Table of Contents
2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
debtor-in-possession financing under the Bankruptcy Code. At December 31, 2006, the remaining principal balance under this facility was $176 million. Delta received final approval for its reorganization plan and emerged from bankruptcy on April 30, 2007, and repaid the entire principal and interest outstanding at that time.
OTHER REPORTING MATTERS
ACCOUNTING DEVELOPMENTS
See the Recently Issued Accounting Standards section of Note 1 to the Consolidated Financial Statements.
GLOSSARY OF SELECTED TERMINOLOGY
Asset securitizations — Asset securitization involves the transfer and sale of receivables or loans to a special purpose entity created for the securitization activity, typically a trust. The trust, in turn, issues securities, commonly referred to as asset-backed securities, that are secured by the transferred receivables or loans. The trust uses the proceeds from the sale of such securities to pay the purchase price for the underlying receivables or loans.
Average discount rate— This calculation is designed to approximate merchant pricing. It represents the percentage of billed business (both proprietary and Global Network Services) retained by the Company from merchants it acquires, prior topayments to third parties unrelated to merchant acceptance.
Basic cards-in-force — Proprietary basic consumer cards-in-force includes basic cards issued to the primary account owner and does not include additional supplemental cards issued on that account. Proprietary basic small business and corporate cards-in-force include basic and supplemental cards issued to employee cardmembers. Non-proprietary basic cards-in-force includes all cards that are issued and outstanding under network partnership agreements.
Billed business — Represents the dollar amount of charges on all American Express cards; also referred to as spend or charge volume. Proprietary billed business includes charges made on the Company’s proprietary cards-in-force, cash advances on proprietary cards and certain insurance fees charged on proprietary cards. Non-proprietary billed business represents the charges through the Company’s global network on cards issued by the Company’s network partners.
Card acquisition — Primarily represents the issuance of new cards to either new or existing cardmembers through marketing and promotion efforts.
Cardmember— The individual holder of an issued American Express branded charge or credit card.
Cardmember lending finance revenue— Represents the revenue earned on outstanding cardmember loans. Cardmember lending finance charges are assessed using the average daily balancemethod. They are recognized based upon the principal amount outstanding in accordance with the terms of the applicable account agreement until the outstanding balance is paid or written-off.
Cardmember loans — Represents the outstanding amount due from cardmembers for charges made on their American Express credit cards, as well as any interest charges and card-related fees. Cardmember loans also include balances with extended payment terms on certain charge card products.
Cardmember receivables — Represents the outstanding amount due from cardmembers for charges made on their American Express charge cards as well as any card-related fees.
Charge cards — Represents cards that carry no pre-set spending limits and are primarily designed as a method of payment and not as a means of financing purchases. Cardmembers generally must pay the full amount billed each month. No finance charges are assessed on charge cards.
Credit cards — Represents cards that have a range of revolving payment terms, grace periods, and rate and fee structures.
Discount revenue— Represents revenue earned from fees charged to merchants with whom the Company has entered into a card acceptance agreement for processing cardmember transactions. The discount fee generally is deducted from the Company’s payment reimbursing the merchant for cardmember purchases. Such amounts are reduced by contra-revenue such as payments to third-party card issuing partners, cash-back reward costs, and corporate incentive payments.
Interest-only strip — Interest-only strips are generated from U.S. Card Services’ securitization activity and are a form of retained interest held by the Company in the securitization. This financial instrument represents the present value of estimated future “excess spread” expected to be generated by the securitized assets over the estimated life of those assets. Excess spread is the net positive cash flow from interest and fee collections allocated to the third-party investors’ interests in the securitization after deducting the interest paid on the investor certificates, credit losses, contractual servicing fees, and other expenses.
Merchant acquisition — Represents the signing of merchants to accept American Express-branded charge and credit cards.
Net card fees — Represents the card membership fees earned during the period. These fees are recognized as revenue over the covered card membership period (typically one year), net of provision for projected refunds for cancellation of card membership. Beginning prospectively as of July 1, 2006, certain card acquisition-related costs were reclassified from other, net expenses to a reduction in net card fees over the membership period covered by the card fee.
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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
Net loss ratio — Represents the ratio of charge card write-offs consisting of principal (resulting from authorized and unauthorized transactions) and fee components, less recoveries, on cardmember receivables expressed as a percentage of gross amounts billed to cardmembers.
Net write-off rate — Represents the amount of cardmember loans written off consisting of principal (resulting from authorized transactions), interest, and fee components, less recoveries, as a percentage of the average loan balance during the period.
Return on average equity — Computed on a trailing 12-month basis using total shareholders’ equity as included in the Consolidated Financial Statements prepared in accordance with GAAP.
Return on segment capital— 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.
Securitization income, net — Includes non-credit provision components of the net gains from securitization activities; changes in fair value of the interest-only strip; excess spread related to securitized cardmember loans; and servicing income, net of related discounts or fees. Excess spread, which is recognized as earned, is the net positive cash flow from interest and fee collections allocated to the third-party investors’ interests in the securitization after deducting the interest paid on the investor certificates, credit losses, contractual servicing fees, and other expenses.
Stored value and prepaid products — Include Travelers Cheques and other prepaid products such as gift cheques and cards as well as reloadable Travelers Cheque cards. These products are sold as safe and convenient alternatives to currency for purchasing goods and services.
Total cards-in-force — Represents the number of cards that are issued and outstanding. Total consumer cards-in-force includes basic cards issued to the primary account owner and any supplemental cards, which represent additional cards issued on that account. Total small business and corporate cards-in-force include basic cards issued to employee cardmembers. Proprietary cards-in-force represent card products where the Company owns the cardmember relationship including card issuance, billing and credit management and strategic plans such as marketing, promotion, and development of card products and offerings. Proprietary cards-in-force include co-brand and affinity cards. For non-proprietary cards-in-force (except for certain independent operator network partnership agreements), the Company maintains the responsibility to acquire and service merchants that accept the Company’s cards and the cardmember relationship is owned by the Company’s network partners that issue the cards.
Travel sales —Represents the total dollar amount of travel transaction volume for airline, hotel, car rental, and other travel arrangements made for consumers and corporate clients. The Company earns revenue on these transactions by charging a transaction or management fee.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements, which are subject to risks and uncertainties. The forward-looking statements, which address the Company’s expected business and financial performance, among other matters, contain words such as “believe,” “expect,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” and similar expressions. 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: 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 economic environment, and the ability to issue new and enhanced card and prepaidproducts, services and rewards programs, and increase revenues from such products, attract new Cardmembers, reduce Cardmember attrition, capture a greater share of existing Cardmembers’ spending, and 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 manage credit risk related to consumer debt, business loans, merchants and other credit trends, which will depend in part on the economic environment, the rates of bankruptcies and unemployment, which can affect spending on card products, debt payments by individual and corporate customers and businesses that accept the Company’s card products, and on the effectiveness of the Company’s credit models; fluctuations in interest rates (including fluctuations in benchmarks, such as LIBOR and other benchmark rates, used to price loans and other indebtedness, as well as credit spreads in the pricing of loans and other indebtedness), which impact the Company’s borrowing costs, return on lending products and the value of the Company’s investments; the Company’s ability to meet its ROE target range of 33 to 36 percent on average and over time, which will depend in part on factors such as 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
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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
due to share repurchases, dividends, changes in accumulated other comprehensive income and accounting changes, among other things; the actual amount to be spent by the Company on marketing, promotion, rewards and Cardmember services based on management’s assessment of competitive opportunities and other factors affecting its judgment; 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; fluctuations in foreign currency exchange rates; 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; 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 percustomer,and merchant benefits such as greater transaction volume and additional higher spending customers; trends in travel and entertainment spending and the overall level of consumer confidence; the costs and integration of acquisitions; the underlying assumptions and expectations related to the sale of the American Express Bank Ltd. businesses proving to be inaccurate or unrealized, including, among other things, the likelihood of and expected timing for completion of the transaction, the proceeds to be received by the Company in the transaction and the transaction’s impact on the Company’s earnings; 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, structuraland 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; bankruptcies, restructurings, consolidations 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 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; 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 Company’s ability to invest in technology advances across all areas of its business to stay on the leading edge of technologies applicable to the payments industry; the Company’s ability to protect its intellectual property rights (IP) and avoid infringing the IP of other parties; the potential negative effect on the Company’s businesses and infrastructure, including information technology, of terrorist attacks, natural 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; accounting changes; outcomes and costs associated with litigation and compliance and regulatory matters; and competitive pressures in all of the Company’s major businesses. See also “Risk Factors” in the Company’s 2007 Form 10-K filed with the SEC.
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
AMERICAN EXPRESS COMPANY
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of American Express Company (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America, and includes those policies and procedures that:
- Pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions anddispositions of the assets of the Company;
- Provide reasonable assurance that transactions are recordedas necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles,and that receipts and expenditures of the Company are beingmade only in accordance with authorizations of managementand directors of the Company; and
- Provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use or disposition ofthe Company’s assets that could have a material effect on thefinancial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control — Integrated Framework.
Based on management’s assessment and those criteria, we conclude that, as of December 31, 2007, the Company’s internal control over financial reporting is effective.
PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm, has issued an audit report appearing on the following page on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
AMERICAN EXPRESS COMPANY
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF AMERICAN EXPRESS COMPANY:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows and of shareholders’ equity present fairly, in all material respects, the financial position of American Express Company and its subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established inInternal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing on page 65. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, andtesting and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
New York, New York
February 25, 2008
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
| CONSOLIDATED FINANCIAL STATEMENTS | PAGE |
| Consolidated Statements of Income – For the Years Ended December 31, 2007, 2006, and 2005 | 68 |
| Consolidated Balance Sheets – December 31, 2007 and 2006 | 69 |
| Consolidated Statements of Cash Flows – For the Years Ended December 31, 2007, 2006, and 2005 | 70 |
| Consolidated Statements of Stockholders’ Equity – For the Years Ended December 31, 2007, 2006, and 2005 | 71 |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
| Note 1 – Summary of Significant Accounting Policies | 72 |
| Note 2 – Discontinued Operations | 80 |
| Note 3 – Accounts Receivable | 81 |
| Note 4 – Investments | 81 |
| Note 5 – Loans | 84 |
| Note 6 – Asset Securitizations | 85 |
| Note 7 – Changes in Accumulated Other Comprehensive Income (Loss) | 88 |
| Note 8 – Other Assets | 90 |
| Note 9 – Short- and Long-Term Debt and Borrowing Agreements | 91 |
| Note 10 – Other Liabilities | 93 |
| Note 11 – Common and Preferred Shares | 93 |
| Note 12 – Derivatives and Hedging Activities | 94 |
| Note 13 – Guarantees | 95 |
| Note 14 – Commitments and Contingencies | 96 |
| Note 15 – Fair Values of Financial Instruments | 97 |
| Note 16 – Significant Credit Concentrations | 98 |
| Note 17 – Stock Plans | 99 |
| Note 18 – Retirement Plans | 101 |
| Note 19 – Income Taxes | 106 |
| Note 20 – Earnings Per Common Share (EPS) | 108 |
| Note 21 – Reportable Operating Segments and Geographic Operations | 108 |
| Note 22 – Quarterly Financial Data (Unaudited) | 111 |
| Note 23 – Restructuring Charges | 111 |
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CONSOLIDATED STATEMENTS OF INCOME
AMERICAN EXPRESS COMPANY
| Years Ended December 31,(Millions, except per share amounts) | | 2007 | | | 2006 | | 2005 |
| Revenues | | | | | | | | | | |
| Discount revenue | | $ | 14,596 | | | $ | 12,978 | | $ | 11,489 |
| Net card fees | | | 2,050 | | | | 1,994 | | | 2,033 |
| Travel commissions and fees | | | 1,926 | | | | 1,778 | | | 1,780 |
| Other commissions and fees | | | 2,417 | | | | 2,233 | | | 2,106 |
| Securitization income, net | | | 1,507 | | | | 1,489 | | | 1,260 |
| Other | | | 1,645 | | | | 1,689 | | | 1,317 |
| Total | | | 24,141 | | | | 22,161 | | | 19,985 |
| Interest income | | | | | | | | | | |
| Cardmember lending finance revenue | | | 6,145 | | | | 4,586 | | | 3,379 |
| Other | | | 1,271 | | | | 1,147 | | | 1,040 |
| Total | | | 7,416 | | | | 5,733 | | | 4,419 |
| Total revenues | | | 31,557 | | | | 27,894 | | | 24,404 |
| Interest expense | | | | | | | | | | |
| Cardmember lending | | | 1,734 | | | | 1,192 | | | 847 |
| Charge card and other | | | 2,092 | | | | 1,548 | | | 1,132 |
| Total | | | 3,826 | | | | 2,740 | | | 1,979 |
| Revenues net of interest expense | | | 27,731 | | | | 25,154 | | | 22,425 |
| Expenses | | | | | | | | | | |
| Marketing, promotion, rewards and cardmember services | | | 7,817 | | | | 6,504 | | | 5,823 |
| Human resources | | | 5,438 | | | | 5,040 | | | 4,745 |
| Professional services | | | 2,283 | | | | 2,269 | | | 1,986 |
| Occupancy and equipment | | | 1,436 | | | | 1,384 | | | 1,318 |
| Communications | | | 461 | | | | 434 | | | 439 |
| Other, net | | | 389 | | | | 1,358 | | | 1,303 |
| Total | | | 17,824 | | | | 16,989 | | | 15,614 |
| Provisions for losses and benefits | | | | | | | | | | |
| Charge card | | | 1,140 | | | | 935 | | | 1,038 |
| Cardmember lending | | | 2,761 | | | | 1,623 | | | 1,349 |
| Other (including investment certificates) | | | 440 | | | | 468 | | | 371 |
| Total | | | 4,341 | | | | 3,026 | | | 2,758 |
| Pretax income from continuing operations | | | 5,566 | | | | 5,139 | | | 4,053 |
| Income tax provision | | | 1,518 | | | | 1,528 | | | 991 |
| Income from continuing operations | | | 4,048 | | | | 3,611 | | | 3,062 |
| (Loss) Income from discontinued operations, net of tax | | | (36 | ) | | | 96 | | | 672 |
| Net income | | $ | 4,012 | | | $ | 3,707 | | $ | 3,734 |
| Earnings per Common Share — Basic: | | | | | | | | | | |
| Income from continuing operations | | $ | 3.45 | | | $ | 2.98 | | $ | 2.48 |
| (Loss) Income from discontinued operations | | | (0.03 | ) | | | 0.08 | | | 0.55 |
| Net income | | $ | 3.42 | | | $ | 3.06 | | $ | 3.03 |
| Earnings per Common Share — Diluted: | | | | | | | | | | |
| Income from continuing operations | | $ | 3.39 | | | $ | 2.92 | | $ | 2.43 |
| (Loss) Income from discontinued operations | | | (0.03 | ) | | | 0.07 | | | 0.54 |
| Net income | | $ | 3.36 | | | $ | 2.99 | | $ | 2.97 |
| Average common shares outstanding for earnings per common share: | | | | | | | | | | |
| Basic | | | 1,173 | | | | 1,212 | | | 1,233 |
| Diluted | | | 1,196 | | | | 1,238 | | | 1,258 |
| See Notes to Consolidated Financial Statements. | | | | | | | | | | |
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CONSOLIDATED BALANCE SHEETS
AMERICAN EXPRESS COMPANY
| December 31,(Millions, except share data) | | 2007 | | | 2006 | |
| Assets | | | | | | | | |
| Cash and cash equivalents | | $ | 11,737 | | | $ | 5,306 | |
| Accounts receivable | | | | | | | | |
| Cardmember receivables, less reserves: 2007, $1,149; 2006, $981 | | | 38,923 | | | | 36,386 | |
| Other receivables, less reserves: 2007, $36; 2006, $35 | | | 3,082 | | | | 2,279 | |
| Investments | | | 15,864 | | | | 17,954 | |
| Loans | | | | | | | | |
| Cardmember lending, less reserves: 2007, $1,831; 2006, $1,171 | | | 52,674 | | | | 42,135 | |
| Other, less reserves: 2007, $45; 2006, $36 | | | 762 | | | | 981 | |
| Land, buildings and equipment — at cost, less accumulated depreciation: | | | | | | | | |
| 2007, $3,453; 2006, $2,980 | | | 2,692 | | | | 2,350 | |
| Other assets | | | 7,349 | | | | 6,526 | |
| Assets of discontinued operations | | | 16,747 | | | | 14,412 | |
| Total assets | | $ | 149,830 | | | $ | 128,329 | |
| Liabilities and Shareholders’ Equity | | | | | | | | |
| Customers’ deposits | | $ | 15,397 | | | $ | 12,010 | |
| Travelers Cheques outstanding | | | 7,197 | | | | 7,215 | |
| Accounts payable | | | 7,674 | | | | 8,676 | |
| Investment certificate reserves | | | 5,299 | | | | 6,058 | |
| Short-term debt | | | 17,762 | | | | 15,236 | |
| Long-term debt | | | 55,285 | | | | 42,747 | |
| Other liabilities | | | 13,959 | | | | 11,931 | |
| Liabilities of discontinued operations | | | 16,228 | | | | 13,945 | |
| Total liabilities | | | 138,801 | | | | 117,818 | |
| Shareholders’ Equity | | | | | | | | |
| Common shares, $.20 par value, authorized 3.6 billion shares; issued and outstanding | | | | | | | | |
| 1,158 million shares in 2007 and 1,199 million shares in 2006 | | | 232 | | | | 240 | |
| Additional paid-in capital | | | 10,164 | | | | 9,638 | |
| Retained earnings | | | 1,075 | | | | 1,153 | |
| Accumulated other comprehensive (loss) income | | | | | | | | |
| Net unrealized securities gains, net of tax: 2007, $(6); 2006, $(61) | | | 12 | | | | 92 | |
| Net unrealized derivatives (losses) gains, net of tax: 2007, $40; 2006, $(16) | | | (71 | ) | | | 27 | |
| Foreign currency translation adjustments, net of tax: 2007, $7; 2006, $22 | | | (255 | ) | | | (222 | ) |
| Net unrealized pension and other postretirement benefit costs, net of tax: 2007, $56; 2006, $210 | | | (128 | ) | | | (417 | ) |
| Total accumulated other comprehensive loss | | | (442 | ) | | | (520 | ) |
| Total shareholders’ equity | | | 11,029 | | | | 10,511 | |
| Total liabilities and shareholders’ equity | | $ | 149,830 | | | $ | 128,329 | |
| See Notes to Consolidated Financial Statements. | | | | | | | | |
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CONSOLIDATED STATEMENTS OF CASH FLOWS
AMERICAN EXPRESS COMPANY
| Years Ended December 31,(Millions) | | | 2007 | | | 2006 | | | 2005 | |
| Cash Flows from Operating Activities | | | | | | | | | | |
| Net income | | $ | 4,012 | | $ | 3,707 | | $ | 3,734 | |
| Loss (Income) from discontinued operations, net of tax | | | 36 | | | (96 | ) | | (672 | ) |
| Income from continuing operations | | | 4,048 | | | 3,611 | | | 3,062 | |
| Adjustments to reconcile income from continuing operations to net cash provided by operating | | | | | | | | | | |
| activities | | | | | | | | | | |
| Provisions for losses and benefits | | | 4,527 | | | 3,021 | | | 2,771 | |
| Depreciation and amortization | | | 648 | | | 608 | | | 567 | |
| Deferred taxes, acquisition costs and other | | | (738 | ) | | (378 | ) | | (266 | ) |
| Stock-based compensation | | | 276 | | | 275 | | | 232 | |
| Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: | | | | | | | | | | |
| Accounts receivable | | | (912 | ) | | (296 | ) | | (682 | ) |
| Other operating assets | | | (139 | ) | | (511 | ) | | 533 | |
| Accounts payable and other liabilities | | | 1,005 | | | 2,507 | | | 1,190 | |
| (Decrease) increase in Travelers Cheques outstanding | | | (22 | ) | | 47 | | | (79 | ) |
| Net cash (used in) provided by operating activities attributable to discontinued operations | | | (209 | ) | | 121 | | | 717 | |
| Net cash provided by operating activities | | | 8,484 | | | 9,005 | | | 8,045 | |
| Cash Flows from Investing Activities | | | | | | | | | | |
| Sale of investments | | | 4,901 | | | 5,416 | | | 3,374 | |
| Maturity and redemption of investments | | | 7,100 | | | 11,067 | | | 6,479 | |
| Purchase of investments | | | (10,332 | ) | | (15,850 | ) | | (10,539 | ) |
| Net increase in cardmember loans/receivables | | | (18,903 | ) | | (15,096 | ) | | (13,012 | ) |
| Proceeds from cardmember loan securitizations | | | 5,909 | | | 3,491 | | | 5,386 | |
| Maturities of cardmember loan securitizations | | | (3,500 | ) | | (4,435 | ) | | (4,463 | ) |
| Loan operations and principal collections, net | | | 25 | | | 107 | | | 100 | |
| Purchase of land, buildings and equipment | | | (938 | ) | | (832 | ) | | (584 | ) |
| Sale of land, buildings and equipment | | | 55 | | | 78 | | | 239 | |
| (Acquisitions) dispositions, net of cash sold/acquired | | | (124 | ) | | 779 | | | (136 | ) |
| Cash spun-off to Ameriprise | | | — | | | — | | | (3,678 | ) |
| Net cash (used in) provided by investing activities attributable to discontinued operations | | | (1,287 | ) | | 70 | | | (427 | ) |
| Net cash used in investing activities | | | (17,094 | ) | | (15,205 | ) | | (17,261 | ) |
| Cash Flows from Financing Activities | | | | | | | | | | |
| Net change in customers’ deposits | | | 3,361 | | | (1,876 | ) | | 4,309 | |
| Sale of investment certificates | | | 3,427 | | | 4,670 | | | 5,728 | |
| Redemption of investment certificates | | | (4,219 | ) | | (5,554 | ) | | (4,296 | ) |
| Net increase (decrease) in debt with maturities of three months or less | | | 5,338 | | | (3,054 | ) | | (345 | ) |
| Issuance of debt | | | 27,353 | | | 29,339 | | | 14,195 | |
| Principal payments on debt | | | (18,390 | ) | | (14,741 | ) | | (14,280 | ) |
| Issuance of American Express common shares and other | | | 852 | | | 1,203 | | | 1,129 | |
| Repurchase of American Express common shares | | | (3,572 | ) | | (4,093 | ) | | (1,853 | ) |
| Dividends paid | | | (712 | ) | | (661 | ) | | (597 | ) |
| Net cash provided by financing activities attributable to discontinued operations | | | 2,028 | | | 1,345 | | | 2,473 | |
| Net cash provided by financing activities | | | 15,466 | | | 6,578 | | | 6,463 | |
| Effect of exchange rate changes on cash | | | 166 | | | 264 | | | (10 | ) |
| Net increase (decrease) in cash and cash equivalents | | | 7,022 | | | 642 | | | (2,763 | ) |
| Cash and cash equivalents at beginning of year includes cash of discontinued | | | | | | | | | | |
| operations: 2007, $2,940; 2006, $1,464; 2005, $2,728 | | | 8,246 | | | 7,604 | | | 10,367 | |
| Cash and cash equivalents at end of year includes cash of discontinued | | | | | | | | | | |
| operations: 2007, $3,531; 2006, $2,940; 2005, $1,464 | | $ | 15,268 | | $ | 8,246 | | $ | 7,604 | |
| See Notes to Consolidated Financial Statements. | | | | | | | | | | |
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AMERICAN EXPRESS COMPANY
| | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | Additional | | Other | | | | |
| | | | | | Common | | Paid-in | | Comprehensive | | Retained | |
| Three Years Ended December 31, 2007(Millions, except per share amounts) | | Total | | Shares | | Capital | | Income/(Loss) | | Earnings | |
| Balances at December 31, 2004 | | $ | 16,020 | | $ | 250 | | $ | 7,316 | | $ | 258 | | $ | 8,196 | |
| Comprehensive income | | | | | | | | | | | | | | | | |
| Net income | | | 3,734 | | | | | | | | | | | | 3,734 | |
| Change in net unrealized securities gains | | | (607 | ) | | | | | | | | (607 | ) | | | |
| Change in net unrealized derivatives gains | | | 275 | | | | | | | | | 275 | | | | |
| Foreign currency translation adjustments | | | (81 | ) | | | | | | | | (81 | ) | | | |
| Minimum pension liability adjustment | | | (2 | ) | | | | | | | | (2 | ) | | | |
| Total comprehensive income | | | 3,319 | | | | | | | | | | | | | |
| Spin-off of Ameriprise | | | (7,746 | ) | | | | | | | | 18 | | | (7,764 | ) |
| Repurchase of common shares | | | (1,853 | ) | | (7 | ) | | (209 | ) | | | | | (1,637 | ) |
| Other changes, primarily employee plans | | | 1,405 | | | 5 | | | 1,545 | | | | | | (145 | ) |
| Cash dividends declared | | | | | | | | | | | | | | | | |
| Common, $0.48 per share | | | (596 | ) | | | | | | | | | | | (596 | ) |
| Balances at December 31, 2005 | | | 10,549 | | | 248 | | | 8,652 | | | (139 | ) | | 1,788 | |
| Comprehensive income | | | | | | | | | | | | | | | | |
| Net income | | | 3,707 | | | | | | | | | | | | 3,707 | |
| Change in net unrealized securities gains | | | (45 | ) | | | | | | | | (45 | ) | | | |
| Change in net unrealized derivatives gains | | | (116 | ) | | | | | | | | (116 | ) | | | |
| Foreign currency translation adjustments | | | 178 | | | | | | | | | 178 | | | | |
| Minimum pension liability adjustment | | | (2 | ) | | | | | | | | (2 | ) | | | |
| Total comprehensive income | | | 3,722 | | | | | | | | | | | | | |
| Adjustment to initially apply SFAS No. 158, net of tax | | | (396 | ) | | | | | | | | (396 | ) | | | |
| Repurchase of common shares | | | (4,093 | ) | | (15 | ) | | (534 | ) | | | | | (3,544 | ) |
| Acquisition of Harbor Payments, Inc. | | | 147 | | | | | | 147 | | | | | | | |
| Other changes, primarily employee plans | | | 1,274 | | | 7 | | | 1,373 | | | | | | (106 | ) |
| Cash dividends declared | | | | | | | | | | | | | | | | |
| Common, $0.57 per share | | | (692 | ) | | | | | | | | | | | (692 | ) |
| Balances at December 31, 2006 | | | 10,511 | | | 240 | | | 9,638 | | | (520 | ) | | 1,153 | |
| Comprehensive income | | | | | | | | | | | | | | | | |
| Net income | | | 4,012 | | | | | | | | | | | | 4,012 | |
| Change in net unrealized securities gains | | | (80 | ) | | | | | | | | (80 | ) | | | |
| Change in net unrealized derivatives (losses) gains | | | (98 | ) | | | | | | | | (98 | ) | | | |
| Foreign currency translation adjustments | | | (33 | ) | | | | | | | | (33 | ) | | | |
| Net unrealized pension and other post retirement benefit | | | | | | | | | | | | | | | | |
| gains | | | 289 | | | | | | | | | 289 | | | | |
| Total comprehensive income | | | 4,090 | | | | | | | | | | | | | |
| Repurchase of common shares | | | (3,572 | ) | | (12 | ) | | (494 | ) | | | | | (3,066 | ) |
| Other changes, primarily employee plans | | | 867 | | | 4 | | | 1,020 | | | | | | (157 | ) |
| Adoption of FIN 48 | | | (127 | ) | | | | | | | | | | | (127 | ) |
| Cash dividends declared | | | | | | | | | | | | | | | | |
| Common, $0.63 per share | | | (740 | ) | | | | | | | | | | | (740 | ) |
| Balances at December 31, 2007 | | $ | 11,029 | | $ | 232 | | $ | 10,164 | | $ | (442 | ) | $ | 1,075 | |
| See Notes to Consolidated Financial Statements. | | | | | | | | | | | | | | | | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
American Express Company (the Company) is a leading global payments, and travel company. The Company’s principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. The Company’s businesses are organized into two customer-focused groups, the Global Consumer Group and the Global Business-to-Business Group. The Global Consumer Group offers a range of products and services including charge and lending (i.e., credit) card products; consumer travel services; stored value products such as Travelers Cheques and prepaid products. The Business-to-Business Group offers business travel, corporate cards and other expense management products and services; network services and merchant acquisition and merchant processing for the Company’s network partners and proprietary payments businesses; and point-of-sale, back-office, and marketing products and services for merchants.The Company’s various products and services are sold globally to diverse customer groups, including consumers, small businesses, middle-market companies, and large corporations. These products and services are sold through various channels including direct mail, on-line applications, targeted sales forces, and direct response advertising.
