United Postal Services (UPS), the world’s largest package delivery company, reported disappointing results for the second quarter and warned that earnings growth would be at the lower end of its guidance this year.

Net income for the second quarter of 2006 increased 7.6 percent from $986 million to $1.06 billion for the same quarter a year ago. Earnings per share (EPS) increased 11 percent from 88 cents to 97 cents in the same period last year. Thompson Financial analysts had estimated that its EPS would be $1.

Revenue in the quarter grew 15 percent from year ago from $10.19 billion to $11.74 billion. Despite the growth, its operating margin fell 5 percent from 15.2 percent to 14.4 percent. This was attributed to high oil prices and weaker margins at two divisions.

In a conference call, Chief Financial Officer Scott Davis blamed some of the company’s losses to a surge in oil prices, which reached a peak of $78 per barrel in the middle of the month. The firm’s jet fuel and diesel fuel costs increased during the quarter, causing an unexpected loss of $25 million, according to Davis.

High fuel costs lowered margins at its international operations and supply chain management operations. The former fell from 19.9 percent to 18.5 percent, while the latter fell from 2.7 percent to 2.3 percent.

Management also downgraded the third quarter earnings growth forecast, predicting it would place at the lower end of the 11-to-16 percent bracket for 2006. Its EPS forecast for the third quarter was down from 87 cents to 91 cents, shy from Wall Street’s EPS expectation of 97 cents.

The reaction by investors was swift and merciless. UPS recorded a steep drop, falling $8.20 to close at $71.80 on the New York Stock Exchange.