MMC 09.30.2013 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 September 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 October 31, 2013, there were outstanding 548,775,659 shares of common stock, par value $1.00 per share, of the registrant.
 


Table of Contents

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; the impact of competition; pension obligations; the impact of foreign currency exchange rates; our effective tax rates; 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;
•
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 ability to maintain adequate physical, technical and administrative safeguards to protect the security of data and the potential of a system or network disruption that results in regulatory penalties, remedial costs and/or the improper disclosure of data;
•
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 relating to countries such as Cuba, Iran, Sudan and Syria, 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;
•
changes in the funded status of our global defined benefit pension plans and the impact of any increased pension funding resulting from those changes;
•
our ability to successfully recover should we experience a disaster or other business continuity problem, such as an earthquake, hurricane, flood, 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.

- 2 -
Table of Contents

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.


- 3 -
Table of Contents

PART I.    FINANCIAL INFORMATION
 
Item 1.
Financial Statements.

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

 
2012

 
2013

 
2012

Revenue
$
2,932

 
$
2,845

 
$
9,146

 
$
8,922

Expense:
 
 
 
 
 
 
 
Compensation and benefits
1,824

 
1,760

 
5,393

 
5,332

Other operating expenses
704

 
707

 
2,165

 
2,167

Operating expenses
2,528

 
2,467

 
7,558

 
7,499

Operating income
404

 
378

 
1,588

 
1,423

Interest income
5

 
6

 
13

 
18

Interest expense
(40
)
 
(44
)
 
(124
)
 
(135
)
Investment income
14

 
(4
)
 
58

 
20

Income before income taxes
383

 
336

 
1,535

 
1,326

Income tax expense
123

 
90

 
463

 
387

Income from continuing operations
260

 
246

 
1,072

 
939

Discontinued operations, net of tax
(1
)
 
1

 
6

 
(1
)
Net income before non-controlling interests
259

 
247

 
1,078

 
938

Less: Net income attributable to non-controlling interests
6

 
6

 
24

 
21

Net income attributable to the Company
$
253

 
$
241

 
$
1,054

 
$
917

Basic net income per share – Continuing operations
$
0.46

 
$
0.44

 
$
1.91

 
$
1.68

 – Net income attributable to the Company
$
0.46

 
$
0.44

 
$
1.92

 
$
1.68

Diluted net income per share – Continuing operations
$
0.45

 
$
0.43

 
$
1.88

 
$
1.66

 – Net income attributable to the Company
$
0.45

 
$
0.44

 
$
1.89

 
$
1.66

Average number of shares outstanding – Basic
549

 
544

 
549

 
544

– Diluted
558

 
552

 
558

 
552

Shares outstanding at September 30
547

 
544

 
547

 
544


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


- 4 -
Table of Contents

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

 
Three Months Ended
September 30,
Nine Months Ended
September 30,
(In millions)
2013

 
2012

2013

 
2012

Net income before non-controlling interests
$
259

 
$
247

$
1,078

 
$
938

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
    Foreign currency translation adjustments
254

 
171

(91
)
 
142

    Unrealized investment loss
—

 
—

(1
)
 
(1
)
    Gain (loss) related to pension/post-retirement plans
(37
)
 
(72
)
265

 
62

Other comprehensive income, before tax
217

 
99

173

 
203

Tax expense (benefit) on other comprehensive income
(5
)
 
(11
)
79

 
20

Other comprehensive income, net of tax
222

 
110

94

 
183

Comprehensive income
481

 
357

1,172

 
1,121

Less: comprehensive income attributable to non-controlling interest
6

 
6

24

 
21

Comprehensive income attributable to the Company
$
475

 
$
351

$
1,148

 
$
1,100


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

- 5 -
Table of Contents

MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
(In millions, except per share figures)
September 30, 2013
(Unaudited)
 
December 31,
2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,174

 
$
2,301

Receivables
 
 
 
