MMC 03.31.2013 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 March 31, 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 April 30, 2013, there were outstanding 551,286,359 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, particularly in our Marsh and Mercer businesses;
•
our ability to make strategic acquisitions and dispositions and to integrate, and realize expected synergies, savings or strategic benefits from the businesses we acquire;
•
the impact of any regional, national or global political, economic, regulatory or market conditions on our results of operations and financial condition;
•
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;
•
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 or cash flows and our effective tax rate in a particular period caused by settled tax audits and expired statutes of limitation;
•
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;
•
our ability to successfully recover should we experience a disaster or other business continuity problem;
•
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
March 31,
(In millions, except per share figures)
2013

 
2012

Revenue:
$
3,126

 
$
3,051

Expense:
 
 
 
Compensation and benefits
1,803

 
1,796

Other operating expenses
716

 
728

Operating expenses
2,519

 
2,524

Operating income
607

 
527

Interest income
4

 
6

Interest expense
(44
)
 
(46
)
Investment income
21

 
20

Income before income taxes
588

 
507

Income tax expense
176

 
153

Income from continuing operations
412

 
354

Discontinued operations, net of tax
12

 
—

Net income before non-controlling interests
424

 
354

Less: Net income attributable to non-controlling interests
11

 
7

Net income attributable to the Company
$
413

 
$
347

Basic net income per share – Continuing operations
$
0.73

 
$
0.64

 – Net income attributable to the Company
$
0.75

 
$
0.64

Diluted net income per share – Continuing operations
$
0.72

 
$
0.63

 – Net income attributable to the Company
$
0.74

 
$
0.63

Average number of shares outstanding – Basic
548

 
542

                               – Diluted
557

 
551

Shares outstanding at March 31
550

 
546


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)

For the Three Months Ended March 31,
 
(In millions)
2013

 
2012

Net income before non-controlling interests
$
424

 
$
354

Other comprehensive income (loss), before tax:
 
 
 
    Foreign currency translation adjustments
(260
)
 
162

    Unrealized investment loss
—

 
(1
)
    Gain related to pension/post-retirement plans
252

 
14

Other comprehensive income (loss), before tax
(8
)
 
175

Income tax expense on other comprehensive income (loss)
64

 
10

Other comprehensive income (loss), net of tax
(72
)
 
165

Comprehensive income
352

 
519

Less: Comprehensive income attributable to non-controlling interest
11

 
7

Comprehensive income attributable to the Company
$
341

 
$
512


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 of dollars, except per share figures)
March 31,
2013

 
December 31,
2012

ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,263

 
$
2,301

Receivables
 
 
 
Commissions and fees
2,994

 
2,858

Advanced premiums and claims
76

 
62

Other
211

 
244

 
3,281

 
3,164

Less-allowance for doubtful accounts and cancellations
(105
)
 
(106
)
Net receivables
3,176

 
3,058

Current deferred tax assets
436

 
410

Other current assets
222

 
194

Total current assets
5,097

 
5,963

Goodwill and intangible assets
7,199

 
7,261

Fixed assets
(net of accumulated depreciation and amortization of $1,586 at March 31, 2013 and $1,582 at December 31, 2012)
793

 
809

Pension related assets
580

 
260

Deferred tax assets
1,129

 
1,223

Other assets
739

 
772

 
$
15,537

 
$
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 of dollars, except per share figures)
March 31,
2013

 
December 31,
2012

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

 
$
260

Accounts payable and accrued liabilities
1,808

 
1,721

Accrued compensation and employee benefits
746

 
1,473

Accrued income taxes
148

 
110

Dividends payable
128

 
—

Total current liabilities
2,840

 
3,564

Fiduciary liabilities
4,396

 
3,992

Less – cash and investments held in a fiduciary capacity
(4,396
)
 
(3,992
)
 
—

 
—

Long-term debt
2,705

 
2,658

Pension, post-retirement and post-employment benefits
1,993

 
2,094

Liabilities for errors and omissions
433

 
460

Other liabilities
853

 
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 March 31, 2013
 
 
 
   and December 31, 2012
561

 
561

Additional paid-in capital
993

 
1,107

Retained earnings
8,786

 
8,628

Accumulated other comprehensive loss
(3,379
)
 
(3,307
)
Non-controlling interests
73

 
64

 
7,034

 
7,053

Less – treasury shares, at cost, 10,373,289 shares at March 31, 2013
 
 
 
   and 15,133,774 shares at December 31, 2012
(321
)
 
(447
)
Total equity
6,713

 
6,606

 
$
15,537

 
$
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 Three Months Ended March 31,
 
 
 
(In millions of dollars)
2013

 
2012

Operating cash flows:
 
 
 
Net income before non-controlling interests
$
424

 
$
354

Adjustments to reconcile net income to cash provided by operations:
 
 
 
Depreciation and amortization of fixed assets and capitalized software
69

 
66

Amortization of intangible assets
18

 
17

Adjustments to acquisition related contingent consideration liability
1

 
—

Provision for deferred income taxes
51

 
35

Gain on investments
(21
)
 
(20
)
Loss on disposition of assets
2

 
12

Stock option expense
7

 
11

Changes in assets and liabilities:
 
 
 
Net receivables
(120
)
 
(101
)
Other current assets
(54
)
 
151

Other assets
(334
)
 
(213
)
Accounts payable and accrued liabilities
53

 
(136
)
Accrued compensation and employee benefits
(727
)
 
(702
)
Accrued income taxes
39

 
17

Other liabilities
(37
)
 
26

Effect of exchange rate changes
36

 
(20
)
Net cash used for operations
(593
)
 
(503
)
Financing cash flows:
 
 
 
Purchase of treasury shares
(100
)
 
—

Proceeds from debt
50

 
248

Repayments of debt
(252
)
 
(252
)
Shares withheld for taxes on vested units – treasury shares
(65
)
 
(84
)
Issuance of common stock
135

 
77

Payments of contingent consideration for acquisitions
(3
)
 
(13
)
Distributions of non-controlling interests
(2
)
 
—

Dividends paid
(127
)
 
(121
)
Net cash used for financing activities
(364
)
 
(145
)
Investing cash flows:
 
 
 
Capital expenditures
(88
)
 
(51
)
Net sales of long-term investments
92

 
(5
)
Proceeds from sales of fixed assets
1

 
1

Dispositions
3

 
—

Acquisitions
(1
)
 
(60
)
Other, net
1

 
(1
)
Net cash provided by (used for) investing activities
8

 
(116
)
Effect of exchange rate changes on cash and cash equivalents
(89
)
 
61

Decrease in cash and cash equivalents
(1,038
)
 
(703
)
Cash and cash equivalents at beginning of period
2,301

 
2,113

Cash and cash equivalents at end of period
$
1,263

 
$
1,410

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 Three Months Ended March 31,
 
 
 
(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
(89
)
 
(118
)
Issuance of shares under stock compensation plans and employee stock purchase plans and related tax impact
(25
)
 
(20
)
Balance, end of period
$
993

 
$
1,018

RETAINED EARNINGS
 
 
 
Balance, beginning of year
$
8,628

 
$
7,949

Net income attributable to the Company
413

 
347

Dividend equivalents declared (per share amounts: $0.46 in 2013 and $0.44 in 2012)
(3
)
 
(3
)
Dividends declared – (per share amounts: $0.46 in 2013 and $0.44 in 2012)
(252
)
 
