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, 2006
or
|_| 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 |_|
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 |_| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes |_| 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 31, 2006
Common Shares (par value $.20 per share) 1,204,773,766 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, 2006 and 2005 1
Consolidated Statements of Income - Nine
months ended September 30, 2006 and 2005 2
Consolidated Balance Sheets - September 30,
2006 and December 31, 2005 3
Consolidated Statements of Cash Flows - Nine
months ended September 30, 2006 and 2005 4
Notes to Consolidated Financial Statements 5 - 14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15 - 40
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 40
Item 4. Controls and Procedures 40 - 42
Part II. Other Information:
Item 1. Legal Proceedings 42 - 43
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 44
Item 6. Exhibits 45
Signatures 46
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,
------------------
2006 2005
------ ------
Net revenues:
Discount revenue $3,259 $2,894
Cardmember lending finance charge revenue, net of
interest 912 648
Net card fees 462 511
Travel commissions and fees 427 421
Other commissions and fees 620 598
Securitization income, net 384 353
Other investment and interest income, net of interest 264 246
Other 431 357
------ ------
Total 6,759 6,028
------ ------
Expenses:
Marketing, promotion, rewards and cardmember services 1,589 1,492
Human resources 1,213 1,197
Provisions for losses and benefits:
Charge card 257 299
Cardmember lending 412 364
Investment certificates and other 129 76
------ ------
Total 798 739
Professional services 684 563
Occupancy and equipment 375 346
Interest 324 238
Communications 107 112
Other 331 261
------ ------
Total 5,421 4,948
------ ------
Pretax income from continuing operations 1,338 1,080
Income tax provision 382 215
------ ------
Income from continuing operations 956 865
Income from discontinued operations, net of tax 11 165
------ ------
Net income $ 967 $1,030
====== ======
Earnings per Common Share ---- Basic:
Income from continuing operations $ 0.79 $ 0.70
Income from discontinued operations 0.01 0.14
------ ------
Net income $ 0.80 $ 0.84
====== ======
Earnings per Common Share ---- Diluted:
Income from continuing operations $ 0.78 $ 0.69
Income from discontinued operations 0.01 0.13
------ ------
Net income $ 0.79 $ 0.82
====== ======
Average common shares outstanding for earnings per common
share:
Basic 1,202 1,229
====== ======
Diluted 1,227 1,254
====== ======
Cash dividends declared per common share $ 0.15 $ 0.12
====== ======
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,
------------------
2006 2005
------- -------
Net revenues:
Discount revenue $ 9,520 $ 8,393
Cardmember lending finance charge revenue, net of
interest 2,467 1,877
Net card fees 1,515 1,515
Travel commissions and fees 1,328 1,345
Other commissions and fees 1,901 1,745
Securitization income, net 1,142 965
Other investment and interest income, net of interest 813 776
Other 1,242 1,072
------- -------
Total 19,928 17,688
------- -------
Expenses:
Marketing, promotion, rewards and cardmember services 4,782 4,260
Human resources 3,729 3,652
Provisions for losses and benefits:
Charge card 658 748
Cardmember lending 1,139 934
Investment certificates and other 399 278
------- -------
Total 2,196 1,960
Professional services 1,903 1,594
Occupancy and equipment 1,086 1,038
Interest 898 671
Communications 333 342
Other 896 882
------- -------
Total 15,823 14,399
------- -------
Pretax income from continuing operations 4,105 3,289
Income tax provision 1,301 819
------- -------
Income from continuing operations 2,804 2,470
(Loss) Income from discontinued operations, net of tax (19) 519
------- -------
Net income $ 2,785 $ 2,989
======= =======
Earnings per Common Share ---- Basic:
Income from continuing operations $ 2.30 $ 2.00
(Loss) Income from discontinued operations (0.01) 0.42
------- -------
Net income $ 2.29 $ 2.42
======= =======
Earnings per Common Share ---- Diluted:
Income from continuing operations $ 2.26 $ 1.96
(Loss) Income from discontinued operations (0.02) 0.42
------- -------
Net income $ 2.24 $ 2.38
======= =======
Average common shares outstanding for earnings per common
share:
Basic 1,217 1,233
======= =======
Diluted 1,242 1,257
======= =======
Cash dividends declared per common share $ 0.42 $ 0.36
======= =======
See Notes to Consolidated Financial Statements.
2
AMERICAN EXPRESS COMPANY
CONSOLIDATED BALANCE SHEETS
(Millions, except share data)
(Unaudited)
September 30, December 31,
2006 2005
------------- ------------
Assets
Cash and cash equivalents $ 7,978 $ 7,126
Accounts receivable and accrued interest:
Cardmember receivables, less reserves: 2006,
$947; 2005, $942 34,075 33,216
Other receivables, less reserves: 2006, $52;
2005, $66 2,381 2,281
Investments 21,575 21,334
Loans:
Cardmember lending, less reserves: 2006,
$1,126; 2005, $996 37,207 32,108
International banking, less reserves: 2006,
$79; 2005, $64 7,128 7,049
Other, less reserves: 2006, $31; 2005, $37 1,573 1,644
Land, buildings and equipment - at cost, less
accumulated depreciation: 2006, $3,178;
2005, $2,868 2,261 2,230
Other assets 6,753 6,972
-------- --------
Total assets $120,931 $113,960
======== ========
Liabilities and Shareholders' Equity
Customers' deposits $ 21,861 $ 24,579
Travelers Cheques outstanding 6,949 7,175
Accounts payable 9,005 7,824
Investment certificate reserves 6,165 6,872
Short-term debt 15,220 15,633
Long-term debt 39,407 30,781
Other liabilities 11,568 10,547
-------- --------
Total liabilities 110,175 103,411
-------- --------
Shareholders' equity:
Common shares, $.20 par value, authorized
3.6 billion shares; issued and
outstanding 1,204 million shares in 2006
and 1,241 million shares in 2005 241 248
Additional paid-in capital 9,140 8,652
Retained earnings 1,408 1,788
Accumulated other comprehensive income
(loss), net of tax:
Net unrealized securities gains 148 137
Net unrealized derivatives gains 63 143
Foreign currency translation adjustments (225) (400)
Minimum pension liability (19) (19)
-------- --------
Total accumulated other comprehensive loss (33) (139)
-------- --------
Total shareholders' equity 10,756 10,549
-------- --------
Total liabilities and shareholders' equity $120,931 $113,960
======== ========
See Notes to Consolidated Financial Statements.
3
AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions)
(Unaudited)
Nine Months Ended
September 30,
--------------------
2005
(Revised-
2006 See Note 1)
-------- ---------
Cash Flows from Operating Activities
Net income $ 2,785 $ 2,989
Loss (Income) from discontinued operations, net
of tax 19 (519)
-------- --------
Income from continuing operations 2,804 2,470
Adjustments to reconcile income from continuing
operations to net cash provided by operating
activities:
Provisions for losses and benefits 2,186 1,986
Depreciation and amortization 484 443
Deferred taxes, acquisition costs and
other (110) (197)
Stock-based compensation 220 192
Changes in operating assets and
liabilities, net of effects of
acquisitions and dispositions:
Accounts receivable and accrued
interest (168) 84
Other operating assets (315) 1,325
Accounts payable and other liabilities 1,893 1,213
Decrease in Travelers Cheques
outstanding (237) (258)
Net cash (used in) provided by operating
activities attributable to
discontinued operations (8) 341
-------- --------
Net cash provided by operating activities 6,749 7,599
-------- --------
Cash Flows from Investing Activities
Sale of investments 3,344 3,304
Maturity and redemption of investments 9,440 2,990
Purchase of investments (12,630) (6,819)
Net increase in cardmember loans/receivables (7,320) (6,230)
Proceeds from cardmember receivable
securitizations -- 1,197
Maturities of cardmember receivable
securitizations -- (1,750)
Proceeds from cardmember loan securitizations 3,491 4,887
Maturities of cardmember loan securitizations (4,435) (4,463)
Loan operations and principal collections, net (157) (218)
Purchase of land, buildings and equipment (495) (406)
Sale of land, buildings and equipment 42 207
Dispositions, net of cash sold 550 190
Cash spun-off to Ameriprise -- (3,678)
Net cash used in investing activities
attributable to discontinued operations (1) (113)
-------- --------
Net cash used in investing activities (8,171) (10,902)
-------- --------
Cash Flows from Financing Activities
Net (decrease) increase in customers' deposits (2,893) 2,673
Sale of investment certificates 3,859 3,951
Redemption of investment certificates (4,604) (3,187)
Net (decrease) increase in debt with maturities
of three months or less (2,040) 417
Issuance of debt 21,354 7,895
Principal payments on debt (10,799) (10,817)
Issuance of American Express common shares and
other 757 867
Repurchase of American Express common shares (2,990) (1,654)
Dividends paid (480) (449)
Net cash provided by financing activities
attributable to discontinued operations 1 1,377
-------- --------
Net cash provided by financing activities 2,165 1,073
Effect of exchange rate changes on cash 109 (54)
-------- --------
Net increase (decrease) in cash and cash
equivalents 852 (2,284)
Cash and cash equivalents at beginning of
period includes cash of discontinued
operations of $2,099 in 2005 7,126 9,907
-------- --------
Cash and cash equivalents at end of period $ 7,978 $ 7,623
======== ========
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, 2005. Certain
reclassifications of prior period amounts have been made to conform to
the current presentation, including reclassifications contained in the
current report on Form 8-K dated April 5, 2006. 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.
The Consolidated Statement of Cash Flows for the nine months ended
September 30, 2005, has been revised from the presentation used in the
Form 10-Q for the quarterly period ended September 30, 2005, to
separately disclose the operating, investing and financing portions of
the cash flows attributable to discontinued operations.
During the three months ended September 30, 2006, the Company completed
the sale of its card and merchant-related activities in Malaysia to
Maybank, and its card and merchant-related activities in Indonesia to
Bank Danamon for combined proceeds of $94 million. The transactions
generated a gain of $33 million ($24 million after-tax), and are reported
as a reduction to other expenses in the Company's continuing operations.
The gain is reported within the International Card & Global Commercial
Services segment. The Company will continue to maintain its presence in
the card and merchant-related businesses within Malaysia and Indonesia
through its Global Network Services arrangements with the acquirers.
On June 30, 2006, the Company completed the sale of its card and
merchant-related activities and international banking activities in
Brazil to Banco Bradesco S.A. (Bradesco), for approximately $470 million.
The transaction generated a net after-tax gain of $109 million. $144
million ($131 million after-tax) of the gain relates to the card and
merchant-related activities sold, and is reported as a reduction to other
expenses in the Company's continuing operations ($119 million in the
International Card & Global Commercial Services segment and $25 million
in the Global Network & Merchant Services segment). The Company will
continue to maintain its presence in the card and merchant businesses
within Brazil through its Global Network Services arrangement with the
acquirer. A $22 million after-tax loss related to the sale of the
Company's international banking activities to Bradesco is reported in
discontinued operations for banking activities the Company exited in
Brazil.
On September 30, 2005, the Company completed the spin-off of Ameriprise
Financial, Inc. (Ameriprise), formerly known as American Express
Financial Corporation, the Company's financial planning and financial
services business. In addition, during the third quarter of 2005, the
Company completed certain dispositions including the sale of American
Express Tax and Business Services, Inc. (TBS), its tax, accounting and
consulting business. The operating results and cash flows related to
Ameriprise and certain dispositions (including TBS) have been reflected
as discontinued operations in the Consolidated Financial Statements, and
the Notes to the Consolidated Financial Statements have been adjusted to
exclude discontinued operations unless otherwise noted. Note 2 provides
additional information regarding discontinued operations.
Cardmember lending finance charge revenue is presented net of interest
expense of $327 million and $224 million for the three months ended
September 30, 2006 and 2005, respectively, and $863 million and $605
million for the nine months ended September 30, 2006 and 2005,
respectively. Other investment and interest income is presented net of
interest expense of $110 million and $83 million for the three months
ended September 30, 2006 and 2005, respectively, and $296 million and
$231 million for the nine months ended September 30, 2006 and 2005,
respectively.
5
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company establishes reserves related to its Membership Rewards
program to cover the cost of future reward redemptions. The Company
continually evaluates its reserve methodology based on developments in
redemption patterns, cost per point redeemed and other factors, in the
U.S. and internationally. Rewards costs for the nine months ended
September 30, 2006, reflected a $62 million ($40 million after-tax)
charge recorded in the three months ended June 30, 2006, related to
certain adjustments made to the Membership Rewards reserve model outside
the U.S., and a $112 million ($73 million after-tax) charge recorded in
the three months ended March 31, 2006, related to certain adjustments
made to the Membership Rewards reserve model in the U.S. These
adjustments to the Membership Rewards reserve models related to a higher
ultimate redemption rate assumption to reflect program redemption trends
over the past five years as management believes this is a better
indicator of future redemption behavior than inception to date statistics
used previously.
Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans -
an amendment of the FASB Statements No. 87, 88, 106, and 132(R)" (SFAS
No. 158), which requires the funded status of pension and other
postretirement plans to be recorded on the balance sheet as of December
31, 2006, with a corresponding offset, net of tax effects, recorded in
accumulated other comprehensive income (loss) within shareholders'
equity. Under SFAS No. 158, all previously unrecognized gains and losses,
prior service costs and credits, and remaining transition amounts under
SFAS Nos. 87 and 106 will be recognized in accumulated other
comprehensive income (loss), net of tax effects, which is a component of
shareholders' equity and therefore does not result in an immediate charge
to earnings. Those previously unrecognized amounts will be amortized as a
component of net periodic pension expense in future periods. Effective for
years ending after December 15, 2008, the measurement date for the benefit
obligation and plan assets is required to be the Company's fiscal year
end. The Company currently uses a September 30 measurement date.
The Company estimates that the adoption of SFAS No. 158's balance sheet
requirements at December 31, 2006, will result in a reduction to
accumulated other comprehensive income (loss) within shareholders' equity
of approximately $400 million to $500 million, net of tax. The Company is
evaluating the impact of adopting a December 31 measurement date.
SFAS No. 156, "Accounting for Servicing of Financial Assets - an
amendment of FASB Statement No. 140" (SFAS No. 156), requires all
separately recognized servicing assets and servicing liabilities to be
initially measured at fair value, if practicable. Subsequent accounting
may be elected under either the amortization method, which systematically
amortizes the servicing asset or liability to income, or the fair value
measurement method, which remeasures the servicing asset or liability at
fair value with the changes recorded in income. Election of the fair
value method is made on a class-by-class basis for each separately
recognized servicing asset and liability. SFAS No. 156 applies to all
financial instruments acquired or issued after December 31, 2006. The
Company does not expect any impact to its Consolidated Financial
Statements.
