MMC 06.30.2013 10Q
Table of Contents

 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
_____________________________________________ 
FORM 10-Q Filing
_____________________________________________ 
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2013
_____________________________________________ 
Marsh & McLennan Companies, Inc.
1166 Avenue of the Americas
New York, New York 10036
(212) 345-5000
_____________________________________________ 
Commission file number 1-5998
State of Incorporation: Delaware
I.R.S. Employer Identification No. 36-2668272
_____________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting Company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting Company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer  x
  
Accelerated Filer  ¨
 
 
Non-Accelerated Filer  ¨(Do not check if a smaller reporting company)
  
Smaller Reporting Company  ¨
Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  ý
As of July 31, 2013, there were outstanding 549,611,971 shares of common stock, par value $1.00 per share, of the registrant.
 


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INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements,” as defined in the Private Securities Litigation Reform Act of 1995. These statements, which express management's current views concerning future events or results, use words like “anticipate,” “assume,” “believe,” “continue,” “estimate,” “expect,” “future,” “intend,” “plan,” “project” and similar terms, and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will” and “would.” For example, we may use forward-looking statements when addressing topics such as: the outcome of contingencies; the expected impact of acquisitions and dispositions; pension obligations; market and industry conditions; the impact of foreign currency exchange rates; our effective tax rates; the impact of competition; changes in our business strategies and methods of generating revenue; the development and performance of our services and products; changes in the composition or level of our revenues; our cost structure, dividend policy, cash flow and liquidity; future actions by regulators; and the impact of changes in accounting rules.

Forward-looking statements are subject to inherent risks and uncertainties. Factors that could cause actual results to differ materially from those expressed or implied in our forward-looking statements include, among other things:
•
our exposure to potential liabilities arising from errors and omissions claims against us;
•
our ability to make acquisitions and dispositions and to integrate, and realize expected synergies, savings or benefits from the businesses we acquire;
•
changes in the funded status of our global defined benefit pension plans and the impact of any increased pension funding resulting from those changes;
•
the impact of competition, including with respect to our geographic reach, the sophistication and quality of our services, our pricing relative to competitors, our customers' option to self-insure or utilize internal resources instead of consultants, and our corporate tax rates relative to a number of our competitors;
•
the extent to which we retain existing clients and attract new business, and our ability to incentivize and retain key employees;
•
our exposure to potential criminal sanctions or civil remedies if we fail to comply with foreign and U.S. laws and regulations that are applicable to our international operations, including trade sanctions laws such as the Iran Threat Reduction and Syria Human Rights Act of 2012, anti-corruption laws such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act 2010, local laws prohibiting corrupt payments to government officials, as well as import and export restrictions;
•
our ability to maintain adequate physical, technical and administrative safeguards to protect the security of data;
•
our ability to successfully recover should we experience a disaster or other business continuity problem, such as an earthquake, hurricane, terrorist attack, pandemic, security breach, cyber attack, power loss, telecommunications failure or other natural or man-made disaster;
•
the impact of changes in interest rates and deterioration of counterparty credit quality on our results related to our cash balances and investment portfolios, including corporate and fiduciary funds;
•
the impact on our net income caused by fluctuations in foreign currency exchange rates;
•
the potential impact of rating agency actions on our cost of financing and ability to borrow, as well as on our operating costs and competitive position;
•
changes in applicable tax or accounting requirements; and
•
potential income statement effects from the application of FASB's ASC Topic No. 740 (“Income Taxes”) regarding accounting treatment of uncertain tax benefits and valuation allowances, including the effect of any subsequent adjustments to the estimates we use in applying this accounting standard.

The factors identified above are not exhaustive. Marsh & McLennan Companies and its subsidiaries operate in a dynamic business environment in which new risks may emerge frequently. Accordingly, we caution readers not to place undue reliance on the above forward-looking statements, which speak only as of the dates on which they are made. The Company undertakes no obligation to update or revise any forward-looking statement to reflect events or circumstances arising after the date on which it is made. Further information concerning Marsh & McLennan Companies and its businesses, including information about factors that could materially affect our results of operations and financial condition, is contained in the Company's filings with the Securities and Exchange Commission, including the “Risk Factors” section of our most recently filed Annual Report on Form 10-K.

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TABLE OF CONTENTS
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
OF OPERATIONS
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
ITEM 5.
 
 
 
ITEM 6.


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PART I.    FINANCIAL INFORMATION
 
Item 1.
Financial Statements.

MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In millions, except per share figures)
2013

 
2012

 
2013

 
2012

Revenue:
$
3,088

 
$
3,026

 
$
6,214

 
$
6,077

Expense:
 
 
 
 
 
 
 
Compensation and benefits
1,766

 
1,776

 
3,569

 
3,572

Other operating expenses
745

 
732

 
1,461

 
1,460

Operating expenses
2,511

 
2,508

 
5,030

 
5,032

Operating income
577

 
518

 
1,184

 
1,045

Interest income
4

 
6

 
8

 
12

Interest expense
(40
)
 
(45
)
 
(84
)
 
(91
)
Investment income
23

 
4

 
44

 
24

Income before income taxes
564

 
483

 
1,152

 
990

Income tax expense
164

 
144

 
340

 
297

Income from continuing operations
400

 
339

 
812

 
693

Discontinued operations, net of tax
(5
)
 
(2
)
 
7

 
(2
)
Net income before non-controlling interests
395

 
337

 
819

 
691

Less: Net income attributable to non-controlling interests
7

 
8

 
18

 
15

Net income attributable to the Company
$
388

 
$
329

 
$
801

 
$
676

Basic net income per share – Continuing operations
$
0.71

 
$
0.61

 
$
1.45

 
$
1.24

 – Net income attributable to the Company
$
0.71

 
$
0.60

 
$
1.46

 
$
1.24

Diluted net income per share – Continuing operations
$
0.70

 
$
0.60

 
$
1.42

 
$
1.23

 – Net income attributable to the Company
$
0.69

 
$
0.59

 
$
1.44

 
$
1.22

Average number of shares outstanding – Basic
551

 
545

 
549

 
544

– Diluted
559

 
553

 
558

 
552

Shares outstanding at June 30
549

 
544

 
549

 
544


The accompanying notes are an integral part of these consolidated statements.


