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DANAHER : DE/ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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04/20/2017 | 12:02 pm

Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is designed to provide a reader of Danaher Corporation's
("Danaher," the "Company," "we," "us" or "our") financial statements with a
narrative from the perspective of Company management. The Company's MD&A is
divided into five sections:
• Information Relating to Forward-Looking Statements





• Overview


• Results of Operations



• Liquidity and Capital Resources



• Critical Accounting Estimates



You should read this discussion along with the Company's MD&A and audited
financial statements as of and for the year ended December 31, 2016 and Notes
thereto, included in the Company's 2016 Annual Report on Form 10-K, and the
Company's Consolidated Condensed Financial Statements and related Notes as of
and for the three-month period ended March 31, 2017 included in this Report.
Unless otherwise indicated, all references in this report refer to continuing
operations.




INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
Certain statements included or incorporated by reference in this quarterly
report, in other documents we file with or furnish to the Securities and
Exchange Commission
("SEC"), in our press releases, webcasts, conference calls,
materials delivered to shareholders and other communications, are
"forward-looking statements" within the meaning of the United States federal
securities laws. All statements other than historical factual information are
forward-looking statements, including without limitation statements regarding:
projections of revenue, expenses, profit, profit margins, tax rates, tax
provisions, cash flows, pension and benefit obligations and funding
requirements, our liquidity position or other projected financial measures;
management's plans and strategies for future operations, including statements
relating to anticipated operating performance, cost reductions, restructuring
activities, new product and service developments, competitive strengths or
market position, acquisitions and the integration thereof, divestitures,
spin-offs, split-offs or other distributions, strategic opportunities,
securities offerings, stock repurchases, dividends and executive compensation;
growth, declines and other trends in markets we sell into; new or modified laws,
regulations and accounting pronouncements; regulatory approvals; outstanding
claims, legal proceedings, tax audits and assessments and other contingent
liabilities; foreign currency exchange rates and fluctuations in those rates;
general economic and capital markets conditions; the timing of any of the
foregoing; assumptions underlying any of the foregoing; and any other statements
that address events or developments that Danaher intends or believes will or may
occur in the future. Terminology such as "believe," "anticipate," "should,"
"could," "intend," "will," "plan," "expect," "estimate," "project," "target,"
"may," "possible," "potential," "forecast" and "positioned" and similar
references to future periods are intended to identify forward-looking
statements, although not all forward-looking statements are accompanied by such
words.
Forward-looking statements are based on assumptions and assessments made by our
management in light of their experience and perceptions of historical trends,
current conditions, expected future developments and other factors they believe
to be appropriate. Forward-looking statements are not guarantees of future
performance and actual results may differ materially from the results,
developments and business decisions contemplated by our forward-looking
statements. Accordingly, you should not place undue reliance on any such
forward-looking statements. Important factors that could cause actual results to
differ materially from those envisaged in the forward-looking statements include
the following:
• Conditions in the global economy, the markets we serve and the financial
markets may adversely affect our business and financial statements.


• Our growth could suffer if the markets into which we sell our products and
services (references to products and services in this report also include
software) decline, do not grow as anticipated or experience cyclicality.


• We face intense competition and if we are unable to compete effectively,
we may experience decreased demand and decreased market share. Even if we
compete effectively, we may be required to reduce prices for our products
and services.



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• Our growth depends in part on the timely development and
commercialization, and customer acceptance, of new and enhanced products
and services based on technological innovation.


• Our reputation, ability to do business and financial statements may be
impaired by improper conduct by any of our employees, agents or business
partners.


• Certain of our businesses are subject to extensive regulation by the U.S.
Food and Drug Administration
and by comparable agencies of other
countries, as well as laws regulating fraud and abuse in the health care
industry and the privacy and security of health information. Failure to
comply with those regulations could adversely affect our reputation and
financial statements.


• The health care industry and related industries that we serve have
undergone, and are in the process of undergoing, significant changes in an
effort to reduce costs, which could adversely affect our financial
statements.


• Any inability to consummate acquisitions at our historical rate and at
appropriate prices could negatively impact our growth rate and stock
price.


• Our acquisition of businesses (including our recent acquisitions of Pall
and Cepheid), joint ventures and strategic relationships could negatively
impact our financial statements.


• The indemnification provisions of acquisition agreements by which we have
acquired companies may not fully protect us and as a result we may face
unexpected liabilities.


• Divestitures and other dispositions could negatively impact our business,
and contingent liabilities from businesses that we have disposed could
adversely affect our financial statements.


• We could incur significant liability if the 2016 spin-off of Fortive or
the 2015 split-off of our communications business is determined to be a
taxable transaction.


• Potential indemnification liabilities related to the 2016 spin-off of
Fortive and the 2015 split-off of our communications business could
materially and adversely affect our business and financial statements.


• A significant disruption in, or breach in security of, our information
technology systems or violation of data privacy laws could adversely
affect our business, reputation and financial statements.


• Our operations, products and services expose us to the risk of
environmental, health and safety liabilities, costs and violations that
could adversely affect our reputation and financial statements.


• Our businesses are subject to extensive regulation; failure to comply with
those regulations could adversely affect our financial statements and
reputation.


• Our restructuring actions could have long-term adverse effects on our
business.


• We may be required to recognize impairment charges for our goodwill and
other intangible assets.



• Foreign currency exchange rates may adversely affect our financial statements.





• Changes in our tax rates or exposure to additional income tax liabilities
or assessments could affect our profitability. In addition, audits by tax
authorities could result in additional tax payments for prior periods.


• Changes in tax law relating to multinational corporations could adversely
affect our tax position.


• We are subject to a variety of litigation and other legal and regulatory
proceedings in the course of our business that could adversely affect our
business and financial statements.


• If we do not or cannot adequately protect our intellectual property, or if
third parties infringe our intellectual property rights, we may suffer
competitive injury or expend significant resources enforcing our rights.


