Morgan Advanced Materials Regulatory News (MGAM)

Risk description, assessment and trend from 2017

Mitigation

STRATEGIC AND EXTERNAL RISKS

1. Technical leadership

The Group's strategic success depends on maintaining and developing its technical leadership in materials science over

its competitors.

Unforeseen/unmitigated technology obsolescence, the emergence of competing technologies, the loss of control of proprietary technology or the loss of intellectual property/know-how would impact the Group's business and its ability to deliver on its strategic goals.

The advanced technological nature of the Group requires people with highly differentiated skillsets. Any inability to recruit, retain and develop the right people would negatively impact the Group's ability to achieve its strategic goals.

Trend

Unchanged

The Group has a dedicated technology team within each Global Business Unit which monitors relevant technology and business

developments using technology roadmaps linked to 20 major technology families to ensure it remains at the leading edge of

development. Three global Centres of Excellence were previously established, with a fourth Centre opened at Penn State University, Pennsylvania, US, in 2018. These Centres focus Morgan's expertise and research resources on core technologies. They are supported by a Technical Advisory Board comprising some of the world's leading academics in relevant fields, who provide continuing insight, advice and challenge to inform the Group's technology plans.

The technology team proactively manages the Group's technology pipeline and R&D investment in existing technologies, as well as actively managing the technology lifecycle. The technology pipeline and key R&D projects are regularly reviewed by the Executive Committee and the Board.

Where Group products are designed for a specific customer, they are developed in partnership with the customer in order to

maintain leading-edge differentiation. The Group seeks to secure intellectual property protection, where appropriate, for its existing and emerging portfolio of products; external advisers manage this protection globally.

The Group continued its global leadership programme adding an advanced programme to develop more high-potential commercial, functional and technical leaders. The graduate leadership programme continued to run in 2018.

2. Operational execution / organisational change / sales effectiveness

As part of the Group's strategy to improve the efficiency of its operations and organisation, various changes have been made to operational processes at individual sites, to the Group's structure, and the structure of and incentives for our sales force. Further improvements and changes are planned for future years. Failure to adequately manage these changes could result in interruption to operations or customer service, or a failure to maximise the Group's opportunities.

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Unchanged

Changes to operational processes are carefully considered by site, GBU and Divisional management before implementation. Operational improvements and savings are monitored against budget by the Executive Committee to ensure that changes deliver the savings promised without disruption to business operations. New capital investments are approved at appropriate levels of the Group and delivery of these overseen by GBU and Group management.

Organisational changes are assessed by the CEO, the Executive Committee and sometimes the Board before being implemented in line with local employment regulations.

Changes to our sales structures and incentives are reviewed at various levels of the organisation before being launched. Further activities to improve sales effectiveness are being rolled out in 2019, including sales force training, more targeted incentives and pricing initiatives.

3. Portfolio management

The Group operates across a range of product and technology families. These are subject to long-term market trends which may lead to either obsolescence or opportunities to further expand the Group. Failure to proactively manage the Group's portfolio of businesses in line with this technology profile could lead to the value of the Group's businesses being eroded over time or to a failure to exploit opportunities to acquire businesses with the capability to add further value to the Group.

Trend

Decreased

The Board performs regular reviews of the Group's portfolio. During 2018 the Group disposed of the Composites and Defence Systems business and exited its Thermal Ceramics site in Brazil, and announced the closure of its China ceramics cores business and Venezuelan Thermal Ceramics business.

Opportunities to acquire businesses are reviewed on a continuing basis.

4. Macro-economic and political environment

The Group operates in a range of markets and geographies around the world and could be affected by political, economic, social or regulatory developments or instability, for example an economic slowdown or issues stemming from oil and natural resources price shocks.

The UK's exit from the EU may have an impact on the Group if subsequent tariff changes, or border effects, negatively impact the profitability of the Group's products. The current value of Group UK exports to the EU is approximately £25 million, and imports into the UK from the EU are approximately £15 million.

Trend

Increased

The Group's broad market and geographic spread helps to mitigate the effects of political and economic changes.

Budgets and forecasts for Morgan's different businesses are used to monitor delivery against expectations and anticipate potential external risks to performance. These are subject to regular review by the Executive Committee and the Board.

The overall macro-economic environment has improved during the course of the year as shown by the Group's strong organic sales growth. However some longer-term metrics are showing signs of potential weakness.

Global issues considered by the Board this year include the impact of the UK's exit from the EU and US / China trade relations. The impact of the UK's exit from the EU could be mitigated in the medium term by moving production to alternative sites where tariffs are not applied to products.