Commissions and fees
3,120

 
2,858

Advanced premiums and claims
62

 
62

Other
219

 
244

 
3,401

 
3,164

Less-allowance for doubtful accounts and cancellations
(107
)
 
(106
)
Net receivables
3,294

 
3,058

Current deferred tax assets
459

 
410

Other current assets
234

 
194

Total current assets
6,161

 
5,963

Goodwill and intangible assets
7,353

 
7,261

Fixed assets
(net of accumulated depreciation and amortization of $1,611 at September 30, 2013 and $1,582 at December 31, 2012)
824

 
809

Pension related assets
780

 
260

Deferred tax assets
1,020

 
1,223

Other assets
838

 
772

 
$
16,976

 
$
16,288

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


- 6 -
Table of Contents

MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
 
(In millions, except per share figures)
September 30, 2013
(Unaudited)
 
December 31,
2012
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
583

 
$
260

Accounts payable and accrued liabilities
1,830

 
1,721

Accrued compensation and employee benefits
1,194

 
1,473

Accrued income taxes
148

 
110

Dividends payable
138

 
—

Total current liabilities
3,893

 
3,564

Fiduciary liabilities
4,657

 
3,992

Less – cash and investments held in a fiduciary capacity
(4,657
)
 
(3,992
)
 
—

 
—

Long-term debt
2,623

 
2,658

Pension, post-retirement and post-employment benefits
1,975

 
2,094

Liabilities for errors and omissions
380

 
460

Other liabilities
985

 
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 September 30, 2013
 
 
 
   and December 31, 2012
561

 
561

Additional paid-in capital
1,010

 
1,107

Retained earnings
9,151

 
8,628

Accumulated other comprehensive loss
(3,213
)
 
(3,307
)
Non-controlling interests
78

 
64

 
7,587

 
7,053

Less – treasury shares, at cost, 13,338,019 shares at September 30, 2013
 
 
 
   and 15,133,774 shares at December 31, 2012
(467
)
 
(447
)
Total equity
7,120

 
6,606

 
$
16,976

 
$
16,288

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


- 7 -
Table of Contents

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

 
2012

Operating cash flows:
 
 
 
Net income before non-controlling interests
$
1,078

 
$
938

Adjustments to reconcile net income to cash provided by operations:
 
 
 
Depreciation and amortization of fixed assets and capitalized software
213

 
201

Amortization of intangible assets
53

 
53

Intangible asset impairment
5

 
8

Adjustments to acquisition related contingent consideration liability
16

 
(32
)
Provision for deferred income taxes
137

 
18

Gain on investments
(58
)
 
(19
)
Loss on disposition of assets
1

 
13

Stock option expense
15

 
23

Changes in assets and liabilities:
 
 
 
Net receivables
(229
)
 
(148
)
Other current assets
(71
)
 
19

Other assets
(564
)
 
(204
)
Accounts payable and accrued liabilities
47

 
(208
)
Accrued compensation and employee benefits
(279
)
 
(176
)
Accrued income taxes
39

 
88

Other liabilities
174

 
201

Effect of exchange rate changes
(2
)
 
(25
)
Net cash provided by operations
575

 
750

Financing cash flows:
 
 
 
Purchase of treasury shares
(400
)
 
(180
)
Proceeds from debt
546

 
248

Repayments of debt
(257
)
 
(257
)
Shares withheld for taxes on vested units – treasury shares
(74
)
 
(92
)
Issuance of common stock from treasury shares
254

 
151

Payments of contingent consideration for acquisitions
(8
)
 
(20
)
Distributions of non-controlling interests
(17
)
 
(5
)
Dividends paid
(394
)
 
(369
)
Net cash used for financing activities
(350
)
 
(524
)
Investing cash flows:
 
 
 
Capital expenditures
(288
)
 
(249
)
Net sales of long-term investments
90

 
26

Proceeds from sales of fixed assets
2

 
4

Dispositions
3

 
2

Acquisitions
(108
)
 
