SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

 

Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): April 13, 2012

 

WABASH NATIONAL CORPORATION

 

(Exact name of registrant as specified in its charter)

 

Delaware   1-10883   52-1375208
(State or other jurisdiction of
incorporation or organization)
  (Commission File
Number)
  (I.R.S. Employer
Identification No.)
         
1000 Sagamore Parkway South
Lafayette, Indiana
  47905
(Address of principal executive offices)   (Zip Code)

 

 

Registrant’s telephone number, including area code: (765) 771-5310

 

Not applicable

 

(Former name or former address, if changed since last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

oWritten communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

oSoliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

oPre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

oPre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

1
 

 

Section 2Financial Information
Item 2.02Results of Operations and Financial Condition.

 

During Wabash National Corporation’s (the “Company,” “Wabash” or “we”) fourth quarter 2011 and full year 2011 results conference call on February 7, 2012, we provided guidance on first quarter and full year expectations for 2012. As an update to that guidance, quote and order activity throughout the first quarter remained healthy and in line with seasonal demand trends. As a result, backlog as of March 31, 2012 is estimated to have remained relatively consistent with the December 31, 2011 level of $587 million at approximately $580 million. Previous guidance provided for the first quarter estimated shipments at approximately 11,000 new trailers, whereas actual shipments for the quarter were approximately 10,300. While slightly below our original estimate, new trailer deliveries improved monthly throughout the quarter as customers adjusted to increasing build rates, and year-over-year consolidated revenues for the first quarter are estimated to have been higher by approximately $54 to $56 million, or 24 to 25 percent. In addition, as production for the first quarter was approximately 11,000 trailers, we anticipate the shipment shortfall to be delivered in the second quarter. Our full year guidance for new trailer shipments of 50,000 to 56,000 remains unchanged.

 

Operationally during the quarter, Wabash continued to experience workforce productivity improvements, as well as an improvement in the mix of backlog built and shipped in the quarter, which reflected higher pricing levels. As a result of these factors, gross margins are expected to improve sequentially resulting in first quarter earnings in the range of $0.09 to $0.10 per diluted share.

 

The information above is preliminary and is subject to change as final results are completed. As a result, actual results could be materially different from these estimates. Wabash is scheduled to release its first quarter 2012 results on Tuesday, May 1, 2012, after the close of the financial markets.

 

Section 8Other Events
Item 8.01Other Events.

 

On March 26, 2012, Wabash entered into a Purchase and Sale Agreement with Walker Group Holdings LLC (“Walker”) and Walker Group Resources LLC, the parent of Walker, pursuant to which we will purchase all of the equity interests of Walker for total consideration of $360 million in cash, subject to purchase price adjustments related to the acquired working capital (the “Acquisition”). Although there can be no assurance, the Acquisition is expected to be consummated in the second quarter of 2012. Consummation of the Acquisition is subject to various important conditions, including, among others, the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”).

 

Walker is a leading manufacturer of liquid-transportation systems and engineered products based in New Lisbon, Wisconsin, with over 1,200 employees in four countries. Walker has a strong existing management team that shares Wabash’s focus on manufacturing based on innovation, quality and continuous improvement. The acquisition of Walker, which will become part of our Diversified Products segment, is part of our commitment to grow and diversify our business outside of our core trailer products. Our Diversified Products segment has been focused historically on leveraging our intellectual technology and core manufacturing expertise into new applications and market sectors in order to deliver greater value to our customers and shareholders. It currently includes a focus on utilizing our DuraPlate® composite panel technology in areas outside van trailer manufacturing, leveraging our core manufacturing technologies to include manufacture of mobile water storage containers (“frac tanks”) used in the oil and gas industry to pump high-pressure water into underground wells and manufacturing of laminated hard wood oak products for the van trailer industry. We expect to continue to focus on our Diversified Products segment through the acquisition of Walker, as well as initiatives to enhance our business model, strengthen our revenues and become a stronger company that can deliver greater value to our shareholders.

 

2
 

 

We believe that Walker is a good strategic fit for Wabash, meeting our key criteria of industry leadership, diversification and financial profile.

 

·Industry Leadership. Walker has leading market positions and strong brand recognition across many of the markets it serves in both its liquid tank transportation products and engineered products, which is complementary to Wabash’s historical leadership positions in dry van, refrigerated and platform trailer manufacturing.

 

·Diversification. The acquisition of Walker will provide Wabash with diversification in products, end-markets, customers and geographies while maintaining a focus on core manufacturing capabilities that the companies share. Walker itself has demonstrated success in diversifying its own business, growing its engineered products division to be a significant contributor to its revenues and income. Additionally, we believe that the markets served by Walker tend to be less cyclical than the van and platform trailer markets historically served by Wabash.

 

·Financial Profile. Walker has demonstrated strong financial performance. In 2011, Walker had gross margin of 21% on revenues of $344 million, net income of $28 million and Adjusted EBITDA of $53 million (below is a reconciliation of Adjusted EBITDA, a non-Generally Accepted Accounting Principle (“GAAP”) measure, to net income, the most comparable GAAP measure.) Walker’s backlog at December 31, 2011 was $164 million. Although there can be no assurance, we believe that we will be able to realize cost, operational and purchasing power synergies following the Acquisition, and that the addition of Walker will be immediately accretive to our income from operations.

 

Walker currently has ten principal brands divided among transportation and engineered products.

 

·Transportation Products accounted for approximately 76% of Walker’s 2011 revenues from seven brands, representing leading positions in liquid transportation systems, including stainless steel liquid transportation systems and stainless steel liquid-tank trailers for the North American chemical, dairy, food and beverage, petroleum, aviation, energy services and waste hauling markets.

 

oWalker Transport produces liquid transport tank trailers for the dairy, food and beverage industries.

 

oGarsite produces aircraft refuelers and hydrant dispensers for in-to-plane fueling companies, oil companies, airlines, freight distribution companies and fuel marketers around the globe. Walker’s management estimates that Garsite refuelers are in service at nearly every major U.S. airport and in over 80 countries on 6 continents.

 

oWalker Defense Group produces military-grade refueling and water tankers for the applications and environments required by the military.

 

oProgress Tank produces truck-mounted tanks for fuel delivery, as well as vacuum tankers. Progress Tank provides services and support through a highly-qualified and trained distribution network and relies on an international network of qualified and factory authorized distributors to provide local Progress in-stock product sales, service and support of new tanks, new cab and chassis, and new ready-to-deliver tank trucks. Walker’s management estimates that Progress Tank is the worldwide leader in the manufacture and supply of truck mounted tanks, meeting the needs of the modern liquid handling transport industry.

 

oBrenner Tank offers a full line of liquid transport solutions in all major categories, including food, chemical, environmental and petroleum. Brenner Tank operates four parts and service centers across the U.S., as well as a full service online TankerParts Store. Based on published industry statistics, Walker’s management believes that Brenner Tank is the largest manufacturer of stainless steel transportation tanks in North America. Brenner Tank also manufactures transportation tanks in aluminum. Its products are sold throughout the U.S. and Canada, as well as in many countries worldwide.

 

3
 

 

oTri State Tank, or TST, is estimated by Walker’s management to be a leader in the assembly of propane trucks, refined fuel trucks, vacuum trucks and crane trucks. TST offers “turn key” production, and also remounts existing tanks, repairs equipment and offers replacement part sales. TST sales consist of new tank/equipment and chassis as well as the refurbishing of existing customer units.

 

oBulk International is focused on delivering competitively priced stainless steel DOT-407 tankers. Bulk International supplies tank fleets and other customers from a plant near San Jose Iturbide in the central Mexican state of Guanajuato.

 

·Engineered Products accounted for approximately 24% of Walker’s 2011 revenues from three brands, representing what Walker’s management estimates to be leading positions in isolators, stationary silos and downflow booths around the world for the chemical, dairy, food and beverage, pharmaceutical and nuclear markets.

 

oWalker Engineered Products produces a broad range of products for storage, mixing and blending, including process vessels, as well as round horizontal and vertical storage silo tanks. For process vessels, it offers a wide range of agitation technologies including turbine, sweeper, scraped surface and counter rotating, as well as numerous heat transfer solutions including dimple, channel and half pipe for heating and cooling of vessels.

