technicolor - 2019 Universal registration document

3 RISKS, LITIGATION, AND CONTROLS RISK FACTORS

TAX CREDITS EVOLUTION

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Risk identification

Risk monitoring and management

Some states, provinces or countries like Canada, United Kingdom, France and Australia have developed incentive programs for film, television/streamers and/or advertising productions (primarily for the benefit of the division’s clients). These production incentive programs offer eligible companies financial incentives, such as refundable tax credits, tax rebates or grants, based on the qualified production costs incurred in the production location. As a result, Technicolor has installed its main production services activities in certain locations attractive to its customers. Any material change to the incentive programs available in such locations may impact significantly the decisions by customers on where they outsource production services like VFX and Animation. While the Group has been effective in optimizing the geographical footprint of its Production Services activities accordingly, and expect that it will continue to do so, there can be no assurance that the Group will not be adversely affected by changes in location-based production incentives, which is likely to expose the Group to potential loss of revenue.

Technicolor maintains an active watch on any potential material changes to the location-based production incentive landscape and strives to be agile in ramping up and down the facilities in the strategic geographies to respond to customers’ preferences for where production services are done. The Tax and Public Affairs Departments of Technicolor work diligently to scrutinize the production tax incentive evolution and to provide guidelines to the operations regarding eligible criteria and administrative constraints. The Group has also established and continues to nurture longstanding relationships with local governments and trade organizations in order to be a leading participant early in any discussions regarding the evaluation and implementation of any changes in production incentives.

DVD SERVICES

CUSTOMER CONCENTRATION AND CONTRACT NEGOTIATION

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Risk identification

Risk monitoring and management

The DVD Services Division operates in a concentrated market with a limited number of significant customers supported by long-term contractual arrangements. A significant percentage of the division’s revenue is derived from its major customers. In 2019, the division’s top 5 customers accounted for approximately 75% of the segment’s revenue, which represents approximately 8% of the Group’s consolidated revenue. The DVD Services Division, which belongs to the Entertainment Services industry, has signed multi-year contracts with many of its customers, which involves multiple contractual arrangements with varying terms, conditions, and expiration dates. In-line with strategic objectives, key customer contracts were extended and/or re-negotiated with Universal and Warner Bros. in 2019. The division’s operating results could be adversely affected, if its customers decide to terminate these contractual arrangements (in accordance with their terms), if the division is unable to renew them when they expire or renew them on significantly less favorable terms. Furthermore, any systemic change in the manner in which companies in the broader Media & Entertainment industry operate, driven by broader government regulation, more significant than anticipated industry consolidation or material technology disruption, could also have a material adverse change on operations and prospects.

The division monitors these contractual arrangements through a robust customer offer review process, including Investment Committee/Management reviews to ensure that risks are adequately monitored and mitigated. Approved agreements are carefully monitored on a day to day basis, through detailed Service Level Agreements and these defined conditions are regularly monitored to ensure adherence and customer satisfaction. These mitigations will be particularly emphasized in the short-term as most of the key contracts are subject to renewal in the coming years. In 2019, the division successfully renegotiated extensions and/or renewals with two major studio customers, which both included significantly improved pricing, terms and conditions for Technicolor. The division is actively pursuing multiple initiatives to diversify its business activities and thereby further reduce the risk associated with a concentrated customer base. These initiatives include an existing and ongoing effort to grow supply chain related services (warehousing, fulfillment, transportation, etc.) for customers outside the Media & Entertainment industry.

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TECHNICOLOR UNIVERSAL REGISTRATION DOCUMENT 2019