(240
)
Balance, end of period
$
8,786

 
$
8,053

ACCUMULATED OTHER COMPREHENSIVE GAIN (LOSS)
 
 
 
Balance, beginning of year
$
(3,307
)
 
$
(3,188
)
Other comprehensive income (loss), net of tax
(72
)
 
165

Balance, end of period
$
(3,379
)
 
$
(3,023
)
TREASURY SHARES
 
 
 
Balance, beginning of year
$
(447
)
 
$
(595
)
Issuance of shares under stock compensation plans and employee stock purchase plans
226

 
184

Purchase of treasury shares
(100
)
 
—

Balance, end of period
$
(321
)
 
$
(411
)
NON-CONTROLLING INTERESTS
 
 
 
Balance, beginning of year
$
64

 
$
57

Net income attributable to non-controlling interests
11

 
7

Other changes
(2
)
 
3

Balance, end of period
$
73

 
$
67

TOTAL EQUITY
$
6,713

 
$
6,265

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.
As discussed below in Note 2, effective January 1, 2013, the Corporate Benefits and Association businesses, previously part of Marsh's U.S. Consumer operations were transferred to Mercer, accordingly, these businesses are now part of the Consulting segment. Prior period segment amounts have been reclassified to conform with current year presentation.
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 disclosure 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”).
Effective January 1, 2013, the Corporate Benefits and Association businesses, previously part of Marsh's U.S. Consumer operations were transferred to Mercer. The presentation of segment revenue and segment operating income has been conformed accordingly. Prior period segment amounts have been reclassified to conform with current year presentations. See Note 16 for additional details about the impact of these reclassifications.
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 month period ended March 31, 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 $230 million related to regulatory requirements outside the U.S. or as collateral under captive insurance arrangements.
Investment (Loss) Income
The caption “Investment (loss) 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

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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 Trident II, a limited partnership. The Company’s investments may include direct investments in insurance or consulting companies and investments in private equity funds. The Company recorded gains on its investment in Trident II of $20 million in both quarters ended March 31, 2013 and 2012, including $15 million of deferred performance fees 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.
Income Taxes

The Company's effective tax rate in the first quarter of 2013 was 29.9%. The rate reflects the impact of 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 quarter of 2012 was 30.2%.

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 decreased from
$117 million at December 31, 2012 to $113 million at March 31, 2013. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between zero and approximately $21 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 $8 million and $11 million for the three-month periods ended March 31, 2013 and 2012, respectively. The Consulting segment recorded fiduciary interest income of $1 million in each of the three-month periods ended March 31, 2013 and 2012. 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 $10.1 billion at March 31, 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 $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.

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In the first quarter of 2013, the share based payment awards with non-forfeitable rights to dividends were 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. Reconciliation 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 is 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
March 31,
 
(In millions, except per share figures)
2013

 
2012

 
Net income from continuing operations
$
412

 
$
354

 
Less: Net income attributable to non-controlling interests
11

 
7

 
 
401

 
347

 
Basic weighted average common shares outstanding
548

 
542

 
Dilutive effect of potentially issuable common shares
9

 
9

 
Diluted weighted average common shares outstanding
557

 
551

 
Average stock price used to calculate common stock equivalents
$
36.21

 
$
31.95

 
There were 28.9 million and 38.2 million stock options outstanding as of March 31, 2013 and 2012, respectively.



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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 three-month periods ended March 31, 2013 and 2012.
 
(In millions of dollars)
2013

 
2012

Assets acquired, excluding cash
$
—

 
$
93

Liabilities assumed
—

 
(27
)
Contingent/deferred purchase consideration
—

 
(13
)
Net cash outflow for current year acquisitions
—

 
53

Deferred purchase consideration from prior years' acquisitions
1

 
7

Net cash outflow for acquisitions
$
1

 
$
60

(In millions of dollars)
2013

 
2012

Interest paid
$
59

 
$
65

Income taxes paid
$
85

 
$
79

The Company had non-cash issuances of common stock under its share-based payment plans of $130 million and $170 million for the three months ended March 31, 2013 and 2012. The Company recorded stock-based compensation expense related to equity awards of $34 million and $41 million for the three-month periods ended March 31, 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 March 31, 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
$
—

 
$
139

 
$
(256
)
 
$
(117
)
 
Amounts reclassified from accumulated other comprehensive income
$
—

 
$
45

 
$
—

 
$
45

 
Net current period other comprehensive income (loss)
$
—

 
$
184

 
$
(256
)
 
$
(72
)
 
Ending Balance
$
4

 
$
(3,267
)
 
$
(116
)
 
$
(3,379
)
 

The components of other comprehensive income (loss) for the three-month periods ended March 31, 2013 and 2012 are as follows:

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Three Months Ended March 31,
2013
 
2012
(In millions of dollars)
Pre-Tax
Tax
Net of Tax
 
Pre-Tax
Tax
Net of Tax
Foreign currency translation adjustments
$
(260
)
$
(4
)
$
(256
)
 
$
162

$
—

$
162

Unrealized investment gains (losses)
—

—

—

 
(1
)
1

(2
)
Pension/post-retirement plans:


 
 
 
 


 
Amortization of losses (gains) included in net periodic pension cost:


 
 
 
 


 
Prior service gains (a)
(6
)
(2
)
(4
)
 
(8
)
(5
)
(3
)
Net actuarial losses (a)
78

29

49

 
66

42

24

Subtotal
72

27

45

 
58

37

21

Foreign currency translation adjustments
180

41

139

 
(44
)
(28
)
(16
)
Pension/post-retirement plans (gains) losses
252

68

184

 
14

9

5

Other comprehensive income (loss)
$
(8
)
$
64

$
(72
)
 
$
175

$
10

$
165

(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 made no acquisitions during the first quarter of 2013.
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.
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.

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Table of Contents

•
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 three months of 2012 was $148 million which consisted of cash paid of $73 million and estimated contingent consideration of $13 million, and cash held in escrow of $62 million that was released in the first quarter of 2012. Contingent consideration arrangements are primarily based on EBITDA and revenue targets over periods from two to four years. The fair value of the contingent consideration was based on the relevant projections of the acquired entities. Estimated fair values of assets acquired and liabilities assumed are subject to adjustment when purchase accounting is finalized. During the first three months of 2012, the Company also paid $20 million of deferred purchase and contingent consideration related to acquisitions made in prior years.
Pro-Forma Information
The Company made no acquisitions during the first quarter of 2013. 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 quarter of 2012 and 2011. In accordance with accounting guidance related to pro-forma disclosure, the information presented for 2012 acquisitions is 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
March 31,
 
(In millions, except per share figures)
 
2012

 
2011

 
Revenue
 
$
3,058

 
$
2,929

 
Income from continuing operations
 
$
355

 
$
315

 
Net income attributable to the Company
 
$
348

 
$
321

 
Basic net income per share:
 
 
 
 
 
– Continuing operations
 
$
0.64

 
$
0.56

 
– Net income attributable to the Company
 
$
0.64

 
$
0.59

 
Diluted net income per share:
 
 
 
 
 
– Continuing operations
 
$
0.63

 
$
0.56

 
– Net income attributable to the Company
 
$
0.63

 
$
0.58

 


8.     Dispositions

Summarized Statements of Income data for discontinued operations is as follows:
 
Three Months Ended March 31,
 
(In millions of dollars, except per share figures)
2013

 
2012

 
Disposals of discontinued operations
$
1

 
$
—

 
Income tax (credit) expense
(11
)
 
