Business Context and Reporting Period
Company: American Express Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2000
Reporting Basis: Unaudited interim financial information. All data reflects a three-for-one stock split executed in the second quarter of 2000. The Travelers Cheque (TC) operations were reclassified from the American Express Bank segment to the Travel Related Services (TRS) segment effective Q3 2000.
Key Financial Metrics
Consolidated Results (Nine Months Ended Sept 30, 2000)
| Metric | 2000 (9 Months) | 1999 (9 Months) | Change |
|---|---|---|---|
| Total Revenues | $17,609 million | $15,580 million | +13.0% |
| Net Income | $2,133 million | $1,869 million | +14.1% |
| Diluted EPS | $1.57 | $1.36 | +15.4% |
| Return on Equity | 25.5% | N/A | - |
| Cash and Equivalents | $8,959 million | $7,471 million (Dec 31, 1999) | +19.9% |
| Net Cash from Operating Activities | $6,272 million | $6,159 million | +1.8% |
Segment Performance (Nine Months Ended Sept 30, 2000)
- Travel Related Services (TRS): Net income of $1,460 million (+13.5% YoY). Driven by a 18.8% increase in billed business and 38.6% growth in lending finance charge revenue.
- American Express Financial Advisors (AEFA): Net income of $790 million (+13.4% YoY). Growth fueled by a 26.4% increase in management and distribution fees.
- American Express Bank (AEB): Net income of $22 million (+24.4% YoY). Net interest income declined 14.1% due to higher funding costs, offset by fee growth.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 13% for the nine-month period, primarily due to higher worldwide billed business and growth in Cardmember loans within TRS, alongside increased fee income at AEFA.
- Expense Increases: Total expenses rose to $14,614 million (up 12.5% YoY). Increases were driven by higher interest costs, larger provisions for losses (particularly in lending), and increased human resource costs due to merit increases and higher employee counts.
- Asset Quality: In the TRS segment, the net loss ratio for charge cards improved to 0.36% from 0.41% in the prior year. However, provisions for losses increased due to higher portfolio volumes.
- Debt Structure: Short-term debt increased to $31,034 million, while long-term debt decreased to $4,589 million, reflecting securitization activity and changes in funding mix.
Guidance, Outlook, and Risks
Management Commentary
Management stated that results met long-term targets of 12-15% earnings per share growth, at least 8% revenue growth, and a return on equity of 18-20%. The company emphasized that growth was driven by volume increases and business-building initiatives.
Capital Actions
- Share Repurchases: Repurchased 18.7 million common shares in the first nine months of 2000 at an average price of $51.94.
- Debt Issuance: In November 2000, issued $500 million of 6.875% Notes due November 1, 2005, for general corporate purposes.
- Securitization: TRS securitized $4 billion of loans in the first nine months of 2000 ($1B in Q1, $2.2B in Q2, $0.8B in Q3).
Risks and Contingencies
- Legal Proceedings:
- Tax Dispute: Lost a judgment in the U.S. Court of Federal Claims regarding the timing of annual fee income recognition; appeal filed with the Federal Circuit.
- Employment Litigation: Facing EEOC charges from former female financial advisors alleging discrimination and a class-action lawsuit regarding the misclassification of financial advisors as independent contractors.
- Insurance Settlement: Reached an agreement in principle to settle three class-action lawsuits regarding insurance and annuity sales practices for approximately $215 million in benefits.
- Accounting Changes: Implementation of SFAS No. 133 (Derivatives) effective Jan 1, 2001, and SFAS No. 140 (Transfers of Financial Assets) effective March 31, 2001. Management does not expect these to have a material impact on financial position.
Investor Verification Checklist
- Segment Reclassification: Verify the impact of moving Travelers Cheque operations to the TRS segment on year-over-year comparisons.
- Securitization Gains: Review the reconciliation between "managed basis" and GAAP results, noting that GAAP includes pretax gains from securitization transactions ($142 million for the nine months ended Sept 30, 2000).
- Legal Exposure: Monitor the status of the $215 million insurance settlement and the outcome of the tax appeal and employment class actions.
- Interest Rate Sensitivity: Assess the impact of rising funding costs on the American Express Bank segment's net interest income and the TRS segment's lending yield.
- Share Count: Confirm the effect of the three-for-one stock split and ongoing repurchase programs on diluted share counts and EPS calculations.