UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the Quarterly Period Ended September 30, 2007

 

 

 

or

 

 

 

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from               to              

 

Commission file number 1-7657

 

AMERICAN EXPRESS COMPANY

(Exact name of registrant as specified in its charter)

 

New York

 

13-4922250

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

 

 

World Financial Center, 200 Vesey Street, New York, NY

 

10285

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code       (212) 640-2000

 

None

Former name, former address and former fiscal year, if changed since last report.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

 

 

Yes x

No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

 

Yes o

No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at October 22, 2007

Common Shares (par value $.20 per share)

 

1,169,425,903 shares

 

 



 

AMERICAN EXPRESS COMPANY

 

FORM 10-Q

 

INDEX

 

 

 

 

 

 

Page No.

 

 

 

 

 

 

Part I.

 

Financial Information:

 

 

 

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Income – Three months ended September 30, 2007 and 2006

 

1

 

 

 

 

 

 

 

 

 

Consolidated Statements of Income – Nine months ended September 30, 2007 and 2006

 

2

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets – September 30, 2007 and December 31, 2006

 

3

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows – Nine months ended September 30, 2007 and 2006

 

4

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

5 – 14

 

 

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

15 – 41

 

 

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

41

 

 

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

41 – 43

 

 

 

 

 

 

Part II.

 

Other Information:

 

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

44 – 47

 

 

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

48

 

 

 

 

 

 

 

 

Item 6.

Exhibits

 

49

 

 

 

 

 

 

 

 

Signatures

 

50

 

 

 

 

 

 

 

Exhibit Index

 

E-1

 



 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Millions, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2007

 

2006

 

Revenues

 

 

 

 

 

Discount revenue

 

$

3,659

 

$

3,259

 

Net card fees

 

522

 

462

 

Travel commissions and fees

 

484

 

427

 

Other commissions and fees

 

644

 

539

 

Securitization income, net

 

392

 

384

 

Other

 

362

 

417

 

Total

 

6,063

 

5,488

 

Interest income

 

 

 

 

 

Cardmember lending finance revenue

 

1,581

 

1,213

 

Other

 

309

 

291

 

Total

 

1,890

 

1,504

 

Total revenues

 

7,953

 

6,992

 

Interest expense

 

 

 

 

 

Cardmember lending

 

444

 

318

 

Charge card and other

 

564

 

409

 

Total

 

1,008

 

727

 

Revenues net of interest expense

 

6,945

 

6,265

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

Marketing, promotion, rewards and cardmember services

 

1,810

 

1,586

 

Human resources

 

1,366

 

1,227

 

Professional services

 

539

 

562

 

Occupancy and equipment

 

374

 

346

 

Communications

 

118

 

104

 

Other

 

339

 

342

 

Total

 

4,546

 

4,167

 

Provisions for losses and benefits

 

 

 

 

 

Charge card

 

279

 

257

 

Cardmember lending

 

579

 

412

 

Other (including investment certificates)

 

124

 

118

 

Total

 

982

 

787

 

Pretax income from continuing operations

 

1,417

 

1,311

 

Income tax provision

 

343

 

377

 

Income from continuing operations

 

1,074

 

934

 

(Loss) Income from discontinued operations, net of tax

 

(7

)

33

 

Net income

 

$

1,067

 

$

967

 

 

 

 

 

 

 

Earnings per Common Share — Basic:

 

 

 

 

 

Income from continuing operations

 

$

0.92

 

$

0.78

 

(Loss) Income from discontinued operations

 

(0.01

)

0.02

 

Net income

 

$

0.91

 

$

0.80

 

 

 

 

 

 

 

Earnings per Common Share — Diluted:

 

 

 

 

 

Income from continuing operations

 

$

0.90

 

$

0.76

 

(Loss) Income from discontinued operations

 

 

0.03

 

Net income

 

$

0.90

 

$

0.79

 

 

 

 

 

 

 

Average common shares outstanding for earnings per common share:

 

 

 

 

 

Basic

 

1,170

 

1,202

 

Diluted

 

1,192

 

1,227

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.15

 

$

0.15

 

 

See Notes to Consolidated Financial Statements.

 

1



 

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Millions, except per share amounts)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2007

 

2006

 

Revenues

 

 

 

 

 

Discount revenue

 

$

10,684

 

$

9,520

 

Net card fees

 

1,506

 

1,515

 

Travel commissions and fees

 

1,412

 

1,328

 

Other commissions and fees

 

1,767

 

1,660

 

Securitization income, net

 

1,181

 

1,142

 

Other

 

1,175

 

1,161

 

Total

 

17,725

 

16,326

 

Interest income

 

 

 

 

 

Cardmember lending finance revenue

 

4,463

 

3,260

 

Other

 

969

 

860

 

Total

 

5,432

 

4,120

 

Total revenues

 

23,157

 

20,446

 

Interest expense

 

 

 

 

 

Cardmember lending

 

1,260

 

841

 

Charge card and other

 

1,530

 

1,126

 

Total

 

2,790

 

1,967

 

Revenues net of interest expense

 

20,367

 

18,479

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

Marketing, promotion, rewards and cardmember services

 

5,098

 

4,772

 

Human resources

 

4,001

 

3,679

 

Professional services

 

1,637

 

1,621

 

Occupancy and equipment

 

1,054

 

1,012

 

Communications

 

342

 

322

 

Other

 

980

 

993

 

Total

 

13,112

 

12,399

 

Provisions for losses and benefits

 

 

 

 

 

Charge card

 

721

 

658

 

Cardmember lending

 

1,791

 

1,139

 

Other (including investment certificates)

 

306

 

331

 

Total

 

2,818

 

2,128

 

Pretax income from continuing operations

 

4,437

 

3,952

 

Income tax provision

 

1,228

 

1,236

 

Income from continuing operations

 

3,209

 

2,716

 

(Loss) Income from discontinued operations, net of tax

 

(28

)

69

 

Net income

 

$

3,181

 

$

2,785

 

 

 

 

 

 

 

Earnings per Common Share — Basic:

 

 

 

 

 

Income from continuing operations

 

$

2.72

 

$

2.23

 

(Loss) Income from discontinued operations

 

(0.02

)

0.06

 

Net income

 

$

2.70

 

$

2.29

 

 

 

 

 

 

 

Earnings per Common Share — Diluted:

 

 

 

 

 

Income from continuing operations

 

$

2.67

 

$

2.19

 

(Loss) Income from discontinued operations

 

(0.02

)

0.05

 

Net income

 

$

2.65

 

$

2.24

 

 

 

 

 

 

 

Average common shares outstanding for earnings per common share:

 

 

 

 

 

Basic

 

1,179

 

1,217

 

Diluted

 

1,202

 

1,242

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.45

 

$

0.42

 

 

See Notes to Consolidated Financial Statements.

