UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2005
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
Commission file number 1-7657
AMERICAN EXPRESS COMPANY
(Exact name of registrant as specified in its charter)
New York 13-4922250
------------------------------------ ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
World Financial Center, 200 Vesey Street, New York, NY 10285
------------------------------------------------------ ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 640-2000
---------------------
None
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes /X/ No / /
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes / / No /X/
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 28, 2005
---------------------------------------- ----------------------------------
Common Shares (par value $.20 per share) 1,241,689,181 shares
AMERICAN EXPRESS COMPANY
FORM 10-Q
INDEX
Page No.
-------
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Income - Three months ended September
30, 2005 and 2004 1
Consolidated Statements of Income - Nine months ended September
30, 2005 and 2004 2
Consolidated Balance Sheets -September 30, 2005 and December 31,
2004 3
Consolidated Statements of Cash Flows - Nine months ended
September 30, 2005 and 2004 4
Notes to Consolidated Financial Statements 5 - 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15 - 36
Item 4. Controls and Procedures 36
Part II. Other Information:
Item 1. Legal Proceedings 39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 41
Item 6. Exhibits 42
Signatures 43
Exhibit Index E-1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Millions, except per share amounts)
(Unaudited)
Three Months Ended
September 30,
-------------------
2005 2004
-------- --------
Revenues:
Discount revenue $ 2,945 $ 2,535
Cardmember lending net finance charge revenue 648 562
Net card fees 511 474
Travel commissions and fees 421 426
Other commissions and fees 628 574
Securitization income, net 353 295
Other investment and interest income, net 246 248
Other 316 362
-------- --------
Total 6,068 5,476
-------- --------
Expenses:
Human resources 1,197 1,098
Marketing, promotion, rewards and cardmember services 1,492 1,286
Provisions for losses and benefits:
Charge card 299 206
Cardmember lending 364 233
Investment certificates and other 76 117
-------- --------
Total 739 556
Professional services 563 534
Occupancy and equipment 346 328
Interest 238 201
Communications 112 114
Other 301 345
-------- --------
Total 4,988 4,462
-------- --------
Pretax income from continuing operations 1,080 1,014
Income tax provision 215 312
-------- --------
Income from continuing operations 865 702
Income from discontinued operations, net of tax 165 177
-------- --------
Net income $ 1,030 $ 879
======== ========
Earnings per Common Share---- Basic:
Continuing operations $ 0.70 $ 0.56
Discontinued operations 0.14 0.14
-------- --------
Net income $ 0.84 $ 0.70
======== ========
Earnings per Common Share ---- Diluted:
Continuing operations $ 0.69 $ 0.55
Discontinued operations 0.13 0.14
-------- --------
Net income $ 0.82 $ 0.69
======== ========
Average common shares outstanding for earnings per common share:
Basic 1,229 1,251
======== ========
Diluted 1,254 1,275
======== ========
Cash dividends declared per common share $ 0.12 $ 0.12
======== ========
See Notes to Consolidated Financial Statements.
1
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Millions, except per share amounts)
(Unaudited)
Nine Months Ended
September 30,
-------------------
2005 2004
-------- --------
Revenues:
Discount revenue $ 8,558 $ 7,432
Cardmember lending net finance charge revenue 1,877 1,664
Net card fees 1,515 1,418
Travel commissions and fees 1,345 1,311
Other commissions and fees 1,816 1,668
Securitization income, net 965 807
Other investment and interest income, net 776 736
Other 978 1,025
-------- --------
Total 17,830 16,061
-------- --------
Expenses:
Human resources 3,652 3,306
Marketing, promotion, rewards and cardmember services 4,260 3,545
Provisions for losses and benefits:
Charge card 748 593
Cardmember lending 934 834
Investment certificates and other 278 230
-------- --------
Total 1,960 1,657
Professional services 1,594 1,494
Occupancy and equipment 1,038 974
Interest 671 592
Communications 342 354
Other 1,024 1,228
-------- --------
Total 14,541 13,150
-------- --------
Pretax income from continuing operations 3,289 2,911
Income tax provision 819 894
-------- --------
Income from continuing operations 2,470 2,017
Income from discontinued operations, net of tax 519 603
Cumulative effect of accounting change related to discontinued
operations, net of tax - (71)
-------- --------
Net income $ 2,989 $ 2,549
======== ========
Earnings per Common Share---- Basic:
Continuing operations $ 2.00 $ 1.60
Discontinued operations 0.42 0.47
Cumulative effect of accounting change - (0.05)
-------- --------
Net income $ 2.42 $ 2.02
======== ========
Earnings per Common Share ---- Diluted:
Continuing operations $ 1.96 $ 1.56
Discontinued operations 0.42 0.47
Cumulative effect of accounting change - (0.05)
-------- --------
Net income $ 2.38 $ 1.98
======== ========
Average common shares outstanding for earnings per common share:
Basic 1,233 1,264
======== ========
Diluted 1,257 1,289
======== ========
Cash dividends declared per common share $ 0.36 $ 0.32
======== ========
See Notes to Consolidated Financial Statements.
2
AMERICAN EXPRESS COMPANY
CONSOLIDATED BALANCE SHEETS
(Millions, except share data)
(Unaudited)
September 30, December 31,
2005 2004
------------- -------------
ASSETS
Cash and cash equivalents $ 7,623 $ 7,808
Accounts receivable and accrued interest:
Cardmember receivables, less reserves: 2005, $909; 2004, $806 31,019 30,270
Other receivables, less reserves: 2005, $45; 2004, $57 2,041 2,128
Investments 21,590 21,675
Loans:
Cardmember lending, less reserves: 2005, $952; 2004, $972 28,932 25,933
International banking, less reserves: 2005, $67; 2004, $95 6,856 6,790
Other, less reserves: 2005, $34; 2004, $17 1,712 1,533
Land, buildings and equipment - at cost, less accumulated
depreciation: 2005, $2,792; 2004, $2,682 2,217 2,380
Other assets 6,834 8,558
Assets of discontinued operations - 87,141
------------- -------------
Total assets $ 108,824 $ 194,216
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Customers' deposits $ 22,194 $ 19,892
Travelers Cheques outstanding 7,021 7,287
Accounts payable 8,273 7,319
Investment certificate reserves 6,219 5,501
Short-term debt 15,014 14,531
Long-term debt 29,110 32,676
Other liabilities 11,091 10,315
Liabilities of discontinued operations - 80,675
------------- -------------
Total liabilities 98,922 178,196
------------- -------------
Shareholders' equity:
Common shares, $.20 par value, authorized 3.6 billion shares;
issued and outstanding 1,239 million shares in 2005 and
1,249 million shares in 2004 248 250
Additional paid-in capital 8,382 7,316
Retained earnings 1,353 8,196
Accumulated other comprehensive (loss) income, net of tax:
Net unrealized securities gains 199 760
Net unrealized derivatives gains (losses) 118 (142)
Foreign currency translation adjustments (382) (344)
Minimum pension liability (16) (16)
------------- -------------
Total accumulated other comprehensive (loss) income (81) 258
------------- -------------
Total shareholders' equity 9,902 16,020
------------- -------------
Total liabilities and shareholders' equity $ 108,824 $ 194,216
============= =============
See Notes to Consolidated Financial Statements.
3
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions)
(Unaudited)
Nine Months Ended
September 30,
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS 2005 2004
-------- --------
Net income $ 2,989 $ 2,549
Less: Income from discontinued operations, net of tax (519) (603)
Add: Cumulative effect of accounting change related to discontinued
operations, net of tax - 71
-------- --------
Income from continuing operations 2,470 2,017
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities from continuing
operations:
Provisions for losses and benefits 2,128 1,794
Depreciation and amortization 443 442
Deferred taxes, acquisition costs and other (197) 817
Stock-based compensation 180 134
Changes in operating assets and liabilities, net of
effects of acquisitions and dispositions:
Accounts receivable and accrued interest 84 (95)
Other operating assets 1,093 162
Accounts payable and other liabilities 1,213 685
(Decrease) increase in Travelers Cheques outstanding (258) 163
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM CONTINUING OPERATIONS 7,156 6,119
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
Sale of investments 3,304 5,285
Maturity and redemption of investments 2,990 2,624
Purchase of investments (6,819) (9,391)
Net increase in cardmember loans/receivables (6,230) (2,468)
Maturities of cardmember receivable securitizations (1,750) (300)
Proceeds from cardmember receivable securitizations 1,197 -
Proceeds from cardmember loan securitizations 4,887 3,888
Maturities of cardmember loan securitizations (4,463) (3,000)
Loan operations and principal collections, net (218) (66)
Purchase of land, buildings and equipment (406) (430)
Sale of land, buildings and equipment 207 62
Acquisitions - (178)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES FROM CONTINUING OPERATIONS (7,301) (3,974)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
Net increase (decrease) in customers' deposits 2,673 (1,283)
Sale of investment certificates 3,809 3,046
Redemption of investment certificates (3,187) (2,593)
Net increase (decrease) in debt with maturities of three months or less 417 (8,996)
Issuance of debt 7,895 15,455
Principal payments on debt (10,817) (5,289)
Issuance of American Express common shares and other 867 753
Repurchase of American Express common shares (1,654) (2,645)
Dividends paid (497) (383)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES FROM CONTINUING OPERATIONS (494) (1,935)
Effect of exchange rate changes on cash (40) (16)
Effect of discontinued operations 494 723
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (185) 917
Cash and cash equivalents at beginning of period 7,808 3,967
-------- --------
Cash and cash equivalents at end of period $ 7,623 $ 4,884
======== ========
See Notes to Consolidated Financial Statements.
4
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying Consolidated Financial Statements should be read in
conjunction with the financial statements which are incorporated by
reference in the Annual Report on Form 10-K of American Express Company
(the Company or American Express) for the year ended December 31, 2004.
Certain reclassifications of prior period amounts have been made to
conform to the current presentation.
The interim financial information in this report has not been audited. In
the opinion of management, all adjustments necessary for a fair
presentation of the consolidated financial position and the consolidated
results of operations for the interim periods have been made. All
adjustments made were of a normal, recurring nature. Results of
operations reported for interim periods are not necessarily indicative of
results for the entire year.
On September 30, 2005, the Company completed the spin-off of Ameriprise
Financial, Inc. (Ameriprise), formerly known as American Express
Financial Corporation, the Company's financial planning and financial
services business, and the distribution of Ameriprise common stock to the
Company's shareholders in a transaction designed to be tax-free for U.S.
federal income tax purposes. The net assets distributed to shareholders
have been treated as a dividend and charged to retained earnings. In
addition, during the third quarter of 2005, the Company completed certain
dispositions including the sale of its tax, accounting and consulting
business, American Express Tax and Business Services, Inc. (TBS). The
operating results and assets and liabilities related to Ameriprise and
certain dispositions (including TBS) prior to disposal have been
reflected as discontinued operations in the Consolidated Financial
Statements.
Effective September 30, 2005, the Company realigned its segment
presentation to reflect the spin-off of Ameriprise. The new segments are:
U.S. Card Services, International Card & Global Commercial Services,
Global Network & Merchant Services, and Corporate & Other.
Cardmember lending net finance charge revenue is presented net of
interest expense of $228 million and $152 million for the three months
ended September 30, 2005 and 2004, respectively, and $609 million and
$415 million for the nine months ended September 30, 2005 and 2004,
respectively. The Company paid interest of approximately $2.1 billion and
$1.2 billion during the nine months ended September 30, 2005 and 2004,
respectively. Other investment and interest income is presented net of
interest expense of $82 million and $55 million for the three months
ended September 30, 2005 and 2004, respectively, and $230 million and
$156 million for the nine months ended September 30, 2005 and 2004,
respectively.
In June 2005, $1.9 billion of interests issued by the American Express
Master Trust (the Charge Trust) matured. The Charge Trust was dissolved
during the third quarter of 2005. In August 2005, the Company securitized
$1.2 billion of cardmember receivables, issuing $1.2 billion of
floating-rate asset backed notes through the American Express Issuance
Trust (AEIT), which was established in May 2005. Accordingly, the Company
had securitized cardmember receivables outstanding totaling $1.2 billion
and $1.9 billion at September 30, 2005 and December 31, 2004, respectively,
which were included in cardmember receivables on the Consolidated Balance
Sheets as they did not qualify for off-balance sheet treatment under
Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities;" likewise, an equal amount of debt was included in short-term
or long-term debt, as appropriate.
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective July 1, 2005, the Company adopted SFAS No. 123 (revised 2004),
"Share-Based Payment (SFAS No. 123(R))," using the modified prospective
application. SFAS No. 123(R) requires entities to measure and recognize
the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award and applies
to (i) new awards, (ii) awards modified, repurchased, or cancelled after
the adoption date, and (iii) any outstanding awards accounted for under
APB Opinion No. 25, Accounting for Stock Issued to Employees, for which
all requisite service has not yet been rendered. The impact of adopting
SFAS No. 123(R) did not have a material impact on the Company's financial
statements.
In December 2004, the FASB issued FASB Staff Position (FSP)
FAS 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004 (the
Act)" (FSP FAS 109-2), which would allow additional time beyond the
financial reporting period of enactment
5
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
to evaluate the effect of the Act on the Company's plan for reinvestment
or repatriation of foreign earnings for purposes of calculating the
income tax provision. The Company does not plan to repatriate any foreign
earnings as a result of the Act.
Effective January 1, 2004, the Company adopted the American Institute of
Certified Public Accountants Statement of Position 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts" (SOP 03-1). The
adoption of SOP 03-1 as of January 1, 2004 resulted in a cumulative
effect of accounting change which related to discontinued operations that
reduced first quarter 2004 results by $71 million ($109 million pretax).
In November 2003, the FASB ratified a consensus on the disclosure
provisions of Emerging Issues Task Force (EITF) Issue 03-1, "The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain
Investments" (EITF 03-1). The Company complied with the disclosure
provisions of this rule in the Consolidated Financial Statements included
in its Annual Report on Form 10-K for the years ended December 31, 2004
and 2003. In March 2004, the FASB reached a consensus regarding the
application of a three-step impairment model to determine whether
investments accounted for in accordance with SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (SFAS No. 115),
and other cost method investments are other-than-temporarily impaired.
