Bill McConnells State of the Surety Industry in 2016

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

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

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Private Construction is BOOMING while Public Construction Remains FLAT

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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%

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

2007: 896,200

2015: 763,559

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

2007: 7.7 million

2001: 5.4 million

2016: 6.6 million

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

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Market Share of the Top 10 Surety Providers:

1980: 21%

1990: 42%

2004: 67%

2008: 68%

2014: 63%

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Top Risks that Face Contract Surety Providers in 2016:

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

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The Lifecycle of a Construction Company

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Corporate Lifecycle

Birth

Go-Go

Infancy

Prime

Stable

Aristocracy

Bureaucracy

Death

Adolescence

Source: Dr. Ichak Adizes, Adizes Institute

Top 100 Contractors of 1964

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• 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)

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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

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• 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





Company Profile – AEC Firm

Dames & Moore

Headquarters: Los Angeles, CA

Current Rank: Acquired by URS in 1999

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Company Profile – AEC Firm

IT Corporation

Headquarters: Torrance, CA

Current Rank: Declared bankruptcy in 2002

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Company Profile

Morrison-Knudsen Co. Inc.

Founded: 1912

Acquired by: Washington Group

Current Rank: #7 (2015 / AECOM)

Landmark Project: Hoover Dam

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Company Profile

J.A. Jones Construction Co.

Founded: 1894

Acquired by: Phillipp Holzmann A.G.

Current Rank: n/a

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Subtle Strategic Changes with Market Shifts

Contractor Takeaways

Planned Leadership Transition

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

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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

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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

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


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

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


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)

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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

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The End

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Bill McConnells State of the Surety Industry in 2016

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