The FASB has also recently issued the following accounting standards,
which are effective after December 31, 2006. The Company is currently
evaluating the impact of these recently issued accounting standards on
the Company's Consolidated Financial Statements:
- FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes" (FIN 48), is an interpretation that clarifies the
accounting for tax positions accounted for under FASB Statement
No. 109, "Accounting for Income Taxes." FIN 48 prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of benefits
associated with tax positions taken or expected to be taken in
a tax return. For those benefits to be recognized, a tax
position must be more-likely-than-not to be sustained upon
examination by taxing authorities. The amount recognized is
measured as the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement.
FIN 48 is applicable to all tax positions as of January 1,
2007. The initial effect of adoption will be recorded in income
taxes payable (in other liabilities) with an offsetting
adjustment to retained earnings.
6
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- SFAS No. 155, "Accounting for Certain Hybrid Financial
Instruments - an amendment of FASB Statements No. 133 and 140"
(SFAS No. 155), ends the temporary exemption of beneficial
interests in securitized assets from the bifurcation
requirements of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 155 permits fair
value remeasurement of any hybrid financial instrument that
contains an embedded derivative that otherwise would require
bifurcation. This will primarily affect the Company's
accounting for its interest only strips, where the changes in
fair value are currently recorded in accumulated other
comprehensive income in shareholders' equity. Remeasurements of
these hybrid financial instruments and bifurcated derivatives
will be recorded in income after the adoption of this new
standard. SFAS No. 155 applies to all financial instruments
acquired or issued after December 31, 2006.
- 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. 157 is effective as
of the first quarter of 2008; earlier adoption is encouraged
although the Company currently does not intend to adopt early.
2. Discontinued Operations
On June 30, 2006, the Company completed the sale of its card and
merchant-related activities and international banking activities in
Brazil for approximately $470 million. The international banking portion
of the transaction generated an after-tax loss of $22 million reported in
discontinued operations for banking activities the Company exited in
Brazil. These banking activities previously were reflected in the
International Card & Global Commercial Services segment. Prior to the
second quarter of 2006, financial results for these operations were not
reclassified as discontinued operations because such results are not
material.
On September 30, 2005, the Company completed the distribution of
Ameriprise common stock to the Company's shareholders in a tax-free
transaction for U.S. federal income tax purposes. In addition, during the
third quarter of 2005, the Company completed certain dispositions
including the sale of TBS.
The operating results 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. Summary
operating results of the discontinued operations for the three and nine
months ended September 30, 2006 and 2005 were:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Millions) 2006 2005 2006 2005
---- ------ ---- ------
Net revenues $ -- $1,993 $ 9 $5,813
==== ====== ==== ======
Pretax (loss) income from
discontinued operations $ (2) $ 213 $(62) $ 698
Income tax (benefit) provision (13)(a) 48 (43) 179
---- ------ ---- ------
Income (Loss) from discontinued
operations, net of tax $ 11 $ 165 $(19) $ 519
==== ====== ==== ======
(a) Primarily represents a tax benefit related to Ameriprise upon
finalization of the Company's 2005 U.S. federal tax return.
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
that are within the scope of FASB 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 guarantees that are
within the scope of FIN 45 as of September 30, 2006 and December 31,
2005:
September 30, 2006 December 31, 2005
---------------------------------------------------------------------------------
Maximum Amount of Maximum Amount of
Undiscounted Future Amount of Undiscounted Future Amount of
Payments (a) Related Liability Payments (a) Related Liability
(Billions) (Millions) (Billions) (Millions)
---------------------------------------------------------------------------------
Card and travel
operations (b) $ 99 $105 $95 $108
International banking and
other (c) 2 92 2 98
---------------------------------------------------------------------------------
Total $101 $197 $97 $206
=================================================================================
(a) Calculated based on the hypothetical scenario that all claims occur
within the next 12 months.
(b) Includes Credit Card Registry, Merchandise and Accounting Protection
Programs, Merchant Protection and Baggage Protection. The Company
generally has no collateral or other recourse provisions related to these
guarantees.
(c) Includes contingent consideration obligations as well as guarantees the
Company provides through its international banking business, such as
financial letters of credit, performance guarantees, and financial
guarantees. The international banking guarantees range in term from three
months to one year. The Company receives a fee related to these
guarantees, many of which help facilitate cross-border transactions. The
maximum potential exposure related to the Company's international banking
guarantees at both September 30, 2006 and December 31, 2005 was
approximately $1 billion. The Company held collateral of approximately $1
billion related to such guarantees at both September 30, 2006 and
December 31, 2005.
8
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Comprehensive Income
The components of comprehensive income, net of related tax, for the three
and nine months ended September 30, 2006 and 2005 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Millions) 2006 2005 2006 2005
------ ------ ------ ------
Net income $ 967 $1,030 $2,785 $2,989
Net unrealized securities gains (losses) 177 (496) 11 (545)
Net unrealized derivative (losses) gains (113) 117 (80) 252
Foreign currency translation adjustments
(gains (losses)) 1 (23) 175 (63)
------ ------ ------ ------
Total $1,032 $ 628 $2,891 $2,633
====== ====== ====== ======
5. Retirement Plans
The components of the net periodic pension cost included in continuing
operations for all defined benefit plans accounted for under SFAS No. 87,
"Employers' Accounting for Pensions," were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Millions) 2006 2005 2006 2005
---- ---- ----- -----
Service cost $ 28 $ 26 $ 86 $ 78
Interest cost 31 29 93 88
Expected return on plan assets (37) (35) (111) (106)
Amortization of prior service cost -- -- 1 1
Recognized net actuarial loss 9 7 28 20
Settlement/curtailment loss 1 2 2 5
---- ---- ----- -----
Net periodic pension benefit cost $ 32 $ 29 $ 99 $ 86
==== ==== ===== =====
The net periodic postretirement benefit expense recognized for the three
months ended September 30, 2006 and 2005, was $10 million and $9 million,
respectively, and $30 million and $26 million for the nine months ended
September 30, 2006 and 2005, respectively.
9
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Stock-Based Compensation
Effective July 1, 2005, the Company adopted SFAS No. 123 (revised 2004),
"Share-Based Payment (SFAS No. 123 (R))," using the modified prospective
application. The adoption did not have a material impact on the Company's
Consolidated Financial Statements since the Company has been expensing
share-based awards granted after January 1, 2003, under the provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation." Included in net
income is expense of $14 million and $13 million after-tax for the three
months ended September 30, 2006 and 2005, respectively, and $41 million
and $52 million after-tax for the nine months ended September 30, 2006
and 2005, respectively, related to stock options granted January 1, 2003,
or later.
The following table illustrates the effect on net income and earnings per
common share (EPS) assuming the Company had followed the fair value
recognition provisions of SFAS No. 123(R) for all outstanding and
unvested stock options and other stock-based compensation for the nine
months ended September 30, 2005:
Nine Months Ended
September 30, 2005
------------------
(Millions, except per share amounts)
Net income as reported: $2,989
Add: Stock-based employee compensation
included in reported net income, net of
related tax effects (a) 167
Deduct: Total stock-based employee
compensation expense determined under fair
value based method, net of related tax effects (a) (177)
------
Pro forma net income $2,979
======
Basic EPS:
As reported $ 2.42
Pro forma $ 2.42
Diluted EPS:
As reported $ 2.38
Pro forma $ 2.37
(a) Includes amounts related to discontinued operations as well as $18
million in expense for Portfolio Grants included in other compensation
expense prior to adoption of SFAS 123(R).
10
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Earnings per Common Share
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 for the three and nine months ended September 30, 2006 and
2005, are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Millions, except per share amounts) 2006 2005 2006 2005
------ ------ ------ ------
Numerator:
Income from continuing operations $ 956 $ 865 $2,804 $2,470
Income (Loss) from discontinued operations, net of tax 11 165 (19) 519
------ ------ ------ ------
Net income $ 967 $1,030 $2,785 $2,989
====== ====== ====== ======
Denominator:
Basic: Weighted-average shares outstanding during the
period 1,202 1,229 1,217 1,233
Add: Dilutive effect of stock options, restricted
stock awards and other dilutive securities 25 25 25 24
------ ------ ------ ------
Diluted 1,227 1,254 1,242 1,257
====== ====== ====== ======
Basic EPS:
Income from continuing operations $ 0.79 $ 0.70 $ 2.30 $ 2.00
Income (Loss) from discontinued operations 0.01 0.14 (0.01) 0.42
------ ------ ------ ------
Net income $ 0.80 $ 0.84 $ 2.29 $ 2.42
====== ====== ====== ======
Diluted EPS:
Income from continuing operations $ 0.78 $ 0.69 $ 2.26 $ 1.96
Income (Loss) from discontinued operations 0.01 0.13 (0.02) 0.42
------ ------ ------ ------
Net income $ 0.79 $ 0.82 $ 2.24 $ 2.38
====== ====== ====== ======
For the three months ended September 30, 2006 and 2005, the dilutive
effect of unexercised stock options excludes 6 million and 13 million
options, respectively, from the computation of EPS because inclusion of
the options would have been anti-dilutive. Similarly, the number of
these excluded unexercised stock options for the nine months ended
September 30, 2006 and 2005, was 6 million and 17 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,
2005, for discussion of the Company's convertible debentures, including
the circumstances under which they would affect the computation of EPS,
and when they would be convertible into the Company's common shares.
11
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Reportable Operating Segment Information
The Company is a leading global payments, network and travel company that
is principally engaged in businesses comprising three reportable
operating segments: U.S. Card Services, International Card & Global
Commercial Services, and Global Network & Merchant Services. The Company
considers a combination of factors when evaluating the composition of its
reportable operating segments and the aggregation of operating segments
with similar attributes, including economic characteristics (primarily
net income metrics), products and services offered, classes of customers,
product distribution channels, geographic considerations (primarily U.S.
versus international), and regulatory environment considerations.
The following table presents certain reportable operating segment
information for the three and nine months ended September 30, 2006 and
2005:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Millions) 2006 2005 2006 2005
------ ------ ------- -------
Net revenues:
U.S. Card Services $3,534 $3,044 $10,199 $ 8,797
International Card & Global
Commercial Services 2,287 2,212 7,031 6,606
Global Network & Merchant Services 798 693 2,292 2,022
Corporate & Other 140 79 406 263
------ ------ ------- -------
Total $6,759 $6,028 $19,928 $17,688
====== ====== ======= =======
Income (Loss) from continuing
operations:
U.S. Card Services $ 580 $ 443 $ 1,742 $ 1,402
International Card & Global
Commercial Services 216 249 654 666
Global Network & Merchant Services 212 141 578 407
Corporate & Other (52) 32 (170) (5)
------ ------ ------- -------
Total $ 956 $ 865 $ 2,804 $ 2,470
====== ====== ======= =======
12
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Restructuring Charges
During the three months ended September 30, 2006, the Company recorded
restructuring charges relating to the Company's business travel
operations. During the nine months ended September 30, 2006, the Company
recorded restructuring charges relating to the Company's business travel
operations, Travelers Cheque, and international card businesses. The
charges related to severance obligations are included in human resources.
The other exit costs are included in occupancy and equipment,
professional services, and other expenses in the Company's Consolidated
Statements of Income. Cash payments related to remaining restructuring
liabilities are expected to be completed by the end of the first quarter
of 2008, except for certain lease obligations which will continue until
their expiration in 2010.
The following table summarizes by category the Company's restructuring
charge activity for each of the Company's reportable operating segments.
International Global
Card & Global Network &
U.S. Card Commercial Merchant Corporate
(Millions) Services Services Services & Other Total
---------------------------------------------------------
Severance
Liability at December 31, 2005 $ 4 $ 48 $ 2 $ 44 $ 98
Cash paid (2) (24) -- (16) (42)
Charges, net of reversals (a) 2 31 2 9 44
Other - non-cash related -- (2) -- -- (2)
---------------------------------------------------------
Liability at June 30, 2006 4 53 4 37 98
Cash paid (1) (10) -- (7) (18)
Charges, net of reversals (a) (1) 8 3 (1) 9
Other -- (1) (1) (2) (4)
---------------------------------------------------------
Liability at September 30, 2006 2 50 6 27 85
---------------------------------------------------------
Other
Liability at December 31, 2005 -- 4 -- 5 9
Cash paid (2) (1) -- (5) (8)
Charges 6 3 -- -- 9
Other - non-cash related (4) (2) -- -- (6)
---------------------------------------------------------
Liability at June 30, 2006 -- 4 -- -- 4
Cash paid -- (2) -- -- (2)
Charges -- 1 -- -- 1
---------------------------------------------------------
Liability at September 30, 2006 -- 3 -- -- 3
---------------------------------------------------------
Total liability at September 30, 2006 $ 2 $ 53 $ 6 $ 27 $ 88
=========================================================
(a) Reversals of $1 million and $2 million in U.S. Card Services, $1 million
and $1 million in International Card & Global Commercial Services, and $1
million and $4 million in Corporate & Other, were recorded for the three
and nine months ended September 30, 2006, respectively.
13
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the total charges cumulatively incurred to
date through September 30, 2006. The Company makes decisions on
restructuring initiatives as the economic environment dictates. As of
September 30, 2006, the total expected expenses to be incurred for
previously approved restructuring activities is not expected to be
materially different than the cumulative expenses incurred to date.
The amounts in the table below relate to restructuring programs that
were not completed prior to 2006, and that were initiated at various dates
between the fourth quarter of 2004 and the third quarter of 2006.
Cumulative Restructuring Expense Incurred to Date
---------------------------------------------------------
International Global
Card & Global Network &
U.S. Card Commercial Merchant Corporate
(Millions) Services Services Services & Other Total
---------------------------------------------------------
Severance $11 $196 $ 8 $76 $291
Other 2 33 -- 21 56
---------------------------------------------------------
Total $13 $229 $ 8 $97 $347
=========================================================
10. Income Taxes
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 vary by jurisdiction. The Company routinely assesses the
likelihood of additional assessments in each of the taxing jurisdictions
resulting from these examinations. Tax reserves have been established
that the Company believes to be adequate in relation to the potential for
additional assessments. Once established, reserves are adjusted when more
information becomes available, a change in circumstance occurs or an
event occurs necessitating a change to the reserves.
