American Express Company - Q3 2006 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2006, for American Express Company, a leading global payments, network, and travel company. The report details operations across three primary segments: U.S. Card Services, International Card & Global Commercial Services, and Global Network & Merchant Services. The company operates a "spend-centric" business model, focusing on driving card spending to generate discount revenue.
Key Financial Metrics
| Metric (Millions) | Q3 2006 | Q3 2005 | 9M 2006 | 9M 2005 |
|---|---|---|---|---|
| Total Net Revenues | $6,759 | $6,028 | $19,928 | $17,688 |
| Income from Continuing Ops | $956 | $865 | $2,804 | $2,470 |
| Net Income | $967 | $1,030 | $2,785 | $2,989 |
| Diluted EPS (Continuing Ops) | $0.78 | $0.69 | $2.26 | $1.96 |
| Diluted EPS (Net Income) | $0.79 | $0.82 | $2.24 | $2.38 |
| Cash from Operating Activities (9M) | $6,749 | $7,599 | - | - |
| Total Assets | $120,931 | - | - | - |
| Total Liabilities | $110,175 | - | - | - |
| Shareholders' Equity | $10,756 | - | - | - |
Note: Balance sheet data is comparative to Dec 31, 2005. Q3 2005 balance sheet data not provided in text.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated net revenues increased 12% in Q3 and 13% for the nine months ended Sept 30, 2006, driven by a 15% increase in worldwide billed business and higher cardmember lending finance charge revenue.
- Profitability: Income from continuing operations rose 11% in Q3 and 14% for the nine-month period. However, total Net Income decreased 6% in Q3 and 7% for the nine months due to a significant drop in income from discontinued operations (Ameriprise spin-off and other dispositions).
- Expense Trends: Total expenses rose 10% in Q3, primarily due to higher professional services, marketing/rewards costs, and interest expenses. Provisions for losses increased 8% in Q3, driven by lending and investment certificate provisions, though charge card provisions declined 14%.
- Discontinued Operations: Q3 2006 included $11 million of income from discontinued operations compared to $165 million in Q3 2005. The nine-month 2006 period included a $19 million loss from discontinued operations versus $519 million income in 2005.
Guidance, Outlook, and Risks
- Strategic Targets: Management has raised its long-term Return on Equity (ROE) target to a range of 33% to 36% (up from 28-30%). The company targets 12-15% EPS growth and at least 8% revenue growth.
- Capital Return: The company aims to return approximately 65% of generated capital to shareholders via dividends and share repurchases. The quarterly dividend was increased by 25% to $0.15 per share.
- Outlook Challenges: Management anticipates higher funding costs in 2007 due to an increase in floating-rate borrowings and reduced economic hedging of interest rate exposure. The company also expects the favorable impact of 2005 bankruptcy law changes on write-off rates to diminish.
- Key Risks:
- Delta Air Lines: The company has a $237 million exposure related to Delta's Chapter 11 bankruptcy and post-petition financing. While the co-brand portfolio is less than 10% of worldwide billed business, a failed reorganization could adversely impact results.
- Legal Proceedings: Ongoing class actions regarding securities litigation, foreign conversion rates, and travel insurance plans. A DOJ investigation into anti-money laundering compliance at American Express Bank International remains active.
- Credit Quality: Higher charge-offs in Taiwan and potential industry-wide credit issues.
- Unusual Items:
- Asset Sales: Gains of $33 million (Malaysia/Indonesia) and $144 million (Brazil card/merchant activities) were recorded in continuing operations. A $22 million loss on the sale of Brazil banking activities was recorded in discontinued operations.
- Rewards Reserve: Charges of $174 million ($112M U.S., $62M International) were recorded in the first half of 2006 due to adjustments in the Membership Rewards reserve model to reflect higher redemption rates.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the extent to which the decline in Net Income is driven by the absence of Ameriprise results versus core business performance.
- Interest Rate Sensitivity: Assess the impact of the reduced interest rate hedging strategy and the shift to floating-rate debt on future margins.
- Delta Air Lines Exposure: Monitor the status of Delta's bankruptcy reorganization and the potential impact on the $237 million loan and the SkyMiles co-brand relationship.
- Rewards Reserve Adequacy: Review the assumptions used for the Membership Rewards redemption rate adjustments to ensure future provisions are not understated.
- Legal Contingencies: Track the status of the DOJ anti-money laundering investigation and the securities class action remanded to the District Court.