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Annual Report 2001 |
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MANAGEMENT
DISCUSSION & ANALYSIS: CAPITAL
INVESTMENT and FINANCING Our capital investment and financing plans are interactive. There are four interlocking components: cash, cash flow from operations, capital cash outlays, and borrowing. A change in any one of the components causes a change in one or more of the others. For example, the amount we borrow over time is largely determined by the difference between our cash flow from operations and our capital cash outlays. Our capital cash outlays are the funds we invest in the business for such capital improvements as facilities, automation equipment and information technology. During the year, when it became apparent that our cash flow from operations was going to be significantly less than expected, we would have had to significantly increase our borrowing to make the capital investments we had planned. Instead, we took action to reduce our capital plan and cash outlays and stay within our borrowing plan. This is what led to the freeze on new facilities commitments. The Cash Flow/Capital Expenditure (CAPEX) ratio shows the relationship between these main drivers of our debt balance. It is computed by dividing cash flow from operations by capital cash outlays. The graphs below illustrate the direct relationship between the CAPEX ratio and borrowing. Whenever capital spending exceeds cash flow, the difference must be paid for either by reducing cash on hand, borrowing or by some combination of the two. For example, in 2001, purchases of property and equipment of $2.9 billion exceeded our cash flow from operations of $1.3 billion, so we borrowed the difference while increasing our cash on hand at the end of the year by $322 million. |
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Go
to: Outlook Operations Capital Investment and Financing |
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When the Cash Flow/Capital Expenditure Ratio Falls Below 100 Percent, We Cannot Pay For Capital With Internally Generated Funds...
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...and Debt Increases Proportionally
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CAPITAL FREEZE Recognizing a slowdown in our cash flow from operations, we significantly reduced the capital commitments we had planned for 2001 in order to conserve cash and remain within our borrowing authority. Initially, we reduced our capital commitment budget from $3.6 billion to $1.6 billion, a total of $2 billion, as detailed in the table below. However, we ended the year with actual capital commitments of $1.2 billion as management further tightened the capital investment process. The actual commitments were spread across the following categories: approximately $450 million for mail processing equipment, $370 million for facility construction and building purchases and improvements, $220 million for postal support equipment and $110 million for retail equipment and vehicles. We placed a temporary hold on capital contract awards, including over 800 facility projects nationwide. In addition, we reprioritized all capital projects and issued revised 2001 capital budgets. We assigned the highest priority to investments related to the safety of our employees and customers, legal requirements, emergencies and investments that produce labor efficiencies. We placed a freeze on all other facilities. We are monitoring the effects of this freeze, and we will make the necessary adjustments to ensure we meet our priorities. |
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| Management aggressively cut the capital plan by $2 Billion to conserve cash. | |||||||||||||||||||||||||||||||||||||||
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CAPITAL INVESTMENTS All major capital projects, generally defined as projects greater than $10 million, require authorization by the Board of Governors. At the beginning of the year there were 56 Board-approved projects in progress. During the year, 13 of these projects were completed and 11 new projects, totaling slightly over $500 million, were authorized. The table below shows the project authorization history and the commitment and capital cash outlays for the 54 Board-authorized projects active at the end of the year. While the funding for a project may be authorized in one year, the commitment, or contract to purchase or build the project, may occur over several years. In addition, the actual payment, or capital cash outlays, for the project may occur over several years. Thus, in the table below, the $1.379 billion in capital outlays for 2001 represents outlays for commitments made in previous years as well as commitments made in 2001 for all 54 projects. |
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* This table summarizes the Cash Outlays and Commitments made that year for each of the 54 active, Board-approved projects, regardless of the year in which the Board authorized the project. |