 

2



 

AMERICAN EXPRESS COMPANY
CONSOLIDATED BALANCE SHEETS

(Millions, except share data)

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

8,410

 

$

5,306

 

Accounts receivable and accrued interest:

 

 

 

 

 

Cardmember receivables, less reserves: 2007, $998; 2006, $981

 

37,536

 

36,386

 

Other receivables, less reserves: 2007, $39; 2006, $35

 

2,694

 

2,279

 

Investments

 

16,485

 

17,954

 

Loans:

 

 

 

 

 

Cardmember lending, less reserves: 2007, $1,469; 2006, $1,171

 

49,018

 

42,135

 

Other, less reserves: 2007, $47; 2006, $36

 

887

 

981

 

Land, buildings and equipment – at cost, less accumulated depreciation: 2007, $3,366; 2006, $2,980

 

2,589

 

2,350

 

Other assets

 

6,680

 

6,526

 

Assets of discontinued operations

 

16,628

 

14,412

 

Total assets

 

$

140,927

 

$

128,329

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Customers’ deposits

 

$

9,036

 

$

12,010

 

Travelers Cheques outstanding

 

6,980

 

7,215

 

Accounts payable

 

10,308

 

8,676

 

Investment certificate reserves

 

5,460

 

6,058

 

Short-term debt

 

15,442

 

15,236

 

Long-term debt

 

54,060

 

42,747

 

Other liabilities

 

12,640

 

11,931

 

Liabilities of discontinued operations

 

16,103

 

13,945

 

Total liabilities

 

130,029

 

117,818

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common shares, $.20 par value, authorized 3.6 billion shares; issued and outstanding 1,169 million shares in 2007 and 1,199 million shares in 2006

 

234

 

240

 

Additional paid-in capital

 

10,099

 

9,638

 

Retained earnings

 

1,126

 

1,153

 

Accumulated other comprehensive income (loss), net of tax:

 

 

 

 

 

Net unrealized securities gains

 

5

 

92

 

Net unrealized derivatives (losses) gains

 

(9

)

27

 

Foreign currency translation adjustments

 

(241

)

(222

)

Net unrealized pension and other postretirement benefit costs

 

(316

)

(417

)

Total accumulated other comprehensive loss

 

(561

)

(520

)

Total shareholders’ equity

 

10,898

 

10,511

 

Total liabilities and shareholders’ equity

 

$

140,927

 

$

128,329

 

 

See Notes to Consolidated Financial Statements.

 

3



 

AMERICAN EXPRESS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Millions)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2007

 

2006

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

3,181

 

$

2,785

 

Loss (Income) from discontinued operations, net of tax

 

28

 

(69

)

Income from continuing operations

 

3,209

 

2,716

 

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:

 

 

 

 

 

Provisions for losses and benefits

 

2,955

 

2,101

 

Depreciation and amortization

 

482

 

456

 

Deferred taxes, acquisition costs and other

 

(589

)

(43

)

Stock-based compensation

 

214

 

204

 

Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:

 

 

 

 

 

Trading securities

 

1,276

 

 

Accounts receivable and accrued interest

 

(477

)

(176

)

Other operating assets

 

(428

)

(130

)

Accounts payable and other liabilities

 

2,403

 

1,882

 

Decrease in Travelers Cheques outstanding

 

(236

)

(225

)

Net cash provided by (used in) operating activities attributable to discontinued operations

 

418

 

(36

)

Net cash provided by operating activities

 

9,227

 

6,749

 

Cash Flows from Investing Activities

 

 

 

 

 

Sale of investments

 

2,706

 

3,184

 

Maturity and redemption of investments

 

4,085

 

8,135

 

Purchase of investments

 

(6,712

)

(11,100

)

Net increase in cardmember loans/receivables

 

(11,395

)

(7,320

)

Proceeds from cardmember loan securitizations

 

4,790

 

3,491

 

Maturities of cardmember loan securitizations

 

(3,500

)

(4,435

)

Loan operations and principal collections, net

 

11

 

105

 

Purchase of land, buildings and equipment

 

(657

)

(474

)

Sale of land, buildings and equipment

 

19

 

29

 

(Acquisitions) dispositions, net of cash sold

 

(124

)

336

 

Net cash used in investing activities attributable to discontinued operations

 

(1,466

)

(105

)

Net cash used in investing activities

 

(12,243

)

(8,154

)

Cash Flows from Financing Activities

 

 

 

 

 

Net change in customers’ deposits

 

(2,952

)

(4,316

)

Sale of investment certificates

 

2,418

 

3,859

 

Redemption of investment certificates

 

(3,057

)

(4,604

)

Net increase (decrease) in debt with maturities of three months or less

 

2,238

 

(2,067

)

Issuance of debt

 

20,805

 

21,215

 

Principal payments on debt

 

(12,187

)

(10,553

)

Issuance of American Express common shares and other

 

722

 

757

 

Repurchase of American Express common shares

 

(2,787

)

(2,990

)

Dividends paid

 

(536

)

(480

)

Net cash provided by financing activities attributable to discontinued operations

 

1,652

 

1,505

 

Net cash provided by financing activities

 

6,316

 

2,326

 

Effect of exchange rate changes on cash

 

78

 

109

 

Net increase in cash and cash equivalents

 

3,378

 

1,030

 

Cash and cash equivalents at beginning of period includes cash of discontinued operations: 2007, $2,940; 2006, $1,464

 

8,246

 

7,604

 

Cash and cash equivalents at end of period includes cash of discontinued operations: 2007, $3,214; 2006, $2,920

 

$

11,624

 

$

8,634

 

 

See Notes to Consolidated Financial Statements.