REPORTABLE OPERATING SEGMENTS
During 2007, the Company’s segments were realigned within the two major customer groups. Accordingly U.S. Card Services (USCS) and International Card Services (ICS) are aligned within the Global Consumer Group and Global Commercial Services (GCS) and Global Network & Merchant Services (GNMS) are aligned within the Global Business-to-Business Group. The Company has reclassified the prior period amounts to be consistent with the new reportable operating segments.
DIVESTITURES AND ACQUISITIONS
The Company announced or completed the following divestitures during 2007, 2006, and 2005.
AEB and AEIDC
On September 18, 2007, the Company entered into an agreement to sell its international banking subsidiary, American Express Bank Ltd. (AEB) and American Express International Deposit Company (AEIDC), a subsidiary that issues investment certificates to AEB’s customers, to Standard Chartered PLC (Standard Chartered) for the approximate value of $1.1 billion, subject to certain regulatory approvals. Standard Chartered will pay the Company an amount equal to the net asset valueof the AEB businesses that are being sold at the closing date plus $300 million. At December 31, 2007, this would have amounted to approximately $819 million. The Company also expects to realize an additional amount representing the net asset value of AEIDC, which was also contracted to be sold to Standard Chartered 18 months after the close of the AEB sale, through a put/call agreement. As of December 31, 2007, the net asset value of that business was $232 million. This value is expected to be realized through (1) dividends from the subsidiary to the Company and (2) a subsequent payment from Standard Chartered based on the net asset value of AEIDC on the date the business is transferred to them.
For 2007 and all prior periods presented, the operating results, assets and liabilities, and cash flows of AEB (except for certain components of AEB that are not being sold) have been removed from the Corporate & Other segment and reported within the discontinued operations captions in the Company’s Consolidated Financial Statements. AEIDC will continue to be included in continuing operations within the Corporate& Other segment until such time as AEIDC qualifies for classification as a discontinued operation, which will occur approximately one year prior to its transfer to Standard Chartered.
The operating results, assets and liabilities, and cash flows of AEB are presented separately in the Company’s Consolidated Financial Statements. The Notes to the Consolidated Financial Statements have been adjusted to exclude discontinued operations unless otherwise noted. Refer to Note 2 for further discussion of AEB as a discontinued operation.
Divestitures with GNS Network Arrangements
On May 31, 2007, the Company completed the sale of its merchant-related activities in Russia to Russian Standard Bank (RSB), for approximately $27 million ($18 million after-tax) net gain in the Global Network & Merchant Services segment.$23 million ($15 million after-tax) of the gain relates to the merchant-related activities sold and is reported as a reduction to other, net expenses in the Company’s continuing operations. $4 million ($3 million after-tax) of the gain relates to the issuance of the Global Network Services (GNS) license and is reported as other revenue in the Company’s continuing operations.
During the third quarter of 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, net expenses in the Company’s continuing operations ($23 million in the International Card Services segment and $10 million in the Global Commercial Services segment).
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
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AMERICAN EXPRESS COMPANY
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, net expenses in the Company’s continuing operations ($91 million in the International Card Services segment, $28 million in the Global Commercial Services segment, and $25 million in the Global Network & Merchant Services segment). A $48 million ($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.
The Company will continue to maintain its presence in the merchant-related businesses within Russia and in the card and merchant-related businesses within Malaysia, Indonesia, and Brazil through its Global Network Services arrangements with the acquirers and its retention of agreements with multinational merchants.
Ameriprise, TBS and Other Divestitures
On September 30, 2005, the Company completed the spin-off of Ameriprise Financial, Inc. (Ameriprise), previously known as American Express Financial Corporation, the Company’s former financial planning and financial services business.In addition, the Company completed certain dispositions including the sale of its tax, accounting, and consulting business, American Express Tax and Business Services, Inc. (TBS). The operating results, assets and liabilities, and cash flows related to Ameriprise and certain dispositions (including TBS) have been reflected as discontinued operations in the Consolidated Financial Statements.
Acquisitions and Other Transactions
On September 30, 2007, the Company purchased all the outstanding common shares of AMEX Assurance Company (AAC), a subsidiary of Ameriprise, for $115 million. During the third quarter of 2005, the Company recorded a $115 million liability related to the share purchase agreement with Ameriprise to purchase all of the shares of AAC, within a period not to exceed two years from the spin-off date of September 30, 2005. The Company had previously consolidated AAC as a variable interest entity within the U.S. Card Services segment since the spin-off of Ameriprise and therefore there is no impact on the Company’s Consolidated Financial Statements from this 2007 acquisition.
On December 31, 2006, the Company acquired Harbor Payments, Inc. (Harbor Payments) for approximately $150 million, which was paid primarily in the Company’s common stock. Harbor Payments is a technology provider that specializes in electronic invoice and payment capabilities. The acquisition is reflected in the Global Commercial Services segment.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements of the Company are prepared in conformity with U.S. generally accepted accounting principles (GAAP). All significant intercompany transactions are eliminated.
The Company consolidates all voting interest entities in which the Company holds a greater than 50 percent voting interest. Entities in which the Company’s voting interest is 20 percent or more but less than 50 percent are accounted for under the equity method. All other investments are accounted for under the cost method unless the Company determines that it exercises significant influence over an entity by means other than voting rights, in which case the entity is accounted for under the equity method.
The Company also consolidates any Variable Interest Entities (VIEs) for which it is considered to be the primary beneficiary. The determination of whether an entity is a VIE is based on the amount and characteristics of the entity’s equity. In general, an enterprise is required to consolidate a VIE when it has a variable interest and it is deemed to be the primary beneficiary (meaning that it will absorb a majority of the VIE’s expected losses or receive a majority of the VIE’s expected residual returns). The Company’s involvement with VIEs is limited, and primarily comprises investments in affordable housing partnerships and its cardmember receivables securitization trust.
Qualifying Special Purpose Entities (QSPEs) under Statement of Financial Accounting Standards (SFAS) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (SFAS No. 140), are not consolidated. The Company utilizes QSPEs in connection with cardmember lending securitizations within the U.S. Card Services segment.
Certain reclassifications of prior period amounts have been made to conform to the current presentation. These reclassifications did not have an impact on the Company’s financial position or results of operations, and primarily includes those described in the Company’s previously filed current reports on Form 8-K dated November 1, 2007, and March 30, 2007.
In addition, beginning prospectively as of July 1, 2006, certain card acquisition related costs were reclassified from other expenses to a reduction in net card fees.
FOREIGN CURRENCY
Assets and liabilities denominated in foreign currencies are translated into U.S. dollars based upon exchange rates prevailing at the end of each year. The resulting translation adjustments, along with any related qualifying hedge and tax effects, are included in accumulated other comprehensive (loss) income, a component of shareholders’ equity. Translation adjustments, including qualifying hedge and tax effects, are
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AMERICAN EXPRESS COMPANY
reclassified to earnings upon the sale or substantial liquidation of investments in foreign operations. Revenues and expenses are translated at the average month-end exchange rates during the year. Gains and losses related to non-functional currency transactions, including non-U.S. operations where the functional currency is the U.S. dollar, are reported net in other revenue or other, net expense, depending on the nature of the activity, in the Company’s Consolidated Statements of Income. Net non-functional currency transaction gains amounted to approximately $27 million, $11 million, and $5 million in 2007, 2006, and 2005, respectively.
AMOUNTS BASED ON ESTIMATES AND ASSUMPTIONS
Accounting estimates are an integral part of the Consolidated Financial Statements. These estimates are based, in part, on management’s assumptions concerning future events. Among the more significant assumptions are those that relate to reserves for cardmember losses relating to loans and charge receivables, asset securitizations, Membership Rewards, and income taxes, as discussed below. These accounting estimates reflect the best judgment of management, but actual results could differ.
REVENUES NET OF INTEREST EXPENSE
The Company generates revenue from a variety of sources including global payments, such as charge and credit cards, travel services and investments funded by the sale of stored value products, such as Travelers Cheques.
Discount Revenue
The Company earns discount revenue from fees charged to merchants with which the Company has entered into card acceptance agreements for processing cardmember transactions. The discount generally is deducted from the payment to the merchant and recorded as discount revenue at the time the charge is captured.
Net Card Fees
Card fees are deferred and recognized as revenue on a straight-line basis over the 12-month card membership period, net of deferred direct card acquisition costs and a reserve for projected membership cancellations.
Travel Commissions and Fees
The Company earns customer revenue by charging a transaction or management fee for airline or other transactions. Customer-related fees and other revenues are recognized at the time a client books travel arrangements. Travel suppliers pay commissions on airline tickets issued and on sales and transaction volumes, based on contractual agreements. These revenues are recognized at the time a ticket is purchased. Other travel suppliers that pay commissions on hotels and car rentals generally are not under firm contractual agreements, andtherefore, revenue is not recognized until cash is received.
Other Commissions and Fees
Other commissions and fees include foreign exchange conversion fees and other card-related assessments, which are recognized primarily in the period in which they are charged to the cardmember. Fees related to the Company’s Membership Rewards program are deferred and recognized over the period covered by the fee and included in deferred card fees and other, net of deferred acquisition costs, as discussed above.
Securitization Income, Net
Securitization income, net includes non-credit provision components of the net gains from securitization activities, excess spread related to securitized cardmember loans, changes in the fair value of the interest-only strip, and servicing income, net of related discounts or fees. Excess spread, which is recognized as earned, is the net positive cash flow from interest and fee collections allocated to the third-party investors’ interests in the securitization after deducting the interest paid on the investor certificates, credit losses, contractual servicing fees and other expenses.
Other Revenue
Other revenue includes insurance premiums earned from cardmember travel and other insurance programs, revenues arising from contracts with Global Network Services’ partners including royalties and signing fees, publishing revenues, and other miscellaneous revenue and fees.
Contra-revenue
The Company regularly makes payments through contractual arrangements with merchants, Corporate Card Clients and all other customers. Payments to any customer are classified as contra-revenue unless a specifically identifiable benefit (e.g., goods or services) is received by the Company in consideration for that payment and the fair value of such benefit is determinable and measurable. If no such benefit is identified, then the entire payment is classified as contra-revenue, and included within revenues net of interest expense in the Consolidated Statements of Income in the line item where the related transaction revenues are recorded (e.g., discount revenue, travel commissions and fees, and other commissions and fees). If such a benefit is identified, then the payment is classified as expense up to the estimated fair value of the benefit.
Interest Income
Cardmember lending finance revenues are assessed using the average daily balance method for receivables owned. These amounts are recognized based upon the principal amount outstanding in accordance with the terms of the applicable account agreement until the outstanding balance is paid or written-off.
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AMERICAN EXPRESS COMPANY
Other interest income primarily relates to the Company’s performing fixed-income securities. Interest income is accrued as earned using the effective interest method, which adjusts the yield for security premiums and discounts, fees and other payments, so that the related security recognizes a constant rate of return on the outstanding balance throughout its term. These amounts are recognized until these securities are in default or when it is likely that future interest payments will not be made as scheduled.
Interest Expense
Interest expense includes interest incurred primarily to fund cardmember lending, charge card product receivables and general corporate purposes.
EXPENSES
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 of SFAS No. 123(R) requires entities to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The adoption of SFAS No. 123(R) did not materially impact the Company’s Consolidated Financial Statements since the Company had been expensing share-based awards granted after January 1, 2003, under the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123). The Company recognizes the cost of these awards on a straight-line basis over their vesting periods.
If the Company had followed the fair value recognition provisions of SFAS 123(R) for all outstanding and unvested stock options for the period from January 1, 2005, through June 30, 2005, pro-forma stock–based compensation would have increased by $9 million, net of tax, and correspondingly pro-forma basic and diluted earnings per common share would have decreased by $0.01.
Marketing, Promotion, Rewards and Cardmember Services
These expenses include the costs of rewards programs (including Membership Rewards, discussed in the other liabilities section below), protection plans and complimentary services provided to cardmembers, and advertising costs, which are expensed in the year in which the advertising first takes place.
Other, Net Expense
Other, net expense includes general operating expenses, gains (losses) on sale of assets or businesses not classified as discontinued operations, and litigation and insurance costs or settlements.
BALANCE SHEET
Cash and Cash Equivalents
The Company has defined cash equivalents to include time deposits and other highly liquid investments with original maturities of 90 days or less.
Accounts Receivable
Cardmember receivables
Cardmember receivables represent amounts due from charge card customers. These receivables are recorded at the time a cardmember enters into a point-of-sale transaction with a merchant. Cardmember receivable balances are presented on the Consolidated Balance Sheets net of reserves for losses, discussed below, and includes principal and any related accrued fees.
Reserves for losses — cardmember receivables
Reserves for losses relating to cardmember receivables represent management’s best estimate of the losses inherent in the Company’s outstanding portfolio of receivables. Management’s evaluation process requires certain estimates and judgments. Reserves for these losses are primarily based upon models that analyze specific portfolio statistics and reflect management’s judgment regarding overall reserve adequacy. The analytic models take into account several factors, including average write-off rates for various stages of receivable aging (i.e., current, 30 days, 60 days, 90 days) over a 24-month period and average bankruptcy and recovery rates. Management considers whether to adjust the analytic models based on other factors, such as the level of coverage and recent trends of past-due accounts, as well as leading economic and market indicators, such as the unemployment rate, consumer confidence index, purchasing manager’s index, bankruptcy filings, concentration of credit risk such as based on tenure, industry or geographic regions, and the legal and regulatory environment.
Cardmember receivable balances are written off when management deems amounts to be uncollectible and is generally determined by the number of days past due. Receivables in bankruptcy or owed by deceased individuals are written off upon notification, while other accounts are written off when 360 days past due.
Investments
Investments include debt and equity securities and are classified within both the Available-for-Sale and Trading categories.
Available-for-Sale investment securities are carried at fair value on the Consolidated Balance Sheets with unrealized gains (losses) recorded in accumulated other comprehensive (loss) income, net of income tax provisions (benefits). Realized gains and losses on these securities are recognized in results of operations upon disposition of the securities using the
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AMERICAN EXPRESS COMPANY
specific identification method on a trade date basis. In addition, realized losses are recognized when management determines that a decline in value is other-than-temporary, which requires judgment regarding the amount and timing of recovery. Indicators of other-than-temporary impairment for debt securities include issuer downgrade, default, or bankruptcy. The Company also considers the extent to which cost exceeds fair value, the duration and size of that gap, management’s judgment about the issuer’s current and prospective financial condition, as well as its intent and ability to hold the security until recovery of the unrealized losses.
Trading investment securities are carried at fair value on the Consolidated Balance Sheets, and changes in fair value are recorded in results of operations.
The Company obtains fair value of investment securities primarily from third party pricing vendors engaged by the Company. When available, quoted market prices are used to determine fair value. If quoted market prices are not available, fair values are estimated using pricing models, where the inputs to those models are based on observable market inputs. The inputs to the valuation models vary by the type of security being priced but are typically benchmark yields, reported trades, broker dealer quotes, and prices of similar assets. Pricing models generally do not entail material subjectivity because the methodologies employed use inputs observed from active markets. In limited cases observable market prices and input may not be readily available or availability may be limited due to market conditions. Internal models may be used in these situations to determine fair value. This represents less than 0.1 percent of the Company’s total assets.
Loans
Cardmember lending
Cardmember loans represent amounts due from lending product customers. These loans are recorded at the time a cardmember enters into a point-of-sale transaction with a merchant or when a charge card customer enters into an extended payment arrangement. Cardmember loans are presented on the Consolidated Balance Sheets net of reserves for cardmember losses, discussed below, and include accrued interest receivable and fees as of the balance sheet date. The Company’s policy is to cease accruing for interest receivable once a cardmember loan is more than 180 days past due.
Reserve for losses — cardmember lending
The Company’s methodology for reserving for losses relating to cardmember loans is consistent with reserving for losses relating to cardmember receivables, with the exception that cardmember loans (other than those in bankruptcy or owed by deceased individuals) are written off when 180 days past due.
Asset Securitizations
The Company periodically securitizes cardmember receivables and loans by transferring those financial assets to a trust. The trust then issues securities to third-party investors, and these securities are collateralized by the transferred assets. The Company accounts for its transfers of these financial assets in accordance with SFAS No. 140.
In order for a securitization of financial assets to be accounted for as a sale, the transferor must surrender control over those financial assets to the extent that the transferor receives consideration other than beneficial interests in the transferred assets.
Cardmember loans are transferred to a QSPE, and such transactions are structured to meet the sales criteria. Accordingly, when loans are sold through securitizations, the Company removes the loans from its Consolidated Balance Sheets and recognizes both a gain on sale and retained interests in the securitizations.
In contrast, cardmember receivables are transferred to a special purpose entity, a trust that does not meet the requirements for treatment as a qualifying sale. Securitizations of cardmember receivables are accounted for as secured borrowings.
Land, Buildings and Equipment
Land, buildings and equipment
Buildings and equipment, including leasehold improvements, are carried at cost less accumulated depreciation. Costs incurred during construction are capitalized and are depreciated once an asset is placed in service. Depreciation is generally computed using the straight-line method over the estimated useful lives of assets, which range from three to eight years for equipment. Buildings are depreciated based upon their estimated useful life at the acquisition date, which generally ranges from 40 to 60 years.
Leasehold improvements are depreciated using the straight-line method over the lesser of the remaining term of the leased facility or the economic life of the improvement, which ranges from five to ten years. The Company maintains operating leases worldwide for facilities and equipment. Rent expense for facility leases is recognized ratably over the lease term, and is calculated to include adjustments for rent concessions, all non-market based rent escalations, and leasehold improvement allowances.
Software development costs
The Company capitalizes certain costs associated with the acquisition or development of internal-use software. Once the software is ready for its intended use, these costs are amortized on a straight-line basis over the software’s estimated useful life, generally five years.
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AMERICAN EXPRESS COMPANY
Goodwill and Other Intangible Assets
Goodwill
Goodwill represents the excess of acquisition cost of an acquired company over the fair value of assets acquired and liabilities assumed. Goodwill is included in other assets on the Consolidated Balance Sheets. The Company assigns goodwill to its reporting units for the purpose of impairment testing. A reporting unit is defined as an operating segment, or a business one level below an operating segment. The Company evaluates goodwill for impairment annually and between annual tests if events occur or circumstances change that more likely than not reduce the fair value of reporting units below their carrying amounts. In determining whether impairment has occurred, the Company generally uses a comparative market multiples approach for calculating fair value.
Intangible assets
Intangible assets, primarily customer relationships, are amortized over their estimated useful lives of 2 to 14 years on a straight-line basis. Intangible assets are included in other assets on the Consolidated Balance Sheets. The Company reviews intangible assets for impairment quarterly and whenever events and circumstances indicate that their carrying amounts may not be recoverable. In addition, on an annual basis, the Company performs a complete impairment evaluation of all intangible assets based upon fair value generally using a discounted cash flow approach. An impairment is recognized if the carrying amount is not recoverable and exceeds the asset’s fair value.
Other Liabilities
Membership Rewards
The Membership Rewards program allows enrolled cardmembers to earn points that can be redeemed for a broad range of rewards, including travel, entertainment, retail certificates, and merchandise. The Company establishes balance sheet reserves which represent the estimated cost of points earned to date that are ultimately expected to be redeemed. Also, these reserves reflect management’s judgment regarding overall adequacy. A weighted average cost per point redeemed during the previous 12 months is used to approximate future redemption costs and is affected by the mix of rewards redeemed. Management uses models to estimate ultimate redemption rates based on historical redemption statistics, card product type, year of program enrollment, enrollment tenure and card spend levels.During 2007, management enhanced the ultimate redemption rate models by incorporating more sophisticated statistical and actuarial techniques to better estimate ultimate redemption rates of points earned to date by current cardmembers given redemption trends and projected future redemption behavior.
The provision for the cost of Membership Rewards points is included in marketing, promotion, rewards and cardmemberservices and the balance sheet reserves are included in other liabilities. The Company continually evaluates its reserve methodology and assumptions based on developments in redemption patterns, cost per point redeemed, and other factors.
Derivative Financial Instruments and Hedging Activities
All derivatives are recognized on balance sheet at fair value as either assets or liabilities. The fair value of the Company’s derivative financial instruments are determined using either market quotes or valuation models that are based upon the net present value of estimated future cash flows and incorporate current market data inputs. The Company reports its derivative assets and liabilities in other assets and other liabilities, respectively, on a net by counterparty basis where management believes it has the legal right of offset under enforceable netting arrangements. The accounting for the change in the fair value of a derivative financial instrument depends on its intended use and the resulting hedge designation, if any, as discussed below.
Cash flow hedges
A cash flow hedge is a derivative designated to hedge the exposure of variable future cash flows that is attributable to a particular risk associated with an existing recognized asset or liability, or a forecasted transaction. For derivative financial instruments that qualify as cash flow hedges, the effective portions of the gain or loss on the derivatives are recorded in accumulated other comprehensive (loss) income and reclassified into earnings when the hedged cash flows are recognized into earnings.The amount that is reclassified into earnings is presented in the Consolidated Statements of Income with the hedged instrument or transaction impact, primarily in interest expense. Any ineffective portion of the gain or loss, as determined by the accounting requirements, is reported as a component of other, net expense. If a hedge is de-designated or terminated prior to maturity, the amount previously recorded in accumulated other comprehensive (loss) income is recognized into earnings over the period that the hedged item impacts earnings. If a hedge relationship is discontinued because it is probable that the forecasted transaction will not occur according to the original strategy, any related amounts previously recorded in accumulated other comprehensive (loss) income are recognized into earnings immediately.
Fair value hedges
A fair value hedge is a derivative designated to hedge the exposure of future changes in the fair value of an asset or liability, or an identified portion thereof that is attributable to a particular risk. For derivative financial instruments that qualify as fair value hedges, changes in the fair value of the derivatives, as well as of the corresponding hedged assets and liabilities are
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AMERICAN EXPRESS COMPANY
recorded in earnings as a component of other, net expense. If a fair value hedge is de-designated or terminated prior to maturity, previous adjustments to the carrying value of the hedged item are recognized into earnings to match the earnings pattern of the hedged item.
Net investment hedges in foreign operations
A net investment hedge in foreign operations is a derivative used to hedge future changes in currency exposure of a net investment in a foreign operation. For derivative financial instruments that qualify as net investment hedges in foreign operations, the effective portions of the change in fair value of the derivatives are recorded in accumulated other comprehensive (loss) income as part of the cumulative translation adjustment. Any ineffective portions of net investment hedges are recognized in other, net expense during the period of change.
Non-designated derivatives and trading activities
For derivative financial instruments that do not qualify for hedge accounting, are not designated as hedges, changes in fair value are reported in current period earnings generally as a component of other revenue, other, net expenses or interest expense, depending on the type of derivative instrument and the nature of the transaction.
