AXP

Business Context and Reporting Period

Company: American Express Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2002
Reporting Basis: Unaudited interim financial statements. Management utilizes a "managed basis" for internal evaluation, which excludes asset securitization effects and nets provisions for annuities/insurance against revenues.

Key Financial Metrics

Consolidated Results (Nine Months Ended Sept 30, 2002)

Balance Sheet Highlights (Sept 30, 2002)

• Total Assets: $145.3 billion (down from $151.1 billion at year-end 2001).
• Total Liabilities: $130.9 billion.
• Shareholders' Equity: $13.98 billion.
• Debt: Short-term debt decreased to $19.2 billion; Long-term debt increased to $14.7 billion.
• Cardmember Receivables: $23.2 billion (net of reserves).

Material Changes vs. Prior Period

Revenue and Profit Drivers

• Significant Income Growth: The 96% increase in net income is largely attributable to a $1.0 billion pretax loss on high-yield securities in the first half of 2001, which did not recur in 2002.
• Expense Reduction: Consolidated expenses decreased 4% on a GAAP basis. This includes the absence of 2001 restructuring charges ($352 million pretax) and 9/11-related one-time costs ($98 million pretax).
• Segment Performance:
  • Travel Related Services (TRS): Net income rose 23% to $1.59 billion. Discount revenue was flat, but net finance charge revenue increased 20% due to higher lending spreads and balances.
  • Financial Advisors (AEFA): Turned a $110 million loss in 2001 into a $479 million profit in 2002, driven by the absence of prior-year high-yield write-downs.
  • American Express Bank (AEB): Net income improved to $56 million from a $22 million loss, aided by lower funding costs.

Unusual Items and Adjustments

• Restructuring Benefits: The company recognized a net benefit of $21 million in the first nine months of 2002 due to adjustments to prior-year restructuring reserves (reversals of severance costs due to voluntary attrition).
• Deferred Acquisition Costs (DAC): AEFA recorded a $44 million expense increase in Q3 2002 following a comprehensive review of DAC assumptions, specifically resetting customer asset value growth rates.
• Goodwill Accounting: Adoption of SFAS No. 142 in 2002 eliminated goodwill amortization, which had reduced 2001 earnings by $75 million pretax for the nine-month period.

Guidance, Outlook, and Risks

Management Outlook

• Full Year 2002 EPS: Management expects full-year 2002 diluted EPS to be "likely not to exceed $2.01."
• Investment Strategy: Plans to increase investment in growth initiatives (marketing and promotion) in the remainder of 2002, funded by reengineering benefits and improved funding costs.
• Long-Term Targets: 12-15% EPS growth, 18-20% Return on Equity, and at least 8% revenue growth over time.

Risks and Contingencies

• Legal Proceedings:
  • Lindmark Class Action: Settlement preliminarily approved for $15.95 million regarding finance charges on Optima cards.
  • Securities Litigation: Consolidated lawsuits alleging misstatements regarding high-yield bond investments (2000-2001). Company intends to defend vigorously.
• Market Volatility: AEFA results are sensitive to equity market performance, affecting management fees, DAC amortization, and structured investment valuations.
• Geopolitical Risks: Uncertainty regarding a potential war in Iraq and ongoing economic weakness in the corporate travel sector.
• Accounting Changes: Potential future impact of FASB rules regarding consolidation of special purpose vehicles (SPVs) and expensing of stock options (SFAS 123) starting in 2003.

Investor Verification Checklist

• Quality of Earnings: Verify the extent to which the 96% income growth is driven by the absence of 2001 non-recurring losses (high-yield write-downs, 9/11 costs) versus organic operational improvement.
• AEFA DAC Adjustments: Review the $44 million DAC expense increase and the new 7% asset growth assumption to assess future earnings volatility.
• Liquidity Management: Confirm the shift from commercial paper to medium-term notes and the adequacy of the $11.45 billion credit line coverage for short-term debt.
• Legal Exposure: Monitor the final approval of the $15.95 million Lindmark settlement and the status of the securities litigation regarding high-yield bonds.
• EPS Guidance: Track the "not to exceed $2.01" full-year EPS guidance against actual Q4 performance, considering increased marketing spend.