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  • Financial Highlights
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  • Consolidated Financial Statements
  • Notes to Consolidated Financial Statements
  • Selected Financial Data
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Notes to Consolidated Financial Statements

Note 1 – Summary of Significant Account Policies Note 2 – Segment Information Note 3 – Earnings Per Share Note 4 – Employee and Retiree Benefits Note 5 – Investments held by VEBA Trust Note 6 – Former Natural Resource Operations Note 7 – Costs Associated With Exit Activities Note 8 – Property and Equipment Note 9 – Impairment of Long-Lived Assets Note 10 – Other Assets Note 11 – Accrued Liabilities Note 12 – Other Liabilities Note 13 – Long-Term Debt Note 14 – Accounts Receivable and Asset Securitization Note 15 – Operating Leases Note 16 – Share-Based Compensation Plans Note 17 – Capital Stock Note 18 – Income Taxes Note 19 – Supplemental Cash Flow Information Note 20 – Other Operating Income, Net Note 21 – Other Nonoperating Income (Expense), Net Note 22 – Risk Management Note 23 – Other Commitments and Contingencies Note 24 – Selected Quarterly Financial Data (unaudited)

Note 22 – Risk Management

The Company has risk management policies designed to minimize the impact on earnings and cash flows of the Company from fluctuations in interest rates, commodity prices and foreign exchange rates. The Company utilizes derivative and non-derivative financial instruments in order to manage these risks. The Company does not use derivative financial instruments for purposes other than hedging underlying commercial or financial exposures of the Company. The risk that counterparties to these derivative financial instruments may be unable to perform is minimized by limiting the counterparties to major financial institutions with investment grade credit ratings. The Company does not expect to incur a loss from the failure of any counterparty to perform under the agreements.

Derivative Financial Instruments and Hedging Activities

Interest Rate Risk Management

The Company’s interest-bearing debt and certain other obligations are subject to interest rate fluctuation risk. The Company’s risk management policy requires that the Company maintain certain ratios between fixed and floating rates. The Company utilizes derivative financial instruments such as interest rate swaps to assist in meeting this objective. Interest rate swaps used by the Company effectively change a portion of variable cash flows from floating rates to fixed rates. The notional amounts of the swap outstanding at December 31, 2004 is $25.0 million; this swap expires in September 2005.

During 2002, 2003, and most of 2004, the Company designated its interest rate swaps as cash flow hedges for accounting purposes. Changes in fair value on interest rate swaps that are accounted for as cash flow hedges are initially recorded in other comprehensive income (loss); they are subsequently reclassified to nonoperating expense (for hedges related to the accounts receivable securitization facility) and to interest expense (for hedges related to debt) in the same period in which the variable cash flows affect earnings. Any ineffectiveness in the hedging relationship is recognized immediately in earnings. During each of the three years ended December 31, 2004, no significant amounts were included in earnings as a result of the interest rate swaps being ineffective. For the three years ended December 31, 2004, no amounts were excluded from the assessment of effectiveness.

Because the Company’s debt and accounts receivable securitization levels have decreased, the Company concluded that the associated future variable cash flows were no longer probable. The Company terminated a notional $25.0 million interest rate swap in December 2004. In addition, beginning in December 2004, the Company ended the designation of its remaining notional $25.0 million interest rate swap as a cash flow hedge. Losses previously deferred in accumulated other comprehensive income aggregating $0.8 million at December 31, 2003 were recognized in earnings in 2004. Future changes in the fair value of the interest rate swap will be recognized immediately in earnings. At December 31, 2004, no amount was included in accumulated other comprehensive loss related to the remaining interest rate swap.

Commodities Price Risk Management

In the past, the Company has entered into swap contracts and collars to hedge a portion of its forecasted jet fuel purchases for use in the BAX Global aircraft operation. In addition, depending on market conditions, the Company charges its customers a fuel surcharge to offset the effects of high jet fuel prices. At December 31, 2004, there were no swap contracts or collars for jet fuel outstanding. The amount of ineffectiveness recognized in 2004 pretax earnings was not significant. No amount was included in accumulated other comprehensive loss at December 31, 2004.

Prior to the February 2004 sale of its gold operations, the Company had entered into forward gold sales contracts to fix the selling price on a portion of forecasted gold sales. As part of the sale of the business, the buyer assumed all remaining derivative financial instruments at the date of the sale.

During 2003, the Company utilized forward sales contracts and option strategies to hedge the selling price on a portion of its forecasted natural gas sales. The Company exited the natural gas business in 2003.

During the past three years, the Company designated its commodity derivatives as cash flow hedges for accounting purposes. Effectiveness was assessed based on the total changes in the estimated present value of cash flows for its jet fuel and natural gas hedges. The effectiveness of gold hedges was assessed based on changes in the spot rate of gold; other changes in expected cash flows were excluded from the assessment.

For jet fuel swaps and collars, the changes in fair value were recorded in other comprehensive income (loss) and subsequently reclassified to earnings, as a component of operating expenses, in the same period as the jet fuel was used. For natural gas and gold contracts prior to the sale of these businesses, the changes in fair value were recorded in other accumulated comprehensive income (loss) and subsequently reclassified to earnings, as a component of discontinued operations.

Foreign Currency Risk Management

The Company is exposed to foreign currency exchange fluctuations due to various transactions to which the Company is a party. For example, some customers are billed for BAX Global’s services in currencies that are different than the functional currency of the subsidiary that recognizes the sale. Also, some transportation costs incurred by BAX Global’s non-U.S. subsidiaries are denominated in currencies that are different than the subsidiaries’ functional currency. In addition, the Company has subsidiaries that have intercompany receivables and payables that are not denominated in the subsidiaries’ functional currency.

The Company utilizes foreign currency forward contracts to minimize the variability in cash flows due to changes in foreign currency values. The Company’s foreign currency forward contracts provide an economic hedge of the risk associated with changes in currency rates on the related assets and liabilities. Changes in the fair value of foreign currency forward contracts are reported in earnings in the same period that the foreign currency transaction gains and losses on the related assets and liabilities are reported.

As of December 31, 2004, the maximum length of time over which the Company is hedging its exposure to the variability in future cash flows associated with forecasted foreign currency denominated transactions is two years.

Non-Derivative Financial Instruments

Non-derivative financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents and trade receivables. The Company places its cash and cash equivalents with high-credit-quality financial institutions and the Company limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are reduced as a result of the diversification benefit provided by the large number of customers comprising the Company’s customer base, and their dispersion across many different industries and geographic areas. Credit limits, ongoing credit evaluation and account-monitoring procedures are utilized to minimize the risk of loss from nonperformance on trade receivables.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the short-term nature of these instruments.

The fair value of the Company’s floating-rate short-term and long-term debt approximates the carrying amount. The fair value of the Company’s significant fixed rate long-term debt is described below. Fair value is estimated by discounting the future cash flows using rates for similar debt instruments at the valuation date.

		December 31,
		2004				2003
(In millions)		Fair Value		Carrying Values		Fair Value		Carrying Values
Senior Notes	$	102.6		95.0		107.2		95.0
DTA bonds		46.6		43.2		48.0		43.2