AXP

American Express Company: Q3 2005 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2005. The most significant corporate event during this period was the completion of the spin-off of Ameriprise Financial, Inc. on September 30, 2005. Consequently, Ameriprise and certain other disposed businesses (including Tax and Business Services) are reported as discontinued operations. The Company realigned its segment reporting effective this date into four segments: U.S. Card Services, International Card & Global Commercial Services, Global Network & Merchant Services, and Corporate & Other.

Key Financial Metrics

Note: Balance sheet data for 2004 is not directly comparable due to the spin-off of Ameriprise assets and liabilities.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 11% year-over-year for both the quarter and the nine-month period, driven by an 18% increase in worldwide billed business and higher discount revenue.
• Profitability: Net income rose 17% for the quarter and 17% for the nine-month period. Income from continuing operations increased 23% for the quarter.
• Expense Increases: Total expenses rose 12% for the quarter. Key drivers included:
  • Marketing & Rewards: Increased 16% due to global brand advertising and higher redemption rates.
  • Provisions for Losses: Increased 33% for the quarter, reflecting volume growth and a $49 million provision for Hurricane Katrina.
  • Human Resources: Increased 9% due to restructuring severance costs ($53 million) and stock-based compensation.
• Discontinued Operations: Income from discontinued operations decreased 7% for the quarter ($165 million vs. $177 million) due to spin-off related costs, partially offset by a $63 million gain on the sale of Tax and Business Services.
• Balance Sheet Impact: The spin-off reduced retained earnings by approximately $7.8 billion (treated as a non-cash dividend). Total assets decreased significantly from the prior year-end due to the removal of Ameriprise assets.

Guidance, Outlook, and Risks

• Bankruptcy Legislation: New federal bankruptcy legislation effective October 17, 2005, caused a surge in filings prior to the deadline. Management anticipates a substantial increase in bankruptcy-related write-offs in the U.S. during the fourth quarter, though they believe current reserves are adequate.
• Marketing Spend: The Company expects year-over-year growth in marketing, promotion, and rewards spending in Q4 to be consistent with Q3 levels to drive cardmember acquisition and spending.
• Reengineering: Ongoing restructuring activities may result in significant expenses affecting future results.
• Delta Air Lines: The Company has restructured financial arrangements with Delta following its Chapter 11 filing. While the co-brand portfolio represents less than 10% of worldwide billed business, a failed reorganization could adversely impact results.
• Capital Strategy: The Company targets 12-15% EPS growth and 28-30% Return on Equity (ROE). It aims to return approximately 65% of generated capital to shareholders via dividends and share repurchases.

Investor Verification Checklist

• Q4 Credit Quality: Verify the actual impact of the post-bankruptcy legislation backlog on Q4 write-off rates and reserve adequacy.
• Spin-off Adjustments: Confirm the treatment of the $7.8 billion non-cash dividend and the specific allocation of assets/liabilities between American Express and Ameriprise.
• Managed vs. GAAP Basis: Review the reconciliation tables for U.S. Card Services and International Card segments, as management uses a "managed basis" (excluding securitization effects) for internal decision-making.
• Legal Settlements: Monitor the status of the $100 million settlement regarding the AEFA Securities Litigation and pending antitrust class actions.
• Share Repurchases: Track the execution of the remaining 43.8 million shares authorized under the current repurchase program.