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MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)


Three Months Ended
June 30,
Six Months Ended
June 30,
(In millions)
2013

 
2012

2013

 
2012

Net income before non-controlling interests
$
395

 
$
337

$
819

 
$
691

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
    Foreign currency translation adjustments
(85
)
 
(191
)
(345
)
 
(29
)
    Unrealized investment loss
(1
)
 
—

(1
)
 
(1
)
    Gain related to pension/post-retirement plans
50

 
120

302

 
134

Other comprehensive income (loss), before tax
(36
)
 
(71
)
(44
)
 
104

Income tax expense on other comprehensive income (loss)
20

 
21

84

 
31

Other comprehensive income (loss), net of tax
(56
)
 
(92
)
(128
)
 
73

Comprehensive income
339

 
245

691

 
764

Less: comprehensive income attributable to non-controlling interest
7

 
8

18

 
15

Comprehensive income attributable to the Company
$
332

 
$
237

$
673

 
$
749


The accompanying notes are an integral part of these consolidated statements.

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MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
(In millions, except per share figures)
June 30,
2013

 
December 31,
2012

ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,230

 
$
2,301

Receivables
 
 
 
Commissions and fees
3,162

 
2,858

Advanced premiums and claims
64

 
62

Other
219

 
244

 
3,445

 
3,164

Less-allowance for doubtful accounts and cancellations
(100
)
 
(106
)
Net receivables
3,345

 
3,058

Current deferred tax assets
410

 
410

Other current assets
229

 
194

Total current assets
5,214

 
5,963

Goodwill and intangible assets
7,281

 
7,261

Fixed assets
(net of accumulated depreciation and amortization of $1,595 at June 30, 2013 and $1,582 at December 31, 2012)
804

 
809

Pension related assets
668

 
260

Deferred tax assets
1,129

 
1,223

Other assets
742

 
772

 
$
15,838

 
$
16,288

 
The accompanying notes are an integral part of these consolidated statements.


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MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
 
(In millions, except per share figures)
June 30,
2013

 
December 31,
2012

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
10

 
$
260

Accounts payable and accrued liabilities
1,786

 
1,721

Accrued compensation and employee benefits
858

 
1,473

Accrued income taxes
171

 
110

Dividends payable
139

 
—

Total current liabilities
2,964

 
3,564

Fiduciary liabilities
4,563

 
3,992

Less – cash and investments held in a fiduciary capacity
(4,563
)
 
(3,992
)
 
—

 
—

Long-term debt
2,703

 
2,658

Pension, post-retirement and post-employment benefits
1,979

 
2,094

Liabilities for errors and omissions
440

 
460

Other liabilities
906

 
906

Commitments and contingencies

 

Equity:
 
 
 
Preferred stock, $1 par value, authorized 6,000,000 shares, none issued
—

 
—

Common stock, $1 par value, authorized
 
 
 
1,600,000,000 shares, issued 560,641,640 shares at June 30, 2013
 
 
 
   and December 31, 2012
561

 
561

Additional paid-in capital
1,002

 
1,107

Retained earnings
9,036

 
8,628

Accumulated other comprehensive loss
(3,435
)
 
(3,307
)
Non-controlling interests
67

 
64

 
7,231

 
7,053

Less – treasury shares, at cost, 11,596,053 shares at June 30, 2013
 
 
 
   and 15,133,774 shares at December 31, 2012
(385
)
 
(447
)
Total equity
6,846

 
6,606

 
$
15,838

 
$
16,288

The accompanying notes are an integral part of these consolidated statements.


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MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended June 30,
 
 
 
(In millions)
2013

 
2012

Operating cash flows:
 
 
 
Net income before non-controlling interests
$
819

 
$
691

Adjustments to reconcile net income to cash provided by operations:
 
 
 
Depreciation and amortization of fixed assets and capitalized software
142

 
133

Amortization of intangible assets
35

 
34

Adjustments to acquisition related contingent consideration liability
10

 
—

Provision for deferred income taxes
71

 
25

Gain on investments
(44
)
 
(24
)
Loss on disposition of assets
5

 
12

Stock option expense
12

 
20

Changes in assets and liabilities:
 
 
 
Net receivables
(283
)
 
(193
)
Other current assets
(34
)
 
(29
)
Other assets
(498
)
 
(37
)
Accounts payable and accrued liabilities
27

 
(218
)
Accrued compensation and employee benefits
(615
)
 
(484
)
Accrued income taxes
53

 
49

Other liabilities
124

 
68

Effect of exchange rate changes
13

 
19

Net cash (used for) provided by operations
(163
)
 
66

Financing cash flows:
 
 
 
Purchase of treasury shares
(250
)
 
(100
)
Proceeds from debt
50

 
248

Repayments of debt
(255
)
 
(254
)
Shares withheld for taxes on vested units – treasury shares
(68
)
 
(89
)
Issuance of common stock from treasury shares
206

 
95

Payments of contingent consideration for acquisitions
(5
)
 
(14
)
Distributions of non-controlling interests
(15
)
 
(4
)
Dividends paid
(255
)
 
(242
)
Net cash used for financing activities
(592
)
 
(360
)
Investing cash flows:
 
 
 
Capital expenditures
(192
)
 
(149
)
Net sales of long-term investments
82

 
(8
)
Proceeds from sales of fixed assets
2

 
1

Dispositions
3

 
2

Acquisitions
(91
)
 
(129
)
Other, net
2

 
(1
)
Net cash used for investing activities
(194
)
 
(284
)
Effect of exchange rate changes on cash and cash equivalents
(122
)
 
(31
)
Decrease in cash and cash equivalents
(1,071
)
 
(609
)
Cash and cash equivalents at beginning of period
2,301

 
2,113

Cash and cash equivalents at end of period
$
1,230

 
$
1,504

The accompanying notes are an integral part of these consolidated statements.

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MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
 
For the Six Months Ended June 30,
 
 
 
(In millions, except per share figures)
2013

 
2012

COMMON STOCK
 
 
 
Balance, beginning and end of period
$
561

 
$
561

ADDITIONAL PAID-IN CAPITAL
 
 
 
Balance, beginning of year
$
1,107

 
$
1,156

Change in accrued stock compensation costs
(69
)
 
(79
)
Issuance of shares under stock compensation plans and employee stock purchase plans and related tax impact
(36
)
 
(25
)
Purchase of subsidiary shares from non-controlling interests
—

 
1

Balance, end of period
$
1,002

 
$
1,053

RETAINED EARNINGS
 
 
 
Balance, beginning of year
$
8,628

 
$
7,949

Net income attributable to the Company
801

 
676

Dividend equivalents declared (per share amounts: $0.71 in 2013 and $0.67 in 2012)
(3
)
 
(4
)
Dividends declared – (per share amounts: $0.71 in 2013 and $0.67 in 2012)
(390
)
 
(364
)
Balance, end of period
$
9,036

 
$
8,257

ACCUMULATED OTHER COMPREHENSIVE GAIN (LOSS)
 
 
 
Balance, beginning of year
$
(3,307
)
 
$
(3,188
)
Other comprehensive income (loss), net of tax
(128
)
 
73

Balance, end of period
$
(3,435
)
 
$
(3,115
)
TREASURY SHARES
 
 
 
Balance, beginning of year
$
(447
)
 
$
(595
)
Issuance of shares under stock compensation plans and employee stock purchase plans
312

 
212

Purchase of treasury shares
(250
)
 
(100
)
Balance, end of period
$
(385
)
 
$
(483
)
NON-CONTROLLING INTERESTS
 
 
 
Balance, beginning of year
$
64

 
$
57

Net income attributable to non-controlling interests
18

 
15

Dividends and other changes
(15
)
 
(1
)
Balance, end of period
$
67

 
$
71

TOTAL EQUITY
$
6,846

 
$
6,344

The accompanying notes are an integral part of these consolidated statements.

