Kellogg Brown & Root, Inc

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Kellogg Brown & Root, Inc.

601 Jefferson Street
Houston, Texas 77002
U.S.A.
Telephone: (713) 753-2000
Fax: (713) 753-5353
Web site: http://www.halliburton.com

Wholly Owned Subsidiary of Halliburton Company
Incorporated: 1929 as Brown & Root, Inc.
Employees: 64,000
Sales: $9.27 billion (2003)
NAIC: 541330 Engineering Services; 23493 Industrial Nonbuilding Structure Construction; 23499 All Other Heavy Construction

Kellogg Brown & Root, Inc. (KBR) operates as the engineering and construction arm of Halliburton Company. The group designs, builds, and provides maintenance services for liquefied natural gas plants, refining and processing plants, production facilities, and onshore and offshore pipelines. Its non-energy business provides engineering and construction services to governments and civil infrastructure customers. KBR plays a large role as a private military company (PMC) and has been contracted to provide a host of military support services in Iraq. Because of a $4 billion asbestos settlement, parent Halliburton has placed KBR under bankruptcy protection. The company's government services business is not included in the filing.

Origins

With the financial backing of his brother-in-law Dan Root, Herman Brown started a road building company named Brown & Root in 1919 with mortgaged wagons and mules. Indeed, it was a meager beginning for a man who would ultimately spearhead some of the largest and most difficult construction projects in modern history and create one of the world's largest construction and engineering firms.

In considerable debt from setting up his business, Brown found work where he could before landing his first road building job in Freestone, Texas. This opportunity led to other road building and earth-moving work elsewhere as Brown gradually tried to make enough money to pay for the mules and wagons which he later described as a "worn-out … three-fresno and plow outfit." Despite Brown's modest equipment, three years after commencing business he was able to win the contracts to rebuild four bridges that had been washed out by a flood in Central Texas. This project represented the fledgling company's first big break, but it also posed a formidable challenge. One of the bridges would require underwater blasting to set its piers, a task for which Brown had no experience; nevertheless, he was commissioned with superintending its execution. This project proved to be the first of many such challenges for Herman Brown and his company.

At many times in Brown & Root's history, the company's employees and management would find themselves either initially lacking the experience to complete a task or being the first group to undertake a certain endeavor. However, cast in the role of pioneer, Brown & Root rose to the occasion in an overwhelming majority of these situations, successfully navigating through uncharted waters and completing what theretofore had been considered improbable. For Brown, the solution to this first problem came from his younger brother George.

Possessing a degree in mining from the Colorado School of Mines, George Brown was home convalescing from a mining accident when his brother approached him about Brown & Root's contracts to rebuild the four bridges. The elder Brown convinced his brother to head the project, thereby resolving the underwater blasting issue and bringing George Brown into the Brown & Root fold. Beginning in 1922, the two brothers would work together for the next 40 years, taking Brown & Root to new heights in each succeeding decade and using their contrasting personalities to steward the company through the many challenges that lay waiting ahead. In meeting these challenges, Herman Brown would be remembered as a "working man's man," personally visiting job sites throughout the year, wherever they were, often more inclined to spend time with his employees than with his fellow executives. His brother George was just the opposite, despite his practical experience in mining. George Brown functioned best as Brown & Root's salesman, able to negotiate over the telephone and influence others with his outgoing personality, talents that were best applied to pursuing Brown & Root's business opportunities. With these two complementary styles, George and Herman Brown successfully concluded the reconstruction of the four bridges in Central Texas, opened an office in Houston in 1926, and then spent the remainder of the decade slowly expanding their business largely through work obtained from building contracts awarded by the State of Texas.

Securing Contracts in the 1930s and 1940s

Despite the promising beginning that Brown & Root had shown during the 1920s, two calamities struck at the end of the decade which had a profound effect on the company. In 1929, Dan Root, Herman and George Brown's brother-in-law, died, the same year that the stock market crash precipitated the Great Depression, sending the country into a deleterious decade-long economic slide. The death of Root, who had been instrumental in the formation of the company ten years earlier, caused the company to take stock of its situation. The Brown brothers purchased Root's interest in the company and then incorporated as Brown & Root, Inc. that same year, marking a new beginning for the company on the eve of the devastating economic climate of the 1930s.

With the onset of the depression, the number of state-funded construction projects slowed to a trickle, forcing the two brothers to pursue other work, including hauling garbage for the city of Houston. However, Brown & Root was able to escape from the grip of the depression in a relatively short time, securing a contract in 1934 for the construction of a board road for Humble Oil Company in Roanoke, Louisiana. The contract was significant for two reasons: first, it extended the company's geographic presence from Texas into Louisiana, and second, it formed the first connection with a company that 30 years later would purchase Brown & Root. Humble Oil, the client for Brown & Root's board road contract, was one of seven major oil companies that owned a company then known as Halliburton Oil Well Cementing Company. This business was later renamed the Halliburton Company, and it would become the parent company of Brown & Root in the 1960s.

