UPS Earnings Drop on Lackluster Freight and International Shipping

United Parcel Service (NYSE: UPS  ) reported Q2 earnings today, missing the top-line mark, but pulling through on bottom-line estimates.

The company reported overall sales of $13.51 billion, not quite up to analysts' $13.58 billion expectations, and around the same sales as Q2 2012.

But while sales are important, the bottom line ultimately dictates the corporation's (and shareholders') profits. Q2 earnings per share (EPS) clocked in at $1.13, matching analysts' expectations. Last year's Q2 earnings were slightly higher at $1.15 per share.

Digging into details, shipping volumes continue to head higher. International shipping was up a seasonally adjusted 5%, while domestic added on 1.9%. Changes in customer and product mix, higher pension costs, and more expensive fuel caused United Parcel Service's domestic package operating margin to drop 0.4 percentage points in the last year to 13.7%. Unfavorable exchange rates and fuel costs also pushed international operating margins down 0.4 points to 14.7%.

The company's supply chain & freight shipping margins felt the largest squeeze, falling 1.7 points to 7.2% due primarily to lackluster demand.

"UPS second quarter results were below our expectations as a result of disappointing performance in freight forwarding and a slight miss in International package," said CFO Kurt Kuehn in a statement. "Going forward, UPS is focused both on our long-term strategy and adapting to changing market conditions."

For the remainder of fiscal 2013, United Parcel Service expects seasonally adjusted earnings growth in the range of 4% to 13%.

UPS delivered 15.7 million packages a day during the quarter, up 2.3% from the prior-year period. UPS and rival FedEx  are losing some high-priced business as international shippers switch from premium next-day air deliveries to two-day or three-day services. UPS Chairman and CEO Scott Davis told analysts on a conference call that the shift could be temporary due to a lack of new technology products from Asia.

"On the other hand, some of the trade-down is likely permanent," Davis added, because of improved manufacturing supply chains and more global trade among nearby nations.

-- Material from The Associated Press was used in this report.

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