2016State of the Construction & Surety Industry

Presented by:

William J. McConnell, P.E., J.D., CEO

The Vertex Companies, Inc.

Engineering | Construction | Environmental | Claims | Technology

VERTEX

The U.S. Economy is Doing Very Well by Most Measures

VERTEX

VERTEX

VERTEX

VERTEX

VERTEX

VERTEX

VERTEX

Private Construction is BOOMING while Public Construction Remains FLAT

VERTEX

VERTEX

Construction is Outpacing the U.S. Economy by a Wide Margin

U.S. Construction Industry Growth Rate Since 2011: 9%

U.S. GDP Growth Rate Since 2011: 3.5%

VERTEX

VERTEX

Number of Construction Establishments in the U.S. – Bureau of Labor Statistics:

2007: 896,200

2015: 763,559

VERTEX

Number of Construction Employees in the U.S. – Bureau of Labor Statistics:

2007: 7.7 million

2001: 5.4 million

2016: 6.6 million

VERTEX

VERTEX

VERTEX

VERTEX

VERTEX

VERTEX

The Surety Industry Continues to be Profitable for the 12th Consecutive Year, Despite a Lack of Premium Growth.

VERTEX

VERTEX

VERTEX

Market Share of the Top 10 Surety Providers:

1980: 21%

1990: 42%

2004: 67%

2008: 68%

2014: 63%

VERTEX

Top Risks that Face Contract Surety Providers in 2016:

1.Quality Issues2.Labor Shortages3.Lack of Growth in Public Construction4.Inflation

VERTEX

The Lifecycle of a Construction Company

VERTEX

Corporate Lifecycle

Birth

Go-Go

Infancy

Prime

Stable

Aristocracy

Bureaucracy

Death

Adolescence

Source: Dr. Ichak Adizes, Adizes Institute

Top 100 Contractors of 1964

Lorem Ipsum

• Bechtel Corp. (#4 / #1)

• Peter Kiewit Sons’ Co. (#5 / #3)

• Brown & Root Inc. (#8 / #8)

• MW Kellogg Co. (#31 / #8)

• Fluor Corp. Ltd (#50 / #2)

• Swinerton & Walberg Co. (#52 / #35)

• Walbridge-Aldinger Co. (#63 / #42)

• Manhattan Construction (#66 / #52)

• Granite Construction (#80 / #25)

• Frank Messer & Sons Inc. (#80 / #68)

• HB Zachry Co. (#98 / #32)

• Perini Corp. (#13 / #13)

• Walsh Construction (#15 / #15)

26 Surviving Contractors

• Gilbane Construction Co. (#10 / #14)

• Noble J. Dick Inc. (#32 / #62)

• The Lane Construction Corp. (#41 / #44)

• Henry Beck Co. (#48 / #108)

• Dinwiddie Construction Co. (#70 / #84)

• Great Lakes Dredge Co. (#75 / #98)

• Boh Bros. Construction Co. (#85 / #177)

• Basic Construction Co. (#26 / n/a)

• Raymond International Inc. (#40 / n/a)

• Miller Davis Co. (#78 / n/a)

• Teichert & Son, Inc. (#81 / n/a)

• James D. Morrissey Inc. (#86 / n/a)

• Millstone Construction Inc. (#99 / n/a)

VERTEX

Corporate Lifecycle

Birth

Go-Go

Infancy

Prime

Stable

Aristocracy

Bureaucracy

Death

Adolescence

Large Contractors - $600M+ in Rev

Corporate Lifecycle

Birth

Go-Go

Infancy

Prime

Stable

Aristocracy

Bureaucracy

Death

Adolescence

Large Design Firms - $130M+ in Rev

Corporate Lifecycle

Birth

Go-Go

Infancy

Prime

Stable

Aristocracy

Bureaucracy

Death

Adolescence

Source: Dr. Ichak Adizes, Adizes Institute

Reinvention

Aristocracy

Results of Top 100 Construction Firms of 1964

33% failed

26% survived

41% were acquired

Status of the 41 Contractor Acquisitions – 46% Survival Rate

9 failed post acquisition

19 survived and continue to offer construction

13 voluntarily dropped construction

Lorem Ipsum

• Turner Construction Co. (#6) acquired by Hochtief in 1999.

• Daniel Construction Co. (#7) acquired by Fluor in 1977.

