American Express 2012 Annual Report Download - page 28

AMERICAN EXPRESS COMPANY
2012 FINANCIAL REVIEW
in co-brand rewards expense of $148 million partially offset by a
decrease in Membership Rewards expense of $84 million.
For 2012, co-brand rewards expenses increased $148 million
primarily related to higher spending volumes. Membership
Rewards expenses decreased $84 million as compared to the
prior year as a result of a $353 million reduction in expenses
related to a slower average URR growth rate (including the
effects of enhancements to the U.S. URR estimation process of
$342 million in 2012 and $188 million in 2011) and a shift in the
redemption mix that drove a favorable change in the WAC
assumption, offset by higher expenses of $269 million relating to
an increase in new points earned.
For 2011, Membership Rewards expenses increased $920
million as compared to the prior year as a result of higher
expenses of $558 million related to an increase in new points
earned, a $362 million increase in expenses related to a higher
average URR growth rate (including the effects of enhancements
to the U.S. URR estimation process of $188 million) in addition
to a shift in the redemption mix resulting in a higher WAC
assumption. Co-brand rewards expenses increased $298 million
primarily related to higher spending volumes.
The Company’s Membership Rewards URR for current
participants was 94 percent (rounded up) at December 31, 2012,
an increase from 92 percent (rounded down) at December 31,
2011 and 91 percent (rounded up) in 2010. The increases in the
ultimate redemption rate are a result of cardmembers’ increased
engagement with the Company’s Membership Rewards program.
Cardmember services expenses increased $83 million or 12
percent and $125 million or 21 percent in 2012 and 2011,
respectively, as compared to the prior year, driven by increases in
the costs associated with enhanced benefits to U.S. cardmembers.
Salaries and employee benefits expenses increased $345 million
or 6 percent in 2012 as compared to the prior year, primarily
reflecting higher restructuring costs in 2012. Salaries and
employee benefits expenses increased $686 million or 12 percent
in 2011 as compared to the prior year, reflecting higher employee
levels, merit increases for existing employees, higher employee
benefits costs and higher incentive-related compensation.
Other, net increased $861 million or 15 percent in 2012 as
compared to the prior year, primarily reflecting the absence of
the benefits of the Visa and MasterCard litigation settlement
payments that ceased in the fourth quarter 2011. In addition, the
increase includes higher costs associated with cardmember
reimbursements of $143 million, as well as impairment of certain
cost method investments. Other, net also includes occupancy
and equipment expenses, which also increased, reflecting higher
data processing expenses. Other, net increased $460 million or 20
percent in 2011 as compared to the prior year, primarily
reflecting $300 million of MasterCard settlement payments
received in 2010 that ceased in the second quarter of 2011. In
addition, higher other expenses are driven by costs associated
with Loyalty Partner expenses following the closing of the
acquisition in the first quarter of 2011, data processing and
software amortization expense, as well as lease termination costs.
Other, net also includes an increase in 2011 as compared to 2010
in professional services expenses related to higher technology
development expenditures including various initiatives related to
digitizing the business, globalizing operating platforms and
enhancing analytical data and capabilities. Higher legal costs and
third-party merchant sales-force commissions also contributed
to the increase.
Income Taxes
The effective tax rate on continuing operations was 30.5 percent,
29.6 percent and 32.0 percent in 2012, 2011 and 2010,
respectively. The tax rates for 2012 and 2011 included benefits of
$146 million and $77 million, respectively, related to the
realization of certain foreign tax credits. The tax rate for 2011
also included a benefit of $102 million related to the resolution
of certain prior years’ tax items. In addition, the tax rates in all
years reflected the level of pretax income in relation to recurring
permanent tax benefits and geographic mix of business.
CASH FLOWS
Cash Flows from Operating Activities
Cash flows from operating activities primarily include net
income adjusted for (i) non-cash items included in net income,
including provisions for losses, depreciation and amortization,
deferred taxes, and stock-based compensation and (ii) changes in
the balances of operating assets and liabilities, which can vary
significantly in the normal course of business due to the amount
and timing of various payments.
For the year ended December 31, 2012, net cash provided by
operating activities of $7.1 billion decreased $2.7 billion
compared to $9.8 billion in 2011. The decrease was primarily due
to a decrease in the liabilities for accounts payable and other
liabilities in 2012 as compared to the prior year versus an
increase in 2011 as compared to the prior year.
For the year ended December 31, 2011, net cash provided by
operating activities of $9.8 billion increased $1.1 billion
compared to $8.7 billion in 2010. The increase was primarily due
to higher net income in 2011 and increases in other receivables
and accounts payable and other liabilities, partially offset by
lower provisions for losses and decreases in deferred taxes and
other in 2011.
Cash Flows from Investing Activities
The Company’s investing activities primarily include funding
cardmember loans and receivables and the Company’s available-
for-sale investment portfolio.
For the year ended December 31, 2012, net cash used in
investing activities of $6.5 billion increased $6.0 billion
compared to $0.5 billion in 2011, primarily due to a reduction in
maturities, redemptions and sales of investments, and a net
decrease in the cash flows related to cardmember loans and
receivables and restricted cash, partially offset by lower purchases
of investments and fewer acquisitions in 2012 as compared to
2011.
For the year ended December 31, 2011, net cash used in
investing activities of $0.5 billion decreased $0.7 billion
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