American Express Company — Q1 2012 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2012, compared with Q1 2011; balance-sheet figures are compared with December 31, 2011. American Express is a global payments and travel company operating in U.S. Card Services (USCS), International Card Services (ICS), Global Commercial Services (GCS), and Global Network & Merchant Services (GNMS), plus Corporate & Other.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Revenues, net of interest expense | $7.614B | $7.031B; +8% |
| Net interest income | $1.133B | $1.070B; +6% |
| Provisions for losses | $412M | $97M |
| Total expenses | $5.429B | $5.202B; +4% |
| Pretax income | $1.773B | $1.732B |
| Net income / diluted EPS | $1.256B / $1.07 | $1.177B / $0.97 |
| Operating cash flow | $3.432B | $537M |
| Cash and cash equivalents | $27.082B | $24.893B at Dec. 31, 2011 |
| Total assets / shareholders’ equity | $151.784B / $19.907B | $153.337B / $18.794B at Dec. 31, 2011 |
| Short-term borrowings / long-term debt | $3.758B / $56.844B | $4.337B / $59.570B at Dec. 31, 2011 |
Net income increased 7% and diluted EPS rose from $0.97 to $1.07. As a simple derived measure, net income was about 16.5% of revenues net of interest expense, versus about 16.7% a year earlier. The filing does not present a conventional gross margin measure.
Worldwide billed business grew 12% to $211.2B; cards-in-force increased 7% to 98.7M. The average discount rate eased to 2.53% from 2.55%. Cardmember loans were $60.1B versus $57.8B a year earlier; cardmember receivables were $41.5B versus $37.7B. Loan net write-off rate (principal only) improved to 2.3% from 3.7%, while U.S. card receivable write-offs increased to 2.3% from 1.7%.
Material changes and segment results
- Revenue growth reflected higher discount revenue, other revenue, net interest income, commissions and card fees. Discount revenue rose 9%, below billed-business growth, partly because of faster growth in partner-network business and higher incentives and rebates.
- Provisions rose sharply because lending reserve releases were substantially smaller than in Q1 2011; the prior-year period included a $120M net release on cardmember loans, compared with a $212M provision in Q1 2012. Management said favorable credit trends continued, with lending loss rates near historic lows, but expected reserve-release benefits to diminish.
- Lower marketing, promotion and rewards costs were offset by higher salaries, cardmember services, professional services and other costs. Q1 2011 included a $188M increase in the Membership Rewards liability from a revised redemption-rate assumption.
- Segment income: USCS $752M (up 35%); ICS $197M (up 4%); GCS $177M (down 4%); GNMS $357M (up 14%); Corporate & Other net expense $227M versus $64M. Prior-year Corporate & Other benefited from MasterCard and Visa settlement income; those payments ended in 2011.
- Operating cash flow increased to $3.4B, while investing cash flow fell to $1.9B from $8.7B, largely reflecting lower investment maturities and sales. Financing used $3.3B, including $4.5B of long-term debt repayments, partly offset by $1.6B of issuance.
Liquidity, outlook, risks and unusual items
Management’s liquidity objective is to withstand at least 12 months without raising new funds through regular funding programs. The reported liquidity portfolio available for maturities was $20.3B after commercial paper, against $12.5B of stated maturities through March 2013. Customer deposits totaled $38.2B. Q1 included issuance of $1.5B of five-year senior unsecured debt at a 2.4% coupon. Regulatory capital ratios were above stated well-capitalized thresholds; the company reported a 13.4% Tier 1 risk-based ratio and 10.8% Tier 1 leverage ratio.
Management cited strong spending and contained expense growth, but described competition as intense and the global economy—particularly Europe—as uncertain. European billed business was about 11% of the quarter’s total. Long-term, on-average financial targets are revenue growth net of interest expense of at least 8%, EPS growth of 12%–15%, and ROE of at least 25%; these are targets, not specific Q1 2012 guidance. The company aims to return an average of 50% of capital generated to shareholders if EPS and ROE targets are achieved. The Federal Reserve raised no objection to a capital plan allowing up to $4B of repurchases in 2012 and up to $1B in Q1 2013; the board also increased the quarterly dividend to $0.20 per share.
Key exposures include uncertain economic conditions, credit and funding markets, competition and merchant pricing, regulation, data security, partner financial health, and litigation. The company disclosed a reasonably possible aggregate loss range of $0–$510M in excess of accrued liabilities for certain matters where estimable; this is not a maximum exposure. It also reported a DOJ and state attorneys general antitrust case concerning merchant steering rules, and likely regulatory action involving American Express Centurion Bank following agency review. A possible decrease of up to $902M in unrecognized tax benefits was noted; the effect on tax expense and net income for a portion was not quantifiable. The filing reports a $50M foreign tax credit benefit in Q1. Management stated that no pending matter was expected to materially harm consolidated financial condition or liquidity, while acknowledging potential material effects on period results.
Important facts for investors to verify
- Whether earnings growth is sustainable as lending reserve releases diminish and the prior-year rewards-liability adjustment and litigation settlements drop out of comparisons.
- Credit trends and reserve adequacy, including the divergence between improved loan write-off rates and higher U.S. charge-card receivable write-offs.
- Execution of the repurchase and dividend plan, subject to capital needs, market conditions and regulatory limits.
- Liquidity and refinancing assumptions, including securitization access, upcoming maturities and the potential consequences of rating or regulatory changes.
- Developments in the merchant antitrust case, Centurion Bank regulatory matters, tax examinations and other contingencies; the disclosed legal-loss range is not a cap.
- Comparability of reported card-fee figures: the company reclassified annual fees on lending products, with no material effect on total financial results.