Business Context and Reporting Period
Company: American Express Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2006
Business Overview: A leading global payments, network, and travel company offering charge/credit cards, stored value products, travel services, and international banking. The company operates under a "spend-centric" model, focusing on driving card spending to generate discount revenue.
Key Financial Metrics
| Metric (Millions, except per share) | Q1 2006 | Q1 2005 |
|---|---|---|
| Total Revenues | $6,332 | $5,640 |
| Net Income | $873 | $946 |
| Income from Continuing Operations | $876 | $745 |
| Diluted EPS (Continuing Ops) | $0.70 | $0.59 |
| Diluted EPS (Net Income) | $0.69 | $0.75 |
| Cash Provided by Operating Activities | $2,005 | $1,842 |
| Cash and Cash Equivalents (End of Period) | $5,393 | $9,279 |
| Total Assets | $110,065 | $113,960 |
| Total Debt (Short + Long Term) | $46,109 | $46,414 |
| Return on Average Shareholders' Equity (Trailing 12mo) | 27% | 23% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 12% to $6.3 billion, driven by a 13% rise in discount revenue (due to 16% growth in worldwide billed business) and a 23% increase in cardmember lending net finance charge revenue.
- Profitability: While income from continuing operations rose 18% to $876 million, net income decreased 8% to $873 million. This decline is primarily due to a $201 million income from discontinued operations in Q1 2005 (Ameriprise spin-off) versus a $3 million loss in Q1 2006.
- Expense Increases: Total expenses rose 10% to $5.0 billion. Notable increases include marketing/rewards (up 15%) and provisions for losses (up 13%).
- Cash Flow: Operating cash flow increased to $2.0 billion. However, cash and cash equivalents decreased by $1.7 billion due to significant financing activities, including a net decrease in customer deposits and share repurchases.
Guidance, Outlook, and Material Items
Management Commentary and Unusual Items
- Rewards Reserve Charge: A $112 million pre-tax charge ($73 million after-tax) was recorded due to a higher ultimate redemption rate assumption for the U.S. Membership Rewards program.
- Credit Losses: A $63 million higher provision for losses in Taiwan due to industry-wide credit issues. Conversely, an estimated $150 million favorable impact was recorded from lower early credit write-offs (attributed to 2005 bankruptcy legislation and lower Hurricane Katrina costs).
- Investment Gain: An $88 million gain ($40 million after-tax) was recognized from the sale of the investment in Egyptian American Bank (EAB).
- Discontinued Operations: Results exclude Ameriprise Financial and Tax and Business Services, which were spun off or sold in late 2005.
Outlook and Strategy
- Capital Allocation: The company targets 12-15% EPS growth and 28-30% ROE. It aims to return approximately 65% of generated capital to shareholders over time. In Q1 2006, approximately 93% of capital generated was returned via dividends and share repurchases.
- Share Repurchases: The company repurchased 18 million shares at an average price of $53.39. Approximately 22 million shares remain under authorization.
- Brazil Sale: Announced an agreement to sell card operations in Brazil to Banco Bradesco for approximately $490 million, expected to close in Q2 2006.
Risks and Contingencies
- Legal Proceedings: Multiple class actions regarding antitrust tying arrangements and "anti-steering" rules are pending. The company believes it has meritorious defenses.
- Airline Industry Risk: Exposure to Delta Air Lines bankruptcy; the company lent $350 million (remaining balance $300 million) as part of Delta's debtor-in-possession financing.
- Market Risk: Exposure to interest rate fluctuations and foreign exchange rates, though no material changes in market risk were noted since December 31, 2005.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the exclusion of Ameriprise results when comparing year-over-year net income, as Q1 2005 included $201 million from discontinued operations.
- Rewards Reserve Methodology: Review the $112 million charge related to the Membership Rewards redemption rate assumption and its potential impact on future quarters.
- Credit Quality in Taiwan: Monitor the $63 million provision increase in Taiwan and the broader credit environment in that region.
- Delta Air Lines Exposure: Assess the risk associated with the $300 million outstanding loan to Delta and the potential impact of Delta's reorganization on the SkyMiles co-brand portfolio.
- Capital Return Consistency: Confirm the sustainability of the 93% capital return rate in Q1 2006 against the long-term target of 65%.