• Third parties may claim that we are infringing or misappropriating their
intellectual property rights and we could suffer significant litigation
expenses, losses or licensing expenses or be prevented from selling
products or services.


• The United States government has certain rights to use and disclose some
of the intellectual property that we license and could exclusively license
it to a third-party if we fail to achieve practical application of the
intellectual property.



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• Defects and unanticipated use or inadequate disclosure with respect to our
products or services could adversely affect our business, reputation and
financial statements.


• The manufacture of many of our products is a highly exacting and complex
process, and if we directly or indirectly encounter problems manufacturing
products, our reputation, business and financial statements could suffer.


• Our indebtedness may limit our operations and our use of our cash flow,
and any failure to comply with the covenants that apply to our
indebtedness could adversely affect our liquidity and financial
statements.


• Adverse changes in our relationships with, or the financial condition,
performance, purchasing patterns or inventory levels of, key distributors
and other channel partners could adversely affect our financial
statements.


• Certain of our businesses rely on relationships with collaborative
partners and other third-parties for development, supply and marketing of
certain products and potential products, and such collaborative partners
or other third-parties could fail to perform sufficiently.


• Our financial results are subject to fluctuations in the cost and
availability of commodities that we use in our operations.


• If we cannot adjust our manufacturing capacity or the purchases required
for our manufacturing activities to reflect changes in market conditions
and customer demand, our profitability may suffer. In addition, our
reliance upon sole or limited sources of supply for certain materials,
components and services could cause production interruptions, delays and
inefficiencies.


• Changes in laws or governmental regulations may reduce demand for our
products or services or increase our expenses.


• Work stoppages, union and works council campaigns and other labor disputes
could adversely impact our productivity and results of operations.


• International economic, political, legal, compliance, trade and business
factors could negatively affect our financial statements.


• The results of the European Union membership referendum in the United
Kingdom
and their formal notice of withdrawal from the European Union
could adversely affect customer demand, our relationships with customers
and suppliers and our business and financial statements.


• If we suffer loss to our facilities, supply chains, distribution systems
or information technology systems due to catastrophe or other events, our
operations could be seriously harmed.


• Our defined benefit pension plans are subject to financial market risks
that could adversely affect our financial statements.



See Part I-Item 1A of the Company's 2016 Annual Report on Form 10-K for a
further discussion regarding reasons that actual results may differ materially
from the results, developments and business decisions contemplated by our
forward-looking statements. Forward-looking statements speak only as of the date
of the report, document, press release, webcast, call, materials or other
communication in which they are made. Except to the extent required by
applicable law, we do not assume any obligation to update or revise any
forward-looking statement, whether as a result of new information, future events
and developments or otherwise.



OVERVIEW



General



As a result of the Company's geographic and industry diversity, the Company
faces a variety of opportunities and challenges, as well as rapid technological
development (including with respect to computing, mobile connectivity,
artificial intelligence, communications and digitization) in most of the
Company's served markets, the expansion and evolution of opportunities in
high-growth markets, trends and costs associated with a global labor force,
consolidation of the Company's competitors and increasing regulation. The
Company defines high-growth markets as developing markets of the world
experiencing extended periods of accelerated growth in gross domestic product
and infrastructure which includes Eastern Europe, the Middle East, Africa, Latin
America
and Asia (with the exception of Japan and Australia). The Company
operates in a highly competitive business environment in most markets, and the
Company's long-term growth and profitability will depend in particular on its
ability to expand its business in high-growth geographies and high-growth market
segments, identify, consummate and




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integrate appropriate acquisitions, develop innovative and differentiated new
products and services with higher gross profit margins, expand and improve the
effectiveness of the Company's sales force, continue to reduce costs and improve
operating efficiency and quality, and effectively address the demands of an
increasingly regulated environment. The Company is making significant
investments, organically and through acquisitions, to address the rapid pace of
technological change in its served markets and to globalize its manufacturing,
research and development and customer-facing resources (particularly in
high-growth markets) in order to be responsive to the Company's customers
throughout the world and improve the efficiency of the Company's operations.
Business Performance and Outlook
While differences exist among the Company's businesses, on an overall basis,
sales from existing businesses increased 2.5% during the first quarter of 2017
as compared to the comparable period of 2016. Increased demand for the Company's
products and services on an overall basis, together with the Company's continued
investments in sales growth initiatives and the other business-specific factors
discussed below contributed to year-over-year sales growth. Geographically,
year-over-year sales growth rates from existing businesses during the first
quarter of 2017 were led by the high-growth markets. Sales growth rates from
existing businesses in high-growth markets grew at a mid-single digit rate
during the first quarter of 2017 as compared to the comparable period of 2016
led primarily by continued strength in China, partially offset by weakness in
the Middle East. High-growth markets represented approximately 28% of the
Company's total sales in the first quarter of 2017. Sales from existing
businesses in developed markets grew at a low-single digit rate during the first
quarter of 2017 with low-single digit growth in North America and Western
Europe
. The Company expects overall sales growth to continue but remains
cautious about challenges due to macro-economic and geopolitical uncertainties,
including global uncertainties related to monetary, fiscal and trade policies.
Currency Exchange Rates
On a year-over-year basis, currency exchange rates adversely impacted reported
sales by approximately 1.5% for the three-month period ended March 31, 2017
primarily due to the strength of the U.S. dollar against several major
currencies in the first three months of 2017 compared to 2016. If the currency
exchange rates in effect as of March 31, 2017 were to prevail throughout the
remainder of 2017, currency exchange rates would reduce the Company's estimated
full year 2017 sales by approximately 1.5% on a year-over-year basis. Additional
strengthening of the U.S. dollar against other major currencies in 2017 would
adversely impact the Company's sales and results of operations, and any
weakening of the U.S. dollar against other major currencies would positively
impact the Company's sales and results of operations for the remainder of the
year.