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MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.     Nature of Operations
Marsh & McLennan Companies, Inc. (“the Company”), a global professional services firm, is organized based on the different services that it offers. Under this organizational structure, the Company’s two business segments are Risk and Insurance Services and Consulting.
The Risk and Insurance Services segment provides risk management and insurance broking, reinsurance broking and insurance program management services for businesses, public entities, insurance companies, associations, professional services organizations, and private clients. The Company conducts business in this segment through Marsh and Guy Carpenter.
The Company conducts business in its Consulting segment through two main business groups. Mercer provides consulting expertise, advice, services and solutions in the areas of talent, health, retirement and investments. Oliver Wyman Group provides specialized management and economic and brand consulting services.
Acquisitions impacting the Risk and Insurance Services and Consulting segments are discussed in Note 7 to the consolidated financial statements.
The Company has "continuing involvement" in certain Corporate Advisory and Restructuring businesses (“CARG”), that were disposed of in 2008. The run-off of the CARG business is being managed by the Company’s corporate departments and financial results of these entities are included in “Corporate” for segment reporting purposes.

2.     Principles of Consolidation and Other Matters
The consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations for interim filings, although the Company believes that the information and disclosures presented are adequate to make such information and disclosures not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 10-K”) and the amended Items 7 and 8 of the Annual Report filed May 10, 2013.
The financial information contained herein reflects all adjustments consisting only of normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the Company’s results of operations for the three and six month periods ended June 30, 2013 and 2012.
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of certificates of deposit and time deposits, with original maturities of three months or less, and money market funds. The estimated fair value of the Company's cash and cash equivalents approximates their carrying value. The Company is required to maintain operating funds of approximately $240 million related to regulatory requirements outside the U.S. or as collateral under captive insurance arrangements.
Investment Income
The caption “Investment income” in the consolidated statements of income comprises realized and unrealized gains and losses from investments recognized in current earnings. It includes, when applicable, other than temporary declines in the value of debt and available for sale securities and the change in value of the Company’s holdings in certain private equity funds, including equity method gains (losses) on its investment in the Trident funds. The Company’s investments may include direct investments in insurance or consulting companies and investments in private equity funds. The Company recorded gains of $4 million on its investment in Trident II for the three months ended June 30, 2012, and $20 million and $24 million for the six months ended June 30, 2013 and 2012, respectively, including $15 million of deferred performance fees recognized in the first quarter of 2013. Trident II has now harvested substantially all its portfolio investments and there are no remaining capital commitments for this fund. The Company has recognized substantially all of the performance fees related to its general partnership

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interest in Trident II. Investment income for the three and six months ended June 30, 2013 includes $21 million of performance fees, which had been deferred, that are no longer subject to claw-back from Trident III. Trident III is a private equity fund created in 2003. No Trident III-related investment income had been recognized since 2006, when MMC contributed its limited partnership investment interest to its U.K. pension plan. The Company continues to hold a general partnership interest in Trident III. At June 30, 2013, the Company has a deferred performance fees of $32 million related to Trident III included in the consolidated balance sheet. Recognition of these deferred fees will only occur as investments are harvested and the performance fees are no longer subject to claw-back. Timing of this is unknown and is not controlled by the Company.
Income Taxes

The Company's effective tax rate in the second quarter of 2013 was 28.9% compared with 29.8% in the second quarter of 2012. These rates reflect non-U.S. earnings subject to tax at rates below the U.S. statutory rate, including the effect of repatriation. The effective tax rate for the first six months of 2013 was 29.5% compared with 30.0% for the first six months of 2012. The rate reflects non-U.S. earnings subject to tax at rates below the U.S. statutory rate, including the effect of repatriation as well as the impact of discrete tax matters such as the resolution of tax examinations.

The Company is routinely examined by tax authorities in the jurisdictions in which it has significant operations. The Company regularly considers the likelihood of assessments in each of the taxing jurisdictions resulting from examinations. When evaluating the potential imposition of penalties, the Company considers a number of relevant factors under penalty statutes, including appropriate disclosure of the tax return position, the existence of legal authority supporting the Company's position, and reliance on the opinion of professional tax advisors.

The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in tax returns. The Company's gross unrecognized tax benefits increased from
$117 million at December 31, 2012 to $120 million at June 30, 2013. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between zero and approximately $22 million within the next twelve months due to settlement of audits and expiration of statutes of limitation.

During the second quarter of 2013 the Company settled federal tax audits with the IRS for the years 2007 and 2009 through 2011.


3.     Fiduciary Assets and Liabilities
In its capacity as an insurance broker or agent, the Company collects premiums from insureds and, after deducting its commissions, remits the premiums to the respective insurance underwriters. The Company also collects claims or refunds from underwriters on behalf of insureds. Unremitted insurance premiums and claims proceeds are held by the Company in a fiduciary capacity. Risk and Insurance Services revenue includes interest on fiduciary funds of $14 million and $21 million for the six-month periods ended June 30, 2013 and 2012, respectively. The Consulting segment recorded fiduciary interest income of $2 million and $1 million in each of the six-month periods ended June 30, 2013 and 2012, respectively. Since fiduciary assets are not available for corporate use, they are shown in the consolidated balance sheets as an offset to fiduciary liabilities.
Net uncollected premiums and claims and the related payables amounted to $9.6 billion at June 30, 2013 and $9.1 billion at December 31, 2012. The Company is not a principal to the contracts under which the right to receive premiums or the right to receive reimbursement of insured losses arises. Net uncollected premiums and claims and the related payables are, therefore, not assets and liabilities of the Company and are not included in the accompanying consolidated balance sheets.
In certain instances, the Company advances premiums, refunds or claims to insurance underwriters or insureds prior to collection. These advances are made from corporate funds and are reflected in the accompanying consolidated balance sheets as receivables.
Mercer manages approximately $16 billion of assets in trusts or funds for which Mercer’s management or trustee fee is considered a variable interest. Mercer is not the primary beneficiary of these trusts or funds. Mercer’s only variable interest in any of these trusts or funds is its unpaid fees, if any. Mercer’s maximum exposure to loss of its interests is, therefore, limited to collection of its fees.