However, with the issuance of FSP EITF 03-1-1, "Effective Date of
Paragraphs 10-20 of EITF 03-1," on September 30, 2004, the provisions of
the consensus relating to the measurement and recognition of
other-than-temporary impairments will be deferred pending further
clarification from the FASB. On November 3, 2005, the FASB issued FSP FAS
115-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." It concludes this matter by (a)
nullifying the EITF 03-1 paragraphs 10-18 that dealt with recognition
criteria for other-than-temporary impairments, (b) requiring such
evaluations to be performed under the guidance of SFAS No. 115 and other
authoritative pronouncements issued by the FASB and the SEC, and (c)
carrying forward the disclosure and other EITF 03-1 requirements. The
Company believes its current procedures are consistent with the
requirements of FSP FAS 115-1.
2. Ameriprise and Other Discontinued Operations
On September 30, 2005, the Company completed the distribution of
Ameriprise common stock to the Company's shareholders in a transaction
designed to be tax-free for U.S. federal income tax purposes. The
Ameriprise distribution was treated as a non-cash dividend to
shareholders and, as such, reduced the Company's retained earnings by
$7.8 billion, which included an approximate $1.1 billion capital
contribution to Ameriprise in connection with the distribution.
Accordingly, the Company's Consolidated Balance Sheet as of September 30,
2005 reflects the non-cash dividend and a decrease in assets and
liabilities.
In addition, during the three months ended September 30, 2005, the
Company completed certain dispositions (including TBS) for cash proceeds
of approximately $190 million. Revenues from these dispositions were $325
million and $309 million for the nine months ended September 30, 2005 and
2004, respectively. These dispositions resulted in a net after-tax gain
of approximately $63 million during the third quarter of 2005.
6
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The operating results and assets and liabilities of discontinued
operations are presented separately in the Company's Consolidated
Financial Statements. Summary operating results of the discontinued
operations for the three and nine months ended September 30, 2005 and
2004, were:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
(Millions) 2005 2004 2005 2004
-------- ------------------- --------
Revenues $ 1,993 $ 1,729 $ 5,813 $ 5,291
Expenses (1,813) (1,489) (5,148) (4,434)
Income tax provision (78) (63) (209) (254)
Gain on disposal, net of tax 63 - 63 -
-------- -------- -------- --------
Income from discontinued operations, net of tax $ 165 $ 177 $ 519 $ 603
======== ======== ======== ========
Assets and liabilities of the discontinued operations at December 31,
2004 were:
December 31,
(Millions) 2004
------------
Assets:
Investments $ 39,134
Separate account assets 35,901
Deferred acquisition costs 3,838
Other assets 8,268
------------
Total assets $ 87,141
------------
Liabilities:
Insurance and annuity reserves $ 32,966
Investment certificate reserves 5,831
Separate account liabilities 35,901
Other liabilities 5,977
------------
Total liabilities $ 80,675
------------
Net assets $ 6,466
============
During the third quarter of 2005, the Company and Ameriprise executed a
reinsurance agreement for the Company to retain the travel and other card
insurance businesses of AMEX Assurance Company (AAC), a subsidiary of
Ameriprise at September 30, 2005. The Company also entered into a share
purchase agreement with Ameriprise under which all of the ownership
interests in and the rights and obligations of AAC will transfer to the
Company within a period not to exceed two years from the spin-off date in
consideration of a fixed purchase price equal to AAC's net book value as
of September 30, 2005, which is $115 million. As a result of these
agreements and in accordance with FASB Interpretation No. 46R
"Consolidation of Variable Interest Entities," the Company consolidates
AAC as a variable interest entity for which the Company is considered the
primary beneficiary. The Company recorded a $115 million liability as of
September 30, 2005 related to the purchase of AAC.
7
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Shareholders' Equity
The following table summarizes the Company's consolidated shareholders'
equity activity for the nine months ended September 30, 2005:
Accumulated
Additional Other
Common Paid-In- Comprehensive Retained
(Millions) Total Shares Capital Income (Loss) Earnings
--------- ------ ---------- ------------- --------
Balances at December 31, 2004 $ 16,020 $ 250 $ 7,316 $ 258 $ 8,196
Comprehensive income:
Net income 2,989 2,989
Change in net unrealized securities gains (545) (545)
Change in net unrealized derivatives gains
(losses) 252 252
Foreign currency translation adjustments (63) (63)
---------
Total comprehensive income 2,633
Repurchase of common shares (1,654) (6) (186) (1,462)
Spin-off of Ameriprise (7,815) 17 (7,832)
Other changes, primarily employee plans 1,165 4 1,252 (91)
Cash dividends declared:
common, $0.36 per share (447) (447)
--------- ------ ---------- ------------- --------
Balances at September 30, 2005 $ 9,902 $ 248 $ 8,382 $ (81) $ 1,353
========= ====== ========== ============= ========
4. Investments
The following is a summary of investments classified as
available-for-sale at fair value, by type at September 30, 2005 and
December 31, 2004:
September 30, December 31,
(Millions) 2005 2004
------------- ------------
State and municipal obligations $ 7,409 $ 7,381
U.S. Government and agencies obligations 5,036 4,060
Mortgage and other asset-backed securities 4,236 4,322
Corporate debt securities 3,358 3,751
Other 1,551 2,161
------------- ------------
Total $ 21,590 $ 21,675
============= ============
8
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Gross realized gains and losses on sales and losses recognized for
other-than-temporary impairments of securities classified as
available-for-sale, using the specific identification method, were as
follows for the three and nine months ended September 30, 2005 and 2004:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
(Millions) 2005 2004 2005 2004
-------- -------- -------- --------
Gross realized gains on sales $ 8 $ 9 $ 15 $ 20
Gross realized losses on sales $ (1) $ - $ (1) $ (2)
Gross other-than-temporary impairments $ (1) $ (1) $ (1) $ (10)
5. Guarantees
The Company provides cardmember protection plans that cover losses
associated with purchased products, as well as certain other guarantees
that are within the scope of FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). In the hypothetical
scenario that all claims occur within the next 12 months, the aggregate
maximum amount of undiscounted future payments associated with such
guarantees would not exceed $95 billion at September 30, 2005 and
December 31, 2004. The total amount of related liability accrued at
September 30, 2005 and December 31, 2004 for such programs was $149
million and $144 million, respectively, which management believes to be
adequate based on actual experience. The Company generally has no
collateral or other recourse provisions related to these guarantees.
Expenses relating to actual claims under these guarantees were not
material for the three and nine months ended September 30, 2005 and 2004,
respectively. As of September 30, 2005, these guarantees also included
certain guarantees provided in conjunction with the spin-off of
Ameriprise.
The Company also provides various guarantees to its international banking
customers in the ordinary course of business that are also within the
scope of FIN 45, including financial letters of credit, performance
guarantees and financial guarantees. Generally, these guarantees range in
term from three months to one year. The Company receives a fee related to
these guarantees, many of which help to facilitate customer cross-border
transactions. At September 30, 2005, the Company held approximately $800
million of collateral supporting these guarantees. The maximum amount of
undiscounted future payments for these guarantees is approximately $1
billion and $900 million, respectively at September 30, 2005 and December
31, 2004, respectively. The total amount of related liability accrued at
September 30, 2005 and December 31, 2004 for such programs was $3 million
and $4 million, respectively.
6. Retirement Plans
The components of the net pension cost included in continuing operations
for all defined benefit plans accounted for under SFAS No. 87,
"Employers' Accounting for Pensions," are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
(Millions) 2005 2004 2005 2004
-------- -------- -------- --------
Service cost $ 26 $ 25 $ 78 $ 74
Interest cost 29 27 88 81
Expected return on plan assets (35) (35) (106) (105)
Amortization of prior service cost - (1) 1 (3)
Recognized net actuarial loss 7 5 20 14
Settlement/curtailment loss 2 2 5 7
-------- -------- -------- --------
Net periodic pension benefit cost $ 29 $ 23 $ 86 $ 68
======== ======== ======== ========
9
The net periodic postretirement benefit expense recognized was $9 million
for the three months ended September 30, 2005 and 2004, and $26 million
for the nine months ended September 30, 2005 and 2004.
7. Stock-Based Compensation
At September 30, 2005, the Company has two stock-based employee
compensation plans, which are described more fully in Note 15 of the
Company's Annual Report on Form 10-K for the year ended December 31,
2004. Effective January 1, 2003, the Company adopted the fair value
recognition provisions of SFAS No. 123 for all stock options granted
after December 31, 2002. Effective July 1, 2005, the Company adopted SFAS
No. 123(R). Included in net income is expense of $13 million after-tax
for the three months ended September 30, 2005 and 2004, and $52 million
and $40 million after-tax for the nine months ended September 30, 2005
and 2004, respectively, related to stock options granted January 1, 2003
or later.
The following table illustrates the effect on net income and earnings per
common share (EPS) assuming the Company had followed the fair value
recognition provisions of SFAS No. 123 for all outstanding and unvested
stock options and other stock-based compensation for the three months
ended September 30, 2004 and the nine months ended September 30, 2005 and
2004:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
(Millions, except per share amounts) 2004 2005 2004
------------------- -------- --------
Net income as reported: $ 879 $ 2,989 $ 2,549
Add: Stock-based employee compensation
included in reported net income, net of
related tax effects 34 139 105
Deduct: Total stock-based employee
compensation expense determined under fair
value based method, net of related tax effects (80) (149) (243)
------------------- -------- --------
Pro forma net income $ 833 $ 2,979 $ 2,411
=================== ======== ========
Basic EPS:
As reported $ 0.70 $ 2.42 $ 2.02
Pro forma $ 0.67 $ 2.42 $ 1.91
Diluted EPS:
As reported $ 0.69 $ 2.38 $ 1.98
Pro forma $ 0.65 $ 2.37 $ 1.87
10
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Earnings per Common Share
Basic EPS is computed using the average actual shares outstanding during
the period. Diluted EPS is basic EPS adjusted for the dilutive effect of
stock options, restricted stock awards and other financial instruments
that may be converted into common shares. The computations of basic and
diluted EPS from continuing and discontinued operations for the three and
nine months ended September 30, 2005 and 2004 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
(Millions, except per share amounts) 2005 2004 2005 2004
-------- -------- -------- --------
Numerator:
Income from continuing operations $ 865 $ 702 $ 2,470 $ 2,017
Income from discontinued operations, net of tax 165 177 519 603
Cumulative effect of accounting change, net of tax - - - (71)
-------- -------- -------- --------
Net income $ 1,030 $ 879 $ 2,989 $ 2,549
-------- -------- -------- --------
Denominator:
Basic: Weighted-average shares outstanding during the
period 1,229 1,251 1,233 1,264
Add: Dilutive effect of stock options, restricted
stock awards and other dilutive securities 25 24 24 25
-------- -------- -------- --------
Diluted 1,254 1,275 1,257 1,289
-------- -------- -------- --------
Basic EPS:
Income from continuing operations $ 0.70 $ 0.56 $ 2.00 $ 1.60
Income from discontinued operations, net of tax 0.14 0.14 0.42 0.47
Cumulative effect of accounting change, net of tax - - - (0.05)
-------- -------- -------- --------
Net income $ 0.84 $ 0.70 $ 2.42 $ 2.02
-------- -------- -------- --------
Diluted EPS:
Income from continuing operations $ 0.69 $ 0.55 $ 1.96 $ 1.56
Income from discontinued operations, net of tax 0.13 0.14 0.42 0.47
Cumulative effect of accounting change, net of tax - - - (0.05)
-------- -------- -------- --------
Net income $ 0.82 $ 0.69 $ 2.38 $ 1.98
-------- -------- -------- --------
For the three months ended September 30, 2005 and 2004, the dilutive
effect of stock options excludes 13 million and 14 million options,
respectively, from the computation of diluted EPS because inclusion of
the options would have been anti-dilutive. Similarly, the number of these
excluded stock options for the nine months ended September 30, 2005 and
2004 was 17 million and 12 million, respectively. As discussed in Note 1
to the Consolidated Financial Statements in the Company's Annual Report
on Form 10-K for the year ended December 31, 2004, the convertible
debentures issued in November 2003 will not affect the computation of EPS
unless the Company's common share price exceeds the base conversion price
(currently $60.49 per share as adjusted to reflect the Company's
distribution on September 30, 2005 of 100 percent of the shares of its
wholly-owned subsidiary, Ameriprise, to the Company's shareholders). In
that scenario, the Company would reflect the additional common shares in
the calculation of diluted earnings per share using the treasury stock
method.
The debentures are convertible into our common shares only in limited
circumstances, including when the trading price of our common stock for a
specified minimum period is more than 125% of the base conversion price
(currently at or above $75.61). If the entire outstanding amount of
debentures were to be converted when our common shares were trading at
$75.61, the maximum number of shares the Company would issue, if it chose
to settle the entire amount of its conversion obligation above the accreted
principal amount of the debentures in shares, would be approximately 26
million shares. The Company is required to settle up to the accreted
principal amount of the debentures in cash. The number of shares issuable
upon conversion of the debentures will increase as the price of our common
shares at the time of conversion increases. For example, if the entire
outstanding amount of debentures were to be converted when our common
shares were trading at $150, the maximum number of shares the Company
would issue, if it chose to settle the entire amount of its conversion
obligation above the accreted principal amount of the debentures in
shares, would be approximately 39 million shares. Using the current
maximum conversion rate, in no event would the Company be required to
issue more than 52 million shares upon conversion of the debentures.
9. Segment Information
Effective September 30, 2005, the Company realigned its segment
presentation to reflect the spin-off of Ameriprise. The new segments are:
U.S. Card Services, International Card & Global Commercial Services,
Global Network & Merchant Services, and Corporate & Other.
11
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
U.S. Card Services includes the U.S. proprietary consumer card business,
OPEN: The Small Business Network from American Express, the Travelers
Cheques and Prepaid Services business and the American Express U.S.
Consumer Travel Network.
