Dissemination announcement

Risk

Context

Impact

Mitigation

·; Market factors

·; Ultra is reliant on defence budgets that are forecast to decline. There is a risk that the declines could accelerate.

·; Parts of Ultra's civil business (notably aerospace and nuclear) may be vulnerable to sudden changes in economics or sentiment.

·; An amount of Ultra's business could be lost as programmes are potentially cut from both government and commercial procurement budgets.

·; The Group has positioned itself in the sweet-spot of defence budgets by focusing on electronic and software solutions. All new platforms and platform upgrades require improved electronics and software.

·; The Group has over 180 specialist capabilities specified on a large number of platforms and programmes. Ultra is not reliant on a small number of large contracts that could be cancelled.

·; Ultra's agility, innovation and speed of response allows the Group to constantly move into new growth markets.

·; Ultra is positioned on many civil aerospace platforms that have long order books providing cover for many years to come.

·; The reaction to the recent incident at the Fukushima nuclear power station showed that the strategic need for secure access to energy outweighed the negative sentiment surrounding this kind of incident.

·; For more information on all of the Group's markets, see pages 19 to 21 (of the Annual Financial Report).

·; Market access

·; Ultra has elected to cede some control (e.g. proxy board, joint ventures) in order to enhance market position.

·; Overall control is lost.

·; Ultra works hard to ensure that its joint venture partners and the members of the Group's security and proxy boards accord with the Group's corporate culture and way of doing business.

·; Ultra benefits from the expertise that the members of its JVs and boards bring to the Group.

·; Bidding for contracts

·; Ultra is bidding for an increasing number of large and complex contracts.

·; Ultra could underestimate the required resources or the project complexity and lose money.

·; The Group has many ways of sharing best practise and lessons learnt from all of its large bids.

·; All large bids are reviewed at many levels of the business, including the Board, before proceeding. Peer group reviews are conducted on the solution, the cost build up and the key points of the proposal.

·; Execution of contracts

·; Ultra has an increasing number of large and complex contracts.

·; The Group could manage these contracts badly and lose money and reputation.

·; Ultra places great emphasis on managing the risks embedded in its customer contracts. The management teams of Ultra businesses must focus on reducing or retiring these risks as quickly as possible.

·; Ultra will not enter into a fixed, firm priced solution with a firm timetable if there is embedded technical risk - Ultra will only commit to delivering what it knows it can deliver. Ultra places great pride in meeting its commitments.

·; Staff retention

·; The Group businesses are capital-light but specialist knowledge intensive.

·; Ultra could lose key staff or capabilities so that the Group cannot fulfil its contractual obligations or is forced to outsource work, squeezing margins.

·; The Group places great emphasis on recruiting, retaining and developing high quality individuals to work in Ultra teams.

·; Ultra has consistently high levels of retention for key staff.

·; Ultra has developed many human resources processes that reinforce the Group's culture and unique ways of operating.

·; In addition to offering properly benchmarked salary and benefits, many training and career development techniques are used constantly to develop those identified as potential high achievers to maintain a challenging but rewarding environment for them.

·; The Group also gives high priority to succession planning; all key staff have a nominated successor so the impact, if someone does leave the business, is reduced.

·; For more information on Ultra's human resources initiatives, see pages 16 to 18 (of the Annual Financial Report).

·; Exchange rates

·; Ultra trades internationally and has both transaction and translation risk.

·; Poor management or sudden exchange rate movements lead to losses.

·; Ultra's projected net transaction exposure is mitigated by the use of forward hedging contracts.

·; The level of hedging cover is regularly reviewed to ensure compliance with the agreed policy.

·; By their nature, currency translation risks cannot be mitigated.

·; Industry restructuring - vertical integration

·; Ultra's customers could integrate vertically (organically or by acquisition), so undermining the Group's market position.

·; A sudden removal of key market segments resulting in a loss of business.

·; The Group operates in specific market niches that often have extremely high barriers to entry.

·; Ultra executes its contracts well and constantly meets its commitments, thereby reducing the incentive for customers to attempt to emulate the Group's specialist expertise and capabilities.

