American Express Company — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; filed May 4, 2010. Unaudited results compared with Q1 2009. American Express provides charge and credit cards, payment network and merchant services, and travel-related services globally.
Financial results and key metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Revenue, net of interest expense | $6.606 billion | $5.926 billion | Up 11% |
| Provisions for losses | $943 million | $1.803 billion | Down 48% |
| Total expenses | $4.411 billion | $3.579 billion | Up 23% |
| Pretax income from continuing operations | $1.252 billion | $544 million | Up |
| Net income | $885 million | $437 million | Up 103% |
| Diluted EPS | $0.73 | $0.32 | Up $0.41 |
| Operating cash flow | $1.076 billion | $994 million | Up |
Net interest income was $1.307 billion, up from $919 million; total interest income rose to $1.905 billion while interest expense increased to $598 million. The effective tax rate was 29%, versus 19%. The filing does not provide a single consolidated operating-margin measure.
Card billed business grew 16% to $161.0 billion (12% excluding foreign-exchange effects). Discount revenue rose 13% to $3.466 billion. Marketing, promotion, rewards and cardmember-services expense increased 51% to $1.962 billion, including rewards expense of $1.218 billion, up 44%.
Segment income: U.S. Card Services $428 million (prior-year loss of $7 million); International Card Services $151 million (up from $52 million); Global Commercial Services $92 million (up from $81 million); Global Network & Merchant Services $267 million (up from $250 million); Corporate & Other had a $53 million loss, compared with $67 million of income.
Balance sheet, debt and liquidity
At March 31, 2010, total assets were $143.314 billion and total liabilities $129.889 billion, compared with $124.088 billion and $109.682 billion, respectively, at year-end. Cash and cash equivalents were $21.098 billion; customer deposits were $28.120 billion. Long-term debt was $72.293 billion and short-term borrowings $1.931 billion. The filing attributes much of the increase in assets and long-term debt to consolidation of the Lending Trust; its securitization debt is non-recourse and payable from trust assets.
Management reported $27.0 billion of excess cash and readily marketable securities available after operating cash and short-term obligations. Cash flow from investing activities was positive $8.113 billion, including investment maturities and a reduction in restricted cash; financing activities used $3.661 billion. The company paid $216 million in dividends and made no program share repurchases.
Material changes and management outlook
- Effective January 1, 2010, new accounting rules required consolidation of the previously unconsolidated Lending Trust. The company added securitized loans and related debt to its balance sheet, established additional loan-loss reserves, and ceased reporting securitization income separately. Prior periods were not restated, so reported year-over-year comparisons are affected by presentation changes.
- Management described improving spending and credit trends, and said approximately $500 million of loss reserves were released in Q1 as credit performance improved. U.S. charge-card write-off and delinquency rates were relatively low; management expected U.S. lending net write-offs in Q2 to be lower than Q1 if past-due trends, bankruptcies and recoveries remained stable.
- The company intended to reinvest a substantial portion of expected credit-performance benefits in marketing and other business-building costs. Management expected rewards-cost growth to remain somewhat elevated through the rest of 2010. It also expected net interest yield to recover toward more historic levels over the year, while noting pressure from low market rates, customer assistance programs and the CARD Act.
- Management’s historical long-term objectives included revenue growth of at least 8%, EPS growth of 12%–15%, and ROE of 33%–36%, on average and over time. It said those goals were unlikely while difficult conditions persisted and higher capital requirements could constrain returns; the company expected ultimately to be positioned to deliver ROE above 20% over time and planned updated long-term targets later in 2010. No new near-term earnings guidance was provided.
- Risks include unemployment and uncertain customer behavior, CARD Act effects and further regulation, funding-market and credit-rating changes, and uncertainty over whether securitization securities can retain AAA ratings under the FDIC safe-harbor framework. The filing also cites ongoing litigation and regulatory matters; management did not expect pending proceedings to materially harm consolidated financial condition or liquidity, but outcomes could affect results in an individual period.
Other notable items
American Express acquired Revolution Money on January 15 for approximately $305 million; the acquisition had no significant Q1 operating impact. Q1 restructuring charges were $16 million. The company noted that a change to 180-day write-offs for certain international and commercial charge-card receivables added approximately $108 million to Q1 net write-offs, without a material effect on provisions. The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Separate underlying credit improvement from the effects of the approximately $500 million reserve release, trust consolidation and changed write-off timing.
- Track loan yields, delinquencies, write-offs and reserve coverage, particularly in light of management’s conditional Q2 loss-rate outlook.
- Assess whether increased rewards and marketing spending produces sustained billed-business growth and whether rewards costs remain elevated.
- Review the Lending Trust consolidation’s effects on debt, capital ratios, reported comparisons, and the cost and availability of securitization funding.
- Monitor the $19.6 billion of disclosed funding maturities over the next 12 months, liquidity availability, and credit-rating outlooks; Moody’s outlook for the parent was negative while other listed agency outlooks were stable.
- Follow CARD Act implementation, proposed financial reforms, tax uncertainty, and material developments in merchant and cardmember litigation.