Derivative financial instruments that qualify for hedge accounting
Derivative financial instruments that are entered into for hedging purposes are designated as such when the Company enters into the contract. For all derivative financial instruments that are designated for hedging activities, the Company formally documents all of the hedging relationships between the hedge instruments and the hedged items at the inception of the relationships. Management also formally documents its risk management objectives and strategies for entering into the hedge transactions. The Company formally assesses, at inception and on a quarterly basis, whether derivatives designated as hedges are highly effective in offsetting the fair value or cash flows of hedged items. These assessments usually are made through the application of statistical measures. Prior to 2006, the Company only applied the “short cut” method of hedge accounting in very limited cases when this method’s requirements were strictly met. Beginning in 2006, the Company discontinued using the “short cut” method of hedge accounting.
In accordance with its risk management policies, the Company generally structures its hedges with very similar terms to the hedged items; therefore, when applying the accounting requirements, the Company generally recognizes insignificant amounts of ineffectiveness through earnings. If it is determined that a derivative is not highly effective as a hedge, the Company will discontinue the application of hedge accounting.
Income Taxes
The Company, its wholly-owned U.S. subsidiaries, and certain non-U.S. subsidiaries file a consolidated federal income tax return. The Company is subject to the income tax laws of the United States, its states and municipalities and those of the foreign jurisdictions in which the Company operates. These tax laws are complex, and the manner in which they apply to the taxpayer’s facts is sometimes open to interpretation. Given the inherent complexities of the business and that the Company is subject to taxation in a substantial number of jurisdictions, the Company must make judgments in assessing the likelihood that a tax position will be sustained upon examination by the taxing authorities based on the technical merits of the tax position.The amount of benefit recognized is based on management’s best judgment of the most likely outcome resulting from examination given the facts, circumstances and information available at the reporting date. Interest and penalties relating to unrecognized tax benefits are reported in income tax provision.
Deferred tax assets and liabilities are determined based on the differences between the GAAP financial statement and tax bases of assets and liabilities using the enacted tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is established when management determines that it is more likely than not that all or some portion of the benefit of the deferred tax assets will not be realized.
The Company does not provide for federal income taxes on foreign earnings intended to be permanently reinvested outside the United States.
Restricted Net Assets of Subsidiaries
Certain of the Company’s subsidiaries are subject to restrictions on the transfer of net assets under debt agreements and regulatory requirements. These restrictions have not had any effect on the Company’s shareholder dividend policy and management does not anticipate any impact in the future. Procedures exist to transfer net assets between the Company and its subsidiaries, while ensuring compliance with the various contractual and regulatory constraints. At December 31, 2007, the aggregate amount of net assets of subsidiaries that may not be transferred to American Express’ Parent Company (Parent Company) was approximately $7 billion (this includes restrictions on the net assets of Discontinued Operations of $1 billion).
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has recently issued the following accounting standards, which are effective beginning January 1, 2008. The adoption of the accounting standards listed below will not have a material impact on the Company’s financial position or results of operations.
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AMERICAN EXPRESS COMPANY
- Statement of Financial Accounting Standard (SFAS) No. 157, “Fair Value Measurements” (SFAS No. 157), defines fair value, establishes a framework for measuring fair value and applies broadly to financial and non-financial assets and liabilities reported or disclosed at fair value under existing authoritative accounting pronouncements. SFAS No. 157 also establishes a multi-level hierarchy that prioritizes the inputs to the valuation techniques used to measure fair value. In addition, SFAS No. 157 expands disclosure requirements regarding the methods and inputs used to measure fair value and the effects on earnings.
On January 1, 2008, the Company adopted SFAS No. 157 for its financial assets and liabilities only. The corresponding required disclosures will be included in the Company’s March 31, 2008, quarterly report on Form 10-Q.FASB Staff Position FAS 157-2 “Effective Date of FASB Statement No. 157” permits for the deferred effective date of SFAS No. 157 for non-financial assets and liabilities until January 1, 2009. The Company elected this deferral option for its non-financial assets and liabilities.
- 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) requires the measurement date for the benefit obligation and plan assets to be the Company’s fiscal year end for years ending after December 15, 2008. The Company currently uses a September 30 measurement date. In order to facilitate this change, the Company will use the September 30, 2007 valuation to estimate pension and other employee benefit plan cost for 2008 and will perform an additional valuation as of December 31, 2008. The change in the measurement date will result in a one-time adjustment to retained earnings and accumulated other comprehensive income in the fourth quarter of 2008.
- SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115” (SFAS No. 159), provides companies with an option to report selected financial assets and liabilities at fair value. SFAS No. 159 allows entities to irrevocably elect, on a contract by contract basis, fair market value as the initial and subsequent measurement for certain financial assets and financial liabilities. The Company does not plan to elect the option to fair value any financial assets or financial liabilities under SFAS No. 159.
- Emerging Issues Task Force Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF 06-11), clarifies when income tax benefits for dividends paid on employee share-based payment awards should be recognized in equity or the income statement.
In addition to the above, the FASB has recently issued the following accounting standards, which are effective beginning January 1, 2009. The Company is currently evaluating the impact of these accounting standards.
- SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141(R)), requires the acquiring entity in a business combination to (1) recognize all assets acquired and liabilities assumed generally at their acquisition-date fair values; (2) record those assets and liabilities at their full fair value amounts even if there is noncontrolling (minority) interest; (3) include noncontrolling interest earnings through net income; (4) expense acquisition-related transaction costs; and (5) disclose information needed to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) is effective for the Company for any acquisitions occurring in 2009 and years thereafter.
- SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS No. 160), which is to be retrospectively applied, requires entities to include noncontrolling (minority) interests in partially owned consolidated subsidiaries within shareholders’ equity in the consolidated financial statements. SFAS No. 160 also requires the consolidating entity to include the earnings of the consolidated subsidiary attributable to the noncontrolling interest holder in its income statement with an offsetting charge (credit) to the non-controlling interest in shareholders’ equity.
- EITF No. 07-1, “Accounting for Collaborative Arrangements” (EITF 07-1), which is to be retrospectively applied, defines collaborative arrangements as those that do not involve a separate legal entity and in which the participants are actively involved and are exposed to significant risks and rewards that depend on the ultimate commercial success of the endeavor. EITF 07-1 also clarifies that the equity method of accounting should not be applied and requires the disclosure of the Company’s accounting policies regarding income statement characterization, the amounts and income statement classification of the arrangements and information about the nature and purpose of the arrangements.
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AMERICAN EXPRESS COMPANY
NOTE 2 DISCONTINUED OPERATIONS
On September 18, 2007, the Company entered into an agreement to sell AEB. The transaction is expected to close in the first quarter of 2008.
Following the completion of the sale, the Company will have continuing obligations for certain on-going costs related to the remediation of regulatory and legal matters that arose prior to the sale. Further discussion on the details of this transaction are included in Note 1.
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 Corporate& Other segment. Financial results for these operations, prior to the second quarter of 2006, were not reclassified as discontinued operations because such results are not material. Refer to Note 1 for a discussion of the impact of the sale of the Brazilian card and merchant-related activities, which are included in continuing operations.
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. The Ameriprise distribution was treated as a non-cash dividend to shareholders and, as such, reduced the Company’s shareholders’ equity by $7.7 billion as of December 31, 2005.
Also during 2005, the Company completed certain dispositions including the sale of TBS for cash proceeds of approximately $190 million. These dispositions resulted in a net after-tax gain of approximately $63 million during the third quarter of 2005. During 2007, the net after-tax gain was reduced by $14 million upon settlement of certain matters in accordance with the TBS purchase agreement and other adjustments.
The operating results, assets and liabilities, and cash flows of discontinued operations are presented separately in the Company’s Consolidated Financial Statements. Summary operating results of the discontinued operations included AEB (except for certain components of AEB that are not being sold), as further described in Note 1, as well as Ameriprise and businesses disposed of in previous years. Results from discontinued operations for the years ended December 31, were as follows:
| (Millions) | | 2007 | | | 2006 | | 2005 |
| Revenues net of interest expense | | $ | 759 | | | $ | 770 | | $ | 6,571 |
| Pretax (loss) income fromdiscontinued operations | | $ | (34 | ) | | $ | 121 | | $ | 885 |
| Income tax provision | | | 2 | | | | 25 | | | 213 |
| (Loss) Income from discontinuedoperations, net of tax | | $ | (36 | ) | | $ | 96 | | $ | 672 |
Assets and liabilities of the discontinued operations related to AEB, at December 31, were as follows:
| (Millions) | | 2007 | | 2006 |
| Assets: | | | | | | |
| Cash and cash equivalents | | $ | 3,531 | | $ | 2,940 |
| Investments | | | 3,080 | | | 3,036 |
| Loans, net of reserves | | | 8,283 | | | 7,319 |
| Other assets | | | 1,853 | | | 1,117 |
| Total assets | | | 16,747 | | | 14,412 |
| Liabilities: | | | | | | |
| Customers’ deposits | | | 15,079 | | | 12,935 |
| Other liabilities | | | 1,149 | | | 1,010 |
| Total liabilities | | | 16,228 | | | 13,945 |
| Net assets | | $ | 519 | | $ | 467 |
Accumulated other comprehensive loss, net of tax, associated with discontinued operations at December 31, was as follows:
| (Millions) | | 2007 | | | 2006 | |
| Accumulated other comprehensive loss,net of tax: | | | | | | | | |
| Net unrealized securities losses | | $ | (15 | ) | | $ | (10 | ) |
| Foreign currency translation adjustments | | | (28 | ) | | | (25 | ) |
| Net unrealized pension and otherpostretirement benefit costs | | | 2 | | | | (2 | ) |
| Total accumulated other comprehensive loss | | $ | (41 | ) | | $ | (37 | ) |
Goodwill of approximately $27 million was included in AEB’s assets as of December 31, 2007 and 2006.
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AMERICAN EXPRESS COMPANY
NOTE 3 ACCOUNTS RECEIVABLE
Accounts receivable at December 31 consisted of:
| (Millions) | | 2007 | | 2006 |
| USCS | | $ | 21,418 | | $ | 20,586 |
| ICS | | | 6,616 | | | 6,013 |
| GCS | | | 11,411 | | | 10,297 |
| GNMS(a) | | | 627 | | | 471 |
| Cardmember receivables, gross(b) | | | 40,072 | | | 37,367 |
| Less: Cardmember reserve for losses | | | 1,149 | | | 981 |
| Cardmember receivables, net | | $ | 38,923 | | $ | 36,386 |
| | | | | | | |
| Other receivables, gross(c) | | $ | 3,118 | | $ | 2,314 |
| Less: Other reserve for losses | | | 36 | | | 35 |
| Other receivables, net | | $ | 3,082 | | $ | 2,279 |
| (a) | | Includes receivables primarily related to certain of the Company’s business partners and International Currency Card portfolios. |
| |
| (b) | | Includes approximately $12.4 billion and $10.9 billion of cardmember receivables outside the United States as of December 31, 2007 and 2006, respectively. |
| |
| (c) | | Other receivables primarily represent amounts due from the Company’s travel customers, third party card issuing partners, accrued interest on investments, and other receivables due to the Company in the ordinary course of business. For 2007, other receivables also includes $1.13 billion related to the Company’s litigation settlement with Visa Inc., Visa USA and Visa International (collectively Visa) which is expected to be paid by March 31, 2008. |
The following table presents changes in the cardmember receivable reserve for losses:
| (Millions) | | 2007 | | | 2006 | | | 2005 | |
| Balance, January 1 | | $ | 981 | | | | $ 942 | | | | $ 806 | |
| Additions: | | | | | | | | | | | | |
| Cardmember receivables provision | | | 1,140 | | | | 935 | | | | 1,038 | |
| Deductions: | | | | | | | | | | | | |
| Cardmember receivables net write-offs(a) | | | (907 | ) | | | (810 | ) | | | (820 | ) |
| Cardmember receivables other(b) | | | (65 | ) | | | (86 | ) | | | (82 | ) |
| Balance, December 31 | | $ | 1,149 | | | | $ 981 | | | | $ 942 | |
| (a) | | Represents write-offs of charge card balances consisting of principal (resulting from authorized and unauthorized transactions) and fee components, less recoveries of $203 million, $177 million, and $159 million for 2007, 2006, and 2005, respectively. |
| |
| (b) | | Primarily includes other adjustments to cardmember receivables such as waived fees. |
NOTE 4 INVESTMENTS
The following is a summary of investments at December 31:
| (Millions) | | 2007 | | 2006 |
| Available-for-Sale, at estimated fair value: | | | | | | |
| State and municipal obligations | | $ | 6,761 | | $ | 6,863 |
| U.S. Government and agencies obligations(a) | | | 5,110 | | | 5,075 |
| Mortgage and other asset-backed securities(b) | | | 79 | | | 3,051 |
| Corporate debt securities | | | 282 | | | 1,948 |
| Foreign government bonds and obligations | | | 53 | | | 23 |
| Other(c) | | | 929 | | | 994 |
| Total Available-for-Sale, at estimatedfair value | | | 13,214 | | | 17,954 |
| Trading, at estimated fair value(d) | | | 2,650 | | | — |
| Total | | $ | 15,864 | | $ | 17,954 |
| (a) | | U.S. Government and agencies obligations at December 31, 2007 and 2006, included $970 million and $716 million, respectively, of securities loaned out on an overnight basis to financial institutions under the securities lending program described on page 83. |
| |
| (b) | | At December 31, 2007, $79 million represents Fannie Mae securities and does not include the Company’s subordinated securities tranche that is discussed on page 85. |
| |
| (c) | | Consists primarily of short-term money market and state tax exempt securities (totaling $833 million and $891 million at December 31, 2007 and 2006, respectively) as well as investment of subordinated securities from securitizations ($78 million at December 31, 2007). |
| |
| (d) | | Refer to page 83 for additional discussion regarding the Trading investments. |
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AMERICAN EXPRESS COMPANY
AVAILABLE-FOR-SALE INVESTMENTS
The following is a summary of investments classified as Available-for-Sale at December 31:
| | | 2007 | | 2006 |
| | | | Gross | | Gross | | | | | | | Gross | | Gross | | | Estimated |
| | | | Unrealized | | Unrealized | | | Estimated | | | | Unrealized | | Unrealized | | | Fair |
| (Millions) | | Cost | | Gains | | Losses | | | Fair Value | | Cost | | Gains | | Losses | | | Value |
| State and municipal obligations | | $ | 6,795 | | | $102 | | | $(136 | ) | | $ | 6,761 | | $ | 6,678 | | | $195 | | | $ (10 | ) | | $ | 6,863 |
| U.S. Government and agencies obligations | | | 5,034 | | | 76 | | | — | | | | 5,110 | | | 5,080 | | | 10 | | | (15 | ) | | | 5,075 |
| Mortgage and other asset-backed securities | | | 79 | | | 1 | | | (1 | ) | | | 79 | | | 3,102 | | | 5 | | | (56 | ) | | | 3,051 |
| Corporate debt securities | | | 285 | | | 1 | | | (4 | ) | | | 282 | | | 1,987 | | | 3 | | | (42 | ) | | | 1,948 |
| Foreign government bonds and obligations | | | 51 | | | 2 | | | — | | | | 53 | | | 21 | | | 2 | | | — | | | | 23 |
| Other | | | 929 | | | — | | | — | | | | 929 | | | 993 | | | 2 | | | (1 | ) | | | 994 |
| Total | | $ | 13,173 | | | $182 | | | $(141 | ) | | $ | 13,214 | | $ | 17,861 | | | $217 | | | $(124 | ) | | $ | 17,954 |
The following tables provide information about Available-for-Sale investments with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2007 and 2006:
| As of December 31, 2007 | |
| (Millions) | | Less than 12 months | | | 12 months or more | |
| | Estimated | | Gross | | | Estimated | | Gross | |
| | Fair | | Unrealized | | | Fair | | Unrealized | |
| Description of Securities | | Value | | Losses | | | Value | | Losses | |
| State and municipal obligations | | $ | 2,680 | | | $(120 | ) | | | $195 | | | $(16 | ) |
| U.S. Government and agenciesobligations | | | — | | | — | | | | — | | | — | |
| Mortgage and other asset-backedsecurities | | | — | | | — | | | | 20 | | | (1 | ) |
| Corporate debt securities | | | 110 | | | (2 | ) | | | 116 | | | (2 | ) |
| Foreign government bonds andobligations | | | — | | | — | | | | 20 | | | — | |
| Other | | | — | | | — | | | | 10 | | | — | |
| Total | | $ | 2,790 | | | $(122 | ) | | | $361 | | | $(19 | ) |
| | |
| As of December 31, 2006 |
| (Millions) | | Less than 12 months | | | 12 months or more | |
| | Estimated | | Gross | | | Estimated | | Gross | |
| | Fair | | Unrealized | | | Fair | | Unrealized | |
| Description of Securities | | Value | | Losses | | | Value | | Losses | |
| State and municipal obligations | | | $ 818 | | | $(10 | ) | | | $ 23 | | | $ — | |
| U.S. Government and agenciesobligations | | | 1,520 | | | (3 | ) | | | 1,536 | | | (12 | ) |
| Mortgage and other asset-backedsecurities | | | 229 | | | (1 | ) | | | 2,056 | | | (55 | ) |
| Corporate debt securities | | | 232 | | | (3 | ) | | | 1,502 | | | (39 | ) |
| Foreign government bonds andobligations | | | 6 | | | — | | | | — | | | — | |
| Other | | | — | | | — | | | | 16 | | | (1 | ) |
| Total | | | $2,805 | | | $(17 | ) | | | $5,133 | | | $(107 | ) |
The Company reviews and evaluates investments at least quarterly and more often as market conditions may require to identify investments that have indications of other-than-temporary impairments. The determination of other-than-temporaryimpairment is a subjective process, requiring the use of judgments and assumptions. Accordingly, the Company considers several factors when evaluating securities for an other-than-temporaryimpairment, including the extent to which amortized cost exceeds fair value, the duration and size of that difference, and the issuer’s credit rating. Key metrics in performing this evaluation are the ratio of fair value to amortized cost and the determination of the extent to which the difference is due to increased default risk for the specific issuer or market interest rate risk, and with respect to market interest rate risk, whether the Company has the intent and ability to hold the securities for a time sufficient to recover the unrealized losses.
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AMERICAN EXPRESS COMPANY
The following table summarizes the unrealized losses of temporary impairments by ratio of fair value to amortized cost as of December 31, 2007:
| (Millions) | | Less than 12 months | | 12 months or more | | Total | |
| | | Estimated | | Gross | | | Estimated | | Gross | | | Estimated | | Gross | |
| Ratio of Fair Value to | | Fair | | Unrealized | | | Fair | | Unrealized | | | Fair | | Unrealized | |
| Amortized Cost | | Value | | Losses | | | Value | | Losses | | | Value | | Losses | |
| 90%–100% | | $ | 2,738 | | | $(116 | ) | | | $346 | | | $(16 | ) | | $ | 3,084 | | | $(132 | ) |
| Less than 90% | | | 52 | | | (6 | ) | | | 15 | | | (3 | ) | | | 67 | | | (9 | ) |
| Total | | $ | 2,790 | | | $(122 | ) | | | $361 | | | $(19 | ) | | $ | 3,151 | | | $(141 | ) |
The securities with a fair value to amortized cost ratio of less than 100 percent consist primarily of state and municipal securities and do not contain a concentration of any one security.
Unrealized losses may be caused by changes to market interest rates, which include both benchmark interest rates and credit spreads, and specific credit events associated with individual issuers. Substantially all of the gross unrealized losses on the securities are attributable to changes in market interest rates. The Company has the ability and the intent to hold these securities for a time sufficient to recover the unrealized losses and expects that contractual principal and interest will be received on these securities.
Supplemental information about other revenues which includes gross realized gains and losses on sales of securities, as well as other-than-temporary losses on investments classified as Available-for-Sale, follows:
| (Millions) | | 2007 | | | 2006 | | | 2005 | |
| Gains | | | $ 16 | | | | $89 | (a) | | | $15 | |
| Losses | | | (38 | )(b) | | | (1 | ) | | | (4 | ) |
| Total | | | $(22 | ) | | | $88 | | | | $11 | |
| (a) | | Includes $68 million of gains related to a rebalancing program in the fourth quarter of 2006 to better align the maturity profile of the Travelers Cheque and Gift Card investment portfolio with its business liquidity needs. |
| |
| (b) | | Primarily due to the rebalancing of AEIDC portfolio resulting from the announced sale of AEB to Standard Chartered. |
Contractual maturities of investments classified as Available-for-Sale, excluding Mortgage and other asset-backed securities and Equity securities, follows:
| | | | | Estimated Fair |
| (Millions) | | Cost | | Value |
| Due in: | | | | | | |
| 2008 | | $ | 2,294 | | | $ 2,299 |
| 2009–2012 | | | 4,184 | | | 4,262 |
| 2013–2017 | | | 358 | | | 365 |
| 2018 and beyond | | | 6,214 | | | 6,165 |
| Total | | $ | 13,050 | | | $13,091 |
The expected payments on mortgage and other asset-backed securities may not coincide with their contractual maturities because borrowers have the right to call or prepay certain obligations. Accordingly, these securities, as well as equity securities, are not included in the maturities distribution.
Under securities lending agreements, the Company lends certain investment securities on an overnight basis to financial institutions. These lending arrangements are collateralized by an amount 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 are classified as investments on the Consolidated Balance Sheet, but are considered restricted and pledged assets. In accordance with U.S. generally accepted accounting principles, 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 interest income-other. At December 31, 2007 and 2006, approximately $970 million and $716 million, respectively, of investment securities were loaned under these agreements.
TRADING INVESTMENTS
In 2007, the Company reclassified the AEIDC investment portfolio of $3.5 billion from the Available-for-Sale category to the Trading category resulting from the AEB sale agreement’s impact on the holding period of these investments.
During 2007, the net unrealized holding loss of the Trading securities amounted to approximately $9 million. In addition, there were $15 million in net realized losses related to the sale of approximately $775 million Trading securities in 2007. There were no Trading investments in 2006 and 2005.
The following is a summary of investments classified as Trading at December 31:
| (Millions) | | 2007 |
| Mortgage and other asset-backed securities | | $ | 1,576 |
| Corporate debt securities | | | 982 |
| Other | | | 92 |
| Total Trading, at estimated fair value | | $ | 2,650 |
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AMERICAN EXPRESS COMPANY
EXPOSURE TO ASSET-BACKED SECURITIES
The Company’s asset-backed holdings are classified as follows:
| Classification(Millions) | | Market Value |
| Trading | | | $1,576 |
| Available-for-Sale: | | | |
| Continuing operations | | | 79 |
| Discontinued operations | | | 838 |
| Total asset-backed holdings | | | $2,493 |
| |
| The following is a summary of the Company’s asset-backed holdings at December 31, 2007: |
| | | |
| (Millions) | | Market Value |
| Mortgage-Backed Securities | | | |
| Government Sponsored Entities (GSEs) | | | $1,070 |
| Non-GSE | | | |
| Prime | | | 258 |
| Alt-A | | | 468 |
| Sub-prime | | | 140 |
| Total Non-Agency | | | 866 |
| Total mortgage-backed securities | | | 1,936 |
| Other asset-backed securities | | | 198 |
| Commercial mortgage-backed securities | | | 359 |
| Total asset-backed holdings | | | $2,493 |
Of the securities backed by residential mortgages, 99 percent are rated AAA and the remaining 1 percent are rated AA.There were no holdings rated below AA backed by residential mortgages. More than 55 percent of the securities backed by residential mortgages, or $1.0 billion, were primarily guaranteed by three GSEs: Fannie Mae, Freddie Mac or Ginnie Mae.These consisted primarily of pass-through securities in which a mortgage pool’s cash flows support one class of securities.The remaining non-GSE securities backed by residential mortgages consisted of securities in structured transactions, or Collateralized Mortgage Obligations (CMOs). Of these securities, 97 percent are rated AAA; the remaining 3 percent are rated AA. The $140 million of subprime mortgages represented underlying assets within AAA-rated classes of asset-backed structures whose cash flows are given priority over other classes and thus offer greater protection from credit deterioration in the underlying assets. The cash flows the Company is currently receiving from these securities exceed the coupon amount and the excess amount has been retiring principal. The $198 million of other asset-backed securities were backed by assets other than first-lien residential mortgages, including auto, student, lease and credit card loans. Of these securities, 98 percent are rated AAA.
Total gross unrealized losses remaining in accumulated other comprehensive income (loss) related to those asset-backed holdings classified as Available-for-Sale amounted to $11 million ($10 million related to discontinued operations) at December 31, 2007.
Valuations of asset-backed holdings will continue to be impacted by external market factors including default rates, rating agency actions, and the prices at which observable market transactions occur. The Company’s future results may be impacted by the valuation adjustments applied to these holdings.
EXPOSURE TO FINANCIAL GUARANTORS
Approximately 73 percent of state and municipal securities owned by the Company classified as Available-for-Sale are insured by financial guarantors. Financial guarantors guarantee timely payment of interest and ultimate payment of principal on insured obligations. Certain private sector financial guarantors, the so-called monoline bond insurers, have recently experienced credit downgrades and difficulty obtaining cost effective capital due to the insurers’ exposure to mortgage related product guarantees. As of December 31, 2007, approximately 98 percent of the Company’s state and municipal securities insured by financial guarantors were rated AAA, the remaining were rated AA. The ratings of these securities will depend in part on the ratings of the financial guarantors as well as in part on the underlying issuers’ ratings without respect to the guaranty, among other factors. The Company has not, to date, incurred any significant losses in the value of its holdings as a result of the financial guarantors’ credit problems. Continued deterioration in the ratings and investor confidence in the claims-paying abilities of the financial guarantors, or their inability to pay guaranty claims, could result in declines in the values of these securities.
