Annual Financial Report

Risk

Impact

Control

Lapse of the offer from Cytec. The acquisition by Cytec of Umeco is dependent on a number of factors including the receipt of certain competition clearances and sanction of the Scheme of Arrangement by the Court.

Lapse of the offer from Cytec would expose the Group to high costs of an aborted transaction and to potential reputational damage and reduction of share value.

The shareholder meetings held on 28 May 2012 overwhelmingly approved the Scheme of Arrangement. Competition clearances are in the process of being sought.

Continuing economic uncertainty. Despite some recovery in markets during 2011/12, economic conditions continue to be uncertain, in particular within the Eurozone.

Greater potential volatility in demand levels, continuing uncertainty surrounding the Euro and a heightened risk of debtors defaulting expose the Group to the risk of reduced profitability.

The sectors in which the Group operates have shown themselves to be resilient in the face of the recent economic downturn. Strong order books at key OEMs in the aerospace sector support long term prospects for this sector which is currently the Group's largest customer segment. Demand levels for advanced composite materials have been robust and the long term prospects for advanced composites remain strong, due to the underlying move to improve efficiency and address regulatory and environmental issues through the use of stronger, lighter weight materials.

The Group's continued development of its product offering through investment in technology and know-how provides a strong position from which to manage the adverse effects of short term economic fluctuations. The longevity of aerospace programmes, strongly embedded relationships with key customers and market leading technology give some mitigation against the effects of weak and volatile macroeconomic conditions.

Risk of product failure. The Group provides warranties to customers regarding the specification and/or proper operation of the products that it supplies and there is a risk of goods supplied leading to the Group being held responsible for incidents.

The liability faced as a result of such an incident, particularly in sectors such as aerospace, could exceed the Group's product liability insurance cover, or the nature of claims may be such that insurance cover provides no protection.

Business units perform quality assurance testing on products received from suppliers and products are sourced through ISO approved companies where possible. All business units are aware of the need for thorough checking of products received and despatched, and for ensuring stringent quality control mechanisms in manufacturing processes. Product liability insurance is maintained, with cover being benchmarked by the Group's insurance brokers.

Unsuccessful merger & acquisition activity and project management. A key aspect of the Group's development has been merger & acquisition activity and the establishment of new operations designed to enhance its strategic position.

The complex activities involved such as due diligence and project management, if unsuccessfully carried out, may lead to loss of qualified personnel or customers and may lead to unforeseen costs and delays. Furthermore, each project requires considerable management attention and this diversion from the day-to-day management of the Group could adversely affect the Group's operating results.

Legal, tax and other advisors are used to ensure that all merger & acquisition activity is properly considered. Sufficient local and divisional management is put in place to ensure proper control of the processes. Head office resources have been strengthened during 2011/12 by the addition of project resource and by the expansion of the central finance function.

Debt funding has become more difficult to obtain and volatility in financial markets can cause the raising of new equity funds to be problematic. The Group's borrowing facilities contain financial covenants, principally interest cover and the ratio of net debt to EBITDA.

Unless the Group puts in place appropriate financial resources and action plans, there is a risk that insufficient financial resources may be available to support its expected growth. Should the Group fail to meet certain financial covenants, facilities may be withdrawn or financial sanctions may be imposed by lenders. The Group may breach its facilities if it does not have adequate visibility of its future cash flows and borrowing requirements.

The Group's revolving credit facility comprises facilities of £15.0 million and $25.0 million. This facility expires in May 2016 (subject to, amongst other things, change of control provisions) and therefore provides a long term core to the Group's funding. While significant covenant headroom currently exists, monitoring of forecasts against banking covenants is designed to provide sufficient advance notice of any potential future covenant issues. In addition, a strong reporting procedure results in regular, up-to-date cash monitoring. Through these processes and controls, the Group identifies and deals with potential funding issues, allowing appropriate and timely action to be taken.

Each of the Group's business units depend upon IT systems for their efficient running. There are risks associated with the loss of data or key IT personnel, or of operational delays caused by technical problems. There are also risks associated with software providers, such as the withdrawal of support.

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

System changes are planned in detail and are made in a controlled manner to cause the minimum of disruption. The Group operates on decentralised IT systems and continues to monitor the suitability of the differing systems in operation. Common software is used wherever appropriate. IT disaster recovery plans are in place at each business unit, to minimise the disruption caused by IT system failures.

Loss of key personnel. In common with most businesses, the Group is dependent on certain key members of management for their knowledge, judgement and leadership skills.

Loss of such personnel could have a material effect on the Group's performance.

The need to motivate and develop management is recognised by the Board and the remuneration and progression of key members of staff is monitored to ensure they are retained and are provided with opportunity for development.

The Group may be vulnerable to rising input costs.

Changes in raw material costs may not be capable of being passed onto customers on a timely basis, thereby impacting profitability.

Significant efforts are made to ensure that changes in input costs beyond certain thresholds can promptly be reflected in selling prices. Detailed reviews of margins and relevant key performance indicators are made by local management.

Quality and qualifications. The strategy of the Group, particularly within the aerospace market, is dependent upon materials gaining the qualifications necessary to ensure they are included in build specifications. To differing extents, all business units are required to comply with quality standards or regulatory requirements set by customers, suppliers and authorities.

Without such qualifications, planned growth levels will be difficult to achieve.

Significant technical resource is applied throughout the Group to ensure that necessary qualifications are obtained. The Group has invested in a global research & development centre where purpose designed products are developed. Technical standards such as ISO 9001, AS9100 and AS7003 (Nadcap) are in place in the key sites. Product quality is continually monitored and any defects are investigated promptly in conjunction with customers and suppliers.

Increased exposure to bad debts.

The risk of business failures has increased as a result of the recent economic downturn, contributing to an increased risk of bad debts arising. While the Group has a broad customer base, there are large debtor balances with customers across a range of market segments, including with customers based in less developed countries.

Regular dialogue with customers whose accounts are outside agreed terms or where there are concerns regarding recoverability, together with the forgoing of sales to high risk customers, help mitigate this risk of customer failure. Attendance at business unit meetings by divisional and head office management enables exposure to particular customers to be considered on a Group basis, rather than solely at local level. Credit insurance is used at certain business units to give protection against bad debts.