 

4



 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.              Basis of Presentation

 

The accompanying Consolidated Financial Statements should be read in conjunction with the financial statements which are incorporated by reference in the Annual Report on Form 10-K of American Express Company (the Company) for the year ended December 31, 2006. Changes to the Company’s reportable operating segments have been made as further discussed below. Additionally, certain reclassifications of prior year amounts have been made to conform to the current presentation related to discontinued operations as further discussed below, and for reclassifications of certain amounts from professional services and occupancy and equipment expense to human resources and other expense. The above items are contained in the current report on Form 8-K dated November 1, 2007. In addition, beginning prospectively as of July 1, 2006, certain card acquisition-related costs were reclassified from other expenses to a reduction in net card fees.

 

The interim financial information in this report has not been audited. In the opinion of management, all adjustments necessary for a fair statement of the consolidated financial position and the consolidated results of operations for the interim periods have been made. All adjustments made were of a normal, recurring nature. Results of operations reported for interim periods are not necessarily indicative of results for the entire year.

 

Reportable Operating Segments

 

The Company instituted organizational changes effective July 1, 2007, which reflect a reorganization of the Company into two distinct customer-focused groups, the Global Consumer Group and the Global Business-to-Business Group. The Company continues to report the U.S. Card Services segment and the Global Network & Merchant Services segment consistent with previous reporting. The previously reported International Card & Global Commercial Services segment is now reported as two separate segments, the International Card Services segment and the Global Commercial Services segment. The U.S. Card Services and International Card Services segments are aligned with the Global Consumer Group, and the Global Network & Merchant Services and Global Commercial Services segments are aligned with the Global Business-to-Business Group. The Company has reclassified the prior period amounts to be consistent with the new reportable operating segments. Refer to Note 7 for further details of the Company’s reportable operating segments.

 

Discontinued Operations

 

On September 18, 2007, the Company announced that it entered into an agreement to sell its international banking subsidiary, American Express Bank Ltd. (AEB) and American Express International Deposit Company (AEIDC), a subsidiary which issues investment certificates to AEB’s customers, to Standard Chartered PLC (Standard Chartered) for the approximate value of $1.1 billion, subject to certain regulatory approvals. Standard Chartered will pay the Company an amount equal to the net asset value of the AEB businesses that are being sold at the closing date plus $300 million. At September 30, 2007, this would have amounted to approximately $825 million. As discussed above, the Company also expects to realize an additional amount representing the net asset value of AEIDC which was also contracted to be sold to Standard Chartered through a put/call agreement subsequent to the sale of AEB. As of September 30, 2007, the net asset value of that business was $262 million. This value is expected to be realized through (i) dividends from the subsidiary to the Company and (ii) a subsequent payment from Standard Chartered based on the net asset value of AEIDC on the date the business is transferred to them 18 months after the completion of the sale of AEB.

 

Beginning with the third quarter of 2007, and for all prior periods, the results, assets, and liabilities of AEB (except for certain components of AEB that are not being sold) have been removed from the Corporate & Other segment and reported within the discontinued operations captions in the Company’s Consolidated Financial Statements. AEIDC will continue to be included in continuing operations within the Corporate & Other segment until such time as AEIDC qualifies for classification as a discontinued operation which will occur approximately one year prior to its transfer to Standard Chartered.

 

5



 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

During the third quarter of 2007, the Company recorded a charge within other revenues of approximately $81 million ($41 million after-tax) related to AEIDC. The charge related to the sale of certain AEIDC securities and the reclassification of the AEIDC investment portfolio ($3.5 billion at September 30, 2007) from the available-for-sale to the trading investment category as a result of the related AEB sale agreement’s impact on the holding period for these investments. The charge principally reflected the reduction in value within the AEIDC investment portfolio attributable to market interest rate movements since the date that the investment securities were purchased that were previously recorded in accumulated other comprehensive income (loss), net of tax effects, which is a component of shareholders’ equity. The Company will report future changes in the market value of AEIDC’s investment portfolio within the income statement until AEIDC is sold.

 

In addition, other interest income includes income related to investments made as a result of AEIDC’s investment certificates business.

 

The operating results, assets and liabilities, and cash flows of discontinued operations are presented separately in the Company’s Consolidated Financial Statements and the Notes to the Consolidated Financial Statements have been adjusted to exclude discontinued operations unless otherwise noted.

 

AMEX Assurance Company

 

During the third quarter of 2005, the Company recorded a $115 million liability related to the share purchase agreement with Ameriprise Financial, Inc. (Ameriprise) to purchase all of the shares of AMEX Assurance Company (AAC), a subsidiary of Ameriprise, within a period not to exceed two years from the spin-off date of September 30, 2005. During the third quarter of 2007, the Company purchased all the outstanding common shares of AAC for $115 million. The Company had previously consolidated AAC as a variable interest entity since the spin-off of Ameriprise and therefore there is no impact on the Company’s Consolidated Financial Statements.

 

Recently Issued Accounting Standards

 

The Financial Accounting Standards Board (FASB) has recently issued the following accounting standards, which are effective beginning January 1, 2008. The Company is currently evaluating the impact of these accounting standards.

 

                  Statement of Financial Accounting Standard (SFAS) No. 157, “Fair Value Measurements” (SFAS No. 157), establishes a framework for measuring fair value and applies broadly to financial and non-financial assets and liabilities measured at fair value under existing authoritative accounting pronouncements. SFAS No. 157 establishes a fair value hierarchy that prioritizes inputs to valuation techniques used for financial instruments without active markets and for non-financial assets and liabilities. SFAS No. 157 also expands disclosure requirements regarding methods used to measure fair value and the effects on earnings.

 

                  SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115” (SFAS No. 159), provides companies with an option to report selected financial assets and liabilities at fair value.

 

                  FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation No. 39” (FIN 39-1), permits a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. The Company does not expect FIN 39-1, which substantially relates to AEB operations, to have a material impact on its Consolidated Financial Statements.

 

6



 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

                  Emerging Issues Task Force Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF 06-11), clarifies when income tax benefits for dividends paid on share-based payment awards should be recognized in equity or the income statement. The Company does not expect EITF 06-11 to have a material impact on its Consolidated Financial Statements.