The effective tax rate for the three and nine months ended September 30,
2006, was 29 percent and 32 percent, respectively, up from 24 percent for
the full year 2005. The 2005 full year effective tax rate reflected the
impact of tax benefits related to the finalization of certain state tax
returns and resolution of IRS audits of previous years' tax returns.
The effective tax rate for the three months ended September 30, 2006,
reflected the favorable impacts of a net interest receivable from the
IRS, finalization of the 2005 U.S. federal tax return, and an adjustment
of 2006 projected state taxes.
The effective tax rate for the nine months ended September 30, 2006,
reflected higher tax expense related to uncertainty regarding the
Company's ability to obtain tax benefits for certain expenses
attributable to foreign subsidiaries, a relatively high effective tax
rate due to the impact of foreign exchange translation on the gain on the
sale of the Company's investment in Egyptian American Bank, and a
relatively low effective tax rate benefit on the credit losses in Taiwan.
These items were offset by the favorable items noted above for the three
months ended September 30, 2006, and a relatively low effective rate on
the sale of the Company's card and merchant-related activities in Brazil
resulting principally from the difference between the applicable Brazil
tax rate and the higher U.S. statutory rate.
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 including
charge and credit cards; stored value products such as Travelers Cheques and
gift cards; travel agency services and travel, entertainment and purchasing
expense management services; network services and merchant acquisition and
merchant processing for our network partners and proprietary payments
businesses; and international banking products. The Company's various products
are sold globally to diverse customer groups, including consumers, small
businesses, mid-market companies, large corporations, and banking
institutions. These products 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 global
payments, such as charge and credit cards, travel services and stored value
products, including Travelers Cheques. Charge and credit cards generate
revenue for the Company primarily in four different ways:
- Discount revenue, the Company's largest single revenue source, which
represents fees charged to merchants when cardmembers use their
cards to purchase goods and services on our network,
- Finance charge 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 expenses related to marketing and reward
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 (that focuses on
generating revenues primarily by driving spending on its cards and secondarily
by finance charges and fees) has significant competitive advantages. For
merchants, the higher spending represents greater value in the form of loyal
customers and higher sales. This gives the Company the ability 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 organically, through related business
opportunities or 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, including:
- Earnings per share growth of 12 to 15 percent;
- Revenue growth of at least 8 percent; and
- A target return on equity (ROE) range.
After the completion of the spin-off of Ameriprise, the Company raised its ROE
target to 28 to 30 percent. Based on the Company's recent financial
performance and expectations regarding the Company's future performance, the
Company's targeted return on shareholders' equity has been raised to 33 to 36
percent, on
15
average and over time. The new 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 card members.
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.
During the three months ended September 30, 2006, the Company completed the
sale of its card and merchant-related activities in Malaysia to Maybank, and
its card and merchant-related activities in Indonesia to Bank Danamon for
combined proceeds of $94 million. The transactions generated a gain of $33
million ($24 million after-tax), and are reported as a reduction to other
expenses in the Company's continuing operations. The gain is reported within
the International Card & Global Commercial Services segment. The Company will
continue to maintain its presence in the card and merchant-related businesses
within Malaysia and Indonesia through its Global Network Services arrangements
with the acquirers.
On June 30, 2006, the Company completed the sale of its card and
merchant-related activities and international banking activities in Brazil to
Banco Bradesco S.A. (Bradesco), for approximately $470 million. The
transaction generated a net after-tax gain of $109 million. $144 million ($131
million after-tax) of the gain relates to the card and merchant-related
activities sold, and is reported as a reduction to other expenses in the
Company's continuing operations ($119 million in the International Card &
Global Commercial Services segment and $25 million in the Global Network &
Merchant Services segment). The Company will continue to maintain its presence
in the card and merchant businesses within Brazil through its Global Network
Services arrangement with the acquirer. A $22 million after-tax loss related
to the sale of the Company's international banking activities to Bradesco is
reported in discontinued operations for banking activities the Company exited
in Brazil. These banking activities previously were reflected in the
International Card & Global Commercial Services segment. Prior to the second
quarter of 2006, financial results for these operations were not reclassified
as discontinued operations because such results are not material. Financial
information and business metrics for the nine months ended September 30, 2006,
include the operating impact of the activities sold, while period end
disclosures reflect the sale.
On September 30, 2005, the Company completed the spin-off of Ameriprise
Financial, Inc. (Ameriprise), formerly known as American Express Financial
Corporation, the Company's financial planning and financial services business.
In addition, during the third quarter of 2005, the Company completed certain
dispositions including the sale of American Express Tax and Business Services,
Inc. (TBS), its tax, accounting and consulting business. The operating results
and cash flows related to Ameriprise and certain dispositions (including TBS)
have been reflected as discontinued operations in the Consolidated Financial
Statements.
Certain statistical information shown in the table below is presented on a
"managed basis," as if, in the U.S. Card Services segment, there had been no
cardmember lending securitization transactions, and certain tax-exempt
investment income had been earned on a taxable basis. These managed basis
adjustments, and management's rationale for such presentation, are discussed
further in U.S. Card Services below under "Differences between GAAP and
Managed Basis Presentation."
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.
16
American Express Company
Selected Statistical Information
(Billions, except percentages and where indicated)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2006 2005 2006 2005
------ ------ ------ ------
Card billed business(a):
United States $101.7 $ 89.6 $297.1 $257.7
Outside the United States 38.6 32.1 110.9 94.1
------ ------ ------ ------
Total $140.3 $121.7 $408.0 $351.8
====== ====== ====== ======
Total cards-in-force (millions)(a):
United States 46.8 42.0 46.8 42.0
Outside the United States 29.7 27.0 29.7 27.0
------ ------ ------ ------
Total 76.5 69.0 76.5 69.0
====== ====== ====== ======
Basic cards-in-force (millions)(a):
United States 36.0 31.9 36.0 31.9
Outside the United States 25.2 22.4 25.2 22.4
------ ------ ------ ------
Total 61.2 54.3 61.2 54.3
====== ====== ====== ======
Average discount rate(b) 2.57% 2.58% 2.57% 2.60%
Average basic cardmember spending (dollars)(a) $2,770 $2,610 $8,216 $7,662
Average fee per card (dollars)(a)(c) $ 34 $ 35 $ 34 $ 35
Travel sales $ 5.1 $ 4.8 $ 16.3 $ 15.4
Travel commissions and fees/sales 8.4% 8.7% 8.1% 8.7%
Worldwide Travelers Cheque and prepaid products:
Sales $ 5.6 $ 5.8 $ 14.9 $ 14.9
Average outstanding $ 7.2 $ 7.3 $ 7.0 $ 7.2
Average investments $ 7.9 $ 7.9 $ 7.7 $ 7.8
Investment yield(d) 4.9% 5.1% 5.0% 5.2%
Tax equivalent yield - managed(d) 7.5% 7.8% 7.6% 7.9%
International banking:
Total loans $ 7.2 $ 6.9 $ 7.2 $ 6.9
Private banking holdings $ 22.0 $ 20.2 $ 22.0 $ 20.2
(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.
Cards-in-force include proprietary cards and cards issued under network
partnership agreements. Average basic cardmember spending and average fee
per card are computed from proprietary card activities only.
(b) 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.
(c) Average fees per card are computed based on net card fees excluding the
amortization of deferred acquisition costs.
(d) Investment yield represents earnings on certain tax-exempt securities.
The tax equivalent yield - managed represents earnings on such tax-exempt
securities as if it had been earned on a taxable basis and assumes an
income tax rate of 35 percent. See the U.S. Card Services segment for
additional information on managed basis presentation.
17
American Express Company
Selected Statistical Information (continued)
(Billions, except percentages and where indicated)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2006 2005 2006 2005
------ ------- ------- -------
Worldwide cardmember receivables:
Total receivables $ 35.0 $ 31.9 $ 35.0 $ 31.9
90 days past due as a % of total 1.8% 1.7% 1.8% 1.7%
Loss reserves (millions): $ 947 $ 909 $ 947 $ 909
% of receivables 2.7% 2.9% 2.7% 2.9%
% of 90 days past due 149% 173% 149% 173%
Net loss ratio as a % of charge volume 0.26% 0.27% 0.23% 0.25%
Worldwide cardmember lending - owned basis(a):
Total loans $ 38.3 $ 29.9 $ 38.3 $ 29.9
30 days past due loans as a % of total 2.8% 2.5% 2.8% 2.5%
Loss reserves (millions):
Beginning balance $1,086 $ 888 $ 996 $ 972
Provision 381 325 1,056 853
Net write-offs (353) (280) (954) (832)
Other 12 19 28 (41)
------ ------ ------- -------
Ending balance $1,126 $ 952 $ 1,126 $ 952
====== ====== ======= =======
% of loans 2.9% 3.2% 2.9% 3.2%
% of past due 106% 128% 106% 128%
Average loans $ 37.5 $ 28.3 $ 35.2 $ 27.4
Net write-off rate 3.8% 4.0% 3.6% 4.0%
Net finance charge revenue(b)/average loans 9.6% 9.2% 9.4% 9.1%
Worldwide cardmember lending - managed basis(c):
Total loans $ 58.5 $ 50.6 $ 58.5 $ 50.6
30 days past due loans as a % of total 2.7% 2.4% 2.7% 2.4%
Loss reserves (millions):
Beginning balance $1,546 $1,367 $ 1,469 $ 1,475
Provision 512 510 1,383 1,425
Net write-offs (498) (494) (1,376) (1,458)
Other 11 18 95 (41)
------ ------ ------- -------
Ending balance $1,571 $1,401 $ 1,571 $ 1,401
====== ====== ======= =======
% of loans 2.7% 2.8% 2.7% 2.8%
% of past due 101% 114% 101% 114%
Average loans $ 57.6 $ 49.6 $ 55.6 $ 47.9
Net write-off rate 3.5% 4.0% 3.3% 4.1%
Net finance charge revenue(b)/average loans 9.6% 9.4% 9.4% 9.2%
(a) "Owned" or GAAP basis measurement reflects only cardmember loans included
in the Company's Consolidated Balance Sheets.
(b) Computed on an annualized basis.
(c) Includes on-balance sheet cardmember loans and off-balance sheet
securitized cardmember loans. The difference between the "owned basis"
(GAAP) information and "managed basis" information is attributable to the
effects of securitization activities. See the U.S. Card Services segment
for additional information on managed basis presentation.
***
18
The following discussions regarding Consolidated Results of Operations and
Consolidated Liquidity and Capital Resources are presented on a basis
consistent with GAAP.
Consolidated Results of Operations for the Three Months Ended September 30,
2006 and 2005
The Company's 2006 consolidated income from continuing operations rose 11
percent to $956 million and diluted earnings per share (EPS) from continuing
operations rose 13 percent to $0.78.
The Company's consolidated net income decreased 6 percent to $967 million and
diluted EPS decreased 4 percent to $0.79. Net income included $11 million of
income from discontinued operations as compared to $165 million a year ago. On
a trailing 12-month basis, return on average shareholders' equity was 34
percent, up from 24 percent a year ago.
As discussed below, results from continuing operations for the three months
ended September 30, 2006, included a gain related to the sales of the
Company's card and merchant-related activities in Malaysia and Indonesia.
Results from continuing operations for the three months ended September 30,
2005, included a tax benefit from the resolution of a prior year tax item, and
a provision to reflect the estimated costs related to Hurricane Katrina.
Net Revenues
Consolidated net revenues were $6.8 billion, up 12 percent from $6.0 billion.
Net revenues increased due primarily to higher discount revenues, increased
cardmember lending finance charge revenue, net of interest, greater other
revenues, and increased securitization income, net, partially offset by lower
net card fees. A reclassification of certain card acquisition-related costs,
as described within the net card fees discussion below, suppressed
consolidated net revenue growth by approximately 1 percent.
Discount revenue rose 13 percent to $3.3 billion as a result of a 15 percent
increase in worldwide billed business, partially offset by a lower average
discount rate. The decrease in the discount rate compared to last year
continues to reflect selective repricing initiatives and ongoing changes in
mix of spending between various merchant segments. Selective repricing
initiatives, continued changes in the mix of business and volume-related
pricing discounts will likely continue to result in some erosion of the
average discount rate over time. The 15 percent increase in worldwide billed
business reflected increases in average spending per proprietary basic card,
growth in cards-in-force, and reflects a 62 percent increase in billed
business related to Global Network Services from a year ago. A comparatively
weaker U.S. dollar resulted in a 1 percent benefit in the reported worldwide
growth rate.
U.S. billed business and billed business outside the U.S. were up 14 percent
and 20 percent, respectively, due to increases in average spending per
proprietary basic card, and growth in cards-in-force. The growth in the billed
business both within the U.S. and outside the U.S. reflected increases within
the Company's consumer card business, small business spending, and Corporate
Services volumes. Assuming no changes in foreign currency exchange rates from
the same period in the prior year, worldwide billed business increased 14
percent driven by increases in spending per proprietary basic card, and growth
in cards-in-force. Total billed business outside the U.S. increased 17 percent
reflecting double-digit proprietary growth in all regions except for Latin
America. Excluding the impact of the sale in Brazil, Latin America also
exhibited double-digit proprietary growth. Within the proprietary business
outside the U.S., billed business growth was driven by an increase in average
spending per proprietary basic card. The increase in proprietary business
outside the U.S. reflected growth in consumer and small business spending, and
an increase in Corporate Services volumes.
19
Percentage Increase
Assuming No Changes
Percentage in Foreign
Increase Exchange Rates(a)
----------------------------------
Worldwide
Billed business 15% 14%
Average spending per proprietary basic card 6 5
Cards-in-force 11
U.S.
Billed business 14
Average spending per proprietary basic card 4
Cards-in-force 11
Proprietary consumer card billed business(b) 11
Proprietary small business billed business(b) 15
Proprietary Corporate Services billed business(c) 14
Outside the U.S.
Billed business 20 17
Average spending per proprietary basic card 11 8
Cards-in-force 10
Proprietary consumer and small business billed
business(c) 12 9
Proprietary Corporate Services billed business(c) 18 14
(a) Assumes no changes in foreign currency exchange rates from the same
period in the prior year.
(b) Included in the U.S. Card Services segment.
(c) Included in the International Card & Global Commercial Services segment.
The increase in overall cards-in-force within both proprietary and Global
Network Services reflected continued robust card acquisitions as well as
continued solid average customer retention levels. In the U.S. and non-U.S.
businesses, 1.4 million and 700,000 cards were added during the three months
ended September 30, 2006, respectively.
