Net Controllable Income

FY2015 Performance Report — FY2015 had total revenue of $68.9 billion and total expenses of $74.0 billion, resulting in a net loss of $5.1 billion.

Our operating results are impacted by items that are not under our control and that are not reflective of our normal operations. These items include the annual legally mandated Postal Service Retiree Health Benefits Fund (PSRHBF) prefunding expense, the non-cash expenses related to changes in the liability for participation in the federal workers’ compensation program, which include fluctuations in workers’ compensation expense due to changes in discount (interest) rates and the amortization of the unfunded liability for our portion of the Federal Employees Retirement System (FERS). This amortization expense is calculated by the Office of Personnel Management (OPM) based on government-wide demographics and pay assumptions and is not reflective of what we believe our FERS liability would be if it were calculated using postal-specific demographics and pay assumptions. Because these items are not under management control, we believe that analyzing operating results without the impact of certain of these charges provides a more meaningful insight into current operations.

Thus, when the impact of the required prefunding payments, FERS amortization and non-cash expenses for workers’ compensation are excluded, the income from ongoing business activities or “controllable income” was $1.2 billion. (See Financial Performance Results table.)

The FY2015 controllable income target was revised from $0.5 billion to $1.1 billion to reflect additional savings from changes in the employee mix that were not reflected in the original plan.

For the third year in a row, revenue increased compared to the prior year, largely as a result of the PRC-approved Consumer Price Index (CPI) price change implemented in May 2015 and temporary exigent surcharge on market dominant products that was implemented beginning in January 2014 and was in effect for the entire 12 months of FY2015. Mail volume continued to decrease in FY2015, most notably by First-Class Mail, which decreased by 1,420 million pieces.

Revenue in shipping and packages increased by 11.4 percent over the same period last year while Standard Mail revenue increased by 1.3 percent. Overall, volume declined by 1,382 million pieces.

Total expenses of $74.0 billion in FY2015 increased 0.9 percent, from $73.4 billion in FY2014. The net $0.9 billion reduction in our non-cash workers’ compensation expense, mainly the result of changes in assumptions and actuarial valuation and revaluation of new and existing workers compensation cases, was more than offset by an increase for the year in compensation and benefits expense of $1.5 billion, attributable to contractually obligated salary escalations, higher FERS contribution rates mandated by OPM and an increase in labor hours, primarily resulting from higher shipping and packages volume.

In January 2015, we revised our service standards for First-Class Mail and began a second phase of mail processing realignments, which resulted in consolidation activities affecting 36 mail processing facilities, of which 21 were partially consolidated and 15 were completely consolidated during the year. In order to further assess operational considerations and to ensure that we continue to provide prompt, reliable and predictable service consistent with our published service standards, we’ve deferred further consolidations until 2016. We anticipate that the remainder of the consolidations associated with this phase of our realignment plan may impact the 21 partially consolidated facilities plus an additional 44 processing facilities that have been unaffected so far. We will not fully realize the projected cost savings of this consolidation effort until we are able to fully implement it as planned.

The Postal Service increased the number of career employees by approximately 4,000 in FY2015, compared to the year before.

The Postal Service still had only about 24 days of operating cash entering FY2016 despite the financial and operational efforts described above.

For a full description of the financial results of the U.S. Postal Service, see USPS 2015 Form 10-K located at http:⁄⁄⁄who-we-are⁄financials⁄welcome.htm.

FY2016 Performance Plan — The Postal Service expects to be required to roll-back the exigent price increase on Market-Dominant products that was implemented in January 2014. The exigent surcharge generated $2.1 billion in additional revenue in FY2015 and is expected to generate another $1.1 billion by April FY2016, absent a successful appeal of one aspect of the PRC’s July 2015 decision. The roll-back of the exigent price increase is the primary reason that controllable income is expected to decrease from $1.2 billion in FY2015 to $0.1 billion in FY2016. The Postal Service projects revenue growth of $0.4 billion, or 0.6 percent, compared to FY2015 despite the loss of $1.0 billion in revenue from the exigent roll-back.

Controllable operating expenses are expected to increase $1.5 billion in FY2016 from inflationary and other cost increases, both in personnel and non-personnel costs. Personnel cost increases are largely driven by scheduled general wage increases for two of our major unions, an increase in FERS contribution percentages mandated by OPM, and higher health benefits costs. Higher non-personnel costs are forecasted due to investments in information systems and support for package growth initiatives.

Despite the loss of exigent revenue, the Postal Service projects a net revenue growth of $0.4 billion in FY2016 due to continued growth in shipping and packages volume, partially offset by continued decreases in First-Class and Standard Mail. Shipping and Packages revenue is forecasted to increase $1.8 billion through an expected volume increase of 5.7 percent as economic and e-commerce growth is extended through marketing initiatives.