OPERATIONAL RISKS

5. Environment, health and safety (EHS)

The Group operates a number of manufacturing facilities around the world. A failure in the Group's EHS procedures could lead to environmental damage or to injury or death of employees or third parties, with a consequential impact on operations and increased risk of regulatory or legal action being taken against the Group. Any such action could result in both financial damages and damage to reputation. Given the long history of many of the operations of the Group, there is also a risk that historical operating and environmental standards may not have met today's environmental regulations. In addition, the Group may have obligations relating to prior asset

sales or closed facilities.

Trend

Unchanged

Managing its operations safely is the Group's number one priority. The Group has a comprehensive EHS programme managed by the Group EHS Director, with clear EHS standards and a refreshed programme of audits to assess compliance.

The Group EHS Director sets annual priorities for EHS which are approved by the EHS Steering Group (comprising the Executive Committee and global business unit leads) These form the basis for individual sites' own EHS priorities and plans, and complement the Group's 'thinkSAFE' behavioural safety programme.

EHS performance is monitored by the EHS Steering Group and the Board.

As at 31 December 2018, the Group was managing projects to remediate legacy contamination at a number of former

operational sites in conjunction with external specialists and relevant authorities.

6. Product quality, safety and liability

Products used in applications for which they were not intended

or inadequate quality control/over commitment on customer specifications could result in products not meeting customer requirements, which could in turn lead to significant liabilities and reputational damage.

Some of our products are used in potentially higher risk applications, for example in the aerospace, automotive, medical and power industries.

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Unchanged

Many of the Group's products are designed to customer specifications. Our businesses' quality management systems and training help ensure that all of Morgan's products meet or exceed customer requirements and national/international standards.

The Group Legal Policy requires that contracts relating to products used in potential high-risk applications are subject to legal review to ensure that appropriate protections are in place for product quality risks.

The Group insurance programme includes product liability insurance; this Group-level insurance is reviewed annually by the Board.

7. IT and cyber security

Information security/cyber risks are dynamic and ever-present in the external environment. If the Group were to lose critical data or information, including proprietary technology information, through inadequate data management or compromised information security, the business would be impacted and could suffer reputational damage.

The effective management of the Group's Information Technology (IT) infrastructure is important in enabling our businesses to reliably deliver customer requirements. If a key business system were to fail or core systems implementation were to be ineffective, the ability of the business to deliver on its strategic goals might be impacted.

Trend

Unchanged

The Group has an IT Policy and guidelines in place as well as Group and business IT teams to manage the Group's infrastructure, IT systems and information security risks. A new Chief Information Officer was appointed in 2018 to further develop the Group's IT strategy.

In 2018 the Group was required to comply with the National Institute of Standards and Technology (NIST) cybersecurity framework in the US and the EU's General Data Protection Regulations. The Group has successfully implemented programmes to deliver compliance with these requirements.

The Group continues to deploy and upgrade enhanced enterprise resource planning (ERP) systems in those businesses where a need for improvement is identified. These deployments are managed in line with IT project management standards.

8. Supply chain / business continuity

The Group has a number of potential single-point exposure risks, which include:

» Single-point supplier - a significant interruption of a key internal or external supply could impact business continuity.

» Single-point customer - the unmitigated loss of a major customer could have an impact on Group profit. The Group's largest customer represents circa 2% of Group revenue.

» Single-point site - a key site exposed to a strike, a natural catastrophe or serious incident, such as fire, could impact

business continuity. One Group site, Hayward, is situated in the California earthquake zone, (US). Certain of the Group's businesses are important for intercompany supply purposes.

Trend

Unchanged

The Group has a diversified manufacturing, customer and geographic base which provides a level of resilience against single-point exposures. Were any site to be unavailable, production in many cases could be switched to other sites.

Management of these risks also involves monitoring and reviewing supply chains (internal and external), dual/multiple sourcing of materials or strategic stock, site security and safety mechanisms, business continuity plans, maintenance of product quality and strong customer relationships.

The Group insurance programme includes business interruption cover and specific cover in relation to the impact of an earthquake in California, US; this Group-level insurance is reviewed annually by the Board.

FINANCIAL RISKS

9. Treasury

The Group's global reach means that it is exposed to uncertainties in the financial markets, the fiscal jurisdictions where it operates, and the banking sector. These heighten the Group's funding, foreign exchange, tax, interest rate, credit and liquidity risks as well as the risk that a bank

failure could impact the Group's cash.

