Jacobs Engineering Group Inc. History

Company History:

Jacobs Engineering Group Inc. designs, builds, and operates on a contract basis a wide variety of processing plants primarily for use in the petroleum, minerals, and environmental waste industries. Jacobs Engineering was moving in the 1990s from a medium niche in the world of industrial engineering to compete with such giants as Fluor Corporation and Bechtel Corporation on major domestic and international projects. Jacobs Engineering provided an unmatched rate of return on equity for its shareholders in the late 1990s and, most remarkably, carried no long-term debt.

Company Origins

Of Lebanese descent, Joseph J. Jacobs viewed his own entrepreneurial success in the context of the traditional emphasis among the Lebanese on commerce and self-reliance. Jacobs grew up in Brooklyn, New York, the son of a Lebanese notions peddlar who became wealthy during World War I by selling straight razors. When the safety razor was subsequently invented the Jacobs family fortune went downhill and young Joseph Jacobs was forced to scramble for extra dollars wherever he could. With strong encouragement from his mother, Jacobs stayed in school and eventually graduated from the Polytechnic Institute of Brooklyn in 1937 with a degree in engineering.

Unable to find steady work in the midst of the Great Depression, Jacobs began teaching at Polytechnic while working on advanced degrees. In 1942, he earned a doctorate in chemical engineering and took a position as senior chemical engineer at Merck & Company in Rahway, New Jersey, where he was involved in the development of vitamin processing and the manufacture of DDT and penicillin. Strongly influenced by the Lebanese tradition of being in business for oneself, Jacobs started his own business in 1947 following a stint at Chemurgic Corporation in Richmond, California. Founding the Jacobs Engineering Company as both a consulting agency and as a manufacturers' representative for makers of large-scale equipment in the processing industry, Jacobs relocated the firm to Pasadena in anticipation of the phenomenal growth that would soon occur in southern California.

Because of a potential conflict of interest between his role as consultant and his work as a broker, Jacobs took pains to advise his clients of his dual professions and to maintain the highest possible standards of integrity with both groups of business associates. Regarding honesty as one of the basic tenets of his business philosophy, Jacobs told the Newcomen Society in 1980, "Play it straight, deal with honesty and integrity, and you'll get your share. My Lebanese heritage ... is never really very far from me."

At first, the sales work expanded more quickly than the consulting end of the business, and by 1954 Jacobs had added four more men to handle sales while he and Stan Krugman concentrated on design consultation. Among their initial consulting clients were such companies as Eston Chemical, Southwest Potash Company (later AMAX Inc.), and Kaiser Aluminum & Chemical, for which Jacobs Engineering provided varied services including feasibility studies, the analysis of proposed new processes, and the development of flowsheets.

Larger Contracts in the 1950s and 1960s

In 1956 Jacobs Engineering landed its largest contract to date. Kaiser Aluminum, wishing to build a new and quite large alumina plant for which its own in-house engineers lacked the requisite technological experience, asked Jacobs Engineering to assume design responsibilities for the project. Although this was new territory and represented a somewhat daunting venture, Jacobs Engineering did the job, hiring an extra 20 designers to help with the complex project, and Kaiser built it as specified and to the satisfaction of everyone involved. Moreover, a decade later when Kaiser wanted to expand the plant threefold they called in Jacobs Engineering to come up with the additional designs. In 1960, Jacobs Engineering won another important contract, this time from Southwest Potash for the design and construction of a potash flotation plant. Until this point in the company's history, Jacobs Engineering had not taken on any construction work, regarding the industry as unprofessional. However, the job for Southwest Potash dispelled that idea for Joseph Jacobs, and his company then offered a full range of both engineering and construction services.