Cardmember lending finance charge revenue, net of interest rose 41 percent to
$912 million, resulting from a 42 percent increase in lending finance charge
revenue which was partially offset by a 46 percent increase in lending finance
charge interest. The net increase is attributable to a 33 percent growth in
average worldwide cardmember lending balances, and a higher net portfolio
yield.
Net card fees decreased 10 percent to $462 million primarily as the benefit of
card growth was offset by the reclassification of certain card
acquisition-related costs, beginning prospectively July 1, 2006, from other
expenses to a reduction in net card fees, and a lower average card fee. This
reclassification had no effect on net income, and is not included in the
average fee per card calculation.
Securitization income, net increased 9 percent to $384 million as a higher
trust portfolio yield, and a decrease in trust portfolio write-offs were
partially offset by greater interest expense, due to a higher coupon rate paid
to certificate holders, and a lower average securitization balance.
Other revenues increased 21 percent to $431 million primarily due to fees
associated with transition services agreements with Ameriprise as well as
higher network partner-related fees.
Expenses
Consolidated expenses were $5.4 billion, up 10 percent from $4.9 billion for
the same period in 2005. The increase in the three months ended September 30,
2006, was primarily driven by higher professional services expenses, increased
marketing, promotion, rewards and cardmember services costs, greater interest
costs, increased other expenses, and higher provisions for losses and
benefits. Consolidated expenses for the three
20
months ended September 30, 2006 and 2005, also included $12 million and $86
million, respectively, of reengineering costs related to restructuring efforts
in the Company's business travel area in both periods and within the finance,
international operations and technology activities during the three months
ended September 30, 2005. Reengineering costs for the three months ended
September 30, 2006, included $9 million of severance, all of which was
restructuring-related and is included within human resources. Reengineering
costs for the three months ended September 30, 2005, included $77 million of
severance, of which $53 million was restructuring-related, and is included
within human resources.
Marketing, promotion, rewards and cardmember services expenses increased 7
percent to $1.6 billion compared to a year ago, reflecting greater rewards
costs, partially offset by moderately lower marketing and promotion expenses.
The higher rewards costs continued to reflect volume growth, a higher
estimated redemption rate, and strong cardmember loyalty program
participation. Marketing expenses continued to reflect relatively high levels
of spending related to various business-building initiatives, but lower costs
related to the Company's ongoing global "MyLife, MyCard(SM)" advertising
campaign.
Total provisions for losses and benefits increased 8 percent over last year
to $798 million as the lending and investment certificate and other
provisions growth of 13 percent and 70 percent, respectively, was partially
offset by a 14 percent decline in the charge card provision. The increase in
the lending provision was driven by increased loan volumes globally,
partially offset by the favorable impact of lower bankruptcy-related charge
offs, strong credit quality in the U.S., and the absence of charges for
Hurricane Katrina-related reserves recorded last year. The investment
certificate and other provision rose due to higher interest rates on larger
investment certificate balances. The charge provision decline of 14 percent
reflects the lower loss rate, the absence of charges for Hurricane
Katrina-related reserves recorded last year, and improved results from
collection activities.
Professional services expenses increased 21 percent to $684 million reflecting
higher technology service fees, greater business and service-related volumes,
and increased credit and collection costs.
Interest expense rose 36 percent to $324 million due to a higher cost of funds
and increased debt funding levels in support of growth in receivables.
Other expenses increased 27 percent to $331 million partially due to
increased volume and technology related costs, which were offset in part by
the reclassification of certain card acquisition-related costs as discussed
previously, and the gain on the sales of operations in Malaysia and
Indonesia. Reengineering costs for the three months ended September 30, 2006,
included $3 million of non-severance exit costs of which $1 million was
restructuring-related, and is included within other expenses. Reengineering
costs for the three months ended September 30, 2005, were $9 million
resulting from $13 million of restructuring-related non-severance costs
offset by $4 million of reversals related to other non-restructuring costs,
and is included within other expenses.
The effective tax rate was 29 percent and 20 percent for the three months
ended September 30, 2006 and 2005, respectively. The lower effective tax rate
for the three months ended September 30, 2005, reflected a $105 million
benefit resulting from the resolution of a prior year tax item related to the
sale of AMEX Life in 1995. The effective tax rate for the three months ended
September 30, 2006, reflected the favorable impacts of a net interest
receivable from the Internal Revenue Service (IRS), finalization of the 2005
U.S. federal tax return, and an adjustment of the 2006 projected state taxes.
Income from discontinued operations, net of tax for the three months ended
September 30, 2006 and 2005 was $11 million and $165 million, respectively.
The three months ended September 30, 2006, primarily represents a tax benefit
related to Ameriprise upon finalization of the Company's 2005 U.S. federal tax
return, and the three months ended September 30, 2005, primarily reflected
income related to Ameriprise prior to its spin-off.
Going forward, the Company recognizes the need to respond to increased
competitive pressures within the marketplace and challenges within the
economic environment. In particular, as compared to 2005, the
21
Company has economically hedged a smaller percentage of its expected interest
rate exposure in 2006, and is substantially less economically hedged for 2007
and beyond. This decrease along with higher interest rates and higher
volume-related borrowings resulted in higher funding costs in 2006 as compared
with 2005. The Company expects higher funding costs to continue in 2007, due
to an expected increase in higher-cost floating rate borrowings relative to
fixed rate funding that matures in 2006. In addition, the Company expects that
results in 2007 will not reflect the same benefit to its write-off rate that
resulted from the change in U.S. bankruptcy laws in 2005, and that has
favorably impacted results in 2006. The Company is focused on meeting these
and other challenges in 2007 and beyond by investing in growth opportunities,
by focusing on reengineering activities to control operating expense growth,
and by efficiently allocating capital.
Consolidated Results of Operations for the Nine Months Ended September 30,
2006 and 2005
The Company's 2006 consolidated income from continuing operations rose 14
percent to $2.8 billion and diluted earnings per share (EPS) from continuing
operations rose 15 percent to $2.26.
The Company's consolidated net income decreased 7 percent to $2.8 billion and
diluted EPS decreased 6 percent to $2.24. Net income included a loss of $19
million from discontinued operations compared to $519 million of income from
discontinued operations a year ago. On a trailing 12-month basis, return on
average shareholders' equity was 34 percent, up from 24 percent a year ago.
As discussed below, results from continuing operations for the nine months
ended September 30, 2006, included a favorable impact from lower early credit
write-offs, primarily related to bankruptcy legislation enacted in 2005, and
lower than expected costs associated with Hurricane Katrina, gains related to
the sales of the Company's card and merchant-related activities in Brazil,
investment in Egyptian American Bank (EAB), and card and merchant-related
activities in Malaysia and Indonesia. Results for this period also included
charges related to certain adjustments made to the Membership Rewards reserve
models in the U.S. and outside the U.S., a reduction in cardmember lending
finance charge revenues, net of interest, and securitization income related to
higher than anticipated cardmember completion of consumer debt repayment
programs and certain associated payment waivers, and a higher provision for
losses in Taiwan due primarily to the impact of industry-wide credit issues.
Results from continuing operations for the nine months ended September 30,
2005, included a benefit from the recovery of September 11th related insurance
claims, income tax benefits from the resolution of prior years' tax items, and
a provision to reflect the estimated costs related to Hurricane Katrina.
Net Revenues
Consolidated net revenues were $19.9 billion, up 13 percent from $17.7 billion
in the same period a year ago. Net revenues increased primarily due to higher
discount revenues, increased cardmember lending finance charge revenue, net of
interest, and greater securitization income, net. Consolidated net revenues in
2006 included a $72 million net reduction in finance charge revenues and
securitization income related to higher than anticipated cardmember completion
of consumer debt repayment programs and certain associated payment waivers.
Discount revenue rose 13 percent to $9.5 billion as a result of a 16 percent
increase in worldwide billed business, offset in part by a lower average
discount rate. The decrease in the discount rate compared to last year
reflects selective repricing initiatives and ongoing changes in mix of
spending between various merchant segments. The 16 percent increase in
worldwide billed business reflected increases in average spending per
proprietary basic card, growth in cards-in-force, and reflects a 40 percent
increase in billed business related to Global Network Services from a year
ago. Changes in the relative values of non-U.S. currencies to the U.S. dollar
had minimal impact on the reported worldwide growth rate.
U.S. billed business and billed business outside the U.S. were up 15 percent
and 18 percent, respectively, due to increases in average spending per
proprietary basic card, and growth in cards-in-force. The growth in the billed
business both within the U.S. and outside the U.S. reflected increases within
the Company's consumer
22
card business, small business spending, and Corporate Services volumes.
Assuming no changes in foreign currency exchange rates from the same period in
the prior year, worldwide billed business increased 16 percent driven by
increases in spending per proprietary basic card, and growth in
cards-in-force. Total billed business outside the U.S. increased 18 percent
reflecting double-digit proprietary growth in all regions except for Latin
America. Excluding the impact of the sale in Brazil, Latin America also
exhibited double-digit proprietary growth. Within the proprietary business
outside the U.S., billed business growth was driven by an increase in average
spending per proprietary basic card, and an increase in cards-in-force. The
increase in proprietary business outside the U.S. reflected growth in consumer
and small business spending, and an increase in Corporate Services volumes.
Percentage Increase
Percentage Assuming No Changes in
Increase Foreign Exchange Rates(a)
--------------------------------------
Worldwide
Billed business 16% 16%
Average spending per proprietary basic card 7 7
Cards-in-force 11
U.S.
Billed business 15
Average spending per proprietary basic card 6
Cards-in-force 11
Proprietary consumer card billed business(b) 13
Proprietary small business billed business(b) 17
Proprietary Corporate Services billed business(c) 16
Outside the U.S.
Billed business 18 18
Average spending per proprietary basic card 10 9
Cards-in-force 10
Proprietary consumer and small business billed
business(c) 13 13
Proprietary Corporate Services billed business(c) 18 18
(a) Assumes no changes in foreign currency exchange rates from the same
period in the prior year.
(b) Included in the U.S. Card Services segment.
(c) Included in the International Card & Global Commercial Services segment.
The increase in overall cards-in-force within both proprietary and Global
Network Services reflected continued robust card acquisitions as well as
continued solid average customer retention levels. In the U.S. and non-U.S.
businesses, 3.8 million and 1.7 million cards were added during the nine
months ended September 30, 2006, respectively.
Cardmember lending finance charge revenue, net of interest, rose 31 percent to
$2.5 billion, resulting from a 34 percent increase in lending finance charge
revenue which was partially offset by a 43 percent increase in lending finance
charge interest. The net increase is attributable to a 28 percent growth in
average worldwide cardmember lending balances, and a higher net portfolio
yield.
Securitization income, net increased 18 percent to $1.1 billion as a higher
trust portfolio yield, and a decrease in trust portfolio write-offs were
partially offset by greater interest expense due to a higher coupon rate paid
to certificate holders, a lower average securitization balance, and the impact
of higher than anticipated cardmember completion of consumer debt repayment
programs and certain associated payment waivers.
Other revenues increased 16 percent to $1.2 billion primarily due to fees
associated with transition services agreements with Ameriprise as well as
higher network partner-related fees.
23
Expenses
Consolidated expenses were $15.8 billion, up 10 percent from $14.4 billion for
the same period in 2005. The increase in 2006 was primarily driven by
increased marketing, promotion, rewards and cardmember services costs, greater
professional services expenses, higher provisions for losses and benefits, and
increased interest costs. Consolidated expenses for the nine month periods
ended September 30, 2006 and 2005, also included $90 million and $221 million,
respectively, of reengineering costs. The charges reflect expenses in
connection with several initiatives relating principally to the restructuring
of the Company's business travel and international operations, and the
relocation of certain functions in the Company's finance and technologies
operations. Reengineering costs for the nine month period ended September 30,
2006, included $53 million of severance, all of which was
restructuring-related, and is included within human resources, and $37 million
of non-severance exit costs, of which $10 million was restructuring-related,
and is included within other expenses. Reengineering costs for the nine month
period ended September 30, 2005, included $179 million of severance, of which
$142 million was restructuring-related, and is included within human
resources, and $42 million of non-severance exit costs, of which $23 million
was restructuring-related, and is included within other expenses.
Marketing, promotion, rewards and cardmember services expenses increased 12
percent to $4.8 billion, reflecting greater rewards costs, and modestly higher
marketing and promotion expenses. The higher rewards costs continued to
reflect volume growth, a higher estimated ultimate redemption rate, and strong
cardmember loyalty program participation. Rewards costs for the nine months
ended September 30, 2006 included a $62 million charge related to certain
adjustments made to the Membership Rewards reserve model outside the U.S., and
a $112 million charge related to certain adjustments made to the Membership
Rewards reserve model in the U.S. These adjustments to the Membership Rewards
reserve models related to a higher ultimate redemption rate assumption to
reflect program redemption trends over the past five years as management
believes this is a better indicator of future redemption behavior than
inception to date statistics used previously. Marketing expenses continued to
reflect relatively high levels of spending related to various
business-building initiatives, and the Company's ongoing global "MyLife,
MyCard(SM)" advertising campaign, although they were lower than last year,
when the campaign was in its early stages.
Total provisions for losses and benefits increased 12 percent over last year
to $2.2 billion as the lending and investment certificate and other
provisions growth of 22 percent and 44 percent, respectively, was partially
offset by a 12 percent decline in the charge card provision. The increase in
the lending provision was driven by a higher level of charge offs outside the
U.S., primarily in Taiwan, and increased loan volumes globally, partially
offset by the favorable impact of lower bankruptcy-related charge offs,
strong credit quality in the U.S., and lower than expected costs related to
Hurricane Katrina that were provided for last year. The investment
certificate and other provision rose due to higher interest rates on larger
investment certificate balances. Compared to last year, the charge provision
declined 12 percent reflecting the lower loss rate, lower than expected costs
for Hurricane Katrina losses that were provided for last year, and improved
results from collection activities.
Professional services expenses increased 19 percent to $1.9 billion reflecting
higher technology service fees, greater business and service-related volumes,
and increased credit and collection costs.
Interest expense rose 34 percent to $898 million due to a higher cost of funds
and increased debt funding levels in support of growth in receivables.
The effective tax rate was 32 percent and 25 percent for the nine months ended
September 30, 2006 and 2005, respectively. The effective tax rate for the nine
months ended September 30, 2005, reflected benefits of $192 million resulting
from the resolution of previous years' tax items. The effective tax rate for
the nine months ended September 30, 2006, reflected higher tax expense related
to uncertainty regarding the Company's ability to obtain tax benefits for
certain expenses attributable to foreign subsidiaries, and a relatively high
effective tax rate due to the impact of foreign exchange translation on the
gain on the sale of the Company's investment in EAB, and a relatively low
effective tax rate benefit on the credit losses in Taiwan. These items were
offset by the favorable impacts of a net interest receivable from the IRS,
finalization of the 2005 U.S. federal tax return, an adjustment of 2006
estimated state taxes, and a relatively low effective rate on the sale
24
of the Company's card and merchant-related operations in Brazil resulting
principally from the difference between the applicable Brazil tax rate and the
higher U.S. statutory rate.