(153
)
Other, net
2

 
1

Net cash used for investing activities
(299
)
 
(369
)
Effect of exchange rate changes on cash and cash equivalents
(53
)
 
74

Decrease in cash and cash equivalents
(127
)
 
(69
)
Cash and cash equivalents at beginning of period
2,301

 
2,113

Cash and cash equivalents at end of period
$
2,174

 
$
2,044

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

- 8 -
Table of Contents

MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
 
For the Nine Months Ended September 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
(45
)
 
(45
)
Issuance of shares under stock compensation plans and employee stock purchase plans and related tax impact
(52
)
 
(36
)
Purchase of subsidiary shares from non-controlling interests
—

 
1

Balance, end of period
$
1,010

 
$
1,076

RETAINED EARNINGS
 
 
 
Balance, beginning of year
$
8,628

 
$
7,949

Net income attributable to the Company
1,054

 
917

Dividend equivalents declared (per share amounts: $0.96 in 2013 and $0.90 in 2012)
(5
)
 
(6
)
Dividends declared – (per share amounts: $0.96 in 2013 and $0.90 in 2012)
(526
)
 
(489
)
Balance, end of period
$
9,151

 
$
8,371

ACCUMULATED OTHER COMPREHENSIVE GAIN (LOSS)
 
 
 
Balance, beginning of year
$
(3,307
)
 
$
(3,188
)
Other comprehensive income, net of tax
94

 
183

Balance, end of period
$
(3,213
)
 
$
(3,005
)
TREASURY SHARES
 
 
 
Balance, beginning of year
$
(447
)
 
$
(595
)
Issuance of shares under stock compensation plans and employee stock purchase plans
380

 
282

Purchase of treasury shares
(400
)
 
(180
)
Balance, end of period
$
(467
)
 
$
(493
)
NON-CONTROLLING INTERESTS
 
 
 
Balance, beginning of year
$
64

 
$
57

Net income attributable to non-controlling interests
24

 
21

Distributions
(17
)
 
(5
)
Other changes
7

 
(3
)
Balance, end of period
$
78

 
$
70

TOTAL EQUITY
$
7,120

 
$
6,580

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

- 9 -
Table of Contents

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, 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 nine- month periods ended September 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 $250 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 (losses) gains on its investment in Trident II of $0 million and $(1) million for the three months ended September 30, 2013 and 2012, respectively, and $20 million and $23 million for the nine months ended September 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

- 10 -
Table of Contents

performance fees related to its general partnership interest in Trident II. Investment income for the three- and nine- months ended September 30, 2013 includes performance fees of $13 million and $34 million, respectively, which had been deferred, that are no longer subject to claw-back from Trident III. At September 30, 2013, the Company has deferred performance fees of approximately $43 million related to Trident III. Recognition of these deferred performance 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 third quarter of 2013 was 32.1%. This rate reflects non-U.S. earnings subject to tax at rates below the U.S. statutory rate, including the effect of repatriation and the impact of tax rate changes on the Company's deferred tax assets and liabilities.

The Company's effective tax rate in the third quarter of 2012 was 26.8%. As discussed above, this rate reflects non-U.S. earnings subject to tax at rates below the U.S. statutory rate, including the effect of repatriation. In addition, it reflects several discrete tax benefits, including the benefit from recording previously unrecognized tax benefits as a result of expiring statutes of limitations for U.S. federal tax years 2006 and 2008, and a favorable permanent difference related to a tax-free adjustment to the estimated liability for contingent consideration. Partially offsetting these benefits in the quarter were charges to increase unrecognized tax benefits for certain operations in Asia and U.S. tax costs related to actions taken during the quarter to reduce positions in the Euro currency held by certain of the Company's non-U.S. operations.