RESULTS OF OPERATIONS
In this report, references to sales from existing businesses refer to sales from
continuing operations calculated according to generally accepted accounting
principles in the United States ("GAAP") but excluding (1) sales from acquired
businesses and (2) the impact of currency translation. References to sales or
operating profit attributable to acquisitions or acquired businesses refer to
GAAP sales or operating profit, as applicable, from acquired businesses recorded
prior to the first anniversary of the acquisition less the amount of sales and
operating profit, as applicable, attributable to divested product lines not
considered discontinued operations. The portion of revenue attributable to
currency translation is calculated as the difference between (a) the
period-to-period change in revenue (excluding sales from acquired businesses)
and (b) the period-to-period change in revenue (excluding sales from acquired
businesses) after applying current period foreign exchange rates to the prior
year period. Sales from existing businesses should be considered in addition to,
and not as a replacement for or superior to, sales, and may not be comparable to
similarly titled measures reported by other companies. Management believes that
reporting the non-GAAP financial measure of sales from existing businesses
provides useful information to investors by helping identify underlying growth
trends in Danaher's business and facilitating easier comparisons of Danaher's
revenue performance with its performance in prior and future periods and to
Danaher's peers. Management also uses sales from existing businesses to measure
the Company's operating and financial performance. The Company excludes the
effect of currency translation from sales from existing businesses because
currency translation is not under management's control, is subject to volatility
and can obscure underlying business trends, and excludes the effect of
acquisitions and divestiture-related items because the nature, size and number
of acquisitions and divestitures can vary dramatically from period-to-period and
between the Company and its peers and can also obscure underlying business
trends and make comparisons of long-term performance difficult. Throughout this
discussion, references to sales volume refer to the impact of both price and
unit sales and references to productivity improvements generally refer to
improved cost efficiencies resulting from the application of the Danaher
Business System.




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Sales Growth (GAAP)



% Change Three-Month Period Ended March 31, 2017 vs.
Comparable 2016 Period
Total sales growth 7.0 %



Components of Sales Growth (non-GAAP)



% Change Three-Month Period Ended March 31, 2017 vs.
Comparable 2016 Period
Existing businesses 2.5 %
Acquisitions and other 6.0 %
Currency exchange rates (1.5 )%
Total 7.0 %


Operating profit margins were 14.8% for the three-month period ended March 31,
2017
as compared to 15.6% in the comparable period of 2016. The following
factors unfavorably impacted year-over-year operating profit margin comparisons:
• Unfavorable product mix, incremental year-over-year costs associated with
various new product development, sales, service and marketing growth
investments, and the impact of the stronger U.S. dollar in 2017, net of
higher 2017 sales volumes from existing businesses and incremental
year-over-year cost savings associated with the restructuring actions and
continuing productivity improvement initiatives taken in 2016 - 15 basis
points


• The incremental net dilutive effect in 2017 of acquired businesses - 65
basis points


Business Segments
Sales by business segment for each of the periods indicated were as follows ($
in millions):
Three-Month Period Ended
March 31, 2017 April 1, 2016
Life Sciences $ 1,308.1 $ 1,258.1
Diagnostics 1,327.3 1,136.2
Dental 655.5 655.9
Environmental & Applied Solutions 914.8 873.9
Total $ 4,205.7 $ 3,924.1




LIFE SCIENCES
The Company's Life Sciences segment offers a broad range of research tools that
scientists use to study the basic building blocks of life, including genes,
proteins, metabolites and cells, in order to understand the causes of disease,
identify new therapies and test new drugs and vaccines. The segment, through
its Pall business, is also a leading provider of filtration, separation and
purification technologies to the biopharmaceutical, food and beverage, medical,
aerospace, microelectronics and general industrial segments.




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Life Sciences Selected Financial Data



Three-Month Period Ended
($ in millions) March 31, 2017 April 1, 2016
Sales $ 1,308.1 $ 1,258.1
Operating profit 211.6 177.2
Depreciation 30.1 32.1
Amortization 76.6 71.9
Operating profit as a % of sales 16.2 % 14.1 %
Depreciation as a % of sales 2.3 % 2.6 %
Amortization as a % of sales 5.9 % 5.7 %


Sales Growth (GAAP)
% Change Three-Month Period Ended March 31, 2017 vs.
Comparable 2016 Period
Total sales growth 4.0 %



Components of Sales Growth (non-GAAP)



% Change Three-Month Period Ended March 31, 2017 vs.
Comparable 2016 Period
Existing businesses 3.0 %
Acquisitions and other 2.5 %
Currency exchange rates (1.5 )%
Total 4.0 %


During the first quarter of 2017, a product line was transferred from the Life
Sciences segment to the Environmental & Applied Solutions segment. While this
change is not material to segment results in total, the resulting change in
sales growth has been included in the acquisitions and other line in the table
above.
Year-over-year price increases in the segment contributed 0.5% to sales growth
on a year-over-year basis during the three-month period ended March 31, 2017,
and are reflected as a component of the change in sales from existing
businesses.
Sales of the business' broad range of mass spectrometers grew on a
year-over-year basis during the three-month period ended March 31, 2017 led by
strong sales growth in China, particularly in the pharmaceutical end-market,
partially offset by declines in demand in North America in the medical
end-market. Sales of microscopy products grew on a year-over-year basis during
the three-month period ended March 31, 2017 across most product lines and all
major geographies. Sales grew in most end-markets, including an improved
industrial end-market. Demand for the business' flow cytometry and genomics
products was strong in the three-month period ended March 31, 2017 as compared
to the comparable period in 2016, due to increased demand in the high-growth
markets, particularly China. Demand for filtration, separation and purification
technologies increased in the three-month period ended March 31, 2017 as
compared to the comparable period in 2016, primarily in the life sciences and
microelectronics end-markets. For these businesses, increased demand in the
developed markets was partially offset by declines in the Middle East, largely
due to a major project in 2016 which did not repeat in 2017.

