NOVEMBER 2016

M&A UPDATE Q3 2016

ENGINEERING & CONSTRUCTION

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M&A activity in the Engineering & Construction industry has remained strong into Q4 2016, with the total number of industry transactions for the last twelve months ("LTM") of 2016 at 261. This is slightly higher than the 251 transactions seen during the LTM period at this point in 2015.

Total transaction value is down 58.3 percent compared to LTM 2015. However, if the $5.7 billion Industry Super Holdings Pty Ltd. acquisition of ITR Concession Co. LLC is removed, the decrease in reported transaction value is only down 7.6 percent. The vast majority of transactions take place between private entities that choose to keep the terms of their transaction private and transaction values were not disclosed on 87 percent of transactions in LTM 2016 and 81 percent in LTM 2015. However, 8.6 percent growth in undisclosed transactions is a signal of strength for middle market M&A activity in the Engineering and Construction space.

ENGINEERING & CONSTRUCTIONMARKET UPDATE Q3

CONSTRUCTION RELATED M&A ACTIVITY

INTRODUCTION

TOTAL TRANSACTIONS

LTM ’2016LTM ’2015261258

HIGHLIGHTS:

• Construction related M&A is up modestly whereas the market as a whole has seen a significant decline.

• Public Engineering and Construction companies have significantly outperformed the Dow Jones Industrial Average and S&P 500 in 2016.

• M&A in the middle market is expected to have a strong finish to 2016 and remain healthy into 2017.

• Private equity continues to increase its share of total M&A activity.

• Dodge Data & Analytics believes the current construction cycle still has legs and the eventual decline will not be severe.

Source: FactSet

This report provides insight into merger & acquisitions (“M&A”), capital markets activity, and market dynamics in the Engineering & Construction industry through the third quarter of 2016.

Headwaters’ Building Products and Construction Services Team advises industry business owners, entrepreneurs, executives and investors in the areas of merger and acquisitions, capital raising and various special situations advisory. Due to our background and laser-focus within the industry, Headwaters is uniquely qualified and has an unparalleled track record of successfully representing Building Products and Construction companies.

Our team covers the following sectors:• Building Products• Product & Material Distributors• Contracting & Sub-Contracting• Construction Materials

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Stantec's Acquisition of MWH Global In May 2016, Stantec Inc. acquired MWH Global Inc. for $793 million in cash. This price represented an enterprise value of $795 million and revenue multiple of 0.4x. The transaction expands Stantec's market presence with the addition of water-related construction capabilities.

Onex Partners’ Acquisition of Tecta AmericaIn August 2016, private equity group, Onex Partners acquired Tecta America for $280 million. Tecta America is the largest provider of commercial roofing services in the U.S. offering installation, replacement and repair services.

KBR’s Acquisition of Honeywell Technology SolutionsIn September 2016, KBR, Inc. acquired Honeywell’s government services provider, Honeywell Technology Solutions, Inc. The transaction price to KBR was $266 million, after adjustments for approximately $34 million of acquired tax benefits. The transaction was initially funded through KBR's existing line of credit facility.[1]

NOTABLE TRANSACTIONS

Has Acquired

Has Acquired

Has Acquired

FIGURE 2: NUMBER OF TRANSACTIONS BY TRANSACTION VALUE ($) MILLIONS

FIGURE 1: TOTAL TRANSACTION VALUE BY TRANSACTION SIZE ($) MILLIONS

TECHNOLOGY SOLUTIONS, INC.

Excludes $5.72 billion Industry Super Holdings acquisition of ITR Concession Co. in LTM '15

Source: FactSet

$0

$500

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10 to 24.9 25 to 99.9 100 to 249.9 250 +

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LTM 2015 LTM 2016

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10 to 24.9 25 to 99.9 100 to 249.9 250 +

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LTM 2015 LTM 2016

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All $'s in Millions EBITDACompany Name TEV Revenue EBITDA Margin Revenue EBITDAAECOM 8,765 17,411 1,002 5.8% 0.50x 8.7x

