Annual Financial Report

RNS Number : 8123F

De La Rue PLC

20 June 2012

 



De La Rue plc - Publication of Documents

De La Rue plc (the Company) has today posted or otherwise made available the following documents to shareholders:

Annual Report 2012

Notice of Annual General Meeting to be held on 26 July 2012

In accordance with Listing Rule 9.6.1, the Company has today submitted a copy of the above documents to the UK Listing Authority via the National Storage Mechanism and the documents will shortly be available for inspection at www.Hemscott.com/nsm.do

Copies of the documents are also available of the Company's website www.delarue.com

In addition, the information below which is extracted from the Annual Report 2012 is in accordance with the requirements of the DTR 4.1.3 and DTR 6.3.5 to make public an annual financial report.

DE LA RUE PLC

ANNUAL FINANCIAL REPORT ANNOUNCEMENT- PERIOD TO 31 MARCH 2012

 

KEY FINANCIALS

	2011/12 £m	2010/11 £m	Change
Revenue	528.3	463.9	14%
Operating profit *	63.1	40.4	56%
Underlying profit before tax *	57.7	33.3	73%
Reported profit before tax	32.9	72.8	(55%)
Headline earnings per share *	43.5p	24.0p	81%
Dividend per share	42.3p	42.3p	-

*

Group operating profit, underlying profit before tax and headline EPS are reported before an exceptional operating charge of £24.8m in 2011/12 and net exceptional income of £39.5m in 2010/11 (representing exceptional operating charges of £15.6m and exceptional non operating profit of £55.1m) as the Directors are of the opinion that these give a better indication of underlying performance.

Headlines

·    Revenue up £64m to £528m, with strong performance in both the Currency and Solutions businesses

·    Operating profit up £23m to £63m, due to improved trading, mix and initial benefits from the Improvement Plan

·    Headline EPS up 81% to 43.5p

·    Final dividend of 28.2p making a total of 42.3p for the year

·    Strong operating cash inflow of £78m, net debt low at £25m

·    Banknote print volumes up 8% to 6.4bn, paper volumes up 11% to 11,000 tonnes

·    Year end order book up 14% to £248m

·    Improvement Plan on track to achieve a target 2013/14 operating profit in excess of £100m

Nicholas Brookes, Chairman, commented:

"I am pleased to report that De La Rue has made excellent progress in the past financial year, achieving strong growth in revenue and profit.  As I leave De La Rue, I am confident that, with a strong management team and a clear plan for improvement, the business is well placed for the future."

Tim Cobbold, Chief Executive, commented:

"De La Rue has made good progress in the first year of the Improvement Plan, demonstrating both the fundamental strengths of the business and its capacity to improve. While recognising there is still much to do, I am confident that with the momentum we have established, we are on track to achieve our target of a 2013/14 operating profit in excess of £100m.

With a good order book and a strong pipeline of opportunities, the Board's expectation for the current year remains unchanged."

Enquiries:

De La Rue plc		[phone]
Tim Cobbold	Chief Executive
Colin Child	Group Finance Director
Rob Hutchison	Group Director of Communications
Brunswick		[phone]
Jon Coles
Zoe Bird

An interview with Tim Cobbold, Chief Executive of De La Rue is available on the Group's website www.delarue.com or on www.cantos.com

29 May 2012

NOTES TO EDITORS

As the world's largest integrated commercial banknote printer, De La Rue is a trusted partner of governments, central banks, issuing authorities and commercial organisations around the world. In the past five years alone, the Group has been involved in the design or production of over 150 national currencies. De La Rue also produces a wide range of security documents including passports, driving licences, authentication labels and tax stamps. In addition, the Group manufactures sophisticated, high speed cash sorting and inspection equipment. De La Rue also offers a range of specialist services and software solutions including government identity schemes, product authentication systems and cash management processing solutions. De La Rue employs approximately 4,000 people worldwide and is listed on the London Stock Exchange. For further information visit De La Rue's website at www.delarue.com

DE LA RUE PLC

ANNUAL FINANCIAL REPORT ANNOUNCEMENT - PERIOD TO 31 MARCH 2012

De La Rue has achieved strong growth in revenue and operating profit during 2011/12 as well as making good progress in implementing the first phases of the Improvement Plan. The Plan is on track and we remain confident that the Group will achieve its target of a 2013/14 operating profit in excess of £100m. 

Group revenue increased by 14 per cent to £528.3m (2010/11: £463.9m) with strong performances in both the Currency and Solutions business units.  Operating profit (before exceptional items) was up 56 per cent to £63.1m (2010/11: £40.4m), as a result of revenue increases, an improved Currency product mix and the initial benefits of the Improvement Plan.  Group operating profit margin (before exceptional items) was 11.9 per cent (2010/11: 8.7 per cent). 

Profit before tax and exceptional items increased by 73 per cent to £57.7m (2010/11: £33.3m) reflecting the trading improvement noted above and lower finance costs of £5.4m (2010/11: £7.1m). Headline earnings per share, before exceptional items, increased by 81 per cent to 43.5p (2010/11: 24.0p).

Exceptional charges in the year totalled £24.8m (2010/11: £15.6m) predominantly in relation to the implementation of the Improvement Plan.  This includes the costs of site transfers as well as business reorganisation and restructuring.  In 2010/11, a non operating exceptional profit of £55.1m was recognised relating to the sale of the Group's investment in Camelot, the UK national lottery operator.  Basic earnings per share was 31.8p (2010/11: 67.6p including the non operating exceptional profit).

Cash inflow from operations was £78.4m reflecting the improved trading performance. At the year end, the Group net debt was £24.8m (2010/11: £31.2m). Interest cover, before exceptional items, remained strong at 15 times (2010/11: 11 times).

DIVIDEND

The Board is recommending a final dividend of 28.2p per share (2010/11: 28.2p per share), reflecting its continuing confidence in both the strength of the business and in delivering the Improvement Plan. Together with the interim dividend paid in January 2012, this will give a total dividend for the year of 42.3p per share (2010/11: 42.3p per share).

Subject to approval by shareholders, the final dividend will be paid on 2 August 2012 to shareholders on the register on 6 July 2012.

Delivering the Improvement Plan

De La Rue is focused on delivering the Improvement Plan that we announced in May 2011.  The Plan has a target to return the business to a 2013/14 operating profit in excess of £100m through a combination of revenue growth and a reduction in operating costs.  This will ensure that De La Rue is a more focused, effective and efficient business, allowing it to capitalise better on its fundamental strengths and to generate value for all stakeholders in the future. 

The fundamental strengths of De La Rue - brand and reputation, long standing customer relationships, technology and design, robust market growth and a high margin and cash generative business model - provide the platform for the Plan. During the past year, in addition to executing the Plan we have focused on reinforcing and leveraging these strengths.

Good progress has been made in the first year of the Plan which contributed approximately £8m to the reported operating profit mainly as a result of actions in process improvement and procurement.  Importantly, good momentum has also been established in the initiatives to generate revenue growth and accelerate innovation.

In order to implement the Plan effectively we have made significant changes to the structure and organisation of the Group establishing a functional organisation which supports the four pillars of the Plan:  

Customer Focus

The new Currency and Solutions business unit teams now share common marketing and pipeline management processes and have together created more than 40 country plans. Each country plan identifies the strategic long term goal in that country as well as the near term tactical opportunities. This approach has already generated encouraging new business opportunities.

Innovation

A new Group wide business development function now drives our innovation agenda. Relationships have been established with leading academic institutions and industry to improve the pipeline of ideas and access to research and early stage technologies. We are investing in a new, industry leading, technical centre at our facility in Overton which will provide the research and development facilities to further accelerate innovation.

 

Professionalism

The significant level of change in the past year has been managed by the business transformation team which is now focussing on the continued improvement of the processes and systems deployed in the business. This will ultimately lead to a revision to the IT infrastructure in the Group.