—

 
Disposals of discontinued operations, net of tax
12

 
—

 
Discontinued operations, net of tax
$
12

 
$
—

 
Discontinued operations, net of tax per share
 
 
 
 
– Basic
$
0.02

 
$
—

 
– Diluted
$
0.02

 
$
—

 


- 15 -
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The credits in discontinued operations for the three months ended March 31, 2013 primarily result from 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:
 
March 31,
 
 
 
(In millions of dollars)
2013

 
2012

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

 
$
6,562

Goodwill acquired
—

 
89

Other adjustments(a)
(40
)
 
24

Balance at March 31, 2013
$
6,752

 
$
6,675

(a) 
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:
  
March 31, 2013
 
December 31, 2012
(In millions of dollars)
Gross
Cost

 
Accumulated
Amortization

 
Net
Carrying
Amount

 
Gross
Cost

 
Accumulated
Amortization

 
Net
Carrying
Amount

Amortized intangibles
$
806

 
$
359

 
$
447

 
$
814

 
$
345

 
$
469

Aggregate amortization expense for the three months ended March 31, 2013 and 2012 was $18 million and $17 million, respectively, 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 March 31, 2013)
$
52

2014
67

2015
66

2016
55

2017
51

Subsequent years
156

 
$
447


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

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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
Equity Securities & 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.
Other Sovereign Government Obligations, Municipal Bonds and Corporate Bonds - Level 2
The investments in this caption, primarily investments in Germany and France, 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).

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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 to 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 March 31, 2013 and December 31, 2012.
 
 
Identical Assets
(Level 1)
 
Observable Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
(In millions of dollars)
03/31/13

 
12/31/12

 
03/31/13

 
12/31/12

 
03/31/13

 
12/31/12

 
03/31/13

 
12/31/12

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

 
$
139

 
$
—

 
$
—

 
$
—

 
$
—

 
$
138

 
$
139

Money market funds(b)
22

 
483

 
—

 
—

 
—

 
—

 
22

 
483

Interest rate swap derivatives(c)
—

 
—

 
5

 
6

 
—

 
—

 
5

 
6

Total assets measured at fair value
$
160

 
$
622

 
$
5

 
$
6

 
$
—

 
$
—

 
$
165

 
$
628

Fiduciary Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and local obligations (including non-U.S. locales)
$
—

 
$
—

 
$
2

 
$
3

 
$
—

 
$
—

 
$
2

 
$
3

Money market funds
107

 
149

 
—

 
—

 
—

 
—

 
107

 
149

Total fiduciary assets measured at fair value
$
107

 
$
149

 
$
2

 
$
3

 
$
—

 
$
—

 
$
109

 
$
152

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration liability(d)
$
—

 
$
—

 
$
—

 
$
—

 
$
61

 
$
63

 
$
61

 
$
63

Senior Notes due 2014(e)
—

 
—

 
255

 
256

 
—

 
—

 
255

 
256

Total liabilities measured at fair value
$
—

 
$
—

 
$
255

 
$
256

 
$
61

 
$
63

 
$
316

 
$
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 three-month period ended March 31, 2013, there were no assets or liabilities that transferred between Level 1 and Level 2 or between Level 2 and Level 3.

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The table below sets forth a summary of the changes in fair value of the Company’s Level 3 liabilities as of March 31, 2013 and 2012 that represent contingent consideration related to acquisitions:
 
(In millions of dollars)
2013

 
2012

 
Balance at January 1,
$
63

 
$
110

 
Additions
—

 
10

 
Payments
(3
)
 
(13
)
 
Revaluation Impact
1

 
1

 
Balance at March 31,
$
61

 
$
108

 
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 $1 million in the three-month period ended March 31, 2013. A 5% increase in the above mentioned projections would increase the liability by approximately $28 million. A 5% decrease in the above mentioned projections would decrease the liability by approximately $15 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 $16 million at March 31, 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 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 March 31, 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 March 31, 2013, the actual allocation for the U.K. Plan was 55% equities and equity alternatives and 45% 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.

- 19 -
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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 March 31,
Benefits
 
Benefits
(In millions of dollars)
2013

 
2012

 
2013

 
2012

Service cost
$
64

 
$
61

 
$
2

 
$
2

Interest cost
145

 
148

 
3

 
3

Expected return on plan assets
(228
)
 
(226
)
 
—

 
—

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

 
(3
)
Recognized actuarial loss
78

 
66

 
—

 
—

Net periodic benefit cost
$
54

 
$
44

 
$
5

 
$
2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Plans only
Pension
 
Postretirement
For the Three Months Ended March 31,
Benefits
 
Benefits
(In millions of dollars)
2013

 
2012

 
2013

 
2012

Service cost
$
27

 
$
24

 
$
1

 
$
1

Interest cost
57

 
57

 
2

 
2

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

 
—

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

 
(3
)
Recognized actuarial loss
51

 
37

 
—

 
—

Net periodic benefit cost
$
50

 
$
33

 
$
3

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Significant non-U.S. Plans only
Pension
 
Postretirement
For the Three Months Ended March 31,
Benefits
 
Benefits
(In millions of dollars)
2013

 
2012

 
2013

 
2012

Service cost
$
37

 
$
37

 
$
1

 
$
1

Interest cost
88

 
91

 
1

 
1

Expected return on plan assets
(147
)
 
(145
)
 
—

 
—

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

 
—

Recognized actuarial loss
27

 
29

 
—

 
—

Net periodic benefit cost
$
4

 
$
11

 
$
2

 
$
2

 
 
 
 
 
 
 
 
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
March 31
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
%
 
—
%
 
—
%

- 20 -
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The Company made approximately $402 million of contributions to its U.S. and non-U.S. defined benefit plans in the first three months of 2013, including $250 million and $70 million of discretionary contributions to its U.K. and Canadian pension plans, respectively, and expects to contribute approximately $246 million to its non-qualified U.S. pension and non-U.S. pensions plans during the remainder of 2013.

12.    Debt
The Company’s outstanding debt is as follows:
 
(In millions of dollars)
March 31,
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
324

 
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
420

 
422

Term Loan Facility - due 2016
50

 
—

Other
1

 
1

 
2,715

 
2,918

Less current portion
10

 
260

 
$
2,705

 
$
2,658

The senior notes in the table above are publicaly 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 five-year unsecured revolving credit facility. 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 March 31, 2013.
In December 2012, the Company closed on a $50 million, three-year delayed draw term loan facility. The interest rate on this facility 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 March 31, 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

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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 March 31, 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
$
(1
)
 
$
1

 
$
—

 
$
(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.

  
March 31, 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
$
2,705

 
$
3,016

 
$
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 $7 million in the first three months of 2013, the majority of which related to severance.
Details of the activity from January 1, 2012 through March 31, 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 3/31/13
Severance
$
27

 
$
46

 
$
(38
)
 
$
1

 
$
36

 
$
4

 
$
(17
)
 
$
(3
)
 
$
20

Future rent under non-cancelable leases and other costs
154

 
32

 
(50
)
 
(2
)
 
134

 
3

 
(12
)
 
(2
)
 
123

Total
$
181

 
$
78

 
$
(88
)
 
$
(1
)
 
$
170

 
$
7

 
$
(29
)
 
$
(5
)
 
$
143

The expenses associated with the above initiatives are included in compensation and benefits and other operating expenses in the consolidated statements of income. The liabilities associated with these initiatives are classified on

- 22 -
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the consolidated balance sheets as Accounts payable, Other liabilities, or Accrued compensation, depending on the nature of the items.