 

2.              Discontinued Operations

 

The operating results, assets and liabilities, and cash flows of discontinued operations are presented separately in the Company’s Consolidated Financial Statements. Summary operating results of the discontinued operations primarily included AEB (except for certain components of AEB that are not being sold), as further described in Note 1, as well as businesses disposed of in previous years. Results from discontinued operations for the three and nine months ended September 30, 2007 and 2006, were as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(Millions)

 

2007

 

2006

 

2007

 

2006

 

Revenues net of interest expense

 

$

181

 

$

172

 

$

561

 

$

572

 

 

 

 

 

 

 

 

 

 

 

Pretax (loss) income from discontinued operations

 

$

(13

)

$

25

 

$

(12

)

$

92

 

Income tax (benefit) provision

 

(6

)

(8

)

16

 

23

 

(Loss) Income from discontinued operations, net of tax

 

$

(7

)

$

33

 

$

(28

)

$

69

 

 

Assets and liabilities of the discontinued operations related to AEB were as follows:

 

 

 

September 30,

 

December 31,

 

(Millions)

 

2007

 

2006

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

3,214

 

$

2,940

 

Investments

 

3,403

 

3,036

 

Loans, net of reserves

 

8,238

 

7,319

 

Other assets

 

1,773

 

1,117

 

Total assets

 

$

16,628

 

$

14,412

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Customers’ deposits

 

$

14,886

 

$

12,935

 

Other liabilities

 

1,217

 

1,010

 

Total liabilities

 

16,103

 

13,945

 

Net assets

 

$

525

 

$

467

 

 

Accumulated other comprehensive loss, net of tax, associated with discontinued operations was as follows:

 

 

 

September 30,

 

December 31,

 

(Millions)

 

2007

 

2006

 

 

 

 

 

 

 

Accumulated other comprehensive loss, net of tax:

 

 

 

 

 

Net unrealized securities losses

 

$

(27

)

$

(10

)

Foreign currency translation adjustments

 

(26

)

(25

)

Net unrealized pension and other postretirement benefit costs

 

(2

)

(2

)

Total accumulated other comprehensive loss

 

$

(55

)

$

(37

)

 

7



 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.              Guarantees

 

The Company provides cardmember protection plans that cover losses associated with purchased products, as well as certain other guarantees in the ordinary course of business that are within the scope of FASB Financial Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45).

 

The following table provides information related to such guarantees as of September 30, 2007 and December 31, 2006:

 

 

 

September 30, 2007

 

December 31, 2006

 

 

 

Maximum amount of
undiscounted future
payments (a)

 

Amount of related
liability (b)

 

Maximum amount of
undiscounted future
payments (a)

 

Amount of related
liability (b)

 

 

 

(Billions)

 

(Millions)

 

(Billions)

 

(Millions)

 

Type of Guarantee:

 

 

 

 

 

 

 

 

 

 

 

 

 

Card and travel operations (c)

 

$

78

 

$

67

 

$

75

 

$

119

 

Other (d)

 

1

 

49

 

1

 

34

 

Total

 

$

79

 

$

116

 

$

76

 

$

153

 

 


(a)    Calculated based on the hypothetical scenario that all claims occur within the next 12 months.

 

(b)   Included as part of other liabilities on the Company’s Consolidated Balance Sheets. The decrease in the liability from December 31, 2006 to September 30, 2007, results substantially from a reduction in merchant-related reserves primarily related to the airline industry.

 

(c)    Includes Credit Card Registry, Merchandise Protection, Account Protection, Merchant Protection, and Baggage Protection. The Company generally has no collateral or other recourse provisions related to these guarantees.

 

(d)   Other primarily relates to real estate and tax indemnifications as well as contingent consideration obligations, among other guarantees provided in the ordinary course of business.

 

4.              Comprehensive Income

 

The components of comprehensive income, net of related tax, were as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(Millions)

 

2007

 

2006

 

2007

 

2006

 

Net income

 

$

1,067

 

$

967

 

$

3,181

 

$

2,785

 

Other comprehensive income (losses):

 

 

 

 

 

 

 

 

 

Net unrealized securities gains (losses) (a)

 

123

 

177

 

(87

)

11

 

Net unrealized derivative losses

 

(58

)

(113

)

(36

)

(80

)

Foreign currency translation adjustments

 

(10

)

1

 

(19

)

175

 

Net unrealized pension and other postretirement benefit costs (b)

 

7

 

 

101

 

 

Total

 

$

1,129

 

$

1,032

 

$

3,140

 

$

2,891

 

 


(a) In connection with the initial adoption of SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140” (SFAS No. 155), as of January 1, 2007, the Company recognized a gain of $80 million ($50 million after-tax) related to the fair value of the interest-only strips, which was recorded in other comprehensive income (loss) in previous periods. Changes in the fair value of the interest-only strips subsequent to the adoption of this standard are reflected in securitization income, net. The amounts for the three and nine months ended September 30, 2007, included a reclassification of unrealized losses of $53 million, net of tax, to earnings related to the AEIDC investment portfolio as a result of the sale of certain AEIDC securities and the reclassification from the available-for-sale to the trading investment category.

 

(b) The nine months ended September 30, 2007, represents primarily the impact of remeasuring U.S. plan obligations in January 2007 based on updated census and claims information, which increased the funded status of the Company’s pension and other postretirement benefit obligations and the recognition of previously unamortized losses/costs as a result of the curtailment discussed below in Note 5.

 

8



 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5.              Retirement Plans

 

The components of the net pension and postretirement benefit cost for all defined benefit plans accounted for under SFAS No. 87, “Employers’ Accounting for Pensions,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” were as follows:

 

 

 

Three Months Ended September 30,

 

 

 

Pension Plans

 

Postretirement Plans

 

(Millions)

 

2007

 

2006

 

2007

 

2006

 

Service cost

 

$

26

 

$

26

 

$

1

 

$

1

 

Interest cost

 

31

 

28

 

5

 

5

 

Expected return on plan assets

 

(39

)

(34

)

 

 

Recognized net actuarial loss

 

9

 

9

 

2

 

3

 

Settlement/curtailment (gain) loss

 

(2

)

1

 

 

 

Net periodic benefit cost

 

$

25

 

$

30

 

$

8

 

$

9

 

 

 

 

Nine Months Ended September 30,

 

 

 

Pension Plans

 

Postretirement Plans

 

(Millions)

 

2007

 

2006

 

2007

 

2006

 

Service cost

 

$

79

 

$

81

 

$

4

 