Operational Excellence

A new Group Supply Chain function has been established to focus on operational excellence. This includes central manufacturing, design, quality and procurement functions in order to drive process improvement and to reduce cost.

Industry best practice quality processes and systems, utilising proven approaches and techniques from outside the industry have been introduced and are already improving quality performance.

The teams in the manufacturing facilities have been focussed on excellence in workplace management and on waste reduction. Good progress has been made with significant reductions in production set up times and waste levels, in some cases by as much as 50 per cent.

The central procurement team has, through consolidating the supply base and placing a greater focus on all constituents of cost, negotiated annualised savings of c£10m, of which c£5m has already been delivered in 2011/12.

A review of the Group's manufacturing facilities was completed in August 2011. The conclusion was to relocate the Dunstable operation to our Gateshead facility and to transfer the Basingstoke based Holographics activity to our facility in Westhoughton. The consolidation of these facilities has commenced and will generate annual savings of c£6m when complete.

OPERATING REVIEWS

Following the reorganisation, the Group has two business units, Currency and Solutions.  Currency is a single operating unit.  Solutions consists of three operating units: Cash Processing Solutions, Security Products and Identity Systems.  These operating units have been disclosed as separate reportable segments as they are the components that the Board and senior management monitor regularly in making decisions about operating matters such as allocating resources to the businesses and assessing performance.

Currency

	2011/12		2010/11	Change
Banknote print volume (bn notes)	6.4		5.9	8%
Banknote paper output ('000 tonnes)	11.0		9.9	11%
	£m		£m
Revenue	332.6		289.0	15%
Operating profit before exceptional items items	45.3		28.5	59%

Banknote print volumes at 6.4bn notes (2010/11: 5.9bn) were 8 per cent higher reflecting the good opening order book and the strong order intake during the year.  Paper output volumes of 11,000 tonnes (2010/11: 9,900 tonnes) were up 11 per cent primarily reflecting the internal print volumes, as well as additional external sales. 

Revenue increased by 15 per cent to £332.6m (2010/11: £289.0m) reflecting the increase in volumes noted above while operating profit at £45.3m (2010/11: £28.5m) was up 59 per cent.  Operating margins improved to 13.6 per cent (2010/11: 9.9 per cent). 

The increase in operating profit reflects the higher volumes, an improved product mix compared with the prior year and the benefits of the Improvement Plan.  However, some of the gains were offset by increased raw material and component costs, most notably on cotton which had an adverse impact of £9m compared with 2010/11.  Cotton prices peaked around February 2011 and have declined since then but currently remain above recent historic levels. 

At the year end, the Currency 12 month order book, excluding currently suspended orders, was up 18 per cent at £183m (2010/11: £155m).  However, as anticipated the external market for banknote paper is becoming more challenging, with some downward pricing pressure, as additional capacity has been brought on stream by some of our competitors.

Solutions

	2011/12 £m		2010/11 £m	Change
Revenue:
Cash Processing Solutions	65.7		57.4	14%
Security Products	65.4		63.3	3%
Identity Systems	75.2		62.8	20%
Total Solutions	206.3		183.5	12%
Operating profit before exceptional items:
Cash Processing Solutions	2.0		0.5	300%
Security Products	7.3		9.0	(19%)
Identity Systems	8.5		2.4	254%
Total Solutions	17.8		11.9	50%

Cash Processing Solutions (CPS)

Following the recent restructuring programme the performance in CPS continues to improve.  Increased volumes of the large DLR 7000 banknote sorter, which processes, sorts and validates up to 2,000 notes a minute, combined with the maintenance of good service revenue have underpinned the 14 per cent increase in revenue.  Operating margins have benefited from the restructuring of the business and the improved economies of scale flowing from the higher volumes. 

Security Products

As expected, Security Products has had a challenging year with flat revenue and reduced operating profit resulting from a combination of continued lower Holographic internal and external component sales, and lower demand for brand licensing products. A number of the revenue and cost saving initiatives under the Improvement Plan, including site relocations, will enhance the performance of this operation.

Identity Systems (IDS)

The IDS team has completed the transition on the UK Passport contract from the implementation phase in the prior year to full production and service in the current year.  Revenue and profit levels predominantly reflect this successful ramp up to full scale production volumes for the year as whole. The business has delivered over seven million passports to date under this contract and also supported a successful repatriation of the Foreign & Commonwealth Office passport issuance service.

The international part of IDS performed in line with expectations, continuing to implement a wide range of projects across the globe. 

Solutions Order Book

At the year end, the Solutions 12 month order book was up 5 per cent at £65m (2010/11: £62m).  These figures exclude order volumes which have yet to be confirmed on committed contracts.

INTEREST

The Group's net interest charge was £4.1m, marginally up on the prior year (2010/11: £3.8m).  The IAS19 related finance cost, which represents the difference between the interest on pension liabilities and the expected return on assets, has reduced to £1.3m (2010/11: £3.3m) as a result of an additional £35m special contribution made in 2010/11. 

EXCEPTIONAL ITEMS

Exceptional costs of £24.8m have been incurred in 2011/12 mainly in connection with the closure of three sites and the relocation of manufacturing activity, including £11.3m in staff compensation, £1.1m of fixed asset impairment charges, £8.8m for site exit costs and £2.9m in other associated reorganisation costs.  The exceptional charge also includes additional costs of £0.7m associated with the paper quality issue that arose in 2010/11.

Exceptional costs relating to the Improvement Plan were originally estimated at c£25m.  With the experience and knowledge gained from implementing the first phases of the Plan we now expect the total exceptional costs of the Plan to be up to £10m higher over the next two years.

The £15.6m exceptional operating charges reported in 2010/11 comprised £29.0m of costs relating to the paper production quality issues and £2.6m of corporate costs incurred in relation to a takeover approach for the Group.  These were offset by a £16.0m exceptional curtailment gain on the closure of the defined benefit pension scheme.  In addition, in 2010/11 the Group also reported a non operating exceptional profit of £55.1m on the sale of the Group's investment in Camelot.

TAXATION

The net tax charge for the year was £0.7m (2010/11: £5.4m). The effective tax rate pre exceptional items, was 24.1 per cent (2010/11: 27.0 per cent), predominantly reflecting the drop in the UK statutory tax rates.  A credit of £6.2m (2010/11: £1.1m) arises on the exceptional items noted above.  In addition there was also an exceptional tax credit of £7.0m in respect of the determination of the tax treatment of prior year exceptional items (2010/11: £2.5m prior year credit).

CASH FLOW AND BORROWINGS

Cash inflow from operations was £78.4m reflecting the strong trading as well as an improved working capital position (2010/11: outflow of £20.3m after a one off special pension contribution of £35.0m). The value of inventory was broadly unchanged, but the Group benefited from positive movements on trade debtors and other payables. Advance payments were £40.9m (2010/11: £54.6m) with the prior year balance benefiting from some large receipts immediately prior to the 2010/11 year end.

Capital expenditure of £32.1m (2010/11: £30.7m) was higher than depreciation, but lower than previously forecast mainly reflecting the phasing of cash spend on planned Improvement Plan projects.

The Group ended the year with net debt of £24.8m (2010/11: £31.2m), lower than previously forecast, largely reflecting the positive trading noted above combined with a tax refund received in the year and the cash phasing on committed capital expenditure projects.

The Group utilises a £175m revolving credit facility which expires in September 2013. Key financial covenants on this facility require that the interest cover be greater than four times and the net debt to EBITDA ratio be less than three times.

UK PENSION SCHEME

Pension deficit and funding

During 2011/12, special funding payments of £23.1m were made to the Group's pension fund.   The Group's latest formal (triennial) funding valuation of the UK defined benefit pension scheme took place on 5 April 2009 and identified the scheme had a deficit of £204m (5 April 2006: £56m deficit). A new valuation as at 5 April 2012 has commenced.

