. The cost-to-cost measure of progress best depicts the transfer of control to the customer which occurs as the Company incurs costs on the contract as the incurred costs are proportionate to the Company's progress in satisfying the performance obligation. Under the cost-to-cost measure of progress, the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues are recognized proportionally as costs are incurred. Costs to fulfill a contract include all direct costs related to contract performance. Selling and administrative expenses are charged to operations as incurred. Provision for loss on an uncompleted performance obligation is recognized in the period in which such loss is determined.

The Company regularly reviews the progress and performance of the performance obligation recognized over time under the cost-to-cost method. Any adjustments to net sales, cost of sales, and the related impact to operating income are recognized as necessary in the period they become known. Changes in estimates of net sales, cost of sales, and the related impact to operating income are recognized on a cumulative catch-up basis, which recognizes in the current

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period the cumulative effect of the changes on current or prior periods based on a performance obligation's cost-to-cost measure of progress.

The Company also recognizes revenues from services contracts over time. For these contracts, the transaction price is determined for each contract based on the consideration the Company expects to receive for the promised service under the contract, which generally is the stated contract price. In order to estimate the standalone selling price of the performance obligation, the Company evaluates the market in which the promised service is sold and estimates the price that customers in the market would be willing to pay. Further, the Company recognizes revenue over time during the term of the agreement as the customer is simultaneously receiving and consuming the benefits provided throughout the Company's performance. Therefore due to control transferring over time, the Company recognizes revenue on a straight-line basis throughout the contract period.

Remaining performance obligations

As of June 30, 2018, the Company's remaining performance obligations are part of contracts that have an original expected duration of one year or less. Therefore, any remaining performance obligations are not required to be disclosed.

Contract assets

Contract assets consist of costs in excess of billings. Costs in excess of billings includes unbilled amounts resulting from revenues under contracts with customers that are satisfied over time and when the cost-to-cost measurement method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer, and right to payment is not just subject to the passage of time. Amounts may not exceed their net realizable value. Costs in excess of billings are classified as current assets and are reported net of contract billings on a contract-by-contract basis at the end of each reporting period.

Contract liabilities

Contract liabilities consist of billings in excess of cost. Billings in excess of cost includes billings in excess of revenue recognized and deferred revenue, which includes advanced payments, up-front payments, and progress billing payments. Billings in excess of cost are reported net of contract cost on a contract-by-contract basis at the end of each reporting period and are classified as current liabilities. To determine the revenue recognized in the period from the beginning balance of billings in excess of cost, the contract liability as of the beginning of the period is recognized as revenue on a contract by contract basis when the Company incurs costs to satisfy the performance obligation related to the individual contract. Once the beginning contract liability balance for an individual contract has been fully recognized as revenue, any additional payments received in the period are recognized as revenue once the related costs have been incurred.

Costs to obtain a contract with a customer

The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if the Company expects the benefit of those costs to be longer than one year. As of June 30, 2018, the Company does not have any open contracts with an original expected duration of greater than one year, and therefore, we expense such costs as incurred. These incremental costs include, but are not limited to, sales commissions incurred to obtain a contract with a customer.


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Contract assets and contract liabilities

The Company's contract assets and contract liabilities consist of costs in excess of billings and billings in excess of cost, respectively. The following table presents the beginning and ending balances and significant changes in the costs in excess of billings and billings in excess of cost balance during the three months ended June 30, 2018:
 
Costs in Excess of Billings
 
Billings in Excess of Cost
Beginning balance, January 1, 2018 (1)
$
16,532

 
$
(12,779
)
Reclassification of the beginning balances of:
 
 
 
Costs in excess of billings to receivables
(14,950
)
 

Billings in excess of cost to revenue

 
9,044

Costs in excess of billings recognized, net of reclassification to receivables
18,581

 

Net billings in advance and cash payments not recognized as revenue

 
(11,792
)
Ending balance, June 30, 2018
$
20,163

 
$
(15,527
)
(1) Due to the adoption of ASC 606 effective January 1, 2018, the Company recorded a transition adjustment to the opening balance of "Costs in excess of billings" at January 1, 2018. There were no transition adjustments to the opening balance of "Billings in Excess of Cost" at January 1, 2018. Refer to "Transition disclosures" below for further explanation of cumulative effect of the changes made to the Company's consolidated January 1, 2018 balance sheet for the adoption of ASC 606.

Transition disclosures

On January 1, 2018, the Company adopted the accounting standard ASC 606, Revenue from Contracts with Customers, only for contracts that were not completed at the date of initial application using the modified retrospective method. The Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of retained earnings. The comparative period information has not been restated and continues to be reported under the accounting standards in effect for that period. The Company does not expect the adoption of this standard to have a material impact to the Company's net income on an ongoing basis.

A majority of the Company's revenues continue to be recognized when products are shipped or service is provided and the customer takes ownership and assumes the risk of loss. For certain custom fabricated products for which there is no alternative use and the Company has enforceable rights to payment for performance to date where revenue was previously recognized upon transfer of title and risk of loss, the Company now recognizes revenue as the Company satisfies its performance over time in accordance with ASC 606.


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The cumulative effect of the changes made to the Company's consolidated January 1, 2018 balance sheet for the adoption of ASC 606 is as follows (in thousands):
 
Balance at December 31, 2017
 
Adjustments
 
Balance at January 1, 2018
Assets
 
 
 
 
 
Accounts receivable, net
$
145,385

 
$
4,922

 
$
150,307

Costs in excess of billings (1)
$
11,610

 
$
4,922

 
$
16,532

Inventories
$
86,372

 
$
(4,735
)
 
$
81,637

Total current assets
$
462,764

 
$
187

 
$
462,951

Total assets
$
991,385

 
$
187

 
$
991,572

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Accrued expenses
$
75,467

 
$
(87
)
 
$
75,380

Total current liabilities
$
171,033

 
$
(87
)
 
$
170,946

 
 
 
 
 
 
Shareholders' equity
 
 
 
 
 
Retained earnings
$
274,562

 
$
274

 
$
274,836

Total shareholders' equity
$
531,719

 
$
274

 
$
531,993

Total liabilities and shareholders' equity
$
991,385

 
$
187

 
$
991,572

(1) The balance presented at December 31, 2017 for "Costs in excess of billings" represents the balance reported in Note 2 of the Company's annual report on Form 10-K for the year ended December 31, 2017. This balance was included within the total balance of "Accounts receivable, net" presented on the Company's Consolidated Balance Sheet on Form 10-K as of December 31, 2017. Due to the adoption of ASC 606 effective January 1, 2018, the Company recorded a transition adjustment to the opening balance of "Costs in excess of billings" at January 1, 2018 that is included in the "Accounts receivable, net" line item presented on the Company's Consolidated Balance Sheet and disclosed in Note 3 of this Form 10-Q for the six months ended June 30, 2018.


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In accordance with ASC 606, the disclosure of the impact of adoption on the Company's consolidated statement of operations and balance sheet for the period ended June 30, 2018 is as follows (in thousands):
Consolidated Statement of Operations
 
Three Months Ended June 30, 2018
 
As Reported
 
Without Adoption of ASC 606
 
Effect of Change
Higher (Lower)
 
 
 
 
 
 
Net sales
$
266,036

 
$
265,752

 
$
284

Cost of sales
195,533

 
195,581

 
(48
)
Gross profit
70,503

 
70,171

 
332

Provision for income taxes
6,294

 
6,201

 
93

Net income
$
22,837

 
$
22,598

 
$
239


Consolidated Statement of Operations
 
Six Months Ended June 30, 2018
 
As Reported
 
Without Adoption of ASC 606
 
Effect of Change
Higher (Lower)
 
 
 
 
 
 
Net sales
$
481,373

 
$
479,121

 
$
2,252

Cost of sales
362,552

 
361,161

 
1,391

Gross profit
118,821

 
117,960

 
861

Provision for income taxes
9,101

 
8,859

 
242

Net income
$
31,189

 
$
30,570

 
$
619


Consolidated Balance Sheet
 
June 30, 2018
 
As Reported
 
Without Adoption of ASC 606
 
Effect of Change
Higher (Lower)
Assets
 
 
 
 
 
Accounts receivable, net
$
171,642

 
$
164,359

 
$
7,283

Inventories
95,694

 
101,915

 
(6,221
)
Total current assets
489,673

 
488,611

 
1,062

Total assets
1,009,920

 
1,008,858

 
1,062

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Accrued expenses
65,174

 
65,005

 
169

Total current liabilities
169,648

 
169,479

 
169

 
 
 
 
 
 
Shareholders' equity
 
 
 
 
 
Retained earnings
306,375

 
305,482

 
893

Total shareholders' equity
560,896

 
560,003

 
893

Total liabilities and shareholders' equity
$
1,009,920

 
$
1,008,858

 
$
1,062



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(5)
INVENTORIES

Inventories consist of the following (in thousands):
 
June 30, 2018
 
December 31, 2017
Raw material
$
52,835

 
$
42,661

Work-in-process
7,640

 
10,598

Finished goods
35,219

 
33,113

Total inventories
$
95,694

 
$
86,372


(6)    ACQUISITIONS

On February 22, 2017, the Company acquired all of the outstanding stock of Package Concierge. Package Concierge is a leading provider of multifamily electronic package delivery locker systems in the United States.

The acquisition of Package Concierge is expected to enable the Company to expand its position in the fast-growing package delivery solutions market. The results of Package Concierge have been included in the Company's consolidated financial results since the date of acquisition (within the Company's Residential Products segment). The final aggregate purchase consideration for the acquisition of Package Concierge was $18.9 million.

The purchase price for the acquisition was allocated to the assets acquired and liabilities assumed based upon their respective fair values. The excess consideration was recorded as goodwill and approximated $16.8 million, which is not deductible for tax purposes. Goodwill represents future economic benefits arising from other assets acquired that could not be individually identified including workforce additions, growth opportunities, and increased presence in the building products markets.

The allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed is as follows as of the date of the acquisition (in thousands):
Cash
$
590

Working capital
(1,998
)
Property, plant and equipment
55

Acquired intangible assets
3,600

Other assets
8

Deferred income taxes
(128
)
Goodwill
16,790

Fair value of purchase consideration
$
18,917


The intangible assets acquired in this acquisition consisted of the following (in thousands):
 
Fair Value
 
Estimated
Useful Life
Trademarks
$
600

 
Indefinite
Technology
1,300

 
10 years
Customer relationships
1,700

 
7 years
Total
$
3,600

 
 

The acquisition of Package Concierge was funded from available cash on hand. The Company incurred certain acquisition-related costs composed of legal and consulting fees, and these costs were recognized as a component of selling, general and administrative expenses in the consolidated statements of operations. Acquisition-related costs were $13 thousand and $115 thousand for the three and six months ended June 30, 2017, respectively.


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(7)
GOODWILL AND RELATED INTANGIBLE ASSETS

Goodwill
The changes in the carrying amount of goodwill for the six months ended June 30, 2018 are as follows (in thousands):
 
Residential
Products
 
Industrial and
Infrastructure
Products
 
Renewable Energy & Conservation
 
Total
Balance at December 31, 2017
$
198,075

 
$
54,280

 
$
68,719

 
$
321,074

Foreign currency translation

 
(269
)
 
70

 
(199
)
Balance at June 30, 2018
$
198,075

 
$
54,011

 
$
68,789

 
$
320,875


Acquired Intangible Assets
Acquired intangible assets consist of the following (in thousands):
 
June 30, 2018
 
December 31, 2017
 
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Estimated 
Life
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
Trademarks
$
45,117

 
$

 
$
45,107

 
$

 
Indefinite
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
Trademarks
5,830

 
3,273

 
5,876

 
3,062

 
5 to 15 Years
Unpatented technology
28,107

 
12,948

 
28,107

 
12,033

 
5 to 20 Years
Customer relationships
80,725

 
42,571

 
80,707

 
39,652

 
5 to 17 Years
Non-compete agreements
1,649

 
1,082

 
1,649

 
931

 
4 to 10 Years
 
116,311

 
59,874

 
116,339

 
55,678

 
 
Total acquired intangible assets
$
161,428

 
$
59,874

 
$
161,446

 
$
55,678

 
 

The following table summarizes the acquired intangible asset amortization expense for the three and six months ended June 30 (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Amortization expense
$
2,148

 
$
2,230

 
$
4,287

 
$
4,392


Amortization expense related to acquired intangible assets for the remainder of fiscal 2018 and the next five years thereafter is estimated as follows (in thousands):
 
2018
 
2019
 
2020
 
2021
 
2022
 
2023
Amortization expense
$
4,048

 
$
7,653

 
$
7,141

 
$
6,538

 
$
6,126

 
$
5,587



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(8)
LONG-TERM DEBT

Long-term debt consists of the following (in thousands):
 
June 30, 2018
 
December 31, 2017
Senior Subordinated 6.25% Notes
$
210,000

 
$
210,000

Other debt
2,000

 
2,400

Less unamortized debt issuance costs
(1,987
)
 
(2,379
)
Total debt
210,013

 
210,021

Less current maturities
400

 
400

Total long-term debt
$
209,613

 
$
209,621

The Company's Fifth Amended and Restated Credit Agreement dated December 9, 2015 (the "Senior Credit Agreement") was amended to convert our secured asset based credit facility into a secured cash flow revolver, and terminates on December 9, 2020.
The Senior Credit Agreement provides for a revolving credit facility and letters of credit in an aggregate amount of $300 million. The Company has the option to request additional financing from the banks to either increase the revolving credit facility to $500 million or to provide a term loan of up to $200 million. The Senior Credit Agreement contains three financial covenants. As of June 30, 2018, the Company is in compliance with all three covenants.
Borrowings under the Senior Credit Agreement are secured by the trade receivables, inventory, personal property, equipment, and certain real property of the Company’s significant domestic subsidiaries. Interest rates on the revolving credit facility are based on the LIBOR plus an additional margin that ranges from 1.25% to 2.25% for LIBOR loans based on the Total Leverage Ratio.
In addition, the revolving credit facility is subject to an undrawn commitment fee ranging between 0.20% and 0.30% based on the Total Leverage Ratio and the daily average undrawn balance.
Standby letters of credit of $9.7 million have been issued under the Senior Credit Agreement on behalf of the Company as of June 30, 2018. These letters of credit reduce the amount otherwise available under the revolving credit facility. As of June 30, 2018, the Company had $290.3 million of availability under the revolving credit facility. No borrowings were outstanding under the revolving credit facility at June 30, 2018 and December 31, 2017.
On January 31, 2013, the Company issued $210 million of 6.25% Senior Subordinated Notes ("6.25% Notes") due February 1, 2021.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 and interest is paid semiannually on February 1 and August 1 of each year.


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Table of Contents

(9)
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

The cumulative balance of each component of accumulated other comprehensive loss, net of tax, is as follows (in thousands):
 
Foreign Currency Translation Adjustment
 
Minimum 
Pension
Liability
Adjustment
 
Unamortized Post Retirement Health
Care Costs
 
Total Pre-Tax Amount
 
Tax (Benefit) Expense
 
Accumulated  Other
Comprehensive
(Loss) Income
Balance at December 31, 2017
$
(2,698
)
 
$
171

 
$
(2,809
)
 
$
(5,336
)
 
$
(970
)
 
$
(4,366
)
Cumulative effect of accounting change (see Note 2)

 
15

 
(365
)
 
(350
)
 

 
(350
)
Minimum pension and post retirement health care plan adjustments

 
(14
)
 
88

 
74

 
21

 
53

Foreign currency translation adjustment
(1,677
)
 

 

 
(1,677
)
 

 
(1,677
)
Balance at June 30, 2018
$
(4,375
)
 
$
172

 
$
(3,086
)

$
(7,289
)

$
(949
)
 
$
(6,340
)

The realized adjustments relating to the Company’s minimum pension liability and post retirement health care costs were reclassified from accumulated other comprehensive loss and included in other expense in the consolidated statements of operations.

(10)
EQUITY-BASED COMPENSATION
On May 4, 2018, the shareholders of the Company approved the adoption of the Gibraltar Industries, Inc. 2018 Equity Incentive Plan (the "2018 Plan"). The 2018 Plan provides for the issuance of up to 1,000,000 shares of common stock and supplements the remaining shares available for issuance under the existing Gibraltar Industries, Inc. 2015 Equity Incentive Plan (the "2015 Plan"). Both the 2018 Plan and the 2015 Plan allow the Company to grant equity-based incentive compensation awards, in the form of non-qualified options, restricted shares, restricted stock units, performance shares, performance stock units, and stock rights, to eligible participants.
In 2016, the shareholders of the Company approved the adoption of the Gibraltar Industries, Inc. 2016 Stock Plan for Non-Employee Directors ("Non-Employee Directors Plan") which allows the Company to grant awards of shares of the Company's common stock to non-employee Directors of the Company and permits the Directors to defer receipt of such shares pursuant to the terms of the Non-Employee Directors Plan.

Equity Based Awards - Settled in Stock
The following table sets forth the number of equity-based awards granted during the six months ended June 30, which will convert to shares upon vesting, along with the weighted average grant date fair values:
 
2018
 
2017
Awards
Number of
Awards (1)
 
Weighted
Average
Grant Date
Fair Value
 
Number of
Awards (2)
 
Weighted
Average
Grant Date
Fair Value
Performance stock units
132,288

 
$
33.35

 
108,748

 
$
42.72

Restricted stock units
69,055

 
$
33.41

 
74,292

 
$
42.39

Options

 
$

 
25,000

 
$
42.35

Deferred stock units
10,255

 
$
35.96

 
10,170

 
$
34.42

Common shares
2,113

 
$
35.50

 
2,034

 
$
34.42

(1) Performance stock units granted will convert to shares based on the Company's actual return on invested capital ("ROIC") relative to the ROIC targeted for the performance period ended December 31, 2018.

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Table of Contents

(2) Performance stock units granted include 78,482 units awarded in February 2017 which will convert to 23,546 shares to be issued in February 2020, representing 30% of the targeted 2017 award, based on the Company’s actual ROIC compared to ROIC target for the performance period ended December 31, 2017. The remaining performance stock units granted include 20,000 units awarded in February 2017. The number of these shares to be issued to the recipients will be determined based upon the ranking of the Company’s total shareholder return ("TSR") over a three (3) year performance period ended February 1, 2020 compared to the TSR of companies in the S&P Small Cap Industrial Sector over the same three year period.
Equity Based Awards - Settled in Cash
The Company's equity-based liabilities include performance based stock units settled in cash and a management stock purchase plan. As of June 30, 2018, the Company's total share-based liabilities recorded on the consolidated balance sheet were $34.5 million, of which $21.3 million was included in non-current liabilities.

Performance Stock Units - Settled in Cash
The Company awarded performance stock units ("PSUs") that will convert to cash after three years based upon a one year performance period. The cost of these awards is recognized over the requisite vesting period. The PSUs earned over the performance period are determined based on the Company’s actual ROIC relative to the ROIC targeted for the performance period.
During the 2016 performance period, the participants earned an aggregate of 256,000 PSUs, representing 200% the targeted 2016 award of 128,000. This award will convert to cash payable in the first quarter of 2019.

During the 2015 performance period, the participants earned an aggregate of 438,000 PSUs, representing 200% of the targeted 2015 award of 219,000. This award converted to cash and was paid in the first quarter of 2018.

The following table summarizes the compensation expense recognized for the PSUs, which will convert to cash, for the three and six months ended June 30, (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
PSUs compensation expense
$
902

 
$
341

 
$
1,608

 
$
2,078


Management Stock Purchase Plan
The Management Stock Purchase Plan ("MSPP") provides participants the ability to defer a portion of their compensation or Directors’ fees, which deferral is converted to restricted stock units, and credited to an account. Employees eligible to defer a portion of their compensation also receive a company-matching award in restricted stock units equal to a percentage of their deferral. Directors do not receive any company-matching on amounts deferred. The account represents a share-based liability that is converted to and settled in cash payable to participants upon retirement or a termination of their service to the Company.