Trend

Decreased

The Group's treasury function operates on a risk-averse basis. Required controls over selection of banks, cash management and other treasury practices and payments globally are documented in Morgan's Treasury Policy and related procedures. The Group treasury team manages the Group's funding, liquidity, cash management, interest rate, foreign exchange, counterparty credit and other treasury-related risks. Treasury matters are regularly reviewed by the Board and Audit Committee.

In 2018 the Group successfully refinanced its £200 million Revolving Credit Facility for a five-year term. Additionally the Group concluded a US Private Placement transaction, utilising shelf agreements already held with Private Placement lenders, raising $25 million and €25 million. The initial €25 million was funded on 27 December 2018, with the funding of the $25 million completed in January 2019.

10. Tax

The Group operates in many jurisdictions around the world and could be affected by changes in tax laws and regulations within the complex international tax environment.

The OECD's Base Erosion and Profit Shifting (BEPS) framework provides additional obligations and filing requirements for the Group as countries implement the actions in the framework. These could have an impact on the tax paid by the Group.

Tax reform in the US could also impact the Group's tax rate.

Trend

Unchanged

The Group's tax function, working in conjunction with external specialists as required, closely monitors fiscal developments and changes such as BEPS, to ensure that the Group's tax arrangements and practices continue to comply with the requirements of all relevant jurisdictions whilst also enabling efficient management of the tax liability. The Group's Head of Tax reports twice-yearly to the Audit Committee on key tax issues and initiatives.

The Group has published its tax strategy on its website in line with UK corporate governance requirements.

11. Pension funding

The Group sponsors several defined benefit pension arrangements, (the Schemes), whose liabilities are subject to fluctuating interest rates, investment values and inflation. This coupled with the increased longevity of members will result in increased funding burdens on the Group in the future.

The deficit in Morgan's global defined benefit pension schemes calculated on the basis required for IAS 19 accounting  disclosures decreased from £218 million at 31 December 2017 to £190.4 million as at December 2018.

Trend

Unchanged

Morgan's primary means of mitigating pensions funding risk is proactive management of the pension scheme assets and liabilities through an integrated pension strategy focusing on funding, investment and benefit risk. This involves both internal management within the Group and also externally through the Scheme Trustees, corporate actuaries and professional advisers.

In the UK, the Morgan Senior Executive Pension and Life Assurance Scheme closed to future accrual in April 2016 and the Morgan Pension Scheme closed to future accrual in April 2018. In consultation with the Company, the Trustees have also adopted a pro-active approach to the management of risk in the Schemes' investment portfolios, significantly reducing their unhedged interest and inflation rate exposure.

In the US, in June 2016 one Defined Benefit Pension Plan completed a full legal termination, and for the other remaining Scheme, a formal offer of a present-value-equivalent, lump-sum cash payment was made to members. In December 2017, the Company made an additional contribution of $36 million to this Scheme.

12. Contract management

As a global advanced materials business supplying components into critical applications, the Group may be exposed to liabilities arising from the use of its products. Ineffective contract risk management could result in significant liabilities for the Group and could damage customer relationships.

Trend

Unchanged

The Group has an in-house legal function supplemented by specialist external lawyers.

The Group Legal Policy requires in-house legal review of high-value or high-risk contracts to ensure they contain appropriate protections for the Group. The Policy requires CEO approval before a business can enter into an unlimited liability contract or one where the liability cap exceeds £5 million.

To the extent that risk cannot be mitigated through contractual arrangements, the Group has insurance cover in place, including

product liability insurance.

13. Compliance

The Group's global operations must comply with a range of national and international laws and regulations including those related to bribery and corruption, human rights, trade/export compliance and competition/anti-trust activities.

A failure to comply with any applicable laws/regulations could result in civil or criminal liabilities and/or individual or corporate fines and could also result in debarment from government-related contracts or rejection by financial market counterparties and reputational damage.

Trend

Unchanged

The Group is committed to the highest standards of corporate and individual behaviour. To support this, in 2018 the Group issued the Morgan Code. The Morgan Code defines the Group's approach to doing business ethically and confirms Morgan's commitments to high standards of ethical behaviour. The Morgan Code is supported by a range of policies, standards and guidance; training materials; the provision of an ethics hotline for employees; and systems to support effective screening of and due diligence on third parties.

Further improvements to the programme are planned in 2019, including enhanced training, a refresh of the ethics hotline and further reviews of businesses operating in higher risk locations.

The Group also has an Export Compliance Director in the US whose role is dedicated to ensuring compliance with export controls.

In addition to Group-level compliance specialists, our businesses are required to establish compliance officer roles, which are responsible for supporting local training and monitoring. Morgan also employs country-specific trade and export compliance specialists in higher risk businesses and jurisdictions.