USPS reports mixed fiscal second quarter earnings

Fiscal second quarter earnings for the United States Postal Service (USPS) picked up where its fiscal first quarter earnings left off: in a mostly good place.

The USPS reported that operating revenue at $17.7 billion was up 4.7 percent, or $788 million, annually. But it incurred a net loss of $2.0 billion compared to a $1.5 billion loss for the same period a year ago. USPS said this net loss was largely attributable to a $547 million unfavorable change in its workers compensation expense as a result of interest rate changes outside of management’s control. And controllable income at $576 million was up 84 percent annually.

“While we have been successful in achieving controllable income during the quarter, we are still reporting net losses and contending with long-term financial challenges,” said Postmaster General and Chief Executive Officer Megan J. Brennan in a statement “We continue to focus on improving operating efficiencies, speeding the pace of innovation, and increasing revenues for the Postal Service. Our financial situation is serious, but solvable. We are confident that we can return to financial stability through the enactment of prudent legislative reform and a favorable resolution of the upcoming regulatory review of our rate-setting system.”

Like previous quarters, USPS benefitted from a strong performance from its Shipping and Package volume and pricing efforts as the key driver for its revenue gains. This group is made up of Priority Mail, Express Mail, Parcel Select and Parcel Return services.

Shipping and Packages volume was up 11.4 percent 1.227 billion packages, with revenue up 16 percent at $4.215 billion. Despite the strong volume and revenue growth for this groups, the USPS said that it accounts for 24 percent of its quarterly revenue, compared to First Class Mail, with revenue of $7.247 billion for a 1.6 percent annual increase, accounting for 41 percent of revenue.

What’s more, the USPS said that Shipping and Packages account for only 3 percent of its total volume, with a 260 percent revenue increased being needed to make up for the impact of the contribution provided by the volume losses of First Class Mail. The First Class Mail volume losses have been intact for several quarters and is due to ongoing trends in the mailing behavior or consumers and businesses resultant of the recession, and ongoing diversion from paper to electronic communications, including e-mailing business documents and online purchasing orders, as well as other electronic mailing processes.

USPS said that total mail volume of 38.3 billion pieces in the fiscal second quarter was up 1.4 percent annually, with First Class volume up 0.7 percent, Standard Mail volume up 1.9 percent, and International up 6.1 percent.

Over all, 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.

A major obstacle 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 $28.1 billion of prefunding payments that were due but unpaid from 2012-2015. And it added that available liquidity in the form of cash and short-term investments plus available borrowing capacity rose by around $6 billion from the reported 2012 low, which it said is mainly due to its temporary exigent surcharge that expired in April and generated roughly $4.6 billion in incremental revenue from January 2014 through March 31, 2016.

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.”

But that was still not enough to offset its $28.1 billion in legally-mandated payments to the mandated Postal Service Retiree Health Benefits Fund, which is expected to continue in ongoing losses and is comprised of around $74 billion in annual operating expenses.

The USPS said it has incurred cumulative net losses of $58.5 billion since the beginning of 2007 through March 31, 2016, and due to these losses and liquidity concerns it lacks sufficient cash balances to meet all of its existing legal obligations when due, coupled with paying down debt and making investments into its infrastructure that have been deferred in recent years. 

“The healthiest offering of the USPS for the last few years has been the growth in their parcel business,” said Jerry Hempstead, president of Hempstead Consulting, in a recent interview. “Their most recent quarter exceeded their expectations for volumes. Their big issue is, of course, financial, but absent of issues that require a legislated solution from our elected officials, the USPS is doing fine. The USPS is 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. Ergo Postal rates need to go up to cover the gaps between costs and revenues. Of course there is legislation that limits how much the USPS can raise pricing in the core businesses.”