Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1998, for American Express Company. The filing includes unaudited consolidated financial statements and management's discussion and analysis. The Company operates through three primary segments: Travel Related Services (TRS), American Express Financial Advisors (AEFA), and American Express Bank/Travelers Cheque (AEB/TC).
Key Financial Metrics
Revenue and Profit (Six Months Ended June 30, 1998):
- Total Net Revenues: $9,282 million (up 8% from $8,585 million in 1997).
- Pretax Income: $1,413 million (up from $1,342 million in 1997).
- Net Income: $1,037 million (up 7% from $974 million in 1997).
- Diluted Earnings Per Share (EPS): $2.22 (up 10% from $2.02 in 1997).
Cash Flow and Liquidity:
- Cash and Cash Equivalents: $3,501 million at June 30, 1998 (down from $4,179 million at year-end 1997).
- Net Cash Provided by Operating Activities: $3,923 million for the six months ended June 30, 1998.
- Short-term Debt: $18,009 million.
- Long-term Debt: $7,832 million.
Segment Performance (Six Months):
- Travel Related Services: Net Income of $676 million (up 18%).
- Financial Advisors: Net Income of $398 million (up 17%).
- Bank/Travelers Cheque: Net Loss of $36 million (compared to $139 million income in 1997).
Material Changes vs. Prior Period
Revenue Growth Drivers: Consolidated revenue growth was driven by increased worldwide billed business, higher Cardmember spending, growth in Cardmember loans, and wider interest margins in the lending portfolio. Management and distribution fees also increased significantly.
Expense Increases: Total expenses rose to $7,869 million, primarily due to higher human resource costs, increased marketing and promotion spending, and higher provisions for losses.
Significant One-Time Items:
- Asia/Pacific Credit Losses: The six-month results include a $213 million ($138 million after-tax) credit loss provision at American Express Bank (AEB) related to its Asia/Pacific portfolio, particularly Indonesia.
- Investment Gains: First-quarter income included a $106 million ($78 million after-tax) gain, comprising a $60 million gain from the sale of First Data Corporation stock and a $46 million preferred stock dividend from Lehman Brothers.
- Securitization Gains: TRS recognized a $36 million ($23 million after-tax) gain from the securitization of U.S. receivables in Q2 1998.
Guidance, Outlook, and Risks
Management Commentary: Results were in line with long-term targets of 12-15% EPS growth and a return on equity of 18-20%. Management noted that discount rate erosion may continue due to changes in business mix and electronic data capture adoption.
Capital Actions:
- Share Repurchases: The Company repurchased 11.9 million common shares in the first half of 1998 at an average price of $96.95 per share.
- Debt Issuance: In July 1998, the Company issued $500 million of 7.0% Cumulative Quarterly Income Preferred Shares (QUIPS) via a subsidiary trust to raise capital for general corporate purposes.
Risks and Contingencies:
- Asia/Pacific Exposure: The economic downturn in Asia, specifically Indonesia, has led to reduced net interest income and significant credit loss provisions. Total credit exposure in the region was approximately $3.7 billion as of June 30, 1998.
- Accounting Changes: The Company adopted SFAS No. 130 (Comprehensive Income) and SFAS No. 131 (Segment Reporting) effective January 1, 1998. Future adoption of SFAS No. 133 (Derivatives) is not expected to have a material impact on net income based on current holdings.
Investor Verification Checklist
- Verify the impact of the $213 million Asia/Pacific credit loss provision on future earnings and capital adequacy.
- Monitor the trend in discount rates and charge card loss ratios as management anticipates rate erosion.
- Review the securitization activities and their effect on the balance sheet and reported revenue.
- Assess the sustainability of management and distribution fee growth in the Financial Advisors segment.
- Confirm the status of nonperforming loans in the AEB segment, which rose to $205 million in Q2 1998.