IAS 19 - Employee Benefits

The valuation of the UK pension scheme under IAS 19 principles indicates a scheme deficit pre tax at 31 March 2012 of £143.3m (26 March 2011: £100.5m) an increase of £42.8m since the previous year end despite the ongoing special contributions of £23.1m paid during the year. This change primarily reflects the increase in the projected value of scheme liabilities following the reduction in the discount rate from 5.6 per cent to 4.8 per cent. The charge to operating profits in respect of the UK pension scheme for 2011/12 was £7.8m (2010/11: £7.6m). In addition, under IAS 19 there was a finance charge of £1.3m arising from the difference between the expected return on assets and the interest on liabilities (2010/11: £3.3m).

2010 PAPER PRODUCTION ISSUES

Discussions remain ongoing with the principal customer concerned and the authorities, and therefore there remains uncertainty as to the ultimate outcome of these issues, including their financial impact (described more fully in note 12).

PEOPLE

De La Rue's employees have again demonstrated their loyalty and commitment to the business and understanding of the case for change. The Board would like to express their thanks and appreciation to everyone for their contribution and positive attitude during a time of significant change.

BOARD CHANGES

As previously announced, Nicholas Brookes will retire as Chairman and as a Non-executive Director following the Annual General Meeting on 26 July 2012.  He has served on the Board of De La Rue since March 1997, including as senior Non-executive Director for four years before he became Chairman in July 2004.    As Chairman, he has overseen considerable change within the Company and the Board would like to thank him for his enormous contribution to the Group as a whole and wish him well in his retirement.

Philip Rogerson joined as a Non-executive Director on 1 March 2012 and will succeed Nicholas Brookes as Chairman on his retirement.  Philip is a highly experienced chairman and non-executive director with considerable international experience and well proven leadership skills. 

OUTLOOK

With a good order book and pipeline of opportunities, and notwithstanding the more challenging market for banknote paper, the Board's expectation for the current financial year remains unchanged.

The Improvement Plan is on track to achieve a target 2013/14 operating profit in excess of £100m through both restoring revenue growth and delivering significant cost reductions.

-ends-

Risk and risk management

De La Rue's reputation is based on security, integrity and trust. The risks outlined in this section represent the principal major uncertainties and trends which may have an impact on De La Rue's ability to implement effectively its future strategy. This section summarises the types of risks which are either specific to De La Rue or which could have a material adverse effect on the Group, together with the controls which have been put in place to manage those risks.

Risk management and governance structure

Risk owners and managers

• Responsible for operational management and oversight of risk within individual businesses or functional areas

• Allocation of appropriate levels of resource for individual risk control

Risk Committee

• Proposes risk management framework

• Reviews business and Group risk registers

• Considers actions to improve management of risk

• Considers new or emerging risks

• Members include the Chief Executive, Group Finance Director, General Counsel and Company Secretary, business unit managing directors, the Group Director of Security and the Group Director of Risk and Internal Audit

Audit Committee

• Advises the Board on the adequacy of internal controls and risk management framework

• Receives updates on risk management from the Chairman of the Risk Committee

• Receives reports from internal and external audit on the status of internal controls

• Details of Audit Committee members can be found on pages 34 and 35 of the De La Rue plc Annual Report 2012

Board

• Responsible for governance structure

• Defines high level risk appetite and risk management framework

• Receives reports from Audit and Risk Committees on risk and internal controls

UK Corporate Governance Code

The UK Corporate Governance Code requires the Board to maintain a sound system of internal control to safeguard shareholders' investment and the Group's assets and at least annually to conduct a review of the effectiveness of the Group's system of internal controls. During the year, the Board carried out its annual review which covered all material controls, including financial, operational, legal and technology controls and risk management systems. Additionally, the Board received information about the Group's operations throughout the year enabling it regularly to evaluate the nature and extent of the risks to which the Group is exposed.

Internal control

The Board has overall responsibility for the Group's system of internal control and for reviewing its effectiveness. It relies on the Audit and Risk Committees to assist in this process. Significant changes to the risk assessment procedures were introduced two years ago to improve the management of risks at the business unit and functional levels. These have been maintained with a further review undertaken by external risk advisers which has assisted the Board in identifying some additional structural changes to strengthen further the area of risk management and activities overseen by the Risk Committee. Changes to the Group's risk management framework and processes are underway and these will be reported more fully in the De La Rue plc 2013 Annual Report. Details of the Audit and Risk Committees are set out in the Corporate Governance Statement on page 43 of the De La Rue plc Annual Report 2012.

Management is responsible for implementing the controls which are designed to meet the particular needs of the Group, and the risks to which it is exposed, with procedures intended to provide effective internal control. The controls by their nature are designed to manage rather than eliminate risk and can only provide reasonable but not absolute assurance against material misstatement or loss. The processes used by the Board and, on its behalf, by the Audit and Risk Committees, have been in place throughout the year, and include reviewing:

• Monthly finance, operational and development reports

• Internal and external audit reports

• Significant issues identified by internal and external audits

• Significant Group risks and risk mitigation actions reported by the Risk Committee including updates to the Group's risk register

• Annual compliance statements in the form of self audit questionnaires

• Reports on other matters such as security, health, safety, environmental issues and fire risks

Internal financial control

The financial control framework includes the following key features:

• An annual strategic planning process

• An annual budget

• A system of monthly reporting by each operating unit which involves comparison of actual results with the original budget and the updating of a full year forecast

• Monthly reporting of performance to the Board

• Audited annual financial statements

• Interim financial statements reviewed by the auditors

The main controls which address the financial implications of the major business risks are centred on strict approval procedures. These are reviewed annually, approved by the Board and apply to all subsidiaries. They include:

• Executive Directors' approval of all major non routine revenue expenditure

• Board approval of all major capital expenditure

• Board approval of all acquisitions and disposals

• A system of authorisation limits which cascades throughout the Group

• Board consideration of any matter likely to have a material effect on the Group

Capital management

The Board's policy is to maintain a strong capital base and modest levels of net debt in order to maintain investor, creditor and market confidence and to sustain development of the business. Further details on capital management can be found in note 12 on page 78 of the De La Rue plc Annual Report 2012.

Treasury, foreign exchange and borrowing facilities

The Group Treasury department provides a central service to Group companies and conducts its operations in accordance with clearly defined guidelines and policies, which have been reviewed and approved by the Board. Treasury transactions are only undertaken as a consequence of underlying commercial transactions or exposures and do not seek to take active risk positions. It is Group Treasury's role to ensure that the Group has sufficient available borrowing facilities to meet its needs in the foreseeable future.

Financial risk management

Overview

The Group's Treasury department, acting in accordance with policies approved by the Board, is responsible for the management of financial risks faced by the Group.  The Group's activities expose it to a variety of financial risks, the most significant of which are liquidity risk, market risk and credit risk.

The Group's financial risk management policies are established and reviewed regularly to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits.

Group Treasury identifies, evaluates and in certain cases hedges financial risks in close cooperation with the Group's operating units. Group Treasury provides written principles for overall financial risk management as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, use of derivative financial instruments and the investment of excess liquidity.

Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation.

The Group manages this risk by ensuring that it maintains sufficient levels of committed borrowing facilities and cash and cash equivalents.  The level of headroom needed is reviewed annually as part of the Group's planning process.

A maturity analysis of the carrying amount of the Group's borrowings is shown in note 12 of the De La Rue plc Annual Report 2012 together with associated fair values.

Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Group's income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return:

(i) Currency risk

The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar and the euro. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities, unrecognised firm commitments and investments in foreign operations.

To manage their foreign exchange risk arising from future commercial transactions and recognised assets and liabilities, entities in the Group use forward contracts, transacted with Group Treasury. Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in a currency that is not the entity's functional currency. Group Treasury is responsible for managing the net position in each currency via foreign exchange contracts transacted with financial institutions.

The Group's risk management policy aims to hedge firm commitments at between 60 per cent and 100 per cent of forecast exposures in each major currency for the subsequent 12 months to the extent that forecast transactions are highly probable.

