Business Context and Reporting Period
Company: American Express Company
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Overview: American Express is a leading global payments, network, and travel company. The company operates through three reportable segments: Global Network & Merchant Services, U.S. Card Services, and International Card & Global Commercial Services, plus a Corporate & Other section. The company utilizes a "spend-centric" business model, generating revenue primarily through driving spending on its cards rather than finance charges.
Key Financial Metrics
- Net Revenues: $27.1 billion (up 13% from $24.1 billion in 2005).
- Income from Continuing Operations: $3.7 billion (up 16% from $3.2 billion in 2005).
- Net Income: $3.7 billion (essentially level with 2005; 2005 included nine months of Ameriprise Financial earnings prior to its spin-off).
- Diluted EPS (Continuing Operations): $3.01 (up 18% from $2.56).
- Diluted EPS (Net Income): $2.99 (up 1% from $2.97).
- Return on Average Equity: 34.7% (compared to 25.4% in 2005).
- Worldwide Billed Business: $561.5 billion.
- Cards-in-Force: 78.0 million (net increase of 7.0 million in 2006).
- Employees: Approximately 65,400 as of December 31, 2006.
Material Changes vs. Prior Period
- Revenue Growth: Driven by increased spending on cards and growth in the Global Network Services (GNS) segment, where partner-issued cards grew at a 27% compound annual rate since 1999.
- Profitability: Return on equity significantly improved to 34.7%, exceeding the company's target range of 33% to 36%.
- Strategic Shifts: Continued migration of U.S. billings from travel/entertainment to retail and everyday spending (non-travel/entertainment now represents over 65% of U.S. billed business).
- Acquisitions: Acquired Harbor Payments, Inc. in December 2006 to enhance electronic invoicing and payment solutions (Source-to-Settle).
- Divestitures: Completed the divestiture of most retail travel and foreign exchange standalone city locations in 2006, concentrating retail foreign exchange in key international airports.
Guidance, Outlook, Risks, and Contingencies
Outlook and Management Commentary: Management stated that 2006 results met or exceeded financial targets for earnings per share growth (12-15%), revenue growth (at least 8%), and return on equity. The company continues to focus on expanding merchant acceptance, particularly in everyday spending categories, and leveraging its closed-loop network to drive value for merchants and cardmembers.
Key Risks and Contingencies:
- Regulatory Pressure: Increasing global regulatory focus on interchange fees and merchant discount rates, particularly in the EU, Australia, and Argentina, which could reduce revenue. The U.S. Congress and state legislatures are also considering caps on interchange fees.
- Competition: Intense competition from VISA, MasterCard, and alternative payment mechanisms (e.g., PayPal, mobile payments). Competitors are increasingly replicating the closed-loop structure.
- Legal Proceedings:
- Antitrust Litigation: Ongoing class actions regarding alleged tying arrangements and "anti-steering" rules. Several cases were stayed pending arbitration rulings.
- Foreign Currency Settlement: A $75 million settlement was approved in December 2005 regarding foreign currency conversion fees, subject to appeal by objectors.
- Money Laundering: The Department of Justice has expressed concerns regarding anti-money laundering compliance programs at American Express Bank International (AEBI).
- Operational Risks: Exposure to data breaches, fraud, and the potential failure of third-party service providers (e.g., IBM for technology operations).
- Segment Reporting: An unresolved SEC staff comment regarding the aggregation of operating segments may require a change in segment presentation in future filings.
Investor Verification Checklist
- Verify the status of the $75 million foreign currency conversion fee settlement and any potential impact from appeals.
- Monitor regulatory developments regarding interchange fee caps in the U.S. and Europe, as these directly impact the merchant discount revenue model.
- Review the outcome of the SEC staff comment regarding segment aggregation to understand potential changes in future financial reporting.
- Assess the progress of the Department of Justice inquiry into anti-money laundering compliance at AEBI.
- Track the growth of Global Network Services (GNS) partner-issued cards versus proprietary cards to evaluate the scalability of the low-capital business model.