A near disaster in 1962 illustrated the qualities that enabled Jacobs Engineering to grow from a tiny local outfit to one of international importance. The company built another plant for Southwest Potash, this one in Vicksburg, Mississippi, which was equipped with a novel process for making potassium nitrate. When the plant developed serious problems shortly after start-up, Jacobs and a team of his top engineers moved to Vicksburg for six months so that the problems could be corrected as quickly as possible. After months of intensive repair work the plant proved to be of sound design, making Southwest Potash a happy customer and adding to Jacobs Engineering's growing reputation for going the extra distance to achieve its clients' full satisfaction. It was a demonstration of commitment and agility that few of the larger companies in the field could have matched, and on such quality performances Jacobs Engineering based its growth.

Parlaying its reputation for hard work and integrity into a period of sustained growth during the 1960s, Jacobs Engineering snatched smaller contracts away from the industry's larger competitors and convinced larger potential customers of their capabilities. By 1967 Jacobs Engineering had opened offices around the country, encouraging each to emulate the main office's entrepreneurial bent and willingness to take risks and assume responsibility. Joseph Jacobs' hope was that each of the branch offices would duplicate the parent company's own strengths, and by and large they were able to do so. By 1970 Jacobs Engineering had grown to the point where it was advantageous to take the company public. Primarily as a way of rewarding employees with stock options, Jacobs Engineering went public; however, the founder's family maintained control of approximately 40 percent of the stock, and the company tried to retain the atmosphere of a family-run business.

Continued Expansion in the 1970s

Sales in 1972 reached $70 million and Jacobs Engineering began to pursue international as well as domestic contracts. As early as 1964, Jacobs Engineering had been interested in a projected potash recovery plant to be built by Jordan on the Dead Sea. Trading on the experience gained in working for Southwest Potash, Jacobs Engineering was selected to prepare a technical evaluation of the project and, after a decade-long hiatus due to the Arab-Israeli war of 1967, eventually signed a contract to design and build a $450 million plant for the Jordanian government. According to Business Week, Joseph Jacobs, speaking fluent Arabic, was instrumental in landing this huge job. The project was handled by Jacobs Engineering's international division based in Dublin, Ireland, which subcontracted much of the heavy construction work to a British company. Because Jacobs Engineering handled the assignment without a hitch, it was asked upon completion in the late 1970s to operate the plant as well.

Merging with the Pace Companies of Houston, Texas, in 1974, Jacobs Engineering recorded skyrocketing sales of $250 million in fiscal 1977, quadruple that of five years earlier. The Pace Companies brought to Jacobs Engineering a strong presence in the Gulf Coast industries of petroleum refining and petrochemicals, which remained staple ingredients of Jacobs Engineering's revenue mix thereafter. With the addition of Pace and its resounding success in the Middle East, Jacobs (which changed its name to Jacobs Engineering Group) set its sights on yet bigger game, hoping one day to rival industry leaders such as Fluor and Bechtel.

Believing that his company had become too large to remain under his personal guidance, Joseph Jacobs made several attempts in the late 1970s to delegate executive authority along the lines favored by his much larger competitors. In 1976 Jacobs hired the first of a series of company presidents and later added a string of executive vice-presidents intended to help the firm pursue further large international contracts like the Jordanian potash project. "Jacobs' concern with management may be coming just in time," wrote Business Week, a sentiment shared by those who believed that a single entrepreneur could not handle the administration of a mature corporation.

Subsequent events proved that thinking wrong, at least in the case of Jacobs Engineering. As Joseph Jacobs reduced his involvement in day-to-day management, the company went after ever larger contracts just as the country plunged into the severe recession of 1982-83. Profits shrank and then disappeared in a small but steady wave of red ink, while revenues fell by an astonishing 50 percent to around $200 million in 1984. The cause of this disaster was twofold. The sudden infusion of extra management saddled the company with a high overhead; worse yet, the enlarged executive staff naturally sought to justify its existence by a corresponding increase in revenues. Jacobs Engineering found itself bidding on so-called fixed-price contracts, as opposed to cost-reimbursable jobs favored by Joseph Jacobs. In the weak economic conditions, competition was brutal for the available fixed-price contracts, which typically included the gigantic engineering projects now pursued by Jacobs Engineering. Thus, Jacobs Engineering was awarded a smaller number of larger-than-average contracts yielding little if any profit.