$

4

 

Interest cost

 

95

 

84

 

14

 

15

 

Expected return on plan assets

 

(115

)

(101

)

 

 

Amortization of prior service cost

 

1

 

1

 

(1

)

(1

)

Recognized net actuarial loss

 

26

 

26

 

6

 

10

 

Settlement/curtailment (gain)/loss (a)

 

(66

)

2

 

 

 

Net periodic benefit cost

 

$

20

 

$

93

 

$

23

 

$

28

 

 


(a) In January 2007, the Company approved amendments to its defined benefit plans in the United States effective July 1, 2007, which provide that active participants will immediately vest in their accrued benefits, but no longer accrue future benefits other than interest credits under the plans. As a result of this action, there was a net reduction in the projected benefit obligation of $91 million and a related curtailment gain of $63 million ($39 million after-tax), at the time of the plan amendment. In combination with these changes, the Company has modified the existing defined contribution plan in the United States to provide for greater Company contributions to employees who were employed by the Company at March 31, 2007.

 

9



 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

6.              Earnings per Common Share (EPS)

 

Basic EPS is computed using the average actual shares outstanding during the period. Diluted EPS is basic EPS adjusted for the dilutive effect of stock options, restricted stock awards, and other financial instruments that may be converted into common shares. The computations of basic and diluted EPS are as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(Millions, except per share amounts)

 

2007

 

2006

 

2007

 

2006

 

Numerator:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1,074

 

$

934

 

$

3,209

 

$

2,716

 

(Loss) Income from discontinued operations, net of tax

 

(7

)

33

 

(28

)

69

 

Net income

 

$

1,067

 

$

967

 

$

3,181

 

$

2,785

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic:

Weighted-average shares outstanding during the period

 

1,170

 

1,202

 

1,179

 

1,217

 

Add:

Dilutive effect of stock options, restricted stock awards and other dilutive securities

 

22

 

25

 

23

 

25

 

Diluted

 

1,192

 

1,227

 

1,202

 

1,242

 

 

 

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.92

 

$

0.78

 

$

2.72

 

$

2.23

 

(Loss) Income from discontinued operations

 

(0.01

)

0.02

(a)

(0.02

)

0.06

 

Net income

 

$

0.91

 

$

0.80

 

$

2.70

 

$

2.29

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.90

 

$

0.76

 

$

2.67

 

$

2.19

 

(Loss) Income from discontinued operations

 

 

0.03

(a)

(0.02

)

0.05

 

Net income

 

$

0.90

 

$

0.79

 

$

2.65

 

$

2.24

 

 


(a) Diluted EPS from discontinued operations was greater than basic EPS from discontinued operations due to the impact of rounding of fractional amounts.

 

For the three months ended September 30, 2007 and 2006, the dilutive effect of unexercised stock options excluded 7 million and 6 million options, respectively, from the computation of EPS because inclusion of the options would have been anti-dilutive. Similarly, the number of these excluded stock options for the nine months ended September 30, 2007 and 2006, was 8 million and 6 million, respectively. See Notes 8 and 18 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, for discussion of the Company’s subordinated debentures, including the circumstances under which additional common shares would be reflected in the computation of EPS.

 

7.              Reportable Operating Segment Information

 

The Company is a leading global payments, network, and travel company that is principally engaged in businesses comprising four reportable operating segments: U.S. Card Services (USCS), International Card Services (ICS), Global Commercial Services (GCS), and Global Network & Merchant Services (GNMS). As discussed in Note 1, the previously reported International Card & Global Commercial Services segment is now reported as two separate segments: ICS, which issues proprietary consumer and small business cards outside the U.S., and GCS which offers global corporate payment and travel-related products and services.

 

During 2006, the Company completed the sales of its card and merchant-related activities in Brazil, Malaysia, and Indonesia, which were included in the ICS and GCS segments prior to the sales. The Company will continue to maintain its presence in the card and merchant-related businesses within Brazil,

 

10



 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Malaysia, and Indonesia through its Global Network Services arrangements, which are reflected in the GNMS segment.

 

The following table presents certain operating segment information which reflects the modifications discussed in Note 1:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(Millions)

 

2007

 

2006

 

2007

 

2006

 

Revenues, excluding interest income:

 

 

 

 

 

 

 

 

 

USCS

 

$

3,016

 

$

2,738

 

$

8,769

 

$

8,077

 

ICS

 

907

 

787

 

2,560

 

2,439

 

GCS

 

1,166

 

1,041

 

3,452

 

3,170

 

GNMS

 

901

 

773

 

2,587

 

2,219

 

Corporate & Other, including adjustments and eliminations

 

73

 

149

 

357

 

421

 

Total

 

$

6,063

 

$

5,488

 

$

17,725

 

$

16,326

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

USCS

 

$

1,232

 

$

932

 

$

3,558

 

$

2,421

 

ICS

 

399

 

318

 

1,117

 

924

 

GCS

 

14

 

4

 

36

 

10

 

GNMS

 

1

 

 

2

 

4

 

Corporate & Other, including adjustments and eliminations

 

244

 

250

 

719

 

761

 

Total

 

$

1,890

 

$

1,504

 

$

5,432

 

$

4,120

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

USCS

 

$

659

 

$

467

 

$

1,814

 

$

1,227

 

ICS

 

192

 

153

 

535

 

424

 

GCS

 

116

 

96

 

347

 

262

 

GNMS

 

(78

)

(68

)

(234

)

(205

)

Corporate & Other, including adjustments and eliminations

 

119

 

79

 

328

 

259

 

Total

 

$

1,008

 

$

727

 

$

2,790

 

$

1,967

 

 

 

 

 

 

 

 

 

 

 

Revenues net of interest expense:

 

 

 

 

 

 

 

 

 

USCS

 

$

3,589

 

$

3,203

 

$

10,513

 

$

9,271

 

ICS

 

1,114

 

952

 

3,142

 

2,939

 

GCS

 

1,064

 

949

 

3,141

 

2,918

 

GNMS

 

980

 

841

 

2,823

 

2,428

 

Corporate & Other, including adjustments and eliminations

 

198

 

320

 

748

 

923

 

Total

 

$

6,945

 

$

6,265

 

$

20,367

 

$

18,479

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) from continuing operations:

 

 

 

 

 

 

 

 

 

USCS

 

$

592

 

$

558

 

$

1,816

 

$

1,679

 

ICS

 

140

 

106

 

359

 

244

 

GCS

 

135

 

105

 

426

 

360

 

GNMS

 

266

 

212

 

768

 

578

 

Corporate & Other

 

(59

)

(47

)

(160

)

(145

)

Total

 

$

1,074

 

$

934

 

$

3,209

 

$

2,716

 

 

11



 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

8.              Restructuring Charges

 

During the three months ended September 30, 2007, the Company recorded restructuring charges primarily related to the Company’s corporate travel business. During the nine months ended September 30, 2007, the Company recorded restructuring charges related to the Company’s corporate travel, prepaid services, and technology areas. These charges principally related to the consolidation of business operations and exiting certain businesses.