Of more immediate significance to the two brothers, though, was a project awarded to the company in 1936, when Brown & Root secured the construction contract for the Marshall Ford Dam. This venture marked the company's entry into heavy construction and the power industry and proved to be a defining moment in the company's history. Located west of Austin, the Marshall Ford Dam, later renamed the Mansfield Dam, would become the largest structure of its kind in Texas, measuring nearly a mile wide and standing 25 stories high. This project, which lasted five years and took two million tons of concrete to complete, elevated Brown & Root's status from that of a constructor of moderately sized projects to a company capable of taking on the largest types of construction projects in the world.

The success of the Marshall Dam project led to more large-scale, government-funded work four years later when Brown & Root was awarded a contract to help build a $90-million naval air station at Corpus Christi, Texas, in 1940. The construction of the Corpus Christi Naval Air Station was prompted by the looming threat of World War II, and as the United States took steps toward entering the conflict, Brown & Root unexpectedly found itself at the center of the government's plans for armament. In addition to the Corpus Christi project, the U.S. Navy approached George Brown in 1941 about taking over the contract to build four submarine chasers, a venture that would pay the company $640,000 for each vessel. Similar to the company's early years, Brown & Root was faced with a project that called for skills that it did not possess.

With no previous experience in ship building, the Brown brothers formed Brown Shipbuilding Company and began work on the four submarine chasers stipulated in the Navy contract. Their marked success with the first four led to a contract for four additional submarine chasers, then 12 more, finally resulting in an order in early 1942 for a medium-sized fleet of destroyer escorts which yielded Brown & Root $3.3 million for each ship. By the end of the war, George and Herman Brown's uncertain foray into ship building had resulted in 359 combat ships, 12 pursuit craft, 307 landing craft, 36 rocket-firing boats, and four salvage boats being constructed for the U.S. Navy, a production total worth $500 million.

Brown & Root emerged from the war as a major U.S. construction company. Its success with the Marshall Ford Dam, the Corpus Christi Naval Station, and its impressive wartime work had propelled the company into the upper echelon of the country's construction firms, a remarkable achievement for a business that as recently as 20 years earlier was subsisting on constructing wooden roads to support oil field work.

Postwar Expansion

During the postwar period, Brown & Root continued to increase the magnitude and scope of its construction and engineering projects, pioneering a string of industry firsts. In 1946, the company received its first overseas assignment when it was selected as managing partner for the reconstruction of Guam, which had incurred severe damage during World War II. Also in that year, Brown & Root began work on its first major engineering project, a contract for a chlorine caustic plant on the Houston Ship Canal for Diamond Alkali, and was awarded its first paper-mill construction contract from Southland Paper in Lufkin, Texas. The following year, Brown & Root secured a contract from Kerr-McGee to design and build the world's first commercial out-of-sight-of-land oil drilling platform, a pivotal and historic step for a company that would become heavily involved in enabling the off-shore development of oil and gas.

Company Perspectives:

Service quality is referred to at KBR as performance excellence. A different name, but the meaning is the same: innovation and knowledge management, excellent execution, predictable results, and customer value.

During the 1950s, Brown & Root began to increase its presence outside the United States, laying a foundation for international expansion that would become an integral component of the company's future growth. In 1951, the company opened an office near Edmonton, Alberta, to facilitate the construction of a petrochemical and synthetic fiber plant. One year later, Brown & Root expanded to the southern hemisphere when it began building a series of gas injection plants on Lake Maracaibo, Venezuela. After extending its presence into Canada and Venezuela, Brown & Root tackled two enormous projects in 1958, building the Bhumiphol Dam in Thailand and the Tantangara Dam and Tunnel for the Snowy Mountains Hydroelectric Authority in Australia. The company ended its first decade of international expansion by opening an office in London with the expectation of gaining contracts from anticipated oil and gas exploration in the North Sea.

In the meantime, Brown & Root also continued to augment the scope of its domestic operations. In 1951, the company designed and built a major petrochemical facility for the Celanese Corporation; one year later, it was awarded its first $100-million contract when it constructed a polyethylene plant in Seadrift, Texas, for Union Carbide. This venture expanded Brown & Root's diversification into petroleum and chemical activities and added customers such as Ciba Giegy and DuPont to the company's growing list of clients.

