Lucent Pension Surplus Masks True Earnings

December 28, 2005 ( - Eighty-two percent of the reported profit for Lucent Technologies Inc. for the fiscal year that ended on September 30 comes from its $973-million pension credit.

The Wall Street Journal reports that the company’s latest annual report to the Securities and Exchange Commission (SEC) shows its pension plan has $2.7 billion more in assets than liabilities.   The pension plan is likely to continue to contribute to the company’s bottom line – assets are likely to grow while obligations are not, since the pension plan covers 120,000 US retirees, and Lucent has 20,000 active US workers.

In the past four years, Lucent’s pension credits have contributed $3.8 billion to the company’s bottom line, according to the WSJ.   In addition to the boost to profits, the pension credits lower Lucent’s price-to-earnings ratio.   Its price-to-earnings ratio is 16.2, but jumps to 34.6 without including retiree-related items.

The WSJ reports that Verizon Communications Inc’s over-funded pension plan has added billions to its bottom line in recent years.   Verizon recently announced it is freezing its pension plan for managers, which is expected to save the company over $3 billion over the next decade (See  Verizon Announces Pension Plan Freeze).

On the flip side, Lucent’s health care funds have a deficit of a little more than $5 billion.   However, thanks to transfers from its over-funded pension plans, Lucent has had to reach into its own pockets for retiree health benefits in only the past two years.

Lucent is lobbying for legislation that would make it easier for the company to transfer more of the pension surplus into the retiree health fund without triggering restrictions on cutting future benefits.    Without that legislation, says Lucent Chief Financial Officer Frank D’Amelio, the health fund would run dry in two years and begin to consume lots of cash.