 

oWalker Barrier Systems develops containment and isolation systems for the pharmaceutical, chemical, and nuclear industries, including custom designed turn key systems and spare components for full service and maintenance contracts.

 

oExtract Technologies, headquartered in Huddersfield, United Kingdom, is a leading supplier of containment systems for the pharmaceutical, chemical and biotech markets. Its products include downflow containment booths for operator protection from respirable dusts, dispensing and sampling facilities as custom solutions designed and supplied from one source, rigid and flexible isolators for containment of potent compounds and aseptic processing, and a full range of pack-off systems to safely offload powdered product into drums or other containers for transport and storage.

 

Through these products and brands, Walker serves a variety of end markets and large, well-known customers. Key end markets for its transportation products include the chemical, dairy, food and beverage, petroleum, aviation, energy services, waste hauling and defense industries. Key end markets for its engineered products include the chemical, dairy, food and beverage, pharmaceutical and nuclear industries.

 

Walker has manufacturing facilities for its Transportation Products in New Lisbon, Wisconsin, Fond du Lac, Wisconsin, Kansas City, Missouri, and Queretaro, Mexico, with parts and service centers in Houston, Texas, Baton Rouge, Louisiana, Findlay, Ohio, Chicago, Illinois, Mauston, Wisconsin, West Memphis, Arkansas and Ashland, Kentucky. Manufacturing facilities for Engineered Products are located in New Lisbon, Wisconsin, Elroy, Wisconsin and Huddersfield, United Kingdom, with parts and service centers in Tavares, Florida, Dallas, Texas and Philadelphia, Pennsylvania.

 

We believe that the markets served by Walker tend to be less cyclical than the van and platform trailer markets historically served by Wabash. Walker’s diversified product base, end-markets and customers may also present opportunities to grow sales of legacy Wabash products, as well as to provide opportunities to sell Walker products to existing Wabash customers. Similarly, we will evaluate how we can use Walker’s international presence to continue efforts to grow opportunities for Wabash’s products internationally.

 

4
 

 

 

Walker has demonstrated strong financial results, and although there can be no assurance, we believe that the Acquisition will be immediately accretive to Wabash’s income from operations. Walker’s profitability has increased over recent years, with Walker’s Adjusted EBITDA growing from $30 million in 2009 to $53 million in 2011 and net income growth from $7 million in 2009 to $28 million in 2011. Following the Acquisition, we expect to pursue synergies from supply chain optimization, commercialization and distribution of new and existing products, back office and administrative consolidation, and further implementation of manufacturing best practices. The Acquisition is subject to various risks and uncertainties, and no assurance can be given that the Acquisition will be completed or that, if completed, it will be successful.

 

Reconciliation of Adjusted EBITDA

 

The following is a reconciliation of Walker’s Adjusted EBITDA to its net income. We believe that Walker’s Adjusted EBITDA is a key indicator of its financial performance and is a measure we used in considering the Acquisition. We believe that using this adjusted measure facilitates comparisons and analysis of Walker and other companies, including Wabash, particularly because this measure excludes differences related to capital structures, tax positions and other items that are, in part, indicative of the fact that Walker is a private company and are not indicative of the principal operating activities of Walker. Adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to net income as an indicator of operating performance or any other measure of performance derived in accordance with GAAP.

 

   Twelve Months Ended December 31, 
   2011   2010   2009 
             
Net income  $28,160   $10,781   $7,011 
Interest expense, net   10,245    10,275    11,208 
Income tax expense   139    201    123 
Depreciation and amortization   6,946    6,794    7,073 
Excess (Deficit) bonus adjustment   5,872    (948)   (841)
Other adjustments (1)   1,669    1,495    5,732 
Adjusted EBITDA  $53,031   $28,598   $30,306 

 

 

 

(1)2011 includes charges related to an asset impairment and production optimization efforts; 2010 includes charges related to restructuring; and 2009 includes charges related to prior acquisitions, an asset impairment, restructuring and the relocation of certain operations.

 

At December 31, 2011, Walker had a backlog of $164 million, which represents an increase of 106% over backlog of $79 million at December 31, 2010. Walker’s backlog is calculated in a manner consistent with the approach historically used by Wabash which is based on orders that have been confirmed by customers in writing, have defined delivery timeframes and can be produced during the next 18 months.

 

Although there can be no assurance, the Acquisition is expected to be consummated in the second quarter of 2012. Consummation of the Acquisition is subject to various important conditions, including, among others, the expiration or termination of the applicable waiting period under the HSR Act. The Purchase and Sale Agreement also contains specified termination rights for the parties, including, among others, if the Acquisition fails to close on or before June 25, 2012. The Purchase and Sale Agreement further provides that we are required to pay a termination fee of $20 million in the event that the Purchase and Sale Agreement is terminated due to (i) a breach by us of our representations, warranties or covenants or (ii) a failure by us to close if the conditions to closing had otherwise been satisfied and the seller was ready, willing and able to close.

 

5
 

 

 

For more information regarding the Acquisition, please see Item 1.01 of our Current Report on Form 8-K filed with the SEC on March 27, 2012.

 

Attached as Exhibit 99.1 and incorporated by reference in this Current Report are the audited consolidated balance sheets of Walker as of December 31, 2011 and 2010, and the related audited consolidated statements of income, member’s equity, and cash flows for each of the three years in the period ended December 31, 2011.

 

Attached as Exhibit 99.2 and incorporated by reference in this Current Report are the unaudited pro forma consolidated balance sheet of Wabash National Corporation as of December 31, 2011, and the related unaudited pro forma consolidated statement of operations for the year ended December 31, 2011. The pro forma consolidated statement of operations gives effect to the following (collectively, the “Transactions”):

 

·The consummation of the Acquisition, and the financing arrangements currently contemplated to fund the Acquisition, which are as follows:

 

othe issuance of a $300 million senior secured first lien term note under a new term loan facility;

 

othe issuance of $150 million in aggregate principal amount of convertible senior notes. We expect the notes would be convertible into cash, shares of our common stock or a combination of cash and shares, at our election. We currently intend to settle any conversion of notes through “net-share settlement,” which we believe will help reduce the potential equity dilution from issuance of convertible notes. Under “net-share settlement,” when notes are converted, we pay cash up to the principal amount of the notes being converted and deliver shares only for the conversion value in excess of the principal amount, if any; and

 

othe repayment of $60.6 million of borrowings under our existing senior secured revolving credit facility from surplus funds, and the amendment and restatement of that facility into a $150 million senior secured revolving credit facility.

 

·The payment of estimated underwriting commissions, financing origination fees and other Transaction related expenses in connection with the foregoing.

 

The unaudited pro forma consolidated balance sheet assumes that the Transactions occurred as of December 31, 2011, and the unaudited pro forma consolidated statement of operations for the year ended December 31, 2011 assumes that the Transactions occurred on January 1, 2011. Adjustments related to the Transactions are described in the accompanying notes to the unaudited pro forma consolidated financial statements. The pro forma financial statements were prepared for informational purposes and are not necessarily indicative of what our financial positions or results of operations would have been had the Transactions occurred as reflected in the pro forma financial statements. These adjustments are based on currently available preliminary information and certain estimates and assumptions and, therefore, the actual effects of the Transactions may differ from the effects reflected in these unaudited pro forma consolidated financial statements. However, management believes that the assumptions provide a reasonable basis for presenting the significant effects of the Transactions as contemplated and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma consolidated financial statement.

 

6
 

 

 

Safe Harbor Statement

 

This Form 8-K contains certain forward-looking statements, as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements convey our current expectations or forecasts of future events. All statements contained in this Form 8-K other than statements of historical fact are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those implied by the forward-looking statements. Readers should review and consider the various disclosures made by the Company in its filings with the Securities and Exchange Commission, including the risks and uncertainties described therein.

 

Section 9Financial Statements and Exhibits
Item 9.01Financial Statements and Exhibits

 

(d)Exhibits

 

Exhibit No.Exhibit

 

23.1Consent of BDO USA, LLP

 

99.1Audited balance sheets of Walker Group Holdings LLC as of December 31, 2011 and 2010, and the related audited consolidated statements of income, members’ equity, and cash flows for each of the three years in the period ended December 31, 2011

 

99.2Unaudited pro forma consolidated balance sheet of Wabash National Corporation as of December 31, 2011, and the related unaudited pro forma consolidated statement of operations for the year ended December 31, 2011

 

7
 

 

 

 

 

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 hereunto duly authorized.