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Operating profit margins increased 210 basis points during the three-month
period ended March 31, 2017 as compared to the comparable period of 2016. The
following factors favorably impacted year-over-year operating profit margin
comparisons:
• Higher 2017 sales volumes from existing businesses and incremental
year-over-year cost savings associated with the restructuring actions and
continuing productivity improvement initiatives taken in 2016, net of
incremental year-over-year costs associated with various new product
development, sales and marketing growth investments in 2017 and the impact
of the stronger U.S. dollar in 2017 - 165 basis points


• The incremental net accretive effect in 2017 of acquired businesses and
intersegment product line transfers - 45 basis points




DIAGNOSTICS



The Company's Diagnostics segment offers analytical instruments, reagents,
consumables, software and services that hospitals, physicians' offices,
reference laboratories and other critical care settings use to diagnose disease
and make treatment decisions.
Diagnostics Selected Financial Data



Three-Month Period Ended
($ in millions) March 31, 2017 April 1, 2016
Sales $ 1,327.3 $ 1,136.2
Operating profit 154.6 180.2
Depreciation 87.6 75.2
Amortization 56.1 33.6
Operating profit as a % of sales 11.6 % 15.9 %
Depreciation as a % of sales 6.6 % 6.6 %
Amortization as a % of sales 4.2 % 3.0 %


Sales Growth (GAAP)
% Change Three-Month Period Ended March 31, 2017 vs.
Comparable 2016 Period
Total sales growth 17.0 %



Components of Sales Growth (non-GAAP)



% Change Three-Month Period Ended March 31, 2017 vs.
Comparable 2016 Period
Existing businesses 2.5 %
Acquisitions and other 15.5 %
Currency exchange rates (1.0 )%
Total 17.0 %



Year-over-year price increases in the segment contributed 0.5% to sales growth
on a year-over-year basis during the three-month period ended March 31, 2017 and
are reflected as a component of the change in sales from existing businesses.
Demand in the segment's clinical business increased on a year-over-year basis
for the three-month period ended March 31, 2017 primarily in the immunoassay
business. Geographically, demand was led by the high-growth markets,
particularly China, partially offset by softer demand in North America and
Western Europe. Solid installed base growth in both blood gas and immunoassay
analyzers across all major geographies, particularly high-growth markets, drove
the growth in the acute care diagnostic business in the three-month period ended
March 31, 2017. Sales in the pathology diagnostics business grew in the




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three-month period ended March 31, 2017, led by North America and Western
Europe
, due primarily to increased demand for advanced staining instruments and
consumables.
The acquisition of Cepheid in November 2016 provides additional sales and
earnings growth opportunities for the segment by expanding geographic and
product line diversity, including new product and service offerings in the areas
of molecular diagnostics. As Cepheid is integrated into the Company over the
next several years, the Company expects to realize significant synergies through
the application of the Danaher Business System. During the three-month period
ended March 31, 2017, Cepheid's revenues grew in all major geographies,
primarily North America and Western Europe, and across most major product lines.
Operating profit margins decreased 430 basis points during the three-month
period ended March 31, 2017 as compared to the comparable period of 2016. The
following factors unfavorably impacted year-over-year operating profit margin
comparisons:
• Incremental year-over-year costs associated with various new product
development, sales, service and marketing growth investments, and the
impact of the stronger U.S. dollar and stronger Japanese yen in 2017, net
of higher 2017 sales volumes from existing businesses and incremental
year-over-year cost savings associated with the restructuring actions and
continuing productivity improvement initiatives taken in 2016 - 240 basis
points


• The incremental net dilutive effect in 2017 of acquired businesses - 190
basis points



Depreciation and amortization increased during the three-month period ended
March 31, 2017 as compared to the comparable period of 2016 due primarily to the
impact of recently acquired businesses, particularly Cepheid.



DENTAL



The Company's Dental segment provides products that are used to diagnose, treat
and prevent disease and ailments of the teeth, gums and supporting bone, as well
as to improve the aesthetics of the human smile. The Company is a leading
worldwide provider of a broad range of dental consumables, equipment and
services, and is dedicated to driving technological innovations that help dental
professionals improve clinical outcomes and enhance productivity.
Dental Selected Financial Data



Three-Month Period Ended
($ in millions) March 31, 2017 April 1, 2016
Sales $ 655.5 $ 655.9
Operating profit 89.4 95.1
Depreciation 10.2 10.9
Amortization 20.0 21.5
Operating profit as a % of sales 13.6 % 14.5 %
Depreciation as a % of sales 1.6 % 1.7 %
Amortization as a % of sales 3.1 % 3.3 %



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Sales Growth (GAAP)



% Change Three-Month Period Ended March 31, 2017 vs.
Comparable 2016 Period
Total sales growth - %



Components of Sales Growth (non-GAAP)



% Change Three-Month Period Ended March 31, 2017 vs.
Comparable 2016 Period
Existing businesses - %
Acquisitions and other - %
Currency exchange rates - %
Total - %


Year-over-year price increases in the segment did not significantly impact sales
growth on a year-over-year basis during the three-month period ended March 31,
2017
.
Geographically, year-over-year sales growth during the three-month period ended
March 31, 2017 as compared to the comparable period of 2016 was strong in China
and other high-growth markets, with softer demand in the United States and
Western Europe. Continued increased year-over-year demand for implant systems,
particularly in China and other high-growth markets, and increased demand for
orthodontic products, primarily in China and Western Europe, drove growth during
the quarter. Dental equipment sales also grew during the three-month period,
primarily in high-growth markets, Western Europe, and North America. Lower
demand for dental consumable product lines in North America and Western Europe
offset this year-over-year growth.
Operating profit margins decreased 90 basis points during the three-month period
ended March 31, 2017 as compared to the comparable period of 2016. The following
factors unfavorably impacted operating profit margin comparisons:
• Incremental year-over-year costs associated with various new product
development, sales and marketing growth investments and unfavorable
product mix due to lower sales of dental consumables in 2017, net of
incremental year-over-year cost savings associated with the restructuring
actions and continuing productivity improvement initiatives taken in 2016
- 85 basis points


• The incremental net dilutive effect in 2017 of acquired businesses - 5
basis points




ENVIRONMENTAL & APPLIED SOLUTIONS
The Company's Environmental & Applied Solutions segment products and services
help protect important resources and keep global food and water supplies safe.
The Company's water quality business provides instrumentation, services and
disinfection systems to help analyze, treat and manage the quality of
ultra-pure, potable, waste, ground, source and ocean water in residential,
commercial, industrial and natural resource applications. The Company's product
identification business provides equipment, consumables, software and services
for various printing, marking, coding, traceability, packaging, design and color
management applications on consumer, pharmaceutical and industrial products.




