American Express 2008 Annual Report Download - page 30

2008 financial review
american express company
were partially offset by the 2008 settlement payments from
MasterCard and Visa. Other, net expenses in 2007 decreased
$974 million or 30 percent to $2.2 billion compared to 2006,
driven by a gain of $1.13 billion related to the settlement of
litigation with Visa, and the reclassification of certain card-
acquisition costs to card fee revenue beginning July 1, 2006,
partially offset by the $177 million gain related to the sale of
the Company’s card and merchant-related activities in Brazil,
Malaysia, and Indonesia in 2006, litigation expenses of $74
million related to the settlement with Visa, and a $50 million
contribution to the American Express Charitable Fund.
Income Taxes
The effective tax rate was 20 percent in 2008 compared to
28 percent in 2007 and 30 percent in 2006. The effective tax rate
for these years reflected tax benefits related to the resolution of
certain prior years’ tax items and in 2008, a relatively lower level
of pretax income.
Discontinued Operations
(Loss) Income from discontinued operations, net of tax, was
$(172) million, $(114) million and $82 million in 2008, 2007,
and 2006, respectively. (Loss) Income from discontinued
operations, net of tax, primarily reflected AEIDC and AEB
results from operations, including AEIDC’s $275 million
($179 million after-tax) and $105 million ($69 million after-
tax) of losses related to mark-to-market adjustments and sales
within the AEIDC investment portfolio in 2008 and 2007,
respectively, as well as AEB’s compliance-related remediation
costs of $71 million ($45 million after-tax) to implement a
robust compliance program and regulatory and legal expenses, and
monetary penalties, of $60 million pretax and after-tax in 2007.
cash flows
Cash Flows from Operating Activities
In 2008 and 2007, net cash provided by operating activities
exceeded net income, primarily due to provisions for losses,
which do not require cash at the time of provision. Similarly,
depreciation and amortization represent non-cash expenses.
In addition, net cash was provided by net income and higher
accounts payable and other liabilities balances (including
the Membership Rewards liability). These accounts vary
significantly in the normal course of business due to the amount
and timing of various payments.
For the year ended December 31, 2008, net cash provided
by operating activities of $8.7 billion increased compared to
2007. The increase was primarily due to the increase in non-cash
provisions for losses and deferred taxes, acquisition costs and
other, offset by the outflow of cash resulting from fluctuations in
the Company’s other assets.
Net cash provided by operating activities was lower in 2007
than 2006 due to fluctuations in other assets and liabilities.
$449 million, $66 million and $152 million, respectively, of
reengineering costs. Refer to the discussion earlier regarding
the Company’s 2008 reengineering initiatives and Note 25
to the Consolidated Financial Statements for reengineering
initiatives for all periods.
Marketing and promotion expenses decreased $132 million
or 5 percent to $2.4 billion in 2008, reflecting decreased
investments as compared to 2007, which included the
incremental business-building costs. Marketing and promotion
for 2007 increased $71 million or 3 percent to $2.6 billion,
primarily reflecting incremental business-building costs.
Cardmember rewards expenses decreased $388 million or
8 percent to $4.4 billion in 2008, reflecting the Membership
Rewards-related charge in 2007, which was partially offset by
the Delta-related charge in 2008 to increase the Membership
Rewards liability and higher volume-driven rewards costs.
Cardmember rewards increased $1.0 billion or 28 percent to
$4.8 billion in 2007 reflecting a $685 million charge related
to the Membership Rewards liability due to enhancements
to the method of liability estimation as discussed above, a
higher redemption rate, higher volume-related rewards costs,
partially offset by the impact of charges in 2006 associated with
adjustments made to the Membership Rewards reserve models.
Cardmember services expenses increased $64 million or
13 percent to $542 million in 2008, and increased $193 million or
68 percent in 2007, reflecting higher expenses on insurance losses
and claims as well as higher cardmember services costs.
Salaries and employee benefits expenses increased
$652 million or 12 percent to $6.1 billion in 2008, reflecting
the fourth quarter of 2008 restructuring charge related to the
Company’s reengineering initiatives, an increase in average
headcount, greater merit and salesforce-related incentive costs
and the pension-related gain in 2007. Salaries and employee
benefits expenses in 2007 increased $398 million or 8 percent to
$5.4 billion due to a higher level of employees and merit increases,
partially offset by the $63 million pension-related gain previously
discussed and lower severance-related costs compared to 2006.
The increased level of employees primarily reflected employee
additions related to customer service volumes and initiatives and
the acquisition of Harbor Payments on December 31, 2006, and
the acquisition of a travel services business in 2007.
Professional services expenses increased $133 million or
6 percent to $2.4 billion primarily due to higher technology-
related consulting and credit and collection expenses.
Professional services expenses in 2007 compared to 2006
increased $17 million or 1 percent.
Other, net expenses in 2008 increased $895 million or
40 percent to $3.1 billion compared to 2007 primarily due to
the initial $1.13 billion Visa litigation settlement gain in the
fourth quarter of 2007, net of litigation expenses, the related
contribution to the American Express Charitable Fund and the
2008 expenses related to the CPS acquisition. These impacts
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