 

 

  Wabash National Corporation
   
   
Date: April 13, 2012 By:  /s/ Mark J. Weber
    Mark J. Weber
Senior Vice President and
Chief Financial Officer

 

8
 

 

INDEX OF EXHIBITS

 

Exhibit No.Exhibit

 

23.1Consent of BDO USA, LLP

 

99.1Audited balance sheets of Walker Group Holdings LLC as of December 31, 2011 and 2010, and the related audited consolidated statements of income, members’ equity, and cash flows for each of the three years in the period ended December 31, 2011

 

99.2Unaudited pro forma consolidated balance sheet of Wabash National Corporation as of December 31, 2011, and the related unaudited pro forma consolidated statement of operations for the year ended December 31, 2011

 

9
 

 

 

 

Exhibit 23.1

 

Consent of Independent Registered Public Accounting Firm

 

Walker Group Holdings, LLC

New Lisbon, Wisconsin

We hereby consent to the incorporation by reference in the Registration Statements on Forms S-3 (Nos. 333-173150 and 333-168944) and Forms S-8 (Nos. 333-54714, 333-115682, 333-113157, and 333-149349) of Wabash National Corporation of our report dated March 9, 2012, relating to the consolidated financial statements of Walker Group Holdings, LLC, which appears in this Form 8-K.

 

 

 

/s/ BDO USA, LLP

Milwaukee, Wisconsin

April 13, 2012

 

 

 

 
 

 

Exhibit 99.1

 

Walker Group Holdings, LLC

 

 

Consolidated Financial Statements

For Each of the Three Years Ended December 31, 2011, 2010 and 2009

 

1
 

 

Walker Group Holdings, LLC

 

Contents

 

  

Independent Auditors' Report 3
   
Consolidated Financial Statements 4
   
Balance Sheets 5-6
   
Statements of Income 7
   
Statements of Members' Equity 8
   
Statements of Cash Flows 9
   
Notes to Financial Statements 10-24

 

2
 

 

Independent Auditors' Report

 

Walker Group Holdings, LLC

New Lisbon, Wisconsin

 

We have audited the accompanying consolidated balance sheets of Walker Group Holdings, LLC (Group) as of December 31, 2011 and 2010, and the related consolidated statements of income, members' equity and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Group as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.

 

/s/ BDO USA, LLP

 

Milwaukee, Wisconsin

March 9, 2012

 

3
 

 

Consolidated Financial Statements

 

 

4
 

 

Walker Group Holdings, LLC
 
Consolidated Balance Sheets

 

December 31,  2011   2010 
         
Assets (Note 8)        
         
Current Assets        
Cash (Note 2)  $12,068,677   $2,605,454 
Accounts receivable, less allowance for doubtful accounts of $1,049,952 and $1,095,037 (Note 2)   38,625,407    33,996,037 
Costs and estimated earnings in excess of billings (Note 4)   1,358,372    5,201,827 
Inventories (Note 3)   29,263,612    27,409,556 
Prepaid expenses   1,669,732    1,724,483 
Deferred income taxes (Note 10)   40,186    46,413 
Other receivables   586,164    290,428 
           
Total Current Assets   83,612,150    71,274,198 
           
Property, Plant and Equipment, net (Note 5)   22,153,747    22,473,900 
           
Other Assets          
Intangible assets, net (Note 7)   33,521,145    37,315,712 
Goodwill (Note 7)   15,675,520    15,675,520 
Deferred financing costs, net (Note 6)   3,192,480    5,533,233 
Asset held for sale (Note 1)   700,000    1,155,000 
           
Total Other Assets   53,089,145    59,679,465 
           
Total Assets  $158,855,042   $153,427,563 

 

5
 

 

Walker Group Holdings, LLC
 
Consolidated Balance Sheets

 

December 31,  2011   2010 
         
Liabilities and Members' Equity        
         
Current Liabilities          
Accounts payable  $36,618,168   $25,252,409 
Billings in excess of costs and estimated earnings (Note 4)   1,179,229    2,298,244 
Compensation and benefits   12,080,620    5,847,372 
Deferred revenue   11,907,082    13,824,996 
Other accrued expenses (Note 11)   9,469,469    8,258,308 
Current maturities of long-term debt (Note 8)   1,601,670    1,601,670 
           
Total Current Liabilities   72,856,238    57,082,999 
           
Long-Term Debt, less current maturities (Note 8)   57,288,029    65,032,799 
           
Total Liabilities   130,144,267    122,115,798 
           
Commitments and Contingencies (Notes 8, 9 and 11)          
           
Members' Equity          
Members' investment   30,799,967    33,304,278 
Accumulated other comprehensive loss   (2,089,192)   (1,992,513)
           
Total Members' Equity   28,710,775    31,311,765 
           
Total Liabilities and Members' Equity  $158,855,042   $153,427,563 

 

See accompanying notes to consolidated financial statements.

 

6
 

 

Walker Group Holdings, LLC
 
Consolidated Statement of Income

 

Year ended December 31,  2011   2010   2009 
             
Net Sales (Note 2)  $343,678,167   $257,003,191   $239,503,219 
                
Cost of Sales (Note 12)   271,453,773    207,173,310    190,127,854 
                
Gross profit   72,224,394    49,829,881    49,375,365 
                
Operating Costs and Expenses               
Selling, general and administrative   33,117,903    26,985,809    27,809,165 
Restructuring charges (Note 12)   -    1,424,855    1,231,242 
Impairment of assets held for sale   455,000    -    1,635,105 
                
Operating income   38,651,491    21,419,217    18,699,853 
                
Other (Income) Expense               
Foreign currency transaction loss   116,324    149,620    564,837 
Interest expense   10,245,015    10,347,302    11,283,255 
Interest income   -    (72,168)   (75,286)
Other (income) expense   (8,483)   11,956    (206,608)
                
Net Other Expense   10,352,856    10,436,710    11,566,198 
                
Income Before Taxes on Income   28,298,635    10,982,507    7,133,655 
                
Taxes on Income (Note 10)   138,830    201,104    122,907 
                
Net Income  $28,159,805   $10,781,403   $7,010,748 

 

See accompanying notes to consolidated financial statements.

 

7
 

 

 

Walker Group Holdings, LLC
 
Consolidated Statements of Member’s Equity

 

   Members'
Investment
   Comprehensive
Income
   Accumulated
Other
Comprehensive
Income (Loss)
   Total
Members'
Equity
 
                 
Balance, December 31, 2008  $33,112,466        $(2,755,413)  $30,357,053 
                     
Member contributions   -         -    - 
                     
Member distributions   (2,621,173)        -    (2,621,173)
                     
Net income   7,010,748   $7,010,748    -    7,010,748 
                     
Effect of foreign currency translation adjustment        1,056,794    1,056,794    1,056,794 
                     
Comprehensive income        8,067,542           
                     
Balance, December 31, 2009   37,502,041         (1,698,619)   35,803,422 
                     
Member contributions   -         -    - 
                     
Member distributions   (14,979,166)        -    (14,979,166)
                     
Net income   10,781,403   $10,781,403    -    10,781,403 
                     
Effect of foreign currency translation adjustment        (293,894)   (293,894)   (293,894)
                     
Comprehensive income        10,487,509           
                     
Balance, December 31, 2010   33,304,278         (1,992,513)   31,311,765 
                     
Member contributions   -         -    - 
                     
Member distributions   (30,664,116)        -    (30,664,116)
                     
Net income   28,159,805   $28,159,805    -    28,159,805 
                     
Effect of foreign currency translation adjustment        (96,679)   (96,679)   (96,679)
                     
Comprehensive income       $28,063,126           
                     
Balance, December 31, 2011  $30,799,967        $(2,089,192)  $28,710,775 

 

See accompanying notes to consolidated financial statements.