(Loss) income from discontinued operations, net of tax for the nine months
ended September 30, 2006 and 2005, was ($19) million and $519 million,
respectively. Included in the nine months ended September 30, 2006, is a $22
million after-tax loss related to the sale of the Company's international
banking business in Brazil. The nine months ended September 30, 2005,
primarily reflected income related to Ameriprise prior to its spin-off.
Consolidated Liquidity and Capital Resources
Capital Strategy
The Company believes allocating capital to its businesses with a return on
risk-adjusted equity in excess of their cost of capital will continue to
generate shareholder value. The Company seeks to retain earnings sufficient
to satisfy its growth objectives and, to the extent capital exceeds
investment requirements, return excess capital to shareholders. Assuming the
Company achieves its financial objectives of 12 to 15 percent EPS growth, 33
to 36 percent return on shareholders' equity and at least 8 percent revenue
growth, on average and over time, it will seek to return to shareholders an
average of 65 percent of capital generated, subject to business mix,
acquisitions and rating agency requirements. As described above, the Company
has raised its ROE targets from a range of 28 to 30 percent to a range of 33
to 36 percent. Important factors relating to ROE include the Company's
revenue growth and margins, the level of capital required in its business,
the mix of financings, and changes in the level of shareholders' equity over
time.
The Company paid dividends of $480 million during the nine months ended
September 30, 2006. In addition, in keeping with the Company's objectives
regarding the return of excess capital to shareholders, the Board of Directors
of the Company approved a 25 percent increase in the quarterly dividend on the
Company's common stock from $0.12 to $0.15 per share for the dividend paid to
shareholders on August 10, 2006, and future dividends. Including share
repurchases and dividends, during the three and nine months ended September
30, 2006, the Company returned approximately 81 percent and 97 percent,
respectively, of total capital generated to shareholders. On a cumulative
basis, since the inception of the share repurchase program in 1994,
approximately 68 percent of capital generated has been returned to
shareholders.
Share Repurchases
The Company has a share repurchase program to return equity capital in excess
of its business needs to shareholders. These share repurchases both offset the
issuance of new shares as part of employee compensation plans and reduce
shares outstanding. The Company repurchases its common shares primarily by
open market purchases. Common shares also may be purchased from the
Company-sponsored Incentive Savings Program (ISP) to facilitate the ISP's
required disposal of shares when employee-directed activity results in an
excess common share position. Such purchases are made at market price without
commissions or other fees. During the nine months ended September 30, 2006,
the Company purchased 56 million common shares at an average price of $52.94.
The Company repurchased a higher level of shares during the nine months ended
September 30, 2006 after activity was reduced last year due to the impact of
the September 30, 2005 spin-off of Ameriprise. In May 2006, the Company's
Board of Directors authorized the repurchase of an additional 200 million
shares of the Company's common stock. There are approximately 183 million
shares remaining at September 30, 2006 under authorizations to repurchase
shares approved by the Company's Board of Directors. For additional
information regarding the Company's share repurchases during the three months
ended September 30, 2006, see Item 2(c) in Part II below.
Cash Flows
Cash Flows from Operating Activities
The net cash provided by operating activities exceeded net income for both the
nine months ended September 30, 2006 and 2005, primarily due to provisions for
losses and benefits, which are expenses in the Consolidated Statements of
Income but do not require cash at the time of provision. Similarly,
depreciation and amortization represent non-cash expenses. In addition, net
cash was provided by fluctuations in other
25
operating assets and liabilities. These accounts vary significantly in the
normal course of business due to the amount and timing of various payments.
Management believes cash flows from operations, available cash balances and
short-term borrowings will be sufficient to fund the Company's operating
liquidity needs.
Cash Flows from Investing Activities
The Company's investing activities primarily include the funding of cardmember
loans and receivables and the Company's Available-for-Sale investment
portfolio.
For the nine months ended September 30, 2006 and 2005, net cash was used in
investing activities primarily due to net increases in cardmember receivables
and loans. Investing activity for the nine months ended September 30, 2005,
also reflected cash retained by Ameriprise after the spin-off.
Cash Flows from Financing Activities
The Company's financing activities primarily include the issuance of debt,
taking customer deposits, and selling investment certificates. The Company
also regularly repurchases its common shares.
For the nine months ended September 30, 2006, net cash was provided by
financing activities primarily due to a net increase in debt partially offset
by a net decrease in customers' deposits and an increase in share repurchase
activity. For the nine months ended September 30, 2005, net cash was provided
by financing activities primarily due to a net increase in customers'
deposits, cash provided by discontinued operations, and a net increase in
investment certificates partially offset by a net decrease in total debt and
share repurchase activity.
Financing Activities
The Company's funding needs are met primarily through the issuances of
commercial paper, bank notes, customer deposits, medium-term notes, senior
unsecured debentures, asset securitizations, long-term committed bank
borrowing facilities, and credit lines. In total, for the Company, short-term
debt at September 30, 2006, decreased $413 million from December 31, 2005, due
to a decrease in commercial paper and borrowed funds, offset by an increase in
bank notes. Long-term debt at September 30, 2006, increased approximately $8.6
billion from December 31, 2005, primarily as a result of the increase in
medium-term notes.
The Company, through its Parent Company, has the ability to issue debt or
equity securities under a shelf registration filed with the Securities and
Exchange Commission (SEC). On October 16, 2006, the Company filed a new shelf
registration statement with the SEC to issue an unspecified amount of debt and
equity securities from time to time. In August 2006, the Parent Company issued
$750 million of fixed-rate subordinated debentures due in 2036 under its shelf
registration. The subordinated debentures are automatically extendible to 2066
unless certain events occur prior to that date. The subordinated debentures
are redeemable at the Company's option on or after September 1, 2016. If the
Company fails to achieve specified performance measures (which the Company
believes is unlikely), the Company will be required to sell shares of its
common stock and apply the net proceeds to pay interest.
American Express Credit Corporation (Credco), a wholly-owned subsidiary of
American Express Travel Related Services, Inc. (TRS), a wholly-owned
subsidiary of the Parent Company, also has the ability to issue an unspecified
amount of debt securities under shelf registrations filed with the SEC. At
September 30, 2006, Credco had $12.2 billion of debt securities outstanding.
American Express Canada Credit Corporation (AECCC), a wholly-owned subsidiary
of Credco, has the ability to issue debt securities under a Canadian shelf
registration statement. As of September 30, 2006, AECCC had approximately $0.9
billion of medium-term notes available for issuance under this shelf and had a
total of $2.1 billion of total debt securities outstanding. All notes issued
under this shelf are guaranteed by Credco.
26
TRS; American Express Centurion Bank, a wholly-owned subsidiary of TRS;
Credco; American Express Overseas Credit Corporation Limited, a wholly-owned
subsidiary of Credco; and American Express Bank Ltd. have established a
program for the issuance, outside the U.S., of debt instruments to be listed
on the Luxemburg Stock Exchange. The maximum aggregate principal amount of
debt instruments outstanding at any one time under the program may not exceed
$10.0 billion at September 30, 2006. At September 30, 2006, $4.1 billion was
outstanding under this program.
At September 30, 2006, the Company maintained total committed bank lines of
credit of $11.5 billion which mature incrementally through 2011. Approximately
$8.5 billion remained available under these facilities. At such date, Credco
could borrow a maximum amount of $10.7 billion (including $3.0 billion
outstanding) under these facilities, with a commensurate maximum $1.2 billion
reduction in the amount available to the Parent Company.
The Parent Company is authorized to issue commercial paper. This program is
supported by the $1.2 billion of committed bank facility available to the
Company, which expires in 2010. There was no Parent Company commercial paper
outstanding during the nine months ended September 30, 2006, and no borrowings
have been made under its bank credit facility.
In conjunction with its liquidity investment portfolio, the Company entered
into securities lending agreements in June 2006 with other financial
institutions. Under these agreements, certain investment securities are loaned
on an overnight basis to financial institutions, and are secured by collateral
equal to at least 102 percent of the fair market value of the investment
securities lent. Collateral received by the Company can be in the form of cash
or marketable U.S. Treasury or government agency securities. The Company may
only retain or sell these securities in the event of a borrower default. The
Company's loaned investment securities continue to be classified as
investments on the Consolidated Balance Sheet that are considered restricted
and pledged assets. The marketable securities received as collateral are not
recorded in the Consolidated Balance Sheet, as the Company is not permitted to
sell or repledge these securities absent a borrower default. Fees received
from the securities lending transactions are recorded as investment income. As
of September 30, 2006, approximately $1.1 billion of investment securities
were loaned under these agreements.
On October 31, 2006, the Company issued a notice of potential remarketing and
a notice of redemption to the holders of the $2 billion principal amount of
its 1.85 percent convertible debentures due 2033. Under the terms of the
debentures, if the average of the closing sales price of the Company's common
stock over the 10 trading day period ending on November 30, 2006 is less than
the conversion price of $60.32 per share, a remarketing reset event will occur
and the yield or cash interest rate on the debentures will be reset on
December 1, 2006. In the notice to holders the Company has elected that any
debentures remarketed will bear cash interest payable quarterly and the next
remarketing reset date will be June 5, 2008. The notice also states that if
the average closing sales price of the Company's common stock over the 10
trading day period ending November 30, 2006 is $60.32 or more, a remarketing
reset event will not occur and the Company will redeem the debentures on
December 1, 2006 at 100 percent of their accreted principal amount. The notice
of redemption gives the holders the right to elect to convert the debentures.
Holders that convert their debentures will receive cash equal to the accreted
principal amount of the debentures and, if the stock price applicable to
determining the conversion rate is more than $60.32, amounts in excess of the
accreted principal amount of the debentures will be paid in shares of the
Company's common stock. If a remarketing event does occur, the notice of
redemption will not be effective and the Company will not give effect to any
conversion of any debentures. The Company believes that a remarketing event
will not have a material impact on the Company's cost of funding. If a
redemption event occurs and all the debentures are converted, for every dollar
that the applicable conversion price exceeds $60.32, the Company will be
required to issue approximately 2 million shares of its common stock to the
debenture holders, with an aggregate maximum cap of approximately 52 million
shares.
Airline Industry Matters
Historically, the Company has not experienced significant revenue declines
resulting from a particular airline's scaling-back or closure of operations
due to bankruptcy or other financial challenges because the
27
volumes generated from the airline are typically shifted to other participants
in the industry that accept the Company's card products. Nonetheless, the
Company is exposed to business and credit risk in the airline industry
primarily through business arrangements where the Company has remitted payment
to the airline for a cardmember purchase of tickets that have not yet been
used or "flown." This creates a potential exposure for the Company in the
event that the cardmember is not able to use the ticket and the Company, based
on the facts and circumstances, credits the cardmember for the unused ticket.
Historically, this type of exposure has not generated any significant losses
for the Company because of the need for an airline that is operating under
bankruptcy protection to continue accepting credit and charge cards and
honoring requests for credits and refunds in the ordinary course of business,
and in furtherance of its reorganization and its formal assumption, with
bankruptcy court approval, of its card acceptance agreement, including
approval of the Company's right to hold cash to cover these potential
exposures to provide credits to cardmembers. Typically, as an airline's
financial situation deteriorates, the Company attempts to delay to the extent
possible payment to the airline thereby increasing cash held to protect itself
in the event of an ultimate liquidation of the airline. The Company's goal in
these distressed situations is to hold sufficient cash over time to ensure
that upon liquidation the cash held is equivalent to the credit exposure
related to any unused tickets.
As part of Delta Airlines' (Delta) decision to file for protection under
Chapter 11 of the Bankruptcy Code, the Company lent funds to Delta as part of
Delta's post-petition, debtor-in-possession (DIP) financing under the
Bankruptcy Code. At September 30, 2006, the remaining principal balance was
$237 million. This post-petition facility continues to be structured as an
advance against the Company's obligations to purchase Delta SkyMiles rewards
points under the Company's co-brand and Membership Rewards agreements and
began amortizing ratably on a monthly basis beginning in July 2006 and will
continue through September 2007.
Given the depth of the Company's business relationships with Delta through the
SkyMiles Credit Card and Delta's participation as a key partner in the
Company's Membership Rewards program, in the event Delta's reorganization
under the bankruptcy laws is not successful or otherwise negatively impacts
the Company's relationship with Delta, the Company's future financial results
could be adversely impacted. As previously disclosed, American Express' Delta
SkyMiles Credit Card co-brand portfolio accounts for less than 10 percent of
the Company's worldwide billed business and less than 15 percent of worldwide
managed lending receivables.
28
BUSINESS SEGMENT RESULTS
As discussed more fully below, results are presented on a GAAP basis unless
otherwise stated.
U.S. Card Services
Selected Income Statement Data
GAAP Basis Presentation
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Millions) 2006 2005 2006 2005
------ ------ ------- ------
Net revenues:
Discount revenue, net card fees and other $2,482 $2,233 $ 7,310 $6,525
Cardmember lending:
Finance charge revenue 928 614 2,416 1,723
Interest expense 260 156 669 416
------ ------ ------- ------
Net finance charge revenue 668 458 1,747 1,307
Securitization income:
Excess spread, net (excluding servicing fees)(a) 279 227 809 624
Servicing fees 100 108 306 307
Gains on sales from securitizations(b) 5 18 27 34
------ ------ ------- ------
Securitization income, net 384 353 1,142 965
------ ------ ------- ------
Total net revenues 3,534 3,044 10,199 8,797
------ ------ ------- ------
Expenses:
Marketing, promotion, rewards and cardmember
services 1,127 1,003 3,267 2,814
Provision for losses 446 458 1,104 1,167
Human resources and other operating expenses 1,142 950 3,293 2,783
------ ------ ------- ------
Total expenses 2,715 2,411 7,664 6,764
------ ------ ------- ------
Pretax segment income 819 633 2,535 2,033
Income tax provision 239 190 793 631
------ ------ ------- ------
Segment income $ 580 $ 443 $ 1,742 $1,402
====== ====== ======= ======
(a) Excess spread is the net positive cash flow from interest and fee
collections allocated to the investor's interests after deducting the
interest paid on investor certificates, credit losses, contractual
servicing fees, and other expenses.