The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk. The Group's policy is to manage the currency exposure arising from the net assets of the Group's foreign operations primarily through borrowings denominated in the relevant foreign currencies and through foreign currency swaps.

The Group's policy is not to hedge net investments in subsidiaries or the translation of profits or losses generated in overseas subsidiaries.

(ii) Interest rate risk

All material financial assets and liabilities are maintained at floating rates of interest. Where the Group has forecast average levels of net debt above £50m on a continuing basis, floating to fixed interest rate swaps will be used to fix the interest rate on a minimum of 50 per cent of the Group's net debt for a period of at least 12 months.

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's receivables from customers and investment securities.

The Group's exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the Group's customer base, including the default risk of the industry and country in which customers operate, has less of an influence on credit risk. Geographically, there is no concentration of credit risk. Where appropriate, letters of credit are used to mitigate the credit risk from customers.

The Group has established a credit policy that ensures that sales of products are made to customers with an appropriate credit history. The Group has a policy to procure advance payments during order negotiation which further reduces credit risk. Derivative counterparties and cash transactions are limited to high credit quality financial institutions and the Group has policies that limit the amount of credit exposure to any one financial institution.

 

Principal risks

Each business unit and every Group function has developed and maintains a risk register, capturing significant risks to which the relevant business unit is exposed or which have been identified as a risk to the Group by the relevant function.

These risks are reviewed on a regular basis by the Risk Committee, which identifies those risks which could have a material adverse impact in the context of the Group as a whole, and which are then reported to the Board. The principal risks identified by the Risk Committee and reported to the Board in 2011/12 are set out below. These are not presented in any particular order of potential materiality or probability of occurrence. It is not an exhaustive list as some risks may be as yet unknown and other risks, currently regarded as immaterial, could become material.

Health and safety failure

Risk

All De La Rue's activities are subject to extensive internal Health, Safety and Environmental (HSE) procedures, processes and controls. Nevertheless, there is a risk that failure of process could, in the worst case, lead to a serious injury or fatality.

Mitigation

The Group has detailed health and safety standards which are internally audited and supplemented by certification to the OHSAS18001 standard in all major facilities providing regular independent external audit verification. As part of the HSE management system, global audits of legal compliance with HSE requirements are undertaken at all major sites annually. The Group HSE Committee reviews HSE performance regularly. Each manufacturing facility has clear HSE action plans which are prioritised, monitored and subject to review by local senior management to ensure that health and safety standards are maintained. HSE performance is reported to the Board monthly. Travel security for employees is also kept under regular review, with enhanced arrangements introduced this year including for repatriation in the event of a serious illness or injury whilst overseas.

Non compliance/illegal behaviour by third parties acting outside the law or De La Rue policies

Risk

In some countries De La Rue relies on the services of third parties to represent its interests.  There is a risk that third parties such as suppliers or agents could operate in a manner contrary to the Group's strict policies on ethical business conduct or the law, exposing the Group to potential reputational damage as well as possible financial loss as a result of disbarment from tenders.

Mitigation

The Group has a process for the appointment and remuneration of third party partners (TPPs) which operates totally independently of the sales function. The process includes a risk assessment of TPPs with external specialists engaged to undertake due diligence as appropriate. The process covers, inter alia, the appointment, reappointment and remuneration of TPPs. Further control measures are also in place such as regular training for sales personnel, senior managers and TPPs on the Code of Business Principles and anti bribery and corruption issues with a particular focus on maintaining compliance with the UK Bribery Act. The TPP processes are subject to regular review by external advisers to provide further assurance. CodeLine (whistleblowing) procedures have also been expanded to encourage employees to report any suspicious conduct (see 'Unethical behaviour by employees' opposite). The behaviours of TPPs are strictly monitored and their management is overseen by the General Counsel and Company Secretary who reports directly to the Board.

Unethical behaviour by employees

Risk

There are already many controls across the business to ensure that standards of behaviour by employees are maintained at an appropriate level. However, it is possible that employees acting either individually or in collusion with others could act in contravention of the Group's stringent requirements resulting in major reputational and financial damage to the business.

Mitigation

The Code of Business Principles underwent a fundamental review and was re-launched last year. It is kept under regular review and is enforced robustly, including dealing with non compliances through disciplinary procedures where necessary. The Group's whistleblowing policies and procedures form an integral part of the new code and were also re-launched last year under the banner of CodeLine. Reports can be made anonymously, including by email, and are handled by a senior manager and reviewed routinely by the Board. Strict recruitment procedures are maintained including mandatory vetting (screening) processes which are reviewed on a regular basis.

Adverse movements in foreign exchange

Risk

The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar and euro. Any material exposure to foreign exchange risk could have a major effect on the Group's profits.

Mitigation

The Group aims to hedge between 60 and 100 per cent of foreign exchange exposure risk arising from future commercial transactions and recognised assets and liabilities. An annual review of hedging policy is presented to the Board.

Product security

Risk

There is the potential for reputational damage in the event of the loss of materials from a manufacturing site as a result of negligence or theft. Loss of product while in transit, particularly during transhipment, through the failure of freight companies or through the loss of an aircraft or vessel as a result of an accident or natural disaster, is also possible.

Mitigation

Security remains a key focus across De La Rue and there has been a significant strengthening of the corporate security function over the course of the year. Security performance is reviewed by the Executive Committee and reported monthly to the Board. Robust physical and audit security procedures at production sites reduce the risk of an inadvertent loss or theft during manufacturing. Movements of security materials between De La Rue sites and onward delivery to customers are conducted applying stringent operational procedures using carefully selected carriers and suitably screened personnel. All movements are risk managed and monitored globally on a 24/7 basis. Procedures are kept under continuous review with any incident or non compliance subject to rigorous investigation. De La Rue maintains a comprehensive, global insurance programme.

Environmental breach

Risk

De La Rue's main banknote paper manufacturing site is at Overton mill which is located in an environmentally sensitive area. Any significant environmental breach, such as unauthorised discharges, could result in immediate suspension of operations at the site.

Mitigation

Environmental awareness is afforded high priority at all De La Rue manufacturing sites and particularly at Overton. To ensure continued compliance with regulations, constant monitoring of all key operating parameters is in place with regular testing of discharge water against performance criteria agreed by the Environment Agency. Controls and specialist personnel are in place on a continuous basis throughout the year, with regular training and awareness programmes in place for all employees. Ninety two per cent of our Supply Chain sites have achieved ISO14001:2004 accreditation.

Breach of competition regulations

Risk

Breach of competition regulations could result in significant financial penalties as well as reputational damage and disbarment from tenders.

Mitigation

Regular training takes place for all sales and other personnel who may have contact with competitors, for example at industry forums or during formal tender processes.

Loss of key site

Risk

There are a number of key manufacturing sites across the business. The total loss of any one of these key sites could have a major financial impact, particularly where the site forms a single source of supply for the business.

Mitigation

It is a key focus to ensure that site risks are clearly prioritised and resourced and actions taken, wherever possible, to eliminate or minimise these risks.  The development, updating and testing of business continuity plans is also an essential component in maintaining assurance for the continuity of operations.  The Group aims to achieve the highest standards of risk engineering to minimise risks, particularly from fire hazards and the use of flammable solvents.

Information security

Risk

The confidentiality, integrity and availability of information systems (IS) could be affected by factors that include human error, ineffective design or operation of key controls or through malfunction or deliberate attack. Outages and interruptions could affect the Group's ability to conduct day to day operations and any compromise of the confidentiality of information could impact its reputation with current and potential customers.

Mitigation

De La Rue keeps all aspects of IS security arrangements under regular review. There are a number of controls in place to manage this risk including network segregation, access restrictions, system monitoring, security reviews and vulnerability assessments of infrastructure and applications. Disaster recovery plans are in place to assist in the prompt recovery from significant system outages or interruptions. Business continuity arrangements, including business impact assessments and regular testing are kept under regular review and subject to independent external verification.

