Annual Financial Report

IMPACT

MITIGATION

Effect of the economic climate upon demand levels

The performance of the Group is influenced by the economic conditions of the countries in which it operates around the world. The precise nature of all the risks and uncertainties the Group faces, and will face, as a result of the global financial crisis and the global economic outlook cannot be predicted and many of these risks are outside the Group's control. These economic conditions may continue to cause reduced levels of revenue and result in a greater risk of debtors defaulting on payment terms and may adversely impact the Group's financial condition and prospects.

Umeco considers that its broad market base and the sectors in which it operates have proven resistant to the worst effects of the downturn. Long-term demand levels for advanced composite materials are considered to be robust, due to moves by aerospace and other manufacturers to improve performance. Inventory and debtor policies are continually re-assessed in light of market conditions and are rigorously enforced.

Restrictions resulting from availability of debt facilities

If the Group is unable to obtain sufficient additional capital resource in the future, it might not be able to take advantage of any new strategic opportunities that arise, as a result of which the Group may be disadvantaged relative to its competitors. The Group's operational and financial flexibility is restricted by the quantum of its committed bank facilities and their associated financial covenants.

The Group maintains committed bank facilities, which are regularly reviewed in comparison to forecast capital requirements, and this information taken together, enables the Group to take appropriate action on a timely basis.

Reduced demand from the civil aerospace sector

The civil aerospace industry has historically been a cyclical industry, strongly influenced by consumer confidence. Consumer confidence is affected by factors such as the cost of air travel, terrorist action, outbreak of war or other civil strife. A prolonged reduction in demand for air travel may result in the cancellation or deferral of orders for new aircraft and this would adversely affect the Group's revenue and prospects.

The leading indicators for long-term demand in the civil aerospace market continue to be positive and passenger and cargo traffic levels have shown high levels of growth so far this year. Following completion of the disposal of the Supply Chain business, the Group will have significantly reduced its dependency on the civil aerospace market.

Technological developments

The markets for some of the Group's products and services are characterised by continual technological development. As a result, substantial improvement in the scope and quality of product function and performance can occur over a short period of time. If the Group is not able to develop and market commercially competitive services or products in a timely manner in response to changes in technology, it may lose customers and its profitability may decrease. Moreover, it may experience operating losses after new services or products are introduced and commercialised because of high start-up costs, unexpected manufacturing costs, unexpected problems or lack of demand.

The Group has invested in a global R&D centre where purpose designed products are developed to production readiness on a continual basis and where part funded R&D projects are undertaken, with the aim of developing new applications for advanced composite materials and low cost manufacturing cost technologies for a variety of industries. The Group protects its intellectual property rights where possible through the application for patent protection or otherwise through the safeguarding of its trade secrets.

Failure of suppliers

Interruptions in the supply of materials could affect the Group's ability to fulfil customer orders.

Forward demand and purchase order levels are closely monitored to ensure the continued availability of products from suppliers. The Group continues to focus on cementing strong relationships with suppliers and maintains safety stocks where appropriate.

Acquisitions

The Group has made, and may make further, strategic acquisitions of complementary businesses, assets and companies, both in the UK and abroad, to accelerate growth and increase revenue and profits. To the extent that the Group is unable to integrate the operations successfully, retain qualified personnel or customers, where applicable, and avoid unforeseen costs and delays, the Group's business, financial condition and the results of its operations may be adversely affected. Furthermore, each acquisition requires considerable management attention and this diversion from the day-to-day management of the Group could adversely affect the Group's operating results.

Comprehensive due diligence is carried out prior to the completion of all acquisitions and appropriate representations, warranties and indemnities are obtained from vendors. Post-acquisition, action plans are promptly implemented to ensure systems of management and control meet the Group's standards.

Financial Risks

The Group is exposed to a number of financial market risks including credit risk, interest rate risk and foreign exchange rate risk. The Group has historically sought to maintain a natural hedge against movements in currencies other than sterling, including the drawing down of debt denominated in US dollars to provide a hedge against movements in the value of the Group's USA based net assets. To the extent that the balance of net assets and debt drawdown denominated in US dollars changes and/or the relative level of purchases and sales denominated in currencies other than sterling change, this natural hedge will become less effective. In this event, fluctuations in the exchange rates of sterling and these currencies could have an adverse impact on the Group's operations, its reported results and financial position.