International Card & Global Commercial Services provides proprietary
consumer cards and small business cards outside the United States.
International Card & Global Commercial Services also offers global
corporate products and services, including Corporate Card, issued to
individuals through a corporate account established by their employer;
Business Travel, which helps businesses manage their travel expenses
through a variety of travel-related products and services; and Corporate
Purchasing Solutions, an account established by a company to pay for
everyday business expenses such as office and computer supplies.
International Card & Global Commercial Services also includes American
Express Bank Ltd. which provides financial products and services to
retail customers and wealthy individuals outside the United States and
financial institutions around the world.
Global Network & Merchant Services consists of the Merchant Services
businesses and Global Network Services. The Global Merchant Services
businesses develop and manage relationships with merchants that accept
American Express branded cards; authorize and record transactions; pay
merchants; and provide a variety of value-added point-of-sale and back
office services. Global Network Services develops and manages
relationships with third parties that issue American Express branded
cards and/or establish relationships with merchants to accept American
Express branded cards. In addition, in particular emerging markets,
issuance of certain proprietary cards is managed within the Global
Network Services business. Global Network & Merchant Services works with
merchant and bank partners to develop and market product propositions,
operate systems that enable third parties to interface with the American
Express global network and provide network functions that include
operations, service delivery, systems, authorization, clearing,
settlement, brand advertising, new product development and marketing.
Corporate & Other consists of corporate functions and auxiliary
businesses including American Express Publishing and the leasing product
line of the Company's small business financing unit, American Express
Business Finance Corporation, which was sold in 2004.
The following table presents certain information regarding these
operating segments for the three and nine months ended September 30, 2005
and 2004.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
(Millions) 2005 2004 2005 2004
-------- -------- -------- --------
Revenues:
U.S. Card Services $ 3,035 $ 2,618 $ 8,772 $ 7,584
International Card & Global Commercial Services 2,238 2,059 6,698 6,164
Global Network & Merchant Services 716 659 2,097 1,936
Corporate & Other 79 140 263 377
-------- -------- -------- --------
Total $ 6,068 $ 5,476 $ 17,830 $ 16,061
======== ======== ======== ========
Income (loss) from continuing operations:
U.S. Card Services $ 446 $ 356 $ 1,423 $ 1,155
International Card & Global Commercial Services 254 224 693 597
Global Network & Merchant Services 141 173 405 440
Corporate & Other 24 (51) (51) (175)
-------- -------- -------- --------
Total $ 865 $ 702 $ 2,470 $ 2,017
======== ======== ======== ========
For certain income statement items that are affected by asset
securitizations and to reflect certain tax-exempt investment income as if
it had been earned on a taxable basis at U.S. Card Services, data are
provided on both a basis consistent with U.S. generally accepted
accounting principles (GAAP) as presented above, as well as on a
12
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
managed basis. In addition, International Card & Global Commercial
Services reflects a reclassification of certain foreign exchange services
as revenues on a managed basis. Income from continuing operations is the
same under both a GAAP and managed basis. See U.S. Card Services and
International Card & Global Commercial Services Results of Operations
sections of MD&A for managed basis discussions.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
(Millions) 2005 2004 2005 2004
-------- -------- -------- --------
Revenues (managed basis):
U.S. Card Services $ 3,303 $ 2,898 $ 9,569 $ 8,453
International Card & Global Commercial Services 2,274 2,106 6,801 6,294
Global Network & Merchant Services 716 659 2,097 1,936
Corporate & Other 79 140 263 377
-------- -------- -------- --------
Total $ 6,372 $ 5,803 $ 18,730 $ 17,060
======== ======== ======== ========
10. Restructuring Charges
As discussed in Note 22 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2004, the Company recorded aggregate
restructuring charges of $102 million for initiatives executed during
2004. During the first six months of 2005, the Company recorded
restructuring charges of $99 million relating principally to the
restructuring activities associated with its business travel operations,
its international payments business included in International Card &
Global Commercial Services and the finance and technologies functions.
During the third quarter of 2005, the Company recorded additional charges
of $66 million relating principally to the restructuring activities
associated with its technologies, finance and international operations,
of which $53 million reflected severance and related costs and is
included in human resources expenses and $13 million reflected other exit
costs and is included in other expenses.
The following table summarizes by category the Company's aggregate
restructuring charge activity from continuing operations for the nine
months ended September 30, 2005:
International Global
Card & GLobal Network &
U.S. Card Commercial Merchant Corporate
(Millions) Services Services Services & Other Total
------------- ------------- ------------- ------------- -------------
Severance
Liability at December 31, 2004 $ - $ 63 $ - $ 3 $ 66
Cash paid - (58) - (4) (62)
Charges 2 55 5 27 89
-----------------------------------------------------------------------------
Liability at June 30, 2005 2 60 5 26 93
Cash paid - (24) - (8) (32)
Charges, net of reversals of $4 3 13 2 35 53
-----------------------------------------------------------------------------
Liability at September 30, 2005 5 49 7 53 114
-----------------------------------------------------------------------------
Other
Liability at December 31, 2004 - 13 - - 13
Cash paid - (11) - - (11)
Charges - 4 - 6 10
-----------------------------------------------------------------------------
Liability at June 30, 2005 - 6 - 6 12
Cash paid - (5) - (9) (14)
Charges - 4 - 9 13
-----------------------------------------------------------------------------
Liability at September 30, 2005 - 5 - 6 11
-----------------------------------------------------------------------------
Total liability at September 30, 2005 $ 5 $ 54 $ 7 $ 59 $ 125
=============================================================================
13
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Income Taxes
The Company is under continuous examination by the Internal Revenue
Service (IRS) and regularly audited by tax authorities in other countries
and states in which the Company has significant business operations. The
tax years under examination vary by jurisdiction. The Company regularly
assesses the likelihood of additional assessments in each of the taxing
jurisdictions resulting from these examinations. Tax reserves have been
established which the Company believes to be adequate in relation to the
potential for additional assessments. Once established, reserves are
adjusted when there is more information available or when an event occurs
necessitating a change to the reserves.
For the three and nine months ended September 30, 2005, the Company
recognized income tax benefits of $105 million and $195 million,
respectively, related to the resolution of certain matters with the IRS.
Income taxes paid, net, by the Company during the nine months ended
September 30, 2005 and 2004 were approximately $1.3 billion and $836
million, respectively.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
American Express Company (the Company or American Express) is a leading global
payments, network and travel Company. The Company offers a broad range of
products including charge and credit cards; stored value products such as
Travelers Cheques, Travelers Cheque funds cards and gift cards; travel agency
services and travel, entertainment and purchasing expense management services;
network services and merchant acquisition and merchant processing for our
network partners and proprietary payments businesses. The Company's various
products are sold globally to diverse customer groups, including consumers,
small businesses, mid-market companies, large corporations and banking
institutions. These products are sold through various channels including
direct mail, on-line applications, targeted sales-forces and direct response
advertising.
The Company generates revenue from a variety of sources including global
payments, such as charge and credit cards, travel services and stored value
products, including Travelers Cheques. Charge and credit cards generate
revenue for the Company primarily in three different ways:
- Discount revenue, the Company's largest single revenue source, which
represents fees charged to merchants when cardmembers use their cards to
purchase goods and services on our network,
- Finance charge revenue, which is earned on outstanding balances related
to the cardmember lending portfolio, and
- Card fees, which are earned for annual membership, and other commissions
and fees such as foreign exchange conversion fees and card-related fees
and assessments.
In addition to operating costs associated with these activities, other major
expense categories are expenses related to marketing and reward programs that
add new cardmembers, promote cardmember loyalty and spending and provisions
for anticipated cardmember credit and fraud losses.
The Company believes that its "spend-centric" business model (in which it
focuses primarily on generating revenues by driving spending on its cards and
secondarily by finance charges and fees) has significant competitive
advantages. For merchants, the higher spending represents greater value to
them in the form of higher sales and loyal customers, which gives the Company
the ability to earn a premium discount rate. As a result of the higher
revenues generated from higher spending, the Company has the flexibility to
offer more attractive rewards and other incentives to cardmembers, which in
turn create an incentive to spend more on their cards.
On September 30, 2005, the Company completed the spin-off of Ameriprise
Financial, Inc. (Ameriprise), formerly known as American Express Financial
Corporation, the Company's financial planning and financial services business,
and the distribution of Ameriprise common stock to the Company's shareholders
in a transaction designed to be tax-free for U.S. federal income tax purposes.
The net assets distributed to shareholders have been treated as a dividend and
charged to retained earnings. In addition, during the third quarter of 2005,
the Company completed certain dispositions including the sale of its tax,
accounting and consulting business, American Express Tax and Business
Services, Inc. (TBS). The operating results and assets and liabilities related
to Ameriprise and certain dispositions (including TBS) prior to disposal have
been reflected as discontinued operations in the Consolidated Financial
Statements.
Effective September 30, 2005, the Company realigned its segment presentation
to reflect the spin-off of Ameriprise. The new segments are: U.S. Card
Services, International Card & Global Commercial Services, Global Network &
Merchant Services, and Corporate & Other.
U.S. Card Services includes the U.S. proprietary consumer card business, OPEN:
The Small Business Network from American Express, the Travelers Cheques and
Prepaid Services business and the American Express U.S. Consumer Travel
Network. Charge and credit cards generate revenue for the Company primarily
through discount revenue, net finance charge revenue and card fees. Prepaid
Services, including
15
Travelers Cheques, earn investment income as cash is invested prior to
encashment of Travelers Cheques or use of other prepaid products, in addition
to other fees.
International Card & Global Commercial Services provides proprietary consumer
cards and small business cards outside the United States. International Card &
Global Commercial Services also offers global corporate products and services,
including Corporate Card, issued to individuals through a corporate account
established by their employer; Business Travel, which helps businesses manage
their travel expenses through a variety of travel-related products and
services; and Corporate Purchasing Solutions, an account established by a
company to pay for everyday business expenses such as office and computer
supplies. International Card & Global Commercial Services also includes
American Express Bank Ltd. which provides financial products and services to
retail customers and wealthy individuals outside the United States and
financial institutions around the world.
International Card & Global Commercial Services derives its revenues from a
number of sources including discount revenue from business billed on its
proprietary card and corporate payment and expense management products, net
finance charge revenue, net interest income from its international banking
operation and various revenues and fees from its corporate travel management
services and other products.
Global Network & Merchant Services consists of the Merchant Services
businesses and Global Network Services. The Global Merchant Services
businesses develop and manage relationships with merchants that accept
American Express branded cards; authorize and record transactions; pay
merchants; and provide a variety of value-added point-of-sale and back office
services. Global Network Services develops and manages relationships with
third parties that issue American Express branded cards and/or establish
relationships with merchants to accept American Express branded cards. In
addition, in particular emerging markets, issuance of certain proprietary
cards is managed within the Global Network Services business. Global Network &
Merchant Services works with merchant and bank partners to develop and market
product propositions, operate systems that enable third parties to interface
with the American Express global network and provide network functions that
include operations, service delivery, systems, authorization, clearing,
settlement and brand advertising, new product development and marketing.
Global Network & Merchant Services derives its revenues primarily from
discount revenue charged to merchants. Other revenues include royalties,
contributions from joint venture partnerships and fees charged to merchants
and partners for value-added services.
Corporate & Other consists of corporate functions and auxiliary businesses
including American Express Publishing and the leasing product line of the
Company's small business financing unit, American Express Business Finance
Corporation, which was sold in 2004.
Certain statistical information shown in the table below is presented on a
"managed basis," as if, in the U.S. Card Services segment, there had been no
cardmember lending securitization transactions, and certain tax-exempt
investment income had been earned on a taxable basis. These managed basis
adjustments, and management's rationale for such presentation, are discussed
further in U.S. Card Services below under "Differences between GAAP and
Managed Basis Presentation." The Company presents certain information on a
managed basis because that is the way the Company's management views and
manages the business.
Certain of the statements in this Form 10-Q report are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. See the "Forward-Looking Statements" section below.
16
SELECTED STATISTICAL INFORMATION
(Amounts in billions, except percentages and where indicated)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2005 2004 2005 2004
------------------- -------- --------
Card billed business:*
United States $ 89 $ 76 $ 254 $ 221
Outside the United States 33 27 98 79
-------- -------- -------- --------
Total $ 122 $ 103 $ 352 $ 300
======== ======== ======== ========
Total cards-in-force (millions):*
United States 42.0 38.0 42.0 38.0
Outside the United States 27.0 25.3 27.0 25.3
-------- -------- -------- --------
Total 69.0 63.3 69.0 63.3
======== ======== ======== ========
Basic cards-in-force (millions):*
United States 31.9 28.9 31.9 28.9
Outside the United States 22.4 20.8 22.4 20.8
-------- -------- -------- --------
Total 54.3 49.7 54.3 49.7
======== ======== ======== ========
Average discount rate** 2.57% 2.60% 2.59% 2.61%
Average quarterly basic cardmember
spending (dollars)* $ 2,610 $ 2,330 $ 7,662 $ 6,871
Average fee per card (dollars)* $ 35 $ 34 $ 35 $ 34
Travel sales $ 4.8 $ 4.6 $ 15.4 $ 14.6
Travel commissions and fees/sales*** 8.7% 9.2% 8.7% 9.1%
Worldwide Travelers Cheque and prepaid products:
Sales $ 5.8 $ 5.8 $ 14.9 $ 15.0
Average outstanding $ 7.3 $ 7.1 $ 7.2 $ 6.9
Average investments $ 7.9 $ 7.6 $ 7.8 $ 7.4
Investment yield 5.1% 5.4% 5.2% 5.4%
Tax equivalent yield - managed 7.8% 8.3% 7.9% 8.4%
International banking
Total loans $ 6.9 $ 6.4 $ 6.9 $ 6.4
Private banking holdings $ 20.2 $ 17.1 $ 20.2 $ 17.1
* Card billed business and cards-in-force include activities related to
proprietary cards, cards issued under network partnership agreements,
cash advances on proprietary cards and certain insurance fees charged on
proprietary cards. Average basic cardmember spending and average fee per
card are computed from proprietary card activities only.
