American Express 2002 Annual Report Download - page 38

I36 AXP IFINANCIAL REVIEW
Travel Related Services reported net income of $2.1 billion in 2002, a 46 percent increase from $1.5 billion in 2001, which was
down 24 percent from 2000. 2001 results included restructuring charges of $414 million ($267 million after-tax) and one-time
costs and waived customer fees directly related to the September 11th terrorist attacks of $87 million ($57 million after-tax).
The following management discussion includes information on both a GAAP basis and managed basis. The managed basis
presentation assumes there have been no securitization transactions, i.e., all securitized cardmember loans and related income
effects are reflected in the company’s balance sheet and income statement, respectively. The company presents TRS information
on a managed basis because that is the way the company’s management views and manages the business. Management believes
that a full picture of trends in the company’s cardmember lending business can only be derived by evaluating the performance
of both securitized and non-securitized cardmember loans. Asset securitization is just one of several ways for the company to
fund cardmember loans. Use of a managed basis presentation, including non-securitized and securitized cardmember loans,
presents a more accurate picture of the key dynamics of the cardmember lending business, avoiding distortions due to the mix
of funding sources at any particular point in time. For example, irrespective of the mix, it is important for management and
investors to see metrics, such as changes in delinquencies and write-off rates, for the entire cardmember lending portfolio
because it is more representative of the economics of the aggregate cardmember relationships and ongoing business perfor-
mance and trends over time. It is also important for investors to see the overall growth of cardmember loans and related
revenue and changes in market share, which are significant metrics in evaluating the company’s performance and which can
only be properly assessed when all non-securitized and securitized cardmember loans are viewed together on a managed basis.
On a GAAP basis, results reflect only net finance charge revenue on the owned portfolio, comprised of unsecuritized card-
member and other loans. Revenues relating to the company’s retained interest in securitized loan receivables are shown in
securitization income, which includes gains on securitizations (as discussed below), net finance charge revenue on retained
interests in securitized loans and servicing income. Securitization income increased 35 percent in 2002 and 42 percent in 2001
as a result of a higher average balance of cardmember lending securitizations and improved spreads. Other revenue decreased
10 percent in 2002 as a result of lower interest income on investment and liquidity pools held within card funding vehicles.
In 2001, other revenue was flat. See Selected Statistical Information below for data relating to TRS’ owned portfolio.
TRS’ results for the years ended December 31, 2002, 2001 and 2000 included net cardmember lending securitization gains of
$136 million ($88 million after-tax), $155 million ($101 million after-tax) and $142 million ($92 million after-tax), respectively.
Management views the gains from securitizations as discretionary benefits to be used for card acquisition expenses, which are
reflected in both marketing and promotion and other operating expenses. Consequently, the managed basis presentation for
the years ended December 31, 2002, 2001 and 2000 assumes that lending securitization gains were offset by higher marketing
and promotion expense of $81 million, $92 million and $86 million, respectively, and other operating expense of $55 million,
$63 million and $56 million, respectively. Accordingly, the incremental expenses, as well as the gains, have been eliminated.
The following table reconciles the GAAP basis for certain TRS income statement line items to the managed basis information,
where different.