 

8
 

 

Walker Group Holdings, LLC
 
Consolidated Statements of Cash Flows

 

Year ended December 31,  2011   2010   2009 
Cash Flows from Operating Activities               
Net income  $28,159,805   $10,781,403   $7,010,748 
Adjustments to reconcile net income to net cash provided by operating activities:               
Depreciation and amortization   9,229,230    8,843,350    9,126,064 
Provision (recovery) for doubtful accounts   (101,028)   144,073    (173,952)
Deferred income tax expense   6,416    98,571    60,371 
(Gain) loss on disposal of equipment   58,466    (16,105)   155,882 
Impairment on asset held for sale   455,000    -    1,635,105 
Changes in asset and liabilities:               
Accounts receivable   (4,601,607)   (4,974,147)   (1,469,257)
Costs and estimated earnings in excess of billings   3,835,445    (1,106,010)   (1,668,121)
Inventories   (1,856,251)   2,020,435    2,944,848 
Prepaid expenses   53,674    (214,149)   497,342 
Other receivables   (298,474)   139,277    (85,279)
Accounts payable   11,365,203    2,707,918    (2,601,718)
Billings in excess of costs and estimated earnings   (1,119,015)   1,404,230    (772,400)
Compensation and benefits   6,233,248    396,561    (2,321,030)
Deferred revenue   (1,935,026)   6,170,598    (2,291,193)
Other accrued expenses   1,224,203    1,202,097    (888,422)
Net cash from operating activities   50,709,289    27,598,102    9,158,988 
Cash Flows from Investing Activities               
Purchase of equipment   (2,712,522)   (1,912,065)   (1,284,391)
Proceeds from sale of equipment   105,225    91,013    215,907 
Other   (28,219)   15,058    (4,324)
Net cash used in investing activities   (2,635,516)   (1,805,994)   (1,072,808)
Cash Flows from Financing Activities               
Repayment of long-term debt   (7,744,770)   (8,165,531)   (4,931,804)
Net decrease in short-term revolving line of credit   -    (4,315,092)   (2,811,940)
Proceeds from the issuance of long-term debt   -    4,400,206    - 
Deferred financing fees paid   (202,215)   (1,677,882)   - 
Member distributions   (30,664,116)   (14,979,166)   (2,621,173)
Net cash used in financing activities   (38,611,101)   (24,737,465)   (10,364,917)
Effect of exchange rate changes on cash   551    (5,605)   56,039 
Net Increase in Cash   9,463,223    1,049,038    (2,222,698)
Cash, beginning of year   2,605,454    1,556,416    3,779,114 
Cash, end of year  $12,068,677   $2,605,454   $1,556,416 
Supplemental Disclosures of Cash Flow Information               
Cash paid during the period for:               
Interest  $7,329,204   $8,152,902   $9,621,095 

 

See accompanying notes to consolidated financial statements.

 

9
 

 

Walker Group Holdings, LLC
 
Notes to Consolidated Financial Statements

 

1. Summary of Accounting Policies

 

Principles of Consolidation

 

The consolidated financial statements of Walker Group Holdings, LLC (Group) include the accounts of its wholly owned subsidiaries, Walker Stainless Equipment Company LLC, Garsite/Progress, LLC, Brenner Tank LLC, and Bulk Solutions LLC.

 

Walker Stainless Equipment Company LLC, based in New Lisbon, Wl, consists of four operating units: Walker Transport, Walker Engineered Products, Walker Barrier Systems and Extract Technology Limited. Collectively they manufacture stainless steel products for the dairy, food, beverage, chemical, pharmaceutical and nuclear industries.

 

Garsite/Progress LLC, based in Kansas City, KS, is a manufacturer of specialized aviation refueler trucks and hydrant carts. Progress Tank is a global manufacturer of vacuum and refined fuel tanks constructed of aluminum, steel and stainless steel. Garsite also has a refueler refurbishment and sales operation in Findlay, OH. Garsite acquired the assets of Tri-State Tank in January, 2008. Tri-State Tank, with operations also based in Kansas City, KS, is a value-added assembler of refined fuel, propane and vacuum tanks and chassis. The tanks, constructed of aluminum, are manufactured by Progress Tank and shipped to Tri-State where they are mounted on truck-chassis and sold as completed units.

 

Brenner Tank LLC, based in Fond du Lac, Wl, is a manufacturer of stainless steel and aluminum tank trailers for the transportation of food, chemical, environmental and petroleum products. In addition to its headquarters and main manufacturing plant in Fond du Lac, Brenner maintains parts and repair facilities in Mauston, Wl, Houston, TX, Memphis, TN, Ashland, KY, Gonzalez, LA and Chicago, IL.

 

Bulk Solutions LLC, with operations based in San Jose Iturbide, Mexico, is a manufacturer of stainless steel tank trailers used primarily for the transportation of liquid chemical products. Bulk Solutions LLC is a U.S. entity with affiliated companies Bulk Tank International S. de R.L. de C.V. and Bulk Services S. de R.L. de C.V. located in San Jose Iturbide, Mexico, all of which are included in the consolidated results.

 

All significant intercompany profits, transactions and balances have been eliminated in consolidation.

 

Cash

 

Outstanding checks without the right of offset against other cash accounts are reflected in the financial statements as accounts payable.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are uncollateralized customer obligations due under normal trade terms. The Group performs continuing credit evaluations of their customers' financial condition.

 

Management reviews accounts receivable on a regular basis to determine if any receivables will potentially be uncollectible. The Group includes accounts receivable balances that are determined to be uncollectible, along with a general reserve in their overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based upon information available to the Group, management believes the allowance for doubtful accounts to be adequate.

 

10
 

 

Walker Group Holdings, LLC
 
Notes to Consolidated Financial Statements

 

Inventories

 

Inventories, excluding costs relating to contracts in process, are stated at the lower of cost (principally, first-in, first-out) or market.

 

Contracts in Process

 

Costs related to contracts in process are stated at actual production cost, including factory overhead incurred to date, reduced by amounts identified with revenue recognized on units delivered. General and administrative costs are charged to expense as incurred. Changes in job performance and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined. If the estimate of total cost on a contract indicates a loss, the total anticipated loss is recognized immediately.

 

Assets Held for Sale

 

The Group has a building that is currently not being used for operations, but is being held for sale. The Group recorded a $455,000, $0 and $1,635,105 impairment charge on this building for the years ended December 31, 2011, 2010 and 2009, respectively. The estimated recoverable value, net of estimated selling costs, of the building on the balance sheet as of December 31, 2011 is $700,000.

 

Property, Plant Equipment and Depreciation

 

Property, plant and equipment are recorded at cost. Plant and equipment are depreciated principally by the straight-line method over their estimated useful lives. The useful lives of each asset class are as follows:

  

    Estimated
Classifications   Useful Lives
     
Land improvements   15 years
Buildings and improvements   7-25 years
Machinery and equipment   3-12 years
Furniture and fixtures   3-5 years
Automobiles   1-5 years
Leasehold improvements   Term of lease

 

Maintenance and repair costs are expensed as incurred.

 

The Group assesses the carrying value of its long-lived assets, including property, plant and equipment and amortizable intangible assets, whenever economic events or changes in circumstances indicate that the carrying values of the assets may not be recoverable. Long-lived assets are considered to be impaired when the sum of the undiscounted expected future net operating cash flows from operating those assets is less than the carrying values of the related assets. If an impairment is indicated, the asset is written down to its estimated fair value.

 

11
 

 

Walker Group Holdings, LLC
 
Notes to Consolidated Financial Statements

 

Reserve for Product Warranties

 

The reserve for product warranties represents the estimated liability for future claims as of the end of the fiscal year and is determined by the Group based on estimates and historical experience factors.

 

Revenue Recognition

 

The Group generally reports revenue upon delivery. Revenue on certain projects are recorded on the percentage-of-completion method, measured by the percentage of costs incurred to date to total estimated costs for each project. When customers, under the terms of specific orders, request that the Group invoice goods and hold the goods ("bill and hold") for future shipment, the Group recognizes revenue when legal title to the finished goods inventory passes to the purchaser. The Group believes it has met the criteria required for bill and hold treatment under Generally Accepted Accounting Principles (GAAP).

 

Deferred Revenue

 

Revenues billed in advance are deferred and recorded in income in the period in which the related products are delivered.

 

Research and Development Costs

 

Research and development costs are charged directly to operations as incurred. Research and development expense was approximately $203,000, $194,000 and $246,000 for the years ended December 31, 2011, 2010 and 2009, respectively.

