Annual Report 2006 Highlights – Profit before tax and exceptional items* from continuing operations up 16.9 per cent to £76.2m (2004/2005 : £65.2m) – Profit before tax up 81.5 per cent to £73.7m (2004/2005 : £40.6m) – Operating margins* improved by 2.6 percentage points to 11.4 per cent (2004/2005 : 8.8 per cent) – Strong cash generation. Operating cash flow was up 8.1 per cent to £106.7m (2004/2005 : £98.7m) – Closing net cash of £91.6m after capital returns of £103.6m through ordinary dividends, a special dividend and share buy back programme – Increase in the final dividend of 11.3 per cent to 11.8p per share, bringing the full year dividend to 17.0p per share, an increase of 11.1 per cent in the year (2004/2005 : 15.3p) – Intention to continue share buy back programme *before net exceptional charges of £2.5m (2004/2005 : £24.6m). Profit before tax, Headline basic earnings Dividends per share† exceptional items and per share (pence) goodwill amortisation (pence) (£m) 76.2 31.4 17.0 15.3 65.2 25.9 14.2 58.7 24.2 03/04 04/05 05/06 03/04 04/05 05/06 03/04 04/05 05/06 †includes proposed final dividend. Contents 01 Our Strategic Progress 30 Corporate Governance 86 Five Year Record 04 Chairman’s Statement 35 Remuneration Report 87 Independent Auditor’s Report – 06 Operating and Financial Review 43 Independent Auditor’s Report – Company 08 – De La Rue Today Group 88 Company Balance Sheet 10 – Security Paper and Print 44 Group Income Statement 89 Accounting Policies – Company 12 – Cash Systems 45 Group Balance Sheet 90 Notes to the Accounts – 14 – Financial Review 46 Group Cash Flow Statement Company 17 – Risks and Risk Management 47 Group Statement of Recognised 92 Principal Subsidiaries, Branches 22 – Corporate Responsibility Income and Expense and Associated Companies 26 Directors and Secretary 48 Accounting Policies – Group 95 Shareholder Information 27 Directors’ Report 53 Notes to the Accounts 01 De La Rue Annual Report 2006 Our Strategic Progress We produce over 150 national currencies and a wide range of security documents such as passports and authentication labels and fiscal stamps. We are also a leading provider of cash handling equipment and software solutions to banks and retailers worldwide helping them reduce the cost of handling cash. We employ over 6,000 people across 31 countries worldwide. We are also pioneering new technologies in government identity solutions for national identification, driver’s licence and passport issuing schemes. 02 De La Rue Annual Report 2006 Our Strategic Progress Last year we set out our clear strategy to create enhanced shareholder value. Find out what we said last year and what we’ve done to create that value. What we said What we did This year we returned a total of £103.6m through a combination of special dividend, an ongoing share repurchase scheme and progressive dividend. £103.6m Total returns to shareholders (£m) 2006 103.6 2005 25.8 2004 24.1 Group operating margins have increased by 2.6 percentage points. percentage +2.6 points Group operating margins (before exceptionals and goodwill amortisation) (%) 2006 11.4 2005 8.8 2004 7.2 Operating cash flow has increased by 8.1 per cent over the last year. +8.1% Operating cash flow (£m) 2006 106.7 2005 98.7 2004 92.1 03 De La Rue Annual Report 2006 Our Strategic Progress What we said What we did The consolidation of manufacturing locations is key to us increasing margins and competitiveness. It allows us to co-locate with customers in lower cost regions and reduce foreign exchange exposure with lower fixed costs through fewer manufacturing locations. De La Rue worldwide manufacturing facilities OEM Sorters Eskilstuna Lisburn Gateshead Flen Moscow Bray Portsmouth Westhoughton Watertown Dunstable Debden Dulles Bathford Overton Lisbon Zejtun Dallas Shanghai Malwana Kuala Lumpur Nairobi DTP Component Supply Key Security Paper and Print Cash Systems Factory move Factory closure completed 04 De La Rue Annual Report 2006 Chairman’s Statement ‘Our shareholder value strategy remains to enhance total returns by distributing surplus cash to our shareholders.’ Nicholas K. Brookes Chairman 05 De La Rue Annual Report 2006 Chairman’s Statement Dividends per share Group Results Share Buy Back (pence) This is an excellent set of results that The Board announced at the interim demonstrates the significant progress that results in November its intention to use 05/06 5.2 11.8 17.0 the Group has made in implementing its the existing authorities granted to it at 04/05 4.7 10.6 15.3 strategy of concentrating on core activities, the 2005 Extraordinary General Meeting addressing underperforming businesses (EGM) to use surplus cash to purchase 03/04 4.4 9.8 14.2 and improving operational productivity. the Company’s own shares for cancellation. 