** Computed as discount revenue from all card spending (proprietary and
Global Network Services) at merchants divided by all billed business
(proprietary and Global Network Services) generating discount revenue at
such merchants. Only merchants acquired by the Company are included in
the computation. Discount rates have been retroactively adjusted on a
historical basis from those previously disclosed, primarily to retain in
the computation the Global Network Services partner portion of discount
revenue, as well as the Company's portion of discount revenue.
*** Computed from information provided herein.
17
SELECTED STATISTICAL INFORMATION (CONTINUED)
(Amounts in billions, except percentages and where indicated)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Worldwide cardmember receivables:
Total receivables $ 31.9 $ 28.6 $ 31.9 $ 28.6
90 days past due as a % of total 1.7% 1.8% 1.7% 1.8%
Loss reserves (millions): $ 909 $ 847 $ 909 $ 847
% of receivables 2.9% 3.0% 2.9% 3.0%
% of 90 days past due 173% 160% 173% 160%
Net loss ratio as a % of charge volume 0.27% 0.26% 0.27% 0.26%
Worldwide cardmember lending - owned
basis:
Total loans $ 29.9 $ 25.2 $ 29.9 $ 25.2
30 days past due loans as a % of total 2.5% 2.5% 2.5% 2.5%
Loss reserves (millions):
Beginning balance $ 888 $ 1,030 $ 972 $ 998
Provision 325 205 853 744
Net write-offs (280) (255) (832) (786)
Other 19 28 (41) 52
-------- -------- -------- --------
Ending balance $ 952 $ 1,008 $ 952 $ 1,008
======== ======== ======== ========
% of loans 3.2% 4.0% 3.2% 4.0%
% of past due 128% 159% 128% 159%
Average loans $ 28.3 $ 26.2 $ 27.4 $ 25.8
Net write-off rate 4.0% 3.9% 4.0% 4.1%
Net finance charge revenue*/average loans 9.2% 8.6% 9.1% 8.6%
Worldwide cardmember lending - managed basis:
Total loans $ 50.6 $ 45.6 $ 50.6 $ 45.6
30 days past due loans as a % of total 2.4% 2.5% 2.4% 2.5%
Loss reserves (millions):
Beginning balance $ 1,367 $ 1,535 $ 1,475 $ 1,541
Provision 510 437 1,425 1,468
Net write-offs (494) (463) (1,458) (1,486)
Other 18 28 (41) 14
-------- -------- -------- --------
Ending balance $ 1,401 $ 1,537 $ 1,401 $ 1,537
======== ======== ======== ========
% of loans 2.8% 3.4% 2.8% 3.4%
% of past due 114% 132% 114% 132%
Average loans $ 49.6 $ 45.3 $ 47.9 $ 45.0
Net write-off rate 4.0% 4.1% 4.1% 4.4%
Net finance charge revenue*/average loans 9.4% 9.1% 9.2% 8.9%
*Computed on an annualized basis.
***
The following discussions regarding Consolidated Results of Operations and
Consolidated Liquidity and Capital Resources are presented on a basis
consistent with GAAP.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2005 AND 2004
The Company's consolidated net income rose 17 percent to $1.0 billion and
diluted earnings per share (EPS) rose 19 percent to $0.82 in the three-month
period ended September 30, 2005 as compared to a year
18
ago. The Company's consolidated income from continuing operations rose 23
percent to $865 million and diluted EPS from continuing operations rose 25
percent to $0.69. On a trailing 12-month basis, return on average
shareholders' equity (ROE) was 24.2 percent, up from 21.5 percent a year ago.
Both the Company's revenues and expenses are affected by changes in the
relative values of non-U.S. currencies to the U.S. dollar. The currency rate
changes increased both revenue and expense growth by less than 1 percentage
point for the three months ended September 30, 2005.
Results from continuing operations for the three months ended September 30,
2005 included a $105 million tax benefit from the resolution of a prior year
tax item related to the sale of AMEX Life in 1995, $86 million ($56 million
after-tax) of reengineering costs, principally related to restructuring
efforts within the business travel, finance and technologies functions, and
international operations areas, and a $49 million ($32 million after-tax)
provision to reflect the estimated costs related to Hurricane Katrina.
REVENUES
Consolidated revenues for the three months ended September 30, 2005 were $6.1
billion, up 11 percent from $5.5 billion in the same period a year ago.
Revenues increased due to higher discount revenues, increased cardmember
lending net finance charge revenue and greater securitization income.
Discount revenue rose 16 percent to $2.9 billion as compared to a year ago as
a result of an 18 percent increase in worldwide billed business, a 12 percent
increase in average spending per proprietary basic card and 9 percent growth
in cards-in-force, offset in part by a lower average discount rate. U.S.
billed business was up 19 percent reflecting growth of 17 percent within the
Company's consumer card business, a 22 percent increase in small business
spending and a 13 percent improvement in Corporate Services volumes. Excluding
the impact of foreign exchange translation, total billed business outside the
U.S. increased 18 percent reflecting double-digit proprietary growth in all
regions. Additionally, billed business outside the U.S. reflected 13 percent
growth in consumer and small business spending, as well as a 15 percent
increase in Corporate Services volumes. Billed business related to Global
Network Services increased 35 percent during the third quarter of 2005
reflecting strong growth in network volumes. The increase in overall
cards-in-force reflects continued acquisitions within both proprietary and
Global Network Services activities and strong average customer retention
levels. In the U.S. and outside the U.S., 1 million and 700,000 cards were
added during the three months ended September 30, 2005, respectively. The
increase in average spending per proprietary basic card reflected an 11
percent increase in the U.S. and a 14 percent increase outside the U.S. The
lower average discount rate reflected, in part, changes in the mix of spending
between various merchant segments. As previously disclosed, continued changes
in the mix of business, volume-related pricing discounts and selective
repricing initiatives will likely continue to result in some erosion of the
average discount rate over time.
Cardmember lending net finance charge revenue of $648 million rose 16 percent,
reflecting 8 percent growth in average worldwide lending balances on an owned
basis and a higher portfolio yield.
Securitization income, net increased 20 percent to $353 million on a greater
average balance of securitized loans, a higher portfolio yield and a decrease
in portfolio write-offs, partially offset by greater interest expense due to
higher coupon rate paid to certificate holders and an increase in the payment
speed of trust assets. Securitization income, net represents the non-credit
provision components of the net gains and charges from securitization
activities within the U.S. Card Services segment, the amortization and related
impairment charges, if any, of the related interest-only strip, excess spread
related to securitized loans, net finance charge revenue on retained interests
in securitized loans, and servicing income, net of related discounts or fees.
EXPENSES
Consolidated expenses for the three months ended September 30, 2005 were $5.0
billion, up 12 percent from $4.5 billion for the same period in 2004. As
discussed in further detail below, the increase in the third quarter of 2005
was primarily driven by higher marketing, promotion, rewards and cardmember
services
19
expenses, greater provisions for losses and benefits and increased expenses
for human resources. Consolidated expenses for the three months ended
September 30, 2005 included $86 million of reengineering costs reflecting $77
million of severance of which $53 million was restructuring-related
principally within the finance and technologies functions and international
operations areas. Severance costs are included in human resources expenses.
Restructuring costs also included $13 million related to other exit costs and
are included in other expenses. Consolidated expenses also included a $49
million provision to reflect the estimated costs related to Hurricane Katrina,
which was included in provisions for losses and benefits, and $5 million of
spin-off expenses related to Ameriprise principally included in professional
services.
Human resources expenses increased 9 percent to $1.2 billion due to severance
related costs resulting from the restructuring initiatives noted above,
increased costs related to management incentives, including the impact of an
additional year of stock-based compensation expenses, merit increases, and
greater employee benefit expenses. The higher stock-based compensation expense
from stock options reflects the Company's decision to expense stock options
beginning in 2003, partially offset by the decision to issue fewer stock
options. Higher expense related to restricted stock awards reflects the
Company's decision to modify compensation practices and use restricted stock
awards in place of stock options for middle management.
Marketing, promotion, rewards and cardmember services expenses increased 16
percent to $1.5 billion versus a year ago, reflecting higher marketing and
promotion expenses and greater reward costs. The increase in marketing and
promotion expenses was primarily driven by the Company's ongoing global brand
advertising campaign and continued focus on business-building initiatives. The
growth in rewards costs is attributable to volume growth, a higher redemption
rate and strong cardmember loyalty program participation. Management believes,
based on historical experience, that cardmembers enrolled in rewards and
co-brand programs yield higher spend, better retention, stronger credit
performance and greater profit for the Company.
Total provisions for losses and benefits increased 33 percent to $739 million
over last year. The increase in provisions was due to increases in the charge
card and cardmember lending provisions of 45 percent and 56 percent,
respectively, partially offset by a decline in other provisions of 35 percent.
The charge and lending growth reflects strong volume increases within both
activities and higher provision rates and a $49 million provision during the
quarter to reflect estimated costs related to Hurricane Katrina. Included in
investment certificates and other provisions in the third quarter of 2004 was
a charge of $115 million related to a securitization reconciliation and a
benefit of $60 million due to a reduction in merchant related reserves.
The effective tax rate was 20 and 31 percent for the three-month periods ended
September 30, 2005 and 2004, respectively. The lower tax rate in the third
quarter of 2005 reflected a tax benefit of $105 million from the resolution of
a prior year tax item related to the sale of AMEX Life in 1995.
Income from discontinued operations, net of tax for the three months ended
September 30, 2005 decreased 7 percent to $165 million from $177 million in
2004 due primarily to spin-off related costs of $71 million after-tax offset
by a $63 million after-tax gain on certain dispositions, primarily TBS. The
discontinued operations generated revenues of $2.0 billion and $1.7 billion
for the three-month periods ended September 30, 2005 and 2004, respectively.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2005 AND 2004
The Company's consolidated net income rose 17 percent to $3.0 billion and
diluted EPS rose 20 percent to $2.38 in the nine-month period ended September
30, 2005 as compared to a year ago. The Company's consolidated income from
continuing operations before accounting change rose 23 percent to $2.5 billion
and diluted EPS from continuing operations before accounting change rose 26
percent to $1.96. On a trailing 12-month basis, return on average
shareholders' equity was 24.2 percent.
20
Net income and EPS for the nine months ended September 30, 2004 reflect the
$71 million ($109 million pretax) or $0.05 per diluted share impact of the
Company's previously disclosed adoption of the American Institute of Certified
Public Accountants Statement of Position 03-1, "Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and
for Separate Accounts." The adoption of SOP 03-1 related to discontinued
operations.
Both the Company's revenues and expenses are affected by changes in the
relative values of non-U.S. currencies to the U.S. dollar. The currency rate
changes increased both revenue and expense growth by approximately 1
percentage point for the nine months ended September 30, 2005.
Results from continuing operations for the nine months ended September 30,
2005 included $195 million of income tax benefits from the resolution of prior
years' tax items, $209 million ($136 million after-tax) of reengineering
costs, principally related to restructuring efforts within the business
travel, finance and technologies functions, and international operations
areas, and a $49 million ($32 million after-tax) provision to reflect the
estimated costs related to Hurricane Katrina.
The following discussion is presented on a basis consistent with GAAP unless
otherwise noted.
REVENUES
Consolidated revenues for the nine months ended September 30, 2005 were $17.8
billion, up 11 percent from $16.1 billion in the same period a year ago.
Revenues increased due to higher discount revenues, increased cardmember
lending net finance charge revenue and greater securitization income.
Discount revenue rose 15 percent to $8.6 billion as compared to a year ago as
a result of a 17 percent increase in worldwide billed business, a 12 percent
increase in average spending per proprietary basic card and 9 percent growth
in cards-in-force, offset in part by a lower average discount rate. U.S.
billed business was up 16 percent reflecting growth of 15 percent within the
Company's consumer card business, a 19 percent increase in small business
spending and a 10 percent improvement in Corporate Services volumes. Excluding
the impact of foreign exchange translation, total billed business outside the
U.S. increased 16 percent reflecting double-digit proprietary growth in most
regions. Additionally, billed business outside the U.S. reflected 12 percent
growth in consumer and small business spending, as well as a 14 percent
increase in Corporate Services volumes. Billed business related to Global
Network Services increased 37 percent during the first nine months of 2005
reflecting strong growth in network volumes. The increase in overall
cards-in-force reflects card acquisitions within both proprietary and Global
Network Services activities and strong average customer retention levels. In
the U.S. and outside the U.S., 2.1 million and 1.5 million cards were added
during the nine months ended September 30, 2005, respectively. The increase in
average spending per proprietary basic card reflects a 9 percent increase in
the U.S. and a 16 percent increase outside the U.S. The lower average discount
rate reflects, in part, changes in the mix of spending between various
merchant segments.
Cardmember lending net finance charge revenue of $1.9 billion rose 13 percent,
reflecting 6 percent growth in the average balance of the owned cardmember
lending portfolio and a higher portfolio yield.
Securitization income, net increased 20 percent to $965 million on a
greater average balance of securitized loans, a higher portfolio yield and a
decrease in portfolio write-offs, partially offset by greater interest expense
due to higher coupon rate paid to certificate holders and an increase in the
payment speed of trust assets.
EXPENSES
Consolidated expenses for the nine months ended September 30, 2005 were $14.5
billion, up 11 percent from $13.2 billion for the same period in 2004. As
discussed in further detail below, the increase in 2005 was primarily driven
by higher marketing, promotion, rewards and cardmember services expenses,
increased expenses for human resources, and greater provisions for losses and
benefits, partially offset by lower other expenses. Consolidated expenses for
the nine months ended September 30, 2005 included $209 million of
reengineering costs reflecting $179 million of severance of which $142 million
was restructuring related principally within the business travel, finance and
technologies functions and international operations areas. Severance costs are
included in human resources expenses. Restructuring costs also included $23
million related to other exit costs and are included in other expenses.
Consolidated expenses also included a $49 million provision to reflect the
estimated costs related to Hurricane Katrina, which was
21
included in provisions for losses and benefits, and $5 million of spin-off
expenses related to Ameriprise principally included in professional services.
