American Express 2004 Annual Report Download - page 34

TRS and higher financial planning and advice services
fees at AEFA.
Expenses
Consolidated expenses increased 12 percent to $24.2
billion in 2004, reflecting increases of 12 percent at TRS,
13 percent at AEFA and 4 percent at AEB. As discussed
in further detail below, the increase in 2004 was driven
primarily by higher marketing, promotion, rewards and
cardmember services expenses, greater human
resources costs, increased professional services
expenses, greater occupancy and equipment expenses
and increased other expenses partially offset by lower
provisions for losses and lower funding costs.
Expenses in 2004 included $102 million in aggregate
restructuring charges recorded in the fourth quarter in
connection with several initiatives principally relating
to the restructuring of the Company’s business travel
operations at TRS, the decision to sell certain opera-
tions of AEB and the relocation of certain functions in
the Company’s finance operations. These charges
included $79 million of employee severance obliga-
tions included in human resources expense and $23
million of other exit costs. The other exit costs included
$15 million recorded in occupancy and equipment
expense principally related to the early termination of
certain real estate property leases. The remainder of the
other exit costs were included in professional services
and other expenses. Also included in 2004 expenses
was a $117 million net gain on the fourth quarter sale
of the equipment leasing product line in TRS’ small
business financing unit, American Express Business
Finance Corporation (AEBF).
Consolidated expenses increased 8 percent to $21.6
billion in 2003. The increase in 2003 was driven by
higher marketing, promotion, rewards and cardmem-
ber services expenses, human resources expenses,
professional services expense and other expenses
partially offset by lower funding costs and provisions
for losses.
Human resources expenses increased 17 percent in
2004 to $7.4 billion due to increased costs related to
management incentives, including the impact of an
additional incremental year of higher stock-based
compensation expenses, the impact of the acquisitions
of Rosenbluth and Threadneedle in late 2003, merit
increases and employee benefit expenses, as well as
the impact of the previously discussed restructuring of
certain operations. The higher stock-based compensa-
tion expense from stock options reflects the Company’s
decision to expense stock options beginning in 2003.
Higher expense related to restricted stock awards
reflects the Company’s decision to modify compensa-
tion practices and use restricted stock awards in place
of stock options for middle management. Human
resources expenses increased 10 percent to $6.3 billion
in 2003 due to increased costs related to merit
increases, employee benefit expenses and manage-
ment incentive costs, as well as the impacts of fourth
quarter 2003 acquisitions.
Marketing, promotion, rewards and cardmember
services expenses of $5.1 billion for 2004 increased 30
percent over 2003, primarily due to a 30 percent increase
at TRS, reflecting both greater rewards costs and higher
marketing and promotion expenses. The growth in
rewards costs is attributable to a higher redemption rate,
strong volume growth and the continued increase in
cardmember loyalty program participation. Manage-
ment believes, based on historical experience, that card-
members enrolled in rewards and co-brand programs
yield higher spend, better retention, stronger credit per-
formance and greater profit for the Company. The
increase in marketing and promotion expenses during
2004 is primarily due to the Company’s new global
brand advertising campaign and the continued focus on
business-building initiatives. Marketing, promotion,
rewards and cardmember services expenses increased
25 percent in 2003 to $3.9 billion including a 26 percent
increase at TRS. Higher expenses were a result of the
continuation of brand and product advertising, an
increase in selected card acquisition activities and higher
cardmember rewards and services expenses reflecting
higher volumes and greater rewards program participa-
tion and penetration.
Total provisions for losses and benefits in 2004 declined
2 percent to $4.3 billion primarily resulting from a com-
bined 3 percent reduction in annuity and investment
certificate provisions at AEFA and a 7 percent reduction
in the cardmember lending provisions at TRS partially
offset by a 4 percent increase in life insurance, interna-
tional banking and other provisions. Total provisions for
losses and benefits declined 3 percent in 2003, primarily
driven by an 11 percent decline in both the charge card
and cardmember lending provisions at TRS partially
offset by a 7 percent net increase in annuity and invest-
ment certificate provisions at AEFA.
Professional services expense rose 12 percent to
$2.5 billion in 2004 primarily due to increased technol-
ogy costs related to higher business and service-related
volumes at TRS. Professional services expense rose 11
percent during 2003 primarily due to higher business
and service-related volumes at TRS.
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Financial Review