The effective tax rate for the first nine months of 2013 was 30.1% compared with 29.2% for the first nine months of 2012. The rate in both periods reflects non-U.S. earnings subject to tax at rates below the U.S. statutory rate, including the effect of repatriation, and 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 $133 million at September 30, 2013. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between zero and approximately $20 million within the next twelve months due to settlement of audits and expiration of statutes of limitation.


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 $21 million and $31 million for the nine-month periods ended September 30, 2013 and 2012, respectively. The Consulting segment recorded fiduciary interest income of $3 million and $2 million in the nine-month periods ended September 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 billion at September 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.

- 11 -
Table of Contents

Mercer manages approximately $17 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.

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
September 30,
 
Nine Months Ended
September 30,
(In millions, except per share figures)
2013

 
2012

 
2013

 
2012

Net income from continuing operations
$
260

 
$
246

 
$
1,072

 
$
939

Less: Net income attributable to non-controlling interests
6

 
6

 
24

 
21

 
$
254

 
$
240

 
$
1,048

 
$
918

Basic weighted average common shares outstanding
549

 
544

 
549

 
544

Dilutive effect of potentially issuable common shares
9

 
8

 
9

 
8

Diluted weighted average common shares outstanding
558

 
552

 
558

 
552

Average stock price used to calculate common stock equivalents
$
42.08

 
$
33.53

 
$
39.15

 
$
32.60

There were 24.9 million and 35.1 million stock options outstanding as of September 30, 2013 and 2012, respectively.


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 nine-month periods ended September 30, 2013 and 2012.

- 12 -
Table of Contents

 
(In millions of dollars)
2013

 
2012

Assets acquired, excluding cash
$
199

 
$
160

Liabilities assumed
(59
)
 
(39
)
Contingent/deferred purchase consideration
(37
)
 
(19
)
Net cash outflow for current year acquisitions
103

 
102

Purchase of other intangibles
1

 
—

Deferred purchase consideration from prior years' acquisitions
4

 
51

Net cash outflow for acquisitions
$
108

 
$
153

(In millions of dollars)
2013

 
2012

Interest paid
$
140

 
$
150

Income taxes paid
$
258

 
$
237

The Company had non-cash issuances of common stock of $148 million and $187 million, respectively, for the nine months ended September 30, 2013 and 2012, primarily related to its share-based payment plans. The Company recorded stock-based compensation expense related to equity awards of $84 million and $117 million for the nine-month periods ended September 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 nine-month period ended September 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
Balance as of January 1, 2013
$
4

 
$
(3,451
)
 
$
140

 
$
(3,307
)
Other comprehensive income (loss) before reclassifications
(1
)
 
36

 
(84
)
 
(49
)
Amounts reclassified from accumulated other comprehensive income
—

 
143

 
—

 
143

Net current period other comprehensive income (loss)
(1
)
 
179

 
(84
)
 
94

Balance as of September 30, 2013
$
3

 
$
(3,272
)
 
$
56

 
$
(3,213
)



- 13 -
Table of Contents

The components of other comprehensive income (loss) for the three and nine-month periods ended September 30, 2013 and 2012 are as follows:
Three Months Ended September 30,
2013
 
2012
(In millions of dollars)
Pre-Tax

Tax

Net of Tax

 
Pre-Tax

Tax

Net of Tax

Foreign currency translation adjustments
$
254

$
(2
)
$
256

 
$
171

$
4

$
167

Unrealized investment gains (losses)
—

—

—

 
—

(1
)
1

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


 
 
 
 


 
Prior service gains (a)
(6
)
(2
)
(4
)
 
(8
)
(6
)
(2
)
Net actuarial losses (a)
81

26

55

 
68

52

16

Subtotal
75

24

51

 
60

46

14

Foreign currency translation adjustments
(106
)
(25
)
(81
)
 
(132
)
(60
)
(72
)
Other
(6
)
(2
)
(4
)
 
—

—

—

Pension/post-retirement plans losses
(37
)
(3
)
(34
)
 