Going into the 1960s, Brown & Root had gained the reputation of an engineering and construction firm able to take on the largest of construction projects. As the company prepared for the challenges of the 1960s, it would enhance this reputation by becoming highly regarded for its technical expertise. Two projects in particular greatly contributed to this perspective. In 1960, the company became involved in a government project for the National Science Foundation dubbed Project Mohole, the objective of which was to drill in 14,000 feet of water and penetrate 21,000 feet below the earth's crust. The following year, Brown & Root followed up this ambitious foray into marine engineering technology by being selected by the National Aeronautics and Space Administration (NASA) as architect-engineer for the Manned Spacecraft Center in Houston.

The Halliburton Purchase: 1962–63

While Brown & Root was taking on these two signal projects, the company's founder was suffering from serious health problems. Herman Brown had undergone heart surgery in 1960, and in its aftermath his prognosis grew increasingly bleak, causing concern over the company's future. A tightly held private firm up to this point, executives resolved to find a company to purchase a controlling interest in Brown & Root as Brown's health worsened in 1961 and 1962. Against this backdrop, Brown & Root was approached by Halliburton Company, an oil field services concern that brought companies with expertise in the oil and gas industry under its corporate umbrella. Since Brown & Root fit Halliburton's acquisition criteria and the company itself was agreeable to becoming part of Halliburton, acquisition negotiations between the two companies commenced in autumn 1962. The deal was completed in November, shortly after Brown's death, with Halliburton paying $32.6 million for roughly 95 percent of Brown & Root up front, then acquiring the remaining 5 percent in June 1963.

George Brown was elected to Halliburton's board of directors concurrent with Brown & Root's sale, and he continued as the company's president and chief executive officer for another year. In this new era, the company fared as well as it had during its past, becoming, like its parent company, increasingly involved in construction and engineering projects for the oil and gas industry. In 1966, Brown & Root laid the first marine pipeline in the North Sea; two years later, the company laid and buried the world's first 48-inch pipeline in offshore Kuwait.

During the 1970s, Brown & Root would use the talents it had first gained during the construction of the Marshall Ford Dam between 1936 and 1941 to build power generating plants. In 1977 alone, the company placed five electric plants into operation, part of Brown & Root's decade-long effort to meet the rising demand for electric power. Among the decade's other highlights were the design and construction in 1972 of two fabrication facilities, Highland Fabricators in Nigg, Scotland, and Sunda Straits Fabrication Yard in Indonesia. These projects positioned Brown & Root for offshore platform work and the design of Chahbahar Baval Port for the Iranian Imperial Navy in 1975.

Struggles and Success: Late 1970s to the Mid-1990s

After decades of remarkable success, Brown & Root's fortunes began to change in the late 1970s. In January 1977, the company announced that its documents pertaining to offshore oil platform activities had been subpoenaed by a Federal grand jury to investigate possible antitrust charges. Nine days after the announcement, Foster Parker, George Brown's hand-picked successor to the post of president and chief executive officer of Brown & Root, was discovered dead in his bedroom with a bullet wound in his right temple. No confirmed connection between the grand jury's inquiry and Parker's apparent suicide was immediately made, but nearly two years later, in December 1978, Brown & Root pleaded no contest to antitrust charges and paid $90 million to settle related civil claims. The allegations of price fixing, led, a short time later, to a protracted legal battle with the proprietors of the South Texas Nuclear Project, ending in a $750 million settlement paid by Brown & Root in 1985.

Key Dates:

1919:: Herman Brown starts a road building company named Brown & Root with start-up money from Dan Root.
1929:: Root dies; brothers Herman and George Brown incorporate as Brown & Root Inc.
1941:: The U.S. Navy begins contracting with the firm.
1961:: The company becomes the architect-engineer for NASA's Manned Spacecraft Center.
1962:: Halliburton Company acquires Brown & Root.
1998:: M.W. Kellogg Company merges with Brown & Root to form Kellogg Brown & Root (KBR).
2002:: Halliburton forms two distinct business groups with KBR overseeing its engineering and construction business.
2003:: Halliburton places KBR into bankruptcy as a result of a $4 billion asbestos settlement.

While it was embroiled in legal turmoil, Brown & Root continued to benefit from large construction and engineering projects, completing the Eisenhower Tunnel at Loveland Pass, Colorado, in 1979 and installing the world's first guyed tower platform in 1,200 feet of water in the Gulf of Mexico in 1984. In 1986, Brown & Root completed a $475 million joint-venture project to build a military base for the U.S. Navy and Air Force on the island of Diego Garcia in the Indian Ocean. The same year, it formed Brown & Root Services Corporation to obtain government operations and maintenance work.