02/03 4.49.2 13.6 The upper limit of the Board’s existing Continued margin improvement from authority is 14.99 per cent of issued Interim the restructuring actions in Cash Systems capital. During the year the Company Final together with another strong year in acquired 1.6 million shares under the Security Paper and Print division were share buy back programme at a cost of Earnings per share the key drivers of the performance. £7.8m. The Board expects to continue (pence) As a result during the year we were able this programme, funded with surplus to return £103.6m to our shareholders cash and will seek shareholder approval 35 31.4 through a combination of a special to renew its existing authority at the AGM. dividend, an ongoing share repurchase The exact amount and timing of future 30 25.9 scheme and ordinary dividends.This purchases will be dependent on market 24.2 30.2 25 demonstrates our continuing commitment conditions and ongoing cash generation. to enhance total returns by distributing 20 surplus cash flow to our shareholders. Special Dividend De La Rue completed the return of 15 18.5 Changes in the 2006 Report £68.3m to shareholders on 5 August You may notice changes in the structure 2005, equivalent to 38.0p per share, 10 and content of this year’s annual report through a special dividend accompanied and accounts. Although UK statutory by a corresponding share consolidation. 5 6.8 requirements to produce a business review The capital return was consistent with 0 do not apply to the Company this year, the Board’s strategy to return surplus 03/04 04/05 05/06 we have decided to expand our reporting cash to shareholders. to produce an Operating and Financial Earnings per share Review section on pages 6 to 25. In Outlook Headline earnings per share (before exceptionals) addition, we have also explained the Looking ahead, the Group’s order book changes arising from the newly adopted provides excellent visibility for the first International Financial Reporting Standards half of 2006/2007, particularly in the Total returns to shareholders (IFRS). Consequently this year you will Currency activities where first half banknote (£m) see not only a much more comprehensive and paper volumes are expected to be annual report but also one which I hope will ahead of last year. This, combined with 7.8 give our shareholders and other stakeholders the ongoing benefits of restructuring and 68.3 a much better understanding of our current productivity improvements, provides position, the environment in which the a sound platform for 2006/2007. Company operates and our strategy for the future. Returns to Shareholders Ordinary Dividends In line with our continued confidence in 27.5 24.1 25.8 the cash generative characteristics of the business, the Board is recommending an increased final dividend of 11.8p per share, 03/04 04/05 05/06 subject to shareholders’ approval. This will be paid on 4 August 2006 to shareholders Buy backs on the register on 7 July 2006. Together Special dividends with the increased interim dividend paid in Ordinary dividends January 2006, this will give a total dividend for the year of 17.0p, an overall increase of 11.1 per cent on last year. 06 De La Rue Annual Report 2006 Operating and Financial Review ‘We believe that driving operational efficiency and focusing on investment in our core businesses provides the best opportunity to deliver enhanced shareholder value.’ Leo Quinn Chief Executive Officer 07 De La Rue Annual Report 2006 Operating and Financial Review Group Results Group Strategy De La Rue is pleased to report a strong In December 2004, we focused the £76.2m performance for the year ended 25 March De La Rue organisation on improving the 2006, with all key performance indicators operational performance and financial Profit before tax and exceptional items*: showing good improvements over 2004/2005. returns of the Group. During 2005/2006, +16.9 per cent on last year This reflected primarily margin and the Group made significant progress operational efficiency improvements which against its financial and operational Group underlying operating profits* demonstrate the significant progress the objectives. We believe that driving (£m) Group has made this year in implementing operational efficiency and focusing our its strategy. Underlying profit before tax* investment in our core businesses provides 05/06 69.4 increased by £11.0m or 16.9 per cent to the best opportunity to deliver improved 04/05 54.8 £76.2m (2004/2005 : £65.2m) and operating shareholder value. The Group’s strong profits* of £69.4m represented an increase cash generative characteristics and 03/04 49.3 of £14.6m or 26.6 per cent compared with ungeared balance sheet also give the last year (2004/2005 : £54.8m).