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Environmental & Applied Solutions Selected Financial Data



Three-Month Period Ended
($ in millions) March 31, 2017 April 1, 2016
Sales $ 914.8 $ 873.9
Operating profit 208.0 198.4
Depreciation 9.9 8.8
Amortization 13.4 12.2
Operating profit as a % of sales 22.7 % 22.7 %
Depreciation as a % of sales 1.1 % 1.0 %
Amortization as a % of sales 1.5 % 1.4 %


Sales Growth (GAAP)
% Change Three-Month Period Ended March 31, 2017 vs.
Comparable 2016 Period
Total sales growth 4.5 %



Components of Sales Growth (non-GAAP)



% Change Three-Month Period Ended March 31, 2017 vs.
Comparable 2016 Period
Existing businesses 4.5 %
Acquisitions and other 1.5 %
Currency exchange rates (1.5 )%
Total 4.5 %


During the first quarter of 2017, a product line was transferred from the Life
Sciences segment to the Environmental & Applied Solutions segment. While this
change is not material to segment results in total, the resulting change in
sales growth has been included in the acquisitions and other line in the table
above.
Price increases in the segment contributed 0.5% to sales growth on a
year-over-year basis during the three-month period ended March 31, 2017 and are
reflected as a component of the change in sales from existing businesses.
Sales from existing businesses in the segment's water quality business grew at a
mid-single digit rate during the three-month period ended March 31, 2017 as
compared to the comparable period of 2016. Year-over-year sales in the
analytical instrumentation product line increased, driven by demand in
industrial end-markets, particularly in North America and China. Year-over-year
sales growth for the three-month period in the business' chemical treatment
solutions product line was due to an expansion of the customer base in the
United States
and increased demand in Latin America, primarily from oil and
gas-related end-markets. Sales in the business' ultraviolet water disinfection
product line continued to grow on a year-over-year basis due primarily to higher
demand in municipal end-markets in high-growth markets, Western Europe and
Australia.
Sales from existing businesses in the segment's product identification
businesses grew at a mid-single digit rate during the three-month period ended
March 31, 2017 as compared to the comparable period of 2016. Continued strong
year-over-year demand for marking and coding equipment and related consumables
in most major geographies, led by North America, drove the majority of the sales
growth. Increased year-over-year demand for the business' packaging and color
solutions products and services, primarily in high-growth markets, also
contributed to sales growth for the three-month period ended March 31, 2017.

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Operating profit margins were flat during the three-month period ended March 31,
2017
as compared to the comparable period of 2016.
First quarter 2017 vs. first quarter 2016 operating profit margin comparisons
were favorably impacted by:
• Higher 2017 sales volumes from existing businesses and incremental



year-over-year cost savings associated with the restructuring actions and
continuing productivity improvement initiatives taken in 2016 and improved
pricing were offset by incremental year-over-year costs associated with
various new product development, sales and marketing growth investments -
60 basis points



First quarter 2017 vs. first quarter 2016 operating profit margin comparisons
were unfavorably impacted by:
• The incremental net dilutive effect in 2017 of intersegment product line



transfers - 60 basis points




COST OF SALES AND GROSS PROFIT



Three-Month Period Ended
($ in millions) March 31, 2017 April 1, 2016
Sales $ 4,205.7 $ 3,924.1
Cost of sales (1,871.4 ) (1,756.8 )
Gross profit $ 2,334.3 $ 2,167.3
Gross profit margin 55.5 % 55.2 %



The year-over-year increase in cost of sales during the three-month period ended
March 31, 2017 as compared to the comparable period in 2016, is due primarily to
the impact of higher year-over-year sales volumes, including sales from recently
acquired businesses, partly offset by incremental year-over-year cost savings
associated with the restructuring and continued productivity improvement actions
taken in 2016.
The year-over-year increase in gross profit margins during the three-month
period ended March 31, 2017 as compared to the comparable periods in 2016, is
due primarily to the favorable impact of higher year-over-year sales volumes,
incremental year-over-year cost savings associated with the restructuring
activities and continued productivity improvement actions taken in 2016.



OPERATING EXPENSES



Three-Month Period Ended
($ in millions) March 31, 2017 April 1, 2016
Sales $ 4,205.7 $ 3,924.1
Selling, general and administrative ("SG&A") expenses 1,443.0 1,328.1
Research and development ("R&D") expenses 267.4 226.1
SG&A as a % of sales 34.3 % 33.8 %
R&D as a % of sales 6.4 % 5.8 %



The year-over-year increase in SG&A expenses as a percentage of sales was driven
by the higher relative spending levels at recently acquired companies, primarily
Cepheid, and continued investments in sales and marketing growth initiatives.
These increases were partially offset by the benefit of increased leverage of
the Company's general and administrative cost base resulting from higher 2017
sales volumes.
The year-over-year increase in R&D expenses (consisting principally of internal
and contract engineering personnel costs) as a percentage of sales was due
primarily to higher R&D expenses as a percentage of sales in the businesses most
recently acquired, particularly Cepheid, as well as continued investments in new
product development initiatives.



NONOPERATING INCOME (EXPENSE)
The Company received $265 million of cash proceeds from the sale of marketable
equity securities during the first quarter of 2016. The Company recorded a
pretax gain related to this sale of $223 million ($140 million after-tax or
$0.20 per diluted share) during the three-month period ended April 1, 2016.