The following table provides the number of restricted stock units credited to active participant accounts and the payments made with respect to restricted stock units issued under the MSPP during the six months ended June 30,
 
2018
 
2017
Restricted stock units credited
69,514

 
88,344

Share-based liabilities paid (in thousands)
$
4,717

 
$
2,353


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(11)
FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices in active markets for similar assets and liabilities.
Level 3 - Inputs that are unobservable inputs for the asset or liability.
The Company had no financial assets or liabilities measured at fair value on a recurring basis at June 30, 2018 and December 31, 2017. The Company’s only financial instrument for which the carrying value differs from its fair value is long-term debt. At June 30, 2018 and December 31, 2017, the fair value of outstanding debt net of unamortized debt issuance costs was $211.8 million and $213.8 million, respectively, compared to its carrying value of $210.0 million and $210.0 million, respectively.  The fair value of the Company’s 6.25% Notes is classified as Level 2 within the fair value hierarchy and was estimated based on quoted market prices adjusted for unamortized debt issuance costs. 
  
(12)
DISCONTINUED OPERATIONS

For certain divestiture transactions completed in prior years, the Company has agreed to indemnify the buyer for various liabilities that may arise after the disposal date, subject to limits of time and amount. The Company is a party to certain claims made under these indemnification provisions. As of June 30, 2018, the Company has a contingent liability recorded for such provisions related to discontinued operations. Management does not believe that the outcome of these claims, or other claims, would significantly affect the Company's financial condition or results of operation.

(13)
EXIT ACTIVITY COSTS AND ASSET IMPAIRMENTS

The Company has incurred exit activity costs and asset impairment charges as a result of its 80/20 simplification and portfolio management initiatives. These initiatives have resulted in the identification of low-volume, low margin, internally-produced products which have been or will be outsourced or discontinued, and in the sale and exiting of less profitable businesses or products lines.

Exit activity costs were incurred during the six months ended June 30, 2018 which related to contract terminations, severance, and other moving and closing costs. The Company closed 1 facility during the first half of 2018 as a result of these initiatives. In addition, the Company sold and leased back a facility which resulted in a gain, which was partially offset by inventory impairment charges incurred for discontinued products.

During the six months ended June 30, 2017, the Company incurred asset impairment charges and exit activity costs resulting from the above initiatives. Also, as a result of these initiatives, the Company closed three facilities during the first half of 2017.


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Table of Contents

The following tables set forth the asset impairment charges and exit activity costs incurred by segment during the three and six months ended June 30, related to the restructuring activities described above (in thousands):
 
Three months ended June 30,
 
2018
 
2017
 
Inventory write-downs &/or asset impairment charges
 
Exit activity (recoveries) costs, net
 
Total
 
Inventory write-downs &/or asset impairment recoveries
 
Exit activity costs
 
Total
Residential Products
$

 
$
(29
)
 
$
(29
)
 
$
(126
)
 
$
207

 
$
81

Industrial & Infrastructure Products

 
(28
)
 
(28
)
 
(1,694
)
 
315

 
(1,379
)
Renewable Energy & Conservation
65

 
(68
)
 
(3
)
 

 
1,369

 
1,369

Corporate

 
223

 
223

 

 
135

 
135

Total exit activity costs & asset impairments
$
65

 
$
98

 
$
163

 
$
(1,820
)
 
$
2,026

 
$
206


 
Six months ended June 30,
 
2018
 
2017
 
Inventory write-downs &/or asset impairment (recoveries) charges, net
 
Exit activity (recoveries) costs, net
 
Total
 
Inventory write-downs &/or asset impairment recoveries
 
Exit activity costs
 
Total
Residential Products
$
(43
)
 
$
(152
)
 
$
(195
)
 
$
(147
)
 
$
392

 
$
245

Industrial & Infrastructure Products
(703
)
 
190

 
(513
)
 
(2,590
)
 
2,971

 
381

Renewable Energy & Conservation
84

 
49

 
133

 

 
2,419

 
2,419

Corporate

 
267

 
267

 

 
163

 
163

Total exit activity costs & asset impairments
$
(662
)
 
$
354

 
$
(308
)
 
$
(2,737
)
 
$
5,945

 
$
3,208


The following table provides a summary of where the asset impairments and exit activity costs were recorded in the consolidated statement of operations for the three and six months ended June 30, (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Cost of sales
$
(193
)
 
$
(1,472
)
 
$
(156
)
 
$
(478
)
Selling, general, and administrative expense (recoveries)
356

 
1,678

 
(152
)
 
3,686

Net asset impairment and exit activity charges (recoveries)
$
163

 
$
206

 
$
(308
)
 
$
3,208


The following table reconciles the beginning and ending liability for exit activity costs relating to the Company’s facility consolidation efforts (in thousands):
 
2018
 
2017
Balance at January 1
$
961

 
$
3,744

Exit activity costs recognized
354

 
5,945

Cash payments
(1,256
)
 
(8,288
)
Balance at June 30
$
59

 
$
1,401


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(14)
INCOME TAXES

The following table summarizes the provision for income taxes for continuing operations (in thousands) for the three and six months ended June 30, and the applicable effective tax rates:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Provision for income taxes
$
6,294

 
$
7,853

 
$
9,101

 
$
9,906

Effective tax rate
21.6
%
 
37.3
%
 
22.6
%
 
36.6
%
The change in the effective tax rate year over year is primarily due to the reduction in the U.S. federal statutory tax rate from 35% to 21%. The effective tax rate for the three and six months ended June 30, 2018 was greater than the U.S. federal statutory rate of 21% due to state taxes and nondeductible permanent differences partially offset by favorable discrete items, including a $1.9 million tax benefit related to performance share unit vesting. The effective tax rate for the three and six months ended June 30, 2017 was greater than the U.S. federal statutory rate of 35% due to state taxes and $2.0 million of pretax losses generated by the European residential solar racking business for which no tax benefit had been recorded as such benefit is not expected to be realizable, partially offset by net deductible permanent differences and favorable discrete items.

On December 22, 2017, the Tax Cuts and Jobs Act ("Tax Reform Act") was signed into law. On this day, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company recognized the provisional tax impacts related to the one-time transition tax, withholding tax and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. As there is some uncertainty around the grandfathering provisions related to performance-based executive compensation, we have not included a provisional amount for deferred tax assets related to performance-based executive compensation as we believe that all of our plans are grandfathered. Our preliminary estimate of the one-time transition tax and the re-measurement of our deferred tax assets and liabilities is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the Tax Reform Act, changes to certain estimates and amounts related to the earnings and profits of certain subsidiaries and the filing of our tax returns, U.S. Treasury regulations, administrative interpretations or court decisions interpreting the Tax Reform Act may require further adjustments and changes in our estimates.

During the six month period ended June 30, 2018, the Company recognized an adjustment to the provisional amounts recorded at December 31, 2017. The following table sets forth the components of the adjustment which were recorded in income tax expense from continuing operations during six month period ended June 30, 2018, (in thousands):
Remeasurement of certain deferred tax balances (1)
 
114

One-time transition tax (2)
 
(233
)
Non-deductible performance based compensation (3)
 
51

Net benefit recorded to provisional income tax expense
 
(68
)

(1) The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. We recorded a provisional income tax benefit of $16.2 million at December 31, 2017 related to the remeasurement of certain deferred tax balances.
 
(2) The Tax Reform Act provided for a one-time transition tax on post-1986 undistributed foreign subsidiary earnings and profits (“E&P”). The Company recognized a provisional $3.7 million of income tax expense at December 31, 2017 related to the one-time transition tax and related repatriation.

(3) The Tax Reform Act repealed the performance-based compensation exceptions to Section 162(m) $1.0 million deduction limitation. The Company did not provide for a provisional adjustment at December 31, 2017.


23


Table of Contents

The Company has elected to account for global intangible low-taxed income ("GILTI") tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2017, or during the three and six months ended June 30, 2018. Based upon our interpretation, the impact of GILTI on our current annual effective tax increased the rate by 0.6%. If future guidance differs from our interpretations, this amount may change.

The final determination of the one-time transition tax and the re-measurement of our deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the Tax Reform Act.

In January 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated other Comprehensive Income, which gives entities the option to reclassify retained earning tax effects resulting from Tax Reform related to items in AOCI that the FASB refers to as having been stranded in AOCI. The Company must adopt this guidance for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted for periods for which financial statements have not yet been issued or made available for issuance, including the period Tax Reform was enacted. We elected to early adopt ASU 2018-02. As a result of adopting this standard, we reclassified $350,000 from AOCI to retained earnings.

(15)    EARNINGS PER SHARE

Basic earnings and diluted weighted-average shares outstanding are as follows for the three and six months ended June 30, (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
22,837

 
$
13,174

 
$
31,189

 
$
17,170

Loss from discontinued operations

 
(405
)
 

 
(405
)
Net income available to common shareholders
$
22,837

 
$
12,769

 
$
31,189

 
$
16,765

Denominator for basic earnings per share:
 
 
 
 
 
 
 
Weighted average shares outstanding
31,862

 
31,709

 
31,824

 
31,698

Denominator for diluted earnings per share:
 
 
 
 
 
 
 
Weighted average shares outstanding
31,862

 
31,709

 
31,824

 
31,698

Common stock options and restricted stock
691

 
474

 
674

 
521

Weighted average shares and conversions
32,553

 
32,183

 
32,498

 
32,219

The weighted average number of diluted shares does not include potential anti-dilutive common shares issuable pursuant to equity based incentive compensation awards, aggregating to 377,000 and 556,000 for the three months ended June 30, 2018 and 2017, respectively, and 368,000 and 541,000 for the six months ended June 30, 2018 and 2017, respectively.

(16)
SEGMENT INFORMATION

The Company is organized into three reportable segments on the basis of the production process and products and services provided by each segment, identified as follows:
(i)
Residential Products, which primarily includes roof and foundation ventilation products, centralized mail systems and electronic package solutions, rain dispersion products and roofing accessories;
(ii)
Industrial and Infrastructure Products, which primarily includes expanded and perforated metal, expansion joints, structural bearings and perimeter security; and
(iii)
Renewable Energy and Conservation, which primarily includes designing, engineering, manufacturing and installation of solar racking systems and greenhouse structures.