 

Restructuring charges are comprised of severance obligations and other exit costs. The charges and any subsequent adjustments related to severance obligations are included in human resources in the Company’s Consolidated Statements of Income, while other exit costs are included in occupancy and equipment, professional services, and other expenses. Cash payments related to remaining restructuring liabilities are expected to be completed by the end of the first quarter of 2009, with the exception of contractual long-term severance arrangements which are expected to be completed by the end of the fourth quarter of 2009 and certain lease obligations which will continue until their expiration in 2012.

 

The following table summarizes by category the Company’s restructuring charge activity for each of the Company’s reportable operating segments:

 

Nine Months Ended September 30, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability balance at
December 31, 2006

 

Restructuring charges, net of
reversals

 

Cash paid

 

Other-non-cash(b)

 

Liability balance at
September 30, 2007

 

(Millions)

 

Severance

 

Other

 

Total

 

Severance(a)

 

Other

 

Total

 

Severance

 

Other

 

Total

 

Severance

 

Other

 

Total

 

Severance

 

Other

 

Total

 

USCS

 

$

16

 

$

 

$

16

 

$

8

 

$

5

 

$

13

 

$

(9

)

$

 

$

(9

)

$

 

$

(5

)

$

(5

)

$

15

 

$

 

$

15

 

ICS

 

13

 

1

 

14

 

3

 

 

3

 

(7

)

 

(7

)

 

 

 

9

 

1

 

10

 

GCS

 

27

 

3

 

30

 

19

 

 

19

 

(19

)

(1

)

(20

)

 

 

 

27

 

2

 

29

 

GNMS

 

7

 

 

7

 

3

 

1

 

4

 

(5

)

 

(5

)

 

 

 

5

 

1

 

6

 

Corporate & Other

 

26

 

 

26

 

(5

)

9

 

4

 

(9

)

 

(9

)

(2

)

(2

)

(4

)

10

 

7

 

17

 

Total

 

$

89

 

$

4

 

$

93

 

$

28

 

$

15

 

$

43

 

$

(49

)

$

(1

)

$

(50

)

$

(2

)

$

(7

)

$

(9

)

$

66

 

$

11

 

$

77

 

 

Three Months Ended September 30, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability balance at
June 30, 2007

 

Restructuring charges, net of
reversals

 

Cash paid

 

Other-non-cash

 

Liability balance at
September 30, 2007

 

(Millions)

 

Severance

 

Other

 

Total

 

Severance(a)

 

Other

 

Total

 

Severance

 

Other

 

Total

 

Severance

 

Other

 

Total

 

Severance

 

Other

 

Total

 

USCS

 

$

 20

 

$

 —

 

$

 20

 

$

 —

 

$

 —

 

$

 —

 

$

 (5

)

$

 —

 

$

 (5

)

$

 —

 

$

 —

 

$

 —

 

$

 15

 

$

 —

 

$

 15

 

ICS

 

11

 

1

 

12

 

 

 

 

(2

)

 

(2

)

 

 

 

9

 

1

 

10

 

GCS

 

23

 

2

 

25

 

9

 

 

9

 

(5

)

 

(5

)

 

 

 

27

 

2

 

29

 

GNMS

 

7

 

1

 

8

 

1

 

 

1

 

(3

)

 

(3

)

 

 

 

5

 

1

 

6

 

Corporate & Other

 

14

 

5

 

19

 

(1

)

2

 

1

 

(2

)

 

(2

)

(1

)

 

(1

)

10

 

7

 

17

 

Total

 

$

 75

 

$

 9

 

$

 84

 

$

 9

 

$

 2

 

$

 11

 

$

 (17

)

$

 —

 

$

 (17

)

$

 (1

)

$

 —

 

$

 (1

)

$

 66

 

$

 11

 

$

 77

 

 


(a)          Reversals of $2 million in Corporate & Other were recorded for the three months ended September 30, 2007, and $2 million in USCS, $2 million in ICS, $1 million in GNMS and $8 million in Corporate & Other were recorded for the nine months ended September 30, 2007, primarily due to a greater portion of impacted employees finding other opportunities with the Company than was originally anticipated.

 

(b)         Represents primarily asset write-downs.

 

12



 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As of September 30, 2007, the total expenses to be incurred for previously approved restructuring activities that were in-progress are not expected to be materially different than the cumulative expenses incurred to date for these programs. This is attributable to the fact that future decisions to initiate new restructuring activities do not represent future phases of previously approved programs. The amounts in the table below relate to restructuring programs that were in-progress during 2007 and initiated at various dates between the fourth quarter of 2004 and the third quarter of 2007.

 

Cumulative Restructuring Expense Incurred To Date on In-Progress Restructuring Programs

 

(Millions)

 

Severance

 

Other

 

Total

 

USCS

 

$

25

 

$

4

 

$

29

 

ICS

 

33

 

6

 

39

 

GCS

 

140

 

25

 

165

 

GNMS

 

11

 

1

 

12

 

Corporate & Other

 

99

 

22

 

121

 

Total

 

$

308

 

$

58

 

$

366

 

 

9.              Income Taxes

 

The Company adopted FASB Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48) as of January 1, 2007. The initial adoption of FIN 48 resulted in a charge of approximately $127 million to the January 1, 2007 balance of retained earnings.

 

As of January 1, 2007, and including the impact of the initial adoption charge to retained earnings, the Company’s total gross benefits for tax positions that have not been recognized through the financial statements were approximately $1.1 billion, exclusive of interest and penalties described below. Included in the $1.1 billion are approximately $636 million of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in a future period. There have been no significant changes in the Company’s unrecognized tax benefits as of September 30, 2007.