NOTE 5 LOANS
Loans at December 31 consisted of:
| (Millions) | | 2007 | | 2006 |
| USCS | | $ | 43,318 | | $ | 33,596 |
| ICS | | | 11,187 | | | 9,710 |
| Cardmember lending, gross | | | 54,505 | | | 43,306 |
| Less: Cardmember lending reserve for losses | | | 1,831 | | | 1,171 |
| Cardmember lending, net | | $ | 52,674 | | $ | 42,135 |
| Other loans, gross(a) | | $ | 807 | | $ | 1,017 |
| Less: Other reserve for losses | | | 45 | | | 36 |
| Other loans, net | | $ | 762 | | $ | 981 |
| (a) | | Other loans primarily represent installment loans, revolving credit due from U.S. Card Services’ customers, and loans to airline partners. At December 31, 2007, there were no airline advances or loans outstanding. |
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AMERICAN EXPRESS COMPANY
The following tables presentchanges in the reserve for losses:
| (Millions) | | 2007 | | | 2006 | | | 2005 | |
| Cardmember lending reserves | | | | | | | | | | | | |
| Balance, January 1 | | $ | 1,171 | | | $ | 996 | | | $ | 972 | |
| Additions: | | | | | | | | | | | | |
| Cardmember lending provisions(a) | | | 2,615 | | | | 1,507 | | | | 1,227 | |
| Cardmember lending other(b) | | | 146 | | | | 116 | | | | 122 | |
| Total provision | | | 2,761 | | | | 1,623 | | | | 1,349 | |
| Deductions: | | | | | | | | | | | | |
| Cardmember lending net write-offs(a) | | | (1,990 | ) | | | (1,359 | ) | | | (1,155 | ) |
| Cardmember lending other(b) | | | (111 | ) | | | (89 | ) | | | (170 | ) |
| Balance, December 31 | | $ | 1,831 | | | $ | 1,171 | | | $ | 996 | |
| (a) | | Represents cardmember lending balances consisting of principal (resulting from authorized transactions), interest, and fee components. Net write-offs for 2007, 2006, and 2005 include recoveries of $295 million, $187 million, and $124 million, respectively. |
| |
| (b) | | Primarily represents adjustments to cardmember lending receivables resulting from unauthorized transactions and other items such as waived fees. |
| (Millions) | | 2007 | | | 2006 | | | 2005 |
| Other reserves | | | | | | | | | | | |
| Balance, January 1 | | $ | 36 | | | $ | 39 | | | $ | 19 |
| Provisions | | | 16 | | | | 16 | | | | 18 |
| Net write-offs and other(a) | | | (7 | ) | | | (19 | ) | | | 2 |
| Balance, December 31 | | $ | 45 | | | $ | 36 | | | $ | 39 |
| (a) | | Net write-offs for 2007, 2006, and 2005 include recoveries of $7 million, $4 million, and $4 million, respectively. |
Individually “impaired” loans are defined by GAAP as larger balance or restructured loans for which it is probable that the lender will be unable to collect all amounts due according to the original contractual terms of the loan agreement. An analysis of total impaired loans follows:
| (Millions) | | 2007 | | 2006 |
| Loans requiring allowance for losses | | $ | 41 | | $ | 67 |
| Loans expected to be fully recoverable | | | — | | | 104 |
| Total impaired loans | | $ | 41 | | $ | 171 |
| Reserve for losses | | $ | 21 | | $ | 31 |
| Average investment during the year | | $ | 61 | | $ | 252 |
| Interest income recognized while impaired | | $ | 3 | | $ | 1 |
Loans amounting to $769 million and $498 million at December 31, 2007 and 2006, respectively, were past due 90 days or more and still accruing interest. These amounts primarily relate to cardmember lending for which the Company’s policy is to cease accruing for interest receivable once a related cardmember loan is more than 180 days past due.
NOTE 6 ASSET SECURITIZATIONS
OFF-BALANCE SHEET SECURITIZATIONS
The Company periodically securitizes cardmember loans through the American Express Credit Account Master Trust (the Lending Trust). The following table illustrates the activity in the Lending Trust (including the securitized cardmember loans and seller’s interest) for the years ended December 31:
| (Millions) | | 2007 | | | 2006 | |
| Lending Trust assets, January 1 | | $ | 34,584 | | | $ | 28,854 | |
| Account additions, net | | | — | | | | 5,932 | |
| Cardmember activity, net | | | 1,610 | | | | (202 | ) |
| Lending Trust assets, December 31 | | $ | 36,194 | | | $ | 34,584 | |
| Securitized cardmember loans, January 1 | | $ | 20,170 | | | $ | 21,175 | |
| Impact of issuances | | | 6,000 | | | | 3,500 | |
| Impact of maturities | | | (3,500 | ) | | | (4,505 | ) |
| Securitized cardmember loans, December 31 | | $ | 22,670 | | | $ | 20,170 | |
| Seller’s interest, January 1 | | $ | 14,414 | | | $ | 7,679 | |
| Impact of issuances | | | (6,000 | ) | | | (3,500 | ) |
| Impact of maturities | | | 3,500 | | | | 4,505 | |
| Account additions, net | | | — | | | | 5,932 | |
| Cardmember activity, net | | | 1,610 | | | | (202 | ) |
| Seller’s interest, December 31 | | $ | 13,524 | | | $ | 14,414 | |
The Company, through its subsidiaries, is required to maintain an undivided interest in the transferred cardmember loans (seller’s interest), which is equal to the balance of all cardmember loans transferred to the Lending Trust (Lending Trust assets) less the investors’ portion of those assets (securitized cardmember loans). Seller’s interest is reported as cardmember lending on the Company’s Consolidated Balance Sheets.
The Company also retains subordinated interests in the securitized cardmember loans. These interests may include one or more investments in tranches of the securitization (subordinated securities) and an interest-only strip. The following table presents retained subordinated interests for the years ended December 31:
| (Millions) | | 2007 | | 2006 |
| Interest-only strip | | $ | 223 | | $ | 266 |
| Subordinated securities | | | 78 | | | — |
| Total | | $ | 301 | | $ | 266 |
The subordinated securities are accounted for at fair value as Available-for-Sale investment securities and are reported in investments on the Company’s Consolidated Balance Sheets with unrealized gains (losses) recorded in accumulated other comprehensive (loss) income as of December 31, 2007. The interest-only strip is accounted for at fair value and is reported
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AMERICAN EXPRESS COMPANY
in other assets on the Company’s Consolidated Balance Sheets.The fair value of the interest-only strip is the present value of estimated future excess spread expected to be generated by the securitized loans over the estimated life of those loans. Upon adoption of SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140” (SFAS No. 155), as of January 1, 2007, the Company records any changes in the fair value of the interest-only strip in its securitization income, net. Prior to the adoption of SFAS No. 155, the Company accounted for the change in the fair value of the interest-only strip in other comprehensive (loss) income.
The following table summarizes the activity related to securitized loans reported in securitization income, net for the years ended December 31:
| (Millions) | | 2007 | | 2006 | | 2005 |
| Excess spread, net(a) | | $ | 1,025 | | $ | 1,055 | | $ | 811 |
| Servicing fees | | | 425 | | | 407 | | | 412 |
| Gains on sales from securitizations | | | 57 | | | 27 | | | 37 |
| Total securitization income | | $ | 1,507 | | $ | 1,489 | | $ | 1,260 |
| (a) | | Excess spread, net is the net positive cash flow from interest and fee collections allocated to the investors’ interests after deducting the interest paid on investor certificates, credit losses, contractual servicing fees, and other expenses. In addition, excess spread, net includes any changes in the fair value of the interest-only strip. |
At the time of a cardmember loan securitization, the Company records a gain on sale, which is calculated as the difference between the proceeds from the sale and the book basis of the cardmember loans sold. The book basis is determined by allocating the carrying amount of the sold cardmember loans, net of applicable credit reserves, between the cardmember loans sold and the interests retained based on their relative fair values. Such fair values are based on market prices at the date of transfer for the sold cardmember loans and on the estimated present value of future cash flows for retained interests. Gains on sale from securitizations are reported in securitization income, net in the Company’s Consolidated Statements of Income. The income component resulting from the release of credit reserves upon sale is reported as a reduction of provision for losses from cardmember lending.
The Company retains servicing responsibilities for the transferred cardmember loans through its subsidiary, American Express Travel Related Services Company, Inc., and earns a related fee. No servicing asset or liability is recognized at the time of a securitization because the Company receives adequate compensation relative to current market servicing fees.
Management utilizes certain estimates and assumptions to determine the fair value of the retained subordinated interests, including subordinated securities and the interest-only strip. These estimates and assumptions are based on projections of finance charges and fees paid related to the securitized assets, expected credit losses, average loan life (i.e., monthly payment rate), the contractual fee to service the transferred assets, and a discount rate applied to the cash flows from the subordinated retained interests which is commensurate with the inherent risk. Changes in the estimates and assumptions used may have a significant impact in the Company’s valuation. The key economic assumptions used in measuring the retained subordinated interest at the time of issuance during 2007 and 2006 were as follows (rates are per annum):
| | | 2007 | | 2006 | |
| Weighted averageloan life(months) | | 4 | | 4 | |
| Expected credit losses | | 2.63%–4.32 | % | 2.60%–3.37 | % |
| Residual cash flowsdiscounted at | | 12.0 | % | 12.0 | % |
The following table presents quantitative information about delinquencies, net credit losses, and components of securitized cardmember loans on a trust basis at December 31:
| | | | | Principal | | |
| | | | Amount of | | Net |
| | Total | | Loans 30 | | Credit |
| | Principal | | Days or | | Losses |
| | Amount of | | More Past | | During |
| (Billions) | | Loans | | Due | | the Year |
| 2007 | | | | | | |
| Cardmember loans managed | | $77.2 | | $2.4 | | $2.8 |
| Less: Cardmember loans sold | | 22.7 | | 0.6 | | 0.8 |
| Cardmember loans on-balancesheet | | $54.5 | | $1.8 | | $2.0 |
| 2006 | | | | | | |
| Cardmember loans managed | | $63.5 | | $1.7 | | $1.9 |
| Less: Cardmember loans sold | | 20.2 | | 0.5 | | 0.5 |
| Cardmember loans on-balancesheet | | $43.3 | | $1.2 | | $1.4 |
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AMERICAN EXPRESS COMPANY
The three key economic assumptions and the sensitivity of the current year’s fair value of the interest-only strip to immediate 10 percent and 20 percent adverse changes in these assumptions are as follows:
| | Cash Flows | |
| | | | | | | | | | from | |
| | | | | | | | | | Interest- | |
| | | | | | | | | | only | |
| | Monthly | | | Expected | | | Strips | |
| | Payment | | | Credit | | | Discounted | |
| (Millions, except rates per annum) | | Rate | | | Losses | | | at | |
| Assumption | | | 24.7 | % | | | 4.3 | % | | | 12.0 | % |
| Impact on fair value of10% adverse change | | $ | (14 | ) | | $ | (22 | ) | | $ | (0.4 | ) |
| Impact on fair value of20% adverse change | | $ | (28 | ) | | $ | (43 | ) | | $ | (0.9 | ) |
This sensitivity analysis does not represent management’s expectations of adverse changes in these assumptions but is provided as a hypothetical scenario to assess the sensitivity of the fair value of the interest-only strip to changes in key inputs.Management cannot extrapolate changes in fair value based on a 10 percent or 20 percent change in all key assumptions simultaneously in part because the relationship of the change in one assumption on the fair value of the retained interest is calculated independently from any change in another assumption. Changes in one factor may cause changes in another, which could magnify or offset the sensitivities. The table below summarizes cash flows received from the Lending Trust for the years ended December 31:
| (Millions) | | 2007 | | 2006 |
| Proceeds from new securitizationsduring the period | | $ | 5,909 | | $ | 3,491 |
| Proceeds from collections reinvested inrevolving cardmember securitizations | | $ | 63,714 | | $ | 62,411 |
| Servicing fees received | | $ | 425 | | $ | 407 |
| Other cash flows received on retainedinterests from interest-only strips | | $ | 2,407 | | $ | 2,517 |
ON-BALANCE SHEET SECURITIZATIONS
The Company’s securitizations of cardmember receivables are accounted for as secured borrowing, rather than as qualifying sales, because the receivables are transferred to a non-qualifying special purpose entity, the American Express Issuance Trust (the Charge Trust). The Charge Trust is considered a variable interest entity, which is consolidated by American Express Receivables Financing Corporation V, LLC, its primary beneficiary, which is in turn consolidated by the Company. The cardmember receivables securitized through this entity are not accounted for as sold and the securities issued by this entity to third-party investors are reported as long-term debt on the Company’s Consolidated Balance Sheets.
The following table summarizes the total assets and liabilities held by the Charge Trust at December 31:
| (Billions) | | 2007 | | 2006 |
| Assets | | $9.0 | | $9.6 |
| Liabilities | | 3.1 | | 1.2 |
These receivables are available only for payment of the debt or other obligations issued or arising in the securitization transactions. The long-term debt is payable only out of collections on the underlying securitized assets.
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AMERICAN EXPRESS COMPANY
NOTE 7 CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in each component of accumulated other comprehensive income (loss) for the three years ended December 31, were as follows:
| | | | | | | Net | | | | | | | Net | | | | | | | | | |
| | | | | | Unrealized | | | | | | | Unrealized | | | | | | | | | |
| | | | | Gains | | | Foreign | | | Pension | | | Minimum | | | Accumulated | |
| | Net Unrealized | | | (Losses) | | | Currency | | | and Other | | | Pension | | | Other | |
| Three Years Ended December 31, | | Gains (Losses) | | | on | | | Translation | | | Postretirement | | | Liability | | | Comprehensive | |
| (Millions), net of tax(a) | | on Securities | | | Derivatives | | | Adjustments | | | Benefit Costs | | | Adjustment | | | Income (Loss) | |
| Balances at December 31, 2004 | | $ | 760 | | | $ | (142 | ) | | $ | (344 | ) | | $ | — | | | $ | (16 | ) | | $ | 258 | |
| Investment Securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Net unrealized securities losses | | | (158 | ) | | | | | | | | | | | | | | | | | | | (158 | ) |
| Reclassification for net realized gains | | | (7 | ) | | | | | | | | | | | | | | | | | | | (7 | ) |
| Other losses(b) | | | (10 | ) | | | | | | | | | | | | | | | | | | | (10 | ) |
| Derivatives | | | | | | | | | | | | | | | | | | | | | | | | |
| Net unrealized gains on cash flow hedges | | | | | | | 300 | | | | | | | | | | | | | | | | 300 | |
| Cash flow hedge gains reclassified to earnings | | | | | | | (44 | ) | | | | | | | | | | | | | | | (44 | ) |
| Foreign currency translation adjustments | | | | | | | | | | | | | | | | | | | | | | | | |
| Translation losses | | | | | | | | | | | (64 | ) | | | | | | | | | | | (64 | ) |
| Net losses related to hedges of investment in foreign | | | | | | | | | | | | | | | | | | | | | | | | |
| operations | | | | | | | | | | | (6 | ) | | | | | | | | | | | (6 | ) |
| Pension and other postretirement benefit costs | | | | | | | | | | | | | | | | | | | | | | | | |
| Minimum pension liability adjustment | | | | | | | | | | | | | | | | | | | (2 | ) | | | (2 | ) |
| Discontinued operations(c) | | | (432 | ) | | | 19 | | | | (11 | ) | | | | | | | | | | | (424 | ) |
| Net change in accumulated other comprehensive | | | | | | | | | | | | | | | | | | | | | | | | |
| income (loss), excluding the spin-off of Ameriprise | | | (607 | ) | | | 275 | | | | (81 | ) | | | | | | | (2 | ) | | | (415 | ) |
| Spin-off of Ameriprise(d) | | | (16 | ) | | | 10 | | | | 25 | | | | | | | | (1 | ) | | | 18 | |
| Net change in accumulated other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | |
| (loss) | | | (623 | ) | | | 285 | | | | (56 | ) | | | — | | | | (3 | ) | | | (397 | ) |
| Balances at December 31, 2005 | | | 137 | | | | 143 | | | | (400 | ) | | | — | | | | (19 | ) | | | (139 | ) |
| Investment Securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Net unrealized securities gains | | | 11 | | | | | | | | | | | | | | | | | | | | 11 | |
| Reclassification for net realized gains | | | (54 | ) | | | | | | | | | | | | | | | | | | | (54 | ) |
| Other gains(b) | | | 44 | | | | | | | | | | | | | | | | | | | | 44 | |
| Derivatives | | | | | | | | | | | | | | | | | | | | | | | | |
| Net unrealized gains on cash flow hedges | | | | | | | 42 | | | | | | | | | | | | | | | | 42 | |
| Cash flow hedge gains reclassified to earnings | | | | | | | (158 | ) | | | | | | | | | | | | | | | (158 | ) |
| Foreign currency translation adjustments | | | | | | | | | | | | | | | | | | | | | | | | |
| Reclassification to earnings due to sale of foreign entities | | | | | | | | | | | 110 | | | | | | | | | | | | 110 | |
| Translation gains | | | | | | | | | | | 215 | | | | | | | | | | | | 215 | |
| Net losses related to hedges of investment in foreign | | | | | | | | | | | | | | | | | | | | | | | | |
| operations | | | | | | | | | | | (221 | ) | | | | | | | | | | | (221 | ) |
| Pension and other postretirement benefit costs | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjustment to initially apply SFAS No. 158 | | | | | | | | | | | | | | | (415 | ) | | | 19 | | | | (396 | ) |
| Discontinued operations(c) | | | (46 | ) | | | | | | | 74 | | | | (2 | ) | | | | | | | 26 | |
| Net change in accumulated other comprehensive | | | | | | | | | | | | | | | | | | | | | | | | |
| income (loss) | | | (45 | ) | | | (116 | ) | | | 178 | | | | (417 | ) | | | 19 | | | | (381 | ) |
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AMERICAN EXPRESS COMPANY
| | | | | | | Net | | | | | | | Net | | | | | | | | |
| | | | | | Unrealized | | | | | | | Unrealized | | | | | | | | |
| | | | | | Gains | | | Foreign | | | Pension | | | Minimum | | Accumulated | |
| | Net Unrealized | | | (Losses) | | | Currency | | | and Other | | | Pension | | Other | |
| Three Years Ended December 31, | | Gains (Losses) | | | on | | | Translation | | | Postretirement | | | Liability | | Comprehensive | |
| (Millions), net of tax(a) | | on Securities | | | Derivatives | | | Adjustments | | | Benefit Costs | | | Adjustment | | Income (Loss) | |
| Balances at December 31, 2006 | | $ | 92 | | | $ | 27 | | | $ | (222 | ) | | $ | (417 | ) | | $ | — | | $ | (520 | ) |
| Investment securities | | | | | | | | | | | | | | | | | | | | | | | |
| Net unrealized securities losses | | | (76 | ) | | | | | | | | | | | | | | | | | | (76 | ) |
| Reclassification for net realized losses(e) | | | 48 | | | | | | | | | | | | | | | | | | | 48 | |
| Other losses(b) | | | (47 | ) | | | | | | | | | | | | | | | | | | (47 | ) |
| Derivatives | | | | | | | | | | | | | | | | | | | | | | | |
| Net unrealized gains on cash flow hedges | | | | | | | (68 | ) | | | | | | | | | | | | | | (68 | ) |
| Cash flow hedge gains reclassified to earnings | | | | | | | (30 | ) | | | | | | | | | | | | | | (30 | ) |
| Foreign currency translation adjustments | | | | | | | | | | | | | | | | | | | | | | | |
| Reclassification to earnings due to sale of foreign entities | | | | | | | | | | | 3 | | | | | | | | | | | 3 | |
| Translation gains | | | | | | | | | | | 347 | | | | | | | | | | | 347 | |
| Net losses related to hedges of investment in foreign | | | | | | | | | | | | | | | | | | | | | | | |
| operations | | | | | | | | | | | (380 | ) | | | | | | | | | | (380 | ) |
| Pension and other postretirement benefit costs | | | | | | | | | | | | | | | | | | | | | | | |
| Annual valuation adjustment | | | | | | | | | | | | | | | 239 | | | | | | | 239 | |
| Curtailment impact | | | | | | | | | | | | | | | 18 | | | | | | | 18 | |
| Amortization of prior service cost and net actuarial loss | | | | | | | | | | | | | | | 28 | | | | | | | 28 | |
| Discontinued operations(c) | | | (5 | ) | | | | | | | (3 | ) | | | 4 | | | | | | | (4 | ) |
| Net change in accumulated other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | |
| (loss) | | | (80 | ) | | | (98 | ) | | | (33 | ) | | | 289 | | | | — | | | 78 | |
| Balances at December 31, 2007 | | $ | 12 | | | $ | (71 | ) | | $ | (255 | ) | | $ | (128 | ) | | $ | — | | $ | (442 | ) |
| (a) | | The following table shows the tax impact for the three years ended December 31, for the changes in each component of accumulated other comprehensive income (loss): |
| (Millions) | | 2007 | | | 2006 | | | 2005 | |
| Investment securities | | $ | (52 | ) | | $ | (2 | ) | | $ | (81 | ) |
| Derivatives | | | (56 | ) | | | (61 | ) | | | 139 | |
| Foreign currency translation adjustments | | | 17 | | | | (28 | ) | | | 30 | |
| Pension and other postretirement benefit costs | | | 152 | | | | (209 | ) | | | — | |
| Minimum pension liability adjustment | | | — | | | | 10 | | | | (2 | ) |
| Discontinued operations(c) | | | (3 | ) | | | 14 | | | | (234 | ) |
| Total tax impact | | $ | 58 | | | $ | (276 | ) | | $ | (148 | ) |
| (b) | | Other gains (losses) primarily related to the impact of changes in the fair market value of the interest-only strip for year 2005 and 2006. In connection with the initial adoption of SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140” (SFAS No. 155), as of January 1, 2007, the Company recognized a gain of $80 million ($50 million after-tax) related to the fair value of the interest-only strips, which was recorded in other comprehensive income (loss) in previous periods. Changes in the fair value of the interest-only strips subsequent to the adoption of this standard are reflected in securitization income, net. |
| |
| (c) | | Relates to the change in accumulated other comprehensive income (loss) prior to the dispositions of AEB and other businesses (including TBS) and the spin-off of Ameriprise. |
| |
| (d) | | Relates to the ending balance of accumulated other comprehensive income (loss) of Ameriprise at the time of the spin-off and certain other dispositions (including TBS) which is shown as a separate component on the Statement of Shareholders’ Equity. |
| |
| (e) | | Includes the impact of transfer of Available-for-Sale securities to Trading securities. The transfer resulted in a gain of $2 million after-tax ($3 million pretax) and loss of $35 million after-tax ($54 million pretax) reclassified from other comprehensive income to earnings. |
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AMERICAN EXPRESS COMPANY
NOTE 8 OTHER ASSETS
The following is a summary of other assets at December 31:
| (Millions) | | 2007 | | 2006 |
| Deferred tax assets, net | | $ | 2,411 | | $ | 1,640 |
| Goodwill | | | 1,508 | | | 1,469 |
| Prepaid expenses | | | 618 | | | 662 |
| Other intangible assets, at cost | | | 204 | | | 156 |
| Other investments | | | 314 | | | 320 |
| Restricted cash | | | 276 | | | 332 |
| Other(a) | | | 2,018 | | | 1,947 |
| Total | | $ | 7,349 | | $ | 6,526 |
| (a) | | Includes the interest-only strip assets, pension plan assets, derivative assets, and other miscellaneous assets. |
GOODWILL
The changes in the carrying amount of goodwill reported in the Company’s reportable operating segments were as follows:
| | | | | | | | | | Global | | | Global Network | | | | | | | | | |
| | U.S. Card | | International | | | Commercial | | | & Merchant | | | Corporate & | | | | | |
| (Millions) | | Services | | Card Services | | | Services | | | Services | | | Other | | | Total | |
| Balance at January 1, 2006 | | $ | 168 | | $ | 542 | | | $ | 631 | | | $ | 104 | | | | $17 | | | $ | 1,462 | |
| Acquisitions(a) | | | — | | | — | | | | 104 | | | | 2 | | | | — | | | | 106 | |
| Dispositions(b) | | | — | | | (27 | ) | | | (5 | ) | | | (1 | ) | | | — | | | | (33 | ) |
| Other, including foreign currency translation | | | | | | | | | | | | | | | | | | | | | | | |
| and reclassifications | | | — | | | 3 | | | | 10 | | | | (78 | ) | | | (1 | ) | | | (66 | ) |
| Balance at December 31, 2006 | | | 168 | | | 518 | | | | 740 | | | | 27 | | | | 16 | | | | 1,469 | |
| Acquisitions(c) | | | 7 | | | — | | | | 19 | | | | — | | | | — | | | | 26 | |
| Other, including foreign currency translation | | | — | | | 1 | | | | 12 | | | | — | | | | — | | | | 13 | |
| Balance at December 31, 2007 | | $ | 175 | | $ | 519 | | | $ | 771 | | | $ | 27 | | | | $16 | | | $ | 1,508 | |
| (a) | | Approximately $100 million related to Harbor Payments. See Note 1 for further discussion. |
| |
| (b) | | Relates to the disposition of the card and merchant-related activities in Brazil, effective June 30, 2006. |
| |
| (c) | | Includes approximately $18 million related to the acquisition of a travel services business. |
OTHER INTANGIBLE ASSETS
The gross changes in the carrying values and accumulated amortization related to other intangible assets, which are all definite-lived and primarily represent customer relationships, were as follows:
| | | 2007 | | | 2006 | |
| | Gross Carrying | | | Accumulated | | | Net Carrying | | | Gross Carrying | | | Accumulated | | | Net Carrying | |
| (Millions) | | Amount | | | Amortization | | | Amount | | | Amount | | | Amortization | | | Amount | |
| Balance at January 1 | | $ | 341 | | | $ | (185 | ) | | $ | 156 | | | $ | 267 | | | $ | (158 | ) | | $ | 109 | |
| Acquisitions(a) | | | 93 | | | | — | | | | 93 | | | | 108 | | | | — | | | | 108 | |
| Amortization(b) | | | — | | | | (47 | ) | | | (47 | ) | | | — | | | | (60 | ) | | | (60 | ) |
| Other(c) | | | (110 | ) | | | 112 | | | | 2 | | | | (34 | ) | | | 33 | | | | (1 | ) |
| Balance at December 31 | | $ | 324 | | | $ | (120 | ) | | $ | 204 | | | $ | 341 | | | $ | (185 | ) | | $ | 156 | |
| (a) | | Intangible assets acquired in 2007 and 2006 are being amortized, on average, over 16 years and 6 years, respectively. |
| |
| (b) | | 2005 amortization expense was $49 million. |
| |
| (c) | | Primarily includes the write-off of fully amortized intangible assets. |
Estimated intangible amortization expense for the next five years is as follows:
| (Millions) | | 2008 | | 2009 | | 2010 | | 2011 | | 2012 |
| Estimated amortization expense | | $51 | | $41 | | $33 | | $22 | | $16 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
OTHER INVESTMENTS
In 2006, the Company acquired a non-controlling interest in the common stock of Industrial and Commercial Bank of China (ICBC) for $200 million. The Company is restricted from transferring 50 percent of the underlying shares until April 2009 and the other 50 percent of the underlying shares until October 2009. As a result of this restriction, the Company accounts for this investment at cost until 12 months before the transfer restriction expires (April 2008 and October 2008 for each 50 percent investment tranche, respectively), at which time the applicable investment tranche will be accounted for at fair value (approximately $375 million and $360 million at December 31, 2007, for each tranche, respectively, considering the impact of any remaining transfer restriction period).