 

Shipping and Handling Costs

 

Shipping and handling costs are included in cost of sales and are expensed as incurred.

 

Advertising Costs 

 

Advertising costs, included in selling, general and administrative expenses, are expensed as incurred and were immaterial to the financial statements.

 

Income Taxes

 

The Group, as a limited liability company, is taxed as a partnership. As such, the members are liable for individual federal and state income taxes related to the Group's taxable income. Accordingly, no provision for income taxes has been included in these consolidated financial statements for the operations in the United States. The Group has two foreign subsidiaries that are taxable entities.

 

The foreign subsidiaries account for income taxes under the asset and liability method which requires that deferred tax assets and liabilities be recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The recognition of net deferred tax assets is reduced, if necessary, by a valuation allowance for the amount of any tax benefits that, based on available evidence, are not expected to be realized. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Deferred tax assets also include tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.

 

12
 

 

 

 

Walker Group Holdings, LLC
 
Notes to Consolidated Financial Statements

 

The Group recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. As required, the Group has assessed whether there remains any income tax exposure related to its tax positions as of December 31, 2011 and 2010. The Group does not believe there is any uncertainty with respect to its tax positions which would result in a material change to the financial statements.

 

Use of Estimates

 

The preparation of 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 reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, but are not limited to, estimated costs to complete contracts in process, losses on contracts, warranty costs, allowances for doubtful accounts and allowances for obsolete and slow moving spare and replacement parts inventories. Actual results could differ from those estimates.

 

Fair Value of Financial Instruments

 

The Group's financial instruments include cash, accounts receivable, accounts payable, borrowings under line of credit facility and long-term debt. The Group believes that the carrying amounts of these accounts are a reasonable estimate of their fair value because of the short-term nature of such instruments or, in the case of long-term debt, because of interest rates available to the Group for similar obligations.

 

Intangible Assets

 

Upon a business acquisition, the Group estimates and records the fair value of purchased intangible assets, which primarily consist of trademarks, trade names, customer relationships, proprietary knowledge/technology, order backlog and a non-compete agreement. The fair values of these intangible assets are estimated based on management's assessment with the assistance of independent third-party appraisals in some cases. Such valuations may include a discounted cash flow analysis of anticipated revenues or cost savings resulting from the acquired intangible asset.

 

The remainder of this page intentionally left blank.

 

13
 

 

Walker Group Holdings, LLC
 
Notes to Consolidated Financial Statements

 

The useful lives of each finite-lived asset are as follows:

 

        Weighted    
        Average    
        Remaining    
        Useful Life    
        as of    
    Estimated   December   Amortization
Classification   Useful Lives   31, 2011   Method
             
Trade name   10 years   5.5 years   Straight-line
Customer relationships   6-20 years   4.4 years   Straight-line
Proprietary designs/technology   5-10 years   .9 years   Straight-line
Chassis program   15 years   10.3 years   Straight-line
Non-compete agreement   5 years   2 years   Straight-line

 

Amortization of intangible assets with finite lives is recognized over their estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized. Intangible assets with finite lives are reviewed for impairment periodically if events or changes in circumstances indicate that the carrying amount may not be recoverable. If expected future undiscounted cash flows from operations are less than their carrying amounts, an asset is determined to be impaired and a loss is recorded for the amount by which the carrying value of the asset exceeds its fair value. No impairment charges for intangible assets with finite lives were recognized during 2011, 2010 or 2009.

 

Trademarks have indefinite lives and are not amortized but instead evaluated for impairment annually or more frequently if events or circumstances indicate that the intangible asset might be impaired. The evaluation of the recoverability of intangible assets with indefinite lives includes valuations based on a discounted cash flow analysis. The fair value of trademarks are estimated on an annual basis utilizing the relief from royalty method. If this analysis indicates an impairment of an intangible asset with an indefinite useful life, the amount of the impairment is recognized in the consolidated financial statements. No impairment of intangible assets with indefinite lives was identified during 2011, 2010 or 2009.

 

The Group capitalizes debt issue costs and amortizes them over the life of the debt.

 

Goodwill

 

Goodwill is reviewed for impairment on at least an annual basis or more frequently if events or circumstances indicate that the asset might be impaired. The impairment model prescribes a two-step method for determining goodwill impairment. In the first step, the fair value of the reporting unit is determined by estimating the expected present value of future cash flows. If the net book value of the reporting unit exceeds fair value, the second step of impairment is required to be performed which allocates the reporting unit's fair value to all of its assets and liabilities using the acquisition method prescribed under authoritative guidance for business combinations with any residual fair value being allocated to goodwill. An impairment charge will be recognized only when the implied fair value of the reporting unit's goodwill is less than its carrying amount. No impairment of goodwill was identified during 2011, 2010 or 2009.

 

14
 

 

Walker Group Holdings, LLC
 
Notes to Consolidated Financial Statements

 

Foreign Currency

 

Assets and liabilities of a foreign subsidiary are translated at year-end exchange rates, except equity accounts which are translated at historical rates; income statement items are translated at average exchange rates for the year. The impact of translation adjustments is shown in other comprehensive income in the accompanying financial statements.

 

Foreign currency transactions may produce receivables or payables that are fixed in terms of the amount of foreign currency that will be paid or received. Gains or losses resulting from foreign currency transactions are included in the consolidated statements of income, as a component of other (income) expense.

 

Reclassifications

 

Certain reclassifications have been made to the 2010 and 2009 financial statements to conform to the 2011 presentation. These reclassifications had no effect on net income or members' equity as previously reported.

 

Subsequent Events

 

The Group evaluated subsequent events through March 9, 2012, which is the date the financial statements were available to be issued. No subsequent events were identified which would have a material impact on these financial statements, other than as described in Note 13.

 

Recent Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05, Amendments to Topic 220, Comprehensive Income. Under the amendments in this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in members' equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this ASU should be applied retrospectively. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. In December 2011, the FASB deferred the requirement to present reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income. Companies are required to either present amounts reclassified out of other comprehensive income on the face of the financial statements or disclose those amounts in the notes to the financial statements. During the deferral period, there is no requirement to separately present or disclose the reclassification adjustments into net income. The effective date of the deferral is consistent with the effective date of the ASU No. 2011-05. The Group will adopt ASU 2011-5 retrospectively by the required date.

 

15
 

 

Walker Group Holdings, LLC
 
Notes to Consolidated Financial Statements

 

In September 2011, the FASB issued ASU No. 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This ASU permits a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying value before applying the two-step goodwill impairment test. If an entity can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not need to perform the two-step impairment test for that reporting unit. This ASU is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011. The adoption of this amendment will not have a material impact on the Group's financial position or results of operations.

 

2.Business and Credit Concentrations

 

Financial instruments which could expose the Group to concentrations of credit risk consist primarily of cash and trade accounts receivable. The Group reviews a customer's credit history before extending credit and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

 

Cash is maintained at financial institutions and, at times, balances may exceed federally insured limits. The Group has never experienced any losses related to these balances. All non-interest bearing cash balances were fully insured at December 31, 2011 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and non-interest bearing cash balances may again exceed federally insured limits.

 

3.Inventories

 

Components of inventories are as follows:

  

December 31,  2011   2010 
           
Raw materials, net of reserves  $16,933,626   $15,828,841 
Work in process   9,772,219    6,559,721 
Finished goods   2,557,767    5,020,994 
           
Total inventories  $29,263,612   $27,409,556 

 

The remainder of this page intentionally left blank.

 

16
 

 

Walker Group Holdings, LLC
 
Notes to Consolidated Financial Statements

 

4. Contracts in Process

 

Costs and estimated earnings compared to billings on uncompleted contracts in process at December 31, 2011 and 2010 consist of the following:

  

December 31,  2011   2010 
         
Accumulated expenditures on uncompleted contracts  $2,975,826   $10,246,198 
Estimated earnings thereon   488,576    1,907,575 
    3,464,402    12,153,773 
           
Less applicable progress billings   3,285,259    9,250,190 
           
   $179,143   $2,903,583 

  

Contracts in process are reported in the accompanying balance sheet as follows:

 

December 31,  2011   2010 
         
Costs and estimated earnings in excess of billings  $1,358,372   $5,201,827 
Billings in excess of costs and estimated earnings   1,179,229    2,298,244 
           
   $179,143   $2,903,583 

 

All open contracts as of December 31, 2011 are expected to be completed in 2012.

