SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The consolidated financial statements include the accounts of Gibraltar Industries, Inc. and subsidiaries (the "Company"). All intercompany accounts and transactions have been eliminated in consolidation.

Use of estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Revenue recognition

On January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” and all related Accounting Standards Updates. As further described in this Note under Recent Accounting Pronouncements Adopted, the core principle of the guidance is that an entity should recognize revenue to depict the transfer of control, 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 Company’s policy for recognizing revenue by timing of transfer of control to the customer, at a point in time or over time, is discussed in more detail in Note 3 of the consolidated financial statements. Note 18 of these consolidated financial statements provide information related to the amount of revenue recognized as defined by timing of transfer of control to the customer along with the reportable segment detail.

Cash and cash equivalents

All highly liquid investments with a maturity of three months or less are considered cash equivalents.

Accounts receivable and allowance for doubtful accounts

Accounts receivable are composed of trade and contract receivables recorded at either the invoiced amount or costs in excess of billings, are expected to be collected within one year, and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the probable amount of uncollectible accounts in the Company’s existing accounts receivable. The Company determines the allowance based on a number of factors, including historical experience, credit worthiness of customers, and current market and economic conditions. The Company reviews the allowance for doubtful accounts on a regular basis. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

The following table summarizes activity recorded within the allowance for doubtful accounts balances for the years ended December 31 (in thousands):



	2018			2017			2016
Beginning balance	$	6,434		$	5,272		$	4,868
Bad debt expense	1,150			1,253			2,519
Accounts written off and other adjustments	(624		)	(91		)	(2,115		)
Ending balance	$	6,960		$	6,434		$	5,272

Concentrations of credit risk on accounts receivable are limited to those from significant customers that are believed to be financially sound. As of December 31, 2018 and 2017, the Company's most significant customer is a home improvement retailer. The home improvement retailer purchases from the Residential Products and the Renewable Energy and Conservation segments. Accounts receivable as a percentage of consolidated accounts receivable from the home improvement retailer was 13.6% as of December 31, 2018 and 2017.

Net sales as a percentage of consolidated net sales to the home improvement retailer were 12%, 12% and 11% for the years ended December 31, 2018, 2017 and 2016, respectively, with the majority of those sales within the Company's Residential Products segment. Note 2 "Accounts Receivable" contains additional information on the Company's accounts receivable.

Inventories

Inventories are valued at the lower of cost, determined using the first-in, first-out method, or net realizable value. Shipping and handling costs are recognized as a component of cost of sales.

Property, plant, and equipment

Property, plant, and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Interest is capitalized in connection with construction of qualified assets. Expenditures that exceed an established dollar threshold and that extend the useful lives of assets are capitalized, while repair and maintenance costs are expensed as incurred. The estimated useful lives of land improvements, buildings, and building improvements are 15 to 40 years, while the estimated useful lives for machinery and equipment are 3 to 20 years.

The table below sets forth the depreciation expense recognized during the years ended December 31 (in thousands):



	2018		2017		2016
Depreciation expense	$	12,152	$	12,929	$	14,477

Acquisition related assets and liabilities

Accounting for the acquisition of a business as a purchase transaction requires an allocation of the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective estimated fair values. The most complex estimations of individual fair values are those involving long-lived assets, such as property, plant, and equipment and intangible assets. The Company uses all available information to make these fair value determinations and, for major business acquisitions, engages independent valuation specialists to assist in the fair value determination of the acquired long-lived assets.

Goodwill and other intangible assets

The Company tests goodwill for impairment at the reporting unit level on an annual basis at October 31, or more frequently if an event occurs, or circumstances change, that indicate that the fair value of a reporting unit could be below its carrying value. The reporting units are at the component level, or one level below the operating segment level. Goodwill is assigned to each reporting unit as of the date the reporting unit is acquired and based upon the expected synergies of the acquisition.

The Company may elect to perform a qualitative assessment that considers economic, industry and company-specific factors for some or all of our selected reporting units. If, after completing the assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company proceeds to a quantitative test. The Company may also elect to perform a quantitative test instead of a qualitative test for any or all of the Company's reporting units.

The quantitative impairment test consists of comparing the fair value of a reporting unit, determined using two valuation techniques, to its carrying value. If the carrying value of the reporting unit exceeds its fair value, goodwill is considered impaired, and a loss measured by the excess of the carrying value of the reporting unit over the fair value of the reporting unit must be recorded.

The Company also tests its indefinite-lived intangible assets for impairment on an annual basis as of October 31, or more frequently if an event occurs, or circumstances change, that indicate that the fair value of an indefinite-lived intangible asset could be below its carrying value. The impairment test consists of comparing the fair value of the indefinite-lived intangible asset, determined using discounted cash flows on a relief-from-royalty basis, with its carrying amount. An impairment loss would be recognized for the carrying amount in excess of its fair value. Acquired identifiable intangible assets are recorded at cost. Identifiable intangible assets with finite useful lives are amortized over their estimated useful lives.

