Construction, Engineering & Building Products - BKD.com

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The market for mergers and acquisitions (M&A) remained robust for the construction, engineering and building product
CONSTRUCTION, ENGINEERING & BUILDING PRODUCTS MERGERS & ACQUISITIONS PERSPECTIVES Q4 2017 YEAR IN REVIEW

800.644.1704 | bkdcorporatefinance.com

OVERVIEW & OUTLOOK The market for mergers and acquisitions (M&A) remained robust for the construction, engineering and building products (CEBP) industry in 2017. Trends driving M&A activity and shaping the industry landscape include the need for experienced labor, efficiencies introduced by offsite construction and the increasing reliance on technology. The need for weather resilient buildings also helped to drive M&A in 2017 after a destructive hurricane season and one of the worst fire seasons in U.S. history. These trends, coupled with continued economic growth and the increasing probability of an infrastructure bill, are expected to create exciting opportunities for M&A in the CEBP industry throughout 2018. Notable large deals in 2017 include Jacobs Engineering Group’s acquisition of CH2M Hill and AECOM’s acquisition of Shimmick Construction. Market watchers speculate that the industry will see the number of deals increase, particularly the number of large deals, potentially driving median transaction values higher as the anticipated infrastructure bill has the potential to put up to $1 trillion in the pipeline. It is expected that companies will seek to capture additional capabilities via M&A in order to take full advantage of the anticipated work. Additionally, companies should benefit from tax relief, freeing up cash to invest in growth initiatives including M&A. An analysis of the CEBP M&A market in 2017 shows fewer transactions occurred while median transaction values increased, indicating industry consolidation, particularly for the building products (BP) segment, which experienced a decrease in the number of deals and an increase in the median deal value. From 2016 to 2017, the overall number of transactions decreased 1.8 percent for the construction and engineering (C&E) subsector and 8.8 percent for the BP subsector.

$40

# of Deals

400 300

125

110

114

$30

200 $20 100 0

283

278

273

2015

2016

2017

C&E Deals

BP Deals

C&E Value

$10

Median Transaction Value ($ in millions)

Number of Deals & Median Transaction Value

CONTENTS Construction Spending Industry Trends Industry Segment Trends Construction & Engineering Firms Building Products BKD Services About BKD Corporate Finance

ABOUT BKDCF Founded in 1994, BKD Corporate Finance helps companies and stockholders go beyond their numbers by creating value through investment banking solutions that include mergers, acquisitions, sales, recapitalizations, management buyouts and financings.

CEBP CONTACTS Tony Schneider Managing Director 317.383.4000 [email protected] Jason Corson Director 417.865.8701 [email protected] Jeff Johnson Vice President 303.861.4545 [email protected]

BP Value

Source: S&P Capital IQ

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CONSTRUCTION SPENDING Construction spending for the U.S. ended 3.8 percent higher in 2017 compared to 2016, led by private residential spending, up 10.6 percent in 2017 compared to 2016. Forecasted 2018 total construction spending in the U.S. is estimated to increase 5 percent. Nonresidential construction spending decreased 0.6 percent in 2017 compared to 2016 from $713 billion to $708 billion. While year-over-year (YOY) nonresidential spending has slowed since 2014, 2017 marks the first total decrease in nonresidential spending since 2012. Provided an infrastructure bill is passed, nonresidential spending should see gains in 2018 and 2019.

$1,200 $1,000

$850

$1,006

$906

$574

$708

$713

$685

$631

$577

8.00% 6.00% 4.00%

$400 $200

12.00% 10.00%

$800 $600

$1,231

$1,186

$1,114

$276

$522

$473

$429

$375

$329

YOY Change

Construction Spending ($ in billions)

Total Construction Spending & YOY Change 2012–2017

2.00%

$0

0.00% 2012

2013

2014

Residential Construction

2015

2016

2017

Nonresidential Construction

YOY Change

Some nonresidential sectors fared better than others in 2017, including spending on commercial construction, up 13.5 percent, spending on lodging construction, up 5.7 percent, and spending on office construction, up 2.1 percent in 2017 compared to 2016.

Commercial, Lodging & Office Spending ($ in billions)

2013

$53

2014

$63

2015

$66

2016

$77

2017

$87

$13

$38 $17

$105 $47

$22

$126 $56

$27

$67 $28

Commercial

$143

Lodging

$171 $69

$184

Office

Source: U.S. Census Bureau

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INDUSTRY TRENDS Labor Shortage According to the Commercial Construction Index—which is produced by USG Corporation and the U.S. Chamber of Commerce and measures the sentiment and health of the construction sector—a reported 93 percent of contractors expect to see equal or greater profit margins in 2018. While the industry outlook is positive, firms continue to face labor shortage challenges. Approximately 60 percent of firms report difficulty finding skilled workers. Additionally, 91 percent of contractors are at least moderately concerned about the skill level of their workforce. Talent acquisition has been and will continue to be a key motivation for M&A in the industry. Furthermore, companies that are able to attract and retain talented staff and managers are more likely to receive a higher valuation.