·; Pricing pressures

·; Many of Ultra's customers are under severe budgetary constraints.

·; Customers could react by demanding price reductions that the Group cannot offset with efficiency savings thereby squeezing margins.

·; Ultra has a long track record of product innovation, exploiting new, lower cost electronics technologies to reduce costs whilst delivering improved performance.

·; Additionally, operational efficiencies are achieved by working more intelligently, particularly through embracing lean manufacturing and design processes.

·; Ultra has made significant progress in sourcing production in low cost economies where this is appropriate given the nature of the products that the Group provides. The anticipated cost reductions have been achieved, thereby helping protect and improve the Group's headline operating margins.

·; Relationships

·; Some Ultra business depends on specific relationships.

·; The Group potentially loses those relationships and consequently the business.

·; The diversified nature of Ultra's activities is reflected in the broad range of platforms and programmes in which the Group is involved.

·; This diversification extends to customer, supplier and partner relationships. Within its total sales to the major prime contractors, Ultra typically supplies products, equipment, sub-systems and services to a range of different platforms and programmes, with each one effectively acting as a different customer.

·; Given that no single platform or programme represents more than 5% of revenue in any one year, there is, therefore, no single relationship of such significance that its severance would have a material impact on Ultra's performance or prospects.

·; Supply chain constraints

·; Ultra is reliant on key suppliers that could be impacted by various factors; for example, natural disasters (e.g. the Japanese tsunami), the pricing of subcomponents or financial issues (e.g. bankruptcy).

·; Necessary components could become unavailable, causing programme delays or price rises that reduce margins. This could have a negative impact on Ultra's reputation and the Group's relationship with its end customers.

·; Where possible Ultra dual-sources specialist components

·; Where necessary the Group holds sufficient buffer stock to protect against supply chain disruptions.

·; In specific instances Ultra has undertaken 'lifetime buys' of components to assure supply and to protect against technical obsolescence.

·; Technology or market change

·; Ultra's competitive position could be undermined by a disruptive technology or a significant change in customer preferences regarding technologies e.g. a move to commercial-off-the-shelf solutions.

·; The Group's specialist capabilities could become redundant leading to a loss of business.

·; Ultra's constant focus on innovation leads the Group to be a leader more often than a follower in introducing advanced technology solutions where appropriate.

·; Lengthy programme timescales make it improbable that a technical innovation could invalidate Ultra's offering overnight.

·; High integrity markets are, by their nature, quite conservative so technical revolutions are not commonplace.

·; Ultra develops good relations with its customers - the Group focuses on customer pull rather than technology push so is likely to find out about changes in attitude early on in the process.

·; The Group is 'technology-agnostic' and so willingly adopts commercial technologies where they can meet the customer requirement.

·; Loss of regulatory approvals

·; Much of Ultra's business relies on markets that require a great deal of regulatory approval. For example, international defence sales are subject to export controls and high integrity equipment is subject to high minimum requirements set by regulatory authorities.

·; If Ultra had a major ITAR or security infringement then the Group's ability to operate in the US, for example, could be severely curtailed.

·; If the Group's high-integrity nuclear safety systems and components, for example, failed to meet regulatory approval then Ultra would not be able to access these markets.

·; In all Ultra businesses there is a clear focus on maintaining compliance with all regulatory requirements of customers, industry, national and international law.

·; The internal audit process that reviews such compliance is reported by each business in each monthly business report.

·; Where non-compliances with required process are noted, the corrective action is monitored until full compliance is regained.

·; Lack of suitable acquisition targets

·; Ultra maintains a balance between organic and acquisition growth. Appropriate businesses that can be acquired at value-enhancing prices augment the Group's portfolio of capabilities.

·; Ultra's rate of growth would be adversely impacted

·; Ultra retains a solid list of potential acquisitions and is confident that it can expand its range specialist capabilities and take market share from others.

·; Ultra identifies targets as part of its internal strategy review process; through use of specialist consultants and by receiving details of businesses being marketed.

2011

2010

£'000

£'000

Short-term employee benefits

4,193

3,108

Post-employment benefits

309

266

Share-based payments

1,635

805

6,137

4,179