Watch out for Lucent - Be sure you understand how Lucent reports earnings

Implications: The derivation of Lucent's earnings must be understood.  In the past couple of years, the majority of Lucent's earning are derived from the way it accounts for pensions.

Analysis: The referenced article points out that Lucent's profits are relatively flat.  To appreciate this, financial analysts must understand the derivation of Lucent's earnings.  In the recent past, the vast majority of Lucent's earning have not come from making and selling product.  The vast majority of Lucent's earning (e.g., year 2005) have come from the way it accounts for its defined benefit pension plans.  Simply the assumptions used regarding 1) the discount factor used to compute the liability and 2) the expected rate of return on plan assets, create a credit.  This credit enhances net income.

All earnings are not equal.  In researching and valuing Lucent, financial analysts must be very careful to understand the source and accounting of earnings.