 

5. Property, Plant and Equipment

 

Property, plant and equipment consists of the following:

  

December 31,  2011   2010 
         
Land and land improvements  $3,909,805    3,830,482 
Buildings and improvements   10,026,498    9,906,773 
Machinery and equipment   14,975,306    13,112,127 
Furniture and fixtures   3,547,109    3,182,517 
Automobiles   707,300    597,266 
Leasehold improvements   1,298,246    1,282,285 
Construction in process   123,519    215,563 
    34,587,783    32,127,013 
           
Less accumulated depreciation   (12,434,036)   (9,653,113)
           
Net property and equipment  $22,153,747   $22,473,900 

 

Depreciation expense was $2,903,322, $2,755,650 and $2,953,466 for the years ended December 31, 2011, 2010 and 2009, respectively.

 

17
 

 

Walker Group Holdings, LLC
 
Notes to Consolidated Financial Statements

 

Construction in process relates to costs incurred in the construction of various pieces of machinery and equipment. These projects, as of December 31, 2011, are anticipated to be completed in 2012 with an estimated cost to complete the projects of approximately $19,000 (unaudited).

 

6. Deferred Financing Costs

 

The components of deferred financing costs are as follows:

  

December 31,  2011   2010 
         
Financing fees  $12,602,042   $12,399,827 
Less accumulated amortization   (9,409,562)   (6,866,594)
           
Net  $3,192,480   $5,533,233 

 

The amortization of financing fees for each of the next two years is anticipated to be:

 

Year ended December 31,  Amount 
      
2012  $2,036,677 
2013   1,155,803 
      
   $3,192,480 

 

Amortization expense was $2,542,968, $2,265,169 and $2,263,919 for the years ended December 31, 2011, 2010 and 2009, respectively.

 

The remainder of this page intentionally left blank.

 

18
 

 

Walker Group Holdings, LLC
 
Notes to Consolidated Financial Statements

 

7. Goodwill and Intangible Assets

 

Intangible assets by category are summarized below.

  

December 31,  2011   2010 
         
Intangible assets with finite lives:          
Gross carrying amount:          
Trade name  $40,000   $40,000 
Customer relationships   26,994,332    27,003,215 
Proprietary designs/technology   1,355,921    1,357,335 
Chassis program   4,540,000    4,540,000 
Non-compete agreement   280,000    280,000 
           
Subtotal   33,210,253    33,220,550 
           
Accumulated amortization:          
Trade name   18,000    14,000 
Customer relationships   14,782,415    11,615,567 
Proprietary designs/technology   1,196,088    942,254 
Chassis program   1,412,446    1,109,778 
Non-compete agreement   179,667    123,667 
           
Subtotal   17,588,616    13,805,266 
           
Total intangible assets with finite lives, net   15,621,637    19,415,284 
           
Unamortized intangible assets:          
Trade names and trademarks   17,899,508    17,900,428 
           
Total intangible assets, net  $33,521,145   $37,315,712 

 

Decreases in gross carrying values were due to foreign currency translation.

 

Based on the current estimated useful lives assigned to intangible assets, amortization expense for fiscal 2012, 2013, 2014, 2015, 2016 and thereafter is projected to total $3.6 million, $3.5 million, $2.6 million, $2.2 million, $1.8 million and $1.9 million, respectively.

Amortization expense was $3,782,940, $3,822,531 and $3,908,679 for the years ended December 31, 2011, 2010 and 2009, respectively.

 

The carrying value of goodwill was $15,675,520 as of December 31, 2011 and 2010.

 

The remainder of this page intentionally left blank.

 

19
 

 

Walker Group Holdings, LLC
 
Notes to Consolidated Financial Statements

 

8. Notes Payable and Long-Term Debt

 

Debt is comprised of the following:

  

December 31,  2011   2010 
         
Notes payable, bank, due in monthly installments of $62,847, plus interest allocated between a LIBOR rate plus 2.75% (3.18% at December 31, 2011) and the Prime rate plus 1.75% (5.00% at December 31, 2011), for an effective interest rate of 3.26%, due December 31, 2013, collateralized by substantially all assets of the Group.  $3,770,834   $4,525,000 
           
Notes payable, bank, due in monthly installments of $59,717, plus interest allocated between a LIBOR rate plus 2.75% (3.18% at December 31, 2011) and the Prime rate plus 1.75% (5.00% at December 31, 2011), for an effective interest rate of 3.22%, due December 31, 2013, collateralized by substantially all assets of the Group.   6,449,401    7,166,000 
           
Notes payable, bank, due in monthly installments of $10,908, plus interest allocated between a LIBOR rate plus 2.75% (3.18% at December 31, 2011) and the Prime rate plus 1.75% (5.00% at December 31, 2011), for an effective interest rate of 3.30%, due December 31, 2013, collateralized by substantially all assets of the Group.   1,178,100    1,309,000 
           
Notes payable, bank, subordinated to bank debt above, due in one final payment plus interest at LIBOR (4.75% floor) plus 8.50% (13.25% at December 31, 2011), due December 31, 2013, collateralized by substantially all assets of the Group.   47,491,364    53,634,469 
    58,889,699    66,634,469 
           
Less current portion   1,601,670    1,601,670 
           
Total long-term debt  $57,288,029   $65,032,799 

 

On October 17, 2011, the Group entered into the Eighth Amendment to the Loan and Security Agreement with their lenders. In connection with this amendment, the amount of cash dividends allowed to be paid to its members in one year was increased from $10,000,000 to $20,000,000. This is in addition to the cash dividends the Holding Company may distribute to its members to cover federal and state taxes imposed on the income of the Holding Company allocated to its members.

 

The Group has a revolving facility with a bank consisting of an operating line of credit up to $56,000,000 (subject to a second lien) and a $3,500,000 sub-limit for letters of credit through December 31, 2013. As defined in the credit agreement, the line of credit, and the undrawn letters of credit, is capped at the lesser of the borrowing base (percentage of eligible receivables and inventories) or the maximum amount of the revolving facility. At December 31, 2011, there was approximately $31,573,000 available under the revolving facility. The line of credit is collateralized by substantially all assets of the Group. Interest is payable monthly at Prime plus 1.50% (4.75% at December 31, 2011). At December 31, 2011 and 2010, there was $0 outstanding under the revolving operating line of credit agreement. At December 31, 2011, $2,765,878 of letters of credit were outstanding.

 

20
 

 

Walker Group Holdings, LLC
 
Notes to Consolidated Financial Statements

 

The Group is assessed an unused line fee equal to .50% per annum of the difference between the maximum amount of the revolving operating line and the average daily aggregate outstanding amount of the revolver loans plus the average daily aggregate undrawn amount of all unexpired letters of credit during the immediate preceding month or portion thereof.

 

The Group's obligations to the lenders are secured by liens on substantially all assets. The agreement contains limitations on capital expenditures and requires maintenance of specified ratios.

 

Maturities of long-term debt are as follows:

  

Year ended December 31,    
     
2012  $1,601,670 
2013   57,288,029 
      
Total  $58,889,699 

  

9. Retirement Plans

 

The Group sponsors two defined contribution plans covering employees who meet specified requirements. Employees may contribute pre-tax earnings subject to certain Internal Revenue Service limitations.

 

Employer contributions to the plans are made at the discretion of the Board of Directors. Employer contributions may be in the form of one or more of the following: matching contributions, profit sharing contributions or qualified non-elective contributions. The expense charged to operations for employer contributions was approximately $943,000, $822,000 and $802,000 for the years ended December 31, 2011, 2010 and 2009, respectively.

 

10. Income Taxes

 

Income tax expense for the years ended December 31, 2011 and 2010 is as follows:

  

Year ended December 31,  2011   2010   2009 
             
Current - foreign  $132,603   $98,225   $81,582 
                
Deferred - foreign   6,227    102,879    41,325 
                
Total taxes on income  $138,830   $201,104   $122,907 

 

21
 

 

Walker Group Holdings, LLC
 
Notes to Consolidated Financial Statements

 

Deferred income tax assets relate to current temporary differences and amounted to $40,816 and $46,413 at December 31, 2011 and 2010, respectively. No valuation allowance has been recorded as the Group expects to fully realize these assets.

