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But I did have some concerns over this working capital performance.
As you can see from the two tables, during 1999 an accounting profit of £2.3m was made. But over half of that, £1.3m, was sucked into working capital requirements. With investors always on the look out for cash earnings, as opposed to accounting earnings, the working capital was not a particularly favourable operating feature.
Alongisde Rex Orton, David Hearson, the Managing Director of Latchways, initially showed me the range of products in the Latchways stable. The equipment can largely be divided into two categories -- horizontal and vertical systems. The core business revolves around the horizontal systems.
A tour of the new building followed, Latchways having recently moved to a site three times the size of their former premises. A quick look through the smart and functional offices -- no chandeliers or fountains I'm glad to report -- led onto the main warehouse.
Having written about them in great detail in my pre "TMF" days, it was only natural that I should actually find out just a little bit more about the company, now that I am a full time Foolish Writer.
Here is the financial record of Latchways, the record that attracted me to the company in the first place.
To 31st March 1995 1996 1997 1998 1999
Sales (£m) 1.75 2.25 3.66 4.57 6.67
Profit before tax
and exceptionals (£m) 0.41 0.62 1.21 1.75 2.30
Earnings per share
before exceptionals (p) 3.20 4.85 9.35 12.82 15.44
Operating margin (%) 22.9 25.8 32.1 36.9 34.0
Return on average
equity (%) 77.4 65.7 65.4 58.6
To 31st March 1995 1996 1997 1998 1999
(£000) (£000) (£000) (£000) (£000)
Change in stocks (122) (50) 42 (190) (626)
Change in debtors 40 (299) (147) (584) (1,168)
Change in creditors (84) 107 (8) 27 451
Total change (166) (242) (113) (747) (1,343)
Of course, the numbers only tell half the story. Latchways is the leading name in fall arrest safety equipment. In a nutshell, fall arrest equipment continuously protects those at height from falling to their deaths. Thus if you're venturing up to the top of the Sydney Harbour Bridge, as tourists are able to do now, you will always be securely attached to a Latchways system as you climb. Should you then slip, being attached to the system will leave you to dangle in mid-air.
The equipment can be used on any type of construction, and can be installed on new and old buildings alike. But Latchways just designs and subsequently assembles the equipment. Manufacturing is outsourced, and the systems are actually put into place by a network of approved third-party installers.
So, what are the prospects for the fall arrest industry? What is the likelihood for the impressive financial record continuing? With 34% operating margins, does Latchways have any competition? And what's the story with the working capital?s
Wanting to discover more, a site visit was in order. Prior to joining TMF, I had contacted the company before, concerning some financial details. I posted the reply that I received from Rex Orton, the Latchways Financial Director, on the Foolish Latchways discussion board.
So when Rex accepted my subsequent request for a site visit, you can imagine my slight embarrassment when he commented that he was not offended to read his e-mail on a Foolish discussion board! It goes without saying that any company director who follows the Foolish boards is certainly worth speaking to.
With that in mind, on Wednesday 23rd February, I travelled to Devizes, Wiltshire to visit Latchways. In the mixed role of a shareholder, analyst and journalist, I hoped to find the answers to the aforementioned questions, and learn far more about the business that I had actually bought into. I wasn't to be disappointed.
Products
For example, imagine you have to perform some maintenance work on a roof. A Latchways system will be installed comprising of a cable stretching along the roof, brackets and hangers to keep the cable secured, and a Transfastener. The Transfastener, an ingenious device at the heart of every system, is the attached "runner" on the cable. The device is also the point of contact between your harness and the safety system. The Transfastener runs freely over all of the cable fixings, allowing complete freedom of movement and continuous "fall protection" for the user.
A similar principle is used with the vertical system. Say, for a crane, a cable will be attached up alongside the ladder, with the crane operator attaching his harness onto the Transfastener before climbing. The Transfastener will run up the cable as the ladder is climbed, but should a slip occur, the system will immediately lock. It was all clever stuff. David Hearson was incredibly enthusiastic about the systems, even over the basic fittings. And having looked at the products myself, I can't blame him.
Suppliers
With Latchways outsourcing the manufacturing of their equipment, I was keen to hear details about these supply arrangements. I was reassured on two points. Firstly, Latchways has at least two suppliers for each system component, with about 30 to 40 suppliers in total, the company favouring small, local suppliers. With the components also being "not desperately complex", it certainly appeared to me that Latchways were not at the whim of any particular supplier. Rex Orton commented: "If anything, they are more reliant on us".
Secondly, in terms of the quality of returns from the manufactures, Rex Orton firmly remarked: "Everyone knows the score". David Hearson painted a picture of a very rigorous quality control, with visual inspections, X-ray inspection and dye penetrant analysis used. Individual component numbering is also performed, allowing Latchways to eventually record the location of every individual piece of kit.
Part 1
Part 2
Related Links
• Latchways discussion board
• Full interview transcript
• Latchways website