24


Table of Contents

When determining the reportable segments, the Company aggregated operating segments based on their similar economic and operating characteristics.
The following table illustrates certain measurements used by management to assess performance of the segments described above for the three and six months ended June 30, (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Net sales:
 
 
 
 
 
 
 
Residential Products
$
131,128

 
$
127,252

 
$
235,076

 
$
231,803

Industrial and Infrastructure Products
61,561

 
57,926

 
116,185

 
108,644

Less: Intersegment sales
(368
)
 
(314
)
 
(589
)
 
(770
)
Net Industrial and Infrastructure Products
61,193

 
57,612

 
115,596

 
107,874

Renewable Energy and Conservation
73,715

 
62,763

 
130,701

 
114,555

Total consolidated net sales
$
266,036

 
$
247,627

 
$
481,373

 
$
454,232

 
 
 
 
 
 
 
 
Income from operations:
 
 
 
 
 
 
 
Residential Products
$
24,196

 
$
22,579

 
$
37,434

 
$
38,220

Industrial and Infrastructure Products
6,604

 
3,397

 
9,206

 
3,360

Renewable Energy and Conservation
9,556

 
3,492

 
13,618

 
6,832

Unallocated Corporate Expenses
(8,082
)
 
(4,538
)
 
(14,141
)
 
(13,803
)
Total income from operations
$
32,274

 
$
24,930

 
$
46,117

 
$
34,609


The following tables illustrate revenue disaggregated by timing of transfer of control to the customer for the three and six months ended June 30 (in thousands):
 
Three Months Ended June 30, 2018
 
Residential Products
 
Industrial and Infrastructure Products
 
Renewable Energy and Conservation
 
Total
Net sales:
 
 
 
 
 
 
 
Point in Time
$
130,958

 
$
51,428

 
$
8,724

 
$
191,110

Over Time
170

 
9,765

 
64,991

 
74,926

Total
$
131,128

 
$
61,193

 
$
73,715

 
$
266,036

 
Three Months Ended June 30, 2017
 
Residential Products
 
Industrial and Infrastructure Products
 
Renewable Energy and Conservation
 
Total
Net sales:
 
 
 
 
 
 
 
Point in Time
$
127,252

 
$
57,612

 
$
5,383

 
$
190,247

Over Time

 

 
57,380

 
57,380

Total
$
127,252

 
$
57,612

 
$
62,763

 
$
247,627






25


Table of Contents




 
Six Months Ended June 30, 2018
 
Residential Products
 
Industrial and Infrastructure Products
 
Renewable Energy and Conservation
 
Total
Net sales:
 
 
 
 
 
 
 
Point in Time
$
233,842

 
$
97,971

 
$
14,344

 
$
346,157

Over Time
1,234

 
17,625

 
116,357

 
135,216

Total
$
235,076

 
$
115,596

 
$
130,701

 
$
481,373

 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
Residential Products
 
Industrial and Infrastructure Products
 
Renewable Energy and Conservation
 
Total
Net sales:
 
 
 
 
 
 
 
Point in Time
$
231,803

 
$
107,874

 
$
11,176

 
$
350,853

Over Time

 

 
103,379

 
103,379

Total
$
231,803

 
$
107,874

 
$
114,555

 
$
454,232



(17)
SUPPLEMENTAL FINANCIAL INFORMATION

The following information sets forth the consolidating summary financial statements of the issuer (Gibraltar Industries, Inc.) and guarantors, which guarantee the 6.25% Notes due February 1, 2021, and the non-guarantors. The guarantors are 100% owned domestic subsidiaries of the issuer and the guarantees are full, unconditional, joint and several.
Investments in subsidiaries are accounted for by the parent using the equity method of accounting. The guarantor subsidiaries and non-guarantor subsidiaries are presented on a combined basis. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.

26


Table of Contents


GIBRALTAR INDUSTRIES, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2018
(in thousands)
 
 
Gibraltar
Industries, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Net sales
$

 
$
256,487

 
$
14,194

 
$
(4,645
)
 
$
266,036

Cost of sales

 
189,082

 
10,891

 
(4,440
)
 
195,533

Gross profit

 
67,405

 
3,303

 
(205
)
 
70,503

Selling, general, and administrative expense
36

 
36,449

 
1,744

 

 
38,229

(Loss) income from operations
(36
)
 
30,956

 
1,559

 
(205
)
 
32,274

Interest expense (income)
3,402

 
(213
)
 
(59
)
 

 
3,130

Other expense (income)

 
111

 
(98
)
 

 
13

(Loss) income before taxes
(3,438
)
 
31,058

 
1,716

 
(205
)
 
29,131

(Benefit of) provision for income taxes
(962
)
 
6,874

 
382

 

 
6,294

Equity in earnings from subsidiaries
25,518

 
1,334

 

 
(26,852
)
 

Net income
$
23,042

 
$
25,518

 
$
1,334

 
$
(27,057
)
 
$
22,837




































27


Table of Contents


GIBRALTAR INDUSTRIES, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2017
(in thousands)
 
 
Gibraltar
Industries, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Net sales
$

 
$
238,652

 
$
10,627

 
$
(1,652
)
 
$
247,627

Cost of sales

 
178,779

 
8,739

 
(1,716
)
 
185,802

Gross profit

 
59,873

 
1,888

 
64

 
61,825

Selling, general, and administrative expense
34

 
33,681

 
3,180

 

 
36,895

(Loss) income from operations
(34
)
 
26,192

 
(1,292
)
 
64

 
24,930

Interest expense (income)
3,403

 
162

 
(15
)
 

 
3,550

Other expense

 
115

 
238

 

 
353

(Loss) income before taxes
(3,437
)
 
25,915

 
(1,515
)
 
64

 
21,027

(Benefit of) provision for income taxes
(1,340
)
 
9,360

 
(167
)
 

 
7,853

(Loss) income from continuing operations
(2,097
)
 
16,555

 
(1,348
)
 
64

 
13,174

Discontinued operations:
 
 
 
 
 
 
 
 
 
Loss from discontinued operations before taxes

 
(644
)
 

 

 
(644
)
Benefit of income taxes

 
(239
)
 

 

 
(239
)
Loss from discontinued operations

 
(405
)
 

 

 
(405
)
Equity in earnings (loss) from subsidiaries
14,802

 
(1,348
)
 

 
(13,454
)
 

Net income (loss)
$
12,705

 
$
14,802

 
$
(1,348
)
 
$
(13,390
)
 
$
12,769





28


Table of Contents

GIBRALTAR INDUSTRIES, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2018
(in thousands)
 
 
Gibraltar
Industries, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Net sales
$

 
$
460,954

 
$
26,524

 
$
(6,105
)
 
$
481,373

Cost of sales

 
347,666

 
20,649

 
(5,763
)
 
362,552

Gross profit

 
113,288

 
5,875

 
(342
)
 
118,821

Selling, general, and administrative expense
80

 
69,173

 
3,451

 

 
72,704

(Loss) income from operations
(80
)
 
44,115

 
2,424

 
(342
)
 
46,117

Interest expense (income)
6,804

 
(297
)
 
(108
)
 

 
6,399

Other expense (income)

 
139

 
(711
)
 

 
(572
)
(Loss) income before taxes
(6,884
)
 
44,273

 
3,243

 
(342
)
 
40,290

(Benefit of) provision for income taxes
(1,927
)
 
10,209

 
819

 

 
9,101

Equity in earnings from subsidiaries
36,488

 
2,424

 

 
(38,912
)
 

Net income
$
31,531

 
$
36,488

 
$
2,424

 
$
(39,254
)
 
$
31,189





































29


Table of Contents

GIBRALTAR INDUSTRIES, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2017
(in thousands)
 
 
Gibraltar
Industries, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Net sales
$

 
$
436,400

 
$
21,869

 
$
(4,037
)
 
$
454,232

Cost of sales

 
329,286

 
17,721

 
(3,855
)
 
343,152

Gross profit

 
107,114

 
4,148

 
(182
)
 
111,080

Selling, general, and administrative expense
77

 
70,187

 
6,207

 

 
76,471

(Loss) income from operations
(77
)
 
36,927

 
(2,059
)
 
(182
)
 
34,609

Interest expense (income)
6,805

 
354

 
(33
)
 

 
7,126

Other expense

 
245

 
162

 

 
407

(Loss) income before taxes
(6,882
)
 
36,328

 
(2,188
)
 
(182
)
 
27,076

(Benefit of) provision for income taxes
(2,684
)
 
12,738

 
(148
)
 

 
9,906

(Loss) income from continuing operations
(4,198
)
 
23,590

 
(2,040
)
 
(182
)
 
17,170

Discontinued operations:
 
 
 
 
 
 
 
 
 
Loss from discontinued operations before taxes

 
(644
)
 

 

 
(644
)
Benefit of income taxes

 
(239
)
 

 

 
(239
)
Loss from discontinued operations

 
(405
)
 

 

 
(405
)
Equity in earnings (loss) from subsidiaries
21,145

 
(2,040
)
 

 
(19,105
)
 

Net income (loss)
$
16,947

 
$
21,145

 
$
(2,040
)
 
$
(19,287
)
 
$
16,765





30


Table of Contents


GIBRALTAR INDUSTRIES, INC.
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED JUNE 30, 2018
(in thousands)
 
 
Gibraltar
Industries, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Net income
$
23,042

 
$
25,518

 
$
1,334

 
$
(27,057
)
 
$
22,837

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment

 

 
(1,787
)
 

 
(1,787
)
Adjustment to retirement benefit liability, net of tax

 
(5
)
 

 

 
(5
)
Adjustment to post employment health care benefit liability, net of tax

 
31

 

 

 
31

Other comprehensive income (loss)

 
26

 
(1,787
)
 

 
(1,761
)
Total comprehensive income (loss)
$
23,042

 
$
25,544

 
$
(453
)
 
$
(27,057
)
 
$
21,076



GIBRALTAR INDUSTRIES, INC.
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED JUNE 30, 2017
(in thousands)
 
 
Gibraltar
Industries, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Net income (loss)
$
12,705

 
$
14,802

 
$
(1,348
)
 
$
(13,390
)
 
$
12,769

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment

 

 
1,091

 

 
1,091

Adjustment to retirement benefit liability, net of tax

 
(3
)
 

 

 
(3
)
Adjustment to post employment health care benefit liability, net of tax

 
30

 

 

 
30

Other comprehensive income

 
27

 
1,091

 

 
1,118

Total comprehensive income (loss)
$
12,705

 
$
14,829

 
$
(257
)
 
$
(13,390
)
 
$
13,887






31


Table of Contents


GIBRALTAR INDUSTRIES, INC.
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 2018
(in thousands)
 