These expenses were offset by a $115 million benefit from the recovery of
insurance claims associated with September 11, 2001, included as a reduction
of other expenses.
Human resources expenses increased 10 percent to $3.7 billion due to severance
related costs resulting from the restructuring initiatives noted above,
increased costs related to management incentives, including the impact of an
additional year of higher stock-based compensation expenses, merit increases
and greater employee benefit expenses as previously discussed.
Marketing, promotion, rewards and cardmember services expenses increased 20
percent to $4.3 billion versus a year ago reflecting higher marketing and
promotion expenses and greater reward costs. The increase in marketing and
promotion expenses was primarily driven by the Company's ongoing global brand
advertising campaign and continued focus on business-building initiatives.
Rewards costs reflect significant volume growth, higher redemption rates and
strong cardmember loyalty program participation.
Total provisions for losses and benefits increased 18 percent to $2.0 billion
over last year. The increase reflected strong volume increases within both
charge card and cardmember activities, higher provision rates and a $49
million provision during the quarter to reflect the estimated costs related to
Hurricane Katrina. In the nine months ended September 30, 2004, a benefit was
recorded for the reduction in merchant-related reserves.
The effective tax rate was 25 and 31 percent for the nine months ended
September 30, 2005 and 2004, respectively. The decrease in the effective tax
rate for the nine months ended September 30, 2005 reflects the impact of a
$195 million benefit resulting from the resolution of previous years' tax
items.
Income from discontinued operations, net of tax for the nine months ended
September 30, 2005 decreased 14 percent to $519 million from $603 million in
2004 due primarily to spin-off related costs of $125 million after-tax offset
by a $63 million after-tax gain on certain dispositions, primarily TBS.
Discontinued operations also includes the first quarter 2004 impact of the $44
million deferred acquisition cost (DAC) valuation benefit at Ameriprise
reflecting a portion of the benefit of the lengthening of amortization periods
for certain insurance and annuity products in conjunction with the adoption of
SOP 03-1. The discontinued operations generated revenues of $5.8 billion and
$5.3 billion for the nine-month periods ended September 30, 2005 and 2004,
respectively.
OUTLOOK
New federal bankruptcy legislation became effective on October 17, 2005. As
has been widely reported, the number of bankruptcy petitions filed prior to
that date was substantially higher than normal. These higher volumes
created a processing backlog at many of the courts where those petitions
were filed. The backlogs, in turn, led to delays of several weeks in
notifying lenders of those filings. Notifications from the early part of
October have been running substantially higher than previous quarters and,
based on its current assessment, the Company anticipates that
bankruptcy-related write-offs in the U.S. will increase substantially in
the fourth quarter over historical write-off levels. The Company
believes the reserve for cardmember losses is adequate at September 30,
2005. The Company will continue to evaluate the impact of increased
write-offs on the adequacy of its reserve for cardmember losses in the U.S.
during the fourth quarter of 2005.
Separately, based on its assessment of competitive opportunities in the
payments industry and the benefits it has generated from recent marketing
initiatives, the Company expects the year-over-year growth rate of spending in
the fourth quarter on marketing, promotion, rewards and cardmember services to
be generally consistent with the growth rate of such spending reported in the
third quarter. This spending will continue to focus on card acquisition, product
enhancements and service offerings to drive additional cardmember spending. In
addition, as previously disclosed, the Company will also continue to engage in
various reengineering activities to capitalize on growth opportunities. These
reengineering activities may, from time to time, result in significant expenses
affecting the Company's results.
22
CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES
CAPITAL STRATEGY
The Company believes allocating capital to its growing businesses with a
return on risk-adjusted equity in excess of their cost of capital will
continue to build shareholder value. The Company's philosophy is to retain
earnings sufficient to enable it to meet its growth objectives, and, to the
extent capital exceeds investment opportunities, return excess capital to
shareholders. Assuming the Company achieves its financial objectives of 12 to
15 percent EPS growth, 28 to 30 percent return on shareholders' equity and at
least 8 percent revenue growth, on average and over time, it will seek to
return to shareholders an average of 65 percent of capital generated, subject
to business mix, acquisitions and rating agency requirements. During the nine
months ended September 30, 2005, the Company paid $497 million in dividends
and continued share repurchases as discussed below.
SHARE REPURCHASES
The Company has in place a share repurchase program to return equity capital
in excess of its business needs to shareholders. These share repurchases are
made to both offset the issuance of new shares as part of employee
compensation plans and to reduce shares outstanding. The Company repurchases
its common shares primarily by open market purchases using several brokers at
competitive commission and fee rates. In addition, common shares may also be
purchased from the Company-sponsored Incentive Savings Program (ISP) to
facilitate the ISP's required disposal of shares when employee-directed
activity results in an excess common share position. Such purchases are made
at market price without commissions or other fees. During the nine months
ended September 30, 2005, the Company repurchased 30.7 million common shares
at an average price of $53.87, based on market prices prior to the spin-off of
Ameriprise. Since the inception of the share repurchase program in September
1994, 526 million shares have been acquired under total authorizations to
repurchase up to 570 million shares, including purchases made under past
agreements with third parties.
CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
The Company generated net cash provided by operating activities in amounts
greater than net income for both the nine months ended September 30, 2005 and
2004 primarily due to provisions for losses and benefits, which represent
expenses in the Consolidated Statements of Income but do not require cash at
the time of provision. Similarly, depreciation and amortization represent
non-cash expenses. In addition, net cash was provided by fluctuations in other
operating assets and liabilities. These accounts vary significantly in the
normal course of business due to the amount and timing of various payments.
Management believes cash flows from operations, available cash balances and
short-term borrowings will be sufficient to fund the Company's operating
liquidity needs.
CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
The Company's investing activities primarily include funding cardmember loans
and receivables and the Company's available-for-sale investment portfolio.
For the nine months ended September 30, 2005 and 2004, net cash was used in
investing activities primarily due to net increases in cardmember receivables
and loans.
CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
The Company's financing activities primarily include the issuance of debt and
taking customer deposits in addition to sales of investment certificates. The
Company also regularly repurchases its common shares.
23
For the nine months ended September 30, 2005, net cash was used in financing
activities primarily due to a net decrease in total debt and share repurchase
activity, partially offset by increases in customers' deposits. For the nine
months ended September 30, 2004, net cash was used in financing activities
primarily due to share repurchase activity and a net decrease in customers'
deposits partially offset by a net increase in total debt.
FINANCING ACTIVITIES
The Company funds its cardmember receivables and loans using various funding
sources, such as short- and long-term debt, medium-term notes, and sales of
cardmember receivables and loans in securitizations. Net accounts receivable
and cardmember loans increased as compared to December 31, 2004 primarily as a
result of higher average cardmember spending and an increase in the number of
cards-in-force. Short-term and long-term debt decreased from December 31, 2004
primarily as a result of scheduled maturities or payments using funds
generated from operations.
Included in the long-term debt activity, the Company securitized $1.2 billion
of cardmember receivables, issuing $1.2 billion of floating-rate asset backed
notes through the American Express Issuance Trust (AEIT), which was
established in May 2005. In June 2005, $1.9 billion of interests issued by
the American Express Master Trust (the Charge Trust) matured. The Charge
Trust was dissolved during the third quarter of 2005.
FUNDING
At September 30, 2005, the Company (parent) had $4.3 billion of debt or equity
securities available for issuance under shelf registrations filed with the
Securities and Exchange Commission (SEC). In addition, American Express Travel
Related Services (TRS), a subsidiary of the Company; American Express
Centurion Bank (Centurion Bank), a wholly-owned subsidiary of TRS; American
Express Credit Corporation (Credco), a wholly-owned subsidiary of TRS;
American Express Overseas Credit Corporation Limited, a wholly-owned
subsidiary of Credco; and American Express Bank Ltd. (AEB) have established
programs for the issuance, outside the United States, of debt instruments to
be listed on the Luxembourg Stock Exchange. The maximum aggregate principal
amount of debt instruments outstanding at any one time under the program will
not exceed $6.0 billion. At September 30, 2005, $3.2 billion was outstanding
under this program.
As of September 30, 2005, Credco had the ability to issue approximately $7.2
billion of debt securities under shelf registration statements filed with the
SEC. On October 4, 2005, Credco issued and sold $500 million of its Floating
Rate Notes due 2010, using the proceeds for general corporate purposes. On
October 28, 2005, Credco received regulatory approval in Canada for a base
shelf prospectus for a medium-term note program providing for the issuance
from time to time, in Canada, of up to Canadian $3.5 billion (U.S. $3.0
billion) of notes by American Express Canada Credit Corporation, a
wholly-owned subsidiary of Credco, which notes would be guaranteed by Credco.
The Board of Directors authorized a Parent Company commercial paper
program supported by the multi-purpose bank credit facility discussed
below. There was no Parent Company commercial paper outstanding as of
September 30, 2005 and no borrowings have been made under its bank credit
facility. As of September 30, 2005, the Company maintained total bank lines
of credit of $13.8 billion, including an approximately $400 million secured
borrowing facility at AEB. As of September 30, 2005, $4.0 billion was
outstanding under these facilities. During April 2005, the Company renewed
and extended a total of $7 billion of these credit line facilities. In
connection with the renewal and extension, the Company renegotiated the
consolidated tangible net worth covenant contained therein (as well as in
the remaining credit facility containing such covenant) to provide for an
adjustment upon completion of the spin-off of Ameriprise. This covenant is
applicable only to the Parent Company's credit lines. Under the terms of
this covenant, the Parent Company's right to borrow under the credit
facilities is subject to the Company's maintaining consolidated tangible
net worth (as defined under the credit facilities) of not less than $4.1
billion ($9.0 billion prior to the spin-off of Ameriprise).
24
AIRLINE INDUSTRY MATTERS
Historically, the Company has not experienced significant revenue declines
resulting from a particular airline's scaling-back or closure of operations
due to bankruptcy or other financial challenges because the volumes generated
from the airline are typically shifted to other participants in the industry
that accept the Company's card products. Nonetheless, the Company is exposed
to business and credit risk in the airline industry primarily through business
arrangements where the Company has remitted payment to the airline for a
cardmember purchase of tickets that have not yet been used or "flown." This
creates a potential exposure for the Company in the event that the cardmember
is not able to use the ticket and the Company, based on the facts and
circumstances, credits the cardmember for the unused ticket. Historically,
this type of exposure has not generated any significant losses for the Company
because of the need for an airline that is operating under bankruptcy
protection to continue accepting credit and charge cards and honoring requests
for credits and refunds in the ordinary course of business, and in furtherance
of its reorganization and its formal assumption, with bankruptcy court
approval, of its card acceptance agreement, including approval of the
Company's right to hold cash to cover these potential exposures to provide
credits to cardmembers. Typically, as an airline's financial situation
deteriorates the Company delays payment to the airlines thereby increasing
cash held to protect itself in the event of an ultimate liquidation of the
airline. The Company's goal in these distressed situations is to hold
sufficient cash over time to ensure that upon liquidation the cash held is
equivalent to the credit exposure related to any unused tickets.
Separately, the Company announced that as part of Delta Airlines' (Delta)
decision to file for protection under Chapter 11 of the Bankruptcy Code, the
Company agreed with Delta to restructure certain of its financial arrangements
with the airline. In particular, Delta agreed to repay to the Company an
aggregate $557 million, representing $500 million that the Company advanced in
the fourth quarter of 2004 and first quarter of 2005 as prepayment for the
purchase of Delta SkyMiles rewards points and $57 million related to a
pre-petition facility arranged by GE Capital in the fourth quarter of 2004.
Contemporaneously with the repayment, the Company lent to Delta $350 million
as part of Delta's post-petition, debtor-in-possession (DIP) financing under
the Bankruptcy Code. Upon approval of the broader DIP financing facility,
Delta applied $50 million of proceeds to pay down a portion of the facility,
leaving a remaining balance of $300 million. This post-petition facility
continues to be structured as an advance against the Company's obligations to
purchase Delta SkyMiles rewards points under the Company's co-brand and
Membership Rewards (MR) agreements and will be amortized ratably each month
beginning in July 2006 through September 2007. The Company's post-petition
facility will be secured by (i) senior liens in Delta assets specifically
related to its American Express co-brand, MR and card acceptance relationships
and (ii) liens subordinate to senior liens in all other Delta assets and
certain Delta subsidiaries.
In addition, given the depth of the Company's business relationships with
Delta through the SkyMiles Credit Card and Delta's participation as a key
partner in the Company's MR program, in the event Delta's reorganization
under the bankruptcy laws is not successful or otherwise negatively impacts
the Company's relationship with Delta, the Company's future financial results
could be adversely impacted. As previously disclosed, American Express' Delta
SkyMiles Credit Card co-brand portfolio accounts for less than 10% of the
Company's worldwide billed business and less than 15% of worldwide managed
lending receivables.
BUSINESS SEGMENT RESULTS
Results of the business segments reflect essentially each segment as a
stand-alone business. The management reporting process that derives these
results allocates income and expense using various methodologies as described
below.
REVENUES
The Company applies a transfer pricing methodology for the allocation of
discount revenue and certain other revenues between segments. Discount revenue
is earned by segments based on the volume of merchant business generated by
cardmembers at predetermined rates. Within the U.S. Card Services and
International Card & Global Commercial Services segments, discount revenue
reflects the issuer component of the overall discount rate and within the
Global Network & Merchant Services segment,
25
discount revenue reflects the network component of the overall discount rate.
Net finance charge revenue and net card fees are directly attributable to the
segment in which they are reported.
EXPENSES
Marketing, promotion, rewards and cardmember services expenses are reflected
in each segment based on actual expenses incurred within the segment, with the
exception of brand advertising, which is reflected in the Global Network &
Merchant Services segment.
The provision for losses reflects credit-related expenses as incurred within
each segment.
Human resources and other expenses reflect expenses incurred directly within
each segment as well as expenses related to the Company's support services,
which are allocated to each segment based on support service activities
directly attributable to the segment. Other overhead expenses are allocated to
segments based on each segment's level of pretax income. Financing
requirements are managed on a consolidated basis. Funding costs are allocated
to segments based on segment funding requirements.