 

The Group recognizes any corresponding interest and penalties with its income tax positions in income tax expense - there were none for 2011, 2010 and 2009.

 

11. Commitments and Contingencies

 

Purchase Commitments

 

In 2011, the Group entered into commitments to purchase 276,000 lbs of nickel at $8.05/lbs, or $2,221,800, and 1,800,000 lbs of aluminum at $1.11/lbs, or $1,998,000. Such purchases are expected to be made by May 2012.

 

Product Warranties

 

The Group's products generally are subject to warranties and, therefore, liabilities are established for the estimated future costs of repair or replacement and included in cost of sales at the time the related sale is recognized. These liabilities are adjusted based on management's best estimates of future warranty costs after considering historical and projected product failure rates and product repair costs. In the event that actual experience differs from these best estimates, changes in the Group's warranty liabilities might become necessary.

 

Changes in the Group's warranty liability for the years ended December 31, 2011 and 2010 are as follows:

  

December 31,  2011   2010 
         
Balance, beginning of year  $2,582,345   $2,559,979 
Warranty cost incurred   (1,936,718)   (2,163,056)
Product warranty provisions   1,878,829    2,185,422 
           
Balance, end of year  $2,524,456   $2,582,345 

 

Leases

 

The Group has various operating leases for vehicles, equipment and facilities. Rental expense was approximately $1,567,947, $1,426,375 and $1,456,439 for the years ended December 31, 2011, 2010 and 2009, respectively.

 

The remainder of this page intentionally left blank.

 

22
 

 

Walker Group Holdings, LLC
 
Notes to Consolidated Financial Statements

 

Total minimum rental commitments under noncancelable leases in effect at December 31, 2011 are payable as follows:

  

Year ended December 31,  Amount 
     
2012  $1,428,666 
2013   1,256,759 
2014   1,106,534 
2015   1,047,319 
2016   954,024 
      
Total  $5,793,302 

 

Litigation

 

The Group is subject to legal actions in the normal course of business, some of which involve claims for compensatory or punitive damages, all of which are generally covered by insurance.

 

Although litigation is subject to many uncertainties and the ultimate exposure cannot be ascertained, management does not believe the final outcome of any outstanding claims will have a material effect on the financial position of the Group.

 

Medical Claims

 

The Group self-insures workmen compensation expenses and certain employee medical claims according to a written benefit plan. The Group has stop-loss coverage to limit the exposure arising from these claims. An estimate of future claims for prior period costs has been calculated based upon prior claim experience. Reserves of approximately $2,042,373 and $1,926,000 have been recorded as of December 31, 2011 and 2010, respectively.

 

12. Nonrecurring Restructuring Charges

 

On May 11, 2009, the Group announced plans to close its Arthur, Illinois operations and transition manufacturing operations to its Fond du Lac, Wl and New Lisbon, Wl facilities. In connection with this restructuring, the Group recorded a non-recurring charge of $1,494,847 to cost of sales and $1,231,242 to operating costs and expenses in 2009.

 

In 2010, the Group recorded a further non-recurring charge of $1,424,855 to operating costs and expenses related to the Arthur plant closing. Included in this charge was a pension withdrawal liability related to the union employees at the closed Arthur, Illinois plant of approximately $372,000. The Group plans to pay this liability over 14 quarterly payments of $28,603 plus one final payment of approximately $9,000. The remaining severance and benefit costs recorded in 2010 relate to unexpected worker compensation claims for terminated employees from the Arthur plant and severance expenses for one key employee.

 

The remainder of this page intentionally left blank.

 

23
 

 

Walker Group Holdings, LLC
 
Notes to Consolidated Financial Statements

 

Restructuring costs incurred consisted of the following:

 

Year ended December 31,  2011   2010   2009 
             
Cost of sales charges:               
Direct labor efficiency loss  $-   $-   $1,494,847 
                
Operating costs and expenses:               
Severance costs & benefit costs   -    1,008,643    - 
Temporary transition labor costs   -    -    509,493 
Employee retention and relocation costs   -    -    303,147 
Freight/logistics costs   -    -    242,489 
Miscellaneous non-recurring expenses   -    416,212    176,113 
                
    -    1,424,855    1,231,242 
                
Total  $-   $1,424,855   $2,726,089 

 

Changes in the Group's restructuring costs accrual for the years ended December 31, 2011 and 2010 are as follows:

  

December 31,  2011   2010 
         
Balance, beginning of year  $861,319   $195,000 
Payments   (594,673)   (758,536)
Provision   -    1,424,855 
           
Balance, end of year  $266,646   $861,319 

 

The restructuring process was fully completed in December 2010 and no additional costs are expected.

 

13. Subsequent Event (Unaudited)

 

On March 26, 2012, the Wabash National Corporation entered into a definitive agreement to acquire Walker Group Holdings, LLC for $360 million in an all cash transaction. The transaction is expected to be completed in the second quarter of 2012 and is subject to regulatory approval.

 

24

 

 

Exhibit 99.2

 

Wabash National Corporation

Unaudited Pro Forma Consolidated Balance Sheet

(in thousands)

 

   As of December 31, 2011 
   Wabash   Walker         
   Historical   Historical (n)   Adjustments   Pro Forma 
Assets:                    
CURRENT ASSETS                    
Cash  $19,976   $12,069   $288,750  (a)  $19,976 
              145,500  (b)     
              (62,500) (c)     
              (371,750) (d)     
              (12,069) (h)     
Accounts receivable   52,219    39,983         92,202 
                     
Inventories   189,533    29,264    1,361  (e)   220,158 
Prepaid expenses and other   2,317    2,296         4,613 
Total current assets   264,045    83,612    (10,708)   336,949 
                     
Property, plant and equipment   96,591    22,154    12,434  (m)   131,179 
Goodwill   -    15,676    134,906  (g)   150,582 
Intangible assets   19,821    33,521    138,959  (f)   192,301 
Other assets   7,593    3,892    750  (a)   10,918 
              1,875  (c)     
              (3,192) (h)     
Total Assets  $388,050   $158,855   $275,024   $821,929 
                     
Liabilities and Stockholders’ Equity:                    
CURRENT LIABILITIES                    
Current portion of capital lease obligations  $1,507   $-   $-   $1,507 
Accounts payable   107,985    37,797    -    145,782 
Deferred revenue   -    11,907    -    11,907 
Other accrued liabilities   59,024    21,550    -    80,574 
Current portion of long-term debt   -    1,602    (1,602) (h)   - 
              3,000  (a)   3,000 
Total current liabilities   168,516    72,856    1,398    242,770 
                     
Other noncurrent liabilities   4,874    -    -    4,874 
Capital lease obligations   3,314    -    -    3,314 
Long-term debt   65,000    57,288    (57,288) (h)   401,375 
              286,500  (a)     
              110,500  (b)     
              (60,625) (c)     
Total Liabilities   241,704    130,144    280,485    652,333 
                     
Stockholders’ Equity:                    
Common stock   704    -    -    704 
Additional paid-in capital   601,482    -    35,000  (b)   636,482 
Accumulated deficit   (429,288)   30,800    (30,800) (i)   (441,038)
              (11,750) (d)     
Treasury stock   (26,552)   -    -    (26,552)
Accumulated other comprehensive loss   -    (2,089)   2,089  (i)   - 
Total Stockholders’ Equity   146,346    28,711    (5,461)   169,596 
                     
Total Liabilities and Stockholders’ Equity  $388,050   $158,855   $275,024   $821,929 

 

 

(See Notes to Unaudited Pro Forma Consolidated Financial Statements)

 

1
 

 

Wabash National Corporation

Unaudited Pro Forma Consolidated Statement of Operations

(in thousands, except per share amounts)

 

       Year ended December 31, 2011     
   Wabash   Walker         
   Historical   Historical (n)   Adjustments   Pro Forma(o) 
                     
Net sales  $1,187,244   $343,678   $-   $1,530,922 
Cost of sales   1,120,524    271,454    850  (m)   1,392,828 
                     
Gross profit   66,720    72,224    (850)   138,094 
                     
General and administrative expenses   33,949    20,171    9,650  (j)   63,770 
Selling expenses   12,981    13,402         26,383 
Income from operations   19,790    38,651    (10,500)   47,941 
                     
Other income (expense)                    
Interest expense   (4,136)   (10,245)   (23,935) (k)   (38,316)
Other, net   (441)   (107)   -    (548)
                     
Income before income taxes   15,213    28,299    (34,435)   9,077 
                     
Income tax expense   171    139    (139) (l)   171 
Net income  $15,042   $28,160   $(34,296)  $8,906 
                     
Net income per share:                    
Basic  $0.22             $0.13 
Diluted  $0.22             $0.13 
                     
Weighted average common shares and equivalent shares outstanding:                    
Basic   68,086              68,086 
Diluted   68,418              68,418 

 

(See Notes to Unaudited Pro Forma Consolidated Financial Statements)

 

2
 

 

WABASH NATIONAL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Basis of Presentation and Other Transactions

 

The historical financial information as of and for year ended December 31, 2011 is derived from the historical consolidated financial statements of Wabash and Walker. The pro forma adjustments have been prepared as if the transactions described in these footnotes had taken place on December 31, 2011, in the case of the pro forma balance sheet or as of January 1, 2011, in the case of the pro forma statement of operations for the year ended December 31, 2011.

