Analyzing Business Earnings 77in a summary of the search process provided in Exhibit 2.36. For purposes of
illustration, all nonrecurring items have been recorded on the SEB worksheet
without regard to their materiality. We have followed this procedure because a
materiality threshold would exclude a series of either immaterial gains or losses
that could, in combination, distort a firm’s apparent profitability. An effort is
made to consider the possible effects of materiality in a report on the efficiency
of the search process presented in Exhibit 2.37.
Without adjustment, Baker Hughes’s income statement reports net in-
come of $105.4 million in 1995, $176.4 million in 1996, and $97.0 million in
- The impression obtained is a company with a volatile earnings stream
and no apparent growth. However, the complete adjustment for nonrecurring
items conveys quite a different message. After restatement, sustainable earn-
ings amount to $97.4 million in 1995, $158.6 million in 1996, and $241.3 mil-
lion in 1997. This suggests that profits are in fact growing, though acquisitions
have contributed to this result.
It should be clear that the number and magnitude of nonrecurring items
identified in the Baker Hughes annual report caused its unanalyzed earnings
data to be unreliable indicators of profit performance. Without the compre-
hensive identification of nonrecurring items and the development of the SEB
EXHIBIT 2.28 Consolidated statements of cash f lows (operating
activities only): Baker Hughes Inc., years ended
September 30 (in millions).
1995 1996 1997
Cash Flows from Operating Activities:
Net income $105.4 $176.4 $97.0
Adjustments to reconcile net income to net cash
f lows from operating activities:
Depreciation and amortization of:
Property $114.2 $115.9 $143.9
Other assets and debt discount 40.4 39.9 42.1
Deferred income taxes 44.8 30.2 (6.8)
Noncash portion of unusual charge 25.3 32.7
Acquired in-process research and development 118.0
Gain on sale of Varco stock (44.3)
Gain on disposal of assets (18.3) (31.7) (18.4)
Foreign currency translation (gain)/loss-net 1.9 8.9 (6.1)
Cumulative effect of accounting changes 14.6 12.1
Change in receivables (94.7) (84.1) (129.8)
Change in inventories (79.9) (73.8) (114.9)
Change in accounts payable 51.7 22.6 65.3
Changes in other assets and liabilities (52.9) 9.4 (35.6)
Net cash f lows from operating activities $127.2 $194.7 $199.5
SOURCE: Baker Hughes Inc., annual report, September 1997, 40.