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INTEREST COSTS AND FINANCING
For a discussion of the Company's outstanding indebtedness, refer to Note 6 to
the accompanying Consolidated Condensed Financial Statements.
Interest expense of $40 million for the three-month period ended March 31, 2017
was $13 million lower than the comparable period of 2016, due primarily to the
decreases in interest costs as a result of the early extinguishment of
outstanding borrowings in the third quarter of 2016 using the proceeds from the
Fortive Distribution.




INCOME TAXES
The Company's effective tax rate from continuing operations for the three-month
period ended March 31, 2017 was 17.3% as compared to 25.2% for the three-month
period ended April 1, 2016.
The Company's effective tax rate for 2017 and 2016 differs from the U.S. federal
statutory rate of 35.0% due principally to the Company's earnings outside the
United States
that are indefinitely reinvested and taxed at rates lower than the
U.S. federal statutory rate. The excess tax benefits from stock-based
compensation and the release of reserves upon the expiration of statutes of
limitations, partially offset by recording valuation allowances on certain
foreign operating losses decreased the reported tax rate for the three-month
period ended March 31, 2017 by 3.2%. The gain on the sale of marketable equity
securities during the first quarter of 2016 resulted in a 4.9% increase in the
reported tax rate on a year-over-year basis for the three-month period ended
April 1, 2016.
The Company conducts business globally, and files numerous consolidated and
separate income tax returns in federal, state and foreign jurisdictions. The
countries in which the Company has a significant presence that have
significantly lower statutory tax rates than the United States include China,
Denmark, Germany, Singapore, Switzerland and the United Kingdom. The Company's
ability to obtain tax benefits from lower statutory tax rates outside the United
States
is dependent on its levels of taxable income in these foreign countries
and the amount of foreign earnings which are indefinitely reinvested in those
countries. The Company believes that a change in the statutory tax rate of any
individual foreign country would not have a material effect on the Company's
financial statements given the geographic dispersion of the Company's taxable
income.
The Company and its subsidiaries are routinely examined by various domestic and
international taxing authorities. The U.S. Internal Revenue Service ("IRS") has
completed substantially all of the examinations of the Company's federal income
tax returns through 2010 and is currently examining certain of the Company's
federal income tax returns for 2011 through 2015. In addition, the Company has
subsidiaries in Belgium, Canada, China, Denmark, France, Finland, Germany,
India, Italy, Japan, Singapore, Sweden, the United Kingdom and various other
countries, states and provinces that are currently under audit for years ranging
from 2004 through 2015.
Tax authorities in Denmark have raised significant issues related to interest
accrued by certain of the Company's subsidiaries. On December 10, 2013, the
Company received assessments from the Danish tax authority ("SKAT") totaling
approximately DKK 1.4 billion including interest through March 31, 2017
(approximately $203 million based on the exchange rate as of March 31, 2017),
imposing withholding tax relating to interest accrued in Denmark on borrowings
from certain of the Company's subsidiaries for the years 2004-2009. The Company
is currently in discussions with SKAT and anticipates receiving an assessment
for years 2010-2012 totaling approximately DKK 833 million including interest
through March 31, 2017 (approximately $120 million based on the exchange rate as
of March 31, 2017). Management believes the positions the Company has taken in
Denmark are in accordance with the relevant tax laws and intends to vigorously
defend its positions. The Company appealed these assessments with the National
Tax Tribunal
in 2014 and intends on pursuing this matter through the European
Court of Justice
should this appeal be unsuccessful. The ultimate resolution of
this matter is uncertain, could take many years, and could result in a material
adverse impact to the Company's financial statements, including its effective
tax rate.
The Company expects its effective tax rate related to continuing operations for
the remainder of 2017 to be approximately 20.5% based on its projected mix of
earnings. The 2017 expected rate includes the anticipated discrete income tax
benefits from excess tax deductions related to the Company's stock compensation
programs, which are now reflected as a reduction in tax expense (refer to Note 1
to the Consolidated Financial Statements for additional information related to
this change in accounting guidance). The actual mix of earnings by jurisdiction
could fluctuate from the Company's projection which would impact the Company's
effective tax rate for the period. In addition, the tax effects of other
discrete items, including accruals related to tax contingencies, the resolution
of worldwide tax matters, tax audit settlements, statute of limitations
expirations and changes in tax regulations, are reflected in the period in which
they occur. As a result of the uncertainty in predicting the Company's actual
earnings mix and discrete items, it is reasonably possible that the actual
effective tax rate used for financial

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reporting purposes will change in future periods. Any future legislative changes
or potential tax reform in the United States or other jurisdictions could also
cause the Company's effective tax rate to differ from this estimate.
In the three-month period ended March 31, 2017, Danaher recorded a $22 million
income tax benefit related to the release of previously provided reserves
associated with uncertain tax positions on certain Danaher tax returns which
were jointly filed with Fortive entities. These reserves were released due to
the expiration of statutes of limitations for those returns. All Fortive
entity-related balances were included in the income tax benefit related to
discontinued operations.



COMPREHENSIVE INCOME
For the three-month period ended March 31, 2017, comprehensive income decreased
$11 million as compared to the comparable period of 2016, primarily due to a
decrease in net earnings in the three-month period mostly offset by the impact
from foreign currency translation adjustments and the impact from the sale of
marketable equity securities on other comprehensive income in the first quarter
of 2016 which did not recur in 2017. For the three-month period ended March 31,
2017
, the Company recorded a foreign currency translation gain of $304 million
as compared to a translation gain of $201 million for the three-month period
ended April 1, 2016.



INFLATION



The effect of inflation on the Company's revenues and net earnings was not
significant in the three-month period ended March 31, 2017.




