San Gabriel Valley Engineering Giants Regroup for Economic Recovery

In retrospect, Ed Lorenzen says today, he should have known things were not going well at the Pasadena-based engineering company where he was working in 1982.

“We should have seen the handwriting on the wall,” said Lorenzen, a project engineer. “We started losing little benefits. They cut our vacation. The coffee pots started disappearing from the counters.”

Lorenzen’s employer, Jacobs Engineering Group Inc., was plunging into the worst slump the engineering and construction industry has faced since the Depression. Within a few months, Lorenzen was laid off from his $47,700-a-year job and was collecting $166 a week in unemployment insurance.

Lorenzen, 49, said his dismissal after eight years with the company came as no surprise, but it did hurt. “I felt a bit of resentment,” he said. “You know, why me and not the other guy?”

A Lot of Other Guys

There were a lot of other guys: Jacobs eventually furloughed more than 800 of its 2,300 employees.

Today, Lorenzen is back at Jacobs, and both he and his employer say they’ve weathered the worst of a slump that slashed worldwide revenues in the industry by an estimated 45% from their peak three years ago.

“We’re doing new things,” Lorenzen said. “We’re learning a new industry, a new business. It’s small projects instead of large ones. We have to be more exacting, use more ingenuity and do things a little faster. It’s making everyone more flexible.”

Jacobs is not alone in its efforts to rebound. Two other San Gabriel Valley-based engineering and construction companies--the Parsons Corp. and C. F. Braun & Co.--also say that the worst is over and that they are attempting to dig their way out of the slump.

Among Industry’s Top 50

The three firms, which are among the industry’s leading 50 in the nation and do substantial domestic and international business, have reduced their collective payrolls by 2,800 workers--from the 16,900 they employed at their zenith a few years ago to 14,100 today. Engineers, the backbone of the industry, constitute up to 50% of the companies’ overall work forces.

“In engineering,” said Braun President Jim Kelly, “talent is all we have to sell.”

The three valley companies, especially Braun and Jacobs, have always derived a substantial portion of their revenues from work on design and construction of large processing and refining plants for energy companies. Parsons, for example, handled design, engineering and construction for 60% of the oil and gas facilities at Prudhoe Bay in Alaska. And Braun last year put the finishing touches on a $2-billion oil refinery in Kuwait.

But when the energy industry nose-dived a few years ago when demand for oil began declining and plans for alternative energy projects such as coal and shale oil plants were canceled or postponed. Because the energy industry has remained in the doldrums, the three companies have had to rethink the way they had made money.

Forced to Diversity

Moreover, top executives of the three companies acknowledged, the downturn has triggered some major structural changes in the industry. Companies have had to diversify and streamline their operations in order to survive and prosper in what has become an increasingly competitive business environment here and abroad.

The shakeup has forced the three companies to seek work in areas where they previously had little or no experience: electrical cogeneration plants, sewage treatment plants, hazardous-waste recovery facilities and specialized research and production buildings for high technology industries.

Some observers say the hard times haven’t ended. “I still believe the shakeout isn’t over,” said Mark Altman, an analyst who watches the industry for PaineWebber Inc. “Everyone is trying to downsize, to do more with fewer people and cut corporate overhead.”

Parsons, the largest of the trio and the fourth-largest engineering and construction operation in the country, with $7.5 billion in 1984 contract awards, has fared the best during the slump because of its size and because it already was diversifying when the hard times hit, said Stanley Goldhaber, vice president in charge of business development.

Parsons Reported Profits

In the depths of the downturn, Parsons reported profits of more than $196 million over the three-year period of 1981-83. The Pasadena-based company showed a profit in 1984, Goldhaber said, but no longer discloses exact figures because it became a privately held company last year.

However, the payroll cuts have been deep. At one time the company had laid off 30% of its 10,000 employees. Parsons is back up to 9,000 workers, Goldhaber said, but has no plans for substantial hiring increases.

“There has always been a cycle of demands,” Goldhaber said. “Build and wait. It became obvious many years ago that to ride out the cycles we had to have a leveling effect so we planned strategies for that approach.”

In the late 1970s, Parsons acquired De Leuw, Cather & Co., a transportation engineering subsidiary, which heads the consortium that would build the planned Los Angeles Metro Rail if it is constructed. And three years ago Parsons purchased an environmental engineering firm. It recently won a contract to develop a $450-million water conservation program for the Imperial Irrigation District in El Centro.

Bumpier Recovery Road

The fortunes of Jacobs and Braun, however, have been more closely tied to the energy industry and their road to recovery has been bumpier.

After reporting two straight years of losses, publicly held Jacobs Engineering reported a $635,000 profit on revenues of $55.2 million in the quarter ending March 31, its second consecutive quarterly gain. Revenues had plunged from $369.6 million in fiscal 1982 to $177.8 million last year and the company went from $12.7 million in profits to $11.7 million in operating losses.

Jacobs, ranked as the 47th largest engineering and construction company in the country, trimmed its staff from 2,300 employees to a low of 1,487 and has sinced grown to 1,700, but does not expect to do any significant hiring soon. “We’ve seen recessions before, two-month cycles at the bottom,” said Gary Allison, executive vice president of Jacobs. “We figured the projects would return in three to six months so we kept a lot of staff. It came down and like a lead ball, hit the concrete floor and stayed there, not for three months, but for two years.”

