LEGRAND / 2018 Registration document

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MANAGEMENT REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED DECEMBER 31, 2018

OPERATING INCOME

W effective purchasing following deployment of the cost-reduction policy through the centralization, internationalization and standardization of purchasing management at Group level; W trends in inflation for other cost components (salaries, energy, etc.); W depreciation of industrial capital expenditures needed to manufacture goods; W initiatives aiming at improving Group operating efficiency; and W product life cycles. R 5.3.2.4 ADMINISTRATIVE AND SELLING EXPENSES Legrand’s administrative and selling expenses consist essentially of the following: W salary costs and benefit charges for administrative staff and sales personnel; W expenses relating to logistics, information systems and miscellaneous expenses; W amortization of intangible assets, such as trademarks revalued following acquisitions; and W other selling expenses, such expense incurred in connection with travel, advertising and communications. R 5.3.2.5 RESEARCH AND DEVELOPMENT COSTS Research and development costs consist principally of the following: W salary costs and benefit charges for research and development employees; W miscellaneous expenses related to research and development, such as software, prototypes and patent registration costs, less R&D tax credits granted in various countries; W expenses related to the use and maintenance of administrative offices, as well as expenses related to information systems, in each case, concerning research and development activities; and

W amortization of capitalized development costs. Costs incurred on significant development projects relating to the design and testing of new or improved products are recognized as intangible assets when it is probable that the project, considering its technical, commercial and technological feasibility, will be a success, and the costs can be reliably quantified. Once these conditions are satisfied, a portion of the relevant development expense is capitalized. Development costs are amortized from the starting date of the sale of the product on a straight-line basis over the period of its expected benefit, not exceeding a period of ten years. R 5.3.2.6 OTHER OPERATING INCOME AND EXPENSES Other operating income and expenses include restructuring costs and other expenses and provisions. R 5.3.2.7 OPERATING PROFIT Operating profit consists of net sales, less cost of sales, administrative and selling expenses, research and development costs, and other operating expenses. R 5.3.2.8 OTHER FACTORS AFFECTING THE GROUP’S RESULTS W The acquisition of Legrand France in 2002 and associated purchase accounting adjustments and transactions related thereto have affected net income. In particular, the significant intangible assets recorded in connection with the acquisition of Legrand France increased the amortization charges of the Group. The purchase accounting adjustments relating to the acquisition of Legrand France essentially concern the revaluation of trademarks that are being amortized on a straight-line basis until 2021 at the latest, and patents, amortized on a declining- balance basis until 2011. W Acquisitions made since 2002 have also had an impact on the Group’s net income. This is because intangible assets revalued as part of the purchase-price allocation of entities acquired generate additional amortization.

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REGISTRATION DOCUMENT 2018