Chapter 3 Financial Highlights

Table 3-4 Income and Expense Statement
blank 2006 2005 Variance % Change
Income($ millions)
Mail Revenue 69,144 66,649 2,495 3.7
Special Services 3,407 3,149 258 8.2
Appropriation* 99 109 (10) (9.2)
Operating Revenue 72,650 69,907 2,743 3.9
Expenses
Compensation and Benefits 56,281 53,932 2,349 4.4
Transportation 6,045 5,437 608 11.2
Other Costs 9,358 8,914 444 5.0
Total Operating Expenses 71,684 68,283 3,401 5.0
Income from Operations 966 1,624 (658) (40.5)
Interest Income 167 86 81 94.2
Interest Expense — Deferred Retirement Costs (231) (263) 32 (12.2)
Interest Expense —Other** (2) (2) 0 0.0
Net Income $900 $1,445 (545) (37.7)

*2006 Appropriation includes reconciliation adjustment of $29 million for 2004.
**Includes imputed interest on deferred rent recievable.

3. Net Income

The Postal Service’s net income in 2006 was $900 million. While revenue was greater than planned, rising fuel prices contributed significantly to the increase in transportation expenses and also contributed to increased compensation and benefits expenses through their impact on employee cost-of-living adjustments (COLAs).

While First-Class Mail volume decreased only slightly in 2006, it was the third annual volume loss in the last 4 years for this premium mail class. Prior to 2004, First-Class Mail volume grew reliably each year and its volumes exceeded those of any other mail class. In 2006 Standard Mail volume exceeded First-Class Mail volume for the second consecutive year. The decline of First-Class Mail volume and the growth of other volumes in other mail classes has now been established as a trend and is expected to continue. The increase in total mail volume and the across the board rate increase of 5.4%, implemented on January 8, 2006, contributed to the $500 million in revenue gain. Net income was less than plan, despite the revenue gain, as increased fuel prices impacted both personnel compensation and non-personnel expenses. This year’s growth in costs was slightly tempered by a reduction of almost 5 million workhours. Net income benefited from Postal Service actions aimed at continued management of expenses, a key strategy of the Strategic Transformation Plan 2006–2010. Although 2006 expenses were $3.4 billion more than those of 2005, growth was slightly tempered by the reduction of almost 5 million workhours. The Postal Service was able to manage an increased workload of more delivery points and increased mail volume with a smaller increase in resource usage. As a result of all these factors, total factor

productivity grew by 0.4% in 2006, the seventh straight year of increased Postal Service productivity.

4. Financing Activities

A. DEBT

As an “independent establishment of the executive branch of the Government of the United States,” the Postal Service receives no tax dollars for ongoing operations. Self-supporting, it has not received an appropriation for operational costs since 1982. The last time the Postal Service received any substantial contribution of capital from the U.S. government was in calendar year 1977. Operations are funded chiefly through cash generated from operations. However, unlike companies in the private sector, it is not permitted to raise capital through the equity markets. Consequently its only long term means of securing outside capital is through borrowing. The uncertainty of the rate setting process influences the cash management strategy.

The amount the Postal Service borrows is largely determined by the difference between its cash flow from operations, its escrow requirement, and capital cash outlays, the funds invested back into the business for capital investments in new facilities, new automation equipment, and new services. On September 30, 2006, after placing $2,958 million into a restricted escrow account, the Postal Service borrowed $2.1 billion to fund capital and operational needs.

In 2005, the Postal Service paid off all existing debt through cash flows created by “savings” from Public Law (P.L.)108–18. That was the first