 

The Company’s continuing practice is to recognize interest and penalties relating to unrecognized tax benefits in the income tax provision, which therefore has an impact on the effective tax rate. As of January 1, 2007, the Company had $222 million ($153 million after-tax) accrued for the payment of interest and penalties. There have been no significant changes in the Company’s accrual for the payment of interest and penalties as of September 30, 2007.

 

The Company is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which the Company has significant business operations. The tax years under examination and open for examination vary by jurisdiction. The Company is currently under examination by the IRS for the years 1997 – 2004.

 

Given the inherent complexities of the business and that the Company is subject to taxation in a substantial number of jurisdictions, the Company routinely assesses the likelihood of additional assessments in each of the taxing jurisdictions and has established a liability for unrecognized tax benefits that management believes to be adequate. Once established, unrecognized tax benefits are adjusted if more accurate information is available, or a change in circumstance, or an event occurs necessitating a change to the liability. The Company believes that it is reasonably possible that the unrecognized tax benefits will significantly decrease within the next twelve months in the range of $0 to $400 million as a result of potential resolutions of prior years’ tax items with various taxing authorities. Such resolutions could include payments of additional taxes and the recognition of tax benefits. Due to the inherent complexities

 

13



 

AMERICAN EXPRESS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

and the number of tax years currently open for examination in multiple jurisdictions, it is not possible to quantify the impact such changes may have on the effective tax rate and net income.

 

The following table summarizes the Company’s effective tax rate:

 

 

 

Three Months Ended
September 30, 2007 (a)

 

Nine Months Ended
September 30, 2007 (b)

 

Full Year 2006

 

Effective tax rate

 

24%

 

28%

 

30%

 

 


(a) The effective tax rate for the three months ended September 30, 2007, reflected tax benefits of $75 million primarily related to the resolution of prior years’ tax items.

 

(b) The effective tax rate for the nine months ended September 30, 2007, reflected tax benefits of $75 million primarily related to the resolution of prior years’ tax items and a $65 million tax benefit from the IRS related to the treatment of certain prior years’ card fee income.

 

10.       Contingencies

 

The Company and its subsidiaries are involved in a number of legal and arbitration proceedings, including class actions, concerning matters arising in connection with the conduct of their respective business activities. The Company believes it has meritorious defenses to each of these actions and intends to defend them vigorously. In the course of its business, the Company and its subsidiaries are also subject to governmental examinations, information gathering requests, subpoenas, inquiries and investigations. The Company believes that it is not a party to, nor are any of its properties the subject of, any pending legal, arbitration, regulatory, tax or investigative proceedings that would have a material adverse effect on the Company’s consolidated financial condition or liquidity. However, it is possible that the outcome of any such proceedings could have a material impact on results of operations in any particular reporting period as the proceedings are resolved.

 

11.   Subsequent Event

 

On November 7, 2007, the Company announced that it had entered into an agreement with Visa, Inc., Visa USA, and Visa International (collectively Visa) to remove Visa and certain of its member banks as defendants in the Company’s lawsuit against MasterCard International, Inc. (MasterCard), Visa and their member banks. The lawsuit alleges MasterCard, Visa and their member banks illegally blocked the Company from the bank-issued card business in the United States. The agreement is subject to the approval of Visa’s member banks.

 

Under terms of the settlement agreement reached with Visa, the Company will receive an aggregate maximum payment of $2.25 billion.  An initial payment of $1.13 billion ($700 million after-tax) will be recorded as a reduction to operating expenses by the Company upon approval of the agreement by Visa’s member banks.  The remainder, payable in installments of up to $70 million ($43 million after-tax) per quarter over the next four years, is subject to achieving certain quarterly performance criteria within the U.S. Global Network Services business of the Company.  The Company will also incur litigation expenses related to the settlement.

 

14



 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

American Express Company (the Company) is a leading global payments, network, and travel company. The Company offers a broad range of products and services including charge and credit cards; travel agency services; travel and business expense management products and services; network services and merchant acquisition and merchant processing for the Company’s network partners and proprietary payments businesses; lending products; point-of-sale and back-office products and services for merchants; magazine publishing; and stored value products such as Travelers Cheques and gift cards. The Company’s various products and services are sold globally to diverse customer groups, including consumers, small businesses, mid-market companies, and large corporations. These products and services are sold through various channels including direct mail, on-line applications, targeted sales forces, and direct response advertising.

 

The Company generates revenue from a variety of sources including payment products, such as charge and credit cards, travel services, and stored value products, including Travelers Cheques. Charge and credit cards generate four types of revenue for the Company:

 

                  Discount revenue, which is the Company’s largest revenue source, represents fees charged to merchants when cardmembers use their cards to purchase goods and services on the Company’s network;

                  Finance revenue, which is earned on outstanding balances related to the cardmember lending portfolio;

                  Card fees, which are earned for annual membership, and other commissions and fees such as foreign exchange conversion fees and card-related fees and assessments; and

                  Securitization income, net which reflects the net earnings related to cardmember loans financed through securitization activities.

 

In addition to funding and operating costs associated with these activities, other major expense categories are related to marketing and rewards programs that add new cardmembers and promote cardmember loyalty and spending, and provisions for anticipated cardmember credit and fraud losses.

 

The Company believes that its “spend-centric” business model (which focuses on generating revenues primarily by driving spending on its cards and secondarily by finance charges and fees) has significant competitive advantages. Average spending per cardmember, which is substantially higher than the Company’s competitors’, represents greater value to merchants in the form of loyal customers and higher sales. This gives the Company the ability overall to earn a premium discount rate and invest in greater value-added services for merchants and cardmembers. As a result of the higher revenues generated from higher spending, the Company has the flexibility to offer more attractive rewards and other incentives to cardmembers, which in turn create an incentive to spend more on their cards.

 

The Company creates shareholder value by focusing on the following elements:

 

                  Driving growth principally through organic opportunities and related business strategies, as well as joint ventures and selected acquisitions;

                  Delivering returns well in excess of the Company’s cost of capital; and

                  Distributing excess capital to shareholders through dividends and stock repurchases.