LIQUIDITY AND CAPITAL RESOURCES
Management assesses the Company's liquidity in terms of its ability to generate
cash to fund its operating, investing and financing activities. The Company
continues to generate substantial cash from operating activities and believes
that its operating cash flow and other sources of liquidity will be sufficient
to allow it to continue investing in existing businesses, consummating strategic
acquisitions, paying interest and servicing debt and managing its capital
structure on a short and long-term basis.
Following is an overview of the Company's cash flows and liquidity for the
three-month period ended March 31, 2017:
Overview of Cash Flows and Liquidity
Three-Month Period Ended
($ in millions) March 31, 2017 April 1, 2016


Total operating cash flows provided by continuing operations $ 560.2 $ 607.1




Cash paid for acquisitions $ - $ (94.7 )
Payments for additions to property, plant and equipment (158.6 ) (122.6 )
Proceeds from sale of investments - 264.8
All other investing activities (5.1 ) -
Total investing cash used in discontinued operations - (39.2 )


Net cash (used in) provided by investing activities $ (163.7 ) $ 8.3




Proceeds from the issuance of common stock $ 20.5 $ 43.9
Payment of dividends (86.6 ) (92.7 )
Payment for purchase of noncontrolling interests (64.4 ) -


Net repayments of borrowings (maturities of 90 days or less) (434.9 ) (1,077.1 )
Proceeds from borrowings (maturities longer than 90 days)


- 262.3
Repayments of borrowings (maturities longer than 90 days) - (0.3 )
All other financing activities (25.3 ) (26.7 )
Net cash used in financing activities $ (590.7 ) $ (890.6 )



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• Operating cash flows from continuing operations decreased $47 million, or
approximately 8%, during the first three months of 2017 as compared to the
first three months of 2016, due primarily to higher payments for income
taxes, working capital and accrued expenses and other liabilities.


• The Company also used cash generated from operations to reduce net
outstanding borrowings with maturities of 90 days or less, primarily
commercial paper borrowings, by $435 million during the three-month period
ended March 31, 2017.


• As of March 31, 2017, the Company held $804 million of cash and cash
equivalents.



Operating Activities
Cash flows from operating activities can fluctuate significantly from
period-to-period as working capital needs and the timing of payments for income
taxes, restructuring activities, pension funding and other items impact reported
cash flows.
Operating cash flows from continuing operations were $560 million for the first
three months of 2017, a decrease of $47 million, or approximately 8%, as
compared to the comparable period of 2016. The year-over-year change in
operating cash flows from 2016 to 2017 was primarily attributable to the
following factors:
• 2017 operating cash flows reflected a decrease in net earnings for the
first three months of 2017 as compared to the comparable period in 2016,
as the net earnings in 2016 included the gain from the sale of marketable
equity securities which was included in other nonoperating income
(expense). The cash flow impact of the nonoperating gain from the sale of
marketable equity securities is reflected in the investing activities
section of the accompanying Consolidated Condensed Statement of Cash
Flows, and therefore, does not contribute to operating cash flows.
Excluding the impact of the gain from the sale of marketable equity
securities from net earnings, the impact to operating cash flows from net
earnings increased for the first three months of 2017 as compared to the
comparable period in 2016.


• Net earnings from continuing operations for the first three months of 2017
reflected an increase of $38 million of depreciation and amortization
expense as compared to the comparable period of 2016. Amortization expense
primarily relates to the amortization of intangible assets acquired in
connection with acquisitions and increased due to the impact of recently
acquired businesses, particularly Cepheid. Depreciation expense relates to
both the Company's manufacturing and operating facilities as well as
instrumentation leased to customers under operating-type lease
arrangements and increased due primarily to the impact of recently
acquired businesses, particularly Cepheid. Depreciation and amortization
are noncash expenses that decrease earnings without a corresponding impact
to operating cash flows.


• The aggregate of trade accounts receivable, inventories and trade accounts
payable provided $21 million in operating cash flows during the first
three months of 2017, compared to $118 million of operating cash flows
used in the comparable period of 2016. The amount of cash flow generated
from or used by the aggregate of trade accounts receivable, inventories
and trade accounts payable depends upon how effectively the Company
manages the cash conversion cycle, which effectively represents the number
of days that elapse from the day it pays for the purchase of raw materials
and components to the collection of cash from its customers and can be
significantly impacted by the timing of collections and payments in a
period.


• The aggregate of prepaid expenses and other assets and accrued expenses
and other liabilities used $283 million of operating cash flows during the
first three months of 2017, compared to $66 million provided in the
comparable period of 2016. This use of operational cash flow in the first
quarter of 2017 resulted primarily from the timing of cash payments for
income taxes, various employee-related liabilities, customer funding and
accrued expenses during the first three months of 2017, compared to the
comparable period of 2016.



Investing Activities
Cash flows relating to investing activities consist primarily of cash used for
acquisitions and capital expenditures, including instruments leased to
customers, cash used for investments and cash proceeds from divestitures of
businesses or assets.
Net cash used in investing activities was $164 million during the first three
months of 2017 compared to $8 million of cash provided in the first three months
of 2016. For a discussion of the Company's sale of marketable equity securities
refer to "-Results of Operations-Nonoperating Income (Expense)".
Capital expenditures are made primarily for increasing capacity, replacing
equipment, supporting new product development, improving information technology
systems and the manufacture of instruments that are used in operating-type lease

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arrangements that certain of the Company's businesses enter into with customers.
Capital expenditures increased $36 million on a year-over-year basis for the
first three months of 2017 compared to 2016 due to increased investments in
other operating assets, particularly new facilities and operating assets at
newly acquired businesses. For the full year 2017, the Company expects capital
spending to be approximately $750 million, though actual expenditures will
ultimately depend on business conditions.