Failure to achieve the Improvement Plan

Risk

As detailed in the Chief Executive's review on pages 8 to 9 of the De La Rue plc Annual Report 2012, the Group is in the process of implementing a major programme of change. Failure to manage this process could result in disruptions to the business or dilution of the intended benefits.

Mitigation

A dedicated and fully resourced change team has been established under the full time guidance of a member of the Executive Committee. A controlled project improvement process is in place with proactive business engagement and early mitigation of key risks wherever possible.

Geopolitical instability

Risk

Political unrest has the potential to delay procurement decisions for sensitive products such as banknotes and passports. Unexpected changes in key government positions may result in the unilateral cancellation of contracts under local jurisdiction. Breakdown of law and order can also disrupt freight schedules and increase shipping and delivery risks.

Mitigation

Close and regular contact is maintained with all key stakeholders so that any changes in customer requirements can be identified early. Financial risk exposure is mitigated through the use of secured payment mechanisms such as letters of credit or through close management of costs prior to receipt of payments.

 

Responsibility Statement of the Directors in respect of the Annual Report Announcement

The 2012 Annual Report and Accounts, which will be issued to shareholders on 20 June 2012, contain a responsibility statement in compliance with Rule 4.1.12 of the Financial Services Authority's Disclosure & Transparency Rules. This states that each of the Directors as at 29 May 2012, the date of approval of the 2012 Annual Report and Accounts, confirms that to the best of their knowledge: (a)  The Group Financial Statements, prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation taken as a whole (b)  The management report represented by the Directors' Report includes a fair review of the development and performance of the business and the position of the Group and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face

The Board

The Board of Directors that served during the period to 31 March 2012 and their respective responsibilities can be found on pages 34 and 35 of the De La Rue plc Annual Report 2012.

For and on behalf of the Board

Nicholas Brookes

Chairman

29 May 2012

GROUP INCOME STATEMENT For the period ended 31 March 2012
	Notes	2012 £m	2011 £m
Revenue		528.3	463.9
Operating expenses - ordinary		(465.2)	(423.5)
Operating expenses - exceptional	3	(24.8)	(15.6)
Total operating expenses		(490.0)	(439.1)
Operating profit		38.3	24.8
Comprising:
Operating profit before exceptional items		63.1	40.4
Exceptional items	3	(24.8)	(15.6)
Profit on sale of associated undertaking	3	-	55.1
Profit before interest and taxation		38.3	79.9
Interest income		0.3	0.9
Interest expense		(4.4)	(4.7)
Retirement benefit obligation finance income		39.4	35.7
Retirement benefit obligation finance cost		(40.7)	(39.0)
Net finance expense		(5.4)	(7.1)
Profit before taxation		32.9	72.8
Comprising:
Profit before tax and exceptional items		57.7	33.3
Exceptional items		(24.8)	39.5
Taxation	4	(0.7)	(5.4)
Profit for the year		32.2	67.4
Comprising:
Profit for the year before exceptional items		43.8	24.3
(Loss)/profit for the year on exceptional items		(11.6)	43.1
Profit attributable to equity shareholders of the Company		31.6	66.9
Profit attributable to non controlling interests		0.6	0.5
		32.2	67.4

Profit for the year attributable to the Company's equity holders
Earnings per share Basic	5	31.8p	67.6p
Diluted	5	31.5p	67.2p

GROUP STATEMENT OF COMPREHENSIVE INCOME For the period ended 31 March 2012
		2012 £m	2011 £m
Profit for the financial year		32.2	67.4
Other comprehensive income
Foreign currency translation differences for foreign operations		(3.9)	(1.3)
Net actuarial losses on retirement benefit obligations		(63.6)	(31.0)
Change in fair value of cash flow hedges		(0.8)	1.2
Change in fair value of cash flow hedges transferred to the Income Statement		(2.5)	5.9
Ineffective portion of change in fair value of cash flow hedges transferred to the Income Statement		0.3	(0.3)
Income tax relating to components of other comprehensive income		13.5	5.3
Other comprehensive income for the year, net of tax		(57.0)	(20.2)
Comprehensive income for the year		(24.8)	47.2
Comprehensive income for the year attributable to:
Equity shareholders of the Company		(25.4)	46.7
Non controlling interests		0.6	0.5
		(24.8)	47.2

 

GROUP BALANCE SHEET At 31 March 2012
		2012 £m	2011 £m
Assets
Non current assets
Property, plant and equipment		160.9	162.0
Intangible assets		24.2	23.3
Investments in associates and joint ventures		0.1	0.1
Deferred tax assets		40.4	27.8
Derivative financial instruments		-	0.3
		225.6	213.5
Current assets
Inventories		68.6	67.5
Trade and other receivables		83.6	89.7
Current tax assets		0.6	6.7
Derivative financial instruments		5.9	15.5
Cash and cash equivalents		24.0	32.6
		182.7	212.0
Total assets		408.3	425.5
Liabilities
Current liabilities
Borrowings		(48.8)	(63.8)
Trade and other payables		(170.2)	(164.4)
Current tax liabilities		(33.6)	(33.1)
Derivative financial instruments		(5.6)	(13.5)
Provisions for other liabilities and charges		(40.2)	(27.0)
		(298.4)	(301.8)
Non current liabilities
Retirement benefit obligations		(145.6)	(102.9)
Deferred tax liabilities		(1.3)	(1.0)
Derivative financial instruments		(0.9)	(0.6)
Provisions for other liabilities and charges		(6.9)	-
Other non current liabilities		(0.8)	(2.4)
		(155.5)	(106.9)
Total liabilities		(453.9)	(408.7)
Net (liabilities)/assets		(45.6)	16.8
Equity
Share capital		45.7	45.6
Share premium account		30.7	29.1
Capital redemption reserve		5.9	5.9
Hedge reserve		(1.2)	1.0
Cumulative translation adjustment		(1.4)	2.5
Other reserves		(83.8)	(83.8)
Retained earnings		(45.4)	13.0
Total equity attributable to shareholders of the Company		(49.5)	13.3
Non controlling interests		3.9	3.5
Total equity		(45.6)	16.8

 

GROUP STATEMENT OF CHANGES IN EQUITY For the period ended 31 March 2012
	Attributable to equity shareholders							Non controlling interest	Total equity
	Share capital £m	Share premium account £m	Capital redemption reserve £m	Hedge reserve £m	Cumulative translation adjustment £m	Other reserve £m	Retained earnings £m	£m	£m
Balance at 27 March 2010	45.5	28.4	5.9	(3.9)	3.8	(83.8)	10.4	3.2	9.5
Comprehensive income for the year	-	-	-	4.9	(1.3)	-	43.1	0.5	47.2
Share capital issued	0.1	0.7	-	-	-	-	-	-	0.8
Employee share scheme:
- value of services provided	-	-	-	-	-	-	1.9	-	1.9
Income tax on income and expenses recognised directly in equity	-	-	-	-	-	-	(0.5)	-	(0.5)
Dividends paid	-	-	-	-	-	-	(41.9)	(0.2)	(42.1)
Balance at 26 March 2011	45.6	29.1	5.9	1.0	2.5	(83.8)	13.0	3.5	16.8
Comprehensive income for the year	-	-	-	(2.2)	(3.9)	-	(19.3)	0.6	(24.8)
Share capital issued	0.1	1.6	-	-	-	-	-	-	1.7
Employee share scheme:
- value of services provided	-	-	-	-	-	-	2.5	-	2.5
Income tax on income and expenses recognised directly in equity	-	-	-	-	-	-	0.4	-	0.4
Dividends paid	-	-	-	-	-	-	(42.0)	(0.2)	(42.2)
Balance at 31 March 2012	45.7	30.7	5.9	(1.2)	(1.4)	(83.8)	(45.4)	3.9	(45.6)