 

Assumptions and estimates underlying the pro forma adjustments are described in the notes below, which should be read in conjunction with the pro forma financial statements. Since the pro forma financial statements have been prepared based upon preliminary estimates and assumptions, the final amounts recorded may differ materially from the information presented. These estimates and assumptions are subject to change pending further review of the assets to be acquired and liabilities to be assumed, and as additional information becomes available. The final purchase price allocation will be determined after the acquisition is completed and the final amounts recorded may differ materially from the information presented.

 

The unaudited pro forma consolidated balance sheet and statement of operations reflects the following transactions:

 

·the acquisition of Walker for a cash purchase price of $360.0 million;

 

·the issuance by Wabash of a $300.0 million senior secured first lien term note;

 

·the issuance by Wabash of $150.0 million of convertible senior notes, where we expect the notes would be convertible into cash, shares of our common stock or a combination of cash and shares, at our election, which we currently intend to settle any conversion of notes through “net share settlement”;

 

·the repayment by Wabash of $60.6 million of borrowings on its secured revolving credit facility and amendment to this facility;

 

·the payment of estimated underwriting commissions, financing origination fees and other acquisition related expenses in connection with the issuances of the notes above and fees related to the amendment to the senior secured revolving credit facility

 

Note 2. Pro Forma Adjustments and Assumptions

 

(a)Reflects the assumed net proceeds to Wabash of $288.8 million from the issuance of a $300.0 million senior secured first lien term note due in 2018 (Term Note) after deducting an issuance discount, as well as underwriting discounts, commissions, and other transactions costs totaling approximately $11.2 million. These discounts and costs will be amortized through interest expense over the life of the note using the effective interest method. The total Term Note debt of $289.5 million, net of issuance discount and other transaction costs, has been reflected on the balance sheet, of which $3.0 million is current based on repayment terms. The foregoing are assumptions used for preparing these pro forma consolidated financial statements. The actual sources and terms of financing may differ.
(b)Reflects the assumed net proceeds to Wabash of $145.5 million from the issuance of $150.0 million of convertible senior notes due in 2017 (the Notes) after paying underwriting discounts, commissions and other transaction costs of approximately $4.5 million, which will be amortized through interest expense over the life of the Notes using the effective interest method. Additionally, long term debt related to the Notes is recorded net of the fair value of the conversion option, preliminarily estimated to be $35.0 million, which has been recorded to additional paid in capital. The Company accounts separately for the liability and equity components of the Notes in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature. This $35.0 million will be amortized through interest expense over the life of the notes using the effective interest method. The foregoing are assumptions used for preparing these pro forma consolidated financial statements. The actual sources and terms of financing may differ.
(c)Reflects the repayment by Wabash of $60.6 million of secured revolving credit facility borrowings and costs of $1.9 million associated with the amendment to the facility, which will be amortized through interest expense over the life of the facility using the effective interest method.

 

3
 

 

(d)Reflects the estimated purchase price of Walker of $360.0 million, other acquisition related costs of $5.0 million and nonrefundable bridge loan financing fees of $6.8 million.
(e)Reflects an adjustment to record Walker’s inventory at fair value. The preliminary estimated fair value of Walker’s inventory was $30.6 million at December 31, 2011 compared to a carrying value of $29.3 million resulting in a total increase to inventory of $1.4 million.
(f)Reflects an adjustment to record intangible assets, based on a preliminary appraisal, related to Walker at fair value consisting of the following (in millions):

 

Preliminary and Tentative

 

Trade names and trade marks (indefinite)  $30.6 
Order backlog (less than 1 year)   7.5 
Customer lists (10 years)   118.6 
Acquired technology (10 years)   15.8 
Total   172.5 
Less historical intangibles of Walker   33.5 
Adjustment  $139.0 

 

(g)Reflects the goodwill arising from the transaction. Goodwill was determined as follows (in millions):

 

Estimated Walker purchase price  $360.0 
Fair value of liabilities assumed   71.3 
Fair value of assets acquired   (280.7)
Goodwill arising from the transaction   150.6 
Less historical goodwill of Walker   15.7 
Adjustment  $134.9 

 

(h)Reflects removal of Walker’s cash and debt that were not acquired by Wabash as well as removal of associated historical deferred financing costs.
(i)Reflects elimination of Walker’s historical members’ equity balances.
(j)Reflects the adjustments for amortization of the intangible assets described in note (f) of the Notes to the Unaudited Pro Forma Consolidated Balance Sheet.
(k)Reflects adjustment for increase in interest expense as a result of the issuance of the Term Note and the Notes and repayment of borrowings under the existing facility from the net proceeds of the issuances of the Notes as well as modifications to the interest rate and credit line under the amended senior secured revolving credit facility. After the consummation of the transactions described in Note 1, the Company’s outstanding indebtedness on a pro forma basis as of December 31, 2011 is expected to consist of (i) $4.4 million of outstanding borrowings and outstanding letters of credit of $4.3 million on the amended $150.0 million senior secured revolving credit facility, (ii) $300.0 million of borrowings under the Term Note and (iii) $150.0 million of borrowings under the Notes. The foregoing are assumptions used for preparing these pro forma consolidated financial statements. The actual sources and terms of financing may differ. If interest rates on the Term Note were 0.125% different, pro forma interest expense would change by $0.4 million. The individual components of the net change in interest expense are as follows (in millions):

 

4
 

 

   Year Ended December 31, 2011 
Historical interest expense as reported by Wabash  $4.1 
Historical interest expense as reported by Walker   10.2 
Total historical interest expense   14.4 
      
Pro forma interest expense associated with the Term Note (an assumed effective interest rate of approximately 8%, including amortization of debt discounts and deferred financing costs)
   22.9 
Pro forma interest expense associated with the Notes (an assumed effective interest rate of approximately 9%, including amortization of debt discounts and deferred financing costs)   13.1 
Reduction of interest expense associated with revolver after repayment of borrowings and amendment to facility   (1.9)
Removal of Walker interest expense associated with debt not assumed in acquisition   (10.2)
Net adjustment   23.9 
      
Pro forma interest expense
  $38.3 
      

 

(l)Reflects reversal of Walker’s historical income tax expense. No adjustment has been made to reflect income tax benefit of the net adjustment to income before income taxes of $34.4 million as it was assumed that it was not more-likely-then-not that deferred tax assets would be realized.
(m)Reflects the adjustment to increase Walker property, plant and equipment to fair value, based on a preliminary appraisal, with the corresponding impact on depreciation expense.
(n)Certain reclassifications have been made in the historical Walker financial statements to conform to Wabash’s financial statement presentation. These reclassifications have no impact on net income or stockholders’ equity.
(o)The pro forma statement of operations does not include approximately $5.0 million of acquisition costs, $1.4 million of acquired profit in inventories, $6.8 million of bridge loan financing costs and $7.5 million of backlog intangible amortization that will be recorded as expenses during the first year after completion of the transaction. Additionally, the pro forma statement of operations does not reflect any impact to diluted net income per share of the Notes. Under the treasury stock method, the Notes will have a dilutive impact when the average market price of the Company’s common stock is above the conversion price of the Notes.

 

5