Offsite Construction In recent years, growing collaboration between offsite building fabricators and traditional contractors, owners and developers has emerged. The shift to offsite has in large part been driven by the industry’s response to a limited supply of experienced workers and the need to increase productivity. Additionally, offsite construction is in some cases safer than onsite construction and is accommodating to tight project schedules. For example, Google announced in 2017 plans to construct 300 modular apartments in San Francisco and McDonalds announced it would be using offsite construction to open new stores more quickly. Marriott International also announced plans to use offsite construction on 13 percent of its new North American projects in 2017, signing approximately 50 deals for prefabricated bathrooms and guestrooms. Companies collaborating with fabricators more regularly could eventually lead to M&A resulting in combined companies performing traditional contractor and developer operations in addition to offsite construction fabrication.

Reliance on Technology It is expected that as much as $500 million of private capital will be designated by venture and private equity funds for innovative construction technology and service solutions to improve productivity and mitigate risks in the construction and engineering industry over the next several years. For example, 3-D printing, robotics and drones are already being used on worksites to create efficiencies. Many industry players predict that artificial intelligence and the Internet of Things (IOT) will disrupt traditional industry practices in the next several years. A strategy for adopting new technology and embracing technology partners will provide firms with a competitive advantage now and into the future.

Weather Resilient Buildings When major weather events take place on the coasts or in the central U.S., they impact the entire nation. Major events like Hurricane Harvey and Hurricane Irma in 2017 caused insurance rates and building product prices to increase, and labor, as a result of high demand, became more costly. Resilient design and building products such as High Performance Concrete (HPC) that can withstand forces of nature are likely to emerge as a predominate trend for residential and nonresidential projects alike in the next several years. Although resilient buildings require greater upfront investments, they mitigate risks in the short and long term. It is also possible to see reliance on technology, and introduction of applications from the Internet of Things (IOT) and artificial intelligence informing weather resilient buildings with sensors and monitors notifying building owners of threats such as a basement flooding or a leaking roof. Sources: Fortune, Commercial Construction Index, FMI Corporation, Construction Dive

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TRENDS FOR CONSTRUCTION & ENGINEERING FIRMS

290

$30

270

$25

# of Deals

250

$20

230 $15 210 $10

190

$5

170 150

263

241

264

283

278

273

2012

2013

2014

2015

2016

2017

# of Deals

Buyer Installed Building Products, Inc. (NYSE:IBP) NV5 Global, Inc. (NasdaqCM:NVEE) Stantec Inc. (TSX:STN) Pennoni Associates Inc. Terracon Consultants, Inc. Tecta America Corp. Bowman Consulting Group, Ltd. Atwell, LLC American Residential Services, Inc. Jacobs Engineering Group Inc. (NYSE:JEC) TOTAL

$0

Median Transaction Value

Top 10 Buyers by Number of Deals in the Last 6 Years Buyer # of Type Deals

Number of Deals by Buyer Type 2012–2017

% of Total Deals

Strategic 23

1.4%

Strategic Strategic Strategic Strategic Strategic Strategic Strategic Strategic

16 15 10 10 8 7 5 5

1.0% 0.9% 0.6% 0.6% 0.5% 0.4% 0.3% 0.3%

Strategic

5

0.3%

104

6.5%

86.83%

Based on 1,602 Total Deals

7.74% 4.99% 0.44%

Strategic Buyer Undisclosed

Financial Buyer Mixed

Source: S&P Capital IQ

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Median Transaction Value ($ in millions)

Number of Deals & Median Transaction Value 2012–2017

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TRENDS FOR CONSTRUCTION & ENGINEERING FIRMS Public Comparables – Construction Firms Company

Ticker

Price (1/31/18)

Mid Cap Companies ($2B - $10B) Quanta Services, Inc. PWR EMCOR Group, Inc. EME MasTec, Inc. MTZ Valmont Industries, Inc. VMI Dycom Industries, Inc. DY Granite Construction Inc. GVA

$38.49 $81.28 $53.40 $163.60 $116.71 $66.69

52-Week High Low 30.23 $40.11 $30.23 $85.08 $59.76 $54.70 $35.45 $176.35 $140.10 $121.39 $73.95 $68.58 $45.14

