GETTING A READ ON THE USPS' MAY FINANCIAL REPORT

 The following is a perspective by PostCom Vice President Kate Muth on the Postal Service's May 2005 financial reports.

Despite volume growth in May of 5.1%, the Postal Service did not make a net profit in the month, with net income dropping by $198 million. The culprit was on the expense side, where total expenses were up 6.7% in the month, the USPS’ financial statement for May indicates. 

The Postal Service’s net income for the year through May 31 was about $1.8 billion. It appears on track to end the year with a net income in excess of $1 billion. 

In particular, May saw big jumps in transportation costs and vehicle maintenance services, which includes fuel costs. Expenses in vehicle maintenance services were up nearly 30% over the same period last year (SPLY). Year-to-date, total expenses were up 4% over SPLY. Total work hours were slightly above last year, and the Postal Service was running behind on its work hour reduction plan. This is probably due to volume jumps in key months of the fiscal year, which has forced overtime hours to increase. For example, May’s total work hours are up 2% compared to last year and about 2% over the USPS budgeted amount for the month. 

Large Cash Flow 

While net income through May 31 was about $1.8 billion, the Postal Service has a great deal more cash on hand this year than it did last year at the same time. In its May financial statement, the USPS reports cash and cash equivalents through May 31, 2005, of $2.5 billion. In comparison, the Postal Service had cash on hand on May 31, 2004, of $184 million. Net income is a component of cash. But cash includes other items such as depreciation. Because the Postal Service is relatively debt-free at the moment, it is not using cash to pay down debt as it has done in past years. 

While postal cash on hand is a hefty amount, it does not translate into an equal dollar-for-dollar net income. As noted, net income is just one component of cash, albeit a significant one. The USPS can have a large cash flow at any particular point in time. Also, it could be that it has an operating loss in a month and has enough cash to pay bills. But a constant operating loss is a drag on cash. Conversely, a positive net income is a boon to cash as it increases its availability. 

Looking ahead to 2006, an ongoing increase in expenses -- of which the escrow account is a major expense -- poses the biggest drain on cash. But the escrow payment won’t be made until the end of FY 2006, so the USPS could have a positive cash flow in the early part of 2006. Because the USPS needs such a long lead time for filing a rate case, all of the wheels were put in motion a few months ago. 

For this fiscal year (2005), net income is on track to exceed $1 billion. The Postal Service’s 2005 operating budget calls for it to lose about $700 million in the final quarter of the fiscal year (July through September). The Postal Service budgeted a small net income of $30 million in June. So, if the USPS were to stay on budget, net income for the year would be about $1.1 billion. There’s an equally good chance the Postal Service will lose less than the planned amount and net income could be higher. (Keep in mind that the USPS’ operating budget for FY 2005 called for it to lose $200 million. It’s now on track for a net income of more than $1 billion.) Further, if a major expense item, such as Workers Compensation, comes in below plan, this bolsters the bottom line as well. 

But one cause for concern remains: the decline in revenue per piece. Year-to-date revenue per piece for all mail is down 1.7% compared to last year, despite total volume growth of 3% for the year. And in May, when volume grew 5.1%, growth in revenue per piece remained relatively flat. The only category of mail to see growth in revenue per piece year-to-date is international mail. All other classes have been flat. 

Still, positive signs abound. Priority Mail had huge volume growth in May of 16.1% and First Class Mail was up 2.5% in May. In addition, Standard Mail volumes for the year are growing at a rate of more than 2 1/2 times First Class Mail – the amount it needs to grow to make up the revenue of a flat First Class Mail stream. 

You can find the Postal Service’s 2005 operating budget by month in Witness William Tayman’s response to interrogatories by the OCA (OCA/USPS-T-6, 12-13 ANS), available under the June 2 Daily Listing of www.prc.gov.