American Express 2007 Annual Report Download - page 29

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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
For 2007, 2006, and 2005, the Company met or exceeded
management’s targets for revenues net of interest, earnings
per share, and ROE, illustrating the success of investments
made over the past few years. Reported ROE was 37 percent,
35 percent and 25 percent (prior to the completion of the
Ameriprise spin-off discussed below, the Company’s ROE
target was 18-20 percent) for 2007, 2006, and 2005, respectively.
Refer to page 41 for discussion of the Company’s outlook for
2008.
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.
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 and 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
businesses, Travelers Cheques and other prepaid products,
American Express International Deposit Company, and the
continuing portions of American Express Bank Ltd. not being
sold to Standard Chartered PLC as discussed below.
VISA SETTLEMENT
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 the
bank-issued card business in the United States. The settlement
agreement with Visa 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) related to the settlement.
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.
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 value
of 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
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