14.    Common Stock
During the first three months of 2013, the Company repurchased 2.7 million shares of its common stock for consideration of $100 million. The Company remains authorized to purchase additional shares of its common stock up to a value of $223 million. The Company did not repurchase any shares in the first quarter of 2012.

15.    Claims, Lawsuits and Other Contingencies

Errors and Omissions Claims

The Company and its subsidiaries, particularly Marsh and Mercer, are subject to a significant number of claims, lawsuits and proceedings in the ordinary course of business. Such claims and lawsuits consist principally of alleged errors and omissions in connection with the performance of professional services, including the placement of insurance, the provision of actuarial services for corporate and public sector clients, and the provision of consulting services relating to the drafting and interpretation of trust deeds and other documentation governing pension plans. Certain of these claims, particularly in the U.S. and the U.K., seek damages, including punitive and treble damages, in amounts that could, if awarded, be significant. In establishing liabilities for errors and omissions claims in accordance with FASB ASC Subtopic No. 450-20 (Contingencies-Loss Contingencies), the Company utilizes case level reviews by inside and outside counsel and an internal actuarial analysis to estimate potential losses. A liability is established when a loss is both probable and reasonably estimable. The liability is reviewed quarterly and adjusted as developments warrant. In many cases, the Company has not recorded a liability, other than for legal fees to defend the claim, because we are unable, at the present time, to make a determination that a loss is both probable and reasonably estimable.

To the extent that expected losses exceed our deductible in any policy year, the Company also records an asset for the amount that we expect to recover under any available third-party insurance programs. The Company has varying levels of third-party insurance coverage, with policy limits and coverage terms varying significantly by policy year.

Governmental Inquiries and Related Claims

In January 2005, the Company and its subsidiary Marsh Inc. entered into a settlement agreement with the New York State Attorney General (“NYAG”) and the New York State Insurance Department to settle a civil complaint and related citation regarding Marsh's use of market service agreements with various insurance companies. The parties subsequently entered into an amended and restated settlement agreement in February 2010 that restored a level playing field for Marsh.

Numerous private party lawsuits based on similar allegations to those made in the NYAG complaint were commenced against the Company, one or more of its subsidiaries, and their current and former directors and officers. Most of these matters have been resolved. Two actions instituted by policyholders against the Company, Marsh and certain Marsh subsidiaries remain pending in federal court.

Our activities are regulated under the laws of the United States and its various states, the European Union and its member states, and the other jurisdictions in which the Company operates. In the ordinary course of business the Company is also subject to investigations, lawsuits and/or other regulatory actions undertaken by governmental authorities.

Other Contingencies-Guarantees

In connection with its acquisition of U.K.-based Sedgwick Group in 1998, the Company acquired several insurance underwriting businesses that were already in run-off, including River Thames Insurance Company Limited (“River Thames”), which the Company sold in 2001. Sedgwick guaranteed payment of claims on certain policies underwritten through the Institute of London Underwriters (the “ILU”) by River Thames. The policies covered by this guarantee are reinsured up to £40 million by a related party of River Thames. Payment of claims under the reinsurance agreement is collateralized by segregated assets held in a trust. As of March 31, 2013, the reinsurance coverage exceeded the best estimate of the projected liability of the policies covered by the guarantee. To the

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extent River Thames or the reinsurer is unable to meet its obligations under those policies, a claimant may seek to recover from us under the guarantee.

From 1980 to 1983, the Company owned indirectly the English & American Insurance Company (“E&A”), which was a member of the ILU. The ILU required the Company to guarantee a portion of E&A's obligations. After E&A became insolvent in 1993, the ILU agreed to discharge the guarantee in exchange for the Company's agreement to post an evergreen letter of credit that is available to pay claims by policyholders on certain E&A policies issued through the ILU and incepting between July 3, 1980 and October 6, 1983. Certain claims have been paid under the letter of credit and we anticipate that additional claimants may seek to recover against the letter of credit.

Kroll-related Matters

Under the terms of a stock purchase agreement with Altegrity, Inc. (“Altegrity”) related to Altegrity's purchase of Kroll from the Company in August 2010, a copy of which is attached as an exhibit to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2010, the Company agreed to provide a limited indemnity to Altegrity with respect to certain Kroll-related litigation and regulatory matters.


**********

The pending proceedings and other matters described in this Note 15 on Claims, Lawsuits and Other Contingencies may expose the Company or its subsidiaries to liability for significant monetary damages and other forms of relief. Where a loss is both probable and reasonably estimable, the Company establishes liabilities in accordance with FASB ASC Subtopic No. 450-20 (Contingencies-Loss Contingencies). Except as described above, the Company is not able at this time to provide a reasonable estimate of the range of possible loss attributable to these matters or the impact they may have on the Company's consolidated results of operations, financial position or cash flows. This is primarily because these matters are still developing and involve complex issues subject to inherent uncertainty. Adverse determinations in one or more of these matters could have a material impact on the Company's consolidated results of operations, financial condition or cash flows in a future period.



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16.    Segment Information
The Company is organized based on the types of services provided. Under this organizational structure, the Company’s business segments are:
▪
Risk and Insurance Services, comprising insurance services (Marsh) and reinsurance services (Guy Carpenter); and
▪
Consulting, comprising Mercer and Oliver Wyman Group
The accounting policies of the segments are the same as those used for the consolidated financial statements described in Note 1 to the Company’s 2012 10-K. Segment performance is evaluated based on segment operating income, which includes directly related expenses, and charges or credits related to integration and restructuring but not the Company’s corporate-level expenses. Revenues are attributed to geographic areas on the basis of where the services are performed.

Effective January 1, 2013, the Corporate Benefits and Association businesses, previously part of Marsh's U.S. Consumer operations, were transferred to Mercer. The segment data presented below reflects the reclassification of prior year segment data to conform with the current year presentations.
Selected information about the Company’s operating segments for the three-month periods ended March 31, 2013 and 2012 are as follows:
 
 
Three Months Ended
March 31,
(In millions of dollars)
Revenue

 
Operating
Income
(Loss)

2013 –
 
 
 
Risk and Insurance Services
$
1,771

(a) 
$
468

Consulting
1,362

(b) 
187

Total Operating Segments
3,133

  
655

Corporate / Eliminations
(7
)
 
(48
)
Total Consolidated
$
3,126

  
$
607

2012–
 
 
 
Risk and Insurance Services
$
1,689

(a) 
$
412

Consulting
1,371

(b) 
164

Total Operating Segments
3,060

  
576

Corporate / Eliminations
(9
)
 
(49
)
Total Consolidated
$
3,051

  
$
527

(a) 
Includes inter-segment revenue of $1 million in 2012, interest income on fiduciary funds of $8 million and $11 million in 2013 and 2012, respectively, and equity method income of $1 million in both 2013 and 2012, respectively.
(b) 
Includes inter-segment revenue of $7 million and $8 million in 2013 and 2012, respectively, and interest income on fiduciary funds of $1 million in both 2013 and 2012 respectively.


