AXP

American Express Company - Q2 2003 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2003. American Express Company operates primarily through three segments: Travel Related Services (TRS), American Express Financial Advisors (AEFA), and American Express Bank (AEB). The company provides global payment services, travel services, financial planning, and international banking.

Key Financial Metrics

Note: Operating cash flow for the six months ended June 30, 2003, was negative $210 million, a significant shift from the positive $4.854 billion in the prior year period.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 7% in Q2 and 6% for the six-month period. Growth was driven by an 8% increase in discount revenue (TRS) and a 19% increase in interest and dividends (largely due to a $78 million WorldCom loss in 2002).
• Profitability: Net income rose 11% in Q2 and 12% for the six-month period. Pretax income margins improved due to lower provisions for losses.
• Expense Management: Total expenses rose 5% in Q2. Marketing and rewards expenses increased 22% due to brand advertising and higher cardmember rewards. However, provisions for losses declined 3% overall, driven by a 27% drop in charge card provisions and a 4% drop in lending provisions due to strong credit quality.
• Segment Performance:
  • TRS: Net income up 12% (Q2) and 18% (6M). Billed business grew 10%.
  • AEFA: Net income up 8% (Q2) but down 11% (6M) due to lower management fees and higher investment impairments.
  • AEB: Net income up 45% (Q2) and 49% (6M) driven by lower funding costs and foreign exchange gains.

Guidance, Outlook, and Risks

• 2003 EPS Guidance: Management expects 2003 EPS (before accounting changes) to exceed $2.26 but is not likely to exceed $2.29. The company plans to invest more in business building in the second half rather than maximizing margins immediately.
• Acquisitions: Agreements announced to acquire Threadneedle Asset Management ($570 million) and Rosenbluth International. Both are expected to close in H2 2003 and be slightly accretive to EPS in 2004.
• Accounting Changes (FIN 46): The adoption of FASB Interpretation No. 46 regarding Variable Interest Entities (VIEs) is expected to result in a non-cash charge of approximately $150 million (after-tax) in Q3 2003, reducing net income. This relates to the consolidation of CDOs and Secured Loan Trusts.
• Liquidity: Cash and cash equivalents decreased by $3.6 billion during the first six months. The company returned approximately 75% of capital generated to shareholders via dividends and share repurchases in H1 2003. Share repurchase activity is expected to be lower for the remainder of 2003 due to planned acquisitions.
• Risks: Key risks include credit quality deterioration, equity market volatility impacting AEFA's investment portfolio and DAC amortization, and the impact of geopolitical events (e.g., war in Iraq, SARS) on travel spending.

Investor Verification Checklist

• FIN 46 Impact: Verify the magnitude of the Q3 2003 non-cash charge related to VIE consolidation and its effect on reported earnings.
• Cash Flow Reversal: Investigate the drivers behind the shift from $4.85 billion positive operating cash flow in H1 2002 to a $210 million outflow in H1 2003.
• Credit Quality Trends: Monitor the "Managed Basis" net write-off rates and past-due percentages to ensure the current low provision levels are sustainable.
• Acquisition Integration: Assess the timeline and regulatory approval status for the Threadneedle and Rosenbluth acquisitions.
• Stock-Based Compensation: Review the pro-forma EPS impact of SFAS 123 adoption, which reduced reported EPS by approximately $0.05 in Q2 2003.