USPS July Preliminary Financials: Oh the Questions They Raise

The Postal Service filed their July 2010 preliminary financials with the Postal Regulatory Commission and the results raise more questions about its financial viability and its ability to develop realistic financial plans.

• What should the financial target be to ensure financial self sufficiency? 
• If accounting break-even is not sufficient, then what operating margin is required?
• Why is the workers compensation expense greater than plan for two years in a row?  It required a $718 adjustment in 2009 and is $1,593 million greater than plan this year.  
• Is the problem with the Postal Service's forecasting approach or is it because properly forecasting workers compensation would require presenting non-GAAP financials prior to the official calculation of its actual liability?
• How is the shift in the mix of mail affecting the demand for resources under the current operating model?
• How does the mix of mail differ from what either the Boston Consulting Group forecast projected or what the Postal Service projected in the exigent rate case?
• Does the decline in the average revenue per piece for both Standard Mail and Mailing Services overall reflect a faster or slower decline than what the Postal Service previously anticipated?
• Does the Postal Service need a more radical or more rapid operating overhaul to bring costs in line with potential revenue than it has proposed to date?  
• Is this rapid or radical operating overhaul required regardless of what happens with the exigent rate case?
• Is this rapid or radical operating overhaul required regardless of what happens in the disputes over the Postal Service's retiree liabilities and expenses?
• Does the Postal Service have the capital necessary to complete the operating overall at a pace required to make it self sufficient by 2015 or 2020?
• How long will it take for Congress and the administration take to realize that fixing the Postal Service's financial problems cannot be solved without major adjustments in its retiree obligations?
• What price will stakeholders have to pay to have the retiree expense problems fixed?
• Can the retiree expense problems be fixed without a major restructuring of the Postal Service's business model, operating model, and regulatory framework?
• Will this restructuring look anything like what the Postal Service proposed in its action plan?
• How will the 2010 election and more conservative Congress affect the political process for fixing the Postal Service as well as potential outcomes?

2010 Financial Performance

I know many people are not into reading footnotes but the footnote on page 2 of the McKinsey & Co. "Future Business Model" presentation dated March 2, 2010 is worth noting.

It states that the January year-to-date results are better than the 7.8 billion loss projected loss for 2010.

I have taken a quick look at the January year-to-date results and they suggest that the Postal Service will have a bad year but not a disastrous year.  Specifically:

• Through January losses are 1.8 billion less than plan.   Results have been better than plan every month so far this year.  Improvements from plan will not produce an operating profit but will likely generate an operating no more than half of what the Postal Service originally projected.
• Results are beating plan because both revenue is above and costs below plan.
• Revenue better than plan reflects improvement over a "worst-case-scenario" plan not growing mail volumes.   My current projection for year-to-year change in mail volume from 2009 are as follows:
  
  
  
  • Single piece First Class:   -7.9% (This rate of decline is double the pre-recession rate and is worse than the rate of decline in 2009.)
  • Bulk First Class:    -4.2%
  • Periodicals:   -10.6%
  • Standard Mail:  -3.5% (Part of the decline reflects the fact that FY 2009 had substantial election year mailings that will not repeat in FY 2010.)

• Better results do not make a self sufficient Postal Service.  As I have noted earlier, break-even is not sufficient for self sufficiency.  Self sufficiency will require an EBITDA ratio of around 15%. (EBITDA ratio is the ratio of Earnings before interest, taxes, depreciation, and amortization and revenue.)
  
  
  
  
  • EBITDA to sales ratio for the first four months is -0.1%.
  • EBITDA to sales ratio excluding the retiree health care payment is 11.8%.
  • Both of these ratios will decline as losses grow over the remainder of the year although it is possible that the EBITDA ratio excluding retiree health care payments could remain positive.

These financial results suggest that the Postal Service's assessment that neither just fixing the retiree health care payment schedule or changing its operating processes, services, cost structure and rates within the framework of existing law and regulations will be enough to make it self sufficient.