(72
)
(14
)
(58
)
Other comprehensive income (loss)
$
217

$
(5
)
$
222

 
$
99

$
(11
)
$
110

(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.
Nine Months Ended September 30,
2013
 
2012
(In millions of dollars)
Pre-Tax

Tax

Net of Tax

 
Pre-Tax

Tax

Net of Tax

Foreign currency translation adjustments
$
(91
)
$
(7
)
$
(84
)
 
$
142

$
(10
)
$
152

Unrealized investment gains (losses)
(1
)
—

(1
)
 
(1
)
1

(2
)
Pension/post-retirement plans:
 
 
 
 
 
 
 
Amortization of losses (gains) included in net periodic pension cost:


 
 
 
 
 
 
 Prior service gains (a)
(17
)
(6
)
(11
)
 
(24
)
(11
)
(13
)
 Net actuarial losses (a)
237

83

154

 
202

95

107

Subtotal
220

77

143

 
178

84

94

Foreign currency translation adjustments
51

11

40

 
(116
)
(55
)
(61
)
Other
(6
)
(2
)
(4
)
 
—

—

—

Pension/post-retirement plans losses
265

86

179

 
62

29

33

Other comprehensive income
$
173

$
79

$
94

 
$
203

$
20

$
183

(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 six acquisitions during the first nine months of 2013.
In September 2013, Marsh purchased an additional stake in Insia a.s., an insurance broker operating in the Czech Republic and Slovakia which, when combined with its prior holdings, gave MMC a controlling interest. Insia a.s. was previously accounted for under the equity method. In August 2013, Mercer acquired Global Remuneration Solutions, a market leading compensation consulting firm based in South Africa. In July 2013, Oliver Wyman acquired Corven, a U.K.-based management consultancy firm and Guy Carpenter acquired Smith Group, a specialist disability reinsurance risk manager and consultant based in Maine. In June 2013, Marsh acquired Rehder y Asociados Group, an insurance adviser in Peru. The business includes the insurance broker Rehder y Asociados and employee health and benefits specialist, Humanasalud. Marsh also completed the acquisition of Franco & Acra Tecniseguros, an insurance advisor in the Dominican Republic in June 2013.


- 14 -
Table of Contents

Total purchase consideration for acquisitions made during the nine months of 2013 was $156 million, which consisted of cash paid of $119 million and deferred purchase and estimated contingent consideration of $37 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 $4 million of deferred purchase consideration and $8 million of contingent consideration related to acquisitions made in prior years.

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 Nine Months Ended September 30,
 
(Amounts in millions)
 
Cash
$
119

Estimated fair value of deferred/contingent consideration
37

Total Consideration
$
156

Allocation of purchase price:
 
Cash and cash equivalents
$
16

Accounts receivable, net
11

Property, plant, and equipment
4

Intangible assets
74

Goodwill
93

Other current assets
17

Total assets acquired
215

Current liabilities
26

Other liabilities
33

Total liabilities assumed
59

Net assets acquired
$
156


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.

- 15 -
Table of Contents

•
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.

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 Norwegian 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 nine months of 2012 was $205 million which consisted of cash paid of $124 million and estimated contingent consideration of $19 million, and cash held in escrow of $62 million that was released in the first quarter of 2013. The Company also paid $51 million of deferred purchase and contingent consideration related to acquisitions made in prior years.
Pro-Forma Information
While the Company does not believe its acquisitions are material in the aggregate, the following unaudited pro-forma financial data gives effect to the acquisitions made by the Company during the first nine 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 occurred 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
September 30,
 
Nine Months Ended
September 30,
(In millions, except per share figures)
2013

 
2012

 
2013

 
2012

Revenue
$
2,935

 
$
2,883

 
$
9,192

 
$
9,057

Income from continuing operations
$
260

 
$
247

 
$
1,076

 
$
947

Net income attributable to the Company
$
253

 
$
242

 
$
1,058

 
$
926

Basic net income per share:
 
