Business Context and Reporting Period
Company: American Express Company
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three and six months ended June 30, 1999
Business Overview: The Company operates through three primary segments: Travel Related Services (TRS), American Express Financial Advisors (AEFA), and American Express Bank/Travelers Cheque (AEB/TC). The Company reported a Return on Equity of 25.3% for the period.
Key Financial Metrics
| Metric (in millions) | Three Months Ended June 30, 1999 |
Six Months Ended June 30, 1999 |
|---|---|---|
| Total Revenues | $5,298 | $10,269 |
| Net Income | $646 | $1,221 |
| Diluted Earnings Per Share | $1.41 | $2.67 |
| Cash and Cash Equivalents | $6,096 (Balance Sheet) | $6,096 (Balance Sheet) |
| Net Cash Provided by Operating Activities | N/A | $4,458 |
| Total Assets | $132,452 | $132,452 |
| Total Liabilities | $122,190 | $122,190 |
| Short-term Debt | $24,785 | $24,785 |
| Long-term Debt | $6,505 | $6,505 |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 11% for both the three and six-month periods compared to the prior year, driven by higher worldwide billed business, Cardmember loans, and travel commissions.
- Profitability: Net income rose 12% (quarterly) and 18% (year-to-date). Diluted EPS increased 14% and 20%, respectively.
- Expense Trends: Total expenses increased primarily due to higher human resource costs and marketing/promotion expenses to support business building and acquisitions. This was partially offset by lower loss provisions in the lending portfolio.
- Segment Performance:
- TRS: Net income up 14% (quarterly) and 15% (YTD). Billed business grew 10% despite the cancellation of 1.6 million U.S. Government cards in late 1998.
- AEFA: Net income up 14% (quarterly) and 15% (YTD), driven by higher fee revenues and wider investment margins.
- AEB/TC: Reported net income of $79 million for the six months ended June 30, 1999, compared to a net loss of $36 million in the prior year. The prior year loss included a $138 million credit loss provision related to the Asia/Pacific portfolio.
- Accounting Change: Adoption of SOP 98-1 required capitalization of internal software costs. This resulted in a benefit of $67 million (quarterly) and $126 million (YTD) to pretax income, though offset by increased investment spending.
Guidance, Outlook, and Risks
- Long-term Targets: Management reiterated targets of 12-15% EPS growth, at least 8% revenue growth, and a return on equity of 18-20% over time.
- Share Repurchases: The Company repurchased 5.0 million shares in the first half of 1999. In Q3 1999, it entered an agreement for a third party to purchase up to 7 million shares over eight months.
- Year 2000 (Y2K) Risk:
- Cumulative Y2K costs were $471 million through June 30, 1999, with an estimated $46-$72 million remaining.
- Internal remediation and testing are 99% complete. Primary focus is now on integration testing and contingency planning.
- Material Risk: The Company faces potential material financial risk if third parties (vendors, utilities, telecommunications) fail to resolve their Y2K issues, potentially causing business interruption or reputational damage.
- Legal Proceedings: A class-action lawsuit (Lambert v. American Express Financial Corporation) alleges misclassification of financial advisors as independent contractors. The Company intends to defend vigorously.
Investor Verification Checklist
- Y2K Contingency Plans: Verify the status of third-party readiness and the effectiveness of the Company's contingency plans for critical systems.
- Credit Quality: Monitor the provision for losses in the Travel Related Services segment, particularly regarding the impact of the U.S. Government card cancellation and international lending.
- Software Capitalization: Assess the long-term impact of the new accounting rule (SOP 98-1) on future amortization expenses versus current period benefits.
- Legal Exposure: Track the progress of the Lambert class-action lawsuit regarding financial advisor classification.
- Debt Maturities: Review the schedule for short-term debt ($24.8 billion) and the impact of interest rate fluctuations on the Company's cost of funds.