Business Context and Reporting Period
Company: American Express Company
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended September 30, 1999
Business Overview: The Company operates primarily through Travel Related Services (charge cards, lending, travel services), American Express Financial Advisors (insurance, annuities, investment management), and American Express Bank/Travelers Cheque. The filing includes unaudited financial statements reviewed by Ernst & Young LLP.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended 9/30/99 | 3 Months Ended 9/30/98 | 9 Months Ended 9/30/99 | 9 Months Ended 9/30/98 |
|---|---|---|---|---|
| Total Revenues | $5,311 | $4,787 | $15,580 | $14,069 |
| Pretax Income | $907 | $799 | $2,593 | $2,212 |
| Net Income | $648 | $574 | $1,869 | $1,611 |
| Diluted EPS | $1.42 | $1.25 | $4.09 | $3.47 |
| Cash & Equivalents | $5,102 | $4,092 (Dec 31, 98) | N/A | |
| Operating Cash Flow (9mo) | N/A | $6,159 | $4,810 | |
| Short-term Debt | $24,683 | $22,605 (Dec 31, 98) | N/A | |
| Long-term Debt | $6,220 | $7,019 (Dec 31, 98) | N/A | |
| Shareholders' Equity | $9,744 | $9,698 (Dec 31, 98) | N/A |
Return on Equity: 25.3% (Nine months ended Sept 30, 1999).
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 11% for both the three and nine-month periods compared to 1998. Growth was driven by higher worldwide billed business, increased Cardmember loans, and higher travel commissions.
- Profitability: Net income rose 13% (quarterly) and 16% (year-to-date). Diluted EPS increased 14% and 18%, respectively.
- Expense Trends: Total expenses increased, primarily due to higher human resources costs and marketing/promotion spending to support business building and acquisitions. These were partially offset by lower loss provisions in the nine-month period.
- Segment Performance:
- Travel Related Services: Net income up 14%. Billed business grew 13% (quarterly) and 10.4% (YTD). Lending balances grew 34%.
- Financial Advisors: Net income up 14%. Driven by higher management fees and wider investment margins.
- Bank/Travelers Cheque: Net income improved significantly to $117 million (YTD) from $7 million in 1998, excluding a $138 million credit loss provision in the prior year related to Asia/Pacific operations.
Guidance, Outlook, Risks, and Unusual Items
- Accounting Change: Adoption of SOP 98-1 requires capitalization of internal software costs. This provided a benefit of $68 million (quarterly) and $194 million (YTD) to earnings, offset by increased investment spending.
- Year 2000 (Y2K) Risk: The Company estimates remaining Y2K costs to be between $22 million and $48 million. While internal systems are 99% compliant, the Company notes a material risk if third-party systems (utilities, telecommunications, financial clearing) fail. Contingency plans are in place.
- Share Repurchases: The Company repurchased 7.4 million shares in the first nine months of 1999. A new agreement allows for the purchase of up to 7 million additional shares over eight months.
- Legal Proceedings: A class-action lawsuit alleges misclassification of financial advisors as independent contractors. The Company intends to defend vigorously. Additionally, a tax refund claim regarding 1987 fees is pending in the Court of Federal Claims.
- Outlook: Management states results met long-term targets of 12-15% EPS growth, at least 8% revenue growth, and 18-20% return on equity.
- Y2K Third-Party Exposure: Verify the status of critical third-party vendors and infrastructure providers, as the Company cannot control their remediation efforts.
- Software Capitalization Impact: Confirm the sustainability of earnings growth after adjusting for the one-time accounting benefit from SOP 98-1.
- Credit Quality: Monitor the provision for losses in the Travel Related Services segment, which increased 50% quarterly due to higher volumes, despite improved loss ratios.
- Legal Liability: Track the progress of the class-action lawsuit regarding financial advisor classification, which could impact compensation structures and retroactive benefits.
- Debt Maturity Profile: Review the composition of short-term debt ($24.7 billion) to assess liquidity requirements and refinancing risks.