The Company has $114 million and $120 million in affordable housing partnership interests at December 31, 2007 and 2006, respectively. The Company has variable interests in affordable housing partnerships for which it is not considered the primary beneficiary and, therefore, does not consolidate.For these variable interests, the Company is a limited partner and typically has a less than 50 percent interest and receives the benefits and accepts the risks consistent with its limited partner interests. In the limited cases in which the Company has a greater than 50 percent interest in affordable housing partnerships, it was determined that the general partner acts as the Company’s agent and the general partner is most closely related to the partnership as it is the key decision maker and controls the operations. These partnership interests are accounted for under EITF No. 94-01, “Accounting for Tax Benefits Resulting from Investments in Affordable Housing Projects,” and the related accounting guidance of Statement of Position No. 78-9, “Accounting for Investments in Real Estate Ventures” and EITF Topic D-46, “Accounting for Limited Partnership Investments.” The Company’s maximum exposure to loss as a result of its investment in these partnerships is represented by the carrying value.
NOTE 9 SHORT- AND LONG-TERM DEBT AND BORROWING AGREEMENTS
SHORT-TERM DEBT
The Company’s short-term debt outstanding, defined as debt with original maturities of less than one year, at December 31, was as follows:
| (Millions, except percentages) | | 2007 | | | 2006 | |
| | | | | | | | | Year-End | | | | | | | | | Year-End | |
| | | | | | Year-End | | | Effective | | | | | | Year-End | | | Effective | |
| | | | | | Stated | | | Interest | | | | | | Stated | | | Interest | |
| | | Outstanding | | Rate on | | | Rate with | | | Outstanding | | Rate on | | | Rate with | |
| | | Balance | | Debt(a) | | | Swaps(a)(b) | | | Balance | | Debt(a) | | | Swaps(a)(b) | |
| Commercial paper | | $ | 10,490 | | 4.36 | % | | 4.33 | % | | $ | 5,782 | | 5.23 | % | | — | |
| Borrowed funds(c) | | | 3,566 | | 4.99 | % | | 4.99 | % | | | 2,609 | | 4.96 | % | | 4.95 | % |
| Bank notes payable | | | 3,243 | | 5.18 | % | | — | | | | 6,100 | | 5.31 | % | | — | |
| Other(d) | | | 463 | | 1.88 | % | | — | | | | 745 | | 2.41 | % | | — | |
| Total | | $ | 17,762 | | 4.57 | % | | | | | $ | 15,236 | | 5.08 | % | | | |
| (a) | | For floating rate debt issuances, the stated and effective interest rates are based on the floating rates in effect at December 31, 2007 and 2006, respectively. These rates are not indicative of future interest rates. |
| |
| (b) | | Effective interest rates are only presented if swaps are in place to hedge the underlying debt at the respective year-end. |
| |
| (c) | | Included in borrowed funds is $313 million and $187 million in 2007 and 2006, respectively, of short-term debt that relates to borrowings with a discontinued operation (AEB). |
| |
| (d) | | Includes interest bearing overdrafts with banks of $463 million and $706 million at December 31, 2007 and 2006, respectively. |
Unused lines of credit to support commercial paper borrowings were approximately $8.2 billion and $8.1 billion at December 31, 2007 and 2006, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
LONG-TERM DEBT
The Company’s long-term debt outstanding, defined as debt with original maturities of one year or greater, at December 31, was as follows:
| (Millions, except percentages) | | 2007 | | | 2006 | |
| | | | | | | | | | | Year-End | | | | | | | | | Year-End | |
| | | | | | | | Year-End | | | Effective | | | | | | Year-End | | | Effective | |
| | | | | | | | Stated | | | Interest | | | | | | Stated | | | Interest | |
| | | Maturity | | Outstanding | | Rate on | | | Rate with | | | Outstanding | | Rate on | | | Rate with | |
| | | Dates | | Balance | | Debt(a) | | | Swaps(a)(b) | | | Balance | | Debt(a) | | | Swaps(a)(b) | |
| American Express Company | | | | | | | | | | | | | | | | | | | | |
| (Parent Company only) | | | | | | | | | | | | | | | | | | | | |
| Fixed and Floating Rate Senior Notes | | 2009–2033 | | $ | 5,996 | | 5.40 | % | | — | | | $ | 5,244 | | 5.04 | % | | — | |
| Subordinated Debentures(c) | | 2036 | | | 750 | | 6.80 | % | | — | | | | 750 | | 6.80 | % | | — | |
| American Express Travel Related | | | | | | | | | | | | | | | | | | | | |
| Services Company, Inc. | | | | | | | | | | | | | | | | | | | | |
| Fixed and Floating Rate Senior Notes | | 2009–2011 | | | 2,000 | | 4.93 | % | | 4.98 | % | | | 2,000 | | 4.95 | % | | 4.98 | % |
| American Express Credit | | | | | | | | | | | | | | | | | | | | |
| Corporation | | | | | | | | | | | | | | | | | | | | |
| Fixed and Floating Rate Senior Notes | | 2008–2017 | | | 19,118 | | 4.99 | % | | 4.98 | % | | | 19,037 | | 5.10 | % | | 5.10 | % |
| Borrowings under Bank Credit Facilities | | 2012 | | | 3,146 | | 7.34 | % | | 7.09 | % | | | 2,753 | | 6.69 | % | | 6.49 | % |
| American Express Centurion Bank | | | | | | | | | | | | | | | | | | | | |
| Fixed and Floating Rate Senior Notes | | 2008–2017 | | | 11,099 | | 5.25 | % | | 5.14 | % | | | 7,541 | | 5.33 | % | | 5.34 | % |
| American Express Bank, FSB | | | | | | | | | | | | | | | | | | | | |
| Fixed and Floating Rate Senior Notes | | 2008–2017 | | | 9,909 | | 5.23 | % | | 5.13 | % | | | 4,000 | | 5.38 | % | | 5.27 | % |
| American Express Receivables | | | | | | | | | | | | | | | | | | | | |
| Financing Corporation V LLC | | | | | | | | | | | | | | | | | | | | |
| Floating Rate Senior Notes | | 2010–2012 | | | 2,976 | | 5.19 | % | | — | | | | 1,116 | | 5.38 | % | | — | |
| Floating Rate Subordinated Notes | | 2010–2012 | | | 144 | | 5.67 | % | | — | | | | 84 | | 5.66 | % | | — | |
| Other | | | | | | | | | | | | | | | | | | | | |
| Fixed and Floating Rate Notes(d) | | 2008–2014 | | | 147 | | 6.53 | % | | — | | | | 222 | | 6.83 | % | | 7.59 | % |
| Total | | | | $ | 55,285 | | 5.30 | % | | | | | $ | 42,747 | | 5.30 | % | | | |
| (a) | | For floating rate debt issuances, the stated and effective interest rates are based on the floating rates in effect at December 31, 2007 and 2006, respectively. These rates are not indicative of future interest rates. |
| |
| (b) | | Effective interest rates are only presented when swaps are in place to hedge the underlying debt at the respective year-end. |
| |
| (c) | | The maturity date will automatically be extended to September 1, 2066 except in the case of (1) prior redemption or (2) default related to the debentures. |
| |
| (d) | | This balance includes $90 million and $92 million related to a sale-leaseback transaction as of December 31, 2007 and 2006, respectively, as described in Note 14. |
As of December 31, 2007, the Parent Company had $750 million principal outstanding of Subordinated Debentures that accrue interest at an annual rate of 6.80 percent until September 1, 2016 and at an annual rate of three-month LIBOR plus 2.23 percent thereafter. At the Company’s option, the Subordinated Debentures are redeemable for cash after September 1, 2016 at 100 percent of the principal amount plus any accrued but unpaid interest. If the Company fails to achieve specified performance measures, it will be required to issue shares of its common stock and apply the net proceeds to make interest payments on the Subordinated Debentures. The Company achieved the specified performance measures in 2007.
As of December 31, 2007, the Parent Company had $2 billion principal outstanding of unsecured, Floating Rate Senior Notes due 2033 (the Senior Notes). The Senior Notes accrue interest at an annual rate of three-month LIBOR plus 11.435 basis points and may be put to the Company at par on June 5, 2008. Contingent interest payments up to 4 percent are required if the Senior Notes are not rated at certain levels by rating agencies. At December 31, 2007, the Company was not in violation of any of its debt covenants.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
Aggregate annual maturities on long-term debt obligations (based on final maturity dates) at December 31, 2007, were as follows:
| (Millions) | | 2008 | | 2009 | | 2010 | | 2011 | | 2012 | | Thereafter | | Total |
| American Express Company (Parent Company only) | | $ | — | | $ | 500 | | $ | — | | $ | 400 | | $ | — | | $ | 5,846 | | $ | 6,746 |
| American Express Travel Related Services | | | | | | | | | | | | | | | | | | | | | |
| Company, Inc. | | | — | | | 800 | | | — | | | 1,200 | | | — | | | — | | | 2,000 |
| American Express Credit Corporation | | | 7,411 | | | 5,634 | | | 2,515 | | | 1,554 | | | 4,738 | | | 412 | | | 22,264 |
| American Express Centurion Bank | | | 1,645 | | | 4,777 | | | 2,204 | | | — | | | 1,177 | | | 1,296 | | | 11,099 |
| American Express Bank, FSB | | | 2,715 | | | 3,265 | | | 1,055 | | | — | | | 1,577 | | | 1,297 | | | 9,909 |
| American Express Receivables Financing | | | | | | | | | | | | | | | | | | | | | |
| Corporation V LLC | | | — | | | — | | | 1,560 | | | — | | | 1,560 | | | — | | | 3,120 |
| Other | | | 44 | | | 13 | | | — | | | — | | | — | | | 90 | | | 147 |
| Total | | $ | 11,815 | | $ | 14,989 | | $ | 7,334 | | $ | 3,154 | | $ | 9,052 | | $ | 8,941 | | $ | 55,285 |
As of December 31, 2007 and 2006, the Company maintained total bank lines of credit, including lines supporting commercial paper borrowings, of $12.4 billion and $11.6 billion, respectively, of which $9.0 billion and $8.9 billion were unutilized as of December 31, 2007 and 2006, respectively.
The Company paid total interest primarily related to short- and long-term debt, corresponding interest rate products and customer deposits of $4.3 billion, $3.2 billion, and $2.4 billion in 2007, 2006, and 2005, respectively (including amounts related to discontinued operations of $0.6 billion, $0.4 billion, and $0.4 billion in 2007, 2006, and 2005, respectively).
NOTE 10 OTHER LIABILITIES
The following is a summary of other liabilities at December 31:
| (Millions) | | 2007 | | 2006 |
| Membership Rewards liabilities | | $ | 4,785 | | $ | 3,760 |
| Employee-related liabilities(a) | | | 1,887 | | | 1,893 |
| Deferred card fees, net | | | 1,126 | | | 987 |
| Other(b) | | | 6,161 | | | 5,291 |
| Total | | $ | 13,959 | | $ | 11,931 |
| (a) | | Employee-related liabilities comprised principally of employee benefit plan obligations and incentive compensation. |
| |
| (b) | | Other consists principally of rebate accruals, advertising and promotion, minority interest in subsidiaries, client incentive accruals, and dividends payable. |
DEFERRED CARD FEES
The carrying amount of deferred card and other fees, net of direct acquisition costs and reserves for membership cancellations as of December 31 were as follows:
| (Millions) | | 2007 | | | 2006 | |
| Deferred card and other fees | | $ | 1,410 | | | $ | 1,252 | |
| Deferred direct acquisition costs | | | (159 | ) | | | (145 | ) |
| Reserves for membership cancellations | | | (125 | ) | | | (120 | ) |
| Deferred card fees and other, net of direct | | | | | | | | |
| acquisition costs and reserves | | $ | 1,126 | | | $ | 987 | |
NOTE 11 COMMON AND PREFERRED SHARES
The Company has a share repurchase program to return equity capital in excess of business needs to shareholders. The share repurchases both offset the issuance of new shares as part of employee compensation plans and reduce the number of shares outstanding. At December 31, 2007, the Company has 105 million shares remaining under the share repurchase authorizations. Such authorizations do not have an expiration date, and at present, there is no intention to modify or otherwise rescind the current authorizations. The Company retires shares upon being repurchased (except for approximately 500,000 shares held as treasury shares at December 31, 2007), and are excluded from the shares outstanding in the table below. There were no shares held in treasury as of December 31, 2006 and 2005.
The following table shows authorized shares and provides a reconciliation of common shares issued and outstanding:
| (Millions, except where indicated) | | 2007 | | | 2006 | | | 2005 | |
| Common shares authorized(billions)(a) | | 3.6 | | | 3.6 | | | 3.6 | |
| Shares issued and outstanding atbeginning of year | | 1,199 | | | 1,241 | | | 1,249 | |
| Repurchases of common shares | | (60 | ) | | (75 | ) | | (34 | ) |
| Acquisition of Harbor Payments | | — | | | 2 | | | — | |
| Other, primarily stock option exercises | | 19 | | | 31 | | | 26 | |
| Shares issued and outstanding at end of year | | 1,158 | | | 1,199 | | | 1,241 | |
| (a) | | Of the common shares authorized but unissued at December 31, 2007, approximately 151 million shares were reserved for issuance for employee stock, employee benefit and dividend reinvestment plans. |
The Board of Directors is authorized to permit the Company to issue up to 20 million preferred shares at a par value of $1.67 without further shareholder approval.
At December 31, 2007 and 2006, no preferred shares had been issued.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
NOTE 12 DERIVATIVES AND HEDGING ACTIVITIES
The Company uses derivative financial instruments to manage exposure to various market risks, such as changes in benchmark interest rates and foreign exchange rates. These instruments enable end users to increase, reduce, or alter exposure to various market risks and, for that reason, are an integral component of the Company’s market risk and related asset/liability management strategy and processes. The value of these derivative instruments is derived from an underlying variable or multiple variables, including interest rate, foreign exchange, and equity indices or prices. Overall market risk exposures are monitored and managed by the Market Risk Committee, guided by Board-approved policies covering derivative financial instruments, funding, and investments.
For the Company’s charge card and fixed-rate lending products, interest rate exposure is managed by using fixed-rate debt and derivative instruments, primarily interest rate swaps, to achieve a targeted mix of fixed and floating rate funding. The Company’s strategy is to lengthen the maturity of interestrate hedges in periods of low interest rates and to shorten their maturity in periods of high interest rates. For the majority of its cardmember loans, which are linked to a floating rate base and generally reprice each month, the Company uses floating rate funding. The Company regularly reviews its strategy and may modify it based on market conditions.
Credit risk associated with the Company’s derivatives is limited to the risk that a derivative counterparty will not perform in accordance with the terms of the contract. To mitigate the risk, counterparties are required to be pre-approved and rated as investment grade. Counterparty risk exposures are monitored by the Company’s Institutional Risk Management Committee (IRMC). The IRMC formally reviews large institutional exposures to ensure compliance with Enterprise-wide Risk Management Committee guidelines and procedures and determines the risk mitigation actions, when necessary. Additionally, the Company may, from time to time, enter into master netting agreements where practical.
The following table summarizes the total fair value, excluding interest accruals, of derivative product assets and liabilities at December 31:
| (Millions) | | 2007 | | 2006 |
| | | Assets | | Liabilities | | Assets | | Liabilities |
| Cash flow hedges | | $ | 11 | | $ | 122 | | $ | 64 | | $ | 21 |
| Fair value hedges | | | 114 | | | — | | | — | | | 13 |
| Net investment hedges | | | 62 | | | 2 | | | 5 | | | 14 |
| Derivatives not designated as hedges | | | 61 | | | 46 | | | 25 | | | 13 |
| Total fair value, excluding interest accruals | | $ | 248 | | $ | 170 | | $ | 94 | | $ | 61 |
The following table summarizes the income effects of derivatives for the years ended December 31:
| (Millions) | | 2007 | | | 2006 | | | 2005 | |
| Cash flow hedges, net of tax(a): | | | | | | | | | | | | |
| Ineffective net (losses) gains | | $ | (1 | ) | | $ | (1 | ) | | $ | 2 | |
| Gains (losses) on forecasted transactions no longer probable to occur | | $ | — | | | $ | 4 | | | $ | (1 | ) |
| Reclassification of realized gains (losses) from other comprehensive (loss) income | | $ | 30 | | | $ | 158 | | | $ | 44 | |
| |
| Fair value hedges, net of tax(a): | | | | | | | | | | | | |
| Ineffective net gains | | $ | — | | | $ | (1 | ) | | $ | — | |
| |
| Net investment hedges, net of tax: | | | | | | | | | | | | |
| Reclassification of loss from cumulative translation adjustment as a result of sales of foreign entities | | $ | (3 | ) | | $ | (110 | )(b) | | $ | — | |
| (a) | | There were no (losses) gains due to exclusion of any component of derivative instruments from the assessment of hedge effectiveness for 2007, 2006, and 2005. |
| |
| (b) | | Represents the sale of Brazil and certain other dispositions. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
CASH FLOW HEDGES
A cash flow hedge is a derivative designated to hedge the exposure of variable future cash flows attributable to a particular risk of an existing recognized asset or liability, or a forecasted transaction. The Company hedges existing long-term variable-rate debt, the rollover of short-term debt and the anticipated forecasted issuance of additional funding through the use of derivative instruments, primarily interest rate swaps. These derivative instruments effectively fix the interest expense for the duration of the swap.
In the normal course of business, as derivatives mature, the Company expects to reclassify $79 million of net pretax losses on derivative instruments from accumulated other comprehensive (loss) income to earnings during the next 12 months. In the event that cash flow hedge accounting is no longer applied (i.e., the Company de-designates a derivative as a hedge, a hedge is no longer considered to be highly effective, or the forecasted transaction being hedged is no longer probable of occurring), the reclassification from accumulated other comprehensive (loss) income into earnings may be accelerated and all future market value fluctuations of the derivative will be reflected in earnings.
Currently, the longest period of time over which the Company is hedging exposure to variability in future cash flows for forecasted transactions is approximately two years, which is related to bank notes.
FAIR VALUE HEDGES
A fair value hedge is a derivative designated to hedge the exposure of future changes in the fair value of an asset or a liability, or an identified portion thereof that is attributable to a particular risk. The Company is exposed to interest rate risk associated with its fixed-rate long-term debt and fixed-rate corporate debt securities. The Company uses interest rate swaps to convert certain fixed-rate long-term debt to floating rate at the time of issuance. From time to time, the Company may enter into interest rate swaps to hedge its exposure related to fixed-rate corporate debt securities.
NET INVESTMENT HEDGES
A net investment hedge in a foreign operation is a derivative used to hedge future changes in currency exposure of a net investment in a foreign operation. The Company designates foreign currency derivatives, primarily forward agreements, as hedges of net investments in certain foreign operations. These derivatives reduce exposure to changes in currency exchange rates on the Company’s investments in non-U.S. subsidiaries.
DERIVATIVES NOT DESIGNATED AS HEDGES
The Company has derivatives that act as economic hedges and that either do not qualify or are not designated for hedge accounting treatment. Foreign currency transactions and non-U.S. dollar cash flow exposures may from time to time be partially or fully economically hedged through foreign currency contracts, primarily forward contracts, foreign currency options, and cross-currency swaps. These hedges generally mature within one year. Foreign currency contracts involve the purchase and sale of a designated currency at an agreed upon rate for settlement on a specified date. From time to time, the Company may enter into interest rate swaps to specifically manage funding costs related to its proprietary card business.The following table provides the total fair value, excluding accruals, of these derivative products assets and liabilities as of December 31:
| (Millions) | | 2007 | | 2006 |
| | | Assets | | Liabilities | | Assets | | Liabilities |
| Foreign currency transactions | | $ | 32 | | $ | 38 | | $ | 13 | | $ | 3 |
| Interest rate swaps | | $ | 29 | | $ | 8 | | $ | 12 | | $ | 10 |
NOTE 13 GUARANTEES
The Company provides cardmember protection plans that cover losses associated with purchased products, as well as other guarantees in the ordinary course of business that are within the scope of FASB Financial Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” (FIN 45). For the Company, FIN 45 guarantees primarily consist of card and travel protection programs, including those that (1) cancel and request replacements of lost or stolen cards, and provide for fraud liability coverage (Credit Card Registry); (2) protect eligible purchases made with the card against accidental damage or theft for up to 90 days from the date of purchase (Purchase Protection); (3) provide account protection in the event that a cardmember is unable to make payments on the account due to unforeseen hardship (Account Protection); (4) protect cardmembers against billing disputes with the merchant, primarily for non-delivery of goods and services (Merchant Protection) (e.g., usually in the event of bankruptcy or liquidation of the merchant. In the event that a dispute is resolved in the cardmember’s favor, the Company will credit the cardmember account for the amount of the purchase and will seek recovery from the merchant. If the Company is unable to collect the amount from the merchant, it will bear the loss for the amount credited to the cardmember.); and (5) indemnify cardmembers against losses due to lost baggage while traveling (Baggage Protection).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
The following table provides information related to such guarantees as of December 31:
| | | 2007 | | 2006 |
| | | Maximum | | | | | Maximum | | | |
| | | amount of | | | | amount of | | |
| | | undiscounted | | Amount | | undiscounted | | Amount |
| | | future | | of related | | future | | of related |
| | | payments(a) | | liability(b) | | payments(a) | | liability(b) |
| Type of Guarantee | | (Billions) | | (Millions) | | (Billions) | | (Millions) |
| Card and travel operations(c) | | $ | 77 | | $ | 67 | | $ | 75 | | $ | 119 |
| Other(d) | | | 1 | | | 48 | | | 1 | | | 34 |
| Total | | $ | 78 | | $ | 115 | | $ | 76 | | $ | 153 |
| (a) | | Calculated using Management’s best estimate of maximum exposure under the hypothetical scenario that all eligible claims (out of total billed business volumes) occur within the next 12 months. The Merchant Protection guarantee is calculated using Management’s best estimate of maximum exposure based on all eligible claims as measured against annual billed business volumes. |
| |
| (b) | | Included as part of other liabilities on the Company’s Consolidated Balance Sheets. The decrease in the liability from December 31, 2006 to December 31, 2007, results substantially from a reduction in merchant-related reserves primarily related to the airline industry. |
| |
| (c) | | Includes Credit Card Registry, Merchandise Protection, Account Protection, Merchant Protection and Baggage Protection. The Company generally has no collateral or other recourse provisions related to these guarantees. |
| |
| (d) | | Other primarily relates to real estate, tax, and Visa settlement indemnifications as well as contingent consideration obligations, among other guarantees provided in the ordinary course of business. |
NOTE 14 COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are involved in a number of legal and arbitration proceedings, including class actions, concerning matters arising in connection with the conduct of their respective business activities. The Company believes it has meritorious defenses to each of these actions and intends to defend them vigorously. In the course of its business, the Company and its subsidiaries are also subject to governmental examinations, information gathering requests, subpoenas, inquiries and investigations. The Company believes that it is not a party to, nor are any of its properties the subject of, any pending legal, arbitration, regulatory, tax or investigative proceedings that would have a material adverse effect on the Company’s consolidated financial condition or liquidity. However, it is possible that the outcome of any such proceedings could have a material impact on results of operations in any particular reporting period as the proceedings are resolved.
On November 7, 2007, the Company announced that it entered into an agreement with Visa Inc., Visa USA, and Visa International (collectively Visa) to remove Visa and certain of its member banks as defendants in the Company’s lawsuit against MasterCard International, Inc. (MasterCard), Visa and their member banks. The lawsuit alleges MasterCard, Visa and their member banks illegally blocked the Company from thebank-issued card business in the United States. The agreement has been approved by Visa USA’s member banks.