(b) Excludes $13 million and $15 million for the three months ended September
30, 2006, and $66 million and $64 million for the three months ended
September 30, 2005, of impact from cardmember loan sales and maturities,
respectively, reflected in credit provision. Excludes $83 million and
$104 million for the nine months ended September 30, 2006, and $131
million and $118 million for the nine months ended September 30, 2005, of
impact from cardmember loan sales and maturities, respectively, reflected
in credit provision.
29
U.S. Card Services
Selected Statistical Information
(Billions, except percentages and where indicated)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2006 2005 2006 2005
------ ------ ------ ------
Card billed business $ 83.4 $ 74.2 $242.6 $212.0
Total cards-in-force (millions) 39.9 36.9 39.9 36.9
Basic cards-in-force (millions) 29.5 27.2 29.5 27.2
Average basic cardmember spending (dollars) $2,852 $2,765 $8,471 $8,042
U.S. Consumer Travel
Travel sales $ 0.6 $ 0.5 $ 1.8 $ 1.4
Travel commissions and fees/sales 8.5% 8.6% 8.4% 8.7%
Worldwide Travelers Cheque and prepaid products:
Sales $ 5.6 $ 5.8 $ 14.9 $ 14.9
Average outstanding $ 7.2 $ 7.3 $ 7.0 $ 7.2
Average investments $ 7.9 $ 7.9 $ 7.7 $ 7.8
Investment yield(a) 4.9% 5.1% 5.0% 5.2%
Tax equivalent yield - managed(a) 7.5% 7.8% 7.6% 7.9%
Total segment assets $ 75.1 $ 61.6 $ 75.1 $ 61.6
Segment capital $ 4.9 $ 4.9 $ 4.9 $ 4.9
Return on segment capital(b) 44.0% 39.7% 44.0% 39.7%
Cardmember receivables:
Total receivables $ 18.2 $ 16.8 $ 18.2 $ 16.8
90 days past due as a % of total 2.3% 2.0% 2.3% 2.0%
Net loss ratio as a % of charge volume 0.33% 0.30% 0.27% 0.28%
Cardmember lending - owned basis (c):
Total loans $ 29.3 $ 22.4 $ 29.3 $ 22.4
30 days past due loans as a % of total 2.7% 2.4% 2.7% 2.4%
Average loans $ 28.6 $ 20.9 $ 26.4 $ 20.2
Net write-off rate 3.1% 3.6% 2.9% 3.8%
Net finance charge revenue(d)/average loans 9.2% 8.7% 8.8% 8.6%
Cardmember lending - managed basis (e):
Total loans $ 49.5 $ 43.0 $ 49.5 $43.0
30 days past due loans as a % of total 2.6% 2.4% 2.6% 2.4%
Average loans $ 48.7 $ 42.3 $ 46.9 $ 40.7
Net write-off rate 3.0% 3.8% 2.8% 3.9%
Net finance charge revenue(d)/average loans 9.3% 9.2% 9.1% 9.0%
(a) Investment yield represents earnings on certain tax-exempt securities.
The tax equivalent yield - managed represents earnings on such tax-exempt
securities as if it had been earned on a taxable basis and assumes an
income tax rate of 35 percent.
(b) Computed on a trailing 12-month basis using segment income and equity
capital allocated to segments based upon specific business operational
needs, risk measures and regulatory capital requirements.
(c) "Owned" or GAAP basis measurement reflects only cardmember loans included
in the Company's Consolidated Balance Sheets.
(d) Computed on an annualized basis.
(e) Includes on-balance sheet cardmember loans and off-balance sheet
securitized cardmember loans. See "Differences between GAAP and Managed
Basis Presentation" below.
30
Results of Operations for the Three and Nine Months Ended September 30, 2006
and 2005 - GAAP Basis
The following discussion of U.S. Card Services' segment results of operations
is presented on a GAAP basis.
U.S. Card Services reported segment income of $580 million for the three
months ended September 30, 2006, a 31 percent increase from $443 million for
the same period a year ago. For the nine months ended September 30, 2006, U.S.
Card Services reported segment income of $1.7 billion, a 24 percent increase
from $1.4 billion for the same period a year ago.
U.S. Card Services' net revenues increased 16 percent for the three and nine
months ended September 30, 2006, compared to a year ago due to higher discount
revenue, net card fees and other and increased net finance charge revenue.
Discount revenue, net card fees and other of $2.5 billion and $7.3 billion for
the three and nine months ended September 30, 2006, respectively, rose 11
percent and 12 percent from a year ago largely due to higher billed business
volumes, which for the three months ended September 30, 2006, were partially
offset by a decrease in net card fees due to the reclassification of certain
card acquisition-related costs as discussed previously. The 12 percent and 14
percent increase in billed business for the three and nine months ended
September 30, 2006, respectively, reflected a 3 percent and 5 percent increase
in spending per proprietary basic card for the three and nine months ended
September 30, 2006, and an 8 percent growth in cards-in-force for the three
and nine months ended September 30, 2006. Within the U.S. consumer business,
billed business grew 11 percent and 13 percent during the three and nine
months ended September 30, 2006, respectively, and small business volumes rose
15 percent and 17 percent during the three and nine months ended September 30,
2006, respectively. Net finance charge revenue rose 46 percent and 34 percent
as compared to a year ago to $668 million and $1.7 billion for the three and
nine months ended September 30, 2006, respectively, primarily due to 37
percent and 31 percent growth in the average cardmember lending balances as
compared to a year ago, and a higher net portfolio yield. For the nine months
ended September 30, 2006, net finance charge revenue was reduced by higher
than anticipated cardmember completion of consumer debt repayment programs and
associated payment waivers.
U.S. Card Services' expenses increased 13 percent for the three and nine month
periods ended September 30, 2006, compared to a year ago primarily due to
greater human resources and other operating expenses, and higher marketing,
promotion, rewards and cardmember services costs.
Marketing, promotion, rewards and cardmember services expenses of $1.1 billion
and $3.3 billion for the three and nine months ended September 30, 2006,
respectively, increased 12 percent and 16 percent as compared to the same
periods a year ago, due to higher volume-related rewards costs and increased
marketing and promotion costs due to the continuation of business-building
activities. For the nine months ended September 30, 2006, the increased
marketing, promotion, rewards and cardmember services expenses reflected the
charge related to a higher ultimate redemption rate within the Membership
Rewards reserve in the U.S. discussed previously. Human resources and other
operating expenses of $1.1 billion and $3.3 billion for the three and nine
months ended September 30, 2006, respectively, increased 20 percent and 18
percent from a year ago. The increase was due to higher interest expense,
greater professional services expenses related to credit and collection
activities and higher technology service fees, increased human resources
costs, and generally higher volume-related costs.
The effective tax rate was 29 percent and 30 percent for the three months
ended September 30, 2006 and 2005, respectively, and 31 percent for both the
nine months ended September 30, 2006 and 2005.
31
Differences between GAAP and Managed Basis Presentation
For U.S. Card Services, the managed basis presentation reflects an increase to
interest income recorded to enable management to evaluate tax exempt
investments on a basis consistent with taxable investment securities. On a
GAAP basis, interest income associated with tax exempt investments is recorded
based on amounts earned. Accordingly, information presented on a managed basis
assumes that tax exempt securities earned income at rates as if the securities
produced taxable income with a corresponding increase in the provision for
income taxes.
The managed basis presentation also assumes that there have been no
off-balance sheet securitization transactions, i.e., all securitized
cardmember loans and related income effects are reflected as if they were in
the Company's balance sheets and income statements, respectively. For the
managed basis presentation, revenue and expenses related to securitized
cardmember loans are reflected in net card fees and other, net finance charge
revenue, and credit provision. On a managed basis, there is no securitization
income, net, as the managed basis presentation assumes no securitization
transactions have occurred.
The Company presents U.S. Card Services information on a managed basis because
that is the way the Company's management views and manages the business.
Management believes that a full picture of trends in the Company's cardmember
lending business can only be derived by evaluating the performance of both
securitized and non-securitized cardmember loans. Management also believes
that use of a managed basis presentation presents a more accurate picture of
the key dynamics of the cardmember lending business. Irrespective of the on
and off-balance sheet funding mix, it is important for management and
investors to see metrics for the entire cardmember lending portfolio because
they are more representative of the economics of the aggregate cardmember
relationships and ongoing business performance and trends over time. It is
also important for investors to see the overall growth of cardmember loans and
related revenue in order to evaluate market share. These metrics are
significant in evaluating the Company's performance and can only be properly
assessed when all non-securitized and securitized cardmember loans are viewed
together on a managed basis. The Company does not currently securitize
international loans.
On a GAAP basis, revenue and expenses from securitized cardmember loans are
reflected in the Company's income statements in securitization income, net,
fees and commissions, and credit provision for cardmember lending. At the time
of a securitization transaction, the securitized cardmember loans are removed
from the Company's balance sheet, and the resulting gain on sale is reflected
in securitization income, net, as well as an impact to credit provision
(credit reserves are no longer recorded for the cardmember loans once sold).
Over the life of a securitization transaction, the Company recognizes
servicing fees and other net revenues (referred to as "excess spread") related
to the interests sold to investors (i.e., the investors' interests). These
amounts are reflected in securitization income, net and fees and commissions.
The Company also recognizes net finance charge revenue over the life of the
securitization transaction related to the interest it retains (i.e., the
seller's interest). At the maturity of a securitization transaction,
cardmember loans on the balance sheet increase, and the impact of the
incremental required loss reserves is recorded in credit provision.
As presented, in aggregate over the life of a securitization transaction, the
pre-tax income impact to the Company is the same whether or not the Company
had securitized cardmember loans or funded these loans through other financing
activities (assuming the same financing costs). The income statement
classifications, however, of specific items will differ.
32
U.S. Card Services
Selected Financial Information
Managed Basis Presentation
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Millions) 2006 2005 2006 2005
------ ------ ------- ------
Discount revenue, net card fees and other
Reported for the period (GAAP) $2,482 $2,233 $ 7,310 $6,525
Securitization adjustments(a) 51 53 143 157
Tax adjustments(b) 55 56 164 170
------ ------ ------- ------
Managed discount revenue, net card fees
and other $2,588 $2,342 $ 7,617 $6,852
====== ====== ======= ======
Net finance charge revenue
Reported for the period (GAAP) $ 668 $ 458 $ 1,747 $1,307
Securitization adjustments(a) 475 512 1,430 1,435
------ ------ ------- ------
Managed net finance charge revenue $1,143 $ 970 $ 3,177 $2,742
====== ====== ======= ======
Securitization income, net
Reported for the period (GAAP) $ 384 $ 353 $ 1,142 $ 965
Securitization adjustment(a) (384) (353) (1,142) (965)
------ ------ ------- ------
Managed securitization income, net $ -- $ -- $ -- $ --
====== ====== ======= ======
Provision for losses
Reported for the period (GAAP) $ 446 $ 458 $ 1,104 $1,167
Securitization adjustments(a) 144 215 397 637
------ ------ ------- ------
Managed provision for losses $ 590 $ 673 $ 1,501 $1,804
====== ====== ======= ======
(a) The managed basis presentation assumes that there have been no
off-balance sheet securitization transactions, i.e., all securitized
cardmember loans and related income effects are reflected as if they were
in the Company's balance sheets and income statements, respectively. For
the managed basis presentation, revenue and expenses related to
securitized cardmember loans are reflected in net card fees and other,
net finance charge revenue, and credit provision. On a managed basis,
there is no securitization income, net, as the managed basis presentation
assumes no securitization transactions have occurred.
(b) The managed basis presentation reflects an increase to interest income
recorded to enable management to evaluate tax exempt investments on a
basis consistent with taxable investment securities. On a GAAP basis,
interest income associated with tax exempt investments is recorded based
on amounts earned. Accordingly, information presented on a managed basis
assumes that tax exempt securities earned income at rates as if the
securities produced taxable income with a corresponding increase in the
provision for income taxes.
33
Results of Operations for the Three and Nine Months Ended September 30, 2006
and 2005 - Managed Basis
The following discussion of U.S. Card Services is on a managed basis.
Discount revenue, net card fees and other increased 11 percent as compared to
a year ago to $2.6 billion and $7.6 billion for the three and nine months
ended September 30, 2006, respectively, largely due to increases in billed
business volumes. Net finance charge revenue rose 18 percent and 16 percent
as compared to a year ago to $1.1 billion and $3.2 billion for the three and
nine months ended September 30, 2006, respectively, primarily due to 15
percent growth in the average cardmember lending balances as compared to a
year ago, and a higher net portfolio yield. For the nine months ended
September 30, 2006, net finance charge revenue was reduced by higher than
anticipated cardmember completion of consumer debt repayment programs and
associated payment waivers. Total provision for losses decreased 12 percent
and 17 percent to $590 million and $1.5 billion for the three and nine months
ended September 30, 2006, respectively, reflecting a lower level of
bankruptcy-related charge offs, improved collections, and continued strong
credit quality, as well as lower than expected costs for Hurricane Katrina
losses for the nine months ended September 30, 2006, that were provided for in
the three months ended September 30, 2005, partially offset by the impact of
strong volume and loan growth.
On a managed basis, as compared to 2005, the Company has economically hedged a
smaller percentage of its expected interest rate exposure in 2006, and is
substantially less economically hedged for 2007 and beyond. This decrease
along with higher interest rates and higher volume-related borrowings resulted
in higher funding costs in 2006 as compared with 2005. The Company expects
higher funding costs to continue in 2007 due to an expected increase in
higher-cost floating rate borrowings relative to fixed rate funding that
matures in 2006.