Small Cap Companies ($300MM - $2B) Comfort Systems USA FIX Primoris Services Corp PRIM MYR Group Inc. MYRG Matrix Service Company MTRX Sterling Construction STRL IES Holdings, Inc. IESC

$42.60 $26.00 $33.88 $17.90 $13.95 $17.50

$44.80 $30.00 $43.77 $22.60 $18.90 $21.95

Market Cap 6005 $5,974 $4,780 $4,419 $3,699 $3,611 $2,658 Median Average

in millions of dollars

TTM TTM Enterprise EBITDA EV to EV to Revenue EBITDA Value Margin Sales EBITDA 9090.8 677.3 6679.1 $9,091 $677 $6,648 7.5% 0.7x 9.8x $7,624 $447 $4,715 5.9% 0.6x 10.6x $6,346 $607 $5,662 9.6% 0.9x 9.3x $2,706 $353 $4,000 13.0% 1.5x 11.3x $3,024 $390 $4,335 12.9% 1.4x 11.1x $2,855 $139 $2,460 4.9% 0.9x 17.7x $4,685 $418 $4,525 8.5% 0.9x 10.8x $5,274 $435 $4,637 8.9% 1.0x 11.7x

$31.90 $21.83 $23.00 $7.80 $7.75 $14.05

$1,574 $1,338 $558 $579 $377 $373 Median Average Median (Small & Mid Cap) Average (Small & Mid Cap)

$1,719 $2,403 $1,374 $1,096 $872 $817 $1,235 $1,380 $2,554 $3,327

$136 $176 $75 $18 $34 $26 $54 $78 $158 $256

$1,627 $1,435 $640 $475 $404 $378 $557 $826 $2,043 $2,731

7.9% 7.3% 5.4% 1.7% 3.9% 3.2% 4.7% 4.9% 6.6% 6.9%

0.9x 0.6x 0.5x 0.4x 0.5x 0.5x 0.5x 0.6x 0.7x 0.8x

12.0x 8.1x 8.6x 25.8x 11.8x 14.6x 11.9x 13.5x 11.2x 12.6x

Public Comparables – Engineering Firms Company

Ticker

Price (1/31/18)

52-Week High Low

Mid Cap Companies ($2B - $10B) Jacobs Engineering Group JEC Fluor Corporation FLR AECOM ACM Stantec Inc. STN KBR, Inc. KBR

$69.46 $60.70 $39.11 $28.37 $20.34

$72.18 $62.09 $39.90 $29.44 $21.70

Small Cap Companies ($300MM - $2B) Exponent, Inc. EXPO Tutor Perini Corporation TPC VSE Corporation VSEC Ameresco, Inc. AMRC

$74.15 $24.75 $49.55 $8.70

$78.39 $55.75 $32.70 $22.60 $59.90 $34.98 $9.50 $4.80

$49.31 $37.04 $30.15 $23.98 $13.36

Market Cap

in millions of dollars

TTM TTM Enterprise EBITDA EV to EV to Revenue EBITDA Value Margin Sales EBITDA

$9,814 $8,490 $6,218 $3,232 $2,849 Median Average

$10,222 $19,483 $18,756 $2,721 $4,424 $10,222 $11,121

$662 $724 $772 $290 $97 $662 $509

$9,337 $8,254 $9,479 $3,709 $2,841 $8,254 $6,724

6.5% 3.7% 4.1% 10.6% 2.2% 4.1% 5.4%

0.9x 0.4x 0.5x 1.4x 0.6x 0.6x 0.8x

14.1x 11.4x 12.3x 12.8x 29.3x 12.8x 16.0x

$1,914 $1,232 $537 $396 Median Average Median (Small & Mid Cap) Average (Small & Mid Cap)

$330 $4,811 $780 $680 $730 $1,650 $4,424 $6,912

$78 $233 $80 $59 $79 $112 $233 $333

$1,748 $1,900 $738 $769 $1,258 $1,289 $2,841 $4,308

23.8% 4.8% 10.2% 8.7% 9.5% 11.9% 6.5% 8.3%

5.3x 0.4x 0.9x 1.1x 1.0x 1.9x 0.9x 1.3x

22.3x 8.2x 9.3x 13.0x 11.1x 13.2x 12.8x 14.7x

Source: S&P Capital IQ

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TRENDS FOR BUILDING PRODUCTS1 Number of Deals by Subsector 2012–2017 128 103 76

