AXP

Business Context and Reporting Period

Company: American Express Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: The Company operates three primary segments: Travel Related Services (TRS), American Express Financial Advisors (AEFA), and American Express Bank (AEB). TRS provides charge and credit cards, travel services, and travelers cheques. AEFA offers financial planning, insurance, and annuities. AEB provides private banking and corporate banking services globally.

Key Financial Metrics

Profitability: Return on average shareholders' equity (trailing 12-month) was 20.4%.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 9% in Q3 and 7% for the nine months ended September 30, 2003, compared to the prior year. Growth was driven by TRS (8% Q3, 7% 9M) and AEFA (10% Q3, 6% 9M).
• Profitability: Net income rose 12% in both Q3 and the nine-month period. Diluted EPS increased 13% in Q3 and 15% for the nine months.
• Expense Trends: Consolidated expenses increased 8% in Q3 and 5% for the nine months. Increases were primarily due to higher marketing, rewards, and human resources costs, partially offset by lower interest expenses and provisions for losses.
• Credit Quality: Provisions for losses declined in the lending portfolio due to improved past due and write-off rates, though charge card provisions increased due to higher volumes.
• Acquisitions: On September 30, 2003, AEFA acquired Threadneedle Asset Management Holdings LTD for approximately $565 million, adding $81.1 billion in assets under management.

Guidance, Outlook, and Risks

• Outlook: Management expects 2003 EPS (before accounting changes) to be at the higher end of the previous guidance range of $2.26 to $2.29. Reengineering initiatives are expected to deliver approximately $1.0 billion in benefits in 2003.
• Accounting Changes (FIN 46): The adoption of FASB Interpretation No. 46 (consolidation of Variable Interest Entities) was delayed to December 31, 2003. Management preliminarily estimated a non-cash charge of approximately $150 million ($230 million pretax) upon adoption, though the final charge depends on market factors and further interpretations.
• Accounting Changes (SOP 03-1): The Company is evaluating the impact of SOP 03-1 regarding reserves for guaranteed minimum death benefits in variable annuities, required to be adopted January 1, 2004.
• Legal Proceedings: The Company is involved in various class actions regarding foreign currency conversion fees and antitrust tying arrangements. Additionally, regulatory investigations into mutual fund practices (late trading, market timing) are ongoing, though management does not currently expect a material impact.
• Antitrust Ruling: The U.S. Court of Appeals affirmed a ruling against Visa and MasterCard in an antitrust lawsuit. American Express expects to sign its first U.S. bank network partnership agreements by the second half of 2004.

Investor Verification Checklist

• FIN 46 Impact: Verify the final non-cash charge and balance sheet impact upon the December 31, 2003 adoption of FIN 46 regarding CDOs and SLTs.
• Reengineering Benefits: Monitor the realization of the projected $1.0 billion in reengineering benefits for 2003.
• Discount Rate Erosion: Track the trend of the average discount rate, which has been declining due to a shift toward lower-rate retail merchant categories.
• Acquisition Integration: Assess the accretive impact of the Threadneedle and Rosenbluth International acquisitions on 2004 earnings.
• Regulatory Exposure: Review updates on SEC/NASD investigations regarding mutual fund practices and potential enforcement actions.