 
 
 
 
 
 
– Continuing operations
$
0.46

 
$
0.44

 
$
1.92

 
$
1.70

– Net income attributable to the Company
$
0.46

 
$
0.44

 
$
1.93

 
$
1.70

Diluted net income per share:
 
 
 
 
 
 
 
– Continuing operations
$
0.46

 
$
0.44

 
$
1.89

 
$
1.68

– Net income attributable to the Company
$
0.45

 
$
0.44

 
$
1.90

 
$
1.67


The consolidated statements of income includes the results of operations of acquired companies as of their respective acquisition dates. The consolidated statements of income for both the three-month and nine-month periods ending September 30, 2013 include approximately $13 million of revenue and $0 million of net operating income related to acquisitions made in 2013.


- 16 -
Table of Contents

8.     Dispositions

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

 
2012

 
2013

 
2012

Income (loss) from discontinued operations, net of tax
$
—

 
$
1

 
$
—

 
$
(1
)
Disposals of discontinued operations
—

 
—

 
(5
)
 
—

Income tax expense (credit)
1

 
—

 
(11
)
 
—

Disposals of discontinued operations, net of tax
(1
)
 
—

 
6

 
—

Discontinued operations, net of tax
$
(1
)
 
$
1

 
$
6

 
$
(1
)
Discontinued operations, net of tax per share
 
 
 
 
 
 
 
– Basic
$
—

 
$
—

 
$
0.01

 
$
—

– Diluted
$
—

 
$
0.01

 
$
0.01

 
$
—


The nine months ended September 30, 2013 includes estimated costs covered under the indemnity related to the Kroll sale and 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 2013, the Company elected to not use the option to perform a qualitative assessment to determine if a step 1 impairment test was necessary and instead elected to perform a step 1 impairment test. Fair values of the reporting units are estimated using either a market approach or a discounted cash flow model. This fair value determination was categorized as Level 3 in the fair value hierarchy. Carrying values for the reporting units are based on balances at the prior quarter end and include directly identified assets and liabilities as well as an allocation of those assets and liabilities not recorded at the reporting unit level. The Company completed its 2013 annual review in the third quarter and concluded goodwill was not impaired, as the fair value of each reporting unit exceeded its carrying value by a substantial margin.
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:
 
September 30,
 
 
 
(In millions of dollars)
2013

 
2012

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

 
$
6,562

Goodwill acquired
93

 
126

Other adjustments(a)
(20
)
 
(9
)
Balance at September 30,
$
6,865

 
$
6,679

(a) 
Primarily reflects the impact of foreign exchange in each period.
Goodwill allocable to the Company’s reportable segments is as follows: Risk & Insurance Services, $4.7 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:

- 17 -
Table of Contents

  
September 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
$
887

 
$
399

 
$
488

 
$
814

 
$
345

 
$
469

The Company recorded an intangible asset impairment charge of $5 million and $8 million in the third quarter of 2013 and 2012, respectively, in the Risk & Insurance Services segment.
Aggregate amortization expense for both nine months ended September 30, 2013 and 2012 was $53 million and the estimated future aggregate amortization expense is as follows:
 
For the Years Ending December 31,
 
(In millions of dollars)
Estimated Expense

2013 (excludes amortization through September 30, 2013)
$
18

2014
71

2015
69

2016
61

2017
51

Subsequent years
218

 
$
488


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

- 18 -
Table of Contents

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 and Money Market 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.
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 2011, 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 September 30, 2013 and December 31, 2012.
 