CAPITAL
Each business segment is allocated capital based on business model operating
requirements, risk measures and regulatory capital requirements. Business
model requirements included capital needed to support operations and specific
balance sheet items. The risk measures include considerations for credit,
market and operational risk. Regulatory capital requirements include the
capital amounts defined for well-capitalized financial institutions.
INCOME TAXES
Income taxes are allocated to each business segment based on the estimated
effective tax rates applicable to various businesses that comprise the
segment.
As discussed more fully below, U.S. Card Services' and International Card &
Global Commercial Services' results are presented on a managed basis and Global
Network & Merchant Services' and Corporate & Other results are presented on a
basis consistent with GAAP.
U.S. CARD SERVICES
DIFFERENCES BETWEEN GAAP AND MANAGED BASIS PRESENTATION
-------------------------------------------------------
The Company presents certain information on a managed basis because that is
the way the Company's management views and manages the business.
For U.S. Card Services, managed basis means the presentation assumes there
have been no securitization transactions, i.e., all securitized cardmember
loans and related income effects are reflected as if they were in the
Company's balance sheets and income statements, respectively. Management
believes that a full picture of trends in the Company's cardmember lending
business can only be derived by evaluating the performance of both securitized
and non-securitized cardmember loans. Asset securitization is just one of
several ways for the Company to fund cardmember loans. Use of a managed basis
presentation, including non-securitized and securitized cardmember loans,
presents a more accurate picture of the key dynamics of the cardmember lending
business, avoiding distortions due to the mix of funding sources at any
particular point in time. The Company does not currently securitize
international loans.
The managed basis presentation for U.S. Card Services also reflects an
increase to interest income recorded to enable management to evaluate tax
exempt investment on a basis consistent with taxable investment securities. On
a GAAP basis, interest income associated with tax exempt investments is
recorded based on amounts earned. Accordingly, information presented on a
managed basis assumes that tax exempt
26
securities earned income at rates as if the securities produced taxable income
with a corresponding increase in the provision for income taxes.
U.S. Card Services' owned portfolio is primarily comprised of cardmember
receivables generated by the Company's charge card products and unsecuritized
cardmember loans. The Company securitizes cardmember loans as part of its
financing strategy; consequently, the level of unsecuritized cardmember loans
is primarily a function of the Company's financing requirements. Delinquency,
reserve coverage and net write-off rates have historically been broadly
comparable between the Company's owned and managed portfolios.
On a GAAP basis, results reflect net securitization income, which is comprised
of the non-credit provision components of the net gains and charges from
securitization activities, the amortization and related impairment charges, if
any, of the interest-only strip, excess spread related to securitized loans,
net finance charge revenue on retained interests in securitized loans, and
servicing income, net of related discounts or fees. Excess spread, which is
the net positive cash flow from interest and fee collections allocated to the
investor's interests after deducting the interest paid on investor
certificates, credit losses, contractual servicing fees and other expenses is
recognized in securitization income as it is earned. See Selected Statistical
Information below for data relating to U.S. Card Services' owned loan
portfolio.
During the three months ended September 30, 2005 and 2004, U.S. Card Services
recognized net gains, including the credit components, of $3 million ($2
million after-tax) and $9 million ($6 million after-tax), respectively, from
net securitization activities. For the three months ended September 30, 2005,
the net gains consisted of $82 million of income from the securitization of
$2.5 billion of cardmember loans, including the impact of the related credit
reserves on the sold loans. This amount was partially offset by $79 million of
charges related to the maturity of $2.5 billion of previously outstanding
issuances. For the three months ended September 30, 2004, the net gains
consisted of $72 million of income from the securitization of $2.1 billion of
cardmember loans. This amount was partially offset by $63 million of charges
related to the maturity of $0.5 billion of securitizations.
During the nine months ended September 30, 2005 and 2004, U.S. Card Services
recognized net gains, including the credit components, of $11 million ($7
million after-tax) and $26 million ($17 million after-tax), respectively, from
net securitization activities. For the nine months ended September 30, 2005,
the net gains consisted of $162 million of income from the securitization of
$4.9 billion of cardmember loans, including the impact of the related credit
reserves on the sold loans. This amount was partially offset by $151 million
of charges related to the maturity of $4.5 billion of previously outstanding
issuances. For the nine months ended September 30, 2004, the net gains
consisted of $230 million of income from the securitization of $3.9 billion of
cardmember loans, including the impact of the related credit reserves on the
sold loans, and the sale of $1.4 billion of certain retained interests from
previous securitization activities. This amount was partially offset by $204
million of charges related to the maturity of $3 billion of securitizations
and changes in interest-only strip assumptions.
Management views any net gains from securitizations as discretionary benefits
to be used for card acquisition expenses, which are reflected in both
marketing, promotion, rewards and cardmember services and other operating
expenses. Consequently, the managed basis presentation for the three months
ended September 30, 2005 and 2004 assumes that the impact of this net activity
was offset by higher marketing, promotion, rewards and cardmember services
expenses of $2 million and $6 million, respectively, and other operating
expenses of $1 million and $3 million, respectively. Similarly, the managed
basis presentation for the nine months ended September 30, 2005 and 2004
assumes that the impact of this net activity was offset by higher marketing,
promotion, rewards and cardmember services expenses of $7 million and $16
million, respectively, and other operating expenses of $3 million and $10
million, respectively. Accordingly, the incremental expenses, as well as the
impact of this net activity, have been eliminated in the managed basis
presentations.
27
The following tables reconcile the GAAP basis for certain U.S. Card Services
income statement line items to the managed basis information, where different.
Securitization Tax Equivalent
(Millions) GAAP Basis Effect Effect Managed Basis
------------------- ------------------- ------------------- -------------------
Three Months Ended
September 30, 2005 2004 2005 2004 2005 2004 2005 2004
-------- -------- -------- -------- -------- -------- -------- --------
Revenues:
Discount revenue, net card
fees and other $ 2,224 $ 1,982 $ 53 $ 53 $ 56 $ 57 $ 2,333 $ 2,092
Cardmember lending:
Finance charge revenue 614 445 721 573 1,335 1,018
Interest expense 156 104 209 108 365 212
-------- -------- -------- -------- -------- --------
Net finance charge
revenue 458 341 512 465 970 806
Securitization income, net 353 295 (353) (295) - -
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues 3,035 2,618 212 223 56 57 3,303 2,898
-------- -------- -------- -------- -------- -------- -------- --------
Expenses:
Marketing, promotion, rewards
and cardmember services 1,003 854 (2) (6) 1,001 848
Provision for losses 458 438 215 232 673 670
Human resources and other
operating expenses 936 824 (1) (3) 935 821
-------- -------- -------- -------- -------- --------
Total expenses 2,397 2,116 $ 212 $ 223 2,609 2,339
-------- -------- -------- -------- -------- -------- -------- --------
Pretax segment income 638 502 56 57 694 559
Income tax provision 192 146 $ 56 $ 57 $ 248 $ 203
-------- -------- -------- -------- -------- --------
Segment income $ 446 $ 356
======== ========
28
Securitization Tax Equivalent
(Millions) GAAP Basis Effect Effect Managed Basis
------------------- ------------------- ------------------- -------------------
Nine Months Ended
September 30, 2005 2004 2005 2004 2005 2004 2005 2004
-------- -------- -------- -------- -------- -------- -------- --------
Revenues:
Discount revenue, net card
fees and other $ 6,500 $ 5,766 $ 157 $ 156 $ 170 $ 171 $ 6,827 $ 6,093
Cardmember lending:
Finance charge revenue 1,723 1,321 1,948 1,601 3,671 2,922
Interest expense 416 310 513 252 929 562
-------- -------- -------- -------- -------- --------
Net finance charge
revenue 1,307 1,011 1,435 1,349 2,742 2,360
Securitization income, net 965 807 (965) (807) - -
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues 8,772 7,584 627 698 170 171 9,569 8,453
-------- -------- -------- -------- -------- -------- -------- --------
Expenses:
Marketing, promotion, rewards
and cardmember services 2,814 2,349 (7) (16) 2,807 2,333
Provision for losses 1,167 1,122 637 724 1,804 1,846
Human resources and other
operating expenses 2,725 2,472 (3) (10) 2,722 2,462
-------- -------- -------- -------- -------- --------
Total expenses 6,706 5,943 $ 627 $ 698 7,333 6,641
-------- -------- -------- -------- -------- -------- -------- --------
Pretax segment income 2,066 1,641 170 171 2,236 1,812
Income tax provision 643 486 $ 170 $ 171 $ 813 $ 657
-------- -------- -------- -------- -------- --------
Segment income $ 1,423 $ 1,155
======== ========
SELECTED STATISTICAL INFORMATION
(Amounts in billions, except percentages and where indicated)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Card billed business $ 74 $ 63 $ 212 $ 182
Total cards-in-force (millions) 36.9 34.4 36.9 34.4
Basic cards-in-force (millions) 27.2 25.3 27.2 25.3
Average quarterly basic cardmember
spending (dollars) $ 2,765 $ 2,498 $ 8,042 $ 7,377
U.S. Consumer Travel
Travel sales $ 0.5 $ 0.4 $ 1.4 $ 1.1
Travel commissions and fees/sales 8.6% 9.3% 8.7% 8.9%
Worldwide Travelers Cheque and prepaid products:
Sales $ 5.8 $ 5.8 $ 14.9 $ 15.0
Average outstanding 7.3 7.1 7.2 6.9
Average investments 7.9 7.6 7.8 7.4
Investment yield 5.1% 5.4% 5.2% 5.4%
Tax equivalent yield-managed 7.8% 8.3% 7.9% 8.4%
Total segment assets $ 65.2 $ 54.3 $ 65.2 $ 54.3
Segment capital $ 4.9 $ 4.1 $ 4.9 $ 4.1
Return on segment capital* 40.0% 39.3% 40.0% 39.3%
* Computed on a trailing 12-month basis using segment income and equity
capital allocated to segments based upon specific business operational needs,
risk measures and regulatory capital requirements.
29
(Amounts in billions, except percentages and where indicated)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Cardmember receivables:
Total receivables $ 16.8 $ 15.3 $ 16.8 $ 15.3
90 days past due as a % of total 2.0% 2.2% 2.0% 2.2%
Net loss ratio as a % of charge volume 0.30% 0.32% 0.30% 0.32%
Cardmember lending - owned basis:
Total loans $ 22.4 $ 17.2 $ 22.4 $ 17.2
30 days past due loans as a % of total 2.4% 2.4% 2.4% 2.4%
Average loans $ 20.9 $ 18.2 $ 20.2 $ 17.7
Net write-off rate 3.6% 3.7% 3.8% 4.0%
Net finance charge revenue*/average loans 8.7% 7.5% 8.6% 7.6%
Cardmember lending - managed basis:
Total loans $ 43.0 $ 37.5 $ 43.0 $ 37.5
30 days past due loans as a % of total 2.4% 2.5% 2.4% 2.5%
Average loans $ 42.3 $ 37.4 $ 40.7 $ 36.9
Net write-off rate 3.8% 4.0% 3.9% 4.4%
Net finance charge revenue*/average loans 9.2% 8.6% 9.0% 8.5%
* Computed on an annualized basis
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005
AND 2004
The following discussion of U.S. Card Services' results of operations for the
three and nine months ended September 30, 2005 and 2004 is presented on a
managed basis.
U.S. Card Services reported segment income of $446 million for the three
months ended September 30, 2005, a 25 percent increase from $356 million for the
same period a year ago. For the nine months ended September 30, 2005, U.S. Card
Services reported segment income of $1.4 billion, a 23 percent increase from
$1.2 billion for the same period a year ago.
U.S. Card Services' total revenues increased 14 percent and 13 percent for the
three and nine months ended September 30, 2005, respectively, primarily due to
higher discount revenue, net card fees and other, and increased cardmember
lending net finance charge revenue. Discount revenue, net card fees and other
of $2.3 billion and $6.8 billion for the three and nine months ended September
30, 2005, respectively, rose 12 percent from both periods a year ago,
primarily due to increases in billed business. The 18 percent and 16 percent
increase in billed business for the three and nine months ended September 30,
2005, respectively, resulted from an increase in spending per proprietary
basic card and growth in cards-in-force. Within the U.S. consumer business,
billed business grew 17 percent and 15 percent and small business volumes rose
22 percent and 19 percent during the three and nine months ended September 30,
2005, respectively. Cardmember lending net finance charge revenue of $970
million and $2.7 billion for the three and nine months ended September 30,
2005, respectively, rose 20 percent and 16 percent as compared to the same
periods a year ago, primarily due to growth in the average balance of the
managed lending portfolio.
U.S. Card Services' total expenses increased 12 percent and 10 percent for
the three and nine months ended September 30, 2005, respectively, primarily
due to higher marketing, promotion, rewards and cardmember services costs,
greater human resources expenses and higher other operating
30
expenses. Total expenses for the three and nine months ended September 30,
2005 include $4 million and $6 million, respectively, of reengineering costs
substantially all of which is related to severance costs within the travel
operations and is included in human resources expenses.
Marketing, promotion, rewards and cardmember services expenses of $1.0 billion
and $2.8 billion for the three and nine months ended September 30, 2005,
respectively, increased 18 percent and 20 percent as compared to the same
periods a year ago, reflecting the Company's increased business-building
initiatives and volume-related rewards expense growth. Total provisions for
losses increased 1 percent for the three months ended September 30, 2005
reflecting charge and lending volume growth, higher provision rates and a $38
million provision during the third quarter of 2005 to reflect the estimated
costs related to Hurricane Katrina. In the same period a year ago, a $115
million securitization reconciliation charge was recorded. Total provisions
for losses decreased 2 percent for the nine months ended September 30, 2005.
Human resources and other operating expenses of $935 million and $2.7 billion
increased 14 percent and 11 percent for the three and nine months ended
September 30, 2005. The increase in both periods was due to higher management
incentives, including an additional year of stock-based compensation expenses,
merit increases, and increased employee benefits costs. In addition, operating
expenses rose reflecting volume-related costs.
