technicolor - 2019 Universal registration document

3 RISKS, LITIGATION, AND CONTROLS RISK FACTORS

SUPPLY CHAIN MANAGEMENT

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GRI [103-1 Procurement practices] [103-2 Procurement practices] Risk identification Connected Home outsources extensive operational activities, including manufacturing and logistics, except for the manufacturing facility in Manaus, Brazil. Reliance on external suppliers and manufacturing partners means Connected Home may be exposed to the effects of production delays or other performance failures of its suppliers. Any delays in the availability of key components and sub-assembly parts, production, quantity or delivery could adversely affect Connected Home’s reputation or operating performance. Please see Supplier and Key Component Dependency risk description here above for more details. Connected Home manages its inventory on a just-in-time basis, which exposes it to supplier performance risks, as well as to certain force majeure risks. As a result, Connected Home’s operations may be disrupted by external factors beyond Connected Home’s control ( e.g . vendors’ mechanical and IT system failure, work stoppage, transportation disruption, customs blockage, natural disasters and pandemics, such as COVID-19). In addition, the industries of Connected Home’s main suppliers may experience a further wave of consolidation, thereby reducing Connected Home’s negotiating leverage. Consequently, the ability to meet business objectives may be negatively impacted, and Connected Home’s operational results could be adversely affected in the event of any severe or prolonged disruption.

Risk monitoring and management

To mitigate the risks inherent to its suppliers, the Sourcing Department has established detailed procedures for operational, quality, and contractual monitoring of our main suppliers, including Contract Electronic Manufacturers in Asia and Latin America, and suppliers of key components such as integrated circuits or memory chips. Weekly Sales and Operations Planning (S&OP) reviews take supply chain risks into consideration for order quantity and timing. Electronic data interchange (EDI) allows Connected Home to communicate electronically demand and order information more quickly and transparently with vendors and customers. An automation and optimization initiative of global supply chain process to support sales and operations planning, customer forecast, commitments, Materials Resources Planning (MRP), EDI, and logistics started end of 2019, which is intended to deliver greater efficiency and transparency. Regular meetings are held with vendors to review supply chain performance and customer demand. Third party production vendors’ facilities are required to maintain Disaster Recovery and Business Continuity Plans.

DEPENDENCY ON CLIENT PERFORMANCE

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Risk identification

Risk monitoring and management

Connected Home’s new products unit volume and revenue expectations are based on customer forecasts and commitments. A decrease in demand from large North American cable customers could significantly impact cash flow and working capital because of excess components and finished goods inventories. Higher than anticipated demand can be difficult to fulfill due to long lead times (up to 6 months) for components. The global CPE customer base is more fragmented so the consequences of a decline in demand is more limited, but cannot be ignored because products are often built specifically for each customer. A substantial decline in the need of the major client, could have a negative impact on Connected Home’s business and financial performance.

To anticipate and prevent the deterioration of major customer relationships, Connected Home closely and continuously monitors its sales process, especially key contract negotiations and customer demand. Each business line has devised account and marketing strategies for major customers to drive close customer relationship, and formulated plans for new client development. All such plans, along with the evolution of sales activity, are regularly reviewed by management. Connected Home performs a systematic formal review process for offers prior to their submission to clients, according to strategic and financial criteria and tiered approval levels. Sensitivity analysis and scenarios based upon volume forecasts are linked to customer product market share expectations as part of the review. The most significant commercial proposals made to customers are subject to prior approval by the Investment Committee, chaired by the CEO. Among the financial criteria, the analysis of the impact of each project on cash flow and the demand for working capital receives attention, as does the return on investment. The Sales and Operations Planning (S&OP) reviews, especially when the product lead time is long, provide a rigorous and more automated framework to secure product delivery and revenues while managing inventory risks. These reviews are now performed on a weekly basis.

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TECHNICOLOR UNIVERSAL REGISTRATION DOCUMENT 2019