34
International Card & Global Commercial Services
Selected Income Statement Data
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Millions) 2006 2005 2006 2005
------ ------ ------ ------
Net revenues:
Discount revenue, net card fees and other $2,086 $2,041 $6,436 $6,106
Cardmember lending:
Finance charge revenue 310 259 911 757
Interest expense 109 88 316 257
------ ------ ------ ------
Net finance charge revenue 201 171 595 500
------ ------ ------ ------
Total net revenues 2,287 2,212 7,031 6,606
------ ------ ------ ------
Expenses:
Marketing, promotion, rewards and cardmember
services 330 310 1,083 948
Provision for losses and benefits 329 270 1,042 737
Human resources and other operating expenses 1,347 1,315 4,020 4,118
------ ------ ------ ------
Total expenses 2,006 1,895 6,145 5,803
------ ------ ------ ------
Pretax segment income 281 317 886 803
Income tax provision 65 68 232 137
------ ------ ------ ------
Segment income $ 216 $ 249 $ 654 $ 666
====== ====== ====== ======
35
International Card & Global Commercial Services
Selected Statistical Information
(Billions, except percentages and where indicated)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2006 2005 2006 2005
------ ------ ------ ------
Card billed business $ 47.5 $ 41.8 $141.9 $123.4
Total cards-in-force (millions)(a) 22.1 22.2 22.1 22.2
Basic cards-in-force (millions) 17.7 17.6 17.7 17.6
Average basic cardmember spending (dollars) $2,642 $2,384 $7,818 $7,107
Global Corporate & International Consumer Travel
Travel sales $ 4.5 $ 4.4 $ 14.5 $ 14.1
Travel commissions and fees/sales 8.3% 8.6% 8.1% 8.6%
International banking:
Total loans $ 7.2 $ 6.9 $ 7.2 $ 6.9
Private banking holdings $ 22.0 $ 20.2 $ 22.0 $ 20.2
Total segment assets $ 57.3 $ 49.9 $ 57.3 $ 49.9
Segment capital $ 4.4 $ 3.8 $ 4.4 $ 3.8
Return on segment capital(b) 21.2% 22.3% 21.2% 22.3%
Cardmember receivables:
Total receivables $ 16.4 $ 15.2 $ 16.4 $ 15.2
90 days past due as a % of total 1.3% 1.2% 1.3% 1.2%
Net loss ratio as a % of charge volume 0.18% 0.24% 0.18% 0.22%
Cardmember lending:
Total loans $ 9.0 $ 7.5 $ 9.0 $ 7.5
30 days past due loans as a % of total 3.1% 2.8% 3.1% 2.8%
Average loans $ 8.9 $ 7.3 $ 8.7 $ 7.2
Net write-off rate 5.9% 5.0% 5.9% 4.7%
Net finance charge revenue(c)/average loans 8.9% 9.3% 9.1% 9.3%
(a) Cards-in-force at September 30, 2006, reflect the transfer of 1.3 million
proprietary cards in Brazil, and approximately 200,000 proprietary cards-
in-force in Malaysia and Indonesia to the Global Network & Merchant
Services segment on June 30, 2006, and during the three months ended
September 30, 2006, respectively.
(b) Computed on a trailing 12-month basis using segment income and equity
capital allocated to segments based upon specific business operational
needs, risk measures and regulatory capital requirements.
(c) Computed on an annualized basis.
Results of Operations for the Three and Nine Months Ended September 30, 2006
and 2005
International Card & Global Commercial Services reported segment income of
$216 million and $249 million for the three months ended September 30, 2006
and 2005, respectively, a 13 percent decrease from the same period a year ago.
For the nine months ended September 30, 2006 and 2005, International Card &
Global Commercial Services reported segment income of $654 million and $666
million, respectively, a 2 percent decrease from the same period a year ago.
Results for the segment for the three and nine months ended September 30,
2006, reflect strength in card-related businesses despite the sales of the
card and merchant-related activities in Brazil, Malaysia and Indonesia which
negatively impacted growth in the revenues and income for the segment. In
addition, growth in revenues and income for the segment was negatively
impacted by interest rate margin pressure in the international bank's
investment certificate and other businesses, as well as the difficult
corporate travel environment.
International Card & Global Commercial Services' discount revenue, net card
fees and other revenues of $2.1 billion and $6.4 billion for the three and
nine months ended September 30, 2006, respectively, rose 2 percent
36
and 5 percent compared to a year ago, driven primarily by the higher level of
card spending, which was partially offset by a decrease in net card fees due
to the reclassification of certain card acquisition-related costs as discussed
previously. Growth was also suppressed by lower travel commissions and fees
and the impact of the sales of card and merchant-related activities in Brazil,
Malaysia and Indonesia. During the three months ended September 30, 2006,
international banking revenues were relatively flat and incentives for
corporate clients associated with growth in corporate volumes increased. The
14 percent and 15 percent increase in billed business for the three and nine
months ended September 30, 2006, respectively, reflected an 11 percent and 10
percent increase in spending per proprietary basic card, respectively, and a 7
percent growth in cards-in-force for both periods before the transfer of cards
in Brazil, Malaysia and Indonesia (cards-in-force at September 30, 2006 in the
table above reflect the transfer of 1.3 million proprietary cards in Brazil,
and approximately 200,000 proprietary cards in Malaysia and Indonesia to the
Global Network Services segment on June 30, 2006, and during the three months
ended September 30, 2006, respectively). Excluding the impact of the Brazil,
Malaysia and Indonesia sales, billed business grew approximately 17 percent
and 16 percent for the three and nine months ended September 30, 2006, and all
of the Company's major geographic regions experienced double digit growth in
both periods.
For the three months ended September 30, 2006, assuming no changes in foreign
currency exchange rates from the same period in the prior year, billed
business and spending per proprietary basic card-in-force increased 12 percent
and 9 percent, respectively. For the nine months ended September 30, 2006,
assuming no changes in foreign currency exchange rates from the same period in
the prior year, billed business and spending per proprietary basic
card-in-force increased 15 percent and 10 percent, respectively. International
consumer and small business spending rose 9 percent and 13 percent for the
three and nine months ended September 30, 2006, respectively, and global
corporate spending rose 14 percent and 16 percent for the three and nine
months ended September 30, 2006, respectively.
Net finance charge revenue rose 18 percent and 19 percent to $201 million and
$595 million for the three and nine months ended September 30, 2006,
respectively, primarily due to 22 percent and 21 percent growth in the average
cardmember lending balances, which was offset by a lower net portfolio yield
in both periods.
International Card & Global Commercial Services' expenses increased 6 percent
for the three and nine months ended September 30, 2006, due to increased
provisions for losses and benefits, and higher marketing, promotion rewards
and cardmember services expenses, and for the three months ended September 30,
2006, greater human resources and other operating expenses. For the nine
months ended September 30, 2006, the increase in expenses was partially offset
by lower human resources and other operating expenses primarily due to the
gains on sales of the Company's card and merchant-related operations in
Brazil, investment in EAB, and its card and merchant-related activities in
Malaysia and Indonesia.
Marketing, promotion, rewards and cardmember services expenses of $330 million
and $1.1 billion for the three and nine months ended September 30, 2006,
respectively, increased 6 percent and 14 percent compared to a year ago, due
to greater volume-related rewards costs during both periods, which was
partially offset by a moderate reduction in marketing and promotion costs for
the three months ended September 30, 2006. The increased marketing, promotion,
rewards and cardmember services expenses for the nine months ended September
30, 2006, also reflected the higher Membership Rewards ultimate redemption
rate estimate previously discussed. Total provisions for losses and benefits
increased 22 percent and 41 percent for the three and nine months ended
September 30, 2006, respectively, principally due to higher interest rates on
investment certificate balances and strong volume and loan growth for both
periods. Higher total provisions for losses and benefits for the nine months
ended September 30, 2006, also reflected a higher level of charge offs,
primarily related to industry-wide credit issues in Taiwan. Human resources
and other operating expenses increased 2 percent for the three months ended
September 30, 2006, as higher interest, human resources, and professional
services expenses were offset by the reclassification of certain card
acquisition-related costs previously discussed, the $33 million gain related
to the sale of the Company's card and merchant-related activities in Malaysia
and Indonesia, and in the three months ended September 30, 2005, $30 million
of reengineering costs. Human resources and other operating expense decreased
2 percent for the nine months ended September 30, 2006, reflecting the items
in the three month discussion above, the $119
37
million gain on the sale of the Company's card and merchant-related activities
in Brazil, the $88 million gain on the sale of the Company's investment in
EAB, and in the nine months ended September 30, 2005, $114 million of
reengineering costs.
The effective tax rate was 23 percent and 21 percent for the three months
ended September 30, 2006 and 2005, respectively, and 26 percent and 17 percent
for the nine months ended September 30, 2006 and 2005, respectively. The
effective tax rate for the nine months ended September 30, 2005, reflected a
$33 million tax benefit at American Express Bank Ltd. resulting from the IRS
audit of previous years' tax returns. The effective tax rate for the nine
months ended September 30, 2006, reflected a higher tax expense related to
uncertainty regarding the Company's ability to obtain tax benefits for certain
expenses attributable to foreign subsidiaries, a relatively high effective tax
rate due to the impact of foreign exchange translation on the gain on the sale
of the Company's investment in EAB, and a relatively low effective tax rate
benefit on credit losses in Taiwan. These items were offset by a relatively
low effective tax rate on the sale of the Company's card and merchant-related
operations in Brazil, resulting principally from the difference between the
applicable Brazil tax rate, and the higher U.S. statutory rate.
38
Global Network & Merchant Services
Selected Income Statement Data
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Millions) 2006 2005 2006 2005
---- ---- ------ ------
Net revenues:
Discount revenue, fees and other $798 $693 $2,292 $2,022
---- ---- ------ ------
Expenses:
Marketing and promotion 118 167 393 463
Provision for losses 19 19 43 53
Human resources and other operating
expenses 347 293 965 876
---- ---- ------ ------
Total expenses 484 479 1,401 1,392
---- ---- ------ ------
Pretax segment income 314 214 891 630
Income tax provision 102 73 313 223
---- ---- ------ ------
Segment income $212 $141 $ 578 $ 407
==== ==== ====== ======
Selected Statistical Information
(Billions, except percentages and where indicated)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2006 2005 2006 2005
------ ------ ------ ------
Global Card billed business(a) $140.3 $121.7 $408.0 $351.8
Global Network & Merchant Services:
Total segment assets $ 5.1 $ 4.5 $ 5.1 $ 4.5
Segment capital $ 1.3 $ 1.2 $ 1.3 $ 1.2
Return on segment capital(b) 57.9% 49.4% 57.9% 49.4%
Global Network Services(c):
Card billed business $ 9.7 $ 6.0 $ 23.9 $ 17.1
Total cards-in-force (millions)(d) 14.5 9.9 14.5 9.9
(a) Global 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) Computed on a trailing 12-month basis using segment income and equity
capital allocated to segments based upon specific business operational
needs, risk measures and regulatory capital requirements.
(c) Billed business and cards-in-force reflect the transfer, effective
January 1, 2006, to International Card & Global Commercial Services'
segment of corporate card accounts in certain emerging markets that had
been managed within Global Network Services.
(d) Cards-in-force at September 30, 2006, reflect the transfer of 1.3 million
proprietary cards in Brazil, and approximately 200,000 proprietary cards-
in-force in Malaysia and Indonesia from the International Card & Global
Commercial Services segment on June 30, 2006, and during the three months
ended September 30, 2006, respectively.
Results of Operations for the Three and Nine Months Ended September 30, 2006
and 2005
Global Network & Merchant Services reported segment income of $212 million for
the three month period ended September 30, 2006, a 50 percent increase from
$141 million for the same period a year ago. For the nine month period ended
September 30, 2006, Global Network & Merchant Services reported segment income
of $578 million, a 42 percent increase from the same period a year ago.
Global Network & Merchant Services' net revenues increased 15 percent and 13
percent for the three and nine months ended September 30, 2006, respectively,
to $798 million and $2.3 billion, primarily due to growth in network-related
discount revenues generated from the 15 percent and 16 percent increase in
global card billed business during the three and nine months ended September
30, 2006, respectively, as well as higher network partner-related fees.
39
Global Network & Merchant Services' expenses remained relatively flat for the
three months and nine months ended September 30, 2006, as compared to the year
ago periods due to increased human resources and other operating expenses,
offset by lower marketing and promotion expenses.
Marketing and promotion expenses decreased 29 percent and 15 percent for the
three and nine months ended September 30, 2006, respectively, due to a
reduction in spending on brand-related advertising costs versus last year when
the "MyLife, MyCard (SM)" campaign was in a particularly active phase. Human
resources and other operating expenses of $347 million and $965 million for
the three and nine months ended September 30, 2006, respectively, increased 18
percent and 10 percent reflecting higher business volumes, and greater salary,
benefit and management incentive costs, which were partially offset by a
larger interest expense credit that recognizes the merchant services' accounts
payable-related funding benefit for both periods. The increase in human
resources and other expenses during the nine month period ended September 30,
2006, also reflected an adjustment in amortization of an intangible asset
relating to an overseas joint venture, partially offset by the Brazil gain.
The effective tax rate was 32 percent and 34 percent for the three months
ended September 30, 2006 and 2005, and 35 percent for both nine months ended
September 30, 2006 and 2005.
Corporate & Other
Results of Operations for the Three and Nine Months Ended September 30, 2006
and 2005
Corporate & Other had net expense of $52 million and $170 million for the
three months and nine months ended September 30, 2006, respectively, compared
to net income of $32 million and net expense of $5 million for the same
periods a year ago. The three months ended September 30, 2005, included the
$105 million tax benefit previously discussed, $51 million ($33 million
after-tax) of reengineering costs, and $3 million after-tax of Amerprise
spin-off related expenses. The nine months ended September 30, 2005, included
the items discussed above for the three months ended September 30, 2005, and a
$112 million ($73 million after-tax) September 11th related insurance
recovery, $95 million ($62 million after-tax) of reengineering costs, and a
$54 million tax benefit resulting from an Internal Revenue Service audit of
previous years' tax returns. In addition, the comparison versus a year ago
reflects efforts to eliminate overhead that was supportive of Amerprise.
As of September 30, 2006, the Company maintained a $200 million equity
investment in the Industrial & Commercial Bank of China (ICBC), which was
accounted for at cost. On October 27, 2006, ICBC completed an Initial Public
Offering (IPO). The Company will continue to be required to account for its
investment at cost for approximately two years due to contractual sales
restrictions, at which time the Company will make a determination whether to
classify the investment as either Available-for-Sale or Trading securities.
