technicolor - 2019 Universal registration document

RISKS, LITIGATION, AND CONTROLS RISK FACTORS

RAWMATERIAL AND OTHER KEY INPUT COST AVAILABILITY AND VOLATILITY

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GRI [103-1 Procurement practices] [103-2 Procurement practices] [103-1 Materials] [103-2 Materials] Risk identification

Risk monitoring and management

The division purchases approximately 65% of its direct materials, including raw materials, components and finished products from its top 10 suppliers. In addition, certain raw materials such as polycarbonate and DVD cases come from a limited number of key suppliers. Any change, delay or disruption in supply, or reallocation of capacity to a different market, product line or customer by a key supplier could cause material delays in DVD Service’s production or operations, increase its production costs or harm customer relationships. DVD Services manages much of its inventory on a just-in-time basis, which exposes it to performance risks by its suppliers, as well as to certain force majeure risks. As a result, in addition to delays or other performance failures of its suppliers, DVD Services’ operations may be disrupted by external factors beyond its control, including price volatility risks. In addition, the industries of the main suppliers may experience a further wave of consolidation, and thereby reduce DVD Services’ negotiating leverage, and thus reduce the ability to meet business objectives. Home Entertainment Services operations (particularly replication activity in Mexico, Poland & Australia) are significant consumers of electricity, and thus are exposed to utility cost/regulatory volatility in these local markets. GRI [103-1 Procurement practices] [103-2 Procurement practices] Risk identification The DVD Services Division’s inability to obtain timely delivery of raw materials of acceptable quantity and quality could result in material delays, increased costs, and reductions in shipments of the DVD Services Division’s products, any of which could increase its operating costs, harm customer relationships, or materially and adversely affect the DVD Services Division’s business and results of operations. See more details on suppliers’ dependency in the risk related to “Raw material availability and volatility”. Customers require high flexibility and reactivity with short lead time following their purchase orders. The DVD Services Division operates two main manufacturing facilities for the replication of DVDs (Poland and Mexico) and various distribution facilities globally. These facilities are subject to operational risks, including mechanical and IT system failure, work stoppage, transportation disruption, customs blockage, and natural disasters. Any interruption of activity in the DVD Services Division’s production, manufacturing or distribution facilities due to these or other events could result in the disruption to the operation of the DVD Services Division’s activities, which could have an adverse effect on the business, financial condition and/or results of operations. In addition, the DVD Services Division operates high production replication lines which are required to meet high quality standards. The failure to meet these requirements may lead to product quality issues or delays in the supply.

The selection process of suppliers is made after careful assessment of the sustainable production capacity, quality standards, financial health and respect of social and environmental standards. The division regularly monitors price volatility of its raw materials, components and finished products from suppliers. To reduce dependency and allow business continuity, the procurement is diversified with some preferred vendors present in different geographies. When possible, and in line with the procurement strategy, the division has identified alternative sources for many of its key materials. In the case of sole or very limited source suppliers, the division has put in place a monitoring structure designed to track potential price pressure of select raw materials (and their constituent components) to anticipate possible shortages and/or price volatility. In some cases, the division has further mitigation potential for sudden unexpected price variation via the inclusion of key material price index/pass-through provisions in certain customer contracts.

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SUPPLY CHAIN AND MANUFACTURING

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Risk monitoring and management

To mitigate the risks inherent to its suppliers, the Sourcing Department has established procedures for operational and contractual monitoring of principal suppliers, including raw materials used in the production of DVD and Blu-ray TM discs. All the main sites have a Business Continuity Plan and the reactivity of the organization is enhanced by Transversal Incident Response Plans. These plans aim at minimizing the impact of any incident or supply chain disruption. The quality of the replication process is constantly monitored, and each production facility has developed a high expertise in ensuring robust industrial processes. HES tracks quality performance with a variety of KPIs and with Customer Quality Complaints on a Parts per Million (PPM) basis being the primary metric. In 2019, for WW HES it was 0.078% (or 780 PPM), which is considered excellent quality level for our industry In addition, covering its internal operations, the DVD Services Division and the Group take insurance coverage that mitigates the risk of business disruption in case of natural disaster or other types of disaster such as fire in major production sites.

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TECHNICOLOR UNIVERSAL REGISTRATION DOCUMENT 2019