The effective tax rate was 36 percent for the three and nine months ended
September 30, 2005 and 2004.
INTERNATIONAL CARD & GLOBAL COMMERCIAL SERVICES
DIFFERENCES BETWEEN GAAP AND MANAGED BASIS PRESENTATION
-------------------------------------------------------
The following discussion of International Card & Global Commercial Services'
results of operations for the three and nine months ended September 30, 2005
and 2004 is presented on a managed basis. The table below reconciles the GAAP
basis for certain income statement line items to the managed basis
information, where different. The foreign exchange services reclassification
reflects revenues earned related to the sale and purchase of foreign
currencies for customers as part of the foreign exchange business. On a GAAP
basis, these revenues are included with other foreign exchange items that are
reflected in other operating expenses. Management views foreign exchange
services as a revenue generating activity and makes operating decisions based
upon that information. Accordingly, the table below assumes that the amounts
earned are included in other revenue with a corresponding increase in other
operating expenses.
31
Foreign Exchange
Services
(Millions) GAAP Basis Reclassification Managed Basis
------------------- ------------------- -------------------
Three Months Ended
September 30, 2005 2004 2005 2004 2005 2004
-------- -------- -------- -------- -------- --------
Revenues :
Discount revenue, net card fees and
other $ 2,067 $ 1,902 $ 36 $ 47 $ 2,103 $ 1,949
Cardmember lending:
Finance charge revenue 259 222
Interest expense 88 65
-------- --------
Net finance charge revenue 171 157
-------- -------- -------- -------- -------- --------
Total revenues 2,238 2,059 36 47 2,274 2,106
-------- -------- -------- -------- -------- --------
Expenses:
Marketing, promotion, rewards and
cardmember services 310 285
Provision for losses and benefits 270 174
Human resources and other operating
expenses 1,333 1,286 36 47 1,369 1,333
-------- -------- -------- -------- -------- --------
Total expenses 1,913 1,745 $ 36 $ 47 $ 1,949 $ 1,792
-------- -------- -------- -------- -------- --------
Pretax segment income 325 314
Income tax provision 71 90
-------- --------
Segment income $ 254 $ 224
======== ========
Foreign Exchange
Services
(Millions) GAAP Basis Reclassification Managed Basis
------------------- ------------------- -------------------
Nine Months Ended
September 30, 2005 2004 2005 2004 2005 2004
-------- -------- -------- -------- -------- --------
Revenues:
Discount revenue, net card fees and
other $ 6,198 $ 5,686 $ 103 $ 130 $ 6,301 $ 5,816
Cardmember lending:
Finance charge revenue 757 667
Interest expense 257 189
-------- --------
Net finance charge revenue 500 478
-------- -------- -------- -------- -------- --------
Total revenues 6,698 6,164 103 130 6,801 6,294
-------- -------- -------- -------- -------- --------
Expenses:
Marketing, promotion, rewards and
cardmember services 948 818
Provision for losses and benefits 737 541
Human resources and other operating
expenses 4,167 3,925 103 130 4,270 4,055
-------- -------- -------- -------- -------- --------
Total expenses 5,852 5,284 $ 103 $ 130 $ 5,955 $ 5,414
-------- -------- -------- -------- -------- --------
Pretax segment income 846 880
Income tax provision 153 283
-------- --------
Segment income $ 693 $ 597
======== ========
32
SELECTED STATISTICAL INFORMATION
(Amounts in billions, except percentages and where indicated)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Card billed business $ 42 $ 36 $ 123 $ 107
Total cards-in-force (millions) 22.2 21.5 22.2 21.5
Basic cards-in-force (millions) 17.6 17.1 17.6 17.1
Average quarterly basic cardmember
spending (dollars) $ 2,384 $ 2,107 $ 7,107 $ 6,227
Global Corporate & International Consumer Travel
Travel sales $ 4.4 $ 4.2 $ 14.1 $ 13.4
Travel commissions and fees/sales 8.6% 9.4% 8.6% 9.4%
International banking
Total loans $ 6.9 $ 6.4 $ 6.9 $ 6.4
Private banking holdings $ 20.2 $ 17.1 $ 20.2 $ 17.1
Total segment assets $ 51.0 $ 44.4 $ 51.0 $ 44.4
Segment capital $ 3.8 $ 3.6 $ 3.8 $ 3.6
Return on segment capital* 23.3% 23.1% 23.3% 23.1%
Cardmember receivables:
Total receivables $ 15.2 $ 13.3 $ 15.2 $ 13.3
90 days past due as a % of total 1.2% 1.5% 1.2% 1.5%
Net loss ratio as a % of charge volume 0.24% 0.18% 0.24% 0.18%
Cardmember lending:
Total loans $ 7.5 $ 6.5 $ 7.5 $ 6.5
30 days past due loans as a % of total 2.8% 2.5% 2.8% 2.5%
Average loans $ 7.3 $ 6.5 $ 7.2 $ 6.6
Net write-off rate 5.0% 5.1% 4.7% 5.2%
Net finance charge revenue**/average loans 9.3% 9.8% 9.3% 9.6%
* Computed on a trailing 12-month basis using segment income and equity
capital allocated to segments based upon specific business operational needs,
risk measures and regulatory capital requirements.
** Computed on an annualized basis.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005
AND 2004
The following discussion of International Card & Global Commercial Services'
results of operations for the three and nine months ended September 30, 2005
and 2004 is presented on a managed basis.
International Card & Global Commercial Services reported segment income of
$254 million for the three months ended September 30, 2005, a 14 percent
increase from $224 million for the same period a year ago. For the nine months
ended September 30, 2005, International Card & Global Commercial Services
reported segment income of $693 million, a 16 percent increase from $597
million for the same period a year ago.
International Card & Global Commercial Services' discount revenue, net card
fees and other revenues of $2.1 billion and $6.3 billion for the three and
nine months ended September 30, 2005, respectively, rose 8 percent for both
periods as compared to the same periods a year ago, driven primarily by
increases in both spending and cards-in-force, as well as greater
volume-related foreign exchange conversion fees and higher card-related
assessments. The 15 percent increase in billed business for the three and nine
months ended September 30, 2005 resulted from an increase in spending per
proprietary basic card as a result of increases in international consumer,
small business and global corporate spending and growth in cards-in-force.
33
Cardmember lending net finance charge revenue of $171 million and $500 million
for the three and nine months ended September 30, 2005, respectively, rose 9
percent and 5 percent as compared to the same periods a year ago, primarily
due to growth in the average lending balances, partially offset by a higher
cost of funds.
International Card & Global Commercial Services' total expenses increased 9
percent and 10 percent for the three and nine months ended September 30, 2005,
respectively, primarily due to higher marketing and promotion expenses,
greater reward costs and increased provisions for losses and benefits, and
other operating expenses. Total expenses for the three and nine months ended
September 30, 2005 include $30 million and $102 million, respectively, of
reengineering costs, which principally relate to restructuring costs of $17
million and $76 million, respectively, primarily for severance which is
included in human resources expenses.
Marketing, promotion, rewards and cardmember services expenses of $310 million
and $948 billion for the three and nine months ended September 30, 2005,
respectively, increased 9 percent and 16 percent as compared to the same
periods a year ago, reflecting greater rewards costs and higher marketing and
promotion expenses due to the Company's ongoing business-building initiatives.
Total provisions for losses and benefits increased 55 percent and 36 percent
for the three and nine months ended September 30, 2005, respectively,
primarily due to strong charge and lending volume growth and higher provision
for losses on charge card products reflecting higher cardmember receivables
balances and a $9 million provision recorded during the third quarter of 2005
to reflect the estimated costs related to Hurricane Katrina. Human resources
and other operating expenses increased 3 percent and 5 percent for the three
and nine months ended September 30, 2005, respectively, reflecting higher
management incentives, merit increases and increased restructuring and
reengineering expenses, which were partially offset by a decline in employees
and other reengineering-related savings.
The effective tax rate was 22 percent and 29 percent for the three months
ended September 30, 2005 and 2004, respectively, and 18 percent and 32 percent
for the nine months ended September 30, 2005 and 2004, respectively. The year
to date 2005 tax rate reflects the previously disclosed $33 million tax
benefit at American Express Bank Ltd. resulting from an IRS audit of prior
years' tax returns.
GLOBAL NETWORK & MERCHANT SERVICES
STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
(Dollars in millions) September 30, September 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Revenues:
Discount revenue, fees and other $ 716 $ 659 $ 2,097 $ 1,936
-------- -------- -------- --------
Expenses:
Marketing and promotion 167 108 463 284
Provision for losses 19 (43) 53 (16)
Human resources and other operating expenses 316 322 953 975
-------- -------- -------- --------
Total expenses 502 387 1,469 1,243
-------- -------- -------- --------
Pretax segment income 214 272 628 693
Income tax provision 73 99 223 253
-------- -------- -------- --------
Segment income $ 141 $ 173 $ 405 $ 440
======== ======== ======== ========
34
SELECTED STATISTICAL INFORMATION
(Amounts in billions, except percentages and where indicated)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Global Card billed business* $ 122 $ 103 $ 352 $ 300
Global Network & Merchant Services:
Total segment assets $ 4.5 $ 3.5 $ 4.5 $ 3.5
Segment capital $ 1.2 $ 1.0 $ 1.2 $ 1.0
Return on segment capital** 48.7% 56.4% 48.7% 56.4%
Global Network Services:
Card billed business $ 6 $ 4 $ 17 $ 12
Total cards-in-force (millions) 9.9 7.4 9.9 7.4
* Global Card billed business includes activities related to proprietary
cards, cards issued under Network partnership agreements, cash advances on
proprietary cards and certain insurance fees charged on proprietary cards.
** Computed on a trailing 12-month basis using segment income and equity
capital allocated to segments based upon specific business operational needs,
risk measures and regulatory capital requirements.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005
AND 2004
Global Network & Merchant Services reported segment income of $141 million for
the three month period ended September 30, 2005, a 19 percent decrease from
$173 million for the same period a year ago. For the nine month period ended
September 30, 2005, Global Network & Merchant Services reported segment income
of $405 million, an 8 percent decrease from the same period a year ago.
Discount revenue, fees and other revenues of $716 million and $2.1 billion for
the three and nine months ended September 30, 2005, respectively, rose 9
percent and 8 percent as compared to the same periods a year ago, primarily
due to growth in discount revenues generated from strong growth in volumes
from both proprietary and global network cards, partially offset by a
decrease in other revenues as a result of the third quarter 2004 sale of the
ATM business. Cards-in-force rose 36 percent for both the three and nine
months ended September 30, 2005, reflecting growth from new partners.
Global Network & Merchant Services' total expenses increased 30 percent and 18
percent for the three and nine months ended September 30, 2005, respectively,
primarily due to higher marketing and promotion, increased costs for
provisions for loss offset by a decrease in human resources expenses and other
operating expenses. Total expenses for the three and nine months ended
September 30, 2005 include $2 million and $7 million, respectively, of
restructuring costs, which principally relate to severance cost which is
included in human resources expenses.
Marketing and promotion expenses of $167 million and $463 million for the
three and nine months ended September 30, 2005, respectively, rose 55 percent
and 63 percent as compared to the same periods a year ago, reflecting higher
marketing and promotion expenses primarily due to the ongoing costs of the
"MyLife, MyCard" brand advertising campaign. Provision for losses of $19
million and $53 million for the three and nine months ended September 30,
2005, respectively, increased compared to the same periods a year ago due to
the $60 million benefit in the third quarter of 2004 resulting from the
reduction in merchant-related reserves in addition to a $2 million provision
during the third quarter of 2005 to reflect the estimated costs related to
Hurricane Katrina. Human resources and other operating expenses of $316
million and $953 million for the three and nine months ended September 30,
2005, respectively, decreased
35
2 percent as compared to the same periods a year ago, due in part to the third
quarter 2004 sale of the ATM business.
The effective tax rate was 35 percent and 36 percent for the three months
ended September 30, 2005 and 2004, respectively, and 35 percent and 36 percent
for the nine months ended September 30, 2005 and 2004, respectively.
CORPORATE & OTHER
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005
AND 2004
Corporate & Other had net income of $24 million for the three month period
ended September 30, 2005 compared with a net expense of $51 million for the
same period a year ago. The third quarter of 2005 reflects the $105 million
tax benefit previously discussed, $51 million ($33 million after-tax) of
reengineering costs, related to the finance and technologies functions, and
$5 million ($3 million after-tax) costs related to the spin-off of
Ameriprise. For the nine month periods ended September 30, 2005 and 2004,
Corporate & Other reported net expenses of $51 million and $175 million,
respectively. In addition to the tax benefit and spin-off costs discussed
above, the nine month period ended September 30, 2005 includes a $54 million
tax audit benefit, a $73 million ($47 million after-tax) benefit related to
the settlement of an insurance claim associated with September 11, 2001 and
$95 million ($62 million after-tax) of reengineering costs.
