UPS projects lower-than-expected earnings in second quarter; multiple factors to blame

UPS Inc. said today that it expects to report lower-than-expected second-quarter earnings with results weighed down by a lackluster U.S. industrial economy, airfreight overcapacity, and the persistent trade down by shippers to less expensive transportation options. Additionally, the company said it saw a decline in package volumes due to what it called "labor negotiations."

The Atlanta-based shipping and logistics giant announced that its second-quarter earnings would come in at $1.13 a share, 7 cents per share below Wall Street's consensus estimates of $1.20. Kurt Kuehn, UPS' CFO, said the company expects the trends that compressed earnings results in the quarter to persist through the rest of the year. As a result, UPS said it has lowered earnings estimates for the balance of 2013.

UPS will release its second-quarter results on July 23.

UPS would not elaborate on the impact of the ongoing negotiations with the Teamsters union to ratify contracts for its small-package operation and for the UPS Freight less-than-truckload (LTL) subsidiary. In late June, rank-and-file employees ratified a five-year agreement by a narrow margin. But they rejected 18 local and regional attachments to the national contract, known in labor lingo as "supplements" or "riders." A national agreement cannot take effect until all of the supplements are renegotiated and voted on again by the affected employees. Workers at UPS Freight rejected their five-year contract proposal outright by a vote of 4,244 to 1,897. UPS and the Teamsters agreed to extend the contracts beyond their original July 31 expiration dates as they work to finalize both agreements. UPS' results and commentary are significant because the company is seen as a proxy of sorts for domestic and global commerce. The company transports the equivalent of 6 percent of U.S. gross domestic product (GDP) and about 2 percent of global GDP. In early trading on the New York Stock Exchange, UPS' shares were down about $4.85 per share.

David G. Ross, transportation analyst for investment firm Stifel, Nicolaus & Co., said he was surprised by the shortfall as Stifel had estimated earnings per share to come in at $1.20. Ross added, however, that he wasn't surprised by the reasons that UPS gave for the downward revisions.

Ross said freight forwarders should benefit from the continued oversupply in airfreight as they avail themselves of more attractive pricing to strengthen their gross profit margins.

Susan L. Rosenberg, a UPS spokesperson, said the company cautioned in April that negative trends in global shipping patterns would reduce revenue for its supply chain and freight segments. UPS also projected flatness in its domestic package segment, which includes the company's core ground parcel business, according to Rosenberg. She added that the 2013 domestic package results reflect unfavorable comparisons to the results in the 2012 quarter, which benefited from the timing of the company's fuel surcharges.