American Express Company — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited interim results; the company cautions that interim performance is not necessarily indicative of full-year results. American Express operates global card, payments-network, merchant-services and travel businesses.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue, net of interest expense | $8.245B | $7.965B | $16.126B | $15.552B |
| Provisions for losses | $593M | $461M | $1.090B | $873M |
| Total expenses | $5.657B | $5.625B | $11.132B | $11.027B |
| Net income | $1.405B | $1.339B | $2.685B | $2.595B |
| Diluted EPS | $1.27 | $1.15 | $2.42 | $2.22 |
| Operating cash flow | Six months: $10.229B | Prior-year six months: $6.742B |
- Q2 revenue net of interest expense grew 4%, net income 5%, and diluted EPS 10%. For the first half, the respective increases were 4%, 3%, and 9%.
- Q2 discount revenue rose 6% to $4.729B; worldwide billed business increased 7% to $237.7B. The average discount rate edged down to 2.52% from 2.54%.
- Net interest income increased 7% in Q2 to $1.202B. Cardmember loan net interest yield was 9.1%, versus 9.0% a year earlier.
- Credit indicators were generally favorable: Q2 U.S. card loan net write-off rate was 2.0% versus 2.2%; worldwide loans past due 30 days were 1.1% versus 1.3%. Loss provisions nevertheless increased, principally because prior-year reserve releases were lower.
- At June 30, cash and cash equivalents were $23.129B; total assets $151.933B; total liabilities $132.899B; and shareholders’ equity $19.034B. Long-term debt was $52.675B, down from $58.973B at December 31, 2012; short-term borrowings were $2.961B.
- Six-month investing cash outflow was $1.930B and financing cash outflow $7.274B. Share repurchases were $2.142B and dividends paid $443M.
- U.S. regulatory capital ratios at June 30 included Tier 1 risk-based capital of 12.5%, total risk-based capital of 14.4%, and Tier 1 leverage of 10.5%. Estimated fully phased-in Basel III ratios were 12.2%, 12.2%, and 10.4%, respectively, under the company’s stated assumptions.
- The filing does not report a conventional consolidated operating-margin measure. Q2 comprehensive income was $1.077B, down from $1.165B, reflecting greater other comprehensive losses, including foreign-currency translation and unrealized securities losses.
Material changes and management commentary
- Growth reflected stronger spending and card fees, alongside lower funding costs. Cardmember rewards expense rose 10% in Q2, including changes in Membership Rewards redemption-rate and cost assumptions. Total expenses increased only 1%.
- Provisions for losses rose 29% in Q2 and 25% for the first half. Management attributed the increase mainly to reduced lending reserve releases—$108M less in Q2 and $198M less in the first half than in the prior-year periods—partly offset by lower loan write-offs.
- Travel commissions and fees declined 5% in Q2, reflecting lower worldwide travel sales and revenue recognized from travel suppliers. Other revenue fell 13%, including comparison effects from prior-year Travelers Cheques liability estimates and current-period cardmember reimbursements.
- Segment income increased in Q2 at U.S. Card Services (3%), International Card Services (17%), Global Commercial Services (3%), and Global Network & Merchant Services (11%). International results were affected by currency movements.
Outlook, risks and contingencies
- Management’s longer-term, “on average and over time” targets are at least 8% growth in revenue net of interest expense, 12–15% EPS growth, and ROE of at least 25%. The company aims to return about 50% of capital generated to shareholders if EPS and ROE targets are achieved; these are not specific quarterly guidance.
- Management aims to keep operating-expense growth below 3% annually over the next two years, using 2012 expenses excluding the fourth-quarter restructuring charge as the base. Up to $1.8B of additional share repurchases were planned for the remainder of 2013, subject to market conditions and the capital plan.
- Management described spending growth as healthy and credit performance as strong, while noting intense competition, uneven global conditions, regulatory uncertainty and possible pressure from U.S. policy and European economic instability. Europe represented about 11% of Q2 billed business.
- Risks include evolving consumer-protection rules, proposed EU payments legislation that could pressure merchant pricing or require business changes, and the U.S. Department of Justice and state antitrust case concerning merchant steering rules. The company stated that similar restrictions to those imposed on Visa and Mastercard could materially affect its business.
- For disclosed legal proceedings and governmental examinations where losses were reasonably possible and estimable, the aggregate estimated range was $0–$440M in excess of accrued liabilities. This is not a maximum exposure; outcomes could vary materially.
- The company said unrecognized tax benefits could decrease by as much as $629M within 12 months; the filing says the impact on tax rate and net income for part of this amount cannot be quantified clearly.
- Liquidity resources included $15.4B of U.S. excess cash available for long-term maturities and $7.2B of committed bank credit facilities. Management’s liquidity objective is to meet obligations for at least 12 months, including under a scenario in which regular funding programs are unavailable.
Important facts for investors to verify
- Whether billed-business growth and discount revenue can persist despite a slightly lower average discount rate and potential pricing pressure.
- Whether higher provisions reflect chiefly the normalization of reserve releases or a material change in underlying credit performance.
- How reward-cost assumptions, cardmember reimbursements, restructuring and the less-than-3% expense-growth objective affect future earnings.
- Developments in the DOJ merchant litigation and proposed EU payments rules, including potential effects on merchant fees, network arrangements and card usage.
- Actual capital and liquidity effects of Basel III implementation, debt maturities, deposit funding and planned shareholder returns.