Policies and procedures exist to ensure customers are given an appropriate level of credit according to their trading history and financial status, and a prudent approach is adopted towards credit control. Interest rate swap contracts are used to hedge the Group's exposure to movements in rates. Forward foreign exchange contracts are used where necessary to manage the exposure to exchange rate movements.

Interruption or failure of IT systems

Any interruptions to the operation of the Group's IT systems could have an adverse effect on its performance.

The Group operates on de-centralised IT systems. Each business unit has in place well established virus protection, back-up and recovery procedures. Changes to systems are implemented in a structured manner following the preparation of documented project plans.

Competition and retention of customers

The loss of key contracts, whether through competition, consolidation or insolvency, could have a material impact on the Group's trading and financial position.

The Group monitors its competitive position closely, to ensure it provides customers with the optimal product offering. The Group devotes significant resources to ensure that strong relationships are developed and maintained with customers. Developing new and innovative products is a key aspect of ensuring customer retention.

Product failure

The Group provides warranties to customers regarding the specification and/or proper operation of the products that it supplies. Failure of these products to operate properly or to meet contractual specifications may increase the Group's costs by requiring the replacement of parts and equipment or monetary re-imbursement to a customer, thereby reducing the Group's profitability. The Group supplies many products and services to the aerospace & defence industry. The failure of any such products and services could result in liabilities which exceed the Group's product liability insurance cover or which are outside the scope of such cover. Any such liability would have to be met from the Group's financial resources and could have a material adverse effect on the Group's financial performance.

Stringent quality control procedures ensure thorough checking of products received and despatched. Appropriate quality control mechanisms are in place over all manufacturing processes. Product liability insurance is maintained, with cover being benchmarked by the Group's insurance brokers.

The Supply Chain disposal may not complete

Completion of the disposal is subject to certain actions relating to obtaining shareholder consent and to regulatory consent in respect of the USA's International Traffic in Arms Regulations. If any of the conditions are not satisfied or waived by 20 August 2011 then the disposal agreement will terminate. If the disposal does not proceed, this may have a material adverse effect on the Group, its management and its employees, who have committed considerable time, effort and resource in preparing the Supply Chain business for sale and executing the disposal. This may also create uncertainty for the customers, management and employees of the Supply Chain business in relation to Umeco's future intentions for the Supply Chain business.

A General Meeting of shareholders held on 13 June 2011 approved the disposal. The other condition to the disposal completing is regulatory in nature and outside the control of management.

Fluctuations in the price of key raw materials

The nature of the Group's business means that it relies heavily on the supply of raw materials such as carbon fibre, resins and other oil based products. Fluctuating oil prices could lead to raw material price increases for the Group which it may not be able to pass on to its customers, reducing its profitability. Should the Group need to pass increased costs on to customers, a consequential drop in the level of demand could have a material adverse effect on the revenues and profitability of the Group.

The Group endeavours to agree contracts with customers that have escalation clauses enabling the impact of raw material cost increases to be passed on. Where such clauses are not agreed, management seek to limit the risk by agreeing shorter term contracts with customers.

Loss of key management or personnel

The Group's businesses are highly reliant on the continued services of its senior management and other key personnel. These individuals possess sales and marketing, engineering, manufacturing, financial and administrative skills that are critical to the continued successful operation of the Group's businesses. Failure to retain such individuals, whether such individuals wish to enter into the employment of the Group's competitors or otherwise, or the failure to attract and retain strong management and technical staff in the future, could have an adverse effect upon the Group's businesses, financial condition and the results of its operations. Furthermore, an extended interruption in the services of one or more members of key management or personnel may have similar consequences.

Incentive schemes for senior managers are in place and are reviewed regularly. Remuneration policy is assessed in the light of professional remuneration studies to ensure that key managers are rewarded appropriately and competitively.

Succession planning and career progression are considered at a strategic level at each Group company. Proper documentation of the Group's procedures and practices and an overlap of skills help reduce the effect of the departure of key personnel.