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A.O. Smith to buy Lochinvar

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“We see this as being a bright future for Lebanon,” Lancaster said, adding the acquisition is a good fit for both companies.

Lochinvar, a privately held company, is a leading manufacturer of high-efficiency boilers used in commercial and residential hydronic heating and hot water applications.

“From a local standpoint, we do not see any changes whatsoever. Our main emphasis is on our employees, and we will still continue to be active in local (events),” Lancaster noted.

The company and its employees have supported community initiatives such as Wilson County Christmas for All, joined with the Nashville Predators professional hockey team in a project called “Stick to Reading = Succeeding” at Southside Elementary School, donated to the March of Dimes, Habitat for Humanity and Cumberland University, and sent holiday gifts and decorations to members of the National Guard who were deployed to Afghanistan.

“We are extremely excited about the potential benefits of combining with such a logical partner like A. O. Smith and the future prospects for our employees, customers and suppliers,” said William L. Vallett Jr., president and chief executive officer of Lochinvar, in a news release announcing the acquisition.

“The addition of Lochinvar expands our product offering and gives us access to proven high-efficiency boiler technology,” said Ajita G. Rajendra, president of A. O. Smith Water Products Company. “The $1.1 billion North American boiler industry is in the midst of a transition to the new high-efficiency condensing technology, which we believe is growing several times faster than GDP,” he continued. “We expect high-efficiency boiler products to continue to grow at an accelerated rate for the foreseeable future.”

“We also believe there are significant growth opportunities in regions outside of North America, especially in China, for Lochinvar’s higher-efficiency boilers, as more commercial customers seek ways to save energy and reduce operating costs,” Rajendra pointed out in the news release. “This opportunity becomes even more compelling when we couple Lochinvar’s leading technology with A. O. Smith’s many years of experience, strong water heater manufacturing platform and prominent brand in China.”

“Lochinvar represents an excellent fit because of their complementary products and commitment to product engineering and technology leadership,” Rajendra observed. “And, they share our commitment to the highest levels of product quality and customer satisfaction. The Lochinvar plant and technical facility in Lebanon, are best-in-class operations, and we are excited about the future for this campus. Lochinvar has built a strong team internally and a strong group of sales representatives. We are enthused about their becoming part of the A. O. Smith team.”

The news release said A. O. Smith expects the acquisition to be accretive to earnings per share in the amount of approximately 10 cents in the fourth quarter of 2011, excluding one-time purchase accounting charges and professional fees related to the acquisition, and in the range of 40 cents to 50 cents per share in 2012. The transaction is expected to close in the third quarter of 2011, subject to customary closing conditions and regulatory review.

“This acquisition fits squarely within our stated strategy to expand our core product offering with new technologies, which emphasize high-efficiency products that can be applied globally,” Paul W. Jones, A. O. Smith chairman and chief executive officer, observed. “This is a significant first step in growing our diversified global water heating platform and the beginning of the redeployment of the proceeds from the sale of our Electrical Products Company.”

For the 12 months ending June 30, Lochinvar recorded sales of approximately $200 million and adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) of approximately $45 million. The purchase price represents an adjusted multiple of 7.5 times EBITDA when taking into account the estimated $80 million of tax benefits that A. O. Smith will receive as a result of treating the transaction as a purchase of assets for tax purposes. In addition to the fixed purchase price, privately held Lochinvar’s shareholders could earn up to an additional $35 million if certain revenue objectives are achieved by November 2012. A.O. Smith expects to achieve approximately $10 to $15 million of annual synergies over the next few years from purchasing economies and potential global expansion opportunities.    

Highlights of the transaction: • Access to higher growth, energy efficient technology and product line expansion: Pro forma A. O. Smith sales in 2010 increase 12 percent to approximately $1.7 billion, based on Lochinvar’s sales of approximately $180 million. Lochinvar’s sales have grown at a rate of 8 percent for the past five years, and A. O. Smith’s management believes that this growth rate will continue for the foreseeable future.

In the last year, approximately two-thirds of Lochinvar’s residential and commercial boiler revenues have come from its well known lines of high-efficiency, condensing products. In addition, the North American commercial boiler industry is currently split between hydronic heating applications and hot water applications, and A. O. Smith currently sells very few hydronic heating systems. Given its leading technology position and presence in this segment, Lochinvar will serve as the foundation for A. O. Smith’s global residential and commercial boiler platform.

• Value creation and synergy opportunities: A. O. Smith expects annual synergies from purchasing economies and potential global expansion opportunities to be $10 to $15 million in the next few years.

• Financing and financial targets: Management expects to fund the $418 million purchase price with a combination of cash and debt, which it expects to borrow under its $425 million revolving credit facility. A. O. Smith believes the transaction will achieve management’s financial targets by delivering full-year earnings accretion of $.40 to $.50 per share in 2012 and a return in excess of the company’s cost of capital in the first year after completing the acquisition.

Lochinvar’s product offerings are highly complementary to A. O. Smith’s and include: residential and commercial high-efficiency condensing and non-condensing boilers, residential and commercial water heaters, indirect water heaters, storage tanks, solar thermal commercial water heaters, and commercial and residential pool and spa heaters.

“It’s an opportunity for the two companies to share best practices,” Lancaster said, adding through A. O. Smith’s global reach, Lochinvar will expand its line of high efficiency boilers beyond North America to places such as China increasing the company’s export sales. “We expect to see growth in this segment in the future,” he added.

The purchase also includes Lochinvar Ltd., the company’s United Kingdom-based subsidiary. A. O. Smith Corporation, with 2010 sales of nearly $1.5 billion, is one of the world’s leading manufacturers of residential and commercial water heating equipment, offering a comprehensive line featuring the best-known brands in North America and China, as well as water purification products for residential and light commercial applications. A. O. Smith employs approximately 10,000 people at operations in the U.S., Canada, Mexico, India, China, and the Netherlands.

The company operates a plant in Ashland City, formerly owned by State Industries.

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