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4.    Per Share Data
From 2009 through 2012, the Company used the two-class method to compute basic and diluted earnings per share ("EPS"). Under the accounting guidance which applies to the calculation of EPS for share-based payment awards with rights to dividends or dividend equivalents, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and should be included in the computation of basic and dilutive EPS using the two-class method.
In the first quarter of 2013, the share based payment awards with non-forfeitable rights to dividends became fully vested. As a result, the Company is no longer required to use the two-class method and in the first quarter of 2013 used the treasury stock method to calculate EPS. There was no difference in the earnings per share calculations when comparing the two-class method to the treasury stock method in any quarter of 2012. Therefore, the prior period information in the chart below shows the earnings per share calculation using the treasury stock method, consistent with current year presentation.
Basic net income per share attributable to the Company and income from continuing operations per share are calculated by dividing the respective after-tax income by the weighted average number of outstanding shares of the Company’s common stock.
Diluted net income per share attributable to the Company and income from continuing operations per share are calculated by dividing the respective after-tax income by the weighted average number of outstanding shares of the Company’s common stock, which have been adjusted for the dilutive effect of potentially issuable common shares. Reconciliations of the applicable income components used for diluted EPS - Continuing operations and basic weighted average common shares outstanding to diluted weighted average common shares outstanding are presented below. The reconciling items related to the calculation of diluted weighted average common shares outstanding are the same for net income attributable to the Company.
 
Basic and Diluted EPS Calculation - Continuing Operations
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In millions, except per share figures)
2013

 
2012

 
2013

 
2012

Net income from continuing operations
$
400

 
$
339

 
$
812

 
$
693

Less: Net income attributable to non-controlling interests
7

 
8

 
18

 
15

 
$
393

 
$
331

 
$
794

 
$
678

Basic weighted average common shares outstanding
551

 
545

 
549

 
544

Dilutive effect of potentially issuable common shares
8

 
8

 
9

 
8

Diluted weighted average common shares outstanding
559

 
553

 
558

 
552

Average stock price used to calculate common stock equivalents
$
39.15

 
$
32.31

 
$
37.68

 
$
32.13

There were 26.5 million and 37.3 million stock options outstanding as of June 30, 2013 and 2012, respectively.



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Table of Contents

5.    Supplemental Disclosures to the Consolidated Statements of Cash Flows
The following schedule provides additional information concerning acquisitions, interest and income taxes paid for the six-month periods ended June 30, 2013 and 2012.
 
(In millions of dollars)
2013

 
2012

Assets acquired, excluding cash
$
126

 
$
131

Liabilities assumed
(24
)
 
(31
)
Contingent/deferred purchase consideration
(14
)
 
(18
)
Net cash outflow for current year acquisitions
88

 
82

Deferred purchase consideration from prior years' acquisitions
3

 
47

Net cash outflow for acquisitions
$
91

 
$
129

(In millions of dollars)
2013

 
2012

Interest paid
$
89

 
$
92

Income taxes paid
$
185

 
$
160

The Company had non-cash issuances of common stock under its share-based payment plans of $138 million and $181 million, respectively for the six months ended June 30, 2013 and 2012. The Company recorded stock-based compensation expense related to equity awards of $54 million and $80 million for the six-month periods ended June 30, 2013 and 2012, respectively.

6.    Other Comprehensive Income (Loss)
The changes in the balances of each component of Accumulated Other Comprehensive Income ("AOCI") for the period ended June 30, 2013, including amounts reclassified out of AOCI, are as follows:

(In millions of dollars)
Unrealized Investment Gains
 
Pension/Post-Retirement Plans Gains (Losses)
 
Foreign Currency Translation Adjustments
 
Total
Beginning Balance
$
4

 
$
(3,451
)
 
$
140

 
$
(3,307
)
Other comprehensive income (loss) before reclassifications
(1
)
 
121

 
(340
)
 
(220
)
Amounts reclassified from accumulated other comprehensive income
—

 
92

 
—

 
92

Net current period other comprehensive income (loss)
(1
)
 
213

 
(340
)
 
(128
)
Ending Balance
$
3

 
$
(3,238
)
 
$
(200
)
 
$
(3,435
)

The components of other comprehensive income (loss) for the three and six-month periods ended June 30, 2013 and 2012 are as follows:

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Table of Contents

Three Months Ended June 30,
2013
 
2012
(In millions of dollars)
Pre-Tax

Tax

Net of Tax

 
Pre-Tax

Tax

Net of Tax

Foreign currency translation adjustments
$
(85
)
$
(1
)
$
(84
)
 
$
(191
)
$
(14
)
$
(177
)
Unrealized investment gains (losses)
(1
)
—

(1
)
 
—

1

(1
)
Pension/post-retirement plans:
 
 
 
 
 
 
 
Amortization of losses (gains) included in net periodic pension cost:


 
 
 
 


 
Prior service gains (a)
(5
)
(2
)
(3
)
 
(8
)
—

(8
)
Net actuarial losses (a)
78

28

50

 
68

1

67

Subtotal
73

26

47

 
60

1

59

Foreign currency translation adjustments
(23
)
(5
)
(18
)
 
60

33

27

Pension/post-retirement plans losses
50

21

29

 
120

34

86

Other comprehensive income (loss)
$
(36
)
$
20

$
(56
)
 
$
(71
)
$
21

$
(92
)
(a) Components of net periodic pension cost are included in compensation and benefits in the Consolidated Statements of Income. Tax on prior service gains and net actuarial losses is included in income tax expense.

Six Months Ended June 30,
2013
 
2012
(In millions of dollars)
Pre-Tax

Tax

Net of Tax

 
Pre-Tax

Tax

Net of Tax

Foreign currency translation adjustments
$
(345
)
$
(5
)
$
(340
)
 
$
(29
)
$
(14
)
$
(15
)
Unrealized investment gains (losses)
(1
)
—

(1
)
 
(1
)
2

(3
)
Pension/post-retirement plans:
 
 
 
 
 
 
 
Amortization of losses (gains) included in net periodic pension cost:

 
 
 
 
 
 
Prior service gains (a)
(11
)
(4
)
(7
)
 
(16
)
(5
)
(11
)
Net actuarial losses (a)
156

57

99

 
134

43

91

Subtotal
145

53

92

 
118

38

80

Foreign currency translation adjustments
157

36

121

 
16

5

11

Pension/post-retirement plans losses
302

89

213

 
134

43

91

Other comprehensive income (loss)
$
(44
)
$
84

$
(128
)
 
$
104

$
31

$
73

(a) Components of net periodic pension cost are included in compensation and benefits in the Consolidated Statements of Income. Tax on prior service gains and net actuarial losses is included in income tax expense.

