AXP

American Express Company: Q3 1998 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 1998, for American Express Company. The filing includes unaudited consolidated financial statements and management discussion for the three and nine months ended September 30, 1998, compared to the same periods in 1997. The Company operates through four primary segments: Travel Related Services (TRS), American Express Financial Advisors (AEFA), American Express Bank/Travelers Cheque (AEB/TC), and Corporate and Other.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 6.4% in Q3 and 7.5% YTD compared to 1997. Growth was driven by higher discount revenue, net finance charge revenue, travel commissions, and management fees. However, revenue growth slowed due to the economic downturn in Asia and a decline in U.S. equity markets affecting AEFA.
• Profitability: Net income rose 9.5% in Q3 and 7.5% YTD. Diluted EPS increased 14% in Q3 and 11% YTD, aided by share repurchases (16.9 million shares repurchased in the first nine months).
• Expense Increases: Total expenses rose primarily due to higher human resource costs, marketing and promotion spending, and increased provisions for losses in the lending portfolio.
• Segment Performance:
  • TRS: Net income up 17% (Q3) and 18% (YTD) due to higher billed business and improved loss rates on charge cards.
  • AEFA: Net income up 15% (Q3) and 16% (YTD) driven by higher management fees from increased assets under management.
  • AEB/TC: Net income declined significantly (36% in Q3, 97% YTD) due to a $213 million credit loss provision related to the Asia/Pacific portfolio (specifically Indonesia) and reduced net interest income.
• Unusual Items: The YTD 1998 results included a $106 million pre-tax gain from the sale of First Data Corporation stock and a preferred stock dividend from Lehman Brothers. Conversely, the AEB segment recorded a $213 million credit loss provision in Q1 1998.

Guidance, Outlook, and Risks

• Targets: Management reiterated long-term targets of 12-15% earnings per share growth and a return on equity of 18-20%. The Company did not meet its target of at least 8% revenue growth for the period.
• Year 2000 (Y2K) Compliance: The Company is on schedule to complete remediation of critical systems by the end of 1998. Cumulative costs through September 30, 1998, were $311 million, with an estimated $210-$235 million remaining through 2000. Management does not expect a material adverse impact on financial condition, though risks remain regarding third-party compliance.
• Euro Conversion: A comprehensive plan is in place for the January 1, 1999, introduction of the euro. While conversion costs are expensed as incurred, the transition is not expected to have a material adverse impact.
• Legal Proceedings: Several class-action lawsuits are pending regarding insurance sales practices and annuity replacements (e.g., Benacquisto v. IDS Life). Damages sought are unspecified.
• Capital Actions: In July 1998, the Company issued $500 million of 7.0% Cumulative Quarterly Income Preferred Shares (QUIPS) via a subsidiary trust to raise capital for general corporate purposes.

Investor Verification Checklist

• Verify the impact of the $213 million Asia/Pacific credit loss provision on future AEB/TC earnings and loan loss reserve adequacy.
• Monitor the progress of Y2K remediation for third-party vendors and the potential for business interruption risks.
• Assess the sustainability of revenue growth in the Travel Related Services segment given the economic slowdown in international markets.
• Review the status of pending litigation regarding insurance sales practices and potential liability exposure.
• Confirm the effectiveness of share repurchase programs in maintaining EPS growth targets amidst revenue headwinds.