Under terms of the settlement agreement reached with Visa, the Company will receive an aggregate maximum payment of $2.25 billion. The initial amount due March 31, 2008, of $1.13 billion ($700 million after-tax) was recorded as a gain in the fourth quarter of 2007. The remaining payments, payable in installments of up to $70 million ($43 million after-tax) per quarter over the next four years, are subject to achieving certain quarterly performance criteria within the U.S. Global Network Services business the Company is optimistic it will achieve.Given the performance criteria associated with the installment payments, the Company will recognize these payments in income when the performance criteria is achieved. Related to the settlement, the Company recognized litigation expense of $74 million ($46 million after-tax). Both the Visa settlement gain and the related litigation expense are included in other, net expenses within continuing operations in the Consolidated Statements of Income and within the Corporate & Other segment.
The Company also has contingent obligations to make payments under contractual agreements entered into as part of the ongoing operation of the Company’s business, primarily with co-brand partners. The contingent obligations under such arrangements were approximately $4.3 billion as of December 31, 2007.
The Company leases certain facilities and equipment under noncancelable and cancelable agreements. Total rental expense amounted to $300 million, $297 million, and $353 million in 2007, 2006, and 2005, respectively. At December 31, 2007, the minimum aggregate rental commitment under all noncancelable operating leases (net of subleases of $28 million) was:
| (Millions) | | |
| 2008 | | $ | 247 |
| 2009 | | | 232 |
| 2010 | | | 199 |
| 2011 | | | 162 |
| 2012 | | | 150 |
| Thereafter | | | 1,688 |
| Total | | $ | 2,678 |
Obligations under capital leases or other similar arrangements entered into by the Company are not material.
During 2005, the Company completed sale-leaseback transactions on several of its owned properties which were sold at fair value. These transactions are included in total operating lease obligations. For 2005, the proceeds totaled $172 million, and pretax gains, net of closing costs, were $46 million. The pretax gains have been deferred and are amortized over the ten-year term of the operating leasebacks as a reduction to rental expense.
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AMERICAN EXPRESS COMPANY
A 2004 sale-leaseback transaction has been accounted for as a financing because of certain terms contained in the lease agreement. The $95 million in proceeds from this transaction has been classified as long-term debt, and the balance was $90 million and $92 million as of December 31, 2007 and 2006, respectively. At December 31, 2007, the Company’s minimum aggregate rental commitment under this transaction is approximately $6 million per annum from 2007 through 2012 and $13 million thereafter.
There were no sale-leaseback transactions in 2007 or 2006.
NOTE 15 FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, “Disclosures About Fair Value of Financial Instruments”, requires the disclosure of the estimated fair value of financial instruments. A financial instrument is defined as cash, evidence of an ownership in an entity, or a contract between two entities to deliver cash or another financial instrument or to exchange other financial instruments. The disclosure requirements of SFAS No. 107 exclude leases, affiliate investments, pension and benefit obligations, insurance contracts, and all non-financial instruments.
The following table discloses fair value information for the Company’s financial instrumentassets and liabilities, included in the scope of SFAS No. 107, as of December 31:
| (Billions) | | 2007 | | 2006 |
| | | Carrying | | Fair | | Carrying | | Fair |
| | | Value | | Value | | Value | | Value |
| Financial Instrument Assets: | | | | | | | | | | | | |
| Assets for which carrying values equal or approximate fairvalue | | $ | 71 | | $ | 71 | | $ | 63 | | $ | 64 |
| Loans | | $ | 53 | | $ | 54 | | $ | 43 | | $ | 43 |
| Financial Instrument Liabilities: | | | | | | | | | | | | |
| Liabilities for whichcarrying values equalor approximate fairvalue | | $ | 59 | | $ | 58 | | $ | 53 | | $ | 53 |
| Long-term debt | | $ | 55 | | $ | 54 | | $ | 43 | | $ | 43 |
The fair values of these financial instruments are estimates based upon market conditions and perceived risks as of December 31, 2007 and 2006 and require management judgment. These figures may not be indicative of their future fair values. The fair value of the Company cannot be estimated by aggregating the amounts presented.
The following methods were used to determine estimated fair values.
FINANCIAL INSTRUMENT LIABILITIES FOR WHICH CARRYING VALUES EQUAL OR APPROXIMATE FAIR VALUE
Financial assets for which carrying values equal or approximate fair values include cash and cash equivalents, cardmember receivables, accrued interest, and certain other assets. For these assets, the carrying values approximate fair value because these are short-term in duration or variable rate in nature.
Investments
Investments are recorded at fair value on the Consolidated Balance Sheets with unrealized gains and losses recorded in accumulative other comprehensive income (loss) or earnings depending upon the classification of securities as Available-for-Sale or Trading. The recognized gains and losses are recognized in the Consolidated Statements of Income upon disposition of the securities or when management determines that a decline in value is other-than-temporary. See Note 4 for carrying and fair value information regarding investments.
Derivative Financial Instruments
Derivative financial instruments are recorded at fair value on the Consolidated Balance Sheets, with gains and losses recognized in the Consolidated Statements of Income or Consolidated Balance Sheets based upon the nature of the derivative. See Note 12 for fair value information regarding derivative financial instruments.
Interest - Only Strip
The Interest-only strip is also recorded at fair value on the Consolidated Balance Sheets, with gains and losses recognized in the Consolidated Statements of Income. See Note 6 for additional information regarding the Interest-only strip.
LOANS
For variable-rate loans that reprice within one year and for which there has been no significant change in counterparties’ creditworthiness, fair values approximate carrying values. The fair values of all other loans are estimated using a discounted cash flow analysis, based on current interest rates for loans with similar terms to borrowers of similar credit quality. For collateral-dependent loans with significant credit deterioration, fair values are based on estimates of collateral values.
FINANCIAL INSTRUMENT LIABILITIES FOR WHICH CARRYING VALUES EQUAL OR APPROXIMATE FAIR VALUE
Financial liabilities for which carrying values equal or approximate fair values include accrued interest, customers’ deposits, Travelers Cheques outstanding, investment certificate reserves, short-term debt, and certain other liabilities. For these liabilities, the carrying values approximate fair value because these are short-term in duration, variable rate in nature, or have no defined maturity.
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AMERICAN EXPRESS COMPANY
LONG-TERM DEBT
For long-term debt, fair value is estimated using either quoted market prices or discounted cash flows based on the Company’s current borrowing rates for similar types of borrowing. For variable-rate long-term debt that reprices within one year, fair value approximates carrying value.
See Note 13 for discussion of carrying and fair value information regarding guarantees.
NOTE 16 SIGNIFICANT CREDIT CONCENTRATIONS
Concentrations of credit risk exist when changes in economic, industry or geographic factors similarly affect groups of counterparties whose aggregate credit exposure is material in relation to American Express’ total credit exposure. The Company’s customers operate in diverse industries, economic sectors and geographic regions.
The following table details the Company’s maximum credit exposure by category, including the credit exposure associated with derivative financial instruments, at December 31:
| (Billions, except percentages) | | 2007 | | 2006 |
| On-balance sheet: | | | | | | |
| Individuals(a) | | $ | 86 | | $ | 74 |
| Financial institutions(b) | | | 16 | | | 10 |
| U.S. Government and agencies(c) | | | 12 | | | 12 |
| All other(d) | | | 13 | | | 13 |
| Total on-balance sheet(e) | | $ | 127 | | $ | 109 |
| | | | | | | |
| Unused lines-of-credit-individuals(f) | | $ | 265 | | $ | 220 |
| (a) | Individuals primarily include cardmember loans and receivables. |
| |
| (b) | Financial institutions primarily include debt obligations of banks, broker-dealers, insurance companies and savings and loan associations. |
| |
| (c) | U.S. Government and agencies represent debt obligations of the U.S. Government and its agencies, states and municipalities, and government sponsored entities. |
| |
| (d) | All other primarily includes cardmember receivables from other corporate institutions. |
| | |
| (e) | Certain distinctions between categories require management judgment. |
| | |
| (f) | Because charge card products have no preset spending limit, the associated credit limit on cardmember receivables is not quantifiable. Therefore, the quantified unused line-of-credit amounts only includes the approximate credit line available on cardmember loans (including both on-balance sheet loans and loans previously securitized). |
At December 31, 2007, the Company’s most significant concentration of credit risk was with individuals, including cardmember receivables and loans. These amounts are generally advanced on an unsecured basis. However, the Company reviews each potential customer’s credit application and evaluates the applicant’s financial history and ability and willingness to repay. The Company also considers credit performance by customer tenure, industry, and geographic location in managing credit exposure. The following table details the Company’s cardmember lending and receivables exposure (includingunused lines-of-credit on cardmember lending) in the United States and International, at December 31:
| (Billions, except percentages) | | 2007 | | 2006 |
| On-balance sheet: | | | | | | |
| United States | | $ | 71 | | $ | 60 |
| International | | | 24 | | | 21 |
| On-balance sheet(a) | | $ | 95 | | $ | 81 |
| | | | | | | |
| Unused lines-of-credit-individuals: | | | | | | |
| United States | | $ | 215 | | $ | 180 |
| International | | | 50 | | | 40 |
| Total | | $ | 265 | | $ | 220 |
| (a) | | Represents cardmember loans to individuals as well as receivables from individuals and corporate institutions as discussed in footnotes (a) and (d) from the previous table. |
EXPOSURE TO AIRLINE INDUSTRY
Many industry analysts and some carriers have indicated that there could be significant consolidation in the airline industry in 2008, particularly in the United States. The Company would not expect consolidation to have any significant effect on its merchant relationships with the airlines. However, airlines are also some of the most important and valuable partners in the Company’s Membership Rewards program. If a participating airline merged with an airline that did not participate in Membership Rewards, the combined airline would have to determine whether or not to continue participation. Similarly, if one of the Company’s co-brand airline partners merged with an airline that had a competing co-brand card, the combined airline would have to determine which co-brand cards it would offer. If a surviving airline determined to withdraw from Membership Rewards or to cease offering an American Express co-brand card, the Company’s business could be adversely affected. The Company has multiple co-brand relationships and rewards partners. The Company’s largest airline co-brand partner is Delta Air Lines (Delta). American Express’ Delta SkyMiles Credit Card co-brand portfolio accounts for approximately 5 percent of the Company’s worldwide billed business and less than 15 percent of worldwide cardmember lending receivables.
Historically, the Company has not experienced significant revenue declines when a particular airline scales back or ceases operations due to a bankruptcy or other financial challenges. This is because volumes generated by that 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.” 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, a potential credit exposure is created for the Company. This credit
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AMERICAN EXPRESS COMPANY
exposure is included in the maximum amount of undiscounted future payments disclosed in Note 13. Historically, even for an airline that is operating under bankruptcy protection, this type of exposure has not generated any significant losses for the Company. 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’s decision to file for protection under Chapter 11 of the Bankruptcy Code during 2005, the Company lent funds to Delta as part of Delta’s post-petition, debtor-in-possession financing under the Bankruptcy Code. At December 31, 2006, the remaining principal balance under this facility was $176 million. Delta received final approval for its reorganization plan and emerged from bankruptcy on April 30, 2007, and repaid the entire principal and interest outstanding at that time.
NOTE 17 STOCK PLANS
STOCK OPTION AND AWARD PROGRAMS
Under the 2007 Incentive Compensation Plan and previously under the 1998 Incentive Compensation Plan (the Plans), awards may be granted to officers and other key individuals who perform services for the Company and its participating subsidiaries. These awards may be in the form of stock options, restricted stock awards or units(RSAs), portfolio grants (PGs), and similar awards designed to meet the requirements of non-U.S. jurisdictions. The Company also has options that remain outstanding pursuant to a Directors’ Stock Option Plan that expired in 2003.
For the Company’s Plans, there were a total of 52 million, 66 million, and 71 million common shares unissued and available for grant at December 31, 2007, 2006, and 2005, respectively, as authorized by the Company’s Board of Directors and shareholders.
The Company granted a special stock option award to its Chief Executive Officer (CEO) in November 2007 that has performance-based and market-based conditions. This option award is separately described in the Stock Options with Performance-Based and Market-Based Conditions section below and is excluded from the information and tables presented in the following paragraphs.
A summary of stock option and RSA activity as of December 31, 2007, and changes during the year are presented below:
| (Shares in thousands) | | Stock Options | | RSAs |
| | | | | | Weighted | | | | | Weighted |
| | | | | | Average | | | | | Average |
| | | | | | Exercise | | | | | Grant |
| | | Shares | | | Price | | Shares | | | Price |
| Outstanding at December 31, 2006 | | 97,310 | | | $ | 37.60 | | 8,474 | | | $ | 45.87 |
| Granted | | 8,520 | | | $ | 57.93 | | 3,232 | | | $ | 57.89 |
| Exercised/vested | | (17,996 | ) | | $ | 34.80 | | (3,502 | ) | | $ | 41.91 |
| Forfeited/expired | | (2,628 | ) | | $ | 46.71 | | (681 | ) | | $ | 51.07 |
| Outstanding at December 31, 2007(a) | | 85,206 | | | $ | 39.93 | | 7,523 | | | $ | 52.38 |
| Options exercisable at December 31, 2007(a) | | 68,880 | | | $ | 36.82 | | | | | | |
| (a) | | At December 31, 2007, stock options outstanding and stock options exercisable had exercise prices ranging from $24.04 to $60.95 and $24.04 to $58.62, respectively. |
STOCK OPTIONS
Each stock option has an exercise price equal to the market price of the Company’s common stock on the date of grant and a contractual term of 10 years from the date of grant. Vesting provisions relating to stock options are as follows:
| Grant Year | | Vesting Provisions |
| 2003 and after | | Generally vest ratably at 25 percent per year beginning with the first anniversary of the grant date |
| |
| 2002 | | Generally vest ratably at 33 1/3 percent per year beginning with the first anniversary of the grant date |
| |
| 2001 | | Generally vest ratably at 33 1/3 percent per year beginning with the second anniversary of the grant date |
The weighted-average remaining contractual life and intrinsic value (the amount by which the fair value of the Company’s stock exceeds the exercise price of the option) of the stock options outstanding and exercisable as of December 31, 2007, were as follows:
| | | Outstanding | | Exercisable |
| Aggregate intrinsic value(millions) | | $ | 1,077 | | $ | 1,047 |
| Weighted-average remaining contractual life(years) | | | 4.3 | | | 3.4 |
The intrinsic value for options exercised during 2007, 2006, and 2005 was $463 million, $661 million, and $455 million, respectively(based upon the fair value of the Company’s stock at the date of exercise).
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AMERICAN EXPRESS COMPANY
The fair value of each option is estimated on the date of grant using a Black-Scholes-Merton option-pricing model.The following weighted-average assumptions are used for grants in 2007, 2006, and 2005, the majority of which were granted in the beginning of each year:
| | | 2007 | | 2006 | | 2005 | |
| Dividend yield | | | 1.0 | % | | 0.9 | % | | 0.9 | % |
| Expected volatility | | | 19 | % | | 23 | % | | 24 | % |
| Risk-free interest rate | | | 4.8 | % | | 4.3 | % | | 3.6 | % |
| Expected life ofstock option(years) | | | 4.7 | | | 4.6 | | | 4.5 | |
| Weighted-average fairvalue per option | | $ | 13.39 | | $ | 12.76 | | $ | 12.59 | |
The dividend yield assumes that the current dividend payout will continue with no anticipated changes. The expected volatility is based on weighted historical and implied volatilities of the Company’s common stock price. The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur.
Stock Options with Performance-Based and Market-Based Conditions
On November 30, 2007, the Compensation and Benefits Committee of the Board of Directors (the CBC) approved and granted to the Company’s CEO a specialnon-qualified stock optionaward with performance-based and market-based conditions. The grant is for 1,375,000 shares with an exercise price per share of $58.98 and a contractual term of 10 years from date of grant. The grant consists of four separate components, each allocated 25 percent of the total shares granted that individually cliff vest at the end of 6 years based on a specified performance-based or market-based metric being achieved for each component. Each component may individually pro-rata vest between years 4 and 6 if the Company’s CEO retires during that period and the specified six-year performance or market metric is subsequently achieved.
Performance-Based Conditions
Three of the stock award components have performance-based conditions that individually vest based on Company performance measured by revenue growth, earnings per share growth, or return on equity performance over the vesting period. Compensation expense for the fair value of each of these three components will be recognized over the six-year vesting period when it is determined it is probable (as defined by SFAS 123(R)) the specific performance metric for the component will be achieved.
The fair value of each performance-based option is estimated at the date of grant (November 30, 2007) using a Black-Scholes-Merton option-pricing model with the following assumptions:
| | | November 30, | |
| | | 2007 | |
| Dividend yield | | | 1.2 | % |
| Expected volatility | | | 23 | % |
| Risk-free interest rate | | | 4.0 | % |
| Expected life of stock option(years) | | | 8 | |
| Fair value per option | | $ | 18.37 | |
| Aggregate fair value(millions) | | $ | 18.9 | |
Market-Based Conditions
The fourth stock award component has a market-based condition that vests based on theCompany’s total shareholder return as compared to the S&P 500 Index. Compensation expense for the fair value of this component is fixed and is recognized ratably over the six-year vesting period irrespective of the probability of the market metric being achieved as required by SFAS 123(R) for awards containing market-based conditions.
The fair value of each market-based optionis estimated at the date of grant (November 30, 2007) using a Monte Carlo Valuation model with the following assumptions:
| | | November 30, | |
| | | 2007 | |
| Dividend yield | | | 1.2 | % |
| Expected volatility – Company | | | 27 | % |
| Expected volatility – S&P 500 Index | | | 16 | % |
| Risk-free interest rate | | | 4.6 | % |
| Expected life ofstock option(years) | | | 8 | |
| Fair value per option | | $ | 17.25 | |
| Aggregate fair value(millions) | | $ | 5.9 | |
On January 31, 2008, the CBC approved and granted to the Company’s CEO a second special grant of non-qualified stock optionaward with performance-based and market-based conditions. The number of shares underlying the option award, terms, and performance-based and market-based conditions are the same as the optionaward granted on November 30, 2007, except that the exercise price per share is $49.13.
RESTRICTED STOCK AWARDS
RSAs granted in 2003 and thereafter vest ratably, substantially all at 25 percent per year, beginning with the first anniversary of the grant date. RSAs granted prior to 2003 generally cliff vest 4 years after the grant date.
The aggregate intrinsic value of outstanding RSAs as of December 31, 2007, was approximately $391 million. The total fair value of shares vested during 2007, 2006, and 2005 was $203 million, $176 million, and $290 million, respectively.
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AMERICAN EXPRESS COMPANY
PORTFOLIO GRANTS
The Company awards cash-settled PGs that earn value based on the Company’s financial performance and the Company’s total shareholder return versus that of the S&P 500 Index (for PGs granted prior to 2006, the S&P Financial Index was used).These awards vest after a three-year performance period and are subject to adjustments and approval by management and the CBC. The PGs are classified as liabilities and, therefore, the fair value is estimated at the date of grant and updated quarterly and recognized over the performance period. Cash paid upon vesting of PGs was $55 million, $56 million, and $66 million in 2007, 2006 and 2005, respectively.
SUMMARY OF STOCK PLAN EXPENSE
The components of the Company’s pretax stock-based compensation expense (net of cancellations) and associated income tax benefit are as follows:
| (Millions) | | 2007 | | 2006 | | 2005 |
| Restricted stock awards(a) | | $ | 135 | | $ | 137 | | $ | 129 |
| Stock options(b) | | | 78 | | | 80 | | | 77 |
| Portfolio grants(c) | | | 62 | | | 54 | | | 24 |
| Performance/market-based stockoptions and other(d) | | | 1 | | | 4 | | | 2 |
| Total compensation expense,pretax | | $ | 276 | | $ | 275 | | $ | 232 |
| Income tax benefit | | $ | 96 | | $ | 96 | | $ | 81 |
| (a) | As of December 31, 2007, the total unrecognized compensation cost related to unvested RSAs was $241 million. This cost is recognized on a straight-line basis over the weighted-average remaining vesting period of 2.4 years. |
| |
| (b) | As of December 31, 2007, the total unrecognized compensation cost related to unvested options was $132 million. This cost is recognized on a straight-line basis over the weighted-average remaining vesting period of 2.5 years. |
| |
| (c) | 2005 expense represents PG expenses subsequent to July 1, 2005, when as a result of the adoption of SFAS No. 123(R), these awards were accounted for as stock-based compensation. PG expense for the first six months of 2005 was $23 million. |
| |
| (d) | As of December 31, 2007, the total unrecognized compensation cost related to performance-based and market-based options was $18.9 million and $5.8 million, respectively. |
NOTE 18 RETIREMENT PLANS
The Company sponsors defined benefit pension plans, defined contribution plans and defined benefit post-employment benefit plans for its employees. The following table provides a summary of the total cost related to these plans:
| (Millions) | | 2007 | | 2006 | | 2005 |
| Defined benefit pension plancost(a) | | $ | 28 | | $ | 124 | | $ | 112 |
| Defined contribution plan cost(a) | | | 173 | | | 106 | | | 109 |
| Defined benefit post-employmentplan cost | | | 31 | | | 39 | | | 35 |
| Net periodic benefit cost | | $ | 232 | | $ | 269 | | $ | 256 |
| (a) | Amendments to the U.S. defined benefit and defined contribution plans were effective in the third quarter of 2007. These amendments are further described in the next paragraph. |
In January 2007, the Company approved amendments to the American Express Retirement Plan (the Plan) and the Supplemental Retirement Plan (the SRP) effective July 1, 2007, which provided that active participants immediately vested in their accrued benefits, but no longer accrue future benefits other than interest credits under the plans. As a result of this action, there was a net reduction in the projected benefit obligation of $91 million and a related curtailment gain of $63 million ($39 million after-tax) on the date the plan amendment was approved. As a result of these changes, the Company has modified the existing defined contribution plan in the United States to provide for greater Company contributions as further described in the “Defined Contribution Retirement Plan” section of this note.
The following sections provide additional information relating to each of these benefit arrangements.
DEFINED BENEFIT PENSION PLANS
The Company sponsors the Plan for eligible employees in the United States. The Plan is a noncontributory defined benefit plan and was amended effective July 1, 2007. The Plan is a qualified plan under the Employee Retirement Income Security Act of 1974, as amended (ERISA). Under the Plan, the cost of retirement benefits is measured by length of service, compensation and other factors. These benefits are funded through a trust and the Company’s funding of retirement costs complies with the applicable minimum funding requirements specified by ERISA. The funded status of the Plan on an ERISA basis for the years ended 2007 and 2006 was 120 percent and 113 percent, respectively. The Plan is a cash balance plan and employees’ accrued benefits are based on notional account balances, which are maintained for each individual. Employees’ balances are credited daily with interest at a fixed-rate that is updated each January 1 and is based on the average of the daily five-year U.S. Treasury Note yields for the previous October 1 through November 30. The interest rate varies from a minimum of 5 percent to a maximum equal to the lesser of (1) 10 percent or (2) the annual maximum interest rate set by the U.S. government for determining lump-sum values. Prior to the amendment as of July 1, 2007, these balances were also credited each pay period with an amount determined by an employee’s age, years of service, and compensation as defined by the Plan (primarily base pay, certain incentive pay and commissions, shift differential, and overtime). Employees and their beneficiaries have the option to receive annuity payments upon retirement or a lump-sum payout at vested termination, death, disability or retirement.
The Company also sponsors an unfunded non-qualified SRP for employees compensated above a certain level to supplement their pension benefits that are limited by the Internal Revenue Service. The SRP is a supplemental plan that was also amended as of July 1, 2007, and its terms generally parallel those of the
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AMERICAN EXPRESS COMPANY
Plan but the SRP’s definition of compensation and payment options differ.
Most employees outside the United States are covered by local retirement plans, some of which are funded, while other employees receive payments at the time of retirement or termination under applicable labor laws or agreements. The Company complies with the minimum funding requirements in all countries.
Effective July 2006, the Company amended its U.K. pension plans. Employees who were participating in the existing U.K. defined benefit plans were given a choice between remaining in the plans and making contributions toward their benefits or moving to the new defined contribution plan. Participants who chose to move no longer accrue benefits under these plans as of July 1, 2006. There was no gain or loss as a result of this change and the overall impact to the projected benefit obligation was minimal.
The Company measures the obligations and related asset values for its pension and other postretirement benefit plans as of September 30th of each year. SFAS No. 158 requires the measurement date for the benefit obligation and plan assets to be the Company’s fiscal year end for years ending after December 15, 2008. The Company will implement this change in 2008 by using a September 30, 2007 measurement date to estimate 2008 pension and other employee benefit plan costs and will revalue the benefit obligation and plan assets at December 31, 2008 for year-end 2008 reporting purposes.
Accumulated Other Comprehensive Loss
Upon adoption of SFAS No. 158 at December 31, 2006, the Company recorded additional liabilities of $39 million in other liabilities, a reduction of pension assets of $416 million in other assets and a $310 million charge to shareholders’ equity, net of a deferred income tax benefit of $145 million, related to its defined benefit pension plans which resulted in the net funded status of the Company’s plans being recorded on the balance sheet. For each plan, the funded status is defined by SFAS No. 158 as the difference between the fair value of plan assets (for funded plans) and the respective plan’s projected benefit obligation. The projected benefit obligation represents a liability based on the plan participant’s service to date and their expected future compensation at their projected retirement date. The $310 million charge to shareholders’ equity, net of tax, represents all previously unrecognized amounts (e.g. unrecognized gains and losses and prior service cost) which were reflected in accumulated other comprehensive income(loss) in the one-time cumulative effect adjustment described above. Changes in unrecognized gains and losses and prior service cost occurring subsequent to adoption of SFAS No. 158 are recognized in other comprehensive income, net of tax, in the periods in which they occur.