7.     Acquisitions
The Company completed two acquisitions during the first six months of 2013.
During June 2013, Marsh acquired Rehder y Asociados Group, a leading insurance adviser in Peru. The business includes the insurance broker Rehder y Asociados and employee health and benefits specialist, Humanasalud. Marsh also completed the acquisitions of Franco & Acra Tecniseguros, the leading insurance advisor in the Dominican Republic.

Total purchase consideration for acquisitions made during the six months of 2013 was $109 million, which consisted of cash paid of $95 million and deferred purchase and estimated contingent consideration of $14 million. Contingent consideration arrangements are primarily based on EBITDA and revenue targets over two to four years. The fair value of the contingent consideration was based on projected revenue and earnings of the acquired entities. Estimated fair values of assets acquired and liabilities assumed are subject to adjustment when purchase accounting is finalized. The Company also paid $3 million of deferred purchase consideration and $5 million of contingent consideration related to acquisitions made in prior years.


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Table of Contents

The following table presents the preliminary allocation of the acquisition cost to the assets acquired and liabilities assumed during 2013 based on their fair values:

For the Six Months Ended June 30, 2013
 
(Amounts in millions)
 
Cash
$
95

Estimated fair value of deferred/contingent consideration
14

Total Consideration
$
109

Allocation of purchase price:
 
Cash and cash equivalents
$
7

Accounts receivable, net
7

Property, plant, and equipment
4

Intangible assets
51

Goodwill
62

Other assets
2

Total assets acquired
133

Current liabilities
10

Other liabilities
14

Total liabilities assumed
24

Net assets acquired
$
109


Prior Year Acquisitions
During 2012, Marsh completed the following twelve acquisitions:
•
January - Marsh acquired Alexander Forbes' South African brokerage operations, including Alexander Forbes Risk Services and insurance broking operations in Botswana and Namibia to expand Marsh's presence in Africa. Marsh subsequently completed the acquisitions of the Alexander Forbes operations in Uganda, Malawi and Zambia.
•
March - Marsh & McLennan Agency business ("MMA") acquired KSPH, LLC, a middle-market employee benefits agency based in Virginia, and Marsh acquired Cosmos Services (America) Inc., the U.S. insurance brokerage subsidiary of ITOCHU Corp., which specializes in commercial property/casualty, personal lines, and employee benefits brokerage services to U.S. subsidiaries of Japanese companies.
•
June - MMA acquired Progressive Benefits Solutions, an employee benefits agency based in North Carolina, and Security Insurance Services, Inc., a Wisconsin-based insurance agency which offers property/casualty and employee benefits products and services to individuals and businesses.
•
August - MMA acquired Rosenfeld-Einstein, a South Carolina-based employee benefits service provider, and Eidson Insurance, a property/casualty and employee benefits services firm located in Florida.
•
October - MMA acquired Howalt+McDowell, a South Dakota-based agency which offers property casualty, surety, personal protection and employee benefits insurance to individuals and businesses, and The Protector Group Insurance Agency, a Massachusetts-based agency which provides property casualty, employee benefits services, personal insurance and individual financial services.
•
November - MMA acquired Brower Insurance, an Ohio-based company providing employee benefits, property/casualty and consulting services.
•
December - MMA acquired McGraw Wentworth, a Michigan-based company providing consulting services to mid-sized organizations, and Liscomb Hood Mason, a Minnesota-based company providing property/casualty and employee benefits products and services.
The MMA acquisitions were made to expand Marsh's presence in the U.S. middle-market business.

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Table of Contents

During 2012, Mercer completed the following three acquisitions:
•
February - Mercer acquired the remaining 49% of Yokogawa-ORC, a global mobility firm based in Japan, which was previously accounted for under the equity method, and Pensjon & Finans, a leading Norway-based financial investment and pension consulting firm.
•
March - Mercer acquired REPCA, a France-based broking and advisory firm for employer health and benefits plans.
Total purchase consideration for acquisitions made during the first six months of 2012 was $183 million which consisted of cash paid of $103 million and estimated contingent consideration of $18 million, and cash held in escrow of $62 million that was released in the first quarter of 2013. The Company also paid $61 million of deferred purchase and contingent consideration related to acquisitions made in prior years.
Pending Acquisitions
Subsequent to June 30, 2013, Oliver Wyman made an acquisition for an aggregate purchase price of approximately $30 million and given the timing of this transaction, the initial accounting for the business combination is not yet complete.
Pro-Forma Information
The Company made two acquisitions during the second quarter of 2013. The actual 2013 results do not include any revenue or operating income from these acquisitions due to their timing. The Company does not believe its acquisitions have been material in the aggregate. The following unaudited pro-forma financial data gives effect to the acquisitions made by the Company during the first six months of 2013 and 2012. In accordance with accounting guidance related to pro-forma disclosure, the information presented for 2013 acquisitions is as if they occurred on January 1, 2012 and reflects acquisitions made in 2012 as if they occured on January 1, 2011. The pro-forma information adjusts for the effects of amortization of acquired intangibles. The unaudited pro-forma financial data is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved if such acquisitions had occurred on the dates indicated, nor is it necessarily indicative of future consolidated results.
 
Three Months Ended
June 30,
 
Six Months Ended June 30,
(In millions, except per share figures)
2013

 
2012

 
2013

 
2012

Revenue
$
3,099

 
$
3,061

 
$
6,237

 
$
6,153

Income from continuing operations
$
404

 
$
344

 
$
817

 
$
701

Net income attributable to the Company
$
391

 
$
334

 
$
806

 
$
684

Basic net income per share:
 
 
 
 
 
 
 
– Continuing operations
$
0.72

 
$
0.62

 
$
1.45

 
$
1.26

– Net income attributable to the Company
$
0.71

 
$
0.61

 
$
1.47

 
$
1.25

Diluted net income per share:
 
 
 
 
 
 
 
– Continuing operations
$
0.71

 
$
0.61

 
$
1.43

 
$
1.24

– Net income attributable to the Company
$
0.70

 
$
0.60

 
$
1.44

 
$
1.24





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Table of Contents

8.     Dispositions

Summarized Statements of Income data for discontinued operations is as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In millions of dollars, except per share figures)
2013

 
2012

 
2013

 
2012

Loss from discontinued operations, net of tax
$
—

 
$
(2
)
 
$
—

 
$
(2
)
Disposals of discontinued operations
(6
)
 
—

 
(5
)
 
—

Income tax credit
(1
)
 
—

 
(12
)
 
—

Disposals of discontinued operations, net of tax
(5
)
 
—

 
7

 
—

Discontinued operations, net of tax
$
(5
)
 
$
(2
)
 
$
7

 
$
(2
)
Discontinued operations, net of tax per share
 
 
 
 
 
 
 
– Basic
$
—

 
$
(0.01
)
 
$
0.01

 
$
—

– Diluted
$
(0.01
)
 
$
(0.01
)
 
$
0.02

 
$
(0.01
)

The three and six months ended June 30, 2013 includes estimated costs covered under the indemnity related to the Kroll sale. The six months ended June 30, 2013 also includes tax indemnities related to the Putnam sale.

