Business Context and Reporting Period
Company: American Express Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 1999
Business Overview: The Company operates primarily through three segments: Travel Related Services (TRS), American Express Financial Advisors (AEFA), and American Express Bank/Travelers Cheque (AEB/TC). The report covers the first quarter of 1999, comparing results to the same period in 1998.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 1999 | Q1 1998 |
|---|---|---|
| Total Revenues | $4,971 | $4,521 |
| Pretax Income | $791 | $614 |
| Net Income | $575 | $460 |
| Diluted Earnings Per Share | $1.26 | $0.98 |
| Cash and Cash Equivalents | $5,438 | $4,342 |
| Net Cash Provided by Operating Activities | $1,565 | $1,454 |
| Total Assets | $128,297 | $126,933 |
| Total Liabilities | $118,012 | $116,735 |
| Shareholders' Equity | $9,785 | $9,698 |
| Short-term Debt | $22,242 | $22,605 |
| Long-term Debt | $7,176 | $7,019 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 10% year-over-year, driven by higher worldwide billed business, growth in Cardmember loans, and increased travel commissions and fees.
- Profitability: Net income rose 25% to $575 million. Diluted EPS increased 29% to $1.26. Excluding one-time items in the prior year (a $138 million credit loss provision in Asia/Pacific and $78 million in corporate gains), organic income growth was 11%.
- Expense Trends: Total expenses increased to $4.18 billion, primarily due to higher human resources costs and marketing/promotion expenses to support business building and acquisitions. This was partially offset by lower loss provisions in the charge card portfolio.
- Segment Performance:
- Travel Related Services: Net income up 15% to $363 million. Billed business grew 8% globally.
- Financial Advisors: Net income up 15% to $214 million, driven by higher fee revenues and wider investment margins.
- Bank/Travelers Cheque: Turned a net loss of $83 million in Q1 1998 into a net income of $41 million in Q1 1999. The prior year loss was heavily impacted by a $138 million credit loss provision related to Indonesia.
Guidance, Outlook, and Risks
- Long-term Targets: Management reiterated targets of 12-15% earnings per share growth, at least 8% revenue growth, and a return on equity of 18-20%.
- Year 2000 (Y2K) Compliance:
- Cumulative costs incurred through March 31, 1999, were $427 million, with an estimated remaining cost of $90-$116 million through 2000.
- Remediation for critical systems is nearly complete (91-94% depending on initiative). The primary focus has shifted to integrated testing and contingency planning.
- Risk: The Company notes that failure of external third parties (merchants, vendors, utilities) to resolve Y2K issues could result in material financial risk, business interruption, or reputational damage.
- Accounting Changes: Adoption of SOP 98-1 requires capitalization of internal software costs. This provided a $59 million benefit in Q1 1999 but had no net effect on income due to offsetting investment spending.
- Legal Proceedings: A class-action lawsuit was filed in March 1999 alleging 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 robustness of the Company's business resumption plans, as external failures pose a material risk.
- Asia/Pacific Credit Exposure: Review the specific composition of the $3.1 billion exposure in the Asia/Pacific region and the adequacy of reserves given the prior year's significant losses in Indonesia.
- Software Capitalization Impact: Assess the long-term impact of the new accounting rule (SOP 98-1) on future depreciation/amortization expenses versus current period benefits.
- Share Repurchases: Confirm the execution of the share repurchase program (2.6 million shares repurchased in Q1) and its impact on diluted EPS.
- Legal Liability: Monitor the outcome of the Lambert v. American Express Financial Corporation lawsuit regarding independent contractor classification.