Aegion Corporation 931 1,231 106 8.6% 0.76x 8.8x

Comfort Systems USA, Inc. 1,111 1,626 125 7.7% 0.68x 8.9x

Dycom Industries, Inc. 3,394 2,673 373 13.9% 1.27x 9.1x

EMCOR Group, Inc. 3,674 7,379 402 5.4% 0.50x 9.1x

Exponent, Inc. 1,238 312 67 21.6% 3.97x 18.4x

Fluor Corporation 7,159 18,418 864 4.7% 0.39x 8.3x

Granite Construction Incorporated 2,091 2,478 164 6.6% 0.84x 12.7x

Great Lakes Dredge & Dock Corporation 591 777 86 11.1% 0.76x 6.8x

Hill International, Inc. 359 720 41 5.7% 0.50x 8.7x

Jacobs Engineering Group Inc. 6,217 11,441 680 5.9% 0.54x 9.1x

KBR, Inc. 2,264 4,158 105 2.5% 0.54x 21.6x

Layne Christensen Company 269 651 14 2.2% 0.41x 18.6x

MasTec, Inc. 3,437 4,820 339 7.0% 0.71x 10.1x

Matrix Service Company 483 1,334 62 4.7% 0.36x 7.8x

Mistras Group, Inc. 783 708 80 11.3% 1.11x 9.8x

MYR Group Inc. 525 1,070 72 6.7% 0.49x 7.3x

Orion Group Holdings, Inc. 296 596 45 7.6% 0.50x 6.6x

Primoris Services Corporation 1,192 1,892 122 6.5% 0.63x 9.7x

Quanta Services, Inc. 4,712 7,444 472 6.3% 0.63x 10.0x

Sterling Construction Company, Inc. 164 674 20 3.0% 0.24x 8.0x

Tutor Perini Corporation 1,649 4,951 246 5.0% 0.33x 6.7xMean 2,332 4,217 249 7.3% 0.8x 10.2x

Median 1,215 1,759 114 6.4% 0.5x 9.0x

Enterprise Value/

PUBLIC MARKET SUMMARY In Q3 2016, median valuation multiples for the publicly traded Engineering and Construction industry increased 4.1 percent and median EBITDA margins during the period increased from 5.9 percent to 6.4 percent compared to Q2 2016. Year over year, median valuation multiples decreased by 8.5 percent while EBITDA margins tightened to 6.4 percent from 6.6 percent.

The publicly traded Engineering and Construction industry as a whole was trading at an average EBITDA multiple of 10.2x at the end of Q3 2016. However, the median multiple of 9.0x is the more relevant valuation metric for Q3 due to outlier multiples.[2]

FIGURE 3: YTD RETURN COMPARISON

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130.00

HW C&E Index Dow Jones Ind Average S&P 500Source: FactSet Source: FactSet

FIGURE 4: PUBLIC VALUATION MULTIPLESThe table below includes the constituents of Headwaters Construction & Engineering Index.

TEV - Total Enterprise Value or company’s total value calculated as the market capitalization plus debt, minus cash.EBITDA - Earnings before interest, income taxes, depreciation and amortization. An approximate measure of a company's operating cash flow.Enterprise Value Multiples - Metrics for deriving the value of a business. Total Enterprise Value divided by Revenue quantifies the value of the company to its total revenue while Total Enterprise Value divided by EBITDA quantifies the value of the company to its operating cash flow.

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HW C&E Index Dow Jones Ind Average S&P 500Source: FactSet

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452013 2014 2015 2016

55.4

SKILLED LABOR SHORTAGE

The M&A Conditions Index (“MACI”) ended October at 55.4, up 2 points from September’s level of 53.4. The MACI is computed by surveying executives of private equity firms, investment banks, lenders and advisor firms. It tracks activity such as leads, signed letters, completed transactions, divestitures, financing availability, M&A business activity, M&A business staffing, and the availability of

bidders. A reading of over 50 indicates an expansion relative to the prior month, and a reading below 50 indicates a contraction.

With leads for new transactions scoring a 66.7 in October and a composite level of 55.4, survey participants expect a strong finish to 2016 and a healthy market in 2017 for middle market M&A.[2]

Source: themiddlemarket.com - Mergers & Acquisitions

FIGURE 5: M&A CONDITIONS COMPOSITE - OCTOBER 2016

President Elect Trump’s 100 day plan includes introducing what he calls the 'American Energy & Infrastructure Act' that aims to “leverage public-private partnerships, and private investments through tax incentives, to spur $1 trillion in infrastructure investment over 10 years.” This has been viewed by many in the market as a bullish sign for construction as reflected by post-election construction related stock returns.

TRUMP, ON YOUTUBE, PLEDGES TO INCREASE INFRASTRUCTURE INVESTMENT

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change. Growing through add-on transactions, similar to strategic acquisitions of corporate acquirers, is playing an increasingly important role in driving growth for PE firms. In 2010, 48 percent of private equity transactions were add-ons with amounts closer to 56 percent thus far in 2016. The increase in PE backed transactions and the prominence of add-on acquisitions as a vehicle for growth demonstrates the important role that PE firms continue to play in the market.[3]

The Associated General Contractors of America (“AGC”) reported that 35 states added construction jobs between September 2015 and September 2016, while construction employment increased in 21 states and the District of Columbia between August and September 2016.