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Details of operating segment revenue for the three-month periods ended March 31, 2013 and 2012 are as follows:
 
 
Three Months Ended
March 31,
(In millions of dollars)
2013

 
2012

Risk and Insurance Services
 
 
 
Marsh
$
1,395

 
$
1,330

Guy Carpenter
376

 
359

Total Risk and Insurance Services
1,771

 
1,689

Consulting
 
 
 
Mercer
1,041

 
1,015

Oliver Wyman Group
321

 
356

Total Consulting
1,362

 
1,371

Total Operating Segments
3,133

 
3,060

Corporate/ Eliminations
(7
)
 
(9
)
Total
$
3,126

 
$
3,051


The following reflects the impact of the transfer discussed above on prior years' segment information:
 
Three Months Ended March 31, 2012
(In millions of dollars)
As Reported
 
Reclassification
 
Current Presentation
Revenue
 
 
 
 
 
Risk and Insurance Services
 
 
 
 


Marsh
$
1,388

 
$
(58
)
 
$
1,330

Guy Carpenter
359

 
—

 
359

Total Risk and Insurance Services
1,747

 
(58
)
 
1,689

Consulting
 
 
 
 
 
Mercer
957

 
58

 
1,015

Oliver Wyman Group
356

 
—

 
356

Total Consulting
1,313

 
58

 
1,371

Total Operating Segments
3,060

 
—

 
3,060

Corporate Eliminations
(9
)
 
—

 
(9
)
Total Revenue
$
3,051

 
$
—

 
$
3,051

Operating Income
 
 
 
 
 
Risk and Insurance Services
417

 
(5
)
 
412

Consulting
159

 
5

 
164

Total Operating Segments
576

 
—

 
576

Corporate Eliminations
(49
)
 
—

 
(49
)
Total Consolidated
$
527

 
$
—

 
$
527



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The following tables reflect the results for revenue and operating income by segment after the transfer of the Consumer operations business:
 

First
Quarter
2012
 
Second
Quarter
2012
 
Third
Quarter
2012
 
Fourth Quarter
2012
 
Full Year 2012
Risk and Insurance Services
 
 
 
 
 
 
 
 
 
Marsh
$
1,330

 
$
1,364

 
$
1,201

 
$
1,370

 
$
5,265

Guy Carpenter
359

 
277

 
250

 
199

 
1,085

    Total Risk and Insurance Services
1,689

 
1,641

 
1,451

 
1,569

 
6,350

Consulting
 
 
 
 
 
 
 
 
 
Mercer
1,015

 
1,017

 
1,054

 
1,061

 
4,147

Oliver Wyman Group
356

 
381

 
351

 
378

 
1,466

    Total Consulting
1,371

 
1,398

 
1,405

 
1,439

 
5,613

    Total operating segments
3,060

 
3,039

 
2,856

 
3,008

 
11,963

Corporate Eliminations
(9
)
 
(13
)
 
(11
)
 
(6
)
 
(39
)
    Total Revenue
$
3,051

 
$
3,026

 
$
2,845

 
$
3,002

 
$
11,924


 
First
Quarter
2012
 
Second Quarter
2012
 
Third
Quarter
2012
 
Fourth
Quarter
2012
 
Full Year 2012
Operating Income
 
 
 
 
 
 
 
 
 
Risk and Insurance Services
412

 
390

 
222

 
310

 
1,334

Consulting
164

 
183

 
205

 
140

 
692

    Total operating segments
576

 
573

 
427

 
450

 
2,026

Corporate
(49
)
 
(55
)
 
(49
)
 
(44
)
 
(197
)
    Total Operating Income
527

 
518

 
378

 
406

 
1,829



17.    New Accounting Guidance

On February 13, 2013 the FASB issued new accounting guidance that adds new disclosure requirements for items reclassified out of accumulated other comprehensive income. The Company implemented this new guidance for the reporting period ended March 31, 2013. Other than enhanced disclosure, the adoption of this new guidance did not have a material effect on the Company's financial statements.
In the first quarter of 2012, the Company adopted new accounting guidance related to the presentation of Comprehensive Income. The new guidance gives an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The guidance did not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. Other than enhanced disclosure, adoption of this new guidance will not have a material effect on the Company's financial statements.
In January 2012, the Company adopted guidance issued by the FASB on accounting and disclosure requirements related to fair value measurements. The guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes, the sensitivity of the fair value to changes in unobservable inputs and the hierarchy classification, valuation techniques, and inputs for assets and liabilities whose fair value is only disclosed in the footnotes.



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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Marsh & McLennan Companies, Inc. and Subsidiaries (“the Company”) is a global professional services firm providing advice and solutions principally in the areas of risk, strategy, and human capital. It is the parent company of a number of the world's leading risk experts and specialty consultants, including: Marsh, the insurance broker, intermediary and risk advisor; Guy Carpenter, the risk and reinsurance specialist; Mercer, the provider of HR and related financial advice and services; and Oliver Wyman Group, the management, economic and brand consultancy. With approximately 54,000 employees worldwide and annual revenue of nearly $12 billion, the Company provides analysis, advice and transactional capabilities to clients in over 100 countries.
The Company conducts business through two segments:
•
Risk and Insurance Services includes risk management activities (risk advice, risk transfer and risk control and mitigation solutions) as well as insurance and reinsurance broking and services. We conduct business in this segment through Marsh and Guy Carpenter.
•
Consulting includes Health, Retirement, Talent and Investments consulting and services, and specialized management and economic consulting services. We conduct business in this segment through Mercer and Oliver Wyman Group.

Effective January 1, 2013, the Corporate benefits and Association businesses, previously part of Marsh's U.S. Consumer operations, were transferred to Mercer. Also, effective January 1, 2013, Mercer realigned management responsibility for its outsourcing business within its other lines of business. Accordingly, we have reclassified prior year segment data and related disclosures contained in this management's discussion and analysis to conform with current year presentation.
A reconciliation of segment operating income to total operating income is included in Note 16 to the consolidated financial statements included in Part II Item 8 in this report. The accounting policies used for each segment are the same as those used for the consolidated financial statements.
This Management's Discussion & Analysis ("MD&A") contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. See “Information Concerning Forward-Looking Statements” at the outset of this report.


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Consolidated Results of Operations
 
For the Three Months Ended March 31,
 
 
(In millions, except per share figures)
2013

2012

 
Revenue
$
3,126

$
3,051

 
Expense:
 
 
 
Compensation and Benefits
1,803

1,796

 
Other Operating Expenses
716

728

 
Operating Expenses
2,519

2,524

 
Operating Income
607

527

 
Income from Continuing Operations
412

354

 
Discontinued Operations, net of tax
12

—

 
Net Income Before Non-Controlling Interest
424

354

 
Net Income Attributable to the Company
$
413

$
347

 
Income From Continuing Operations Per Share:
 
 
 
Basic
$
0.73

$
0.64

 
Diluted
$
0.72

$
0.63

 
Net Income Per Share Attributable to the Company:
 
 
 
Basic
$
0.75

$
0.64

 
Diluted
$
0.74

$
0.63

 
Average Number of Shares Outstanding:
 
 
 
Basic
548

542

 
Diluted
557

551

 
Shares Outstanding at March 31
550

546

 
The Company's consolidated operating income increased 15% to $607 million in the first quarter of 2013 compared with $527 million in the prior year. This was driven by the combined effect of a 2% increase in revenue and slightly lower expenses as compared to the same period last year. Risk and Insurance Services operating income increased $56 million or 14% increase while Consulting increased $23 million or 14% compared with the same period last year.
Consolidated Revenue and Expense
The Company conducts business in many countries, as a result of which the impact of foreign exchange rate movements may impact period-to-period comparisons of revenue. Similarly, the revenue impact of acquisitions and dispositions, including transfers among businesses, may impact period-to-period comparisons of revenue. Underlying revenue, presented below, measures the change in revenue from one period to another by isolating these impacts. The impact of foreign currency exchange fluctuations and acquisitions and dispositions, including transfers among businesses, on the Company’s operating revenues by segment is as follows:
 