• J.W. Bateson Co. Inc. (#14) acquired by Centex in 1966; Balfour Beatty acquired Centex in 2007.

• C.F. Braun & Co. (#16) acquired by Santa Fe in 1981; Halliburton acquired C.F. Braun from Santa

Fe in 1989; KBR (including CF Braun) separated from Halliburton in 1989.

• Fischbach & Moore, Inc. (#18) acquired by Sullivan & McLaughlin in 2005.

• Huber, Hunt & Nichols, Inc. (#22) (now Hunt Construction Group) acquired by AECOM in 2014.

• Pittsburgh-Des Moines Steel Co. (#28) acquired by CB&I in 2001.

• Tishman Realty & Construction Co. (#29) acquired by AECOM in 2010.

• T.L. James & Co. Inc. (#35) acquired by Primoris in 2009.

• Fruin-Colnon Contracting Co. (Fru-Con) (#51) acquired by Bilfinger in 1978; in 2011, Balfour

Beatty acquired Fru-Con from Bilfinger.

• Frank J. Rooney Inc. (#73) acquired by Centex in 1978; in 2007, Balfour Beatty acquired Centex

Construction.

• Beacon Construction Co. of Mass., Inc. (#74) acquired by Skanska AB in 1996.

• Ragnar Benson, Inc. (#84) acquired by William Charles Ltd. in 2005.

13 Successful Acquisitions

Results of Top 100 Design Firms of 1964

41% failed

24% survived

35% were acquired

Acquirers of the 35 Design Firms

3 by Parsons (employee-owned)

12 by AECOM (public)

4 by Jacobs (public)

2 by CH2M (employee-owned)

2 by Dewberry (private)

14 by Other Large Design Firms

Market Consolidation - Design(1995 – 2015)

2005 Top 10 Firms had 44.2% Market Share

1995 Top 10 Firms had 30.2% Market Share

2000 Top 10 Firms had 40.5% Market Share

2010 Top 10 Firms had 50.4% Market Share

2015 Top 10 Firms had 50.0% Market Share

Company Profile – AEC Firm

Dames & Moore

Headquarters: Los Angeles, CA

Current Rank: Acquired by URS in 1999

VERTEX

Company Profile – AEC Firm

IT Corporation

Headquarters: Torrance, CA

Current Rank: Declared bankruptcy in 2002

VERTEX

Company Profile

Morrison-Knudsen Co. Inc.

Founded: 1912

Acquired by: Washington Group

Current Rank: #7 (2015 / AECOM)

Landmark Project: Hoover Dam

VERTEX

Company Profile

J.A. Jones Construction Co.

Founded: 1894

Acquired by: Phillipp Holzmann A.G.

Current Rank: n/a

VERTEX

Subtle Strategic Changes with Market Shifts

Contractor Takeaways

Planned Leadership Transition

Seldom and Selective M&A Transactions; Growth is Primarily Organic

VERTEX

Poor Leadership Transition – Lee Iacocca Effect

Contractor Takeaways

Failure to Adjust to Market Conditions and Market Shifts

Excessive Bureaucracy Causes an End to Most Large Contractors – Too Slow to Move and Top Heavy

VERTEX

Acquirer has Long History of Construction

Contractor Takeaways – M&A

Acquirer in Similar Vertical as Acquiree

Current Trend: AEC Companies Acquiring Large Construction Companies – Success is TBD

VERTEX

Developers that Manage Construction Companies have Difficulty Achieving Long-Term Success

Contractor Takeaways – M&A

Both Development and Construction are High RiskEndeavors but Development has More Reward

Construction as a Non-Primary Sector Does Not Work in the Long-Term

VERTEX

Large Non-Construction Buyer is Often Quick to Exit Construction to Focus on Service Business

Contractor Takeaways – M&A

Large Public Buyer Tends to Shed Most, if Not All of the At-Risk Work

Value of Predictable Service Components Far Exceed Value of At-Risk Vertical (more buyers)

VERTEX

Design Firms Must Diversify; an Over-Concentration of Work in One Sector Often Leads to Failure, Particularly When the Sector Compresses

Design Takeaways

Design Firms Must Embrace an Effective M&A Strategy to Continue Growth Over the Long-Term

Design Firms Must Keep in Front of Technology Improvements that Improve Efficiency

VERTEX

The End

VERTEX