American Express 2005 Annual Report Download - page 85

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(Millions) 2005 2004 2003
Shares outstanding at
beginning of year 1,249 1,284 1,305
Repurchases of common
shares
(a)
(34) (69) (36)
Other, primarily employee
benefit plans 26 34 15
Shares outstanding at end
of year 1,241 1,249 1,284
(a)Includes purchases under share repurchase agreements that were entered
into to partially offset the Company’s exposure to the effect on diluted
earnings per share of outstanding in-the-money stock options issued
under the Company’s stock option program.
The Board of Directors is authorized to permit the
Company to issue up to 20 million preferred shares
without further shareholder approval.
NOTE 10 Derivatives and Hedging Activities
Derivative financial instruments enable the Company to
manage exposure to credit and various market risks. The
value of such instruments is derived from an underlying
variable or multiple variables, including commodity,
equity, foreign exchange and interest rate indices or
prices. The Company enters into various derivative finan-
cial instruments as part of its ongoing risk management
activities as well as for customer and limited trading pur-
poses. Credit risk associated with the Company’s deriva-
tives is limited to the risk that a derivative counterparty
will not perform in accordance with the terms of the con-
tract. To mitigate such risk, counterparties are required
to be pre-approved. Additionally, the Company may,
from time to time, enter into master netting agreements
where practical. As of December 31, 2005 and 2004, the
total fair value, excluding accruals, of derivative product
assets was $530 million and $722 million, respectively,
and derivative product liabilities was $354 million and
$1.1 billion, respectively. The following summarizes the
Company’s use of derivative financial instruments.
Cash Flow Hedges
The Company uses interest rate products, primarily
interest rate swaps, to manage interest rate risk related
to the Company’s charge card business. The interest rate
swaps are used primarily to achieve a targeted mix of
fixed and floating rate funding as well as to protect the
Company from the interest rate risk through hedging of
its existing long-term debt, the rollover of short-term
debt and the anticipated forecasted issuance of addi-
tional funding. See Note 8 for additional discussion of
the cash flow hedging strategies related to short- and
long-term debt. During 2005, the Company discontin-
ued its only foreign currency risk cash flow hedge
program, which related to the forecasted purchase
of investment securities by foreign subsidiaries. The
anticipated transactions were no longer probable of
occurring in accordance with the original strategy.
During 2005, 2004 and 2003, the Company recognized
the following impacts in other comprehensive (loss)
income related to its cash flow hedging activity.
(Millions) 2005 2004 2003
Unrealized gains (losses)
net of tax of $161, $3
and $(174), respectively $ 300 $ 6 $(323)
Reclassification for realized
(gains) losses, net of
tax of $(23), $161 and
$224, respectively (44) 298 415
Net unrealized derivative gains $ 256 $ 304 $ 92
As of December 31, 2004, net unrealized derivatives
losses, net of tax, reflected in accumulated other com-
prehensive income were $142 million, including
$29 million of gains associated with discontinued
operations. For 2005 activity, excluded from the table
above is $19 million of net change in accumulated other
comprehensive income related to discontinued opera-
tions. As of December 31, 2005, net unrealized deriva-
tives gains, net of tax, reflected in accumulated other
comprehensive income were $143 million.
At December 31, 2005, the Company expects to
reclassify $184 million of net pretax gains on deri-
vative instruments from accumulated other comprehen-
sive (loss) income to earnings during the next twelve
months. In the event that cash flow hedge accounting
is no longer applied (i.e., the Company de-designates a
derivative as hedge, a hedge is no longer considered to
be highly effective, or the forecasted transaction being
hedged is no longer probable of occurring), the reclas-
sification 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.
During 2005 and 2004, the Company recognized the
following impacts in other revenue related to these
activities. The Company recognized no impact in 2003.
(Millions) 2005 2004
Cash flow hedge ineffective
net gains $3 $1
Cash flow hedge (losses) gains
on forecasted transactions
no longer probable to occur $ (2) $16
Notes to Consolidated
Financial Statements
AXP / AR.2005
[83 ]