American Express Company — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The interim financial statements are unaudited. American Express is a global payments and travel company, with charge and credit cards, merchant and network services, travel, and fee-based offerings.
Financial performance
Amounts are U.S. dollars; financial statement amounts are in millions unless stated otherwise.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue, net of interest expense | $7,571 | $6,973 | $22,220 | $20,338 |
| Provisions for losses | $249 | $373 | $703 | $1,968 |
| Total expenses | $5,611 | $4,960 | $16,309 | $13,883 |
| Pretax income from continuing operations | $1,711 | $1,640 | $5,208 | $4,487 |
| Net income | $1,235 | $1,093 | $3,743 | $2,995 |
| Diluted EPS | $1.03 | $0.90 | $3.11 | $2.47 |
- Q3 net income rose 13% and diluted EPS rose $0.13. Revenue net of interest expense increased 9%; expenses grew 13%, while provisions fell 33%. Net income was approximately 16.3% of revenue net of interest expense, versus 15.7% a year earlier.
- For the first nine months, net income increased 25% and diluted EPS increased 26%. Revenue net of interest expense rose 9%, expenses increased 17%, and provisions declined 64%. The nine-month net income includes $36 million from discontinued operations; continuing-operations diluted EPS was $3.08.
- Q3 discount revenue increased 12% to $4.2 billion, with billed business up 16%; the average discount rate edged down to 2.54% from 2.56%. Worldwide billed business was $207.7 billion, up from $179.3 billion.
- Rewards expense was a notable cost increase: $1.6 billion in Q3, up 24%, and $4.8 billion year to date, up 30%. Management attributed the rise to greater spending, co-brand expense, higher redemptions, and a higher estimated ultimate redemption rate.
- Net interest income was $1.179 billion in Q3, slightly below the prior year. Net interest yield on cardmember loans declined to 9.1% from 9.5% in Q3 and to 9.1% from 9.8% for the nine-month period.
Balance sheet, liquidity and cash flow
- At September 30, 2011, total assets were $148.7 billion and shareholders’ equity was $18.1 billion. Long-term debt was $61.8 billion, short-term borrowings $3.6 billion, and customer deposits $33.1 billion.
- Cash and cash equivalents were $24.9 billion, compared with $16.4 billion at December 31, 2010. Customer deposits increased from $29.7 billion. Cardmember loans, net, were $56.1 billion versus $57.2 billion at year-end.
- Management reported $21.6 billion of cash and readily marketable securities available to fund maturities after short-term obligations. Long-term debt, securitization and CD maturities over the following 12 months totaled $19.1 billion, including $8.2 billion in Q4 2011. The company also had $7.4 billion in committed bank credit facilities, of which $4.5 billion was outstanding, and a separate $3.0 billion secured facility.
- For the nine months, operating cash flow was $7.0 billion (versus $7.2 billion), investing cash flow was positive $4.9 billion (versus $5.3 billion), and financing cash flow used $3.3 billion (versus $7.9 billion). Cash increased $8.6 billion over the period.
- Regulatory capital ratios at September 30 included a 12.3% Tier 1 risk-based ratio and 14.3% total risk-based ratio for the company. Management estimated proposed Basel III rules, if then in effect, would reduce its Tier 1 risk-based and Tier 1 common ratios by about 30 basis points and its Tier 1 leverage ratio by about 170 basis points.
Material changes and segment results
- All four operating segments reported higher Q3 income: U.S. Card Services $733 million (up 23%), International Card Services $221 million (up 53%), Global Commercial Services $197 million (up 31%), and Global Network & Merchant Services $332 million (up 32%). Corporate & Other reported a $248 million net expense, compared with $48 million a year earlier.
- Credit performance improved in cardmember loans: Q3 worldwide loan net write-off rate fell to 2.6% from 5.1%, and 30-day-past-due loans were 1.5% of total versus 2.5%. Loan loss reserves were $2.1 billion, down from $3.6 billion at year-end 2010. In contrast, U.S. card receivables’ principal net write-off rate rose to 1.8% from 1.6%, and 30-day-past-due receivables rose to 2.0% from 1.7%.
- Management said approximately $450 million of loss reserves were reduced during Q3 and expected the benefit from future reserve releases to diminish. The sharp year-to-date decline in loan provisions reflects lower write-offs and reserve requirements compared with 2010.
- The company repurchased 25.8 million shares in Q3 at an average $46.55 per share. It repurchased 41 million shares in the first nine months and was pursuing a 2011 plan to repurchase up to $2.3 billion of shares, subject to market conditions. Dividends declared were $0.18 per share in Q3.
- American Express acquired a controlling interest in Loyalty Partner in March 2011 for $616 million; a potential purchase of the remaining interest beginning in late 2013 had an estimated fair value of $150 million. The purchase-price allocation was not yet final.
Outlook, risks and unusual items
- The company’s stated longer-term financial targets are average revenue growth, net of interest expense, of at least 8%; EPS growth of 12%–15%; and return on average equity of at least 25%. These are targets “on average and over time,” not specific quarterly or full-year guidance.
- Management described spending growth and credit trends as strong, but warned of an uncertain economic environment, including European sovereign and banking-system risks. It was slowing year-over-year operating expense growth entering 2012, while continuing investments in growth and business capabilities.
- Management cited lower loan yields associated with reduced revolving balances and penalty-rate balances, including effects of the CARD Act. It said future yields would depend on portfolio mix, credit quality, funding costs, and pricing.
- MasterCard settlement payments had ended; the last Visa settlement payment was expected in Q4 2011. These settlements affected period comparisons. The company received $43 million of after-tax Visa settlement income in Q3 2011; Q3 2010 included $93 million of MasterCard and $43 million of Visa settlement income.
- Q3 included a $77 million tax benefit related to a distribution of foreign subsidiary earnings. Nine-month results also included a $102 million tax benefit from favorable resolution of prior-year tax items and $36 million of discontinued-operations income related to a prior sale.
- The company recorded $39 million of net additional severance-related reengineering costs in Q3. Separately, it expected approximately $50–$60 million pretax of additional facility-consolidation charges in 2011–2012; substantially all related activity was expected to be completed by Q2 2012.
- Legal proceedings include DOJ and state antitrust litigation over merchant anti-steering rules, as well as other class actions and regulatory matters. For matters where a possible loss range could be estimated, the aggregate range was $0–$470 million in excess of accrued liabilities; this is not the company’s maximum exposure. Management did not believe pending matters would materially affect consolidated financial condition or liquidity, but acknowledged potential material effects on results in a particular period.
- Other material risks include regulatory changes under Dodd-Frank, Basel III and the CARD Act; merchant pricing and competition; credit and liquidity conditions; funding access and ratings; data security and fraud; and the company’s ability to manage costs and realize acquisition and restructuring benefits.
Important facts for investors to verify
- Whether spending growth and card acquisition continue to support discount revenue as the average discount rate remains under pressure.
- Whether loan credit quality remains improved and reserve releases diminish as management expects; monitor charge-card losses and delinquency trends separately.
- Whether rewards, compensation, technology, legal and other operating costs can be contained as revenue growth moderates and settlement income ends.
- How the $19.1 billion of stated 12-month maturities, deposit funding, securitization access and available liquidity evolve, particularly around the Q4 2011 maturities.
- Developments and potential outcomes in anti-steering and other litigation, regulatory implementation, tax examinations, and the Loyalty Partner acquisition and remaining-interest option.
- Progress against the company’s long-term targets and the proposed share-repurchase plan; the filing does not provide specific near-term earnings guidance.