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FUTURE Our capital plan for the future calls for aggressive cost management by developing and deploying new automation and mechanization equipment that will increase our operating efficiency. Under this plan, we will make significant investments in programs that reduce work hours in our distribution, processing and delivery operations. Additionally, there is uncertainty as to the cost of the equipment necessary to protect the mail and adjust delivery operations in response to terrorist attacks. However, the capital plan is at extreme risk due to the 2002 financial condition of the Postal Service. Furthermore, we need to invest approximately $600 million in new facilities each year just to keep up with the growth in the universal delivery system. Each year we add about 1.7 million new delivery points, the equivalent of over 3,000 new carrier routes, requiring the space equivalent to approximately 100 new delivery facilities. Moreover, this growth is not spread evenly throughout the system but is concentrated in specific high growth areas. While we will continue to plan for projects that will generate productivity improvements and increase revenue, for the second year in a row we will not be able to make the necessary capital investments to meet the growth demands of universal delivery. DEBT From 1997 through 2001, our capital cash outlays exceeded cash flow from operations by $5.2 billion, so the difference was covered with borrowed funds. Our debt outstanding with the Department of the Treasury's Federal Financing Bank increased by $5.4 billion. Debt outstanding at the end of 2001 was $11.3 billion, an increase of $2 billion compared to 2000. Normally, our debt balance at the end of our fiscal year represents our highest level of debt for the year because, while expenses for workers' compensation and retirement are accrued throughout the year, the actual payments are not made until late September of each year. The amount that we paid this year was $4.5 billion, including $694 million for workers' compensation and $3.8 billion for the Civil Service Retirement System (CSRS) and Cost of Living Adjustments (COLAs) for retirees. Our cash flow during the fiscal year was sufficiently strong to reduce debt from the prior year-end level. Debt outstanding reached a low of $4.6 billion on July 5. In other words, we had extinguished 50% of the debt that we had entering the year. Since we have debt financing flexibility, we can manage the fluctuations in our debt during the year by actively managing our credit lines. However, just as our debt balance at year-end has increased in recent years, so did our average debt balance. The graph of our debt balance during the year illustrates this point well, showing that the peaks are getting higher each year and so are the valleys. |
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Debt Increase During the Year*
* Plotted by accounting period |
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| Debt Is Increasing At Year-End, and So Is Average Debt During the Year. | |||||||||||||||||||||||||||||||||||||||
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For 2001, our average outstanding debt during the year was far less than the year-end balance, but increased 36%, or $1.7 billion, to $6.4 billion. The interest we paid on our debt totaled $306 million in 2001, compared to $220 million in 2000. Minimizing cash and debt on a daily basis produces good effects because average debt is one driver of annual interest expense, as is evident in a comparison of 1997 with 2001. In 2001, while we continued to minimize cash, our average debt outstanding was $2 billion higher than 1997, a 45% increase. Yet our interest expense was below our 1997 expense, as we took advantage of lower interest rates on our debt. |
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MANAGING NET INTEREST EXPENSE AND RISK Our interest expense is determined by the interaction of a number of variables including day-to-day cash flows, the behavior of interest rates, and our debt management activities. It was a challenge to manage interest expense during a year of increasing average debt outstanding. We cannot claim any credit for lower interest rates, but we did position our debt portfolio in such a manner that we benefited from declining rates while at the same time taking some steps to stabilize future interest expense volatility. We prefer to maintain a mix of fixed- and floating-rate debt because we believe that, over the long-term, variable or floating rate debt may provide more cost-effective financing than 100% fixed-rate debt. However, we strive for a favorable balance, and we will borrow fixed-rate debt when market opportunities arise, or when we believe doing so reduces risk. In contrast to the end of the prior fiscal year, where 76% of our debt portfolio had a rate above 6%, we now have only one loan outstanding with a rate above 6%, representing just 2% of our debt portfolio. At year-end, our long-term debt was $5.75 billion, with a weighted average interest rate of 5.17%, in comparison with $2.55 billion and a weighted average rate of 5.65% at the end of 2000. Our 2001 borrowing transactions with a five-year maturity ranged from a high of 5.42% to a low of 4.44%. The weighted average interest rate on our total debt portfolio at year-end is now 3.86% compared to 6.13% last year. As we enter the new fiscal year, our debt portfolio puts us in a good position to manage interest expense and risk for next year and beyond. For 2002, we anticipated a financing plan with a $1.6 billion net increase in our debt. However, we made that estimate before the attacks of September 11 and following. Because of present and future uncertainty, we cannot predict the net increase in our debt with any degree of certainty. |
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| At
the End of 2001, Only $250 Million or 2% of Our Debt Had a Rate Above 6%. |
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At
Year-End 2000, |
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continue... |
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