“The list of states that are adding construction jobs has been shrinking, yet contractors generally report they are busy now and optimistic about the workload ahead,” said Ken Simonson, Chief Economist for AGC. “Therefore, the lack of employment increases in many states may reflect the difficulty contractors say they are having in finding qualified workers.” [4]

CONSTRUCTION MARKET DYNAMICS AND OUTLOOK SKILLED LABOR SHORTAGE

FIGURE 7: STATE CONSTRUCTION EMPLOYMENT SEPTEMBER 2016

Source: AGC of America

Over -10%

Over 10%

-5.1% to -10%

5.1% to 10%

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0.1% to 5%

0%

FIGURE 6: NUMBER OF PE TRANSACTIONS AS A % OF OVERALL CONSTRUCTION M&A ACTIVITY

Private equity (PE) activity dropped in line with the overall decline in M&A activity in 2016, falling from 1,350 transactions in Q2 to 976 in Q3, continuing a six quarter trend of falling PE-backed transactions.

As the number of transactions declined, the percentage of PE-backed transactions has been rising. In Q1 2013, 24 percent of M&A transactions were PE backed and that number has grown to 31 percent through Q3 2016.

PE firms are bidding aggressively to win companies in an increasingly competitive market. In addition, the dynamic where PE firms have traditionally focused primarily on operations as a means for growth is also beginning to

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1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q

2013 2014 2015 2016

Sponsor-Backed Corporate M&A % Sponsor-Backed

PRIVATE EQUITY OUTLOOK

Source: PitchBook, 3Q 2016 M&A Report

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WEST

NORTHEAST

MIDDLE STATES

SOUTH

Q2 2015: 6.77 MonthsQ2 2016: 7.15 Months

Q2 2015: 7.33 MonthsQ2 2016: 8.00 Months

Q2 2015: 9.80 MonthsQ2 2016: 10.81 Months

0.38 Months0.38 Months

1.01 Months

Q2 2015: 8.85 MonthsQ2 2016: 7.13 Months

1.72 Months

COMMERCIAL AND INDUSTRIAL CONSTRUCTION BACKLOG

The Associated Builders and Contractors ("ABC") Construction Backlog Indicator ("CBI") is a forward-looking national economic indicator that reflects the amount of work that will be performed by commercial and industrial contractors in the coming months.

The September release of the CBI reported that construction backlog for large contractors (more than $100 million in revenue) reached a new high of 14.1 months during the Q2 2016. This shattered the previous high reported in Q1 2016 and Q3 2013 of 12.5 months.

The national average was down slightly from 8.6 months to a level of 8.5 months. The decline of the national average was led primarily by a 12.9 percent reduction in construction backlog in the Northeast from 8.2 months to 7.1 months.[5]

FIGURE 8: YEAR-OVER-YEAR CBI MAP OF REGIONS & BACKLOG MONTH

Source: Associated Builders & Contractors, Construction Backlog Indicator

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CBI – National Backlog AverageQ2 2009 – Q2 2016FIGURE 9: CBI – NATIONAL BACKLOG AVERAGE

Q2 2009 – Q2 2016

Source: Associated Builders & Contractors, Construction Backlog Indicator

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CONSTRUCTION INDUSTRY OUTLOOK

2011 2012 2013 2014 2015 2016E 2017PTotal Construc�on 441.4 492.9 547.3 601.0 667.8 676.4 712.9

1% 12% 11% 10% 11% 1% 5%Single Family Housing 97.3 125.8 159.2 163.8 186.2 203.5 227.1

-3% 29% 27% 3% 14% 9% 12%Mul�family Housing 29.7 40.8 51.7 68.9 84.0 86.8 86.6

34% 37% 27% 33% 22% 3% 0%Commercial Buildings 48.4 55.3 67.7 83.1 88.0 98.9 105.1

15% 14% 22% 23% 6% 12% 6%Ins�tu�onal Buildings 100.3 91.8 92.1 104.4 105.2 108.1 118.5

-11% -8% 0% 13% 1% 3% 10%Manufacturing Buildings 17.3 13.1 19.4 35.6 24.1 17.0 18.1

82% -24% 48% 84% -32% -29% 6%Public Works 106.9 112.3 127.3 121.3 123.7 120.1 127.5

-11% 5% 13% -5% 2% -3% 6%Electric U�li�es 41.5 53.8 29.9 23.9 56.6 42.0 30.0

45% 30% -44% -20% 137% -26% -29%

Total construction starts in 2016 are estimated to finish up 1 percent to $676 billion, following the 11 percent increase that was reported in 2015. In addition, residential building was up 7 percent and provided much of the lift in 2016. Total construction starts in 2017 are expected to increase 5 percent to $713 billion. Gains of 8 percent are expected for both residential building and nonresidential building, while non-building construction slides another 3 percent.

