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Originally published April 17, 2011 in Crain’s Detroit Business by Dustin Walsh And Chad Halcom

Edward Walker’s plan was to grow the small Detroit automotive supplier his father founded in 1981 from a modest operation into a serious player for lucrative defense and aerospace contracts.

For a while, it appeared to work: W Industries Inc. had attracted local and national media attention over the past two years for its seemingly successful diversification efforts, including work on Pentagon contracts for vehicles used in Iraq and Afghanistan.

But behind the scenes, it was struggling with debt and failed to pay vendors, taxes or employee benefits. It also couldn’t deliver on contracts — three lawsuits sprang up as government contracts began expiring.

Its outstanding financial obligations made W Industries vulnerable to a buyer — Livonia-based automotive supplier Tower International Inc. — which last week completed its acquisition of W Industries in a deal that saw the Walker family lose control of the business.

In its quest to acquire W Industries — first its debt and then its assets — Tower filed a breach-of-contract lawsuit April 6 in Wayne County Circuit Court, the contents of which exposed just how troubled Walker’s company has been the past two years. Other lawsuits revealed troubles, as well.

W Industries may yet prove to be a successful venture, but it will be for someone else.

The story of W Industries is a classic case of a family-owned business that assumed too much risk too quickly in pursuit of higher revenue and profits, sources familiar with its situation, who spoke on the condition of anonymity, told Crain’s.

Efforts to track down Walker, 43, for comment were unsuccessful, but his wife, Rhonda, said he wouldn’t have anything to say.

A cautionary tale

Edward Walker set in motion his expansion plans in the early 2000s, a time when the company relied almost exclusively on Ford Motor Co. work.

W Industries at the time was a middle-market, family-run business that manufactured welded metal components. The idea was that the firm would expand by financing new equipment and space to become a player for big-ticket government contracts.

Revenue grew from $15 million in 2003 to $90 million by 2009 thanks to contracts with Sterling Heights-based defense supplier General Dynamics Land Systems for work on the Airbus A350 airliner and other jobs.

Walker’s firm in 2009 landed a 10-year, $9.7 million state tax credit to expand its Detroit operations, including the acquisition of a 200,000-square-foot manufacturing plant near its Hoover Street headquarters.

The city also awarded the firm a 12-year tax abatement, according to media reports.

A $17 million loan from JPMorgan Chase in October 2009 — the seventh such loan through the bank — allowed W Industries to buy much-needed milling equipment to make large aerospace components, according to the Tower lawsuit. The loan bought a 200-by-26-foot milling tool, according to sources, that the company claimed is the largest of the sort in the world.

Mary Kay Bean, a Detroit-based spokeswoman for Chase in Detroit, declined to comment on the loan, the deal with Tower, or its involvement with W Industries.

In the spotlight

The big contracts, revenue growth and expansion fueled media coverage. W Industries was profiled by The New York Times in 2009. A year later, The Detroit News published a feature about the firm, which had won the Michigan Manufacturers Association‘s 2010 Michigan Manufacturer of the Year award.

Crain’s Detroit Business identified W Industries as one of “25 Companies to Watch” in May 2010.

What was unknown was that debt was drowning the firm’s ability to function.

Walker told Crain’s in April 2010 that the company would generate $150 million in revenue that year, but when Tower announced its purchase of the company, it reported its revenue at only $65 million.

In May 2010, W Industries defaulted on its loans and was struggling to fulfill contracts, according to the Tower lawsuit.

Root of the problem

Sources said W Industries was, to some degree, a victim of timing: Taking on more than $28 million in loans to expand its capacity came just before a reduction in defense procurement spending following the Obama administration’s draw-down strategy in Iraq.

W Industries was previously a major structural component supplier on the Pentagon’s Mine-Resistant Ambush Protected Vehicle, a program that finished production in 2009, and for the Army’s Stryker vehicle program, which is expected to end production in 2013.

While the company had several ongoing defense contracts, it was no longer on the same growth curve as when it made expensive equipment purchases and did not have the available cash to retire its past debts.

“A lot of businesses run into these type of dicey situations when they try to double their growth,” said Bill Wildern, CEO of Farmington Hills-based turnaround firm Hydra Professionals LLC. “I don’t think anyone would argue with W’s strategy to diversify, but when you lay all your chips on the table, if anything was delayed or pricing changes, all of a sudden you’re in the dubious position of a cash flow problem and left to the whims of the customers and creditors.”

Left in the lurch

The story of W Industries’ financial problems can be seen in its relationship with its clients and vendors.

Oklahoma City-based Benham Constructors LLC, a subsidiary of defense contractor Science Applications International Corp. Inc., subcontracted W Industries in September 2009 to manufacture a vibration table for NASA as part of the Orion spacecraft program.

W Industries failed to meet its July 2010 delivery deadline and, following an extension, stopped work on the project by November. It requested more than $2 million over its original $1.5 million bid to complete the project, according to a December lawsuit filed in U.S. District Court in Detroit against W Industries by Benham.

