2010 Environmental Financial Statement

Baxter's Environment, Health and Safety (EHS) function pioneered its Environmental Financial Statement (EFS) in 1994 (covering 1993 data). The EFS demonstrates the value of the company’s proactive global environmental management program to EHS team members, senior leadership and other stakeholders. For the past decade, the company has received a return of approximately three dollars for every dollar invested in environmental initiatives.

Environmental income, savings and cost avoidance totaled $11.5 million for initiatives completed in 2010, or 61% of the cost of Baxter's basic global environmental program. This amount increased from $10.8 million in 2009.

Factors that influenced 2010 performance include the following:

• The strengthening of the global economy increased demand and revenue for production byproducts sent off-site for recycling.
• Increased average utility rates for energy combined with higher levels of energy consumption during the year negatively impacted net energy cost savings and avoidance compared to prior years.
• Significant investments made by Baxter in enhanced wastewater pretreatment and treatment systems in 2008 have increased annualized depreciation expenses (for a period of seven years for U.S. capital improvements and 10 years for all others, beginning in 2008) as well as associated operation and maintenance costs.

Total estimated environmental income, savings and cost avoidance realized in 2010 from environmental initiatives implemented during the prior six years, including 2010, totaled $94.1 million.

Background

When initiating the EFS, Baxter developed specific methodologies to estimate savings and cost avoidance. The company uses this approach consistently each year, to enhance the reliability and comparability of the results.

In compiling the EFS, Baxter uses the following terms and conventions:

Monetary Amounts

Stated in U.S. dollars.

Income

Money received in each of the reported years.

Savings

Reduction in actual costs between the report year and the prior year. An increase in actual costs equals negative savings.

Cost Avoidance

Costs that the company would have incurred had the reduction activity not taken place. Conservation initiatives produce cost avoidance in the year commenced, and in future years in which the resource (such as energy, water or materials) remains eliminated from processes. To be conservative, Baxter stops accumulating cost avoidance from conservation activities after seven years (including the year implemented). This reflects the typical duration of many conservation projects, after which additional improvements or changes may be made.

Calculating Savings and Cost Avoidance

In calculating savings and cost avoidance for resource reduction activities, Baxter assumes that production and distribution grow at the same rate as the company's cost of goods sold, and that resource use and waste generation increase at that same rate in the absence of reduction initiatives. Baxter determines this rate by calculating the average annual increase in the company's published cost of goods sold over the past six years. It then adjusts this number for new acquisitions and changes in inventory, and subtracts inflation, which is calculated as an average of three major, relevant U.S. producer-price indexes. The company then rounds the resulting growth rate down to the nearest whole number to conservatively report performance.

In calculations related to materials use, Baxter uses the current average cost of materials and the compounded growth in business activity.

Undetermined (and Unreported) Environmental-related Costs and Savings

The following undetermined costs are not included in the EFS:

• Environmentally driven materials research and other research and development. These costs are typically offset by increased sales and other non-environmental benefits not reported in the EFS;
• Capital costs of modifying processes and implementing certain resource conservation projects, other than adding pollution controls. These are typically offset by increased production rates, efficiencies and other non-environmental benefits not reported in the EFS;
• Cost of substitutes for ozone-depleting substances and other hazardous materials (estimated to be relatively minor); and
• Time spent by non-environmental employees on environmental activities. Environmental training and responsibilities are part of every employee's job.

Baxter's global environmental program also produces undetermined savings and other benefits that are not easily measured and are not included in the EFS. Examples include the following:

• Decreased liability exposure related to the operation of regulated waste management sites by maintaining a program (launched in the 1980s) requiring a detailed audit of any such site before use by Baxter and periodic re-audits after the initial assessment;
• Reduced risk due to other risk-management programs, including performance of environmental due diligence on all business acquisitions and divestitures, use of a common set of EHS policies, throughout Baxter operations, auditing those operations regularly against these policies and using a tracking system to resolve any audit findings;
• Decreased regulatory burden by reducing waste generation at Baxter below certain thresholds (decreases training, recordkeeping, reporting, and administrative costs);
• Avoided costs for environmental problems that did not occur due to Baxter's proactive efforts;
• Enhanced ability for employees to focus on higher value tasks due to the reduction of waste, possible spills and other potential environmental problems;
• Increased good will and brand value, improved company reputation and employee morale, and possible additional sales; and
• Attraction and retention of key personnel in part due to Baxter’s strong environmental program.