GROUP CASH FLOW STATEMENT For the period ended 31 March 2012
	Notes	2012 £m	2011 £m
Cash flows from operating activities
Profit before tax		32.9	72.8
Adjustments for:
Finance income and expense		5.4	7.1
Depreciation and amortisation		26.6	24.4
Increase in inventory		(2.1)	(7.9)
Decrease/(Increase)in trade and other receivables		6.6	(11.6)
Increase/(decrease) in trade and other payables		11.6	(9.9)
Increase/(decrease) in reorganisation provisions		17.3	(1.4)
Special pension fund contributions		(23.1)	(42.5)
Loss on disposal of property, plant, equipment and software intangibles		3.0	1.4
Non operating exceptional items	3	-	(55.1)
Other non cash movements		0.2	2.4
Cash generated from operating activities		78.4	(20.3)
Tax received		7.1	4.8
Net cash flows from operating activities		85.5	(15.5)
Cash flows from investing activities
Net proceeds from sale of investment in associate		-	75.4
Purchases of property, plant, equipment and software intangibles		(32.1)	(30.7)
Development assets capitalised		(3.7)	(4.3)
Proceeds from sale of property, plant and equipment		0.4	0.3
Net cash flows from investing activities		(35.4)	40.7
Net cash inflow before financing activities		50.1	25.2
Cash flows from financing activities
Proceeds from issue of share capital		1.7	0.8
(Repayments of)/proceeds from borrowings		(7.3)	6.0
Finance lease principal payments		-	(0.2)
Interest received		0.3	0.9
Interest paid		(3.5)	(4.5)
Dividends paid to shareholders		(42.0)	(41.9)
Dividends paid to non controlling interests		(0.2)	(0.2)
Net cash flows from financing activities		(51.0)	(39.1)
Net decrease in cash and cash equivalents in the year		(0.9)	(13.9)
Cash and cash equivalents at the beginning of the year		23.4	37.8
Exchange rate effects		-	(0.5)
Cash and cash equivalents at the end of the year		22.5	23.4
Cash and cash equivalents consist of:
Cash at bank and in hand	7	24.0	31.9
Short term bank deposits	7	-	0.7
Bank overdrafts	7	(1.5)	(9.2)
	7	22.5	23.4

1 Basis of preparation and accounting policies

The preliminary announcement for the period ended 31 March 2012 has been prepared in accordance with International Accounting Standards and International Financial Reporting Standards (collectively "IFRS") as adopted by the European Union (EU) at 31 March 2012. Details of the accounting policies applied are those set out in De La Rue plc's Annual Report 2011.

During the period the Group has adopted a number of revised and amended standards and interpretations, none of which has had a material impact on the Group's net cash flows, financial position, total comprehensive income or earnings per share.

The financial information set out above does not constitute the Group's statutory accounts for the periods ended 31 March 2012 or 26 March 2011. The financial information for the period ended 31 March 2012 is derived from the statutory accounts for the period ended 31 March 2012 which will be delivered to the registrar of companies. The auditor has reported on the accounts for the period ended 31 March 2012; their report was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. These consolidated financial statements have been prepared on the going concern basis and using the historical cost convention, modified for certain items carried at fair value, as stated in the Group's accounting policies.

2 Segmental analysis
The Group has two business units, Currency and Solutions.  Currency is a single operating unit.  Solutions consists of three operating units: Cash Processing Solutions, Security Products and Identity Systems.  The Board, which is the Group's Chief Operating Decision Maker, monitors the performance of the Group at an operating unit level and there are therefore four reportable segments.  The principal financial information reviewed by the Board, is revenue and operating profit before exceptional items, measured on an IFRS basis. The Group's segments are:
·        Currency - provides banknote paper, printed banknotes and banknote security features
·       Solutions
-	Cash Processing Solutions - primarily focused on the production of large banknote sorters and authentication machines for central banks, complimenting the Currency business
-	Security Products - produces security documents, including authentication labels, brand licensing products, government documents, cheques and postage stamps
-	Identity Systems - involved in the provision of passport, ePassport, national ID and eID, driving licence and voter registration schemes

	Currency	Solutions			Exceptional items	Total
2012		Cash Processing Solutions	Security Products	Identity Systems
	£m	£m	£m	£m	£m	£m
Total revenue	332.6	65.7	65.4	75.2	-	538.9
Less: Inter segment revenue	(0.6)	-	(10.0)	-	-	(10.6)
Revenue	332.0	65.7	55.4	75.2	-	528.3
Operating profit before exceptional items	45.3	2.0	7.3	8.5	-	63.1
Exceptional items - operating (note 3)	(6.5)	-	(14.3)	-	(4.0)	(24.8)
Operating profit/(loss)	38.8	2.0	(7.0)	8.5	(4.0)	38.3
Net interest expense						(4.1)
Retirement benefit obligations net finance expense						(1.3)
Profit before taxation						32.9
Segment assets	194.8	40.7	22.7	48.6	-	306.8
Unallocated assets						101.5
Total assets						408.3
Segment liabilities	(101.0)	(25.4)	(13.3)	(27.0)	-	(166.7)
Unallocated liabilities						(287.2)
Total liabilities						(453.9)
Capital expenditure on property, plant and equipment	25.4	0.9	2.0	2.8	-	31.1
Capital expenditure on intangible assets	1.6	2.1	-	0.4	-	4.1
Depreciation of property, plant and equipment	15.9	1.9	3.3	3.0	-	24.1
Amortisation of intangible assets	0.9	0.5	-	1.1	-	2.5

	Currency	Solutions			Exceptional items	Total
2011		Cash Processing Solutions	Security Products	Identity Systems
	£m	£m	£m	£m	£m	£m
Total revenue	289.0	57.4	63.3	62.8	-	472.5
Less: Inter segment revenue	(0.6)	-	(8.0)	-	-	(8.6)
Revenue	288.4	57.4	55.3	62.8	-	463.9
Operating profit before exceptional items	28.5	0.5	9.0	2.4	-	40.4
Exceptional items - operating (note 3)	(29.0)	-	-	-	13.4	(15.6)
Operating profit	(0.5)	0.5	9.0	2.4	13.4	24.8
Profit on sale of associated undertaking						55.1
Net interest expense						(3.8)
Retirement benefit obligations net finance expense						(3.3)
Profit before taxation						72.8
Segment assets	197.1	35.3	23.9	53.7	-	310.0
Unallocated assets						115.5
Total assets						425.5
Segment liabilities	(106.2)	(22.6)	(10.8)	(28.2)	-	(167.8)
Unallocated liabilities						(240.9)
Total liabilities						(408.7)
Capital expenditure on property, plant and equipment	6.1	0.8	1.7	14.6	-	23.2
Capital expenditure on intangible assets	2.3	2.7	-	2.0	-	7.0
Depreciation of property, plant and equipment	15.8	2.1	2.4	2.9	-	23.2
Amortisation of intangible assets	0.4	0.6	-	0.2	-	1.2

Unallocated assets principally comprise deferred tax assets of £40.4m (2010/11: £27.8m), cash and cash equivalents of £24.0m (2010/11: £32.6m) which are used as part of the Group's financing offset arrangements and derivative financial instrument assets of £5.9m (2010/11: £15.5m) as well as current tax assets, associates and centrally managed property, plant and equipment. Unallocated liabilities principally comprise retirement benefit obligations of £145.6m (2010/11: £102.9m), borrowings of £48.8m (2010/11: £63.8m), current tax liabilities of £33.6m (2010/11: £33.1m) and derivative financial instrument liabilities of £6.5m (2010/11: £14.1m) as well as deferred tax liabilities and centrally held accruals and provisions.