- 19 -
Table of Contents

 
Identical Assets
(Level 1)
 
Observable Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
(In millions of dollars)
09/30/13

 
12/31/12

 
09/30/13

 
12/31/12

 
09/30/13

 
12/31/12

 
09/30/13

 
12/31/12

Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments owned:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds(a)
$
146

 
$
139

 
$
—

 
$
—

 
$
—

 
$
—

 
$
146

 
$
139

Money market funds(b)
23

 
483

 
—

 
—

 
—

 
—

 
23

 
483

Interest rate swap derivatives(c)
—

 
—

 
3

 
6

 
—

 
—

 
3

 
6

Total assets measured at fair value
$
169

 
$
622

 
$
3

 
$
6

 
$
—

 
$
—

 
$
172

 
$
628

Fiduciary Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Municipal Bonds
$
—

 
$
—

 
$
—

 
$
3

 
$
—

 
$
—

 
$
—

 
$
3

Money market funds
4

 
149

 
—

 
—

 
—

 
—

 
4

 
149

Total fiduciary assets measured at fair value
$
4

 
$
149

 
$
—

 
$
3

 
$
—

 
$
—

 
$
4

 
$
152

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration liability(d)
$
—

 
$
—

 
$
—

 
$
—

 
$
92

 
$
63

 
$
92

 
$
63

Senior Notes due 2014(e)
—

 
—

 
253

 
256

 
—

 
—

 
253

 
256

Total liabilities measured at fair value
$
—

 
$
—

 
$
253

 
$
256

 
$
92

 
$
63

 
$
345

 
$
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 nine-month period ended September 30, 2013, there were no assets or liabilities that transferred between Level 1 and Level 2 or between Level 2 and Level 3.
The table below sets forth a summary of the changes in fair value of the Company’s Level 3 liabilities as of September 30, 2013 and 2012 that represent contingent consideration related to acquisitions:
 
(In millions of dollars)
2013

 
2012

 
Balance at January 1,
$
63

 
$
110

 
Additions
21

 
19

 
Payments
(8
)
 
(20
)
 
Revaluation Impact
16

 
(32
)
 
Balance at September 30,
$
92

 
$
77

 
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 $16 million in the nine-month period ended September 30, 2013. A 5% increase in the above mentioned projections would increase the liability by approximately $15 million. A 5% decrease in the above mentioned projections would decrease the liability by approximately $13 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 September 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

- 20 -
Table of Contents

determination of fair value. The Company monitors these investments for impairment and makes appropriate reductions in carrying values when necessary. If carried at fair value, 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 September 30, 2013, the actual allocation for the U.S. Plan was 62% equities and equity alternatives and 38% fixed income. The target asset allocation for the U.K. Plans, which comprises approximately 83% of non-U.S. Plan assets, is 53% equities and equity alternatives and 47% fixed income. As of September 30, 2013, the actual allocation for the U.K. Plan was 50% equities and equity alternatives and 50% 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.

- 21 -
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 September 30,
Benefits
 
Benefits
(In millions of dollars)
2013

 
2012

 
2013

 
2012

Service cost
$
63

 
$
59

 
$
2

 
$
1

Interest cost
144

 
148

 
2

 
3

Expected return on plan assets
(227
)
 
(225
)
 
—

 
—

Amortization of prior service credit
(5
)
 
(4
)
 
—

 
(3
)
Recognized actuarial loss
79

 
67

 
—

 
—

Net periodic benefit cost
$
54

 
$
45

 
$
4

 
$
1

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

 
2012

 
2013

 
2012

Service cost
$
188

 
$
180

 
$
4

 
$
3

Interest cost
433

 
445

 
8

 
9

Expected return on plan assets
(680
)
 
(676
)
 
—

 
—

Amortization of prior service credit
(16
)
 
(14
)
 
—

 
(9
)
Recognized actuarial loss
237

 
201

 
1

 
—

Net periodic benefit cost
$
162

 
$
136

 
$
13

 
$
3

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

 
2012

 
2013

 
2012

Service cost
$
26

 
$
23

 
$
1

 
$
1

Interest cost
57

 
57

 
1

 
2

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

 
—

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

 
(3
)
Recognized actuarial loss
52

 
38

 
—

 
—

Net periodic benefit cost
$
50

 
$
34

 
$
2

 
$
—

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

 
2012

 
2013

 
2012

Service cost
$
78

 
$
70

 
$
2

 
$
2

Interest cost
171

 
172

 
5

 
6

Expected return on plan assets
(243
)
 