70

59

61

53

49

55

50

2014

2015

2016

2017

64

52

2012

39 2013

114

110

Construction Materials

# of % of Total Deals Deals

Buyer

125 112

Top 10 Buyers by Number of Deals in the Last 6 Years

64

Building Products

STRATEGIC BUYERS U.S. Concrete, Inc. (NasdaqCM:USCR) CRH plc (ISE:CRG) Summit Materials, Inc. (NYSE:SUM) US LBM Holdings, Inc. Summit Materials, LLC Vulcan Materials Company (NYSE:VMC) Ingram Concrete LLC Clio Holdings, LLC Martin Marietta Materials, Inc. (NYSE:MLM) Q.E.P. Co., Inc. (OTCPK:QEPC) Other Strategic Buyers TOTAL STRATEGIC BUYERS FINANCIAL BUYERS UNDISCLOSED MIXED TOTAL

14 10 8 7 6 6 6 5 5 4 513 584 78 28 2 692

2.0% 1.4% 1.2% 1.0% 0.9% 0.9% 0.9% 0.7% 0.7% 0.6% 74.1% 84.4% 11.3% 4.0% 0.3% 100.0%

Public Comparables Company

Ticker

in millions of dollars

Price 52-Week Market TTM TTM Enterprise EBITDA EV to EV to (1/31/18) High Low Cap Revenue EBITDA Value Margin Sales EBITDA Mid Cap Companies ($2B - $10B) 30.23 6005 9090.8 677.3 6679.1 USG Corporation USG $38.66 $41.18 $25.60 $5,469 $3,204 $499 $6,138 15.6% 1.9x 12.3x Armstrong World Industries AWI $62.70 $64.60 $38.45 $3,316 $1,296 $262 $4,057 20.2% 3.1x 15.5x Trex Company, Inc. TREX $111.59 $120.40 $61.57 $3,281 $538 $155 $3,256 28.7% 6.0x 21.1x Simpson Manufacturing SSD $58.74 $61.62 $39.82 $2,779 $977 $175 $2,579 17.9% 2.6x 14.8x Builders FirstSource, Inc. BLDR $21.42 $23.28 $10.66 $2,419 $6,802 $367 $4,261 5.4% 0.6x 11.6x American Woodmark AMWD $135.85 $148.44 $71.75 $2,378 $1,060 $127 $2,176 12.0% 2.1x 17.1x Universal Forest Products UFPI $37.33 $39.58 $25.93 $2,284 $3,835 $228 $2,440 5.9% 0.6x 10.7x Median $1,296 $228 $3,256 15.6% 2.1x 14.8x Average $2,530 $259 $3,558 15.1% 2.4x 14.7x Small Cap Companies ($300MM - $2B) Masonite International DOOR $69.75 $85.30 $50.40 $1,986 $2,006 $230 $2,475 11.5% 1.2x 10.8x Boise Cascade Company BCC $44.45 $45.95 $24.50 $1,714 $4,260 $195 $1,980 4.6% 0.5x 10.2x Interface, Inc. TILE $24.95 $26.25 $17.18 $1,503 $970 $143 $1,660 14.8% 1.7x 11.6x Gibraltar Industries, Inc. ROCK $37.10 $44.90 $25.61 $1,171 $961 $116 $1,173 12.1% 1.2x 10.1x Quanex Building Products NX $20.70 $24.60 $17.45 $726 $867 $92 $948 10.7% 1.1x 10.3x Median $970 $143 $1,660 11.5% 1.2x 10.3x Average $1,812 $155 $1,647 10.7% 1.1x 10.6x Median (Small & Mid Cap) $1,178 $185 $2,458 12.0% 1.5x 11.6x Average (Small & Mid Cap) $2,231 $216 $2,762 13.3% 1.9x 13.0x 1Industry

segment consists of target companies with industry classifications of Construction Materials & Building Products Source: S&P Capital IQ

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INDUSTRY FOCUS

Tony Schneider Managing Director Indianapolis, IN 317.383.4000 [email protected]

Jason Corson Director Springfield, MO 417.865.8701 [email protected]

Jeff Johnson Vice President Denver, CO 303.861.4545 [email protected]

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BKDCF, a wholly owned subsidiary of BKD, LLP, helps companies and stockholders go beyond their numbers by creating value through investment banking solutions that include mergers, acquisitions, sales, recapitalizations, management buyouts and financings. Founded in 1994, BKDCF is staffed with experienced investment bankers and financial analysts. In addition, the firm draws on the resources of BKD with its network of accountants, auditors, tax professionals, business consultants and industry-specific consultants. BKDCF is a member of the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation.

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