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Three Months Ended
March 31,
 
%
Change
GAAP
Revenue
 
Components of Revenue Change*
Currency
Impact
 
Acquisitions/
Dispositions
Impact
 
Underlying
Revenue
(In millions of dollars)
2013

 
2012

 
Risk and Insurance Services
 
 
 
 
 
 
 
 
 
 
 
Marsh
$
1,388

 
$
1,321

 
5
 %
 
—
%
 
2
 %
 
4
 %
Guy Carpenter
375

 
357

 
5
 %
 
1
%
 
—
 %
 
4
 %
Subtotal
1,763

 
1,678

 
5
 %
 
—
%
 
2
 %
 
4
 %
Fiduciary Interest Income
8

 
11

 
 
 
 
 
 
 
 
Total Risk and Insurance Services
1,771

 
1,689

 
5
 %
 
—
%
 
2
 %
 
3
 %
Consulting
 
 
 
 
 
 
 
 
 
 
 
Mercer
1,041

 
1,015

 
3
 %
 
—
%
 
—
 %
 
3
 %
Oliver Wyman Group
321

 
356

 
(10
)%
 
—
%
 
(2
)%
 
(9
)%
Total Consulting
1,362

 
1,371

 
(1
)%
 
—
%
 
—
 %
 
—
 %
Corporate/Eliminations
(7
)
 
(9
)
 
 
 
 
 
 
 
 
Total Revenue
$
3,126

 
$
3,051

 
2
 %
 
—
%
 
1
 %
 
2
 %

The following table provides more detailed revenue information for certain of the components presented above:
 
 
Three Months Ended
March 31,
 
%
Change
GAAP
Revenue
 
Components of Revenue Change*
Currency
Impact
 
Acquisitions/
Dispositions
Impact
 
Underlying
Revenue
(In millions of dollars)
2013

 
2012

 
Marsh:
 
 
 
 
 
 
 
 
 
 
 
EMEA
$
594

 
$
577

 
3
 %
 
1
 %
 
(1
)%
 
3
 %
Asia Pacific
147

 
142

 
4
 %
 
(2
)%
 
—
 %
 
6
 %
Latin America
78

 
74

 
5
 %
 
(8
)%
 
—
 %
 
13
 %
Total International
819

 
793

 
3
 %
 
(1
)%
 
—
 %
 
5
 %
U.S. / Canada
569

 
528

 
8
 %
 
—
 %
 
6
 %
 
2
 %
Total Marsh
$
1,388

 
$
1,321

 
5
 %
 
—
 %
 
2
 %
 
4
 %
Mercer:
 
 
 
 
 
 
 
 
 
 
 
Health
$
381

 
$
351

 
9
 %
 
—
 %
 
2
 %
 
6
 %
Retirement
343

 
360

 
(5
)%
 
—
 %
 
(3
)%
 
(1
)%
Talent
123

 
125

 
(1
)%
 
(1
)%
 
4
 %
 
(4
)%
Investments
194

 
179

 
8
 %
 
(1
)%
 
1
 %
 
9
 %
Total Mercer
$
1,041

 
$
1,015

 
3
 %
 
—
 %
 
—
 %
 
3
 %

Underlying revenue measures the change in revenue using consistent currency exchange rates, excluding the impact of certain items such as: acquisitions, dispositions and transfers among businesses.
*
Components of revenue change may not add due to rounding.
 Revenue
Consolidated revenue for the first quarter of 2013 was $3.1 billion, an increase of 2% on both a reported and underlying basis from the first quarter of 2012.

Revenue in the Risk and Insurance Services segment for the first quarter of 2013 was $1.8 billion, an increase of 5% from the same period last year on a reported basis and 3% on an underlying basis. Marsh experienced

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underlying revenue growth in all geographies with particularly strong underlying revenue growth of 13% in Latin America and 6% in Asia Pacific. Guy Carpenter's revenue increased 5% on a reported basis and 4% on an underlying basis driven by improved retention rates as well as increased new business. On an underlying basis, Consulting revenue was flat, reflecting an increase of 3% in Mercer and a decrease of 9% in Oliver Wyman.
Operating Expense
Consolidated operating expense in the first quarter of 2013 was slightly lower from the same period of 2012.
Risk and Insurance Services
The results of operations for the Risk and Insurance Services segment are presented below:
 
For the Three Months Ended March 31,
 
 
(In millions of dollars)
2013

2012

 
Revenue
$
1,771

$
1,689

 
Compensation and Benefits
919

881

 
Other Expenses
384

396

 
Expense
1,303

1,277

 
Operating Income
$
468

$
412

 
Operating Income Margin
26.4
%
24.4
%
 
Revenue
Revenue in the Risk and Insurance Services segment in the first quarter of 2013 was $1.8 billion, an increase of 5% on a reported basis and 3% on an underlying basis compared with the same period in 2012.
In Marsh, revenue in the first quarter of 2013 was $1.4 billion, an increase of 5% compared with the same quarter of the prior year, and 4% on an underlying basis. The underlying revenue grew across all major geographic markets. International operations had underlying revenue growth of 5%, reflecting growth of 13% in Latin America; 6% in Asia Pacific; and 3% in EMEA. Underlying revenue increased 2% in the U.S. / Canada division. The increase in underlying revenue was driven by continued strong growth in new business development.
Guy Carpenter's first quarter revenue was $375 million, an increase of 5% on a reported basis, or 4% on an underlying basis. The increase in underlying revenue was driven by new business and higher retention rates.
Expense
Expenses in the Risk and Insurance Services segment increased 2% in the first quarter of 2013 compared with the same period in the prior year, reflecting a 1% increase on an underlying basis and a 1% increase from acquisitions. Underlying expenses increased 1% in the first quarter of 2013 compared with the same period last year reflecting the impact of higher base salaries and pension costs, offset by generally lower other operating expenses.
Consulting
The results of operations for the Consulting segment are presented below:
For the Three Months Ended March 31,
 
 
(In millions of dollars)
2013

2012

 
Revenue
$
1,362

$
1,371

 
Compensation and Benefits
796

828

 
Other Expenses
379

379

 
Expense
1,175

1,207

 
Operating Income
$
187

$
164

 
Operating Income Margin
13.7
%
12.0
%
 


- 31 -
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Revenue
Consulting revenue in the first quarter of 2013 decreased 1% on a reported basis but was flat on an underlying basis compared with the same period in 2012. Mercer's revenue was $1.0 billion in the first quarter of 2013, an increase of 3% on both a reported basis and an underlying basis as compared to the same period last year. The increase in underlying revenue was driven by growth in its Health and Investments lines of business, which increased 6% and 9%, respectively, compared with the same period last year. Oliver Wyman's revenue decreased 10% to $321 million in the first quarter of 2013, or 9% on an underlying basis, as ongoing weakness in Europe as well as a slowdown in North America offset expansion in its other, smaller geographic regions.
Expense
Consulting expenses in the first quarter of 2013 decreased 3% on a reported basis compared with the same period in 2012, reflecting a 2% decrease on an underlying basis and a 1% decrease due to the impact of dispositions. The underlying expense decrease in the first quarter of 2013 is primarily due to lower base salaries and executive compensation costs.
Corporate and Other
The following results of Corporate and Other include the run-off of the Corporate Advisory and Restructuring ("CARG") operations:
 