9.    Goodwill and Other Intangibles
The Company is required to assess goodwill and any indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. The Company performs the annual impairment test for each of its reporting units during the third quarter of each year. In accordance with applicable accounting guidance, the Company assesses qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test.
Other intangible assets that are not deemed to have an indefinite life are amortized over their estimated lives and reviewed for impairment upon the occurrence of certain triggering events in accordance with applicable accounting literature.
Changes in the carrying amount of goodwill are as follows:
 
June 30,
 
 
 
(In millions of dollars)
2013

 
2012

Balance as of January 1, as reported
$
6,792

 
$
6,562

Goodwill acquired
62

 
113

Other adjustments(a)
(50
)
 
(32
)
Balance at June 30, 2013
$
6,804

 
$
6,643

(a) 
Primarily reflects the impact of foreign exchange in each year.
Goodwill allocable to the Company’s reportable segments is as follows: Risk & Insurance Services, $4.6 billion and Consulting, $2.2 billion.
Amortized intangible assets consist of the cost of client lists, client relationships and trade names acquired. The gross cost and accumulated amortization are as follows:
  
June 30, 2013
 
December 31, 2012
(In millions of dollars)
Gross
Cost

 
Accumulated
Amortization

 
Net
Carrying
Amount

 
Gross
Cost

 
Accumulated
Amortization

 
Net
Carrying
Amount

Amortized intangibles
$
849

 
$
372

 
$
477

 
$
814

 
$
345

 
$
469

Aggregate amortization expense for the six months ended June 30, 2013 and 2012 was $35 million and $34 million, respectively, and the estimated future aggregate amortization expense is as follows:

- 17 -
Table of Contents

 
For the Years Ending December 31,
 
(In millions of dollars)
Estimated Expense

2013 (excludes amortization through June 30, 2013)
$
36

2014
70

2015
69

2016
60

2017
54

Subsequent years
188

 
$
477


10.     Fair Value Measurements
Fair Value Hierarchy
The Company has categorized its assets and liabilities that are valued at fair value on a recurring basis into a three-level fair value hierarchy as defined by the FASB. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy, for disclosure purposes, is determined based on the lowest level input that is significant to the fair value measurement.
Assets and liabilities recorded in the consolidated balance sheets at fair value are categorized based on the inputs in the valuation techniques as follows:
Level 1.
Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market (examples include active exchange-traded equity securities, most U.S. Government and agency securities, money market mutual funds and certain other sovereign government obligations).
Level 2.
Assets and liabilities whose values are based on the following:
a)
Quoted prices for similar assets or liabilities in active markets;
b)
Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);
c)
Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and
d)
Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full asset or liability (for example, certain mortgage loans).
Level 3.
Assets and liabilities whose values are based on prices, or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability (examples include private equity investments, certain commercial mortgage whole loans, and long-dated or complex derivatives including certain foreign exchange options and long-dated options on gas and power).
Valuation Techniques
Mutual Funds - Level 1
Investments for which market quotations are readily available are valued at the sale price on their principal exchange, or official closing bid price for certain markets. If no sales are reported, the security is valued at its last reported bid price.

- 18 -
Table of Contents

U.S. Municipal Bonds - Level 2
These investments are valued on the basis of valuations furnished by an independent pricing service. Such services or dealers determine valuations for normal institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships, generally recognized by institutional traders, between securities.
  
Interest Rate Swap Derivative - Level 2
The fair value of interest rate swap derivatives is based on the present value of future cash flows at each valuation date resulting from utilization of the swaps, using a constant discount rate of 1.6% compared to discount rates based on projected future yield curves (See Note 12).

Senior Notes due 2014 - Level 2
The fair value of the first $250 million of Senior Notes maturing in 2014 is estimated to be the amortized cost of those notes adjusted by the fair value of the interest rate swap derivative, discussed above. In the first quarter of 2012, the Company entered into two interest rate swaps that effectively convert interest on a portion of its Senior Notes from a fixed rate to a floating rate. The swaps are designated as fair value hedging instruments. The change in the fair value of the swaps is recorded on the balance sheet. The carrying value of the debt related to these swaps is adjusted by an equal amount (See Note 12).

Contingent Consideration Liability - Level 3
Purchase consideration for some acquisitions made by the Company includes contingent consideration arrangements. Contingent consideration arrangements are primarily based on achieving EBITDA and revenue targets over two to four years. The fair value of contingent consideration is estimated as the present value of future cash flows that would result from the projected revenue and earnings of the acquired entities.
The following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012.
 
 
Identical Assets
(Level 1)
 
Observable Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
(In millions of dollars)
06/30/13

 
12/31/12

 
06/30/13

 
12/31/12

 
06/30/13

 
12/31/12

 
06/30/13

 
12/31/12

Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments owned:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds(a)
$
138

 
$
139

 
$
—

 
$
—

 
$
—

 
$
—

 
$
138

 
$
139

Money market funds(b)
24

 
483

 
—

 
—

 
—

 
—

 
24

 
483

Interest rate swap derivatives(c)
—

 
—

 
5

 
6

 
—

 
—

 
5

 
6

Total assets measured at fair value
$
162

 
$
622

 
$
5

 
$
6

 
$
—

 
$
—

 
$
167

 
$
628

Fiduciary Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Municipal Bonds
$
—

 
$
—

 
$
2

 
$
3

 
$
—

 
$
—

 
$
2

 
$
3

Money market funds
4

 
149

 
—

 
—

 
—

 
—

 
4

 
149

Total fiduciary assets measured at fair value
$
4

 
$
149

 
$
2

 
$
3

 
$
—

 
$
—

 
$
6

 
$
152

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration liability(d)
$
—

 
$
—

 
$
—

 
$
—

 
$
81

 
$
63

 
$
81

 
$
63

Senior Notes due 2014(e)
—

 
—

 
255

 
256

 
—

 
—

 
255

 
256

Total liabilities measured at fair value
$
—

 
$
—

 
$
255

 
$
256

 
$
81

 
$
63

 
$
336

 
$
319

(a) 
Included in other assets in the consolidated balance sheets.
(b) 
Included in cash and cash equivalents in the consolidated balance sheets.                  
(c) 
Included in other receivables in the consolidated balance sheets.
(d) 
Included in accounts payable and accrued liabilities and other liabilities in the consolidated balance sheets.
(e) 
Included in long term debt in the consolidated balance sheets.
During the six-month period ended June 30, 2013, there were no assets or liabilities that transferred between Level 1 and Level 2 or between Level 2 and Level 3.