The companies settled, with Benham taking the incomplete table and hiring another subcontractor to finish the project, said attorney George Head of Bloomfield Hills-based Plunkett Cooney PC, who represented Benham.

He declined to disclose other terms of the settlement.

“They are very competent in what they do. But if this was a contract they had underbid on, then it’s possible they got the job that way and then weren’t prepared to complete at their projected cost. That’s not uncommon within this industry,” he said.

W Industries stopped paying its suppliers as its debt grew.

The company failed to pay Taylor-based T Tool Co. Inc. on a $140,000 component contract in 2009, said James Bommarito, T Tool’s president. T Tool delivered 110 steel component rails on a project in which W Industries was a subcontractor in 2009.

T Tool threatened to sue W Industries, which responded with a plan to pay the supplier in $5,000 installments every few weeks — but then quit paying eight months ago with more than $30,000 left on the balance, Bommarito said.

“We’ve worked with them and they always used to be good about payment. Now I’ve had to tap into my line of credit to cover (operating costs) since this happened,” he said.

But T Tool is a drop in the bucket: W Industries has more than $10.5 million in overdue balances to vendors and suppliers, including Madison Heights-based Easom Automotive Systems Inc. and Cleveland-based Sherwin-Williams Co., which has threatened to reclaim paint equipment, according to the Tower lawsuit.

The company owed the city of Detroit $1.25 million in back taxes, stopped paying on its employee health care and pension obligations and failed to pay United Auto Workers fees while deducting dues from employee paychecks, according to the Tower lawsuit.

Last ditch efforts

In September, Walker hired financial consultant and longtime automotive CFO Bruce Weber to help rectify the company’s financial woes. Weber brought on Birmingham-based investment banking firm DPP & Partners Inc. to help raise capital while he attempted to refinance debt away from Chase, he said.

By November, however, W Industries was once again in default. Chase, the primary holder of its debt, issued a forbearance agreement, allowing the company more time to make good on its payments, according to the Tower lawsuit.

Weber’s and Donnelly Penman’s efforts were unsuccessful, and Walker fired Weber in February and ended its use of Donnelly Penman, Weber said.

Chase was in talks with several of metro Detroit’s turnaround firms, looking to place management in the company that could deliver a partner to help alleviate W Industries’ debt burden, sources told Crain’s.

“It takes years to position yourself. And for a debt-loaded company in aerospace or defense, it makes sense to find a partner that demonstrates to both your tier-twosuppliers and to your customers that you’re stable in order to get future contracts,” said Gavin Brown, executive director of the Grand Rapids-based Michigan Aerospace Manufacturers Association.

Enter Tower

Early this year, W Industries was staring at bankruptcy, sources said, and Tower, a supplier of frames and chassis parts that was looking to diversify, saw an opportunity.

Tower acquired a total of $28.6 million in W Industries obligations from Chase on Feb. 25 in a power play that led to Tower buying W Industries’ assets last week. The deal, for an undisclosed sum, allows Tower to take over W Industries’ government contracts.

After buying the debt, Tower approached Walker to take over its assets, but sources familiar with the situation told Crain’s last week that talks between Tower and Walker broke down after weeks of negotiations. It’s unclear why.

“There were discussions going on for some time, and these deals take their twists and turns along the way. This one was no different,” said George Malis, partner at Detroit-based Abbott, Nicholson, Quilter, Esshaki & Youngblood PC, attorney for Edward Walker and corporate counsel for W Industries.

After the negotiations fell apart, Tower filed the lawsuit. As debt holder, Tower accused W Industries of breach of contract after it failed to pay on its debt, and it sought to freeze the company’s assets.

“If Ed Walker didn’t think this was ultimately for the benefit of his company and for the city, he wouldn’t have completed the transaction,” Malis said.

In its acquisition announcement, Tower said W Industries currently employs 250 people. Two years ago, it was 400 — further evidence of financial trouble for a company outwardly projecting success.

Tower’s majority shareholder is New York-based private-equity firm Cerberus Capital Management LP, which bought the supplier out of Chapter 11 bankruptcy in the summer of 2007 in a $1 billion deal before Tower went public in 2010.

Derek Fiebig, Tower’s executive director for investor and external relations, declined to comment on details of the deal.

Moving on

Tower will invest in its new acquisition and look to expand the business, Fiebig said. It will make good on some of W Industries’ debts but won’t assume all of its liabilities.

In the end, the company that bears Walker’s name will remain, as Tower will keep the W moniker, Fiebig said.

But W will continue without Walker at the helm — Tower removed him as part of the settlement.

Michael Rajkovic, Tower’s executive vice president and COO, has assumed leadership of W Industries as its president.

“Ed’s going to be sitting on the sidelines for some time and regrouping,” Malis said.

“He’s a young man with a bright mind and entrepreneurial spirit, so when the time comes for him to return to the local business market, we’ll all hear about it. With the capital Tower can bring, I’m sure they can take over the company very effectively, and (Walker) wanted to make sure that the employees, particularly within the city of Detroit, would be taken care of.”

By Derek DeVries | April 17, 2011