technicolor - 2019 Universal registration document

RISKS, LITIGATION, AND CONTROLS RISK FACTORS

CONNECTED HOME

SUPPLIER AND KEY COMPONENT DEPENDENCY





GRI [103-1 Procurement practices] [103-2 Procurement practices] Risk identification Technicolor manufactures and integrates products that are highly dependent on the procurement of key components (DRAM, Flash memories and passive electronic components/MLCC), sub-assembly parts, and on the design by a very limited number of suppliers and sub-contractors. In 2019, the division’s top 5 suppliers provided 45% of key components. This dependence on suppliers involves several risks, including limited control over pricing, terms and conditions availability, quality and delivery schedules. Given the short supply chain, shortages of raw materials or components, quality control problems, production capacity constraints or delays by suppliers caused by any kind of source create a risk of interruptions in the availability of our products, which could reduce our net sales, adversely affect our results of operations and deteriorate our customer relationship. In addition, if our suppliers experience such problems, they may possibly give priority to other customers to Technicolor’s disadvantage. Restrictions imposed to prevent the spread of the virus currently limit the Connected Home business, where production and assembly sites in China and Brazil were impacted caused by disruptions on the supply chain. Nevertheless, the demand for Connected Home products is stable and supply chains in China have now resumed activity. The market price increases and shortages for DRAM, Flash memories and passive electronic components/MLCC (capacitors, resistors), which started end of 2016 for DRAM and Flash memories, and end of H1 2017 for MLCC are an illustration of this dependency of the Connected Home business on a very limited number of strategic component suppliers. These products are used in a much broader range of products than for the Connected Home business, such as smartphones, PCs, tablets, automotive applications and the global imbalance between supply and demand has created a material price increase of their costs. The difficulty to mitigate this risk can impact significantly the profitability of Connected Home. A large proportion of the revenues in Technicolor’s Connected Home segment is generated from large Pay-TV Operators and Network Service Providers. In 2019, the division’s top 5 customers accounted for 43% of the Connected Home segment’s revenue and 22% of the Group’s consolidated revenue. This concentration of revenues around a few companies in the CPE (Customer Premises Equipment) industry has accelerated with the consolidation that has taken place in recent years such as Charter Communications (acquisition of Time Warner Cable), AT&T (acquisition of DIRECTV), and Comcast’s X1 syndication activities. This concentration has created opportunities for Connected Home to expand activities among these ever-larger customers while simultaneously increasing risk should entities switch to competitors. Another possible result of the concentration is the shift in the balance of power with these customers which have increasing purchasing power. Risk identification

Risk monitoring and management

The selection process of suppliers is made after careful assessment of the production capacity, quality standards, financial health and respect of social and environmental standards. To reduce dependency and allow business continuity, the procurement is diversified with some preferred vendors present in different geographies (mostly APAC region). The Company strives to foster a strong collaboration with its key suppliers to properly integrate all activities. Some longstanding suppliers have become partners with whom a strong contract management process is in place to allow flexibility in the creation of supply. Scorecards with vendors are implemented to allow a proper monitoring of the vendor performance. Connected Home strengthens its relationship with its suppliers by providing them visibility into its long term forecasts. When possible and in line with the procurement strategy, the Connected Home Division has identified alternative sources for some of its key materials and components. Though it may limit its ability to negotiate the most favorable terms, these alternative sources are established to reduce dependency on key suppliers. In the case of sole or very limited source suppliers, as this is the case for memories and passive components, the Company has put in place a monitoring structure in charge of keeping watch of the price pressure of some components and anticipate possible shortages. In case those risks materialize, the Company initiated mitigation actions such as the inclusion of key material price index provisions in the customer contracts or negotiations with customers to compensate for sudden unexpected price variation. In 2019, the Company started to implement an automated supplier risk tracking using a dedicated tool.

3

CLIENT CONCENTRATION AND CONTRACT NEGOTIATION



Risk monitoring and management

Client concentration requires suppliers to become global partners and to increase depth of relationship. Technicolor’s 2015 acquisition of the Cisco Connected Devices Division is a response to the industry consolidation with efforts to deliver more value through innovation and competitive pricing through economies of scale and greater market share. Technicolor strives to foster collaboration with its customers by increasing intimacy and proximity; key account teams oversee anticipation of customer needs to deliver better services and solutions. A strong customer offer review process is in place to properly manage large requests for quotation, identify risks and mitigating actions to stay ahead of competition.

55

TECHNICOLOR UNIVERSAL REGISTRATION DOCUMENT 2019