As Brown & Root maneuvered through the late 1980s, it strengthened its construction and engineering abilities with the acquisition of two companies: Howard Humphreys, a civil consulting company with expertise in water, dams, roads, bridges, buildings, and tunneling, in 1987, and CF Braun, a process engineering firm, in 1989. Entering the 1990s, Brown & Root extended its presence into Eastern Europe, completed its first major project off the shore of China, and participated in the reconstruction of Kuwait following the Persian Gulf War.

After strengthening its position in Eastern Europe in 1993 by forming Brown & Root Skoda in the Czech Republic through a joint venture, the company entered the mid-1990s intent on increasing its operations in the region, where opportunities in oil and gas development abounded. The company's future called for Brown & Root personnel to engage in large-scale, sophisticated construction and engineering projects across the globe. As Brown & Root moved toward this future, its remarkable rise from a small company boasting no more than mortgaged mules and wagons to one of the largest construction and engineering concerns in the world instilled confidence that the years ahead would represent a continuation of its storied past.

Problems Arise in the Late 1990s and Beyond

The years leading into the late 1990s and beyond, however, proved to be perhaps the biggest test of the company's resolve as it was catapulted into the public spotlight due to its relationship with Halliburton. Brown & Root's parent had been growing significantly over the past several years through a series of acquisitions made under the leadership of Dick Cheney, who was named chairman, CEO, and president of Halliburton in 1995. He had served as U.S. Secretary of Defense under President George H.W. Bush and would eventually leave Halliburton in 2000 to join running mate George W. Bush on the Republican ticket in the upcoming presidential election. During his tenure at Halliburton, Cheney orchestrated a number of deals, including a multi-billion dollar merger with Dresser Industries Inc., the parent company of M.W. Kellogg Company. Founded in 1900, Kellogg was acquired by Dresser in 1988 and since that time had made a name for itself in the construction of petroleum and petrochemical facilities. The Halliburton/Dresser union brought Kellogg and Brown & Root together in 1998, forming Kellogg Brown & Root (KBR).

The new KBR proved an instant success, shoring up a host of contract agreements worth billions, including a $1.5 billion contract to expand Malaysia's Bintulu liquefied natural gas complex. While the company remained focused on expanding its business, its parent company began to experience a host of problems related to asbestos claims and investigations into its accounting practices.

Overall, Halliburton had been involved in asbestos-related litigation for years—since 1976 there had been 474,500 claims against the firm for its use of asbestos in certain products. During 2001 and 2002 however, the company faced an onslaught of new claims. Halliburton finally put the litigation to rest in 2002 by agreeing to pay approximately $4.2 billion to settle all outstanding claims. That same year, the Securities and Exchange Commission (SEC) began an investigation into Halliburton's accounting practices. During 1998, when Cheney was in office, the company changed how it booked revenue related to cost overruns on billion-dollar contracts. While the change itself was legal, the firm neglected to report it to shareholders and the SEC for over a year. By making the change, Halliburton was able to meet earnings expectations for 1998—the year of the Dresser merger. Without it, earnings would have fallen short. The SEC began its investigation in May, forcing Halliburton to hand over nearly 200,000 accounting documents to prove that it had not inflated cost overrun claims. The investigation came to a close and Halliburton eventually settled the case with shareholders for $6 million.

As a result of losses brought on by industry conditions and litigation, Halliburton restructured itself in 2002. The company realigned its businesses into two major groups—Halliburton Energy Services Group and KBR, the engineering and construction group. As part of its asbestos settlement, Halliburton placed KBR under bankruptcy protection in 2003. The filing did not include KBR's military and government services business.

While Halliburton struggled under a mountain of negative publicity, KBR also came under fire for its military services role in Iraq. A 2003 Business Week article reported, "The company's high-profile success in winning contracts, coupled with its intimate ties to the White House, has aroused suspicions that it is a beneficiary of political favoritism." Acting as a private military company (PMC), KBR had billed the U.S. government approximately $950 million by 2003 for contracts related to the invasions of Iraq and Afghanistan. The cap on those contracts was set at $8.2 billion. Most of its military-related work came under the Logistics Civil Augmentation Program, or LOGCAP, contract secured in 2001.

A separate contract—capped at $7 billion—was drawn up for KBR in late 2002. As part of the deal, KBR created a contingency plan to handle the possible burning of Iraq's oil fields during a U.S. invasion. KBR was awarded the contract without a bidding process which resulted in outcries of political favoritism that led to an investigation by the General Accounting Office of the U.S. Congress. To make matters worse, Halliburton and its KBR unit, along with other PMCs working in Iraq, were facing criticism from Pentagon officials as well as the Justice Department by early 2004 for quality of work issues and billing and pricing matters. While KBR would no doubt continue to play a significant role supporting the U.S. military, it faced a long and perhaps bumpy road ahead in the years to come.