For the Three Months Ended March 31,
 
 
(In millions of dollars)
2013

2012

 
Corporate Advisory and Restructuring Operating Income
$
—

$
1

 
Corporate Expense
(48
)
(50
)
 
Total Corporate and Other
$
(48
)
$
(49
)
 
Corporate expenses in the first quarter of 2013 were $48 million compared with $50 million in the prior year. The decrease is primarily due to lower amortization of equity awards in the first quarter of 2013 as compared to the same quarter in the prior year, as the prior year's expense included the impact of accelerated amortization for retirement eligible senior executives.
Interest
Interest income earned on corporate funds amounted to $4 million in the first quarter of 2013 compared with $6 million in the first quarter of 2012 due to lower interest rates. Interest expense decreased $2 million in 2013 compared with the first quarter of 2012. The decrease in interest expense is primarily due to the maturity of senior notes in February of 2013.
Investment Income
For the first three months of 2013, investment income was $21 million, primarily related to the Company's private equity investment in Trident II, which divested its remaining position in the common stock of Axis. For the three months of 2012, the Company recorded $20 million of investment income, primarily due to mark-to-market gains on private equity fund investments.
Income Taxes

The Company's effective tax rate in the first quarter of 2013 was 29.9%. The rate reflects 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 quarter of 2012 was 30.2%.

The effective tax rate is sensitive to the geographic mix and repatriation of the Company's earnings, which may result in higher or lower tax rates. U.S. federal and state corporate tax rates substantially exceed tax rates applicable in most jurisdictions outside the U.S. A significant portion of the Company's profits were earned outside the U.S. In 2013 the forecasted pre-tax income in the U.K., Australia, Canada and France are expected to account for approximately 60% of the Company's total non-U.S. pre-tax income, with estimated effective rates in those countries of 23%, 30%, 27% and 42%, respectively. Consequently, continued improvement in the

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profitability of the Company's U.S.-based operations would tend to result in higher effective tax rates. Losses in certain jurisdictions cannot be offset by earnings from other operations, and may require valuation allowances affecting the rate, depending on estimates of the realizability of associated deferred tax assets. The tax rate is also sensitive to changes in unrecognized tax benefits, including the impact of settled tax audits and expired statutes of limitation.

Changes in tax laws or tax rulings may have a significant impact on our effective tax rate. Discussions continue within Congress and the Administration about broad reform of the corporate tax system in the US. It is not possible to predict the ultimate outcome of these discussions. Future legislation could have a material impact on our effective tax rate and consolidated financial statements due to reforms that could include changes in the corporate tax rate and in the way US corporations are taxed on foreign earnings.

The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in the tax return. The Company's gross unrecognized tax benefits decreased from $117 million at December 31, 2012 to $113 million at March 31, 2013. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between zero and approximately $21 million within the next twelve months due to settlement of audits and expiration of statutes of limitation.

Dispositions
Summarized Statements of Income data for discontinued operations is as follows:
For the Three Months Ended March 31,
 
 
(In millions of dollars, except per share figures)
2013

2012

 
Disposals of discontinued operations
$
1

$
—

 
Income tax expense (credit)
(11
)
—

 
Disposals of discontinued operations, net of tax
12

—

 
Discontinued operations, net of tax
$
12

$
—

 
Discontinued operations, net of tax per share
 
 
 
– Basic
$
0.02

$
—

 
– Diluted
$
0.02

$
—

 
The credits in discontinued operations for the three months ended March 31, 2013 primarily results from tax indemnities related to the Putnam sales.


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Liquidity and Capital Resources
The Company is organized as a holding company, a legal entity separate and distinct from its operating subsidiaries. As a holding company without significant operations of its own, the Company is dependent upon dividends and other payments from its operating subsidiaries to meet its obligations for paying principal and interest on outstanding debt obligations, for paying dividends to stockholders and for corporate expenses. Other sources of liquidity include borrowing facilities discussed below in financing cash flows.
The Company derives a significant portion of its revenue and operating profit from operating subsidiaries located outside of the United States. Funds from the Company’s operating subsidiaries located outside of the United States are regularly repatriated to the United States out of annual earnings. At December 31, 2012, the Company had approximately $1.3 billion of cash and cash equivalents in its foreign operations of which all but approximately $80 million is considered to be permanently invested in those operations to fund foreign investments and working capital needs. The Company expects to continue its practice of repatriating foreign funds out of current annual earnings. The analysis of the portion of 2013 earnings that the Company expects to repatriate and the portion that will be permanently reinvested will be finalized later in the year as the amount of non-U.S. earnings and the Company’s cash requirements become more certain. While management does not foresee a need to repatriate the funds which are currently deemed permanently invested, if facts or circumstances change management could elect to repatriate them, if necessary, which could result in higher effective tax rates in the future.
Cash on our consolidated balance sheets includes funds available for general corporate purposes. Funds held on behalf of clients in a fiduciary capacity are segregated and shown separately in the consolidated balance sheets as an offset to fiduciary liabilities. Fiduciary funds cannot be used for general corporate purposes, and should not be considered as a source of liquidity for the Company.
Operating Cash Flows
The Company used $593 million of cash from operations for the three months ended March 31, 2013, compared with $503 million used by operations for the same period in 2012. These amounts reflect the net income of the Company during those periods, excluding gains or losses from investments and from the disposition of businesses, adjusted for non-cash charges, and changes in working capital which relate primarily to the timing of payments of accrued liabilities or receipts of assets. During the first quarter of 2013, the Company made $320 million of discretionary pension contributions, discussed in more detail below, compared to $200 million for the same period in 2012.
Pension Related Items
The Company's policy for funding its tax-qualified defined benefit plans is to contribute amounts at least sufficient to meet the funding requirements set forth in the applicable laws or regulations of the U.S. and other jurisdictions. During the first quarter of 2013, the Company contributed $396 million to its non-U.S. pension plans and $6 million to its U.S. pension plans, including discretionary contributions of $250 million to its U.K. pension plan and $70 million to its Canadian plan. During the first three months of 2012, the Company contributed $167 million to its non-U.S. plans and $106 million to its U.S. plans, including discretionary contributions of $100 million to its U.S. plans and $100 million to its non-U.S. plans.

In the U.S., contributions to the tax-qualified defined benefit plans are based on ERISA guidelines and the Company generally expects to maintain a funded status of 80% or more of the liability determined under the ERISA guidelines. The pension stabilization provisions included in the “Moving Ahead for Progress in the 21st Century Act” enacted on July 6, 2012, changed the methodology for determining the discount rate used for calculating plan liabilities under ERISA, which determines, in part, the funding requirements. After considering the impact of the pension funding stabilization provisions discussed above, the Company does not expect any contributions will be required to its U.S. tax-qualified plan through the end of 2014.