3 Exceptional items
	2012 £m	2011 £m
Site relocation and restructuring	(24.1)	-
Curtailment gain on closure of defined benefit scheme to further accrual	-	16.0
Costs relating to paper production quality issues	(0.7)	(29.0)
Corporate costs	-	(2.6)
Exceptional items in operating profit	(24.8)	(15.6)
Profit on sale of associated undertaking	-	55.1
Total exceptional items	(24.8)	39.5
Tax credit on exceptional items	13.2	3.6

Exceptional costs of £24.8m have been incurred in 2011/12 mainly in connection with the closure of three sites and the relocation of manufacturing activity including £11.3m in staff compensation, £1.1m of fixed asset impairment charges, £8.8m for site exit costs and £2.9m in associated reorganisation costs.  The exceptional charge also includes additional costs (reported under the Currency segment) of £0.7m associated with the paper quality issue that arose in 2010/11. Exceptional costs in the prior year related to the following:

·      A curtailment gain following the closure of the defined benefit pension scheme to further accruals from 2013

·    An exceptional charge relating to the paper production quality issues incurred in the year ended 26 March 2011 of £29.0m included production and rectification costs of £19.9m, a £0.9m impairment of receivables, legal costs of £3.5m and other costs of £4.7m mainly relating to losses on derivatives related to sales and purchase contracts rendered ineffective by the cancellation of shipments. Provision has not been made for the potential costs of resolutions or for potential fines from regulatory authorities. The nature and extent of these resolutions and potential fines will be the subject of ongoing discussion, the outcome of which cannot be estimated reliably at present. The issue is more fully described in note 8: Contingent liabilities

·    Corporate costs in relation to the engagement of legal and professional advisors following a takeover approach for the Group The profit arising on the sale of an associated undertaking is in respect of the sale of the Group's share in Camelot, the UK national lottery operator, which was completed on 8 July 2010. Tax credits relating to exceptional items arising in the year were £6.2m (2010/11: £1.1m). In addition, there was an exceptional credit of £7.0m (2010/11: £2.5m) in respect of the determination of the tax treatment of prior year exceptional items.

4 Taxation
	2012 £m	2011 £m
Consolidated Income Statement
Current tax:
UK Corporation tax:
- Current tax	7.6	0.7
- Adjustment in respect of prior years	(6.8)	(4.2)
	0.8	(3.5)
Overseas tax charges:
- Current year	3.7	2.9
- Adjustment in respect of prior years	1.0	3.4
	4.7	6.3
Total current income tax expense	5.5	2.8
Deferred tax:
- Origination and reversal of temporary differences, UK	(6.3)	3.3
- Origination and reversal of temporary differences, Overseas	1.5	(0.7)
Total deferred tax (credit)/expense	(4.8)	2.6
Total income tax expense in the consolidated Income Statement	0.7	5.4
Attributable to:
- Ordinary activities	13.9	9.0
- Exceptional items	(13.2)	(3.6)
Consolidated Statement of Comprehensive Income:
- On pension actuarial adjustments	(12.7)	(7.7)
- On cash flow hedges	(0.8)	1.9
- On foreign exchange on quasi equity balances	-	0.5
Income tax credit reported within comprehensive income	(13.5)	(5.3)
Consolidated Statement of Changes in Equity:
- On share options	(0.4)	0.5
Income tax (credit)/expense reported within equity	(0.4)	0.5

The tax on the Group's consolidated profit before tax differs from the UK tax rate of 26 per cent as follows:

	2012			2011
	Before exceptionals £m	Exceptional items £m	Total £m	Before exceptionals £m	Exceptional items £m	Total £m
Profit before tax	57.7	(24.8)	32.9	33.3	39.5	72.8
Tax calculated at UK tax rate of 26 per cent (2011: 28 per cent)	15.0	(6.4)	8.6	9.3	11.1	20.4
Effects of overseas taxation	(1.3)	-	(1.3)	(1.4)	-	(1.4)
Non taxable disposal of Camelot	-	-	-	-	(15.4)	(15.4)
Expenses not deductible for tax purposes	1.2	0.5	1.7	1.2	1.5	2.7
Increase in/(usage of) unutilised tax losses	0.1	(0.3)	(0.2)	(0.7)	1.7	1.0
Adjustments in respect of prior years	(0.7)	(7.0)	(7.7)	0.7	(2.5)	(1.8)
Change in UK tax rate	(0.4)	-	(0.4)	(0.1)	-	(0.1)
Tax charge/(credit)	13.9	(13.2)	0.7	9.0	(3.6)	5.4
The underlying effective tax rate excluding one-off items was 24.1 per cent (2010/11: 27.0 per cent).

5 Earnings per share
	2012 pence per share	2011 pence per share
Total operations
Basic earnings per share	31.8	67.6
Diluted earnings per share	31.5	67.2
Headline
Basic earnings per share	43.5	24.0
Diluted earnings per share	43.1	23.9
Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year, excluding those held in the employee share trust which are treated as cancelled. For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted for the impact of all dilutive potential ordinary shares.
The Directors are of the opinion that the publication of the headline earnings per share, before exceptional items, is useful to readers of the accounts as it gives an indication of underlying business performance. Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below.

Earnings	2012 £m	2011 £m
Earnings for basic and diluted earnings per share	31.6	66.9
Exceptional items	24.8	(39.5)
Less: Tax on exceptional items	(13.2)	(3.6)
Earnings for headline earnings per share	43.2	23.8

Weighted average number of ordinary shares	2012 Number m	2011 Number m
For basic earnings per share	99.3	99.0
Dilutive effect of share options	0.9	0.6
For diluted earnings per share	100.2	99.6

6 Equity dividends
	2012 £m	2011 £m
Final dividend for the year ended 26 March 2011 of 28.2p paid on 4 August 2011	28.0	-
Interim dividend for the period ended 24 September 2011 of 14.1p paid on 6 January 2012	14.0	-
Final dividend for the year ended 27 March 2010 of 28.2p paid on 5 August 2010	-	27.9
Interim dividend for the period ended 25 September 2010 of 14.1p paid on 12 January 2011	-	14.0
	42.0	41.9
A final dividend per equity share of 28.2p has been proposed for the period ended 31 March 2012, payable on 2 August 2012. In accordance with IFRS accounting requirements this dividend has not been accrued in these consolidated financial statements.
7 Analysis of net debt
	2012 £m	2011 £m
Cash at bank and in hand	24.0	31.9
Short term bank deposits	-	0.7
Bank overdrafts	(1.5)	(9.2)
Total cash and cash equivalents	22.5	23.4
Borrowings due within one year	(47.3)	(54.6)
Borrowings due after one year	-	-
Net debt	(24.8)	(31.2)

8 Property, plant and equipment
	Land and buildings £m	Plant and machinery £m	Fixtures and fittings £m	In course of construction £m	Total £m
Cost or valuation
At 27 March 2010	53.5	306.5	17.8	20.0	397.8
Exchange differences	(0.4)	(2.1)	(0.2)	(0.1)	(2.8)
Additions	-	8.8	0.9	13.5	23.2
Transfers from assets in the course of construction	1.1	11.8	0.6	(13.5)	-
Reclassifications	-	(3.5)	3.5	-	-
Disposals	(0.1)	(6.6)	(1.9)	(0.7)	(9.3)
At 26 March 2011	54.1	314.9	20.7	19.2	408.9
Exchange differences	(0.2)	(4.8)	(0.2)	(0.1)	(5.3)
Additions	2.2	6.3	2.9	19.7	31.1
Transfers from assets in the course of construction	5.1	12.6	1.9	(22.6)	(3.0)
Disposals	(1.0)	(8.8)	(1.4)	(0.4)	(11.6)
At 31 March 2012	60.2	320.2	23.9	15.8	408.9
Accumulated depreciation
At 27 March 2010	21.2	198.1	12.9	-	232.2
Exchange differences	(0.1)	(1.3)	(0.2)	-	(1.6)
Depreciation charge for the year	1.5	20.1	1.6	-	23.2
Reclassifications	-	(3.2)	3.2	-	-
At 26 March 2011	22.5	208.1	16.3	-	246.9
Exchange differences	(0.1)	(3.1)	(0.2)	-	(3.4)
Depreciation charge for the year	1.5	19.7	2.9	-	24.1
Disposals	(0.1)	(7.5)	(0.9)	-	(8.4)
At 31 March 2012	23.9	217.2	18.1	-	259.2
Net book value at 31 March 2012	36.3	103.0	5.8	15.8	160.9
Net book value at 26 March 2011	31.6	106.8	4.4	19.2	162.0
Net book value at 27 March 2010	32.3	108.4	4.9	20.0	165.6