OTHER REPORTING MATTERS
Accounting Developments
See "Recently Issued Accounting Standards" section of Note 1 to the
Consolidated Financial Statements.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this
report. Based on such evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective. There have not
been any changes in the Company's internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
FORWARD-LOOKING STATEMENTS
This release includes forward-looking statements, which are subject to
risks and uncertainties. The words "believe," "expect," "anticipate,"
"optimistic," "intend," "plan," "aim," "will," "may," "should," "could,"
"would," "likely," and similar expressions are intended to identify
forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the
date on which they are made. The Company undertakes no obligation to update
or revise any forward-looking statements. Factors that could cause actual
results to differ materially from these forward-looking statements include,
but are not limited to, the following: the ultimate amount of the provision
for credit losses that the Company recognizes as a result of the
higher-than-expected levels of bankruptcy petitions filed prior to the
mid-October 2005 effective date of the new federal bankruptcy legislation;
the Company's ability to generate sufficient net income to achieve a return
on equity on a GAAP basis of 28% to 30%; the actual amount spent by the
Company in the fourth quarter of 2005 on marketing, promotion, rewards and
cardmember services based on management's assessment of competitive
opportunities and other factors affecting its judgement; the Company's
ability to grow its business and meet or exceed its return on shareholders'
equity target by reinvesting approximately 35 percent of annually-generated
capital, and returning approximately 65 percent of such capital to
shareholders, over time, which will depend on the Company's ability to
manage its capital
36
needs and the effect of business mix, acquisitions and rating agency
requirements; consumer and business spending on the Company's credit and
charge card products and Travelers Cheques and other prepaid products and
growth in card lending balances, which depend in part on the ability to issue
new and enhanced card and prepaid products, services and rewards programs, and
increase revenues from such products, attract new cardmembers, reduce
cardmember attrition, capture a greater share of existing cardmembers'
spending, sustain premium discount rates on its card products in light of
regulatory and market pressures, increase merchant coverage, retain
cardmembers after low introductory lending rates have expired, and expand the
Global Network & Merchant Services business; the Company's ability to
introduce new products, reward program enhancements and service enhancements
on a timely basis during the latter half of 2005 and the first half of 2006;
the success of the Global Network & Merchant Services business in partnering
with banks in the United States, which will depend in part on the extent to
which such business further enhances the Company's brand, allows the Company
to leverage its significant processing scale, expands merchant coverage of the
network, provides Global Network & Merchant Services' bank partners in the
United States the benefits of greater cardmember loyalty and higher spend per
customer, and merchant benefits such as greater transaction volume and
additional higher spending customers; the continuation of favorable trends,
including increased travel and entertainment spending, and the overall level
of consumer confidence; successfully cross-selling financial, travel, card and
other products and services to the Company's customer base, both in the United
States and abroad; the Company's ability to generate sufficient revenues for
expanded investment spending, and the ability to capitalize on such
investments to improve business metrics; the costs and integration of
acquisitions; the success, timeliness and financial impact (including costs,
cost savings and other benefits including increased revenues), and beneficial
effect on the Company's operating expense to revenue ratio, both in the
short-term and over time, of reengineering initiatives being implemented or
considered by the Company, including cost management, structural and strategic
measures such as vendor, process, facilities and operations consolidation,
outsourcing (including, among others, technologies operations), relocating
certain functions to lower-cost overseas locations, moving internal and
external functions to the Internet to save costs, and planned staff reductions
relating to certain of such reengineering actions; the ability to control and
manage operating, infrastructure, advertising and promotion expenses as
business expands or changes, including the ability to accurately estimate the
provision for the cost of the Membership Rewards program; the Company's
ability to manage credit risk related to consumer debt, business loans,
merchant bankruptcies and other credit trends and the rate of bankruptcies,
which can affect spending on card products, debt payments by individual and
corporate customers and businesses that accept the Company's card products and
returns on the Company's investment portfolios; bankruptcies, restructurings
or similar events affecting the airline or any other industry representing a
significant portion of the Company's billed business, including any potential
negative effect on particular card products and services and billed business
generally that could result from the actual or perceived weakness of key
business partners in such industries; the triggering of obligations to make
payments to certain co-brand partners, merchants, vendors and customers under
contractual arrangements with such parties under certain circumstances; a
downturn in the Company's businesses and/or negative changes in the Company's
and its subsidiaries' credit ratings, which could result in contingent
payments under contracts, decreased liquidity and higher borrowing costs;
risks associated with the Company's agreements with Delta Air Lines to prepay
$350 million for the future purchases of Delta SkyMiles rewards points;
fluctuations in foreign currency exchange rates; fluctuations in interest
rates, which impact the Company's borrowing costs, return on lending products
and spreads in the insurance, annuity and investment certificate products;
accuracy of estimates for the fair value of the assets in the Company's
investment portfolio and, in particular, those investments that are not
readily marketable, including the valuation of the interest-only strip
relating to the Company's lending securitizations; the potential negative
effect on the Company's businesses and infrastructure, including information
technology, of terrorist attacks, disasters or other catastrophic events in
the future; political or economic instability in certain regions or countries,
which could affect lending and other commercial activities, among other
businesses, or restrictions on convertibility of certain currencies; changes
in laws or government regulations, including changes in tax laws or
regulations that could result in the elimination of certain tax benefits;
outcomes and costs associated with litigation and compliance and regulatory
matters; deficiencies and inadequacies in the Company's internal control over
financial reporting, which could result in inaccurate or incomplete financial
reporting; and competitive pressures in all of the Company's major
37
businesses. A further description of these and other risks and uncertainties
can be found in the Company's Annual Report on Form 10-K for the year ended
December 31, 2004, and its other reports filed with the SEC.
38
PART II. OTHER INFORMATION
AMERICAN EXPRESS COMPANY
Item 1. Legal Proceedings
The Company and its subsidiaries are involved in a number of legal and
arbitration proceedings, including class actions, concerning matters arising
in connection with the conduct of their respective business activities. The
Company believes it has meritorious defenses to each of these actions and
intends to defend them vigorously. The Company believes that it is not a party
to, nor are any of its properties the subject of, any pending legal or
arbitration proceedings that would have a material adverse effect on the
Company's consolidated financial condition, results of operation or liquidity.
However, it is possible that the outcome of any such proceedings could have a
material impact on results of operations in any particular reporting period as
the proceedings are resolved. Certain legal proceedings involving the Company
are set forth below. For a discussion of certain other legal proceedings
involving the Company and its subsidiaries, please refer to the Company's
Annual Report on Form 10-K for the year ended December 31, 2004, as well as
its Quarterly Reports on Form 10-Q for the three months ended March 31 and
June 30, 2005.
In July 2004, a purported class action captioned Ross, et al. v. American
Express Company, American Express Travel Related Services and American Express
Centurion Bank was filed in the United States District Court for the Southern
District of New York. The complaint alleges that AMEX conspired with Visa,
MasterCard and Diners Club in the setting of foreign conversion rates and in
the inclusion of arbitration clauses in certain of their cardmember
agreements. The suit seeks injunctive relief and unspecified damages. The
class is defined as "all Visa, MasterCard and Diners Club general purpose
cardholders who used cards issued by any of the MDL Defendant Banks...."
American Express cardholders are not part of the class. In September 2005, the
Court denied the Company's motion to dismiss the action and preliminarily
certified an injunction class of Visa and MasterCard cardholders to determine
the validity of Visa's and MasterCard's cardmember arbitration clauses.
American Express has filed a motion for reconsideration with the Court.
In August 2005 a purported class action captioned Performance Labs Inc. v.
American Express Travel Related Services Company, Inc. ("TRS"), MasterCard
International Incorporated, Visa USA, Inc. et. al. was filed in the United
States District Court for the District of New Jersey. The complaint alleges
that the Company's policy prohibiting merchants from imposing restrictions on
the use of American Express cards that are not imposed equally on other forms
of payment violates U.S. antitrust laws. The suit seeks injunctive relief. TRS
has moved to dismiss the complaint and that motion is pending. In addition,
the Company has learned that two additional purported class actions that make
allegations similar to those made in the Performance Labs action have also
been filed: 518 Restaurant Corp. v. American Express Travel Related Services
Company, Inc., MasterCard International Incorporated, Visa USA, Inc. et. al.
(filed in August 2005 in the United States District Court for the Eastern
District of Pennsylvania) and Lepkowski v. American Express Travel Related
Services Company, Inc., MasterCard International Incorporated, Visa USA, Inc.
et. al. (filed in October 2005 in the United States District Court for the
Eastern District of New York). The plaintiffs in such actions seek injunctive
relief. At present, TRS has not been served with the complaints in either of
these actions.
In October 2004, a purported class action complaint captioned In re American
Express Financial Advisors Securities Litigation (the "AEFA Securities
Litigation") was filed in the United States District Court for the Southern
District of New York. The action names the following defendants: American
Express Company, the Company's former wholly-owned subsidiaries Ameriprise
Financial, Inc. (formerly known as American Express Financial Corporation)
("AFI") and Ameriprise Financial Services, Inc. (formerly known as American
Express Financial Advisors, Inc.) ("AFSI"), and James M. Cracchiolo in his
capacity as President and CEO of AFI and Chairman and CEO of AFSI. Certain
American Express- and AXP-brand mutual funds are also named as nominal
defendants. The action is a consolidation of the following actions: (i) Naresh
Chand v. American Express Company, American Express Financial Corporation and
American
39
Express Financial Advisors, Inc. (filed March 2004); (ii) Elizabeth Flenner v.
American Express Company et al. (filed March 2004); (iii) John B. Perkins v.
American Express Company et al. (filed March 2004); (iv) Kathie Kerr v.
American Express Company et al. (filed April 2004); and (v) Leonard D.
Caldwell, Gale D. Caldwell and Richard T. Allen v. American Express Company et
al. (filed April 2004). The plaintiffs allege violations of certain federal
securities laws and/or state statutory and common law. The plaintiffs, among
other things, allege that AFI's financial plans are used as a means to
recommend mutual funds that pay "undisclosed kickbacks" to the Company.
Plaintiffs seek to represent one class consisting of all AFI clients who
purchased the preferred mutual funds during the class period and another class
comprised of those AFI clients who also purchased financial plans during the
class period. American Express and the other defendants have denied any
liability or wrongdoing with respect to the claims raised in the litigation.
On October 21, 2005, American Express, together with the other named
defendants, entered into a Memorandum of Understanding Concerning Settlement
Terms ("MOU") to settle the pending action. Under the terms of the MOU, the
named plaintiffs, American Express and the other defendants agree that the
final stipulation will contain a disclaimer of liability or wrongdoing
consistent with the MOU. The class period covered by the MOU is March 10, 1999
through and including the date of the stipulation of the settlement (the
"Class Period"). Subject to the terms and conditions set forth in the MOU,
AFI, on behalf of itself, American Express and all other defendants, will pay
into escrow for the benefit of the class members $100 million (the "Settlement
Fund") within ten (10) business days of preliminary approval of the settlement
by the Court. Reasonable attorneys' fees will be paid out of the Settlement
Fund. In exchange for the Settlement Fund, American Express and the other
defendants will be granted a release and discharge of all claims set forth in
the plaintiffs' complaint and any other claims or causes of action that are or
could have been alleged or asserted with respect to conduct giving rise to any
or all of those claims for the Class Period. The MOU, stipulation of
settlement and settlement agreement are contingent upon the satisfaction of
various conditions, including, but not limited to, preliminary approval by the
Court and final approval by the Court after notice to the class and a hearing.
There can be no assurance that the settlement agreement will be approved by
the Court or upheld if challenged on appeal.
In addition, two lawsuits making similar allegations (based solely on state
causes of action) to those made in the AEFA Securities Litigation were filed
in the Supreme Court of the State of New York: Beer v. American Express
Company and American Express Financial Advisors and You v. American Express
Company and American Express Financial Advisors. The Company has sought to
remove these two actions to the United States District Court for the Southern
District of New York. Plaintiffs have sought to remand the cases to state
court. The Court's decision on the remand motion is pending.
40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Securities
The table below sets forth the information with respect to purchases
of the Company's common stock made by or on behalf of the Company
during the quarter ended September 30, 2005.
Total Number Maximum
of Shares Number of
Purchased as Shares that
Part of May Yet Be
Publicly Purchased
Total Number Announced Under
of Shares Average Price Plans or the Plans or
Period Purchased Paid Per Share(*) Programs (3) Programs
------------------------------ ------------------ ------------------ ------------------ -------------------
July 1-31, 2005
Repurchase program (1) 2,800,000 $ 55.08 2,800,000 48,941,723
Employee transactions (2) 4,288 $ 54.32 N/A N/A
August 1-31, 2005
Repurchase program (1) 5,143,000 $ 55.61 5,143,000 43,798,723
Employee transactions (2) 5,251 $ 56.05 N/A N/A
September 1-30, 2005
Repurchase program (1) - $ - - 43,798,723
Employee transactions (2) 17,180 $ 56.49 N/A N/A
------------------ ------------------
Total
Repurchase program (1) 7,943,000 $ 55.43 7,943,000
Employee transactions (2) 26,719 $ 56.06 N/A
(1) The Board of Directors of the Company authorized the repurchase
of 120 million shares of common stock in November 2002. At
present, there are approximately 43.8 million shares remaining
under such authorization. Such authorization does not have an
expiration date, and at present, there is no intention to modify
or otherwise rescind such authorization. Since September 1994,
the Company has acquired 526.2 million shares of common stock
under various Board authorizations to repurchase up to an
aggregate of 570 million shares, including purchases made under
agreements with third parties.
(2) Includes: (1) shares delivered by or deducted from holders of
employee stock options who exercised options (granted under the
Company's incentive compensation plans) in satisfaction of the
exercise price and/or tax withholding obligation of such holders
and (2) restricted shares withheld (under the terms of grants
under the Company's incentive compensation plans) to offset tax
withholding obligations that occur upon vesting and release of
restricted shares. The Company's incentive compensation plans
provide that the value of the shares delivered or attested to, or
withheld, shall be the average of the high and low price of the
Company's common stock on the date the relevant transaction
occurs.
(3) Share purchases under publicly announced programs are made
pursuant to open market purchases or privately negotiated
transactions (including with employee benefit plans) as market
conditions warrant and at prices the Company deems appropriate.
* Based on market prices prior to spin-off of Ameriprise.
41
Item 6. Exhibits
The list of exhibits required to be filed as exhibits to this report
are listed on page E-1 hereof, under "Exhibit Index," which is
incorporated herein by reference.
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN EXPRESS COMPANY
------------------------
(Registrant)
Date: November 9, 2005 By /s/ Gary L. Crittenden
----------------------------------
Gary L. Crittenden
Executive Vice President and
Chief Financial Officer
Date: November 9, 2005 By /s/ Joan C. Amble
----------------------------------
Joan C. Amble
Executive Vice President and
Comptroller
(Principal Accounting Officer)
43
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report:
Exhibit Description
------- -----------
12 Computation in Support of Ratio of Earnings to Fixed Charges.
31.1 Certification of Kenneth I. Chenault pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Gary L. Crittenden pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
32.1 Certification of Kenneth I. Chenault and Gary L. Crittenden
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
E-1