OTHER REPORTING MATTERS
Accounting Developments
See "Recently Issued Accounting Standards" section of Note 1 to the
Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk to earnings or value resulting from movements in
market prices. The Company's non-trading related market risk consists
primarily of interest rate risk in the card and certificate businesses and
foreign exchange risk. There were no material changes in these market risks
since December 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
40
amended (the "Exchange Act")) as of the end of the period covered by this
report. Based on such evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective. There have not
been any changes in the Company's internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Forward-Looking Statements
This report includes forward-looking statements, which are subject to
risks and uncertainties. The words "believe," "expect," "anticipate,"
"optimistic," "intend," "plan," "aim," "will," "may," "should," "could,"
"would," "likely," and similar expressions are intended to identify
forward-looking statements. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date on which
they are made. The Company undertakes no obligation to update or revise any
forward-looking statements. Factors that could cause actual results to differ
materially from these forward-looking statements include, but are not limited
to, the following: the Company's ability to generate sufficient revenue growth
and achieve sufficient margins, fluctuations in the capital required to
support its businesses, the mix of the Company's financings, and fluctuations
in the level of the Company's shareholders' equity; the Company's ability to
grow its business and meet or exceed its return on shareholders' equity target
by reinvesting approximately 35 percent of annually-generated capital, and
returning approximately 65 percent of such capital to shareholders, over time,
which will depend on the Company's ability to manage its capital needs and the
effect of business mix, acquisitions and rating agency requirements; consumer
and business spending on the Company's credit and charge card products and
Travelers Cheques and other prepaid products and growth in card lending
balances, which depend in part on the ability to issue new and enhanced card
and prepaid products, services and rewards programs, and increase revenues
from such products, attract new cardmembers, reduce cardmember attrition,
capture a greater share of existing cardmembers' spending, sustain premium
discount rates on its card products in light of regulatory and market
pressures, increase merchant coverage, retain cardmembers after low
introductory lending rates have expired, and expand the Global Network
Services business; the Company's ability to introduce new products, reward
program enhancements and service enhancements on a timely basis during 2006;
the success of the Global Network Services business in partnering with banks
in the United States, which will depend in part on the extent to which such
business further enhances the Company's brand, allows the Company to leverage
its significant processing scale, expands merchant coverage of the network,
provides Global Network Services' bank partners in the United States the
benefits of greater cardmember loyalty and higher spend per customer, and
merchant benefits such as greater transaction volume and additional higher
spending customers; fluctuations in interest rates, which impact the Company's
borrowing costs and return on lending products; the continuation of favorable
trends, including increased travel and entertainment spending, and the overall
level of consumer confidence; the costs and integration of acquisitions; the
success, timeliness and financial impact (including costs, cost savings and
other benefits including increased revenues), and beneficial effect on the
Company's operating expense to revenue ratio, both in the short-term and over
time, of reengineering initiatives being implemented or considered by the
Company, including cost management, structural and strategic measures such as
vendor, process, facilities and operations consolidation, outsourcing
(including, among others, technologies operations), relocating certain
functions to lower-cost overseas locations, moving internal and external
functions to the Internet to save costs, and planned staff reductions relating
to certain of such reengineering actions; the Company's ability to reinvest
the benefits arising from such reengineering actions in its businesses; the
ability to control and manage operating, infrastructure, advertising and
promotion expenses as business expands or changes, including the ability to
accurately estimate the provision for the cost of the Membership Rewards
program; the Company's ability to manage credit risk related to consumer debt,
business loans, merchant bankruptcies and other credit trends and the rate of
bankruptcies, which can affect spending on card products, debt payments by
individual and corporate customers and businesses that accept the Company's
card products and returns on the Company's investment portfolios;
bankruptcies, restructurings or similar events affecting the airline or any
other industry representing a significant portion of the Company's billed
business, including any potential negative effect on particular card products
and services and billed business generally that could result from the actual
or perceived weakness of
41
key business partners in such industries; the triggering of obligations to
make payments to certain co-brand partners, merchants, vendors and customers
under contractual arrangements with such parties under certain circumstances;
a downturn in the Company's businesses and/or negative changes in the
Company's and its subsidiaries' credit ratings, which could result in
contingent payments under contracts, decreased liquidity and higher borrowing
costs; risks associated with the Company's agreements with Delta Air Lines to
prepay $300 million for the future purchases of Delta SkyMiles rewards points;
fluctuations in foreign currency exchange rates; accuracy of estimates for the
fair value of the assets in the Company's investment portfolio and, in
particular, those investments that are not readily marketable, including the
valuation of the interest-only strip relating to the Company's lending
securitizations; the potential negative effect on the Company's businesses and
infrastructure, including information technology, of terrorist attacks,
disasters or other catastrophic events in the future; political or economic
instability in certain regions or countries, which could affect lending and
other commercial activities, among other businesses, or restrictions on
convertibility of certain currencies; changes in laws or government
regulations; outcomes and costs associated with litigation and compliance and
regulatory matters; and competitive pressures in all of the Company's major
businesses. A further description of these and other risks and uncertainties
can be found in the Company's Annual Report on Form 10-K for the year ended
December 31, 2005, and its other reports filed with the SEC.
PART II. OTHER INFORMATION
AMERICAN EXPRESS COMPANY
ITEM 1. LEGAL PROCEEDINGS
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. The Company believes that it is not a party
to, nor are any of its properties the subject of, any pending legal or
arbitration proceedings that would have a material adverse effect on the
Company's consolidated financial condition, results of operations 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. Certain legal proceedings
involving the Company are described below. For a discussion of certain other
legal proceedings involving the Company and its subsidiaries, please refer to
the Company's Annual Report on Form 10-K for the year ended December 31, 2005,
and its Forms 10-Q for the three months ended March 31 and June 30, 2006.
Corporate Matters
Beginning in mid-July 2002, 12 putative class action lawsuits were filed
in the U.S. District Court for the Southern District of New York. In October
2002, these cases were consolidated under the caption In re American Express
Company Securities Litigation. These lawsuits allege violations of the federal
securities laws and the common law in connection with alleged misstatements
and omissions regarding certain investments in high-yield bonds and
write-downs in the 2000-2001 timeframe. The purported class covers the period
from July 18, 1999 to July 17, 2001. The actions seek unspecified compensatory
damages as well as disgorgement, punitive damages, attorneys' fees and costs,
and interest. In March 2004, the District Court granted the Company's motion
to dismiss the lawsuit. Plaintiffs appealed the dismissal to the U.S. Court of
Appeals for the Second Circuit. In August 2006, the Court of Appeals, without
expressing any views whatsoever on the merits of the cases, vacated the
District Court's judgment and remanded all claims to the District Court for
further proceedings. More particularly, the Court of Appeals reversed the
District Court's ruling that two of the plaintiffs' claims in an amended
complaint did not "relate back" to the original complaint and were thus
time-barred under the statute of limitations period. As a result, the Court of
Appeals decided that it was prudent to remand all claims back to the District
Court so that plaintiffs could file a new amended complaint. The Company
continues to believe that it has meritorious defenses to the action and
intends to file a new motion to dismiss the lawsuit once the amended complaint
is filed.
U.S. Card Services and Global Network & Merchant Services Matters
In December 2003, American Express Travel Related Services Company, Inc.
was named as a defendant in a shareholder derivative action purportedly filed
on behalf of InfoSpace Inc. The action,
42
captioned Dreiling v. American Express Travel Related Services Company, Inc.,
was filed in the U.S. District Court for the District of Washington. The
complaint alleges that the Company violated the "short swing" liability
provisions of Section 16(a) of the Securities Exchange Act of 1934, as
amended, in connection with its sale of InfoSpace common stock. The plaintiff
seeks disgorgement of profits from the sale of the InfoSpace shares, as well
as fees and expenses. In June 2004, the Court granted American Express' motion
to dismiss the complaint without American Express' ever having answered the
complaint. In August 2006, the U.S. Court of Appeals for the Ninth Circuit
reinstated the action because of certain unresolved factual disputes. The
Company continues to believe that it has meritorious defenses to this action
and intends to defend it vigorously.
In July 2004, a purported class action captioned Ross, et al. v. American
Express Company, American Express Travel Related Services and American Express
Centurion Bank was filed in the U.S. District Court for the Southern District
of New York. The complaint alleges that AMEX conspired with Visa, MasterCard
and Diners Club in the setting of foreign conversion rates and in the
inclusion of arbitration clauses in certain of their cardmember agreements.
The suit seeks injunctive relief and unspecified damages. The class is defined
as "all Visa, MasterCard and Diners Club general purpose cardholders who used
cards issued by any of the MDL Defendant Banks...." American Express
cardholders are not part of the class. In September 2005, the Court denied the
Company's motion to dismiss the action and preliminarily certified an
injunction class of Visa and MasterCard cardholders to determine the validity
of Visa's and MasterCard's cardmember arbitration clauses. American Express
filed a motion for reconsideration with the Court, which motion was denied in
September 2006. American Express has filed an appeal from the District Court's
order denying its motion to compel arbitration and has asked the appellate
court to entertain an interlocutory appeal from the District Court's
certification of an injunction class.
In January 2006, in a matter captioned Hoffman, et al. v. American
Express Travel Related Services Company, Inc., No. 2001-02281, Superior Court
of the State of California, County of Alameda, the Court certified a class
action against TRS. Two classes were certified: (1) all persons who held
American Express charge cards with billing addresses in California who
purchased American Express' fee-based travel-related insurance plans from
September 6, 1995, through a date to be determined and (2) all persons who
held American Express charge cards with billing addresses in states other than
California and who purchased American Express' fee-based travel-related
insurance plans from September 6, 1995, through a date to be determined.
Plaintiffs allege that American Express violated California and New York law
by allegedly billing customers for flight and baggage insurance that they did
not receive. American Express denies the allegations and filed an
interlocutory appeal (known as a petition for a writ of mandate) of the class
certification order. In June 2006, the appellate court denied jurisdiction
over that interlocutory appeal. American Express also appealed the denial of
its motion to compel individual arbitration of all non-California class
members. The appellate court has jurisdiction over that appeal and the appeal
is pending. In the U.S. District Court for the Eastern District of New York a
matter making related allegations as those raised in Hoffman is pending. That
matter, captioned Environment Law Enforcement Systems v. American Express et.
al., had effectively been stayed pending the proceedings in the Hoffman
action. In October 2006, the Court in the Environment Law action entered an
order scheduling a pre-motion conference on American Express' anticipated
motion to compel arbitration for January 31, 2007.
International Matters
As disclosed in the Company's 2005 10-K Report, in recent years, U.S.
and foreign regulatory authorities, together with international
organizations, have raised increasing concerns over the ability of criminal
organizations and corrupt persons to use global financial intermediaries to
facilitate money laundering. In the United States, the Secretary of the
Treasury has issued regulations pursuant to the USA PATRIOT Act that
specifically impact certain money laundering prevention activities of
entities involved, as American Express Bank Ltd. (AEBL) is, in correspondent
and private banking activities. Compliance efforts to combat money laundering
remain a high priority for AEBL and it has increased these efforts to
address evolving regulatory and supervisory standards and requirements in
jurisdictions in which AEBL does business. In early 2004, American Express
Bank International (AEBI), a subsidiary of AEBL headquartered in Miami,
received subpoenas from the Department of Justice (DOJ) relating to certain
customer accounts and anti-money laundering (AML) compliance programs. In
September 2006, the DOJ informed AEBI of concerns relating to AML compliance
programs that could result in an action. AEBI has been cooperating with the
DOJ.
43
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) ISSUER PURCHASES OF SECURITIES
The table below sets forth the information with respect to purchases of the
Company's common stock made by or on behalf of the Company during the quarter
ended September 30, 2006.
Total Number Maximum
of Shares Number of
Purchased as Shares that
Part of May Yet Be
Publicly Purchased
Total Number Announced Under
of Shares Average Price Plans or the Plans or
Period Purchased Paid Per Share Programs (3) Programs
---------------------------- ------------ -------------- ------------ ------------
July 1-31, 2006
Repurchase program (1) 2,750,000 $51.88 2,750,000 196,447,423
Employee transactions (2) 41,180 $52.20 N/A N/A
---------- ----------
August 1-31, 2006
Repurchase program (1) 11,550,400 $52.38 11,550,400 184,897,023
Employee transactions (2) 9,166 $52.48 N/A N/A
---------- ----------
September 1-30, 2006
Repurchase program (1) 1,478,900 $52.47 1,478,900 183,418,123
Employee transactions (2) 5,967 $53.79 N/A N/A
---------- ----------
Total
Repurchase program (1) 15,779,300 $52.30
Employee transactions (2) 56,313 $52.41
(1) The Board of Directors of the Company authorized the repurchase of an
additional 200 million shares of common stock in May 2006. At September
30, 2006, there are approximately 183.4 million shares remaining under
such authorization. Such authorization does not have an expiration date,
and at present, there is no intention to modify or otherwise rescind such
authorization. Since September 1994, the Company has acquired 586.6
million shares of common stock under various Board authorizations to
repurchase up to an aggregate of 770.0 million shares, including
purchases made under agreements with third parties.
(2) Includes: (1) shares delivered by or deducted from holders of employee
stock options who exercised options (granted under the Company's
incentive compensation plans) in satisfaction of the exercise price
and/or tax withholding obligation of such holders and (2) restricted
shares withheld (under the terms of grants under the Company's incentive
compensation plans) to offset tax withholding obligations that occur upon
vesting and release of restricted shares. The Company's incentive
compensation plans provide that the value of the shares delivered or
attested to, or withheld, shall be the average of the high and low price
of the Company's common stock on the date the relevant transaction
occurs.
(3) Share purchases under publicly announced programs are made pursuant to
open market purchases or privately negotiated transactions (including
with employee benefit plans) as market conditions warrant and at prices
the Company deems appropriate.
44
ITEM 6. EXHIBITS
The list of exhibits required to be filed as exhibits to this report are
listed on page E-1 hereof, under "Exhibit Index," which is incorporated herein
by reference.
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN EXPRESS COMPANY
(Registrant)
Date: November 9, 2006 By /s/ Gary L. Crittenden
------------------------------------
Gary L. Crittenden
Executive Vice President and
Chief Financial Officer
Date: November 9, 2006 By /s/ Joan C. Amble
------------------------------------
Joan C. Amble
Executive Vice President and
Comptroller
(Principal Accounting Officer)
46
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report:
Exhibit Description
------- -----------
4.1 Form of Global Debenture for $500,000,000 principal amount of the
Company's 6.80% Subordinated Debentures due September 1, 2036 and
automatically extendible to September 1, 2066 (incorporated by
reference to Exhibit 4.2 of the Company's Current Report on Form 8-K
(Commission File No. 1-7657), filed August 2, 2006).
4.2 Form of Global Debenture for $250,000,000 principal amount of the
Company's 6.80% Subordinated Debentures due September 1, 2036 and
automatically extendible to September 1, 2066 (incorporated by
reference to Exhibit 4.3 of the Company's Current Report on Form 8-K
(Commission File No. 1-7657), filed August 2, 2006).
12 Computation in Support of Ratio of Earnings to Fixed Charges.
31.1 Certification of Kenneth I. Chenault pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Gary L. Crittenden pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
32.1 Certification of Kenneth I. Chenault and Gary L. Crittenden pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
E-1