American Express Company: Q1 1998 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly period ended March 31, 1998. American Express Company operates through four primary segments: Travel Related Services (TRS), American Express Financial Advisors (AEFA), American Express Bank/Travelers Cheque (AEB/TC), and Corporate and Other. The reporting period reflects the adoption of new accounting standards (SFAS No. 130 and 131), resulting in the reclassification of the Travelers Cheque operation from TRS to the AEB/TC segment.
Key Financial Metrics
| Metric | Q1 1998 | Q1 1997 |
|---|---|---|
| Total Net Revenues | $4,521 million | $4,164 million |
| Pretax Income | $614 million | $640 million |
| Net Income | $460 million | $454 million |
| Diluted EPS | $0.98 | $0.94 |
| Cash and Equivalents | $4,342 million | $3,170 million (Q1 1997) |
| Short-term Debt | $18,151 million | $20,570 million (Dec 1997) |
| Long-term Debt | $8,140 million | $7,873 million (Dec 1997) |
| Operating Cash Flow | $1,454 million | $1,329 million |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 9% year-over-year, driven by growth in worldwide billed business, Cardmember loans, and wider interest margins.
- Profitability: Net income rose 1% to $460 million. However, excluding specific items (a $213 million credit loss provision in Asia/Pacific and $106 million in corporate investment income), adjusted income would have risen 14%.
- Segment Performance:
- TRS: Net income increased 18% to $315 million, supported by higher card volumes and spending.
- AEFA: Net income increased 18.3% to $186 million, driven by higher management fees and record mutual fund sales.
- AEB/TC: Reported a net loss of $83 million compared to $69 million income in 1997. This was primarily due to a $213 million provision for credit losses related to exposures in the Asia/Pacific region (specifically Indonesia).
- Capital Actions: The Company repurchased 5.5 million common shares at an average price of $89.65 and canceled 6.6 million shares under its repurchase program.
Outlook, Risks, and Management Commentary
- Asia/Pacific Risk: Management highlighted significant economic uncertainty in the Asia/Pacific region, particularly Indonesia, leading to increased non-performing assets and a substantial credit loss provision. Total exposure in the region was approximately $3.7 billion as of March 31, 1998.
- Discount Rate Erosion: While discount rates were stable in Q1, management noted that shifts to electronic data capture and volume-related pricing discounts may result in some discount rate erosion over time.
- Accounting Changes: The Company adopted SFAS No. 130 (Comprehensive Income) and SFAS No. 131 (Segment Reporting). Additionally, SOP 98-1 regarding software costs will be adopted in 1999, requiring capitalization of certain internal-use software costs.
- Liquidity: The Company remains well-capitalized. In April 1998, American Express purchased $225 million of deferred tax assets from AEB to increase regulatory capital.
Investor Verification Checklist
- Asia/Pacific Exposure: Verify the current status of the $213 million credit loss provision and the $3.7 billion total exposure in the Asia/Pacific region, specifically regarding Indonesia.
- Segment Reclassification: Confirm the impact of moving Travelers Cheque operations to the AEB/TC segment on future segment comparisons.
- Share Repurchases: Review the remaining capacity and strategy of the common share repurchase program following the cancellation of 6.6 million shares.
- Software Capitalization: Assess the potential future impact of SOP 98-1 on earnings once adopted in 1999.
- Unusual Items: Isolate the $106 million corporate income from First Data and Lehman Brothers to evaluate core operating performance.