 
Gibraltar
Industries, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Net income
$
31,531

 
$
36,488

 
$
2,424

 
$
(39,254
)
 
$
31,189

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment

 

 
(1,677
)
 

 
(1,677
)
Cumulative effect of change in accounting (see Note 2)

 
(350
)
 

 

 
(350
)
Adjustment to retirement benefit liability, net of tax

 
(10
)
 

 

 
(10
)
Adjustment to post employment health care benefit liability, net of tax

 
63

 

 

 
63

Other comprehensive loss

 
(297
)
 
(1,677
)
 

 
(1,974
)
Total comprehensive income
$
31,531

 
$
36,191

 
$
747

 
$
(39,254
)
 
$
29,215





GIBRALTAR INDUSTRIES, INC.
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 2017
(in thousands)
 
 
Gibraltar
Industries, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Net income (loss)
$
16,947

 
$
21,145

 
$
(2,040
)
 
$
(19,287
)
 
$
16,765

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment

 

 
1,770

 

 
1,770

Adjustment to retirement benefit liability, net of tax

 
(6
)
 

 

 
(6
)
Adjustment to post employment health care benefit liability, net of tax

 
59

 

 

 
59

Other comprehensive income

 
53

 
1,770

 

 
1,823

Total comprehensive income (loss)
$
16,947

 
$
21,198

 
$
(270
)
 
$
(19,287
)
 
$
18,588















32


Table of Contents

GIBRALTAR INDUSTRIES, INC.
CONSOLIDATING BALANCE SHEETS
JUNE 30, 2018
(in thousands) 

 
Gibraltar
Industries, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
181,879

 
$
28,864

 
$

 
$
210,743

Accounts receivable, net

 
164,357

 
7,285

 

 
171,642

Intercompany balances
(1,220
)
 
4,505

 
(3,285
)
 

 

Inventories

 
91,611

 
4,083

 

 
95,694

Other current assets
1,975

 
5,708

 
3,911

 

 
11,594

Total current assets
755

 
448,060

 
40,858

 

 
489,673

Property, plant, and equipment, net

 
90,333

 
2,888

 

 
93,221

Goodwill

 
298,258

 
22,617

 

 
320,875

Acquired intangibles

 
93,367

 
8,187

 

 
101,554

Other assets

 
4,597

 

 

 
4,597

Investment in subsidiaries
774,373

 
62,074

 

 
(836,447
)
 

 
$
775,128

 
$
996,689

 
$
74,550

 
$
(836,447
)
 
$
1,009,920

Liabilities and Shareholders’ Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
84,166

 
$
4,381

 
$

 
$
88,547

Accrued expenses
5,469

 
56,377

 
3,328

 

 
65,174

Billings in excess of cost

 
13,028

 
2,499

 
 
 
15,527

Current maturities of long-term debt

 
400

 

 

 
400

Total current liabilities
5,469

 
153,971

 
10,208

 

 
169,648

Long-term debt
208,763

 
850

 

 

 
209,613

Deferred income taxes

 
28,928

 
2,268

 

 
31,196

Other non-current liabilities

 
38,567

 

 

 
38,567

Shareholders’ equity
560,896

 
774,373

 
62,074

 
(836,447
)
 
560,896

 
$
775,128

 
$
996,689

 
$
74,550

 
$
(836,447
)
 
$
1,009,920


















33


Table of Contents

GIBRALTAR INDUSTRIES, INC.
CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2017
(in thousands)
 
 
Gibraltar
Industries, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
192,604

 
$
29,676

 
$

 
$
222,280

Accounts receivable, net

 
138,903

 
6,482

 

 
145,385

Intercompany balances
324

 
4,166

 
(4,490
)
 

 

Inventories

 
82,457

 
3,915

 

 
86,372

Other current assets
5,415

 
(368
)
 
3,680

 

 
8,727

Total current assets
5,739

 
417,762

 
39,263

 

 
462,764

Property, plant, and equipment, net

 
93,906

 
3,192

 

 
97,098

Goodwill

 
298,258

 
22,816

 

 
321,074

Acquired intangibles

 
97,171

 
8,597

 

 
105,768

Other assets

 
4,681

 

 

 
4,681

Investment in subsidiaries
739,970

 
61,746

 

 
(801,716
)
 

 
$
745,709

 
$
973,524

 
$
73,868

 
$
(801,716
)
 
$
991,385

Liabilities and Shareholders’ Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
77,786

 
$
4,601

 
$

 
$
82,387

Accrued expenses
5,469

 
67,746

 
2,252

 

 
75,467

Billings in excess of cost

 
9,840

 
2,939

 

 
12,779

Current maturities of long-term debt

 
400

 

 

 
400

Total current liabilities
5,469

 
155,772

 
9,792

 

 
171,033

Long-term debt
208,521

 
1,100

 

 

 
209,621

Deferred income taxes

 
28,907

 
2,330

 

 
31,237

Other non-current liabilities

 
47,775

 

 

 
47,775

Shareholders’ equity
531,719

 
739,970

 
61,746

 
(801,716
)
 
531,719

 
$
745,709

 
$
973,524

 
$
73,868

 
$
(801,716
)
 
$
991,385



















34


Table of Contents

GIBRALTAR INDUSTRIES, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2018
(in thousands)
 
 
Gibraltar
Industries, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Cash Flows from Operating Activities
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
$
(6,643
)
 
$
884

 
$
1,956

 
$

 
$
(3,803
)
Cash Flows from Investing Activities
 
 
 
 
 
 
 
 
 
Net proceeds from sale of property and equipment

 
2,864

 
65

 

 
2,929

Purchases of property, plant, and equipment

 
(3,564
)
 
(140
)
 

 
(3,704
)
Net cash used in investing activities

 
(700
)
 
(75
)
 

 
(775
)
Cash Flows from Financing Activities
 
 
 
 
 
 
 
 
 
Long-term debt payments

 
(400
)
 

 

 
(400
)
Purchase of treasury stock at market prices
(6,016
)
 

 

 

 
(6,016
)
Net proceeds from issuance of common stock
526

 

 

 

 
526

Intercompany financing
12,133

 
(10,509
)
 
(1,624
)
 

 

Net cash provided by (used in) financing activities
6,643

 
(10,909
)
 
(1,624
)
 

 
(5,890
)
Effect of exchange rate changes on cash

 

 
(1,069
)
 

 
(1,069
)
Net decrease in cash and cash equivalents

 
(10,725
)
 
(812
)
 

 
(11,537
)
Cash and cash equivalents at beginning of year

 
192,604

 
29,676

 

 
222,280

Cash and cash equivalents at end of period
$

 
$
181,879

 
$
28,864

 
$

 
$
210,743

























35


Table of Contents


GIBRALTAR INDUSTRIES, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2017
(in thousands)
 
 
Gibraltar
Industries, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Cash Flows from Operating Activities
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
$
(6,640
)
 
$
31,687

 
$
(3,327
)
 
$

 
$
21,720

Cash Flows from Investing Activities
 
 
 
 
 
 
 
 
 
Cash paid for acquisitions

 
(18,494
)
 

 

 
(18,494
)
Net proceeds from sale of property and equipment

 
12,627

 
151

 

 
12,778

Purchases of property, plant, and equipment

 
(3,123
)
 
(151
)
 

 
(3,274
)
Net cash used in investing activities

 
(8,990
)
 

 

 
(8,990
)
Cash Flows from Financing Activities
 
 
 
 
 
 
 
 
 
Long-term debt payments

 
(400
)
 

 

 
(400
)
Purchase of treasury stock at market prices
(1,003
)
 

 

 

 
(1,003
)
Net proceeds from issuance of common stock
247

 

 

 

 
247

Intercompany financing
7,396

 
(7,280
)
 
(116
)
 

 

Net cash provided by (used in) financing activities
6,640

 
(7,680
)
 
(116
)
 

 
(1,156
)
Effect of exchange rate changes on cash

 

 
628

 

 
628

Net increase (decrease) in cash and cash equivalents

 
15,017

 
(2,815
)
 

 
12,202

Cash and cash equivalents at beginning of year

 
143,826

 
26,351

 

 
170,177

Cash and cash equivalents at end of period
$

 
$
158,843

 
$
23,536

 
$

 
$
182,379



36


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain information set forth herein includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and, therefore, are or may be deemed to be, “forward-looking statements.” These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “anticipates,” “expects,” “estimates,” “seeks,” “projects,” “intends,” “plans,” “may,” “will” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, competition, strategies and the industries in which we operate. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, those described in the “Risk Factors” disclosed in our Annual Report on Form 10-K. Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if our results of operations, financial condition and liquidity and the development of the industries in which we operate are consistent with the forward-looking statements contained in this quarterly report, those results or developments may not be indicative of results or developments in subsequent periods. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statements that we make herein speak only as of the date of those statements, and we undertake no obligation to update those statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.

Overview
Gibraltar Industries, Inc. (the "Company") is a leading manufacturer and distributor of building products for residential, industrial, infrastructure, renewable energy and conservation markets.
The Company operates and reports its results in the following three reporting segments, entitled:
Residential Products;
Industrial and Infrastructure Products; and
Renewable Energy and Conservation.

Our Residential Products segment services residential repair and remodeling activity and new residential housing construction with products including roof and foundation ventilation products, centralized mail systems and electronic package solutions, rain dispersion products and accessories. This segment's products are sold through major retail home centers, building material wholesalers, distributor groups, residential contractors and directly to multi-family property management companies.
Our Industrial and Infrastructure Products segment focuses on a variety of markets including industrial and commercial construction, highway and bridge construction, automotive, airports and energy and power generation markets with products including perimeter security, expanded and perforated metal, plank grating, architectural facades, as well as, expansion joints and structural bearings for roadways and bridges. This segment sells its products through steel fabricators and distributors, commercial and transportation contractors, and original equipment manufacturers.
Our Renewable Energy and Conservation segment focuses on the design, engineering, manufacturing and installation of solar racking systems and commercial, institutional, and retail greenhouse structures. This segment's services and products are provided directly to developers, power companies, solar energy contractors, and institutional and commercial growers of plants.
As of June 30, 2018, we operated 41 facilities, comprised of 29 manufacturing facilities, six distribution centers, and six offices, which are located in 17 states, Canada, China, and Japan. These facilities give 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 primarily throughout North America and, to a lesser extent, Asia.

