TWST: May we start with an overview of your company today and a short history?
Dr. Prociv: Today, Versar is a global project management company. We deliver construction management services, quality assurance services, environmental protection and remediation, homeland security and engineering infrastructure solutions to both public and private customers.
Historically, we've evolved from an environmental company. As far back as 1999, we were performing a considerable amount of regulatory environmental work. We realized that the market was producing insufficient margins and wasn't moving or changing very much. We needed to transform the company into a new business line, but we didn't have the resources to make substantive changes, and so we had to come up with a different internal plan. We created something we called the "transformation" and over the next seven years (when I say seven years, that was a five-year plan that took seven years to execute), we successfully transformed ourselves into a large project management company with a specialty in construction services.
The most difficult part of the transformation was creating a cultural shift away from consulting projects to large project management efforts. At the same time, we made a shift from being predominantly a commercial contractor to one working for the federal government, where, today, we do almost 85% of our work. We are still moving through the transformation and still changing, but we have come quite a long way, to where now more than half of our business consists of higher margin, larger projects, with about 40% performed outside of the United States.
To summarize, we have accomplished three major changes to get to this point: moving from consulting contracts to large project management contracts; changing focus from commercial markets to government markets; and changing our product from environmental studies to construction related services.
TWST: What are the economic circumstances specific to the majority of your business, construction?
Dr. Prociv: That's a very good question because we struggle with that. We try to enter markets that are both recession proof and politician proof.
In the formation of the construction services market, we focused on two types of infrastructure markets. The first having to do with the aging infrastructure, which we hear about when bridges, buildings, etc. have problems, and the second related to infrastructure issues associated with the increasing population on this planet. The growing population is a combination of both the internal growth and the immigration issues that we are facing worldwide today. These issues have to get addressed in order to improve the quality of life on our planet and are generally immune from budgetary vagaries. These have to get resolved and we have to be there when the work begins to emerge.
We have been very agile in the emerging markets. For example, as we saw some of the Defense Department funding shift toward Iraq, we moved with it. A good portion of our work today is providing construction and QA services to the Department of Defense, which is associated with the reconstruction of Iraq and Afghanistan. Had we not made that move, we would have been in poor shape as a company. Now we are seeing the emphasis is starting to shift, with defense funding returning to the more traditional Base Realignment and Closure [BRAC] which had been held back for budget reasons during the Iraq reconstruction. As a result, we have re-positioned ourselves to be just ahead of the changing marketplace.
TWST: What might keep you up at night? What worries you the most?
Dr. Prociv: Budgets and security. I think the thing that worries me the most is the whole direction that the national financial situation is going. Who would have thought that real estate problems would affect our business? Well, it does, even though our business is really not real estate. There are changes going on in the financial markets; there is a weakening of the dollar; there is the rising fuel cost. We have to be really agile. We have to move very, very quickly. And the thing that keeps me up at night is if we somehow make the mistake of not being agile enough to adapt to changing outside influences.
TWST: What actions are you taking to counteract these challenges?
Dr. Prociv: Training. On a regular basis, we have a specialist come in who talks to our people about the state of the market, the state of politics and the international market.
We have tripled our expenditure in external marketing in the last four years as part of the transformation. So we have many more people out in the marketplace who are sensing what's going on. We have a twofold marketing approach that we've deployed. One is strictly "doer-seller," meaning that the people who are in operations can develop and sell their own projects. We have another marketing team at the corporate level that is executing our strategic plan. These are the individuals who I depend on to look into the future and make sure that we don't miss something that we are involved in. So the increased investment in marketing was very key to the transformation.
TWST: When reviewing your balance sheet every quarter, what should investors look for? How would you define success?
Dr. Prociv: The best indicator of our success is our backlog. Our backlog today is the largest it's ever been and the backlog is a good predictor what our revenue is going to be the following year. When investors ask me what they should be looking for, I tell them to look at the backlog and then look at our financial factors, such as debt-to-equity ratio, cash on hand and shareholder equity. The numbers are strong and indicate a healthy operation at Versar.
TWST: What else would you like to touch upon?
Dr. Prociv: The thing that I get asked the most is what we're going to do when Iraq closes down. And I think it's worth mentioning here that there are really two kinds of business in Iraq and Afghanistan. There is the military side and there is the reconstruction side. When we hear about pulling out the military, we are talking about the military support side of the business. There are other companies that support the military. As the US reduces its military presence we'll likely see, the State Department taking over the reconstruction efforts. The reconstruction activity will probably continue for several more years. Afghanistan reconstruction is now growing faster than Iraq. We are seeing a reduction in some projects in Iraq, but in contrast we are seeing a growth of reconstruction activities in Afghanistan.
However, as I mentioned earlier, we are protecting our business in the Middle East by entering commercial construction markets in the UAE.