Trends in building activity are showing similarities to the 1991-2011 cycle, growing at a slower, more sustainable rate. While Dodge economists do not expect our current cycle to continue for another 10 years like the previous cycle, they do believe it still has legs. Dodge’s Chief Economist, Robert A. Murray projects, “When a cycle decline does take hold for the current cycle, possible in 2019, it is not likely to be severe, barring a steep economic recession.” This conclusion is based on the estimate that single family housing and commercial building have been subdued and show little sign of overbuilding at this point. Furthermore, Dodge expects institutional building and public works to lag and provide support to overall construction activity when a downturn does eventually occur.[6]

“When a cycle decline does take hold for the current cycle, possible in 2019, it is not likely to be severe, barring a steep economic recession.”

Dodge Data and Analytics recently released its 2017 Construction Outlook

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T T+2 T+4 T+6 T+8 T+10 T+12 T+14 T+16 T+18 T+20Years from Cyclical Trough

Total Construction Activity by Cycle Cyclical Trough (T)-100, Based on Constant Dollars

1991-2011

1975-1982

2011-??

1982-1991

FIGURE 11: TOTAL CONSTRUCTION ACTIVITY BY CYCLE CYCLICAL TROUGH (T)-100BASED ON CONSTANT DOLLARS

FIGURE 10: U.S. CONSTRUCTION STARTS (BILLIONS OF DOLLARS)

Source: Dodge Data & Analytics

Source: Dodge Data & Analytics

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1. FactSet 11/9/162. Mergers & Acquisitions, M&A Conditions Index (MACI) October 20163. PitchBook, 3Q 2016 M&A Report, October 24,20164. “Construction Employment Rises in 35 States from September 2015 to 2016; Only 21 States and D.C. Add Jobs Last Month Amid

Worker Shortages”, The Associated General Contractors of America, October 21, 20165. “Backlog Skyrockets for Largest Firms During Second Quarter, But Falls to 8.5 Months Overall”, Associated Builders and Contractors,

Inc., September 20, 20166. “2017 Dodge Construction Outlook”, Prepared October, 2016, Robert A. Murray, Chief Economist and Vice President, Dodge Data &

Analytics7. Associated Builders and Contractors (ABC) Construction Backlog Indicator (CBI)

CITATIONS:

Disclosure: This newsletter is a periodic compilation of certain economic and corporate information, as well as completed and announced merger and acquisition activity. Information contained in this newsletter should not be construed as a recommendation to sell or buy any security. Any reference to or omission of any reference to any company in this newsletter should not be construed as a recommendation to buy, sell or take any other action with respect to any security of any such company. We are not soliciting any action with respect to any security or company based on this newsletter. The newsletter is published solely for the general information of clients and friends of Headwaters MB, LLC. It does not take into account the particular investment objectives, financial situation or needs of individual recipients. Certain transactions, including those involving early-stage companies, give rise to substantial risk and are not suitable for all investors. This newsletter is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Prediction of future events is inherently subject to both known and unknown risks and other factors that may cause actual results to vary materially. We are under no obligation to update the information contained in this newslet-ter. Opinions expressed are our present opinions only and are subject to change without notice. Additional information is available upon request. The companies mentioned in this newsletter may be clients of Headwaters MB, LLC. The decisions to include any company in this newsletter is unrelated in all respects to any service that Headwaters MB, LLC may provide to such company. This newsletter may not be copied or reproduced in any form, or redistributed without the prior written consent of Headwaters MB, LLC. The information contained herein should not be construed as legal advice.

About Headwaters MB:Headwaters MB is an independent, middle market investment banking firm providing strategic merger and acquisition advice, capital raising and special situations advisory. Named “Investment Bank of the Year” by major industry organizations in 2014 and 2015, Headwaters MB is headquartered in Denver, CO, with six regional offices across the United States and partnerships with 18 firms covering 30 countries. For more information, visit www.headwatersmb.com.

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Building Products & Construction Services Coverage Team

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