(241
)
 
—

 
—

Amortization of prior service credit
(12
)
 
(12
)
 
—

 
(9
)
Recognized actuarial loss (gain)
156

 
114

 
—

 
(1
)
Net periodic benefit cost (credit)
$
150

 
$
103

 
$
7

 
$
(2
)
 
 
 
 
 
 
 
 

- 22 -
Table of Contents

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

 
2012

 
2013

 
2012

Service cost
$
37

 
$
36

 
$
1

 
$
—

Interest cost
87

 
91

 
1

 
1

Expected return on plan assets
(146
)
 
(145
)
 
—

 
—

Amortization of prior service credit
(1
)
 
—

 
—

 
—

Recognized actuarial loss
27

 
29

 
—

 
—

Net periodic benefit cost
$
4

 
$
11

 
$
2

 
$
1

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

 
2012

 
2013

 
2012

Service cost
$
110

 
$
110

 
$
2

 
$
1

Interest cost
262

 
273

 
3

 
3

Expected return on plan assets
(437
)
 
(435
)
 
—

 
—

Amortization of prior service cost
(4
)
 
(2
)
 
—

 
—

Recognized actuarial loss
81

 
87

 
1

 
1

Net periodic benefit cost
$
12

 
$
33

 
$
6

 
$
5

 
 
 
 
 
 
 
 
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
September 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 $552 million of contributions to its U.S. and non-U.S. defined benefit plans in the first nine months of 2013, including $250 million to its U.K. pension plans to pre-fund all or a substantial portion of any deficit funding contributions that may be required from 2014 through 2016 as a result of negotiations with the Trustee of its U.K. pension plans. The Company also made discretionary contributions of $70 million to its Canadian pension plans. The Company expects to contribute approximately $102 million to its non-qualified U.S. pension and non-U.S. pension plans during the remainder of 2013.

- 23 -
Table of Contents

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

 
December 31,
2012

Short-term:
 
 
 
Current portion of long-term debt
$
583

 
$
260

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

 
250

Senior notes – 5.875% due 2033
297

 
296

Senior notes – 5.375% due 2014
323

 
326

Senior notes – 5.75% due 2015
479

 
479

Senior notes – 2.30% due 2017
249

 
249

Senior notes – 9.25% due 2019
399

 
398

Senior notes – 4.80% due 2021
497

 
497

Senior notes – 2.55% due 2018
248

 
—

Senior notes – 4.05% due 2023
247

 
—

Mortgage – 5.70% due 2035
415

 
422

Term Loan Facility - due 2016
50

 
—

Other
2

 
1

 
3,206

 
2,918

Less current portion
583

 
260

 
$
2,623

 
$
2,658

The senior notes in the table above are publicly registered by the Company with no guarantees attached.
In September 2013, the Company issued $250 million of 2.55% five-year senior notes and $250 million of 4.05% ten-year senior notes. The net proceeds of this offering will be used for general corporate purposes, which includes a partial redemption of $250 million of the outstanding principal amount of the existing 5.75% senior notes due 2015. The redemption settled in October 2013 with a total cash outflow of approximately $275 million including a $24 million charge for early redemption.
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 September 30, 2013.
In December 2012, the Company closed on a $50 million, three-year term loan facility. The interest rate on this facility at September 30, 2013 was 1.43%, 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 September 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

- 24 -
Table of Contents

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 September 30, 2013 and 2012 are as follows:
 
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
$
(3
)
 
$
3

 
$
—

 
$
(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.

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

 
Fair
Value

 
Carrying
Amount

 
Fair
Value

Short-term debt
$
583

 
$
614

 
$
260