- 19 -
Table of Contents

The table below sets forth a summary of the changes in fair value of the Company’s Level 3 liabilities as of June 30, 2013 and 2012 that represent contingent consideration related to acquisitions:
 
(In millions of dollars)
2013

 
2012

 
Balance at January 1,
$
63

 
$
110

 
Additions
13

 
18

 
Payments
(5
)
 
(14
)
 
Revaluation Impact
10

 
2

 
Balance at June 30,
$
81

 
$
116

 
The fair value of the contingent liability is based on projections of revenue and earnings for the acquired entities that are reassessed on a quarterly basis. As set forth in the table above, based on the Company's ongoing assessment of the fair value of contingent consideration, the Company recorded a net increase in the estimated fair value of such liabilities for prior period acquisitions of $10 million in the six-month period ended June 30, 2013. A 5% increase in the above mentioned projections would increase the liability by approximately $16 million. A 5% decrease in the above mentioned projections would decrease the liability by approximately $14 million.
Fair Value of Long-term Investments
The Company has certain long-term investments, primarily related to investments in non-publicly traded private equity funds of $12 million and $16 million at June 30, 2013 and December 31, 2012 carried on the cost basis for which there are no readily available market prices. The carrying values of these investments approximates their fair value. Management's estimate of the fair value of these non-publicly traded investments is based on valuation methodologies including estimates from private equity managers of the fair value of underlying investments in private equity funds. The ability to accurately predict future cash flows, revenue or earnings may impact the determination of fair value. The Company monitors these investments for impairment and makes appropriate reductions in carrying values when necessary. These investments would be classified as Level 3 in the fair value hierarchy and are included in Other assets in the consolidated balance sheets.

11.    Retirement Benefits
The Company maintains qualified and non-qualified defined benefit pension plans for its U.S. and non-U.S. eligible employees. The Company’s policy for funding its tax qualified defined benefit retirement plans is to contribute amounts at least sufficient to meet the funding requirements set forth by U.S. law and the laws of the non-U.S. jurisdictions in which the Company offers defined benefit plans.
The target asset allocation for the U.S. Plan is 58% equities and equity alternatives and 42% fixed income. As of June 30, 2013, the actual allocation for the U.S. Plan was 60% equities and equity alternatives and 40% fixed income. The target asset allocation for the U.K. Plans, which comprises approximately 82% of non-U.S. Plan assets, is 53% equities and equity alternatives and 47% fixed income. As of June 30, 2013, the actual allocation for the U.K. Plan was 53% equities and equity alternatives and 47% fixed income. The assets of the Company's defined benefit plans are diversified and are managed in accordance with applicable laws and with the goal of maximizing the plans' real return within acceptable risk parameters. The Company uses threshold-based portfolio re-balancing to ensure the actual portfolio remains consistent with target asset allocation ranges.

- 20 -
Table of Contents

The components of the net periodic benefit cost for defined benefit and other post-retirement plans are as follows:
 
Combined U.S. and significant non-U.S. Plans
Pension
 
Postretirement
For the Three Months Ended June 30,
Benefits
 
Benefits
(In millions of dollars)
2013

 
2012

 
2013

 
2012

Service cost
$
61

 
$
60

 
$
—

 
$
—

Interest cost
144

 
149

 
3

 
3

Expected return on plan assets
(225
)
 
(225
)
 
—

 
—

Amortization of prior service credit
(6
)
 
(5
)
 
—

 
(3
)
Recognized actuarial loss
80

 
68

 
1

 
—

Net periodic benefit cost
$
54

 
$
47

 
$
4

 
$
—

 
 
 
 
 
 
 
 
Combined U.S. and significant non-U.S. Plans
Pension
 
Postretirement
For the Six Months Ended June 30,
Benefits
 
Benefits
(In millions of dollars)
2013

 
2012

 
2013

 
2012

Service cost
$
125

 
$
121

 
$
2

 
$
2

Interest cost
289

 
297

 
6

 
6

Expected return on plan assets
(453
)
 
(451
)
 
—

 
—

Amortization of prior service credit
(11
)
 
(10
)
 
—

 
(6
)
Recognized actuarial loss
158

 
134

 
1

 
—

Net periodic benefit cost
$
108

 
$
91

 
$
9

 
$
2

 
 
 
 
 
 
 
 
U.S. Plans only
Pension
 
Postretirement
For the Three Months Ended June 30,
Benefits
 
Benefits
(In millions of dollars)
2013

 
2012

 
2013

 
2012

Service cost
$
25

 
$
23

 
$
—

 
$
—

Interest cost
57

 
58

 
2

 
2

Expected return on plan assets
(81
)
 
(80
)
 
—

 
—

Amortization of prior service credit
(4
)
 
(4
)
 
—

 
(3
)
Recognized actuarial loss (gain)
53

 
39

 
—

 
(1
)
Net periodic benefit cost (credit)
$
50

 
$
36

 
$
2

 
$
(2
)
U.S. Plans only
Pension
 
Postretirement
For the Six Months Ended June 30,
Benefits
 
Benefits
(In millions of dollars)
2013

 
2012

 
2013

 
2012

Service cost
$
52

 
$
47

 
$
1

 
$
1

Interest cost
114

 
115

 
4

 
4

Expected return on plan assets
(162
)
 
(161
)
 
—

 
—

Amortization of prior service credit
(8
)
 
(8
)
 
—

 
(6
)
Recognized actuarial loss (gain)
104

 
76

 
—

 
(1
)
Net periodic benefit cost (credit)
$
100

 
$
69

 
$
5

 
$
(2
)
 
 
 
 
 
 
 
 

- 21 -
Table of Contents

 
 
 
 
 
 
 
 
Significant non-U.S. Plans only
Pension
 
Postretirement
For the Three Months Ended June 30,
Benefits
 
Benefits
(In millions of dollars)
2013

 
2012

 
2013

 
2012

Service cost
$
36

 
$
37

 
$
—

 
$
—

Interest cost
87

 
91

 
1

 
1

Expected return on plan assets
(144
)
 
(145
)
 
—

 
—

Amortization of prior service credit
(2
)
 
(1
)
 