Scaling Back in the 1980s

Distressed by swollen overhead costs and managerial complacency, in 1985 Joseph Jacobs came "roaring back from retirement," as Forbes put it, to save his once gleaming creation. The chairman fired almost half of the company's 2,300 employees, including 8 of 14 vice-presidents, and generally returned the company to its old-fashioned methods of the previous three decades--a time when "we made all our decisions standing in the hall," as Jacobs told ENR magazine. Starting with a fresh determination not to bid on fixed-price contracts regardless of their appeal, Jacobs Engineering ceded the biggest projects to its bigger rivals, concentrating instead on medium-sized process plants and specialty construction, such as a research and development center for Lockheed Missiles and Space Company in Austin, Texas, a $65 million project, and an addition to the Community Hospital of San Gabriel, California, costing around $20 million. In particular, Jacobs Engineering began lobbying for the many projects suddenly available in the area of environmental safety and clean-up, which typically require a high level of technical competence but not necessarily a contractor of great size. In other words, Joseph Jacobs left to his competitors the battle for mere revenue dollar volume and restored his company's emphasis on what he called the "net return on brainpower"--a ratio based on the amount of profit divided by number of employees to measure the profitable productivity per each of his highly skilled engineers.

The results of this program were astonishing. Between 1987 and 1991 Jacobs Engineering returned an industry best 22.4 percent on shareholders equity while also managing to increase sales by an average of 37 percent annually, which also topped the industry by a wide margin--all this without incurring any long-term debt. Annual reports in the early 1990s revealed that the company had literally zero debt; according to a 1992 Forbes index of leading engineering firms which listed the median debt to capital ratio as 25 percent, with several companies reporting figures well over 40 percent, Jacobs Engineering's ratio was given as 0.0 percent.

In the early 1990s, Jacobs Engineering Group enjoyed a balanced sales mix, having long since shed its former dependence on the petroleum industry. Again, with the emphasis on smaller, high-tech, higher margin contracts, Jacobs Engineering provided a broad variety of engineering services. From its earlier work in the minerals, fertilizers, and petrochemical segments, Jacobs Engineering had diversified into the areas of pharmaceuticals, biotechnology, and sterile facilities, along with the already mentioned opportunities in environmental protection projects. The company was the third largest domestic hazardous waste contractor, with 25 percent of its professional staff dedicated to environmentally driven projects. A 1987 buyout of Robert E. McKee Corporation (formerly the construction arm of Santa Fe Southern Pacific Corporation) gave the company added strength in the construction end of its business.

In 1992 Jacobs stepped down as CEO, and Noel Watson, an employee at Jacobs Engineering for 32 years, replaced him at the head of the company. Watson focused the company on two of its most profitable and growing segments: government-financed environmental cleanup jobs and facilities design and construction for the biopharmaceutical industry. In 1993 ten percent of Jacobs' annual revenue came from government contracts, but those contracts generated 20 percent of the company's pretax profits. Jacobs pursued this area in the mid-1990s with several government projects. In a joint venture with industry leader Fluor, Jacobs was awarded a contract in 1993 to clean up former uranium production facilities in Fernold, Ohio. The $2.2 billion contract was expected to generate as much as $40 million in profit for Jacobs. The company was also developing clean-up plans with the U.S. Navy for several sites in the southwestern United States and with the Department of Energy for a weapons plant in Colorado. With clean-ups at military bases and weapons sites on the rise, Jacobs anticipated its environmental division would grow 20 to 30 percent a year throughout the 1990s.