Financing Activities and Indebtedness
Cash flows relating to financing activities consist primarily of cash flows
associated with the issuance and repayments of commercial paper and other debt,
issuance and repurchases of common stock and payments of cash dividends to
shareholders. Financing activities used cash of $591 million during the first
three months of 2017 compared to approximately $891 million of cash used in the
comparable period of 2016. The year-over-year decrease in cash used in financing
activities was due primarily to lower net repayments of borrowings net of the
payments of $64 million to noncontrolling interest holders.
For a description of the Company's outstanding debt as of March 31, 2017, the
debt issued and debt repaid during the three-month period ended March 31, 2017
and the Company's commercial paper programs and credit facilities, refer to Note
6 to the accompanying Consolidated Condensed Financial Statements. As of
March 31, 2017, the Company was in compliance with all of its debt covenants.
As of March 31, 2017, Danaher had the ability to incur approximately an
additional $1.6 billion of indebtedness in direct borrowings under the Credit
Facilities or under outstanding commercial paper facilities (based on aggregate
amounts available under the Credit Facilities that were not being used to
backstop outstanding commercial paper balances).
The Company has classified approximately $4.0 billion of its borrowings
outstanding under the commercial paper programs as of March 31, 2017 as
long-term debt in the accompanying Consolidated Condensed Balance Sheet as the
Company had the intent and ability, as supported by availability under the
Credit Facility, to refinance these borrowings for at least one year from the
balance sheet date. As commercial paper obligations mature, the Company may
issue additional short-term commercial paper obligations to refinance all or
part of these borrowings.


Stock Repurchase Program
Neither the Company nor any "affiliated purchaser" repurchased any shares of
Company common stock during the three-month period ended March 31, 2017. On July
16, 2013
, the Company's Board of Directors approved the Repurchase Program
authorizing the repurchase of up to 20 million shares of the Company's common
stock from time to time on the open market or in privately negotiated
transactions. There is no expiration date for the Repurchase Program, and the
timing and amount of any shares repurchased under the program will be determined
by the Company's management based on its evaluation of market conditions and
other factors. The Repurchase Program may be suspended or discontinued at any
time. Any repurchased shares will be available for use in connection with the
Company's equity compensation plans (or any successor plan) and for other
corporate purposes. As of March 31, 2017, 20 million shares remained available
for repurchase pursuant to the Repurchase Program. The Company expects to fund
any future stock repurchases using the Company's available cash balances or
proceeds from the issuance of debt.



Dividends



Aggregate cash payments for dividends during the first three months of 2017 were
$87 million. This is lower than in the comparable period of 2016, as the Company
decreased the per share amount of its quarterly dividend to $0.125 in the third
quarter of 2016 as a result of the Separation.
In the first quarter of 2017, the Company declared a regular quarterly dividend
of $0.14 per share payable on April 28, 2017 to holders of record on March 31,
2017
.



Cash and Cash Requirements
As of March 31, 2017, the Company held $804 million of cash and cash equivalents
that were invested in highly liquid investment-grade debt instruments with a
maturity of 90 days or less with an approximate weighted average annual interest
rate of 0.72%. Of this amount, $214 million was held within the United States
and $590 million was held outside of the United States. The Company will
continue to have cash requirements to support working capital needs, capital
expenditures and acquisitions, pay interest and service debt, pay taxes and any
related interest or penalties, fund its restructuring activities and pension
plans as required, pay dividends to shareholders, repurchase shares of the
Company's common stock and support other business needs.




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The Company generally intends to use available cash and internally generated
funds to meet these cash requirements, but in the event that additional
liquidity is required, particularly in connection with acquisitions, the Company
may also borrow under its commercial paper programs or the credit facilities,
enter into new credit facilities and either borrow directly thereunder or use
such credit facilities to backstop additional borrowing capacity under its
commercial paper programs and/or access the capital markets. The Company also
may from time to time access the capital markets to take advantage of favorable
interest rate environments or other market conditions. With respect to the
Company's commercial paper (including commercial paper backstopped by the
364-Day Facility), notes and bonds scheduled to mature in 2017, the Company
expects to repay the principal amounts when due using available cash, proceeds
from the issuance of commercial paper and/or proceeds from other debt issuances.
While repatriation of some cash held outside the United States may be restricted
by local laws, most of the Company's foreign cash balances could be repatriated
to the United States but, under current law, would be subject to U.S. federal
income taxes, less applicable foreign tax credits. For most of its foreign
subsidiaries, the Company makes an election regarding the amount of earnings
intended for indefinite reinvestment, with the balance available to be
repatriated to the United States. The Company has recorded a deferred tax
liability for the funds that are available to be repatriated to the United
States
. No provisions for U.S. income taxes have been made with respect to
earnings that are planned to be reinvested indefinitely outside the United
States
, and the amount of U.S. income taxes that may be applicable to such
earnings is not readily determinable given the various tax planning alternatives
the Company could employ if it repatriated these earnings. The cash that the
Company's foreign subsidiaries hold for indefinite reinvestment is generally
used to finance foreign operations and investments, including acquisitions. As
of December 31, 2016, the total amount of earnings planned to be reinvested
indefinitely outside of the United States and the basis difference in
investments outside of the United States for which deferred taxes have not been
provided in aggregate was approximately $23.0 billion. As of March 31, 2017,
management believes that it has sufficient liquidity to satisfy its cash needs,
including its cash needs in the United States.
During 2017, the Company's cash contribution requirements for its U.S. and
non-U.S. defined benefit pension plans are expected to be approximately $35
million
and $40 million, respectively. The ultimate amounts to be contributed
depend upon, among other things, legal requirements, underlying asset returns,
the plan's funded status, the anticipated tax deductibility of the contribution,
local practices, market conditions, interest rates and other factors.



CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Information related to Danaher's contractual obligations as of December 31, 2016
can be found in "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Contractual Obligations," in Part II-Item 7 of Danaher's
2016 Annual Report.
There were no material changes outside the ordinary course of business to the
Company's contractual obligations reported in the Company's 2016 Annual Report
on Form 10-K.



CRITICAL ACCOUNTING ESTIMATES
There were no material changes during the three-month period ended March 31,
2017
to the items that the Company disclosed as its critical accounting
estimates in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's 2016 Annual Report on Form 10-K.

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