LEGRAND_REGISTRATION_DOCUMENT_2017

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MANAGEMENTREPORTONTHECONSOLIDATEDFINANCIALSTATEMENTSFORTHEFINANCIALYEARENDEDDECEMBER31,2017

Operating income

5.3.2.2.7 Using constant exchange rates Consolidated historical net sales include the effects of exchange rate differences between the euro and other currencies. To analyze the variation of consolidated net sales excluding the effects of these exchange rate changes, Legrand uses constant exchange rates (calculated by adjusting net sales reported for a given financial year using the exchange rates for the prior financial year) to compare year-to-year changes in net sales. R 5.3.2.3 COST OF SALES Cost of sales consists primarily of the following: Cost of raw materials and components . The cost of raw materials and components accounted for, on average, approximately 67% of consolidated cost of sales over the last two financial years. Likewise, on average approximately 72% of this cost relates to components and approximately 28% relates to raw materials. The breakdown between raw materials, components and semi- finished products varies according to product mix, trends in market prices and choices for industrial organization, in particular with the implementation of good practices (“Legrand way”). Legrand purchases some of its raw materials and components locally. However, Company policy is to increase the percentage of raw materials and components purchased by the Group on world markets in order to benefit from economies of scale. The cost of raw materials and components may also fluctuate with macro- economic trends. Production costs . In general, these costs change on an aggregate basis in proportion to fluctuations in production volumes; they rise due to inflation and decline as a result of productivity initiatives and economies of scale associated with the increase in production volumes. Other items included in production costs are: W depreciation of fixed assets; W subcontracted added value; and W other general manufacturing expenses, such as expenses linked to energy consumption. The main factors that influence cost of sales, in particular as a percentage of net sales, include: W trends in net sales; W production volumes, insofar as the Company achieves economies of scale through higher production volumes, thereby spreading fixed production costs over a larger number of units produced; W themix of products sold, insofar as consumption and production costs vary depending on the cost of raw materials and other components needed to manufacture a given product;

W changes in the prices of raw materials, components and semi- finished goods due to local or global economic conditions; 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, through the implementation of best practices designed to improve productivity and inventory management optimization; and W product life cycles. R 5.3.2.4 ADMINISTRATIVE AND SELLING EXPENSE 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 use of administrative offices, logistics, information systems and miscellaneous expenses; W advertising expenses; W amortization of intangible assets, such as trademarks revalued following acquisitions; and W other selling expenses, such as printing costs for catalogs and expense incurred in connectionwith travel 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 testingof newor improvedproductsare recognizedas intangible assets when it is probable that the project, considering its technical, commercial and technological feasibility, will be a

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REGISTRATION DOCUMENT 2017 - LEGRAND