37


Table of Contents

Business Strategy
Our business strategy focuses on significantly elevating and accelerating the growth and financial returns of the Company. We strive to deliver best-in-class, sustainable value creation for our shareholders for the long-term, and to generate more earnings at a higher rate of return with a more efficient use of capital year over year.
Our business strategy has four key elements, or "pillars," which consist of operational excellence, product innovation, portfolio management and acquisitions as a strategic accelerator. We believe that the continuing implementation of these pillars will produce transformational change in the Company’s portfolio and performance, resulting in sustainable value creation for our shareholders.
Operational excellence is our first pillar in this strategy. We focus on reducing complexity, adjusting costs and simplifying our product offering through 80/20 initiatives (“80/20”). 80/20 is the practice of focusing on our largest and best opportunities (the “80”) and eliminating complexity associated with less profitable opportunities (the “20”). Implementation of 80/20, along with in-lining and market rate of demand replenishment initiatives and outsourcing initiatives for our “B” products across our businesses will improve our profitability. Our next step in operational excellence is to concentrate on selling and marketing strategies, known as trade focus, to drive organic growth by developing new and innovative products which respond to our customers’ needs to simplify their operations.
Product innovation is our second strategic pillar where we focus on products with patent protection, developed internally or through acquired product lines. Innovation is centered on the allocation of new and existing resources to opportunities that we believe will produce sustainable returns. Our focus is on driving top line growth with new and innovative products. We are focused on those products and technologies that have relevance to the end-user and can be differentiated from our competition. We believe that development of these innovative products and technologies will support our objectives to produce sustainable returns for our shareholders.
The third pillar of our strategy is portfolio management, which involves the evaluation of our product lines, customers and end markets with the objective of allocating leadership time and financial resources to the highest-potential platforms and businesses. We view portfolio management as a continuous process that will remain an important part of our strategy as we look to improve the Company’s long-term financial performance. We are currently supporting all of the businesses in our portfolio today.
The fourth pillar of our strategy is acquisitions, which we consider an important part of the Company’s transformation. Our low leverage, high liquidity and strong cash flow enables us to consider larger acquisition targets. Our executive leadership team continues to invest time and energy in prospecting for and vetting of potential acquisition candidates. However, we remain committed to only making acquisitions which will contribute long-term value to the Company and its shareholders. We continue to seek acquisition prospects in attractive end markets, with unique value propositions and patented products or technologies. Our target markets include postal and parcel solutions, residential building products, perimeter security, infrastructure, renewable energy and conservation.
Overall, we believe our business strategy has enabled us to achieve stronger financial results, make more efficient use of capital, and deliver higher shareholder returns. We have and expect to continue to restructure our operations, including consolidation of facilities, reducing overhead costs, and controlling investments in inventory, which enables us to better react to fluctuations in commodity costs and customer demand and has contributed to both improved margins and cash flows.
Acquisitions and Divestitures
On February 22, 2017, the Company acquired all of the outstanding stock of Package Concierge for approximately $19 million subject to a working capital adjustment and certain other adjustments provided for in the stock purchase agreement. The acquisition was financed through cash on hand. Package Concierge is a leading provider of multifamily electronic package delivery locker systems in the United States. The results of operations of Package Concierge have been included within the Residential Products segment of the Company's consolidated financial statements from the date of acquisition.
On February 6, 2017, the Company completed the sale of substantially all of its U.S. bar grating product line assets to a third party. The Company had previously announced, on December 2, 2016, its intentions to exit its U.S. bar grating product line and its European residential solar racking business as part of its portfolio management initiative. This action resulted in the sale and closing of 3 facilities in early 2017. These assets were a part of our Industrial and Infrastructure Products segment.

38


Table of Contents

Economic Conditions
The end markets our businesses serve are subject to economic conditions that are influenced by various factors. These factors include but are not limited to changes in general economic conditions, interest rates, exchange rates, commodity costs, demand for residential construction, demand for repair and remodeling, governmental policies and funding, tax policies and incentives, tariffs, trade policies, the level of non-residential construction and infrastructure projects, need for protection of high value assets, demand for renewable energy sources, and climate change. We believe the key elements of our strategy will allow us to respond timely to changes in these factors.
Results of Operations
Three Months Ended June 30, 2018 Compared to the Three Months Ended June 30, 2017
The following table sets forth selected data from our consolidated statements of operations and the related percentage of net sales for the three months ended June 30, (in thousands):
 
2018
 
2017
Net sales
$
266,036

 
100.0
%
 
$
247,627

 
100.0
 %
Cost of sales
195,533

 
73.5
%
 
185,802

 
75.0
 %
Gross profit
70,503

 
26.5
%
 
61,825

 
25.0
 %
Selling, general, and administrative expense
38,229

 
14.4
%
 
36,895

 
14.9
 %
Income from operations
32,274

 
12.1
%
 
24,930

 
10.1
 %
Interest expense
3,130

 
1.1
%
 
3,550

 
1.4
 %
Other expense
13

 
0.0
%
 
353

 
0.2
 %
Income before taxes
29,131

 
11.0
%
 
21,027

 
8.5
 %
Provision for income taxes
6,294

 
2.4
%
 
7,853

 
3.2
 %
Income from continuing operations
22,837

 
8.6
%
 
13,174

 
5.3
 %
Loss from discontinued operations

 
0.0
%
 
(405
)
 
(0.1
)%
Net income
$
22,837

 
8.6
%
 
$
12,769

 
5.2
 %
The following table sets forth the Company’s net sales by reportable segment for the three months ended June 30, (in thousands):
 
2018
 
2017
 
Total
Change
Net sales:
 
 
 
 
 
Residential Products
$
131,128

 
$
127,252

 
$
3,876

Industrial and Infrastructure Products
61,561

 
57,926

 
3,635

Less: Intersegment sales
(368
)
 
(314
)
 
(54
)
Net Industrial and Infrastructure Products
61,193

 
57,612

 
3,581

        Renewable Energy and Conservation
73,715

 
62,763

 
10,952

Consolidated
$
266,036

 
$
247,627

 
$
18,409


Consolidated net sales increased by $18.4 million, or 7.4%, to $266.0 million for the three months ended June 30, 2018 compared to the three months ended June 30, 2017. The 7.4% increase was driven by higher sales across our three reportable segments, led by our Renewable Energy and Conservation segment, the result of a 4.3% increase in pricing to customers, along with a 3.1% increase in volume.

Net sales in our Residential Products segment increased 3.1%, or $3.9 million to $131.1 million for the three months ended June 30, 2018 compared to $127.3 million for the three months ended June 30, 2017. The increase over the prior year quarter was primarily driven by pricing actions.

39


Net sales in our Industrial and Infrastructure Products segment increased 6.2%, or $3.6 million to $61.2 million for the three months ended June 30, 2018 compared to $57.6 million for the three months ended June 30, 2017. Contributions from new innovative industrial products along with pricing actions drove the increased revenues as compared to the prior year.
Net sales in our Renewable Energy and Conservation segment increased 17.5%, or $11.0 million to $73.7 million for the three months ended June 30, 2018 compared to $62.8 million for the three months ended June 30, 2017. The increase was the result of strong demand in both our domestic renewable energy and conservation markets and continued traction of innovative products.
Our consolidated gross margin increased to 26.5% for the three months ended June 30, 2018 compared to 25.0% for the three months ended June 30, 2017. This increase was the result of higher-margin product mix, 80/20 profit improvement initiatives, and contributions from our new innovative products.
Selling, general, and administrative (SG&A) expenses increased by $1.3 million, or 3.6%, to $38.2 million for the three months ended June 30, 2018 from $36.9 million for the three months ended June 30, 2017. The $1.3 million increase was the net result of $3.1 million of higher performance-based compensation expenses, partially offset by a $1.5 million decrease in restructuring charges relating to our 80/20 initiatives, as compared to the prior year quarter. The higher performance-based compensation costs are the result of improvements in return on invested capital year over year and an increasing average stock price in 2018. SG&A expenses as a percentage of net sales decreased to 14.4% for the three months ended June 30, 2018 compared to 14.9% for the three months ended June 30, 2017.
The following table sets forth the Company’s income from operations and income from operations as a percentage of net sales by reportable segment for the three months ended June 30, (in thousands):
 
2018
 
2017
 
Total
Change
Income from operations:
 
 
 
 
 
 
 
 
 
Residential Products
$
24,196

 
18.5
 %
 
$
22,579

 
17.7
 %
 
$
1,617

Industrial and Infrastructure Products
6,604

 
10.8
 %
 
3,397

 
5.9
 %
 
3,207

Renewable Energy and Conservation
9,556

 
13.0
 %
 
3,492

 
5.6
 %
 
6,064

Unallocated Corporate Expenses
(8,082
)
 
(3.0
)%
 
(4,538
)
 
(1.8
)%
 
(3,544
)
Consolidated income from operations
$
32,274

 
12.1
 %
 
$
24,930

 
10.1
 %
 
$
7,344

Our Residential Products segment generated an operating margin of 18.5% during the three months ended June 30, 2018 compared to 17.7% during the three months ended June 30, 2017. The increase in operating margin is due to the effects of product mix and improved raw material costs recovery through pricing actions.
Our Industrial and Infrastructure Products segment generated an operating margin of 10.8% during the three months ended June 30, 2018 compared to 5.9% during the three months ended June 30, 2017. The improvement was the result of operational efficiencies resulting from the Company's 80/20 initiatives along with higher demand for our innovative products, and improved raw material costs recovery through pricing actions.
The Renewable Energy and Conservation segment generated an operating margin of 13.0% in the current year quarter compared to 5.6% in the prior year quarter. The improvement was primarily the result of higher-margin product mix and operational improvements from our 80/20 initiatives along with costs incurred in the comparable prior-year quarter for these initiatives.

Unallocated corporate expenses increased $3.5 million from $4.5 million during the three months ended June 30, 2017 to $8.1 million during the three months ended June 30, 2018. This increase from the prior year quarter was largely due to a $3.5 million increase in performance-based compensation expenses, the result of improvements in return on invested capital year over year and increasing average stock price in 2018.
Other expense, net of other income for the three months ended June 30, 2018 was negligible. The Company recorded other expense of $0.4 million for the three months ended June 30, 2017. The decrease in other expense from the prior year quarter was primarily the result of foreign currency fluctuations.