Kuwaiti Connection

Under foreign ownership, Braun is a division of Santa Fe International Corp., which is owned by the government-owned Kuwait Petroleum Corp. It does not reveal earnings figures, but there are indications that the company is still having difficulties. The value of its new contracts dropped to $690 million last year from $3.3 billion in 1983. Kelly said the Alhambra-based company expects no increase in 1985 profits over 1984 and expectes revenues to slip 15% to 20% from last year’s levels. Braun was ranked the 33rd largest engineering and construction firm in the country last year.

Unlike past years, improving profit margins and growing work backlogs do not necessarily translate into significantly more jobs. Kelly said Braun has about 3,200 employees and plans to trim another 200 to 500 workers to remain “mean and lean.”

“We have no illusions about being a Bechtel (an industry giant), but we’ve trimmed our fat and we’re going to get our share of the business,” Kelly said. “We’re not sitting and watching the world go by.”

Meanwhile, the companies are scrambling to diversify. Allison said Jacobs is building a 33-megawatt cogeneration plant in Bakersfield and has secured a technical assistance contract on a federal project to clean up low-level nuclear waste at 23 sites around the country. Braun is in the final stages of negotiations on a contract with a large chemical manufacturing complex in Louisiana for a cogeneration plant.

Building Plants in China

Jacobs and Braun also are vying for more overseas contracts to offset the slack in orders from the domestic energy industry. Both are building plants in China. Braun is building a diamonium phosphate chemical plant at Qinhuangdao near Peking, and Jacobs is constructing a fertilizer plant in another part of the country.

Like other U.S. companies, Jacobs and Braun are facing increased foreign competition, particularly from Europe and Japan. And they are finding it advantageous to engage in joint ventures with foreign companies and governments to win contracts. Braun, for instance, is working with the government of the People’s Republic of China on the diamonium phosphate plant.

“The top 400 companies in the 1960s and 1970s used to be all American,” said Kelly, who was hired as the president of Braun six months ago. “Now there’s not enough work and too many companies.”

The valley’s big three, like their counterparts elsewhere, are finding that clients are asking for help with financing of projects, which means they must share more of the risk. Goldhaber said that in 1983, Parsons became the first company to arrange private financing for a municipal project, a waste-water treatment plant near Phoenix, Ariz.

Once ‘Fat and Happy’

Energy and construction firms used to secure most contracts on a “cost-plus” basis, which literally built in profits and kept the companies “fat and happy,” Kelly said. These days, they more often must compete in the dicier world of “lump sum” bidding, where profits depend on the accuracy of the bids and the efficiency of job performance.

To reduce labor costs and speed up projects, the companies have increased the use of computer-aided design and drafting equipment and have computerized more of their operations.

“Something is happening in the business,” said Jacobs’ Allison. “The image of the traditional company conjured up a guy with a hard hat and calluses. In the 1990s, the profitable companies won’t be run by those guys. The profitable companies will be run by Stanford MBA’s tuned into personal computers.”

But company executives say they are optimistic about the future.

“In the next two to three years,” Allison predicted, “the progress will be substantial.”

Others Less Certain

Others, however, are not so certain.

“Diversification,” said Altman, a vice president of PaineWebber. “Everyone’s trying to do it, so it makes it tough to make money.”

Indeed, even in an industry accustomed to peaks and valleys, the swiftness and depth of the slide has left many with the jitters.

Because the heavy engineering and construction business often deals with projects valued at $100 million or more, as much as a year can pass between the time a contract is signed and when work begins. As the industry hit its peak in the early 1980s, orders for new work fell dramatically. The companies were caught with huge payrolls and small work backlogs, which produced the recession that is just now showing signs of easing.

“From 1979 to 1982, it probably was the most dynamic industry in the world,” said Steven Milakov, a former corporate communications director for Jacobs who was laid off and now works for a defense contractor. “The industry was looking down the barrel of an energy (shortage) crisis and billions of dollars in (plant) construction were projected in every area the company was doing business. It was a period of tremendous growth and a lot of fun and it was a helluva ride.

‘Parasitic Industry’

“But people did not adequately predict the impact that energy conservation would have and its fallout on the engineering construction business. It’s a parasitic industry. You go where the contracts go--synfuels, coal. All this stuff suddenly didn’t look so promising. And then there was the (economic) downturn in general.

“These people had never faced such serious problems. I don’t think anybody was psychologically willing to accept how deep these cuts were going. They didn’t know what it was like to lose money.”

Lorenzen, who was project engineer on a fertilizer plant when he was laid off, found out what it was like. He was out of work for nearly two months and soon would have been strapped for cash, but his wife was able to increase her earnings. With her higher wages and his unemployment benefits, they managed to meet the mortgage on their Pasadena condominium and pay other bills. Eventually, he took a job with a Los Angeles architectural firm at 30% less pay than he had made at Jacobs.

But Lorenzen wanted to return to Jacobs, so he kept in contact with his former boss. Eleven months after his layoff, he was rehired at a higher salary to help design a small chemical plant.

“I’m happy to be back,” he said.