A.O. Smith Acquires Lochinvar

A. O. Smith Corporation Milwaukee, WI, announced on July 19 it has signed a definitive agreement to acquire Lochinvar Corporation of Lebanon, TN, for $418 million and will not assume Lochinvar’s existing debt.

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

“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, 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 ended June 30, 2011, Lochinvar recorded sales of approximately $200 million and adjusted EBITDA 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.

“The addition of Lochinvar expands our product offering and gives us access to proven high efficiency boiler technology,” Ajita G. Rajendra, president of A. O. Smith Water Products Company, said. “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. “

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, Tenn., 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.”

William L. Vallett, Jr., chief executive officer and president of Lochinvar, commented, “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.”

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 eight percent for the last 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. Lochinvar’s manufacturing and product engineering operations are located in Tennessee. The purchase also includes Lochinvar Ltd., the company’s United Kingdom-based subsidiary.

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