technicolor - 2018 Registration document

3 RISKS, LITIGATION, AND CONTROLS RISK FACTORS

Physical security GRI [103-1 Customer privacy] [103-2 Customer privacy]

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 Management Client concentration requires suppliers to become global partners and to be in a position to boost their innovation investments to increase value, and offer a larger range of products at competitive prices. 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. Dependency on client performance Risk description 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. Risk management 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 customer intimacy, 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 framework to secure product delivery and revenues while managing inventory risks.

Risk description The DVD Services Division is exposed to physical security risks via its contractual obligations to protect customers’ content across all supply chain services provided by the Division, from receipt and storage of content masters, to replication into optical media, and through the successful delivery of finished products into retail. The Division’s customers make substantial investments in creation and marketing of content, and any illegal copies and/or stolen finished goods can result in material economic loss for the customer. Therefore, any physical security failures by the Division contributing to such losses may result in financial penalties, loss of customer contracts and damage to the Group’s image and reputation. Risk management Rigorous security policies and controls have been implemented by a dedicated Loss Prevention Department, and are enforced on all sites that handle customer content. Risk assessments and associated mitigation actions are performed annually and upon environmental change. Employees are provided with security awareness training and are a part of the Division’s security network. Several customers and industry associations regularly audit these security procedures on a recurring basis (see Cyber and physical content security section). Against the theft of packaged media, the facilities are guarded by effective perimeter controls, alarms and extensive surveillance devices. All personnel and visitors are subject to strict security access controls, and upon exit, all are searched using hand held metal detectors and/or full body scanners, and all personal belonging are inspected. All third-party service providers (such as transportation and janitorial services providers) are thoroughly vetted to ensure compliance with Technicolor security standards. Overall, the DVD Services Division and the Group take insurance coverage for material theft of products (including Property, Cargo and Professional Liability policies).

CONNECTED HOME Client concentration and contract negotiation Risk description

A large proportion of the revenues in Technicolor’s Connected Home segment is generated from large Pay-TV Operators and Network Service Providers. In 2018, the top five customers in the Connected Home segment accounted for approximately 49% of the segment’s revenues and 27% of the Group’s consolidated revenues. This concentration of revenues around a few actors 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

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TECHNICOLOR REGISTRATION DOCUMENT 2018