40


Interest expense decreased by $0.4 million to $3.1 million for the three months ended June 30, 2018 compared to $3.6 million for the three months ended June 30, 2017. During the three months ended June 30, 2018 and 2017, no amounts were outstanding under our revolving credit facility.
We recognized a provision for income taxes of $6.3 million and $7.9 million, with effective tax rates of 21.6% and 37.3% for the three months ended June 30, 2018, and 2017, respectively. The change in the effective tax rate year over year is primarily due to the reduction in U.S. federal statutory tax rate from 35% to 21%. The effective tax rate for the second quarter of 2018 exceeded the U.S. federal statutory rate of 21% due to state taxes and nondeductible permanent differences largely offset by favorable discrete items, including a $1.9 million tax benefit related to performance share unit vesting. The effective tax rate for the second quarter of 2017 exceeded the U.S. federal statutory rate of 35% due to state taxes and $2.0 million of pretax losses generated by the European residential solar racking business for which no tax benefit had been recorded as such benefit is not expected to be realizable, partially offset by net deductible permanent differences and favorable discrete items.


Six Months Ended June 30, 2018 Compared to the Six Months Ended June 30, 2017

The following table sets forth selected data from our statements of operations and the related percentage of net sales for the six months ended June 30, (in thousands):
 
2018
 
2017
Net sales
$
481,373

 
100.0
 %
 
$
454,232

 
100.0
 %
Cost of sales
362,552

 
75.3
 %
 
343,152

 
75.5
 %
Gross profit
118,821

 
24.7
 %
 
111,080

 
24.5
 %
Selling, general, and administrative expense
72,704

 
15.1
 %
 
76,471

 
16.9
 %
Income from operations
46,117

 
9.6
 %
 
34,609

 
7.6
 %
Interest expense
6,399

 
1.3
 %
 
7,126

 
1.5
 %
Other (income) expense
(572
)
 
(0.1
)%
 
407

 
0.1
 %
Income before taxes
40,290

 
8.4
 %
 
27,076

 
6.0
 %
Provision for income taxes
9,101

 
1.9
 %
 
9,906

 
2.2
 %
Income from continuing operations
31,189

 
6.5
 %
 
17,170

 
3.8
 %
Loss from discontinued operations

 
0.0
 %
 
(405
)
 
(0.1
)%
Net income
$
31,189

 
6.5
 %
 
$
16,765

 
3.7
 %

The following table sets forth the Company’s net sales by reportable segment for the six months ended June 30, (in thousands):
 
 
 
 
 
 
 
2018
 
2017
 
Total
Change
Net sales:
 
 
 
 
 
Residential Products
$
235,076

 
$
231,803

 
$
3,273

Industrial and Infrastructure Products
116,185

 
108,644

 
7,541

Less: Intersegment sales
(589
)
 
(770
)
 
181

Net Industrial and Infrastructure Products
115,596

 
107,874

 
7,722

Renewable Energy and Conservation
$
130,701

 
$
114,555

 
16,146

Consolidated
$
481,373

 
$
454,232

 
$
27,141


Consolidated net sales increased by $27.1 million, or 6.0%, to $481.4 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The 6.0% increase was driven by higher sales across our three reportable segments, the result of a 3.4% increase in pricing to customers, along with a 2.4% increase in volume.


41


Net sales in our Residential Products segment increased 1.4%, or $3.3 million to $235.1 million for the six months ended June 30, 2018 compared to $231.8 million in the six months ended June 30, 2017. The increase over the prior year was largely driven by pricing actions.

Net sales in our Industrial and Infrastructure Products segment increased 7.1%, or $7.7 million to $115.6 million for the six months ended June 30, 2018 compared to $107.9 million for the six months ended June 30, 2017. Contributions from new innovative industrial products along with pricing actions drove the increased revenues.

Net sales in our Renewable Energy and Conservation segment increased 14.1%, or $16.1 million to $130.7 million for the six months ended June 30, 2018 compared to $114.6 million for the six months ended June 30, 2017. The increase was the result of strong demand in both our domestic renewable energy and conservation markets and continued traction of innovative products.

Our consolidated gross margin increased to 24.7% for the six months ended June 30, 2018 compared to 24.5% for the six months ended June 30, 2017. This increase was the result of higher-margin product mix, 80/20 profit improvement initiatives, and contributions from our new innovative products.

Selling, general, and administrative (SG&A) expenses decreased by $3.8 million, or 4.9%, to $72.7 million for the six months ended June 30, 2018 from $76.5 million for the six months ended June 30, 2017. The $3.8 million decrease was primarily due to a $4.0 million decrease in restructuring charges related to our 80/20 initiatives, partially offset by a $0.6 million increase in performance-based compensation expenses. SG&A expenses as a percentage of net sales decreased to 15.1% in the six months ended June 30, 2018 compared to 16.9% in the six months ended June 30, 2017.

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 six months ended June 30, (in thousands):
 
2018
 
2017
 
Total
Change
Income from operations:
 
 
 
 
 
 
 
 
 
Residential Products
$
37,434

 
15.9
 %
 
$
38,220

 
16.5
 %
 
$
(786
)
Industrial and Infrastructure Products
9,206

 
8.0
 %
 
3,360

 
3.1
 %
 
5,846

Renewable Energy and Conservation
13,618

 
10.4
 %
 
6,832

 
6.0
 %
 
6,786

Unallocated Corporate Expenses
(14,141
)
 
(2.9
)%
 
(13,803
)
 
(3.0
)%
 
(338
)
Consolidated income from operations
$
46,117

 
9.6
 %
 
$
34,609

 
7.6
 %
 
$
11,508



Our Residential Products segment generated an operating margin of 15.9% during the six months ended June 30, 2018 compared to 16.5% during the six months ended June 30, 2017. The decrease in operating margin is due to the effects of product mix, partially offset by a more favorable alignment of material costs to customer selling prices.

Our Industrial and Infrastructure Products segment generated an operating margin of 8.0% during the six months ended June 30, 2018 compared to 3.1% during the six months ended June 30, 2017. The improvement was largely the result of operational efficiencies resulting from the Company's 80/20 initiatives along with higher demand for our innovative products, and improved raw material costs recovery through pricing actions.

The Renewable Energy and Conservation segment generated an operating margin of 10.4% during the first half of the current year compared to 6.0% in the same period of the prior year. The improvement was primarily the result of higher-margin product mix, and operational improvements from our 80/20 initiatives along with costs incurred in the comparable prior-year period for these initiatives.

Unallocated corporate expenses increased $0.3 million from $13.8 million during the six months ended June 30, 2017 to $14.1 million during the six months ended June 30, 2018. The largest contributor to the higher expenses in the current year was the increase in performance-based compensation expenses.


42


The Company recorded other income of $0.6 million for the six months ended June 30, 2018 and other expense of $0.4 million for the six months ended June 30, 2017. The increase in other income from the prior year was primarily the result of foreign currency fluctuations.

Interest expense decreased by $0.7 million to $6.4 million for the six months ended June 30, 2018 compared to $7.1 million for the six months ended June 30, 2017. During the six months ended June 30, 2018 and 2017, no amounts were outstanding under our revolving credit facility.

We recognized a provision for income taxes of $9.1 million and $9.9 million, with effective tax rates of 22.6% and 36.6% for the six months ended June 30, 2018, and 2017, respectively. The change in the effective tax rate year over year is primarily due to the reduction in U.S. federal statutory tax rate from 35% to 21%. The effective tax rate for the six months ended June 30, 2018 exceeded the U.S. federal statutory rate of 21% due to state taxes and nondeductible permanent differences partially offset by favorable discrete items, including a $1.9 million tax benefit related to performance share unit vesting. The effective tax rate for the six months ended June 30, 2017 exceeded the U.S. federal statutory rate of 35% due to state taxes and $2.0 million of pretax losses generated by the European residential solar racking business for which no tax benefit has been recorded as such benefit is not expected to be realizable, partially offset by net deductible permanent differences and favorable discrete items.
Outlook

For 2018, we expect our innovative projects to continue to gain traction across all of our reporting segments. At the same time, we are cautious about the domestic and global volatility and competitive pressures related to the impact of tariffs. In addition, we expect higher development costs as we continue to execute on our new product initiatives. Our goals for 2018 are to drive sustainable organic growth through the acceleration of new product development initiatives, implement 80/20 simplification projects, and seek value-added acquisitions in attractive end markets.

On a comparative basis, excluding the $12.5 million, or $0.39 per share, one-time benefit from tax reform recorded in 2017, we expect to once again have generated increased profits at a higher rate of return with a more efficient use of capital in 2018.

The Company is maintaining its guidance for revenues and earnings for the full year 2018. We expect 2018 consolidated revenues to exceed $1 billion, considering modest growth across our end markets and continued traction from innovative products. GAAP EPS for the full year 2018 is expected to be between $1.75 and $1.87 per diluted share, as compared to $1.95 in 2017, which included the aforementioned one-time $0.39 per share benefit from tax reform.

For the third quarter of 2018, the Company is expecting revenue in the range of $285 million to $295 million as a result continued traction from innovative products. GAAP EPS for the third quarter 2018 are expected to be between $0.54 and $0.61 per diluted share.


Liquidity and Capital Resources
General
Our principal capital requirements are to fund our operations' working capital and capital improvements and to fund acquisitions. We will continue to invest in growth opportunities as appropriate while focusing on working capital efficiency and profit improvement opportunities to minimize the cash invested to operate our business. During the three months ended June 30, 2018, we invested cash in our working capital to meet the upcoming higher seasonal demands from our customers as noted below in “Cash Flows.”

On December 9, 2015, we entered into the Company's Fifth Amended and Restated Credit Agreement (the "Senior Credit Agreement") which includes a 5-year, $300 million revolving credit facility and provides the Company with access to capital and improved financial flexibility. As of June 30, 2018, our liquidity of $501.0 million consisted of $210.7 million of cash plus $290.3 million of availability under our revolving credit facility. We believe this liquidity, together with the cash expected to be generated from operations, should be sufficient to fund working capital needs and simplification initiatives that likely will need cash to fund transitions and future growth. We continue to search for strategic acquisitions and larger acquisitions may require additional borrowings and/or the issuance of our common stock.