The following table provides the items comprising the amount in accumulated other comprehensive loss, which are not yet recognized as a component of net periodic pension benefit cost as of December 31:
| (Millions) | | 2007 | | | 2006 | (a) |
| Net actuarial loss | | $ | 123 | | | $ | 472 | |
| Net prior service cost | | | 2 | | | | 13 | |
| Total, pretax effect | | | 125 | | | | 485 | |
| Tax impact | | | (32 | ) | | | (156 | ) |
| Total, net of taxes | | $ | 93 | | | $ | 329 | |
| (a) | 2006 includes the $310 million charge to shareholders’ equity as a result of the adoption of SFAS No. 158. |
The estimated portion of the net actuarial loss and net prior service cost above that is expected to be recognized as a component of net periodic pension benefit cost in 2008 is $20 million and nil, respectively. For 2007, excluded from the table above is $(2) million of net change in accumulated other comprehensive income related to AEB discontinued operations.
The following table details the amounts recognized in other comprehensive loss in 2007:
| (Millions) | | 2007 | |
| Net actuarial loss: | | | | |
| Reclassified to earnings from equity | | $ | (40 | ) |
| Gains in current year | | | (297 | ) |
| Recognized as a result of settlements | | | 6 | |
| Recognized as a result of curtailment | | | (18 | ) |
| Net actuarial loss | | | (349 | ) |
| Net prior service cost: | | | | |
| Reclassified to earnings from equity | | | (2 | ) |
| Losses in current year | | | 2 | |
| Recognized as a result of curtailment | | | (11 | ) |
| Net prior service cost | | | (11 | ) |
| Total, pretax | | $ | (360 | ) |
Plan Assets and Obligations
The following tables provide a reconciliation of the changes in the plans’ projected benefit obligation, the fair value of assets and the net funded status for all plans:
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AMERICAN EXPRESS COMPANY
| Reconciliation of Change in Projected | | | | | | | | |
| Benefit Obligation | | | | | | | | |
| (Millions) | | 2007 | | | 2006 | |
| Projected benefit obligation, October | | | | | | | | |
| 1 prior year | | $ | 2,619 | | | $ | 2,349 | |
| Service cost | | | 93 | | | | 115 | |
| Interest cost | | | 138 | | | | 126 | |
| Benefits paid | | | (52 | ) | | | (54 | ) |
| Actuarial (gain) loss | | | (163 | ) | | | 35 | |
| Plan amendments | | | 2 | | | | — | |
| Settlements/curtailments | | | (185 | ) | | | (95 | ) |
| Foreign currency exchange rate | | | | | | | | |
| changes | | | 28 | | | | 143 | |
| Projected benefit obligation at | | | | | | | | |
| September 30, | | $ | 2,480 | | | $ | 2,619 | |
| |
| Reconciliation of Change in Fair Value | | | | | | | | |
| of Plan Assets | | | | | | | | |
| (Millions) | | 2007 | | | 2006 | |
| Fair value of plan assets, October 1 | | | | | | | | |
| prior year | | $ | 2,383 | | | $ | 2,122 | |
| Actual return on plan assets | | | 304 | | | | 231 | |
| Employer contributions | | | 29 | | | | 44 | |
| Benefits paid | | | (52 | ) | | | (54 | ) |
| Settlements | | | (93 | ) | | | (95 | ) |
| Foreign currency exchange rate | | | | | | | | |
| changes | | | 22 | | | | 135 | |
| Fair value of plan assets at | | | | | | | | |
| September 30, | | $ | 2,593 | | | $ | 2,383 | |
| |
| Net Funded Status | | | | | | | | |
| (Millions) | | 2007 | | | 2006 | |
| Funded status at September 30, | | $ | 113 | | | $ | (236 | ) |
| Fourth quarter contributions | | | 4 | | | | 4 | |
| Net amount recognized at | | | | | | | | |
| December 31, | | $ | 117 | | | $ | (232 | ) |
| | |
| The following table provides the amounts recognized on the Consolidated Balance Sheets as of December 31: | |
| |
| (Millions) | | 2007 | | | 2006 | |
| Other liabilities | | $ | (199 | ) | | $ | (256 | ) |
| Other assets | | | 316 | | | | 24 | |
| Net amount recognized at | | | | | | | | |
| December 31, | | $ | 117 | | | $ | (232 | ) |
Benefit Obligations
The accumulated benefit obligation is the present value of benefits earned to date by plan participants computed based on current compensation levels as contrasted to the projected benefit obligation, which is the present value of benefits earned to date by plan participants based on their expected future compensation at their projected retirement date. The unvested portion of the accumulated benefit obligation is minimal.
The accumulated benefit obligation for all pension plans was $2.4 billion at September 30, 2007 and 2006. The accumulated benefit obligation and fair value of plan assets for pension plans where the accumulated benefit obligation exceeds the fair value of plan assets (primarily unfunded international plans and the SRP) was $205 million and $22 million, respectively, as of September 30, 2007 and $205 million and $17 million, respectively, as of September 30, 2006.
The projected benefit obligation for all pension plans was $2.5 billion and $2.6 billion at September 30, 2007 and 2006, respectively. The projected benefit obligation and fair value of plan assets for where the projected benefit obligation exceeds the fair value of plan assets was $224 million and $22 million, respectively, at September 30, 2007 and $1.5 billion and $1.2 billion, respectively, at September 30, 2006.
Net Periodic Pension Benefit Cost
SFAS No. 87, “Employers’ Accounting for Pensions” (SFAS No. 87), provides for the delayed recognition of the net actuarial loss and the net prior service cost remaining in accumulated other comprehensive income (loss).
Service cost is the component of net periodic benefit cost which represents the current value of benefits earned by an employee during the period. Net periodic benefit cost also includes the estimated interest incurred on the outstanding projected benefit obligation during the period.
A plan amendment that retroactively increases benefits is recognized as an increase to the projected benefit obligation and a corresponding charge to other comprehensive income, net of tax, at the date of the amendment. The related costs (prior service costs) are amortized as a component of net periodic pension benefit cost on a straight-line basis over the average remaining service period of active participants.
Actuarial gains and losses that are not recognized immediately as a component of net periodic pension cost are recognized as increases or decreases in accumulated other comprehensive income, net of tax, as they arise. Cumulative net actuarial loss included in accumulated other comprehensive income (loss) which exceeds 10 percent of the greater of the projected benefit obligation and the estimated market value of plan assets are amortized over the average remaining service period of active participants.
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AMERICAN EXPRESS COMPANY
The components of the net periodic pension benefit cost for all defined benefit pension plans are as follows:
| (Millions) | | 2007 | | | 2006 | | | 2005 | |
| Service cost | | $ | 89 | | | $ | 109 | | | $ | 104 | |
| Interest cost | | | 126 | | | | 115 | | | | 109 | |
| Expected return on plan assets | | | (155 | ) | | | (138 | ) | | | (131 | ) |
| Amortization of prior service | | | | | | | | | | | | |
| costs | | | 1 | | | | 1 | | | | 1 | |
| Recognized net actuarial loss | | | 35 | | | | 36 | | | | 25 | |
| Settlements/curtailment (gain) | | | | | | | | | | | | |
| loss | | | (68 | ) | | | 1 | | | | 4 | |
| Net periodic pension benefit cost | | $ | 28 | | | $ | 124 | | | $ | 112 | |
Assumptions
The weighted average assumptions used to determine benefit obligations were:
| | | 2007 | | | 2006 | |
| Discount rates | | 5.8 | % | | 5.2 | % |
| Rates of increase in compensation levels | | 4.2 | % | | 4.1 | % |
The weighted average assumptions used to determine net periodic pension benefit cost were:
| | | 2007 | | | 2006 | | | 2005 | |
| Discount rates | | 5.2 | % | | 5.1 | % | | 5.6 | % |
| Rates of increase in compensation levels | | 4.1 | % | | 4.3 | % | | 4.1 | % |
| Expected long-term rates of return | | | | | | |
| on assets | | 7.8 | % | | 7.8 | % | | 7.9 | % |
The Company assumes a long-term rate of return on assets on a weighted average basis. In developing this assumption, management evaluates historical returns on plan assets as well as benchmark information including projections of asset class returns and long-term inflation.
The discount rate assumptions for the Company’s material plans (U.S. and U.K.) are determined by using a model consisting of bond portfolios that match the cash flows of the plan’s projected benefit payments based on the plan participant’s service to date and their expected future compensation. Use of the rate produced by this model generates a projected benefit obligation that equals the current market value of a portfolio of high-quality zero coupon bonds whose maturity dates and amounts match the timing and amount of expected future benefit payments.
Asset Allocation
The asset allocation for the Company’s pension plans at September 30, 2007 and 2006, and the target allocation for 2008, by asset category, are below. Actual allocations generally will be within 5 percent of these targets.
| | | Target | | | Percentage of | |
| | | Allocation | | | Plan assets at | |
| | | 2008 | | | 2007 | | | 2006 | |
| Equity securities | | 52 | % | | 55 | % | | 67 | % |
| Debt securities | | 40 | % | | 27 | % | | 27 | % |
| Other | | 8 | % | | 18 | % | | 6 | % |
| Total | | 100 | % | | 100 | % | | 100 | % |
The Company invests in a diversified portfolio to ensure that adverse or unexpected results from a security class will not have a detrimental impact on the entire portfolio. The portfolio is diversified by asset type, risk characteristics and concentration of investments. Asset classes and ranges considered appropriate for investment of each plan’s assets are determined by the plan’s investment committee. The asset classes typically include domestic and foreign equities, emerging market equities, domestic and foreign investment grade and high-yield bonds and domestic real estate. Given the January 2007 plan amendments described above, 25 percent of the assets of the U.S. Plan were temporarily transferred from equity securities to cash (other) and will be re-allocated to debt securities in 2008. This decreased the overall amount of assets allocated to equities by 12 percent and increased other by the same amount in 2007.
Benefit Payments
The Company’s retirement plans expect to make benefit payments to retirees as follows:
| | | | | | | | | | | | | | | | | | 2013 |
| (Millions) | | 2008 | | 2009 | | 2010 | | 2011 | | 2012 | | –2017 |
| Expected | | | | | | | | | | | | | | | | | | |
| payments | | $ | 133 | | $ | 145 | | $ | 147 | | $ | 152 | | $ | 161 | | $ | 942 |
In addition, the Company expects to contribute $18 million to its pension plans in 2008.
DEFINED CONTRIBUTION RETIREMENT PLANS
The Company sponsors defined contribution retirement plans, the principal plan being the Retirement Savings Plan (RSP) (formerly the ISP), a 401(k) savings plan with a profit sharing component. The RSP is a qualified plan under ERISA and covers most employees in the United States. Under the terms of the RSP, employees have the option of investing up to 10 percent of their contributions in the American Express Company Stock Fund, which invests primarily in the Company’s common stock, through accumulated payroll deductions. Employees are restricted from transferring balances into this fund if the balance has reached 10 percent of the employees’ total account balance. The RSP held 15 million and 16 million shares of American Express Common Stock at December 31, 2007 and 2006, respectively, beneficially for employees. In conjunction with the amendments to the Plan and the SRP which occurred in 2007,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
the Company amended the RSP effective July 1, 2007.These amendments include an expanded definition of pay which includes more elements of employee compensation (total pay) as well as an increase in the Company’s matching of employees’ contributions to the plan from a maximum of 3 percent of base pay to a maximum of 5 percent of total pay. Additional annual conversion contributions of up to 8 percent of total pay will be provided into the RSP in the future for eligible employees who were hired before April 1, 2007. The Company also sponsors an unfunded non-qualified Supplemental Retirement Plan (the SRP-RSP) which was also amended during 2007, and its terms generally parallel those of the RSP.
In 2006, as part of the amendment to the U.K. pension plan, the Company established a defined contribution plan. As a result, expense and contributions related to defined contribution plans have increased in the current year as compared to previous periods.
The total expense for all defined contribution plans globally was $173 million, $106 million, and $109 million in 2007, 2006, and 2005, respectively.
OTHER POSTRETIREMENT BENEFITS PLANS
The Company sponsors unfunded defined postretirement benefit plans that provide health care and life insurance to certain retired U.S. employees.
Accumulated Other Comprehensive Loss
Upon implementation of SFAS No. 158 at December 31, 2006, the Company recorded additional liabilities of $140 million in other liabilities and an $86 million charge to shareholders’ equity, net of a deferred income tax benefit of $54 million, related to its other postretirement benefit plans which resulted in the net funded status of the Company’s plan being recorded.
The following table provides the items comprising the amount in accumulated other comprehensive loss which are not yet recognized as a component of net periodic benefit cost as of December 31:
| (Millions) | | 2007 | | | 2006 | (a) |
| Net actuarial loss | | $ | 66 | | | $ | 146 | |
| Net prior service cost | | | (4 | ) | | | (6 | ) |
| Total, pretax effect | | | 62 | | | | 140 | |
| Tax impact | | | (25 | ) | | | (54 | ) |
| Total, net of taxes | | $ | 37 | | | $ | 86 | |
| (a) | | 2006 includes the $86 million charge to shareholders’ equity as a result of the adoption of SFAS No. 158. |
The estimated portion of the net actuarial loss and net prior service credit above that is expected to be recognized as a component of net periodic benefit cost in 2008 is $4 million and $(2) million, respectively.
The following table details the amounts recognized in other comprehensive loss in 2007:
| (Millions) | | 2007 | |
| Net actuarial loss: | | | | |
| Reclassified to earnings from equity | | $ | (8 | ) |
| Gains in current year | | | (72 | ) |
| Net actuarial loss | | | (80 | ) |
| Net prior service cost: | | | | |
| Reclassified to earnings from equity | | | 2 | |
| Net prior service cost | | | 2 | |
| Total, pretax | | $ | (78 | ) |
Plan Obligations
The following table provides a reconciliation of the changes in the plans’ projected benefit obligation for all plans accounted for under SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (SFAS No. 106):
Reconciliation of Change in Projected Benefit Obligation
| (Millions) | | 2007 | | | 2006 | |
| Projected benefit obligation, October 1 | | | | | | | | |
| prior year | | $ | 376 | | | $ | 388 | |
| Service cost | | | 6 | | | | 7 | |
| Interest cost | | | 19 | | | | 20 | |
| Benefits paid | | | (23 | ) | | | (22 | ) |
| Actuarial gain | | | (66 | ) | | | (17 | ) |
| Projected benefit obligation at | | | | | | | | |
| September 30, | | $ | 312 | | | $ | 376 | |
The liabilities for the Company’s defined postretirement benefit plans recognized in the Consolidated Balance Sheets as of December 31 are included in the table below:
Reconciliation of Accrued Benefit Cost and Total Amount Recognized
| (Millions) | | 2007 | | | 2006 | |
| Funded status of the plan | | $ | (312 | ) | | $ | (376 | ) |
| Fourth quarter payments | | | 5 | | | | 7 | |
| Net amount recognized at | | | | | | | | |
| December 31, | | $ | (307 | ) | | $ | (369 | ) |
Net Periodic Benefit Cost
SFAS No. 106 provides for the delayed recognition of the net actuarial loss and the net prior service credit remaining in accumulated other comprehensive income (loss).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
The components of the net periodic benefit cost for all defined postretirement benefit plans accounted for under SFAS No. 106, are as follows:
| (Millions) | | 2007 | | | 2006 | | | 2005 | |
| Service cost | | $ | 6 | | | $ | 7 | | | $ | 6 | |
| Interest cost | | | 19 | | | | 20 | | | | 19 | |
| Amortization of prior service costs | | | (2 | ) | | | (2 | ) | | | (2 | ) |
| Recognized net actuarial loss | | | 8 | | | | 14 | | | | 12 | |
| Net periodic benefit cost | | $ | 31 | | | $ | 39 | | | $ | 35 | |
Assumptions
The weighted average assumptions used to determine benefit obligations were:
| | | 2007 | | | 2006 | |
| Discount rates | | 6.1 | % | | 5.7 | % |
| Health care cost increase rate: | | | | |
| Following year | | 9.0 | % | | 9.5 | % |
| Decreasing to the year 2016 | | 5 | % | | 5 | % |
The discount rate assumption for the Company’s unfunded defined postretirement benefit plan is determined by using a model consisting of bond portfolios that match the cash flows of the plan’s projected benefit payments. Use of the rate produced by this model generates a projected benefit obligation that equals the current market value of a portfolio of high-quality zero coupon bonds whose maturity dates and amounts match the timing and amount of expected future benefit payments.
A one percentage-point change in assumed health care cost trend rates would have the following effects:
| | | One | | One | |
| | | percentage- | | percentage- | |
| | | point increase | | point decrease | |
| (Millions) | | 2007 | | 2006 | | 2007 | | | 2006 | |
| Increase (Decrease) on benefits | | | | | | | | | | | | | | |
| earned and interest cost | | | | | | | | | | | | | | |
| for U.S. plans | | $ | 1 | | $ | 1 | | $ | (1 | ) | | $ | (1 | ) |
| Increase (Decrease) on | | | | | | | | | | | | | | |
| postretirement benefit | | | | | | | | | | | | | | |
| obligation for U.S. plans | | $ | 16 | | $ | 19 | | $ | (14 | ) | | $ | (17 | ) |
Benefit Payments
The Company’s other postretirement benefit plans expect to make benefit payments as follows:
| | | | | | | | | | | | | | | | | | 2013 |
| (Millions) | | 2008 | | 2009 | | 2010 | | 2011 | | 2012 | | –2017 |
| Expected | | | | | | | | | | | | | | | | | | |
| payments | | $ | 23 | | $ | 24 | | $ | 24 | | $ | 25 | | $ | 25 | | $ | 134 |
In addition, the Company expects to contribute $23 million to its other postretirement benefit plans in 2008.
NOTE 19 INCOME TAXES
The components of income tax expense included in the Consolidated Statements of Income on income from continuing operations were as follows:
| (Millions) | | 2007 | | | 2006 | | | 2005 | |
| Current income tax expense: | | | | | | | | | | | | |
| U.S. federal | | $ | 1,608 | | | $ | 1,082 | | | $ | 942 | |
| U.S. state and local | | | 246 | | | | 153 | | | | 96 | |
| Non-U.S. | | | 408 | | | | 302 | | | | 350 | |
| Total current income tax | | | | | | | | | | | | |
| expense | | | 2,262 | | | | 1,537 | | | | 1,388 | |
| Deferred income tax (benefit) | | | | | | | | | | | | |
| expense: | | | | | | | | | | | | |
| U.S. federal | | | (523 | ) | | | 16 | | | | (313 | ) |
| U.S. state and local | | | (22 | ) | | | (36 | ) | | | (46 | ) |
| Non-U.S. | | | (199 | ) | | | 11 | | | | (38 | ) |
| Total deferred income tax | | | | | | | | | | | | |
| benefit | | | (744 | ) | | | (9 | ) | | | (397 | ) |
| Total income tax expense on | | | | | | | | | | | | |
| continuing operations | | $ | 1,518 | | | $ | 1,528 | | | $ | 991 | |
A reconciliation of the U.S. federal statutory rate of 35 percent to the Company’s actual income tax rate for 2007, 2006, and 2005 on continuing operations was as follows:
| | | 2007 | | | 2006 | | | 2005 | |
| Combined tax at U.S. statutory | | | | | | | | | |
| federal income tax rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
| Increase (decrease) in taxes resulting | | | | | | | | | |
| from: | | | | | | | | | |
| Tax-exempt income | | (2.9 | ) | | (3.0 | ) | | (3.8 | ) |
| State and local income taxes, net of | | | | | | | | | |
| federal benefit | | 2.6 | | | 1.5 | | | 0.8 | |
| Non-U.S. subsidiaries earnings | | (5.1 | ) | | (3.9 | ) | | (3.6 | ) |
| IRS tax settlements | | (2.2 | ) | | (0.3 | ) | | (3.9 | ) |
| All other | | (0.1 | ) | | 0.4 | | | — | |
| Actual tax rates | | 27.3 | % | | 29.7 | % | | 24.5 | % |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
The Company adopted FASB Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48) as of January 1, 2007. The initial adoption of FIN 48 resulted in a charge of approximately $127 million to the January 1, 2007 balance of retained earnings and an increase in the liability for unrecognized tax benefits. The following table presents changes in the unrecognized tax benefits:
| (Millions) | | 2007 | |
| Balance, January 1 | | $ | 1,143 | |
| Increases: | | | | |
| Current year tax positions | | | 165 | |
| Tax positions related to prior years | | | 95 | |
| Effects of foreign currency translations | | | 1 | |
| Decreases: | | | | |
| Tax positions related to prior years | | | (164 | ) |
| Settlements with tax authorities | | | (126 | ) |
| Lapse of statute of limitations | | | (2 | ) |
| Balance, December 31 | | $ | 1,112 | |
Included in the $1.1 billion of unrecognized tax benefits at December 31, 2007, are approximately $597 million that, if recognized, would favorably affect the effective tax rate in a future period and relates to the Company’s gross permanent benefits and corresponding foreign tax credits and federal tax effects.
The Company is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which the Company has significant business operations. The tax years under examination and open for examination vary by jurisdiction. The Company is currently under examination by the IRS for the years 1997 – 2004.
Given the inherent complexities of the business and that the Company is subject to taxation in a substantial number of jurisdictions, the Company routinely assesses the likelihood of additional assessments in each of the taxing jurisdictions and has established a liability for unrecognized tax benefits that management believes to be adequate. Once established, unrecognized tax benefits are adjusted if more accurate information is available, or a change in circumstance, or an event occurs necessitating a change to the liability. The Company believes that it is reasonably possible that the unrecognized tax benefits will significantly decrease within the next 12 months in the range of $0 to $500 million principally as a result of potential resolutions through settlements of prior years’ tax items with various taxing authorities. The items include unrecognized tax benefits relating to the potential deductibility of certain expenses or losses and the attribution of taxable income to a particular jurisdiction or jurisdictions. Such resolutions could include payments of additional taxes and the recognition of taxbenefits. Due to the inherent complexities and the number of tax years currently open for examination in multiple jurisdictions, it is not possible to quantify the impact such changes may have on the effective tax rate and net income.
During the year ended December 31, 2007, the Company recognized approximately $13 million of interest and penalties.The Company has approximately $235 million accrued for the payment of interest and penalties.
Accumulated earnings of certain non-U.S. subsidiaries, which totaled approximately $4.9 billion at December 31, 2007, are intended to be permanently reinvested outside the United States. Accordingly, federal taxes, which would have aggregated approximately $1.1 billion, have not been provided on those earnings.
The Company records a deferred income tax (benefit) provision when there are differences between assets and liabilities measured for financial reporting and for income tax return purposes. The significant components of deferred tax assets and liabilities at December 31 are reflected in the following table:
| (Millions) | | 2007 | | | 2006 | |
| Deferred tax assets: | | | | | | | | |
| Reserves not yet deducted for tax | | | | | | | | |
| purposes | | $ | 3,403 | | | $ | 2,790 | |
| Employee compensation and benefits | | | 461 | | | | 558 | |
| Other | | | 206 | | | | 54 | |
| Gross deferred tax assets | | | 4,070 | | | | 3,402 | |
| Valuation allowance | | | (60 | ) | | | (51 | ) |
| Deferred tax assets after valuation | | | | | | | | |
| allowance | | | 4,010 | | | | 3,351 | |
| Deferred tax liabilities: | | | | | | | | |
| Intangibles and fixed assets | | | 633 | | | | 585 | |
| Deferred revenue | | | 499 | | | | 380 | |
| Asset securitizations | | | 335 | | | | 323 | |
| Other | | | 132 | | | | 423 | |
| Gross deferred tax liabilities | | | 1,599 | | | | 1,711 | |
| Net deferred tax assets | | $ | 2,411 | | | $ | 1,640 | |
The valuation allowances at December 31, 2007 and 2006 relate to deferred tax assets associated with non-U.S. operations.
Income taxes paid by the Company (including amounts related to discontinued operations) during 2007, 2006, and 2005 were approximately $1.8 billion, $1.4 billion, and $1.7 billion, respectively. These amounts include estimated tax payments and cash settlements relating to prior tax years.
The tax benefit realized for tax deductions from stock option exercises which are recorded in additional paid-in capital totaled $158 million, $128 million, and $234 million for the years ended December 31, 2007, 2006 and 2005, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
NOTE 20 EARNINGS PER COMMON SHARE (EPS)
Basic EPS is computed using the average actual shares outstanding during the period. Diluted EPS is basic EPS adjusted for the dilutive effect of stock options, RSAs, and other financial instruments that may be converted into common shares. The computations of basic and diluted EPS for the years ended December 31 were as follows:
| (Millions, except per share amounts) | | 2007 | | | 2006 | | 2005 |
| Numerator: | | | | | | | | | | |
| Income from continuing | | | | | | | | | | |
| operations | | $ | 4,048 | | | $ | 3,611 | | $ | 3,062 |
| (Loss) Income from | | | | | | | | | | |
| discontinued operations, net | | | | | | | | | | |
| of tax | | | (36 | ) | | | 96 | | | 672 |
| Net income | | $ | 4,012 | | | $ | 3,707 | | $ | 3,734 |
| Denominator: | | | | | | | | | | |
| Basic: Weighted-average | | | | | | | | | | |
| shares outstanding during | | | | | | | | | | |
| the period | | | 1,173 | | | | 1,212 | | | 1,233 |
| Add: Dilutive effect of stock | | | | | | | | | | |
| options, restricted stock | | | | | | | | | | |
| awards and other dilutive | | | | | | | | | | |
| securities | | | 23 | | | | 26 | | | 25 |
| Diluted | | | 1,196 | | | | 1,238 | | | 1,258 |
| Basic EPS: | | | | | | | | | | |
| Income from continuing | | | | | | | | | | |
| operations | | $ | 3.45 | | | $ | 2.98 | | $ | 2.48 |
| (Loss) Income from | | | | | | | | | | |
| discontinued operations | | | (0.03 | ) | | | 0.08 | | | 0.55 |
| Net income | | $ | 3.42 | | | $ | 3.06 | | $ | 3.03 |
| Diluted EPS: | | | | | | | | | | |
| Income from continuing | | | | | | | | | | |
| operations | | $ | 3.39 | | | $ | 2.92 | | $ | 2.43 |
| (Loss) Income from | | | | | | | | | | |
| discontinued operations | | | (0.03 | ) | | | 0.07 | | | 0.54 |
| Net income | | $ | 3.36 | | | $ | 2.99 | | $ | 2.97 |
For the years ended December 31, 2007, 2006, and 2005, the dilutive effect of unexercised stock options excludes 8 million, 6 million, and 14 million options, respectively, from the computation of EPS because inclusion of the options would have been anti-dilutive.
