American Express 2009 Annual Report Download - page 39

2009 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
benefits expenses, higher occupancy and equipment expenses,
increased professional services costs and greater cardmember
services expense, partially offset by decreased cardmember
rewards expense and lower marketing and promotion
expense. Consolidated expenses in 2009, 2008, and 2007 also
included $190 million, $449 million and $66 million,
respectively, of reengineering costs, of which $185 million,
$417 million, and $49 million, respectively, represent
restructuring charges. Refer to the discussion earlier regarding
the Company’s 2008 and 2009 reengineering initiatives and
Note 16 to the Consolidated Financial Statements for
restructuring activities for all periods.
Marketing and promotion expenses decreased $516
million or 21 percent to $1.9 billion in 2009 from $2.4 billion
in 2008, due to lower spending levels in the first three quarters
of 2009, partially offset by higher expense in the fourth
quarter of 2009. Marketing and promotion for 2008 decreased
$132 million or 5 percent to $2.4 billion, reflecting decreased
investments as compared to 2007, which included the
incremental business-building costs.
Cardmember rewards expenses decreased $353 million or
8 percent to $4.0 billion in 2009 from $4.4 billion in 2008,
reflecting lower rewards-related spending volumes, partially
offset by higher redemption rates and costs in Membership
Rewards and higher costs with relatively lower declines in
co-brand spending volumes. Cardmember rewards decreased
$388 million or 8 percent to $4.4 billion in 2008 from $4.8
billion in 2007, 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.
Salaries and employee benefits expenses decreased $1.0
billion or 17 percent to $5.1 billion in 2009 from $6.1 billion
in 2008, reflecting lower employee levels and costs related to
the Company’s reengineering initiatives, as well as the
restructuring charge in the fourth quarter of 2008. Salaries
and employee benefits expenses in 2008 increased $652
million or 12 percent to $6.1 billion from $5.4 billion in 2007
reflecting the fourth quarter of 2008 restructuring charge
related to the Company’s reengineering initiatives, an increase
in average headcount, greater merit and sales force-related
incentive costs and the pension-related gain in 2007.
Professional services expenses in 2009 compared to 2008
remained flat. Professional services expenses in 2008
compared to 2007 increased $133 million or 6 percent.
Other, net expenses in 2009 decreased $708 million or 23
percent to $2.4 billion compared to 2008, reflecting the full
year of settlement payments from MasterCard in 2009 versus
two quarters in 2008, a $180 million third quarter benefit
related to the accounting for a net investment in the
Company’s consolidated foreign subsidiaries (as discussed
further in Business Segment Results – Corporate & Other
below), a $59 million benefit in the second quarter of 2009
from the completion of certain account reconciliations related
to prior periods, and lower travel and entertainment and
other expenses due to the Company’s reengineering activities.
These were partially offset by a $9 million favorable impact in
the fourth quarter of 2008 related to fair value hedge
ineffectiveness. 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 were partially offset by the 2008
settlement payments from MasterCard and Visa.
Income Taxes
The effective tax rate was 25 percent in 2009 compared to 20
percent in 2008 and 28 percent in 2007. The tax rates for these
years reflect tax benefits related to the resolution of certain
prior years’ tax items and recurring permanent tax benefits in
relation to the level of pretax income.
Discontinued Operations
Loss from discontinued operations, net of tax, was $7 million,
$172 million and $114 million in 2009, 2008, and 2007,
respectively. Loss from discontinued operations, net of tax,
primarily reflected AEIDC and AEB results from operations,
including AEIDC’s $15 million ($10 million after-tax), $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 2009, 2008
and 2007, respectively, as well as AEB’s compliance-related
remediation costs of $71 million ($45 million after-tax) to
implement a more 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 2009 and 2008, 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, 2009, net cash provided
by operating activities of $6.4 billion decreased compared to
2008. The decrease was primarily due to a decrease in deferred
taxes, acquisition costs and other, fluctuations in the
Company’s other receivables, accounts payable and other
liabilities, as well as a reduction in income from continuing
operations, partially offset by changes in other assets.
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