 

9 Retirement benefit obligations
The Group operates pension plans throughout the world covering the majority of employees. These plans are devised in accordance with local conditions and practices in the country concerned. The assets of the Group's plans are generally held in separately administered trusts or are insured.
	2012 £m	2011 £m
UK retirement benefit obligations	(143.3)	(100.5)
Overseas retirement benefit obligations	(2.3)	(2.4)
Retirement benefit obligations	(145.6)	(102.9)
Deferred tax	35.0	27.7
Net retirement benefit obligations	(110.6)	(75.2)
The largest defined benefit pension plan operated by the Group is in the UK:
	2012 £m	2011 £m
At 26 March 2011/27 March 2010	(100.5)	(124.8)
Current service cost included in operating profit	(7.8)	(7.6)
Curtailments	-	16.0
Net finance expense	(1.3)	(3.2)
Actuarial losses arising over the year	(63.6	(31.1)
Cash contributions and benefits paid	29.9	50.2
Transfers	-	-
At 31 March 2012/26 March 2011	(143.3)	(100.5)
Amounts recognised in the consolidated Balance Sheet:
Fair value of plan assets	697.6	638.5
Present value of funded obligations	(833.8)	(732.0)
Funded defined benefit pension plans	(136.2)	(93.5)
Present value of unfunded obligations	(7.1)	(7.0)
Net liability	(143.3)	(100.5)
Amounts recognised in the consolidated Income Statement:
Included in employee benefits expense:
- Current service cost	(7.8)	(7.6)
Included in profit from operations:
- Curtailments	-	16.0
Included in net finance expense:
- Expected return on plan assets	39.4	35.7
- Interest expense	(40.7)	(38.9)
	(1.3)	(3.2)
Total recognised in the consolidated Income Statement	(9.1)	5.2
Actual return on plan assets	60.8	46.4
Amounts recognised in the Statement of Comprehensive Income:
Actuarial gains on plan assets	21.4	10.7
Actuarial losses on defined benefit pension obligations	(85.0)	(41.8)
Amounts recognised in the Statement of Comprehensive Income	(63.6)	(31.1)
Principal actuarial assumptions:
	2012 UK %	2011 UK %
Future salary increases	-	-
Future pension increases - past service	3.70	3.80
Future pension increases - future service	3.20	3.50
Discount rate	4.80	5.60
Inflation rate	3.30	3.60
Expected return on plan assets:
Equities	8.50	8.50
Bonds	4.80	5.60
Gilts	2.90	4.20
The expected rate of return on plan assets has been determined following advice from the plans' independent actuary and is based on the expected return on each asset class together with consideration of the long term asset strategy.
The mortality assumptions used to assess the defined benefit obligation for the UK plan are based on tables issued by the Continuous Mortality Investigation Bureau. At 31 March 2012 and 26 March 2011 mortality assumptions are based on the PxA92 birth year tables multiplied by a rating of 125 per cent and allowance for medium cohort mortality improvements in future, with a 0.5 per cent mortality improvement underpin. The resulting life expectancy for a 65 year old pensioner is 20.6 years (2010/11:20.6 years).

10 Related party transactions
During the year the Group traded on an arms length basis with the associated company Fidink (33.3 per cent owned) The Group's trading activities with this company included £16.3m (2010/11: £14.3m) for the purchase of ink and other consumables. At the balance sheet date there were creditor balances of £0.3m (2010/11: £1.9m) with Fidink. Intra Group transactions between the parent and the fully consolidated subsidiaries or between fully consolidated subsidiaries are eliminated on consolidation. Such transactions were contracted on an arms length basis.
	2012 £m	2011 £m
Salaries and other short-term employee benefits	3,612.3	2,267.3
Termination benefits	-	333.0
Retirement benefits:
- Defined contribution	276.1	24.5
- Defined benefit	57.2	113.4
Share based payments	1,290.6	1,051.3
	5,236.2	3,789.5
Key management comprises members of the Board and the Executive Committee. Key management compensation includes fees of Non-executive Directors, compensation for loss of office, ex gratia payments, redundancy payments, enhanced retirement benefits and any related benefits in kind connected with a person leaving office or employment.

11 Share based payments
At 31 March 2012, De La Rue plc has a number of share based payment plans, which are described below. These plans have been accounted for in accordance with the fair value recognition provisions of IFRS 2, 'Share Based Payments', which means that IFRS 2 has been applied to all grants of employee share based payments granted after 7 November 2002 that had not vested at 1 January 2005 and cash settled awards outstanding at 1 January 2005. The compensation cost and related liability that have been recognised for De La Rue's share based compensation plans are set out in the table below:
	Expense recognised for the year			Liability at end of year
	2012 £m	2011 £m		2012 £m		2011 £m
Annual bonus plan	0.2	0.1		-		-
Deferred bonus and matching plan	(0.1)	0.5		-		-
Performance share plan	2.2	0.1		-		-
Recruitment share award	0.1	0.6		-		-
Retention share award	0.1	0.4		-		-
Savings related share option plan	0.3	0.2		-		-
US employee share plan	-	-		-		-
	2.8	1.9		-		-

12  Contingent liabilities

De La Rue has extensive international operations and is subject to various legal and regulatory regimes, including those covering taxation matters. While the outcome of litigation and other disputes can never be predicted with certainty, having regard to legal advice received and the insurance arrangements of the Company and its subsidiaries, the Directors believe that adequate provision has been made to cover these matters.   The Group provides guarantees and performance bonds which are issued in the ordinary course of business.  In the event that a guarantee or bond is called provision may be required subject to the particular circumstances, including an assessment of its recoverability. In July 2010 the Board commissioned an investigation by external lawyers into issues that had been brought to its attention internally. The investigation, which was completed in October 2010, found nothing of substance to support the matters raised other than in respect of some paper production issues where it was found that a small number of the many detailed specification parameters of some paper had fallen marginally short of specification. It was also established that certain paper specification test certificates had been deliberately falsified. The Board reported the findings of the investigation to the appropriate authorities, who are considering the matter, and has implemented a number of measures arising from the findings of the investigation. Provision, as described in note 3: Exceptional items, has been made for the costs associated with the paper production issues identified at this stage including the write off of trade receivables and other costs relating to the investigation, production and rectification of these matters. Provision has not been made for the potential cost of resolutions or for potential fines from regulatory authorities. The nature and extent of these resolutions will be the subject of ongoing discussions, the outcome of which cannot be estimated reliably at present. The timing, response and outcome of the consideration by the authorities of the reported findings of the investigation is also uncertain and the financial consequences, if any, cannot be estimated reliably at present.

13 Capital commitments
	2012 £m	2011 £m
The following commitments existed at the balance sheet date:
Contracted but not provided for in the accounts	22.0	4.0

14 Dates

The consolidated accounts have been prepared as at 31 March 2012, being the last Saturday in March. The comparatives for the 2010/11 financial year are for the period ended 26 March 2011.

15 Statutory accounts

Statutory accounts for the period ended 31 March 2012 will be made available to shareholders for subsequent approval at the Annual General Meeting and copies will be available from the Company Secretary at De La Rue plc, De La Rue House, Jays Close, Viables, Hampshire, RG22 4BS.

16 Foreign exchange
Principal exchange rates used in translating the Group's results:
	2011/12		2010/11
	Avg	Year End	Avg	Year End
US dollar	1.60	1.60	1.55	1.61
Euro	1.16	1.20	1.17	1.14

17 De La Rue financial calendar : 2012/13
Ex dividend date for 2011/12 final dividend	4 July 2012
Record date for final dividend	6 July 2012
Annual General Meeting	26 July 2012
Payment of 2011/12 final dividend	2 August 2012

 

END

 

 

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