US Postal Service 2013 Annual Report Download - page 22

2013 Report on Form 10-K United States Postal Service 20
RESULTS OF OPERATIONS
Overview
During 2013, major drivers of operating results included overall customer demand and the mix of postal services, the
contribution margins associated with those services, the volume of mail and packages processed through our network,
and our ability to manage our cost structure, which includes wages and fuel prices, to match declining volume levels. In
addition, the annual legally-mandated PSRHBF prefunding expense and fluctuations in workers’ compensation expense
due to discount (interest) rates also greatly impacted our results, although these items are not under our control. During
2013, we also had a change in accounting estimate resulting in a one-time adjustment which had an unusually large
impact on our revenue and net loss.
In the day-to-day operation of our business, we focus our attention on those costs that are controllable by us in the short
term. We exclude the other noncontrollable factors from our internal financial analyses in order to direct focus onto the
relevant expenses that management can control and, for example, include only those workers’ compensation costs
representing current year payments on behalf of postal claimants.
The annual legally-mandated PSRHBF prefunding expense is set by law and is not under the control of management.
The legally-mandated participation in the federal workers’ compensation program is managed by the Department of
Labor’s (DOL) Office of Workers’ Compensation Programs (OWCP) and governed by Federal Employees’ Compensation
Act (FECA), instead of Postal management. Under FECA, many types of workers’ compensation claims cannot be settled
through lump-sum payments, rather, compensation must be paid over many years. This, compounded by the cost of
living adjustments (COLA) granted by Federal Law to those claims, results in substantially higher costs to the Postal
Service than would likely be the case if claims management decisions were made by the Postal Service. In addition to the
constraints imposed due to the legally-mandated FECA program, actuarial estimations and projected cash payments that
will be paid well into the future also have substantial impact on our reported liability. Future cash payments must be
converted to present-day dollars, or discounted, by applying the current rates at which the liability could theoretically be
settled. Discount rates can fluctuate significantly from period to period with changes in the economic and interest rate
environment. Even a very small change in discount rates can have a large impact, as a 1% decrease in rates at
September 30, 2013, would have resulted in an increase of approximately $2.1 of the liability. This can, and does, result
in the U.S. GAAP workers’ compensation expense varying significantly from our cash outlays.
Revenue is recognized based on customer usage of postal services. The estimate for stamps that are purchased but not
used is included on our Balance Sheets as a liability, Deferred revenue-prepaid postage. The majority of the deferred
revenue balance relates to Forever Stamps which have been sold since 2007 but have not yet entered the mail stream.
Since 2007, we have sold more than 65 billion Forever Stamps to the public, totaling $30.2 billion in cumulative stamp
sales. A small portion of these sales will never be used on a mail piece (referred to as breakage). Breakage represents
those stamps that will never be used on a mail piece due to loss, damage or having been saved in a collection. The usage
portion of the deferred revenue estimate is developed and validated through complex mathematical and statistical
methods, including regression analysis of stamp usage trends. Small differences in inputs can lead to significant
differences in the estimate of the liability. In Quarter IV, 2013, we analyzed data that was not previously available on
consumer behavior and usage patterns of Forever Stamps, particularly, Forever Stamps nearing completion of the
stamp’s lifecycle. This new data, which allowed us to account for the entire life cycle of a series of particular Forever
Stamp issues, resulted in an update of the “breakage” input included in the statistical estimation process. As a result of
this analysis, we recorded a $1.3 billion increase in revenue and a decrease in Deferred revenue-prepaid postage. This
change relates solely to changes in our estimates of consumer behavior and our statistical estimation process.
Assumptions regarding estimated breakage of a particular stamp issue can not be refined until the near completion of the
stamps’ life cycle. In accordance with U.S. GAAP, this is considered a change in accounting estimate in 2013. As a result,
our revenue increased and net loss decreased by $1.3 billion in 2013. This adjustment had no impact on our cash balance
nor did it lessen the severity of our liquidity situation.
Financial Results
For the first time since 2008, revenue increased compared to the prior year; however, mail volume continued to decline.
The decrease in 2013 mail volume follows the continuing trend since 2008. The main causes of this downward trend are
changes in consumer behavior patterns that developed during the Great Recession, public adoption of other forms of
electronic communication, and slow economic growth. The U.S. economy emerged from this recession in June 2009, but
economic growth has been slow, and we have not experienced the revenue growth historically associated with an
economic recovery.