American Express 2014 Annual Report Download - page 21

AMERICAN EXPRESS COMPANY
2014 FINANCIAL REVIEW
As announced on February 12, 2015, we sought to renew our co-brand and merchant acceptance agreements with Costco in the United
States, a substantial and growing business relationship. We were unable to agree to terms that would have provided attractive returns for our
Company and our shareholders compared to alternative investments. U.S. Costco co-brand accounts generated approximately 8 percent of
our worldwide billed business for the year ended December 31, 2014. Over 70 percent of the spending on these accounts occurred outside
Costco warehouses. As of December 31, 2014, these co-brand accounts were responsible for approximately 20 percent of our worldwide Card
Member loans and approximately 10 percent of our total cards-in-force. In addition, 1 percent of our worldwide billed business for the year
ended December 31, 2014 came from spending on other American Express cards at Costco warehouses. Our current co-brand and merchant
acceptance agreements with Costco are set to expire on March 31, 2016. The term of any sale of the existing Costco U.S. Card Member loan
portfolio will depend on a series of decisions and negotiations among Costco, us and the new co-brand card issuers.
We intend to make investments to attract Card Members, including those from the Costco co-brand relationship, by offering them
attractive products from our suite of proprietary offerings. We will also be making investments in other growth initiatives across our
Company that we believe offer more attractive returns over time and position us for continued long-term growth. We believe having greater
certainty regarding our existing co-brand relationships gives us more flexibility to invest in growth opportunities in the co-brand space and
across our Company to help us drive innovation in the world of payments and commerce.
At the same time, we are prepared to re-scale our overall cost base so that it is appropriately sized, which could include a restructuring
charge in the future and help us to maintain discipline over operating expenses in 2015 and 2016. The timing and size of any restructuring
charge will be dependent on a number of factors, including whether there is a portfolio sale as well as the rate the billed business associated
with the Costco U.S. co-brand portfolio declines and how quickly we can grow billed business with other products.
The cumulative effect of increased competition and pricing regulation, the strengthening of the U.S. dollar, the expiration of our U.S.
Costco co-brand relationship in 2016 and other factors previously discussed leads us to expect earnings per share in 2015 will likely be
significantly adversely affected year over year as we manage through these near-term challenges and invest aggressively to prepare for the end
of the Costco U.S. relationship. The impact of these challenges in 2016 will depend on factors such as our ability to offer attractive products
and services to Card Members, grow other sources of revenue and implement expense control initiatives, although there can be no assurance
that these measures will be successful. We are confident in our business model and believe our financial targets remain appropriate over the
longer term once our year over year results are not impacted by the loss of Costco or the renewal of our other co-brand partner relationships.
On February 19, 2015, a trial court ruled in favor of the U.S. Department of Justice (DOJ) in a case challenging provisions in our card
acceptance agreements with merchants that prohibit merchants from discriminating against our card products at the point of sale. See
“Certain Legislative, Regulatory and Other Developments” for information on the potential impacts of an adverse decision on our business.
TABLE 1: ADJUSTED OPERATING EXPENSES
Years Ended December 31,
(Millions, except percentages) 2014 2013
Change
2014 vs. 2013
Salaries and employee benefits $6,095$6,191
Other, net 6,089 6,796
Total reported operating expenses 12,184 12,987 (6)%
Gain on GBT JV transaction, net of transaction-related costs 547 —
Global Business Travel (GBT) operating expenses(a) —(696)
Contribution to the American Express Foundation(b) (40) —
Restructuring charges(b) (446) —
Adjusted operating expenses(c) $ 12,245 $12,291 —%
(a) Represents operating expenses of GBT as reported in the third and fourth quarters of 2013. It does not include other GBT-related items, including transaction-
related costs and impacts related to a transition service agreement that will phase out over time.
(b) To the extent comparable categories of charges were recognized in periods other than the second or fourth quarters of 2014, they have not been excluded.
(c) Adjusted operating expense and the related growth rate are non-GAAP measures. Management believes these metrics are useful in evaluating the ongoing
performance of the Company.
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