43


Table of Contents

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 June 30, 2018, our foreign subsidiaries held $28.9 million of cash in U.S. dollars. As a result of the Tax Cuts and Jobs Act ("Tax Reform Act") signed into law on December 22, 2017, cash held by foreign subsidiaries is expected to be repatriated to the U.S.
Over the long-term, we expect that future obligations and 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. Any potential acquisitions are evaluated based on our acquisition strategy, which includes the enhancement of our existing products, operations, or capabilities, expanding our access to new products, markets, and customers, and the improvement of shareholder value. Our 2017 acquisition of Package Concierge was funded by cash on hand.
These expectations are forward-looking statements based upon currently available information and may change if conditions in the credit or equity markets 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 not available at acceptable terms, our future liquidity may be adversely affected.
Cash Flows
The following table sets forth selected cash flow data for the six months ended June 30, (in thousands):
 
2018
 
2017
Cash (used in) provided by:
 
 
 
Operating activities of continuing operations
$
(3,803
)
 
$
21,720

Investing activities of continuing operations
(775
)
 
(8,990
)
Financing activities of continuing operations
(5,890
)
 
(1,156
)
Effect of exchange rate changes
(1,069
)
 
628

Net (decrease) increase in cash and cash equivalents
$
(11,537
)
 
$
12,202

During the six months ended June 30, 2018, net cash used in operating activities totaling $3.8 million was primarily driven by an investment in working capital and other net assets of $50.2 million, partially offset by net income of $31.2 million and $15.2 million from non-cash charges including depreciation, amortization, stock compensation, and exit activities. Net cash provided by operating activities for the six months ended June 30, 2017 totaled $21.7 million, primarily composed of net income of $17.2 million plus $12.1 million from non-cash charges including depreciation, amortization, stock compensation, and exit activities, partially offset by an investment in working capital and other net assets of $7.5 million.

During the six months ended June 30, 2018, the cash invested in working capital and other net assets of $50.2 million included a $22.1 million, a $15.0 million and a $2.8 million increase in accounts receivable, inventories and other current assets and other assets, respectively, along with a $16.4 million decrease in accrued expenses and other non-current liabilities partially offset by a $6.1 million increase in accounts payable. The increase in accounts receivable relate to seasonal increases in manufacturing activity. Inventory increases are primarily due to seasonality as well as increased material costs. Total other current assets increased due in large part to timing of prepaid expenses. The decrease in accrued expenses and other non-current liabilities of $16.4 million was largely due to payments related to the Company's performance based incentive plans as well as accrued customer rebate payments. Accounts payable increased due to the seasonal increase in manufacturing activity and the timing of quarter end vendor payments.
Net cash used in investing activities for the six months ended June 30, 2018 of $0.8 million was the net result of capital expenditures of $3.7 million and net proceeds of $2.9 million from the sale and lease-back of property and equipment. Net cash used in investing activities for the six months ended June 30, 2017 of $9.0 million primarily consisted of $18.3 million of net cash paid for the acquisition of Package Concierge, capital expenditures of $3.3 million and a payment of $0.2 million related to the final purchase price adjustment for the acquisition of Nexus. These payments were partially offset by net proceeds of $12.8 million from the sale of property and equipment.
Net cash used in financing activities for the six months ended June 30, 2018 of $5.9 million consisted of the purchase of treasury stock of $6.0 million due to a large number of performance awards that vested in June 2018 and payment

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of long-term debt borrowings of $0.4 million partially offset by the proceeds received from the issuance of common stock of $0.5 million. Net cash used in financing activities for the six months ended June 30, 2017 of $1.2 million consisted of the purchase of treasury stock of $1.0 million and payment of long-term debt borrowings of $0.4 million partially offset by the proceeds received from the issuance of common stock of $0.2 million.
Senior Credit Agreement and Senior Subordinated Notes
Our Senior Credit Agreement is committed through December 9, 2020. Borrowings under the Senior Credit Agreement are secured by the trade receivables, inventory, personal property, 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 of $300 million. The Company can request additional financing from the banks to increase the revolving credit facility to $500 million or to provide a term loan of up to $200 million subject to conditions set forth in the Senior Credit Agreement. The Senior Credit Agreement contains three financial covenants. As of June 30, 2018, the Company is in compliance with all three covenants.

Interest rates on the revolving credit facility are based on the LIBOR plus an additional margin that ranges from 1.25% to 2.25% for LIBOR loans based on the Total Leverage Ratio. In addition, the revolving credit facility is subject to an undrawn commitment fee ranging between 0.20% and 0.30% based on the Total Leverage Ratio and the daily average undrawn balance.
As of June 30, 2018, we had $290.3 million of availability under the Senior Credit Agreement net of outstanding letters of credit of $9.7 million. No amounts were outstanding under our revolving credit facility as of either June 30, 2018 or December 31, 2017.
In addition to our Senior Credit Agreement, the Company issued $210.0 million of 6.25% Notes in January 2013 which are due February 1, 2021. 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 and interest is paid semiannually on February 1 and August 1 of each year.

Off Balance Sheet Financing Arrangements
We have no off-balance sheet arrangements, other than operating leases, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.

Contractual Obligations
Our contractual obligations have not changed materially from the disclosures included in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Critical Accounting Estimates
In the current year, there have been no changes to our critical accounting estimates from those disclosed in the consolidated financial statements and accompanying notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2017, other updates to our revenue recognition policy due to the adoption of ASU 2014-09 Revenue from Contracts with Customers (Topic 606) in the first quarter of 2018, which are discussed in Note 4 to the Company's consolidated financial statements in Part I, Item I of this Form 10-Q.

Recent Accounting Pronouncements
See Note 2 to the Company's consolidated financial statements in Part I, Item 1 of this Form 10-Q for further information on recent accounting pronouncements.


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Item 3. Qualitative and Quantitative 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, foreign exchange rates, and raw materials pricing and availability. In addition, the Company is exposed to other financial market risks, primarily related to its long-term debt and foreign operations. Refer to Item 7A in the Company's Form 10-K for the year ended December 31, 2017 for more information about the Company's exposure to market risk.
Item 4. Controls and Procedures
 
(a)
Evaluation of Disclosure Controls and Procedures
The Company maintains a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). The Company’s Chief Executive Officer and the Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls as of the end of the period covered in this report. Based upon that evaluation and the definition of disclosure controls and procedures contained in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that as of the end of such period the Company’s disclosure controls and procedures were effective.
 
(b)
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as defined by Rule 13a-15(f) or 15d-15(f)) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.

Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the risks discussed in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operation, cash flows, and future prospects. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may materially adversely impact our business, financial condition, or operating results. We are providing the following information regarding changes that have occurred to the previously disclosed risk factors in our Form 10-K. Except for such additional information, we believe there have been no material changes from the risk factors previously disclosed in our Form 10-K.

Recently imposed tariffs and potential future tariffs may result in increased costs and could adversely affect our results of operations
 
On June 1, 2018, the United States imposed Section 232 tariffs on certain steel (25%) and aluminum (10%) products imported into the U.S. These tariffs have created volatility in the market and have increased the costs of these inputs. Increased costs for imported steel and aluminum products have lead domestic sellers to respond with market-based increases to prices for such inputs as well. The new tariffs, along with any additional tariffs or trade restrictions that may be implemented by the U.S. or other countries, could result in further increased costs, shifting in competitive positions and a decreased available supply of steel and aluminum as well as additional imported components and inputs. We may not be able to pass price increases on to our customers and may not be able to secure adequate alternative sources of steel and aluminum on a timely basis. While retaliatory tariffs imposed by other countries on U.S. goods have not yet had a significant impact, we cannot predict further developments. The tariffs could adversely affect the operating profits for certain of our businesses and customer demand for certain of our products which could have a material adverse effect on our consolidated results of operations, financial position and cash flows.



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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.

Item 3. Defaults Upon Senior Securities
Not applicable.

Item 4. Mine Safety Disclosures
Not applicable.

Item 5. Other Information
Not applicable.



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Item 6. Exhibits
(a) Exhibits
 
 
Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes–Oxley Act of 2002.
 
Certification of Senior Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes–Oxley Act of 2002.
 
Certification of the President and Chief Executive Officer pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002.
 
Certification of the Senior Vice President and Chief Financial Officer pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002.
 
101.INS
XBRL Instance Document *
 
101.SCH
XBRL Taxonomy Extension Schema Document *
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document *
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document *
 
101.PRA
XBRL Taxonomy Extension Presentation Linkbase Document *
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document *
*
Submitted electronically with this Quarterly Report on Form 10-Q.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GIBRALTAR INDUSTRIES, INC.
(Registrant)
 
 
/s/ Frank G. Heard
Frank G. Heard
President and Chief Executive Officer

/s/ Timothy F. Murphy
Timothy F. Murphy
Senior Vice President and
Chief Financial Officer
Date: July 26, 2018


49
Exhibit


EXHIBIT 31.1
CERTIFICATIONS
I, Frank G. Heard, certify that:
1.
I have reviewed this report on Form 10-Q of Gibraltar Industries, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) or 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:
July 26, 2018
 
/s/ Frank G. Heard
 
 
 
Frank G. Heard
 
 
 
President and Chief Executive Officer



Exhibit


EXHIBIT 31.2
CERTIFICATIONS
I, Timothy F. Murphy, certify that:
1.
I have reviewed this report on Form 10-Q of Gibraltar Industries, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) or 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:
July 26, 2018
 
/s/ Timothy F. Murphy
 
 
 
Timothy F. Murphy
 
 
 
Senior Vice President and
Chief Financial Officer




Exhibit


EXHIBIT 32.1
CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER
PURSUANT TO TITLE 18, UNITED STATES CODE, SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Frank G. Heard, President and Chief Executive Officer, of Gibraltar Industries, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
The Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2018 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
/s/ Frank G. Heard
Frank G. Heard
President and Chief Executive Officer
 
July 26, 2018
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.



Exhibit


EXHIBIT 32.2
CERTIFICATION OF SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
PURSUANT TO TITLE 18, UNITED STATES CODE, SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Timothy F. Murphy, Senior Vice President and Chief Financial Officer, of Gibraltar Industries, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
The Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2018 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
/s/ Timothy F. Murphy
Timothy F. Murphy
Senior Vice President and
Chief Financial Officer
 
July 26, 2018
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.