Impairment of long-lived assets

Long-lived assets, including acquired identifiable intangible assets with finite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. In specific situations, when the Company has selected individual assets to be sold or scrapped, the Company obtains market value data for those specific assets and measures and records the impairment loss based on such data. Otherwise, the Company uses undiscounted cash flows to determine whether impairment exists and measures any impairment loss by approximating fair value using acceptable valuation techniques, including discounted cash flow models and third-party appraisals. The Company recognized impairment charges related to intangible assets during the years ended December 31, 2018, 2017 and 2016. Several of these impairment charges related to exit activities during the three year period ended December 31, 2018 as described in Note 14 of the consolidated financial statements.

Deferred charges

Deferred charges associated with initial costs incurred to enter into new debt arrangements are included as a component of long-term debt and are amortized as a part of interest expense over the terms of the associated debt agreements.

Advertising

The Company expenses advertising costs as incurred. For the years ended December 31, 2018, 2017 and 2016, advertising costs were $5.2 million, $4.9 million, and $5.1 million, respectively.

Research and Development

The Company expenses research and development costs as incurred. For the years ended December 31, 2018, 2017 and 2016, research and development costs were $1.7 million, $2.9 million, and $2.2 million, respectively.

Foreign currency transactions and translation

The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period.

Income taxes

The provision for income taxes is determined using the asset and liability approach. Under this approach, deferred income taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. The Company records a valuation allowance to reduce deferred tax assets when uncertainty exists regarding their realization. On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Tax Reform Act”). Further information on the impact of the Tax Reform Act is included in Note 15 of the consolidated financial statements.

Equity-based compensation

The Company measures the cost of equity-based compensation based on grant date fair value and recognizes the cost over the period in which the employee is required to provide service in exchange for the award reduced by forfeitures. Equity-based compensation consists of grants of stock options, deferred stock units, restricted stock, restricted stock units, and performance stock units. Equity-based compensation expense is included as a component of selling, general, and administrative expenses. The Company’s equity-based compensation plans are discussed in more detail in Note 12 of the consolidated financial statements.

Sale-Leaseback Transactions

During the first quarter of 2018, the Company entered into a transaction to sell one of its real estate properties to an independent third party for $3.0 million. The Company leased back the entire property under a four year operating lease agreement. In accordance with the U.S. generally accepted accounting principles, the Company accounted for the transaction as a sale-leaseback. The net present value of the Company's future minimum lease payments of $0.7 million were less than the gain on sale of $1.4 million. As such, the portion of the gain equal to the fair value of the future minimum lease payments was deferred and is being amortized on a straight-line basis over the four year term of the lease. The gain exceeding the fair value of the minimum lease payments amounted to $0.7 million and was recognized during 2018 as a component of selling, general, and administrative expenses. The minimum lease payment for each of the four years is $0.2 million.

These amounts have been included in the future minimum lease payments table in Note 17 of the consolidated financial statements.

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 2017 and 2016 information has not been restated and continues to be reported under the accounting standard in effect for that period. Refer to Note 3 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 January 1, 2018. Date of adoption: Q1 2018

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 standard is effective for the Company as of January 1, 2019. The Company will adopt the new leasing standard using the modified retrospective transition approach and will elect the transition method to initially apply the new leases standard to leases that exist at January 1, 2019 (i.e., adoption date). Under this transition method, the date of initial application, and the consolidated financial statements which the Company will first apply the new standard will be January 1, 2019, rather than the later of January 1, 2017 or the Company's underlying leases commencements dates. Further under this approach, the Company will continue reporting and presenting comparative periods in accordance with ASC 840, including disclosures. In addition, the Company will elect the package of practical expedients permitted under the transition guidance within the standard, which among other things, allows the Company to carry-forward the historical lease classification assessed under ASC 840. The Company will make an accounting policy election to keep leases with an initial term of 12 months or less off of the consolidated balance sheet. The Company will recognize operating lease costs in the consolidated statements of operations on a straight-line basis over the lease term. The Company estimates the adoption of the standard will result in recognition of operating lease assets and operating lease liabilities of approximately $29 million, respectively, as of January 1, 2019. The Company expects the standard will have no impact to the Company's lease expense presentation in the consolidated statement of operations nor the Company's liquidity. The standard will have no impact on the Company's debt covenant compliance under the Company's current agreements. Also, the Company has identified and will be implementing appropriate changes to the Company's business processes, systems and internal controls to support recognition and disclosure under this standard. Planned date of adoption: Q1 2019

We consider the applicability and impact of all ASUs. ASUs not listed above were assessed and determined to be either not applicable, or had or are expected to have minimal impact on our financial statements and related disclosures.