The Subordinated Debentures, discussed in Note 9, would affect the EPS computation only in the unlikely event the Company fails to achieve specified performance measures related to the Company’s tangible common equity and consolidated net income. In that circumstance the Company would reflect the additional common shares in the EPS computation.
NOTE 21 REPORTABLE OPERATING SEGMENTS AND GEOGRAPHIC OPERATIONS
REPORTABLE OPERATING SEGMENTS
The Companyis a leading global payments, network, and travel company. The Company’s businesses are organized into two customer-focused groups, the Global Consumer Group and the Global Business-to-Business Group. During 2007, the Company’s segments were realigned within the two major customer groups. Accordingly, U.S. Card Services (USCS) and International Card Services (ICS) are aligned within the Global Consumer Group and Global Commercial Services (GCS) and Global Network & Merchant Services (GNMS) are aligned within the Global Business-to-Business Group. The Company has reclassified the prior period amounts to be consistent with the new reportable operating segments.
The Company considers a combination of factors when evaluating the composition of its reportable operating segments, including the results reviewed by the chief operating decision maker, economic characteristics, products and services offered, classes of customers, product distribution channels, geographic considerations (primarily U.S. versus international), and regulatory environment considerations.
U.S. Card Services issues a wide range of card products and services to consumers and small businesses in the United States, and provides consumer travel services to cardmembers and other consumers.
International Card Services issues proprietary consumer and small business cards outside the United States.
Global Commercial Services offers global corporate payment and travel-related products and services to large and mid-sized companies.
Global Network & Merchant Services segment operates a global general-purpose charge credit card network, which includes both proprietary cards and cards issued under network partnership agreements. It also manages merchant services globally, which includes signing merchants to accept cards as well as processing and settling card transactions for those merchants. This segment also offers merchants point-of-sale and back-office products, services and marketing programs.
Corporate & Other consists of corporate functions and auxiliary businesses, including the Company’s publishing business, Travelers Cheques and other prepaid products, and AEIDC and the continuing portions of AEB not being sold to Standard Chartered.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
The following table presents certain selected financial information at December 31, 2007, 2006, and 2005 and for each of the years then ended.
| | | | | | | | | | | | | | | | | Corporate | | | | |
| (Millions, except where indicated) | | USCS | | ICS | | | GCS | | GNMS | | | & Other(a) | | | Consolidated |
| 2007 | | | | | | | | | | | | | | | | | | | | | |
| Revenues, excluding interest income | | $ | 11,838 | | $ | 3,540 | | | $ | 4,697 | | $ | 3,547 | | | $ | 519 | | | $ | 24,141 |
| Interest income | | | 4,866 | | | 1,535 | | | | 50 | | | 3 | | | | 962 | | | | 7,416 |
| Interest expense | | | 2,482 | | | 744 | | | | 478 | | | (314 | ) | | | 436 | | | | 3,826 |
| Revenues net of interest expense | | | 14,222 | | | 4,331 | | | | 4,269 | | | 3,864 | | | | 1,045 | | | | 27,731 |
| Pretax income from continuing operations | | | 2,730 | | | 117 | | | | 744 | | | 1,560 | | | | 415 | | | | 5,566 |
| Income tax provision (benefit) | | | 907 | | | (174 | ) | | | 208 | | | 538 | | | | 39 | | | | 1,518 |
| Income from continuing operations | | $ | 1,823 | | $ | 291 | | | $ | 536 | | $ | 1,022 | | | $ | 376 | | | $ | 4,048 |
| Total Equity(billions) | | $ | 4.5 | | $ | 2.1 | | | $ | 2.2 | | $ | 1.2 | | | $ | 1.0 | | | $ | 11.0 |
| 2006(b) | | | | | | | | | | | | | | | | | | | | | |
| Revenues, excluding interest income | | $ | 10,897 | | $ | 3,291 | | | $ | 4,254 | | $ | 3,059 | | | $ | 660 | | | $ | 22,161 |
| Interest income | | | 3,447 | | | 1,260 | | | | 15 | | | 4 | | | | 1,007 | | | | 5,733 |
| Interest expense | | | 1,724 | | | 586 | | | | 369 | | | (281 | ) | | | 342 | | | | 2,740 |
| Revenues net of interest expense | | | 12,620 | | | 3,965 | | | | 3,900 | | | 3,344 | | | | 1,325 | | | | 25,154 |
| Pretax income (loss) from continuing operations | | | 3,323 | | | 312 | | | | 716 | | | 1,188 | | | | (400 | ) | | | 5,139 |
| Income tax provision (benefit) | | | 1,171 | | | (31 | ) | | | 239 | | | 409 | | | | (260 | ) | | | 1,528 |
| Income (Loss) from continuing operations | | $ | 2,152 | | $ | 343 | | | $ | 477 | | $ | 779 | | | $ | (140 | ) | | $ | 3,611 |
| Total Equity(billions) | | $ | 4.7 | | $ | 1.7 | | | $ | 1.9 | | $ | 1.3 | | | $ | 0.9 | | | $ | 10.5 |
| 2005(b) | | | | | | | | | | | | | | | | | | | | | |
| Revenues, excluding interest income | | $ | 9,709 | | $ | 3,135 | | | $ | 4,013 | | $ | 2,679 | | | $ | 449 | | | $ | 19,985 |
| Interest income | | | 2,410 | | | 1,042 | | | | — | | | 2 | | | | 965 | | | | 4,419 |
| Interest expense | | | 1,145 | | | 457 | | | | 294 | | | (211 | ) | | | 294 | | | | 1,979 |
| Revenues net of interest expense | | | 10,974 | | | 3,720 | | | | 3,719 | | | 2,892 | | | | 1,120 | | | | 22,425 |
| Pretax income (loss) from continuing operations | | | 2,675 | | | 298 | | | | 594 | | | 882 | | | | (396 | ) | | | 4,053 |
| Income tax provision (benefit) | | | 938 | | | (8 | ) | | | 165 | | | 309 | | | | (413 | ) | | | 991 |
| Income from continuing operations | | $ | 1,737 | | $ | 306 | | | $ | 429 | | $ | 573 | | | $ | 17 | | | $ | 3,062 |
| Total Equity(billions) | | $ | 4.6 | | $ | 1.9 | | | $ | 1.7 | | $ | 1.3 | | | $ | 1.0 | | | $ | 10.5 |
| (a) | | Corporate & Other includes adjustments and eliminations for the items included in revenues net of interest expense above. |
| | | |
| (b) | | Amounts for 2006 and 2005 include certain revenue and expense reclassifications, as well as changes to the Company’s reportable operating segments in 2007. Additionally, certain reclassifications of prior year amounts have been made to conform to the current presentation related to discontinued operations as discussed in Note 1. Except for discontinued operations, these items had no impact on the Company’s consolidated pretax income from continuing operations, income tax provision, and income from continuing operations. None of these items had an impact on the Company’s net income. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
Revenues Net of Interest Expense
The Company allocates discount revenue and certain other revenues among segments using a transfer pricing methodology. Segments earn discount revenue based on the volume of merchant business generated by cardmembers. Within the U.S. Card Services, International Card Services, and Global Commercial Services segments, discount revenue reflects the issuer component of the overall discount rate; within the Global Network & Merchant Services segment, discount revenue reflects the network and merchant component of the overall discount rate. Cardmember lending finance revenue and net card fees are directly attributable to the segment in which they are reported.
Expenses
Marketing, promotion, rewards and cardmember services expenses are reflected in each segment based on actual expenses incurred, with the exception of brand advertising, which is reflected in the Global Network & Merchant Services segment.
Human resources and other operating expenses reflect expenses, such as professional services, occupancy and equipment, and communications, incurred directly within each segment. In addition, expenses related to the Company’s support services, such as technology costs, are allocated to each segment based on support service activities directly attributable to the segment. Other overhead expenses, such as staff group support functions, are allocated to segments based on each segment’s level of pretax income. Financing requirements are managed on a consolidated basis. Funding costs are allocated based on segment funding requirements.
Provisions for Losses and Benefits
The provisions for losses and benefits include credit-related expenses and interest credited on investment certificates directly attributable to the segment in which they are reported.
Capital
Each business segment is allocated capital based on established business model operating requirements, risk measures, and regulatory capital requirements. Business model operating requirements include capital needed to support operations and specific balance sheet items. The risk measures include considerations for credit, market, and operational risk.
Income Taxes
Income tax provision (benefit) is allocated to each business segment based on the actual effective tax rates applicable to various businesses that make up the segment.
GEOGRAPHIC OPERATIONS
The following table presents the Company’s revenues net of interest expense and pretax income in different geographic regions:
| (Millions) | | United States | | Europe | | Asia/Pacific | | All Other | | Consolidated |
| 2007 | | | | | | | | | | | | | | | |
| Revenues net of interest expense | | $ | 19,355 | | $ | 3,560 | | $ | 2,259 | | $ | 2,557 | | $ | 27,731 |
| Pretax income from continuing operations | | $ | 4,749 | | $ | 384 | | $ | 162 | | $ | 271 | | $ | 5,566 |
| |
| 2006 | | | | | | | | | | | | | | | |
| Revenues net of interest expense | | $ | 17,393 | | $ | 3,168 | | $ | 1,992 | | $ | 2,601 | | $ | 25,154 |
| Pretax income from continuing operations | | $ | 4,312 | | $ | 292 | | $ | 131 | | $ | 404 | | $ | 5,139 |
| |
| 2005 | | | | | | | | | | | | | | | |
| Revenues net of interest expense | | $ | 15,506 | | $ | 2,824 | | $ | 1,776 | | $ | 2,319 | | $ | 22,425 |
| Pretax income from continuing operations | | $ | 3,401 | | $ | 230 | | $ | 103 | | $ | 319 | | $ | 4,053 |
The data in the above table are, in part, based upon internal allocations, which necessarily involve management’s judgment.Therefore, it is not practicable to separate precisely the U.S. and international services.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
NOTE 22 QUARTERLY FINANCIAL DATA (UNAUDITED)
| (Millions, except per share amounts) | | 2007(a) | | | 2006(a) |
| Quarters Ended | | 12/31 | | | 9/30(b) | | | 6/30 | | 3/31 | | | 12/31 | | 9/30 | | 6/30 | | | 3/31 |
| Revenues net of interest expense | | $ | 7,364 | | | $ | 6,945 | | | $ | 6,938 | | $ | 6,484 | | | $ | 6,675 | | $ | 6,265 | | $ | 6,370 | | | $ | 5,844 |
| Pretax income from continuing | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| operations | | | 1,129 | | | | 1,417 | | | | 1,409 | | | 1,611 | | | | 1,187 | | | 1,311 | | | 1,437 | | | | 1,204 |
| Income from continuing operations | | | 839 | | | | 1,074 | | | | 1,040 | | | 1,095 | | | | 895 | | | 934 | | | 972 | | | | 810 |
| (Loss) Income from discontinued | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| operations, net of tax | | | (8 | ) | | | (7 | ) | | | 17 | | | (38 | ) | | | 27 | | | 33 | | | (27 | ) | | | 63 |
| Net income | | | 831 | | | | 1,067 | | | | 1,057 | | | 1,057 | | | | 922 | | | 967 | | | 945 | | | | 873 |
| Earnings Per Common Share — Basic: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 0.72 | | | $ | 0.92 | | | $ | 0.88 | | $ | 0.92 | | | $ | 0.75 | | $ | 0.78 | | $ | 0.80 | | | $ | 0.66 |
| Discontinued operations | | | — | | | | (0.01 | ) | | | 0.02 | | | (0.03 | ) | | | 0.02 | | | 0.02 | | | (0.02 | ) | | | 0.05 |
| Net income | | $ | 0.72 | | | $ | 0.91 | | | $ | 0.90 | | $ | 0.89 | | | $ | 0.77 | | $ | 0.80 | | $ | 0.78 | | | $ | 0.71 |
| Earnings Per Common Share — | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Diluted: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 0.71 | | | $ | 0.90 | | | $ | 0.86 | | $ | 0.90 | | | $ | 0.73 | | $ | 0.76 | | $ | 0.78 | | | $ | 0.64 |
| Discontinued operations | | | — | | | | — | | | | 0.02 | | | (0.03 | ) | | | 0.02 | | | 0.03 | | | (0.02 | ) | | | 0.05 |
| Net income | | $ | 0.71 | | | $ | 0.90 | | | $ | 0.88 | | $ | 0.87 | | | $ | 0.75 | | $ | 0.79 | | $ | 0.76 | | | $ | 0.69 |
| Cash dividends declared per common | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| share | | $ | 0.18 | | | $ | 0.15 | | | $ | 0.15 | | $ | 0.15 | | | $ | 0.15 | | $ | 0.15 | | $ | 0.15 | | | $ | 0.12 |
| Common share price: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| High | | $ | 63.63 | | | $ | 65.89 | | | $ | 65.24 | | $ | 61.90 | | | $ | 62.50 | | $ | 56.19 | | $ | 54.91 | | | $ | 55.00 |
| Low | | $ | 50.37 | | | $ | 55.50 | | | $ | 55.34 | | $ | 53.91 | | | $ | 55.00 | | $ | 49.73 | | $ | 50.92 | | | $ | 51.05 |
| (a) | | Note 2 provides additional information on discontinued operations. |
| |
| (b) | | Diluted EPS from discontinued operations was greater than basic EPS from discontinued operations due to the impact of rounding fractional amounts. |
NOTE 23 RESTRUCTURING CHARGES
During 2007, the Company recorded restructuring charges of $49 million related to the Company’s business travel, prepaid services, international payments business, and technology areas. During 2006 and 2005, the Company recorded restructuring charges of $100 million and $188 million, respectively, related to the Company’s business travel, operations, finance, and technology areas. These charges principally related to the consolidation of business operations, closing of operating sites, and exiting certain businesses.
Restructuring charges are comprised of severance obligations and other exit costs. The charges and any subsequent adjustments related to severance obligations are included in human resources in the Company’s Consolidated Statements of Income, while other exit costs are included in occupancy and equipment, professional services, and other expenses. Cash payments related to the remaining restructuring liabilities are expected to be completed in 2009, with the exception of contractual long-term severance arrangements which are expected to be completed in 2010 and certain lease obligations which will continue until their expiration in 2012.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
The following table summarizes the Company’s restructuring charge activity for the years ended December 31, 2007, 2006, and 2005:
| (Millions) | | Severance | | | Other | | | Total | |
| Liability balance at December 31, 2004 | | $ | 35 | | | $ | 8 | | | $ | 43 | |
| Restructuring charges | | | 159 | | | | 29 | | | | 188 | |
| Payments | | | (108 | ) | | | (29 | ) | | | (137 | ) |
| Liability balance at December 31, 2005 | | | 86 | | | | 8 | | | | 94 | |
| Restructuring charges, net of reversals(a) | | | 89 | | | | 11 | | | | 100 | |
| Payments | | | (84 | ) | | | (9 | ) | | | (93 | ) |
| Other non-cash | | | (2 | ) | | | (6 | ) | | | (8 | ) |
| Liability balance at December 31, 2006 | | | 89 | | | | 4 | | | | 93 | |
| Restructuring charges, net of reversals(b) | | | 34 | | | | 15 | | | | 49 | |
| Payments | | | (61 | ) | | | (6 | ) | | | (67 | ) |
| Other non-cash | | | (2 | ) | | | (4 | ) | | | (6 | ) |
| Liability balance at December 31, 2007 | | $ | 60 | | | $ | 9 | | | $ | 69 | |
The following table summarizes the Company’s restructuring charges, net of reversals, and other non-cash items by reportable operating segment for the years ended December 31, 2007, 2006, and 2005:
| | | | | | | | | | | | | | | | | Corporate | | | | | |
| (Millions) | | USCS | | | ICS | | | GCS | | GNMS | | & Other | | | Total | |
| 2005 | | | | | | | | | | | | | | | | | | | | | | |
| Restructuring charges | | $ | 3 | | | $ | 44 | | | $ | 51 | | $ | 3 | | $ | 87 | | | $ | 188 | |
| 2006 | | | | | | | | | | | | | | | | | | | | | | |
| Restructuring charges, net of reversals(a) | | | 17 | | | | 15 | | | | 41 | | | 7 | | | 20 | | | $ | 100 | |
| Other non-cash | | | — | | | | (1 | ) | | | — | | | — | | | (7 | ) | | $ | (8 | ) |
| 2007 | | | | | | | | | | | | | | | | | | | | | | |
| Restructuring charges, net of reversals(b) | | | 13 | | | | 12 | | | | 19 | | | 4 | | | 1 | | | $ | 49 | |
| Other non-cash | | | (2 | ) | | | — | | | | — | | | — | | | (4 | ) | | $ | (6 | ) |
| (a) | | Reversals of $20 million ($3 million in ICS, $1 million in GNMS, and $16 million in Corporate & Other), primarily due to higher redeployment rates. |
| |
| (b) | | Reversals of $17 million ($2 million in USCS, $2 million in ICS, $2 million in GNMS, and $11 million in Corporate & Other), primarily due to higher redeployment rates. |
As of December 31, 2007, the total expenses to be incurred for previously approved restructuring activities that were in-progress are not expected to be materially different than the cumulative expenses incurred to date for these programs. Future decisions to initiate new restructuring activities do not represent future phases of previously approved programs. The amounts in the table to the right relate to the restructuring programs in-progress during 2007 and initiated at various dates between the fourth quarter of 2004 and fourth quarter of 2007.
Cumulative Restructuring Expense Incurred to Date on In-progress Restructuring Programs
| (Millions) | | Severance | | Other | | Total |
| USCS | | $ | 24 | | $ | 5 | | $ | 29 |
| ICS | | | 41 | | | 6 | | | 47 |
| GCS | | | 141 | | | 25 | | | 166 |
| GNMS | | | 11 | | | 1 | | | 12 |
| Corporate & Other | | | 98 | | | 21 | | | 119 |
| Total | | $ | 315 | | $ | 58 | | $ | 373 |
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CONSOLIDATED FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
AMERICAN EXPRESS COMPANY
| (Millions, except per share amounts, percentages, and where indicated) | | 2007 | | | 2006 | | 2005 | | 2004 | | | 2003 | |
| Operating Results(a) | | | | | | | | | | | | | | | | | | |
| Revenues net of interest expense | | $ | 27,731 | | | $ | 25,154 | | $ | 22,425 | | $ | 20,412 | | | $ | 18,061 | |
| Expenses | | | 17,824 | | | | 16,989 | | | 15,614 | | | 14,438 | | | | 12,437 | |
| Provisions for losses and benefits | | | 4,341 | | | | 3,026 | | | 2,758 | | | 2,229 | | | | 2,309 | |
| Income from continuing operations | | | 4,048 | | | | 3,611 | | | 3,062 | | | 2,630 | | | | 2,267 | |
| (Loss) Income from discontinued operations | | | (36 | ) | | | 96 | | | 672 | | | 886 | | | | 733 | |
| Income before cumulative effect of accounting change | | | 4,012 | | | | 3,707 | | | 3,734 | | | 3,516 | | | | 3,000 | |
| Net income | | | 4,012 | | | | 3,707 | | | 3,734 | | | 3,445 | | | | 2,987 | |
| Return on average equity(b) | | | 37.3 | % | | | 34.7 | % | | 25.4 | % | | 22.0 | % | | | 20.6 | % |
| Balance Sheet | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 11,737 | | | $ | 5,036 | | $ | 6,140 | | $ | 7,639 | | | $ | 3,778 | |
| Accounts receivable, net | | | 42,005 | | | | 38,665 | | | 35,321 | | | 32,159 | | | | 29,210 | |
| Investments | | | 14,895 | | | | 17,954 | | | 18,332 | | | 18,196 | | | | 15,347 | |
| Loans, net | | | 53,436 | | | | 43,116 | | | 33,904 | | | 27,674 | | | | 25,617 | |
| Assets of discontinued operations | | | 16,747 | | | | 14,412 | | | 12,746 | | | 99,624 | | | | 93,436 | |
| Total assets | | | 149,830 | | | | 128,329 | | | 114,637 | | | 194,873 | | | | 177,167 | |
| Customers’ deposits | | | 15,397 | | | | 12,010 | | | 13,827 | | | 10,040 | | | | 9,851 | |
| Travelers Cheques outstanding | | | 7,197 | | | | 7,215 | | | 7,175 | | | 7,287 | | | | 6,819 | |
| Short-term debt | | | 17,762 | | | | 15,236 | | | 15,711 | | | 14,498 | | | | 19,573 | |
| Long-term debt | | | 55,285 | | | | 42,747 | | | 30,781 | | | 32,627 | | | | 20,010 | |
| Liabilities of discontinued operations | | | 16,228 | | | | 13,945 | | | 12,203 | | | 92,406 | | | | 85,679 | |
| Shareholders’ equity | | | 11,029 | | | | 10,511 | | | 10,549 | | | 16,020 | | | | 15,323 | |
| Common Share Statistics | | | | | | | | | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | | | | | | | | | |
| Income from continuing operations: | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 3.45 | | | $ | 2.98 | | $ | 2.48 | | $ | 2.09 | | | $ | 1.77 | |
| Diluted | | $ | 3.39 | | | $ | 2.92 | | $ | 2.43 | | $ | 2.05 | | | $ | 1.75 | |
| (Loss) Income from discontinued operations: | | | | | | | | | | | | | | | | | | |
| Basic | | $ | (0.03 | ) | | $ | 0.08 | | $ | 0.55 | | $ | 0.70 | | | $ | 0.57 | |
| Diluted | | $ | (0.03 | ) | | $ | 0.07 | | $ | 0.54 | | $ | 0.69 | | | $ | 0.56 | |
| Cumulative effect of accounting change, net of tax: | | | | | | | | | | | | | | | | | | |
| Basic | | $ | — | | | $ | — | | $ | — | | $ | (0.05 | ) | | $ | (0.01 | ) |
| Diluted | | $ | — | | | $ | — | | $ | — | | $ | (0.06 | ) | | $ | (0.01 | ) |
| Net income: | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 3.42 | | | $ | 3.06 | | $ | 3.03 | | $ | 2.74 | | | $ | 2.33 | |
| Diluted | | $ | 3.36 | | | $ | 2.99 | | $ | 2.97 | | $ | 2.68 | | | $ | 2.30 | |
| Cash dividends declared per share | | $ | 0.63 | | | $ | 0.57 | | $ | 0.48 | | $ | 0.44 | | | $ | 0.38 | |
| Book value per share | | $ | 9.53 | | | $ | 8.76 | | $ | 8.50 | | $ | 12.83 | | | $ | 11.93 | |
| Market price per share(c): | | | | | | | | | | | | | | | | | | |
| High | | $ | 65.89 | | | $ | 62.50 | | $ | 59.50 | | $ | 57.05 | | | $ | 49.11 | |
| Low | | $ | 50.37 | | | $ | 49.73 | | $ | 47.01 | | $ | 47.32 | | | $ | 30.90 | |
| Close | | $ | 52.02 | | | $ | 60.67 | | $ | 51.46 | | $ | 56.37 | | | $ | 48.23 | |
| Average common shares outstanding for earnings per share: | | | | | | | | | | | | | | | | | | |
| Basic | | | 1,173 | | | | 1,212 | | | 1,233 | | | 1,259 | | | | 1,284 | |
| Diluted | | | 1,196 | | | | 1,238 | | | 1,258 | | | 1,285 | | | | 1,298 | |
| Shares outstanding at period end | | | 1,158 | | | | 1,199 | | | 1,241 | | | 1,249 | | | | 1,284 | |
| Other Statistics | | | | | | | | | | | | | | | | | | |
| Number of employees at period end(thousands): | | | | | | | | | | | | | | | | | | |
| United States | | | 32 | | | | 32 | | | 29 | | | 41 | | | | 42 | |
| Outside United States | | | 36 | | | | 33 | | | 37 | | | 37 | | | | 36 | |
| Total(d) | | | 68 | | | | 65 | | | 66 | | | 78 | | | | 78 | |
| Number of shareholders of record | | | 50,216 | | | | 51,644 | | | 55,409 | | | 50,394 | | | | 47,967 | |
| (a) | | In 2007, the Company entered into an agreement to sell its international banking subsidiary, AEB, to Standard Chartered subject to certain regulatory approvals. The results, assets, and liabilities of AEB are presented as discontinued operations. Additionally, the spin-off of Ameriprise and certain dispositions were completed in 2006 and 2005, and the results of these operations are presented as discontinued operations. Note 2 provides additional information on discontinued operations. |
| |
| (b) | | Computed on a trailing 12-month basis using total shareholders’ equity as included in the Consolidated Financial Statements prepared in accordance with GAAP. |
| |
| (c) | | The market price per share beginning with the fourth quarter of 2005 reflects the spin-off of Ameriprise as of September 30, 2005. The opening share price on the first trading day after the spin-off was $50.75. |
| |
| (d) | | Amounts include employees from discontinued operations. |
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