LEGRAND / 2018 Registration document

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

YEAR-ON-YEAR COMPARISON: 2018 AND 2017

5.4.2 – Cost of sales

The consolidated cost of sales rose 9.2% to €2,869.7 million in 2018, compared with €2,627.0 million in 2017. This was primarily due to: W the consolidation of new acquisitions; W the increase in volume of raw materials and components consumed as production increased; and W higher rawmaterial and component prices, and higher customs duties in 2018 than in 2017.

These were partly offset by: W ongoing efforts to raise productivity and adjust to changing conditions. As a percentage of net sales, the cost of sales came to 47.9% in 2018 compared with 47.6% in 2017.

5.4.3 – Administrative and selling expenses

Administrative and selling expenses rose by 6.3% to €1,606.8 million in 2018, compared with €1,511.6million in 2017. This was essentially attributable to: W ongoing investments in growing activities; and W consolidation of new acquisitions.

These were partly offset by: W ongoing efforts on productivity initiatives. Expressed as a percentage of sales, administrative and selling expenses decreased from 27.4% in 2017 to 26.8% in 2018.

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5.4.4 – Research and development costs

12 months ended

December 31, 2018

December 31, 2017

(in € millions)

Research and development costs

(276.5)

(252.1)

Acquisition-related amortization and R&D tax credit

(3.9)

(7.6)

Amortization of capitalized development costs

28.5

29.4

R&D costs before capitalized development costs

(251.9)

(230.3)

Capitalized development costs

(33.7)

(33.6)

Research and development expenditure for the period

(285.6)

(263.9)

In accordance with IAS 38 “Intangible Assets”, the Group has implemented an internal measurement and accounting system for development costs to be recognized as intangible assets. On this basis, €33.7 million in development costs were capitalized in 2018 compared with €33.6 million in 2017. Amortization charges for capitalized development costs amounted to €28.5 million in 2018, compared to €29.4 million in 2017.

Research and development costs totaled €276.5 million in 2018 compared with €252.1 million in 2017. Excluding the impact of the capitalization of development costs and purchase accounting charges relating to acquisitions, as well as the tax credit for research and development activities, R&D expenditure stood at €285.6 million in 2018 (4.8% of net sales), compared with €263.9 million in 2017 (4.8% of net sales). In 2018, research and development operations had close to 2,400 employees in more than 20 countries.

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LEGRAND

REGISTRATION DOCUMENT 2018