Expansion in the 1990s

Watson also targeted the biotech industry for further investment. As the young biotech industry matured in the 1990s, Jacobs Engineering wanted to be in the position to build the specialized plants they would need for product development To that end, Jacobs purchased Triad Technologies and Sigel Group in the early 1990s, two companies that expanded Jacobs' expertise in designing and constructing biotechnology facilities.

Once again aiming to compete with the industry leaders, Jacobs needed a stronger presence internationally. With foreign contracts accounting for only 16 percent of Jacobs' annual revenues in 1992, Jacobs lagged far behind the overseas activity of rivals Foster Wheeler, Fluor, and Bechtel. To narrow the gap, Jacobs purchased the U.K. companies H&G Process Contracting and H&G Contractors in 1993. Humphreys & Glasgow, as the companies were collectively known, were among Europe's most widely recognized contractors.

By 1993 the company had fully recovered from the hard years of the mid-1980s. Not only did the company earn $6.5 million on revenues of $26.6 million in fiscal 1992, but it also held a record backlog of $1.8 billion in contracted business.

Some of that profitability went toward funding further acquisitions. In 1994 Jacobs bought CRS Sirrine Engineers and CRSS Constructors for $38 million. The purchase moved Jacobs Engineering into design and construction for the paper and semiconductor industries. Although the company paused to catch its breath in 1995 and make headway on its backlog, in 1996 Jacobs' acquisitions spree continued. That year it further expanded its presence in Europe by purchasing 49 percent of Serete Group, an engineering company that primarily served in the government sector and specialized in communications. In 1997 Jacobs formed a joint venture with Stone & Webster that would also extend its reach internationally. Named Stone & Webster/Humphreys & Glasgow Ltd., the venture would design and construct power plants in India. The same year, Jacobs purchased CPR Engineering and incorporated the specialist in paper plant engineering as a division.

As Jacobs Engineering grew in size, it maintained an impressive performance record. In 1997 it boasted an almost 16 percent five-year return on capital, and it beat out its rivals in terms of sales growth: a five-year average of 12.4 percent. For fiscal year 1998 the company reported record revenues of $2.1 billion and record net income of $54 million. The company expected a continued rise in revenues and income based on its backlog of $3.33 billion.

Late in 1998 Jacobs was discussing a possible merger with Sverdrup Corporation; if the merger were accomplished the resulting company would have 1998 revenues of approximately $3 billion. According to Watson, "Together, we would immediately emerge as a national leader in three very important and expanding markets: public sector buildings, civil engineering and infrastructure, and federal sector operations and maintenance."

Principal Subsidiaries: Jacobs Constructors, Inc.; J.E. Merit Constructors, Inc.; Robert E. McKee, Inc.; Jacobs Applied Technology, Inc.; The Pace Consultants, Inc.; Triad Technologies, Inc.; Payne & Keller Company, Inc.

Further Reading:

• Barnett, Chris, "Managing by Instinct," Nation's Business, December, 1985.
• "Jacobs Buys Santa Fe's McKee," ENR, July 30, 1987.
• "Jacobs Engineering's Goal: Quintupling by 1986," ENR, August 13, 1981.
• "Jacobs Engineering Enters Merger Talks with Sverdrup Corp.," Wall Street Journal, November 6, 1998, p. A8.
• "Jacobs Eyes Smaller Jobs," ENR, December 2, 1982.
• Jacobs, Joseph J., Jacobs Engineering Group Inc.: A Story of Pride, Reputation and Integrity, New York: Newcomen Society in North America, 1980.
• "A Loner Relaxes His Grip," Business Week, November 21, 1977.
• Lubove, Seth, "Thank You, Jack Welch," Forbes, January 13, 1997, pp. 102-03.
• Poole, Claire, "Faster, Better, Cheaper," Forbes, January 6, 1992.
• "Potash Project Taps Dead Sea Salts," ENR, May 28, 1981.
• Taylor, John H., "After the Pink Slips," Forbes, August 2, 1993, p. 51.

Source: International Directory of Company Histories, Vol. 26. St. James Press, 1999.

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