USPS reports mixed fiscal third quarter earnings results

Save for a change in an accounting estimate, the United States Postal Service (USPS) tuned an operating profit in the fiscal third quarter, it reported today.

Operating revenue at $16.6 billion was up $117 million, or 0.7 percent, annually, but it still had a controllable loss of $522 million (up from $197 million a year ago) and a net loss of $1.6 billion, which was up $981 million over last year, and was impacted by a $1.6 billion unfavorable charge in workers’ compensation expense as a result of interest rate changes offset by the $1.1 billion change in accounting estimate, the USPS said.

“We continue to post double-digit gains in package volume and are well-positioned operationally for further growth. Our capital investments are enabling increased efficiencies across the enterprise and improving experiences for our customers,” said Postmaster General and CEO Megan J. Brennan in a statement. “Despite the encouraging numbers, net losses continue to mount. Our results in the quarter further underscore the need for legislative reform that provides the organization with greater financial stability.”

As previously reported by LM, the USPS said in February that without Congressional or court action to extend, or make permanent, the exigent surcharge for mailing products and services, it would be required to decrease certain prices, adding that this situation will further hinder its financial outlook by reducing revenue and increasing its net losses by roughly $2 billion annually. Postmaster Brennan said earlier this year that “removing the surcharge and reducing our prices is an irrational outcome considering the Postal Service’s precarious financial condition.”

The USPS Shipping and Package business saw revenue climb 18 percent to $645 million, but it was offset by First Class Mail revenue down $379 million, a 5.5 percent decrease, which was largely attributed to the expiration of its exigent surcharge, which is expected to reduce revenue by around $500 million for the fourth quarter.

Third quarter Shipping and Package revenue was up 18.1 percent at $4.2 billion on volume growth of 13.6 percent annually, or 1.220 billion packages.

USPS said that this business has continued to show solid revenue and volume growth, due to its strong performance in highly competitive ground shipping services and last-mile e-commerce fulfillment markets that include through Sunday delivery. And it added that volume saw end-to-end growth as consumers continued to shop online, resulting in a package volume surge seen during the 2015 holiday season, which subsequently led to an increase in Sunday delivery service. Even with this strong performance, USPS said that its Shipping and Package group accounts for only 3 percent of total volume and 24 percent of revenues.

But its First Class Mail group accounts for 37 percent of revenue and 40 percent of volume, with Standard Mail representing 23 percent of revenue and 52 percent of volume.

First Class revenue was down 5.5 percent at $6.493 billion, and total volume was down 3.3 percent at 14.624 billion. Standard Mail revenue was down 1.7 percent at $4.069 billion, and total volume was up 1.8 percent at 19.115 billion.

“Shipping and Packages services were, and continue to be, substantially higher than the costs for First-Class Mail,” USPS said in its Form 10-Q statement. “Although revenue and volume are closely linked to the strength of the U.S. economy and changes in how our customers use the mail, we have been active in addressing growth opportunities. We continue to concentrate on our customers’ needs and have increased our marketing investment, as well as focusing on mail and package innovation. However, we also recognize that revenue growth is constrained by laws and regulations restricting the types of products, services and prices we can offer
to our customers and the speed with which we can bring them to market.
To address the long-term trend that technological change and the lingering effects of the Great Recession have had on our First-Class Mail revenue and volume, we have focused on providing new services, growing e-commerce and implementing marketing campaigns that have helped us grow our Shipping and Packages business.”

As has been the case for several quarters running, the USPS remains hamstrung, due to the ongoing decline in First Class Mail, federally mandated payment obligations, and an inflexible business model, among other issues.

And a major obstacle remains in the form of the Postal Accountability Enforcement Act’s mandated Postal Service Retiree Health Benefits Fund continues to hinder the USPS’s financial viability, with the USPS saying it has reached the maximum capacity under its statutory debt ceiling, and available liquidity, which is made up of cash and short-term investments, plus available borrowing capacity, having increased by around $7 billion from a reported low in 2012. USPS said that this improvement would not have occurred had the Postal Service not defaulted on the
annual PSRHBF prefunding payments in 2012 and subsequent years, adding that aside from the defaults, the improvement is largely attributable to the temporary exigent surcharge, which generated approximately $4.6 billion in incremental revenue from January 2014 through April 10, 2016, as well as aggressively managing capital expenditures and operating expenses under management’s control.

What’s more, despite this increase in the Postal Service’s liquidity,  it said that unrestricted cash remains insufficient to support an organization that has already defaulted on $28.1 billion in PSRHBF payments, projects continuing losses and has approximately $74 billion in annual operating expenses. The Postal Service has incurred cumulative net losses of $60.1 billion since the beginning of 2007 through June 30, 2016. And as a result of these losses and its liquidity concerns, the USPS said it does not have sufficient liquidity to meet all of its existing legal obligations when due, pay down its debt and make critical investments in its infrastructure that have been deferred in recent years.

Despite its financial challenges, industry observers maintain that the USPS’s future for its parcel business is bright, with the USPS remaining focused on the costs it can control and its service and on revenue generation.

“The sad reality is that the revenue for the core services like First Class Mail and Standard Mail is declining and declining at a faster rate than can be replaced by parcels and parcels come with a lower margin than the traditional mail products,” said Jerry Hempstead, president of Hempstead Consulting. “Ergo Postal rates need to go up to cover the gaps between costs and revenues.”

He added that these losses stem from a budget that calls for payments for retiree health, and workers compensation that are based on Congressional mandate and faulty math.

“The USPS can’t fix Congress. Congress has to fix the funding requirements,” he said. “Congress should also deal with the overfunding of the pension plan and use those funds to pay down the USPS debt. E-commerce continues to aid and assist the revenue with extraordinary growth in parcel.”