—

 
—

Recognized actuarial loss
27

 
29

 
1

 
1

Net periodic benefit cost
$
4

 
$
11

 
$
2

 
$
2

Significant non-U.S. Plans only
Pension
 
Postretirement
For the Six Months Ended June 30,
Benefits
 
Benefits
(In millions of dollars)
2013

 
2012

 
2013

 
2012

Service cost
$
73

 
$
74

 
$
1

 
$
1

Interest cost
175

 
182

 
2

 
2

Expected return on plan assets
(291
)
 
(290
)
 
—

 
—

Amortization of prior service cost
(3
)
 
(2
)
 
—

 
—

Recognized actuarial loss
54

 
58

 
1

 
1

Net periodic benefit cost
$
8

 
$
22

 
$
4

 
$
4

 
 
 
 
 
 
 
 
The weighted average actuarial assumptions utilized to calculate the net periodic benefit costs for the U.S. and significant non-U.S. defined benefit plans are as follows:
 
Combined U.S. and significant non-U.S. Plans
Pension
Benefits
 
Postretirement
Benefits
June 30,
2013

 
2012

 
2013

 
2012

Weighted average assumptions:
 
 
 
 
 
 
 
Expected return on plan assets
7.66
%
 
8.04
%
 
—
%
 
—
%
Discount rate
4.38
%
 
4.91
%
 
4.32
%
 
5.05
%
Rate of compensation increase
2.43
%
 
3.09
%
 
—
%
 
—
%
The Company made approximately $473 million of contributions to its U.S. and non-U.S. defined benefit plans in the first six months of 2013, including $250 million and $70 million of discretionary contributions to its U.K. and Canadian pension plans, respectively. The Company expects to contribute approximately $175 million to its non-qualified U.S. pension and non-U.S. pension plans during the remainder of 2013.

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Table of Contents

12.    Debt
The Company’s outstanding debt is as follows:
 
(In millions of dollars)
June 30,
2013

 
December 31,
2012

Short-term:
 
 
 
Current portion of long-term debt
$
10

 
$
260

Long-term:
 
 
 
Senior notes – 4.850% due 2013
—

 
250

Senior notes – 5.875% due 2033
297

 
296

Senior notes – 5.375% due 2014
325

 
326

Senior notes – 5.75% due 2015
479

 
479

Senior notes – 2.30% due 2017
249

 
249

Senior notes – 9.25% due 2019
398

 
398

Senior notes – 4.80% due 2021
497

 
497

Mortgage – 5.70% due 2035
417

 
422

Term Loan Facility - due 2016
50

 
—

Other
1

 
1

 
2,713

 
2,918

Less current portion
10

 
260

 
$
2,703

 
$
2,658

The senior notes in the table above are publicly registered by the Company with no guarantees attached.
In February 2013, the Company repaid its 4.850% fixed rate $250 million senior notes that matured using cash.
During the first quarter of 2012, the Company repaid its 6.25% fixed rate $250 million senior notes that matured. The Company used proceeds from the issuance of 2.3% five-year $250 million senior notes in the first quarter of 2012 to fund the maturing notes.
The Company and certain of its foreign subsidiaries maintain a $1.0 billion multi-currency unsecured revolving credit facility which expires in October 2016. The interest rate on this facility is based on LIBOR plus a fixed margin which varies with the Company's credit ratings. This facility requires the Company to maintain certain coverage and leverage ratios which are tested quarterly. There were no borrowings outstanding under this facility at June 30, 2013.
In December 2012, the Company closed on a $50 million, three-year draw term loan facility. The interest rate on this facility at June 30, 2013 was 1.44%, which is based on LIBOR plus a fixed margin which varies with the Company's credit ratings. The facility requires the Company to maintain coverage ratios and leverage ratios consistent with the revolving credit facility discussed above. The Company had $50 million of borrowings under this facility at June 30, 2013.
Derivative Financial Instruments
In February 2011, the Company entered into two $125 million 3.5-year interest rate swaps to hedge changes in the fair value of the first $250 million of the outstanding 5.375% senior notes due in 2014.
Under the terms of the swaps, the counter-parties pay the Company a fixed rate of 5.375% and the Company pays interest at a floating rate of three-month LIBOR plus a fixed spread of 3.726%. The maturity date of the senior notes and the swaps match exactly. The floating rate resets quarterly, with every second reset occurring on the interest payment date of the senior notes. The swaps net settle every six months on the senior note coupon payment dates. The swaps are designated as fair value hedging instruments, and in accordance with applicable accounting guidance, are deemed to be perfectly effective. The fair value of the swaps at inception was zero and subsequent changes in the fair value of the interest rate swaps are reflected in the carrying value of the interest rate swaps and in the consolidated balance sheet. The carrying value of the debt on the balance sheet was adjusted by an equal amount. The gain or (loss) on the hedged item (fixed rate debt) and the offsetting gain or (loss) on the interest rate swaps for the year-to-date periods ended June 30, 2013 and 2012 are as follows:

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Table of Contents

 
2013
 
2012
Income statement classification                (In millions of dollars)
Loss on Swaps
 
Gain on Notes
 
Net Income Effect
 
Loss on Swaps
 
Gain on Notes
 
Net Income Effect
Other Operating Expenses
$
(1
)
 
$
1

 
$
—

 
$
—

 
$
—

 
$
—

 
The amounts earned and owed under the swap agreements are accrued each period and are reported in interest expense. There was no ineffectiveness recognized in the periods presented.

Fair Value of Short-term and Long-term Debt

The estimated fair value of the Company’s significant financial instruments is provided below. Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts shown below are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or need to dispose of the financial instrument.

  
June 30, 2013
 
December 31, 2012
(In millions of dollars)
Carrying
Amount

 
Fair
Value

 
Carrying
Amount

 
Fair
Value

Short-term debt
$
10

 
$
10

 
$
260

 
$
261

Long-term debt
$
2,703

 
$
2,939

 
$
2,658

 
$
2,986


The fair value of the Company’s short-term debt, which consists primarily of term debt maturing within the next year, approximates its carrying value. The estimated fair value of the Company’s long-term debt is based on discounted future cash flows using current interest rates available for debt with similar terms and remaining maturities. Short and long-term debt would be classified as Level 2 in the fair value hierarchy.


13.    Restructuring Costs
The Company recorded total restructuring costs of $13 million in the first six months of 2013, related to severance and future rent under non-cancelable leases.
Details of the activity from January 1, 2012 through June 30, 2013 regarding restructuring activities, which includes liabilities from actions prior to 2013, are as follows:
 
(In millions of dollars)
Liability at 1/1/12
 
Amounts
Accrued

 
Cash
Paid

 
Other 

 
Liability at 12/31/12
 
Amounts
Accrued

 
Cash
Paid

 
Other 

 
Liability at 6/30/13
Severance
$
27

 
$
46

 
$
(38
)
 
$
1

 
$
36

 
$
7

 
$
(26
)
 
$
(2
)