American Express Company — Form 10-Q Summary
Business context and reporting period
Global payments, card, merchant-network and travel-services company. This unaudited filing covers the quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Financial statement amounts below are in U.S. dollars, generally millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Change |
|---|---|---|---|
| Revenue, net of interest expense | $8.301 billion | $7.862 billion | +6% |
| Net interest income | $1.283 billion | $1.181 billion | +9% |
| Provisions for losses | $492 million | $479 million | +3% |
| Total expenses | $5.805 billion | $5.513 billion | +5% |
| Pretax income | $2.004 billion | $1.870 billion | +7% |
| Net income | $1.366 billion | $1.250 billion | +9% |
| Diluted EPS | $1.25 | $1.09 | +15% |
For the first nine months, revenue net of interest expense was $24.427 billion (+4%), net income was $4.051 billion (+5%), and diluted EPS was $3.67 (+11%). Provisions rose 17% to $1.582 billion, while expenses increased 2% to $16.937 billion.
- Q3 worldwide billed business grew 7% to $236.2 billion; U.S. volume rose 8% and international volume 7%. Cards-in-force increased 4% to 105.4 million. The average discount rate was 2.52%, versus 2.53%.
- Q3 interest income on loans rose 2%, supported by 3% average loan growth; lower funding costs and debt balances helped reduce interest expense 13%. Management reported a 9% increase in net interest income.
- Card Member loans were $63.0 billion, up 2% from December 2012; receivables were $43.1 billion, up 2%. Loan reserves were $1.281 billion (2.0% of loans), and receivables reserves were $396 million (0.9% of receivables). Q3 loan net write-off rate was 1.7% on principal; 30-day delinquency was 1.1%.
- At September 30, cash and cash equivalents were $22.286 billion; total assets $150.103 billion; customer deposits $42.487 billion; short-term borrowings $3.247 billion; long-term debt $52.529 billion; total liabilities $130.887 billion; and shareholders’ equity $19.216 billion. Long-term debt was down from $58.973 billion at December 31, 2012.
- Nine-month operating cash flow was $8.203 billion, versus $10.614 billion in 2012; investing cash outflow was $1.467 billion versus $2.986 billion; financing cash outflow was $6.592 billion versus $7.483 billion. Cash and cash equivalents ended at $22.286 billion.
- Management reported $16.4 billion of excess U.S. cash available for long-term maturities and $13.1 billion of debt and certificate-of-deposit maturities over the following 12 months. The company also had $7.2 billion of committed bank credit facilities.
- Reported Basel I capital ratios at quarter-end: Tier 1 12.8%, total risk-based 14.7%, and Tier 1 leverage 10.7%. The company estimated that fully phased-in Basel III standardized ratios would be 12.5% Tier 1 risk-based, 10.5% leverage and 8.9% supplementary leverage.
Material changes versus prior comparable periods
- Growth was driven principally by higher billed business and discount revenue, card fees, loan interest income, and lower interest expense. Q3 discount revenue rose 5%; worldwide billed business grew 7%.
- Credit provisions increased, especially over nine months, in part because reserve releases were lower than in 2012. Management also cited improved credit performance and historically low lending loss rates; it had not observed overall credit deterioration, and delinquency was consistent with the prior quarter.
- Rewards and marketing costs increased with higher spending and co-brand activity. Q3 Membership Rewards expense included approximately $47 million from changes in redemption-rate and cost-per-point assumptions.
- Operating cash flow declined year over year, largely because changes in accounts payable and other liabilities and deferred taxes were smaller or less favorable.
- Shareholders’ equity rose to $19.216 billion from $18.886 billion at year-end, while shares outstanding fell to approximately 1.071 billion from 1.105 billion. The company repurchased $3.2 billion of shares and paid $693 million of dividends in the first nine months.
Outlook, management commentary, risks and unusual items
- Long-term financial targets, described as averages over time: revenue net of interest expense growth of at least 8%, EPS growth of 12%–15%, and return on average equity of at least 25%. If EPS and ROE targets are achieved, the company aims to return approximately 50% of generated capital to shareholders over time.
- Management aimed to keep operating expense growth below 3% annually in 2013 and 2014, using 2012 operating expenses excluding the fourth-quarter restructuring charge as the baseline. Operating expenses were flat for the first nine months year over year. These are targets, not guarantees.
- Management described spending growth, credit quality and capital as strong, while noting uneven global economic conditions, intense competition and the possibility that lending losses could rise from historically low levels. It highlighted continuing investment in growth, technology and digital payments.
- American Express announced plans for a Global Business Travel joint venture, with the company and an investor group each expected to hold 50%. The transaction was subject to definitive agreements and approvals and was expected to close in Q2 2014; timing, terms and financial impact remained uncertain.
- Regulatory and litigation exposure includes the U.S. DOJ/state antitrust action concerning merchant anti-steering rules, evolving payment-network regulation, and CFPB and other regulatory scrutiny. The company estimated a possible loss range of $0–$510 million in excess of accruals for certain matters for which a range could be estimated; it said this is not a maximum exposure.
- The European Commission had proposed payment-card rules that could affect partner economics, merchant pricing and network practices; final scope and impact were undetermined. The company also cited potential effects from regulatory reform, competition, credit and funding markets, foreign exchange, cybersecurity and operational disruptions.
- Tax items affected reported results: the 2013 effective tax rate benefited from reversal of a valuation allowance and resolution of prior-year items. The filing said unrecognized tax benefits could decrease by as much as $736 million in the next 12 months, with the net-income effect of some items not quantifiable.
- Other notable items: Q3 included a $37 million gain on investment securities. The company transferred receivables to a new securitization trust structure during Q3; no securitization trigger events occurred during the nine months.
Most important facts for investors to verify
- Whether billed-business and card growth can sustain revenue gains despite a slightly lower discount rate and competitive pricing pressure.
- Whether provisions, reserve releases, delinquencies and write-off rates remain consistent with management’s favorable credit-quality assessment.
- Whether the operating-expense target, especially amid higher rewards, marketing, technology and regulatory costs, is achieved.
- Progress, approvals, final economics and accounting effects of the proposed Global Business Travel joint venture.
- Developments in the DOJ merchant case, other legal matters and regulatory proposals, including potential losses beyond recorded accruals.
- Liquidity and funding against upcoming maturities, and capital effects of Basel III implementation and planned share repurchases.