 

Overall, it is management’s priority to increase shareholder value over the moderate to long term by achieving the following long-term financial targets, on average and over time:

 

                  Revenues net of interest expense growth of at least 8 percent;

                  Earnings per share growth of 12 to 15 percent; and

                  Return on average equity (ROE) of 33 to 36 percent.

 

The relatively high ROE target reflects the success of the Company’s spend-centric business model and its effectiveness in capturing high spending consumer, small business, and corporate cardmembers.

 

15



 

Assuming the Company achieves its financial objectives noted above, it will seek to return to shareholders an average of 65 percent of capital generated, subject to business mix, acquisitions, and rating agency requirements.

 

Certain reclassifications of prior period amounts have been made to conform to the current presentation, including revenue and expense reclassifications contained in the current report on Form 8-K dated November 1, 2007. These reclassifications related to reportable operating segments and discontinued operations as further discussed below, and reclassifications from professional services and occupancy and equipment expense to human resources and other expense. In addition, beginning prospectively as of July 1, 2006, certain card acquisition-related costs were reclassified from other expenses to a reduction in net card fees. Except for discontinued operations as discussed below, these items had no impact on the Company’s consolidated pretax income from continuing operations, income tax provision, and income from continuing operations.

 

Certain of the statements in this Form 10-Q report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See the “Forward-Looking Statements” section below.

 

Reportable Operating Segments

 

The Company instituted organizational changes effective July 1, 2007, which reflect a reorganization of the Company into two distinct customer-focused groups, the Global Consumer Group and the Global Business-to-Business Group. The Company continues to report the U.S. Card Services segment and the Global Network & Merchant Services segment consistent with previous reporting. The previously reported International Card & Global Commercial Services segment is now reported as two separate segments, the International Card Services segment and the Global Commercial Services segment. The U.S. Card Services and International Card Services segments are aligned with the Global Consumer Group, and the Global Network & Merchant Services and Global Commercial Services segments are aligned with the Global Business-to-Business Group. The Company has reclassified the prior period amounts to be consistent with the new reportable operating segments.

 

Discontinued Operations

 

On September 18, 2007, the Company announced that it entered into an agreement to sell its international banking subsidiary, American Express Bank Ltd. (AEB) and American Express International Deposit Company (AEIDC), a subsidiary which issues investment certificates to AEB’s customers, to Standard Chartered PLC (Standard Chartered) for the approximate value of $1.1 billion, subject to certain regulatory approvals. Standard Chartered will pay the Company an amount equal to the net asset value of the AEB businesses that are being sold at the closing date plus $300 million. At September 30, 2007, this would have amounted to approximately $825 million. As discussed above, the Company also expects to realize an additional amount representing the net asset value of AEIDC, which was also contracted to be sold to Standard Chartered through a put/call agreement subsequent to the sale of AEB. As of September 30, 2007, the net asset value of that business was $262 million. This value is expected to be realized through (i) dividends from the subsidiary to the Company and (ii) a subsequent payment from Standard Chartered based on the net asset value of AEIDC on the date the business is transferred to them 18 months after the completion of the sale of AEB.

 

Beginning with the third quarter of 2007, and for all prior periods, the results, assets, and liabilities of AEB (except for certain components of AEB that are not being sold) have been removed from the Corporate & Other segment and reported within the discontinued operations captions in the Company’s Consolidated Financial Statements. AEIDC will continue to be included in continuing operations within the Corporate & Other segment until such time as AEIDC qualifies for classification as a discontinued operation which will occur approximately one year prior to its transfer to Standard Chartered.

 

The operating results, assets and liabilities, and cash flows of discontinued operations are presented separately in the Company’s Consolidated Financial Statements and the following discussion reflects continuing operations unless otherwise noted.

 

16



 

American Express Company

Selected Statistical Information

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(Billions, except percentages and where indicated)

 

2007

 

2006

 

2007

 

2006

 

Card billed business(a):

 

 

 

 

 

 

 

 

 

United States

 

$

115.2

 

$

101.7

 

$

336.3

 

$

297.1

 

Outside the United States

 

47.3

 

38.6

 

133.5

 

110.9

 

Total

 

$

162.5

 

$

140.3

 

$

469.8

 

$

408.0

 

Total cards-in-force (millions)(b):

 

 

 

 

 

 

 

 

 

United States

 

51.7

 

46.8

 

51.7

 

46.8

 

Outside the United States

 

33.0

 

29.7

 

33.0

 

29.7

 

Total

 

84.7

 

76.5

 

84.7

 

76.5

 

Basic cards-in-force (millions)(b):

 

 

 

 

 

 

 

 

 

United States

 

40.1

 

36.0

 

40.1

 

36.0

 

Outside the United States

 

28.3

 

25.2

 

28.3

 

25.2

 

Total

 

68.4

 

61.2

 

68.4

 

61.2

 

 

 

 

 

 

 

 

 

 

 

Average discount rate(c)

 

2.57

%

2.57

%

2.57

%

2.57

%

Average basic cardmember spending (dollars)(d)

 

$

3,006

 

$

2,782

 

$

8,874

 

$

8,216

 

Average fee per card (dollars)(d)

 

$

36

 

$

34

 

$

36

 

$

34

 

 


(a)

Card billed business includes activities (including cash advances) related to proprietary cards, cards issued under network partnership agreements, and certain insurance fees charged on proprietary cards.

 

 

(b)

Total cards-in-force represents the number of cards that are issued and outstanding. Proprietary basic consumer cards-in-force includes basic cards issued to the primary account owner and does not include additional supplemental cards issued on that account. Proprietary basic small business and corporate cards-in-force include basic and supplemental cards issued to employee cardmembers. Non-proprietary basic cards-in-force includes all cards that are issued and outstanding under network partnership agreements.

 

 

(c)

Computed as follows: Discount revenue from all card spending (proprietary and Global Network Services) at merchants divided by all billed business (proprietary and Global Network Services) generating discount revenue at such merchants. Only merchants acquired by the Company are included in the computation.

 

 

(d)

Average basic cardmember spending and average fee per card are computed from proprietary card activities only. Average fee per card is computed based on net card fees excluding the amortization of deferred direct acquisition costs.

 

17



 

Selected Statistical Information (continued)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(Billions, except percentages and where indicated)

 

2007

 

2006

 

2007

 

2006

 

Worldwide cardmember receivables:

 

 

 

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