United Parcel Service, Inc. ( UPS - Analyst Report ) reported third quarter 2012 earnings per share of $1.06, in line with the Zacks Consensus Estimate. However, earnings per share decreased 2.8% from the year-ago adjusted earnings of $1.09.

Total revenue for the quarter dipped 0.7% year over year to $13,071 million and missed the Zacks Consensus Estimate of $13,346 million. Consolidated volume grew 2.9% year over year while average revenue per piece fell 1.4% year over year.

Total adjusted operating profit dropped 0.2% year over year to $1,662 million. Adjusted operating margin remained flat year over year at 12.7%.

Revenue Segments

US Domestic Package revenue rose 1.2% year over year to $7,861 million in the reported quarter. Operating profits were down 2% year over year to $1,025 million. Operating margin deteriorated 50 bps to 13.0% from 13.5% in the year-ago quarter.

International Package revenue dropped 3.7% year over year to $2,943 million due to uncertainties in the global economy and poor exports from Asia. Additionally, negative currency translation also impacted the segment’s revenue performance.

Operating profit rose 7.7% year over year to $449 million in the reported quarter and operating margin expanded to 15.3% from 13.6% in the year-ago quarter. Average daily volume declined 1.2% year over year on a 2.7% drop in non-U.S. domestic average daily volumes offsetting 1.2% growth in export average daily volumes. Revenue per piece was also down 1.3% from the year-ago quarter.

Supply Chain and Freight segment revenues were down 3.2% to $2,267 million due to lower yields that offset volume gains. Operating profit decreased 7.4% to $188 million due to declines in forwarding business that offset improvements in freight business. Operating margin contracted 40 bps year over year to 8.3%.

Liquidity

At the end of the third quarter, the company generated free cash flow of $3.6 billion and spent $1.6 billion. The company repurchased 18.5 million shares for approximately $1.4 million.

Guidance

In 2012, the company expects adjusted diluted earnings per share to range between $4.55 and $4.65.

Our Analysis

Over the long term, we believe the company will continue to invest in technology and network enhancements. Its integrated sales approach also promises future growth given its industry-leading margins and financial strength. The company is also seeking capacity adjustment to improve cost structure.

Moreover, United Parcel Service continues to accelerate shareholder returns in the form of higher dividends and share buybacks. However, labor unionization, large European exposure and competitive threats from peers like FedEx Corp. ( FDX - Analyst Report ) keep us cautious on the stock.

We, currently, have a long-term Neutral rating on UPS. For the short term (1–3 months), the stock retains a Zacks #3 Rank (Hold).