When we use the terms "American Express", "the Company", "we", "our" or "us", we mean
We are a global services company with four reportable operating segments: U.S. Card Services (USCS), International Card Services (ICS), Global Commercial Services (GCS) and Global Network and Merchant Services (GNMS). We provide our customers with access to products, insights and experiences that enrich lives and build business success. Our principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. Our range of products and services includes:
• charge and credit card products; • expense management products and services; • consumer and business travel services; • stored-value products such as Travelers Cheques and other prepaid products; • network services; • merchant acquisition and processing, servicing and settlement, and point-of-sale, marketing and information products and services for merchants; and • fee services, including fraud prevention services and the design of customized customer loyalty and rewards programs.
Our products and services are sold globally to diverse customer groups, including consumers, small businesses, mid-sized companies and large corporations. These products and services are sold through various channels, including direct mail, online applications, in-house and third-party sales forces and direct response advertising.
We compete in the global payments industry with charge, credit and debit card networks, issuers and acquirers, as well as evolving alternative payment mechanisms, systems and products. As the payments industry continues to evolve, we face increasing competition from non-traditional players that leverage new technologies and customers' existing card accounts and bank relationships to create payment or other fee-based solutions. We are transforming our existing businesses and creating new products and services for the digital marketplace as we seek to enhance our customers' digital experiences and develop platforms for online and mobile commerce. Emerging technologies also provide an opportunity to deliver financial products and services that help new and existing customer segments move and manage their money, which we are pursuing through our
Our products and services generate these types of revenue for the Company:
• Discount revenue, our largest revenue source, which represents fees generally charged to merchants when Card Members use their cards to purchase goods and services at merchants on the Company's network; • Net card fees, which represent revenue earned for annual card membership fees; • Travel commissions and fees, which are earned by charging a transaction or management fee to both customers and suppliers for travel-related transactions; • Other commissions and fees, which are earned on foreign exchange conversions, card-related fees and assessments, Loyalty Partner-related fees and other service fees; 34
Table of Contents • Other revenue, which represents revenues arising from contracts with partners of our Global Network Services (GNS) business (including royalties and signing fees), insurance premiums earned from Card Member travel and other insurance programs, Travelers Cheques, and prepaid card-related revenues and other miscellaneous revenue and fees; and • Interest on loans, which principally represents interest income earned on outstanding balances.
In addition to funding and operating costs associated with these types of revenue, other major expense categories are related to marketing and rewards programs that add new Card Members and promote Card Member loyalty and spending, and provisions for Card Member credit and fraud losses.
We seek to achieve three financial targets, on average and over time:
• Revenues net of interest expense growth of at least 8 percent; • Earnings per share (EPS) growth of 12 to 15 percent; and • Return on average equity (ROE) of 25 percent or more.
If we achieve our EPS and ROE targets, we will seek to return on average and over time approximately 50 percent of the capital we generate to shareholders as dividends or through the repurchases of common stock, which may be subject to certain regulatory restrictions as described herein.
Forward-Looking Statements and Non-GAAP Measures
Certain of the statements in this Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Refer to the "Cautionary Note Regarding Forward-Looking Statements" section. We prepare our Consolidated Financial Statements in accordance with accounting principles generally accepted in
Current Business Environment/Outlook
Our results for the second quarter of 2014 reflect increased spending by Card Members, growth in average Card Member loans and continued low write-off rates, while our strong balance sheet allowed us to return a substantial amount of capital to our shareholders.
Our second quarter results also include the impact of the closing of the previously announced joint venture (JV) transaction for our
• a restructuring charge of
$133 million( $90 millionafter-tax); • JV transaction-related costs of $79 million( $56 millionafter-tax); and • a contribution to the American Express Foundationof $40 million( $25 millionafter-tax). 35
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Card Member billed business increased 9 percent over the prior year, which represented a modest acceleration from the first quarter of 2014 primarily due to volume growth in the U.S. Billed business growth internationally was relatively consistent with the first quarter. The average discount rate of 2.48 percent for the second quarter of 2014 decreased by 4 basis points from an average rate of 2.52 percent in both the second quarter of 2013 and the first quarter of 2014. In the current quarter, the discount rate was primarily impacted by changes in the mix of Card Member spending by industry and the timing of certain contract signings and payments to merchant partners. As indicated in prior quarters, changes in the mix of spending by location and industry, volume-related pricing discounts, strategic investments, certain pricing initiatives, competition in the market and other factors will likely result in erosion of the average discount rate over time. Average loans continued to grow year over year, which, along with lower funding costs, led to a 9 percent increase in net interest income. Lending write-off rates remained near historically low levels, though we expect, at some point, lending write-off rates will increase from such levels.
Total expenses increased 2 percent over the prior year. Marketing and promotion expenses increased 25 percent over the prior year, reflecting the above-mentioned incremental investments in growth initiatives. Operating expenses for the quarter decreased 8 percent, as compared to the prior year reflecting the gain on the JV transaction, which is reported as a reduction to other expense. We would not expect to see similar year-over-year declines in operating expenses for the second half of the year, although we remain committed to our goal to have operating expenses grow at an annual rate of less than 3 percent in 2014 after adjusting for the impact of the JV transaction and related items referenced above.
We continue to be impacted by certain tax law changes in 2014 and the failure of the
The regulatory environment continues to evolve and has heightened the focus that all financial services firms, including us, must have on controls and processes. The review of products and practices will be a continuing focus of ours, as well as regulators. In addition, regulation of the payments industry has increased significantly in recent years and various governments around the world have established or are proposing to establish payment system regulatory regimes. See "Certain Legislative, Regulatory and Other Developments" for additional information on the legislative and regulatory environment.
Competition remains extremely intense across our businesses.
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American Express CompanyConsolidated Results of Operations
Refer to the "Glossary of Selected Terminology" for the definitions of certain key terms and related information appearing within this section.
Table 1: Summary of Financial Performance