Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 1997, for American Express Company. The filing includes unaudited consolidated financial statements for the three and nine months ended September 30, 1997, compared to the same periods in 1996. The Company operates primarily through Travel Related Services (TRS), American Express Financial Advisors (AEFA), and American Express Bank.
Key Financial Metrics
Consolidated Results (Nine Months Ended Sept 30, 1997)
- Total Net Revenues: $13,086 million (up 8% from $12,080 million in 1996).
- Net Income: $1,498 million (up 15% from $1,307 million in 1996).
- Diluted Earnings Per Share (EPS): $3.12 (up 16% from $2.68 in 1996).
- Pretax Income: $2,060 million.
- Operating Cash Flow: $4,177 million provided by operating activities.
- Cash and Cash Equivalents: $4,614 million (up from $2,677 million at year-end 1996).
- Total Assets: $117,642 million.
- Total Liabilities: $108,524 million.
- Shareholders' Equity: $9,118 million.
Debt and Liquidity
- Short-term Debt: $18,511 million.
- Long-term Debt: $8,080 million.
- Customers' Deposits: $9,724 million.
- Travelers Cheques Outstanding: $6,134 million.
Material Changes vs. Prior Period
Revenue Drivers
- Discount Revenue: Increased 13.5% to $4,136 million, driven by higher worldwide billed business and cardmember spending.
- Cardmember Lending: Net finance charge revenue rose 16.8% to $910 million, aided by a 21% growth in worldwide lending balances and wider interest margins.
- Management Fees: Increased 23.2% to $1,082 million, reflecting higher managed asset levels at AEFA.
- Card Fees: Declined 3.8% to $1,206 million due to a strategic shift toward low- and no-fee credit cards.
Expense Trends
- Provisions for Losses: Increased significantly, particularly in Cardmember lending (up 37.0% to $577 million) and Charge card (up 4.4% to $658 million), reflecting higher loss rates and loan volumes.
- Human Resources: Rose 9.3% to $3,472 million due to merit increases and technology project costs.
- Marketing: Increased 2.3% to $780 million to support business expansion and loyalty programs.
Guidance, Outlook, and Risks
Management Commentary
Management stated that results met or exceeded long-term targets of 12-15% EPS growth and an 18-20% return on equity. The Company repurchased 12.8 million common shares in the first nine months of 1997 at an average price of $71.70 per share.
Unusual Items and Accounting Changes
- Securitization Gain: A $37 million pretax gain was recognized in Q3 1997 from the securitization of U.S. Cardmember loans under SFAS No. 125. This gain was reinvested in marketing expenses and had no material impact on net income.
- EPS Standard: The Company will adopt SFAS No. 128 ("Earnings Per Share") effective December 31, 1997, with no expected material effect on EPS.
Risks and Contingencies
- Discount Rate Erosion: Management anticipates some discount rate erosion over time due to electronic data capture shifts and volume-related pricing discounts.
- Credit Quality: Loss rates increased in both charge card and lending portfolios. Non-performing loans at American Express Bank rose to $60 million.
- Market Volatility: Hedging activities were increased to reduce the effect of stock market volatility on management fees.
Investor Verification Checklist
- Verify the sustainability of the 16% EPS growth given the one-time $37 million securitization gain.
- Monitor the trend in provisions for losses, which rose sharply (37% in lending) and could impact future margins.
- Assess the impact of the strategic shift to low-fee cards on the long-term trajectory of Net Card Fees.
- Review the discount rate trends (2.74% for nine months) against the management warning of potential erosion.
- Confirm the Company's ability to maintain its return on equity target of 18-20% amidst rising operating expenses.