The Company has a large number of non-U.S. defined benefit pension plans, the largest of which are in the U.K., which comprise approximately 82% of non-U.S. plan assets. In the U.K., contributions to defined benefit pension plans are determined through a negotiation process between the Company and the plans' trustee that typically occurs every three years in conjunction with the valuation of the plans. This process is governed by U.K. pension regulations. The assumptions that result from the funding negotiations are different than those used for U.S. GAAP and currently result in a lower funded status than under U.S. GAAP. The current funding plan was based on assumptions (including interest rates, inflation, salary increases and mortality) that reflected market conditions as of year-end 2009, was agreed to in early 2011 and forms the basis for the Company's aggregate contributions to the U.K. plans for 2011 through 2013. During the first three months of 2013, the Company made required contributions

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of $76 million to its non-U.S. defined benefit pension plans, including amounts called for under the U.K. funding plan. Additionally, the Company made a $250 million discretionary contribution to the U.K. plans and $70 million to its Canadian plan. The Company expects to fund an additional $227 million to its non-U.S. plans over the remainder of 2013, of which approximately half relates to the U.K. plans. For the entire year, the U.K. plans represent approximately two thirds of the total non-U.S. required contributions. The valuation of the U.K. pension plan at December 31, 2012 that results from the negotiation process described above will determine funding that is expected to become applicable in 2014.
Financing Cash Flows
Net cash used for financing activities was $364 million for the period ended March 31, 2013 compared with $145 million net cash used for the same period in 2012.
During the first quarter of 2013, the Company used cash to repay its 4.85% fixed rate $250 million senior notes that matured.
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 to fund the maturing notes.
The Company paid dividends on its common shares of $127 million ($0.23 per share) during the first three months of 2013, as compared with $121 million ($0.22 per share) during the first three months of 2012.
The Company and certain of its foreign subsidiaries maintain a $1.0 billion multi-currency five-year unsecured revolving credit facility. The interest rate on this facility is based on LIBOR plus a fixed margin which varies with the Company's credit ratings. The facility requires the Company to maintain certain coverage and leverage ratios which are tested quarterly. There were no borrowings outstanding under this facility at March 31, 2013.
In December 2012, the Company closed on a $50 million, three-year delayed draw term loan facility. The interest rate on this facility 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 March 31, 2013.
The Company's senior debt is currently rated Baa2 by Moody's and BBB by Standard & Poor's. The Company's short-term debt is currently rated P-2 by Moody's and A-2 by Standard & Poor's. The Company carries a positive outlook from Moody's and a stable outlook from Standard & Poor's.
During the first three months of 2013, the Company paid $3 million of contingent payments related to acquisitions made in prior periods. In the first quarter of 2012, the Company paid $13 million of contingent payments related to acquisitions made in prior periods.
During the three months of 2013, the Company repurchased 2.7 million of its common stock for consideration of $100 million. The Company remains authorized to purchase additional shares of its common stock up to a value of $223 million. The Company did not repurchase any shares in the first quarter of 2012.
Investing Cash Flows
Cash provided by investing activities amounted to $8 million in the first three months of 2013, compared with $116 million used during the same period in 2012.
The Company made no acquisitions during the first three months of 2013.
The Company made six acquisitions in the first three months of 2012. Cash used for these acquisitions, net of cash acquired, was approximately $53 million. In addition, in the first quarter of 2012, the Company paid $7 million of deferred purchase consideration related to acquisitions made in prior years.
The Company used cash of $88 million to purchase fixed assets and capitalized software in the first three months of 2013 compared with $51 million in the first three months of 2012, primarily related to computer equipment and software purchases, software development costs and the refurbishing and modernizing of office facilities.
The Company has commitments for potential future investments of approximately $40 million in two private equity funds that invest primarily in financial services companies.

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Commitments and Obligations
The Company’s contractual obligations of the types identified in the table below were of the following amounts as of March 31, 2013 (dollars in millions):
 
  
Payment due by Period
Contractual Obligations
Total

 
Within
1 Year

 
1-3 Years

 
4-5 Years

 
After
5 Years

Current portion of long-term debt
$
10

 
$
10

 
$
—

 
$
—

 
$
—

Long-term debt
2,711

 
—

 
871

 
273

 
1,567

Interest on long-term debt
1,257

 
154

 
266

 
209

 
628

Net operating leases
2,400

 
344

 
564

 
423

 
1,069

Service agreements
340

 
120

 
113

 
76

 
31

Other long-term obligations
139

 
36

 
95

 
6

 
2

Purchases commitments
33

 
18

 
15

 
—

 
—

Total
$
6,890

 
$
682

 
$
1,924

 
$
987

 
$
3,297

The above does not include unrecognized tax benefits of $113 million, accounted for under ASC Topic No. 740, as the Company is unable to reasonably predict the timing of settlement of these liabilities, other than approximately $7 million that may become payable within one year. The above does not include liabilities established under ASC Topic No. 460 ("Guarantees") as the Company is unable to reasonably predict the timing of settlement of these liabilities. The above does not include the indemnified liabilities discussed in Note 15 as the Company is unable to reasonably predict the timing of settlement of these liabilities. The above does not include net pension liabilities for underfunded plans of approximately $1.7 billion because the timing and amount of ultimate payment of such liability is dependent upon future events, including, but not limited to, future returns on plan assets, and changes in the discount rate used to measure the liabilities. In 2013, the Company expects to contribute approximately $19 million and $227 million to its U.S. and non-U.S. pension plans, respectively.
New Accounting Guidance
Note 17 to the consolidated financial statements contains a discussion of recently issued accounting guidance and their impact or potential future impact on the Company’s financial results, if determinable.


Item 3.
Qualitative and Quantitative Disclosures About Market Risk

Market Risk and Credit Risk
Certain of the Company’s revenues, expenses, assets and liabilities are exposed to the impact of interest rate changes and fluctuations in foreign currency exchange rates and equity markets.

Interest Rate Risk and Credit Risk
The Company has historically managed its net exposure to interest rate changes by utilizing a mixture of variable and fixed rate borrowings to finance the Company’s asset base. During 2007, virtually all of the Company’s variable rate borrowings were repaid. In February 2011, the Company entered into two 3.5-year interest rate swaps to hedge changes in the fair value of the first $250 million of its 5.375% senior notes due in 2014. Under the terms of the swaps, the counter-parties will pay the Company a fixed rate of 5.375% and the Company will pay interest at a floating rate of three-month LIBOR plus a fixed spread of 3.726%. The swaps are designated as fair value hedging instruments and are deemed to be perfectly effective in accordance with applicable accounting guidance.
Interest income generated from the Company’s cash investments as well as invested fiduciary funds will vary with the general level of interest rates.


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The Company had the following investments subject to variable interest rates:
(In millions of dollars)
March 31, 2013
Cash and cash equivalents invested in money market funds, certificates of deposit and time deposits
$
1,263

Fiduciary cash and investments
$
4,396

Based on the above balances, if short-term interest rates increased or decreased by 10%, or 9 basis points, over the course of the remainder of the year, annual interest income, including interest earned on fiduciary funds, would increase or decrease by approximately $3 million.
In addition to interest rate risk, our cash and cash equivalents and fiduciary fund investments are subject to potential loss of value due to counter-party credit risk. To minimize this risk, the Company and its subsidiaries invest pursuant to a Board-approved investment policy. The policy mandates the preservation of principal and liquidity and requires broad diversification with counter-party limits assigned based primarily on credit rating and type of investment. The Company carefully monitors its cash and fiduciary fund investments and will further restrict the portfolio as appropriate to market conditions. The majority of cash and fiduciary fund investments are invested in short-term bank deposits and liquid money market funds.
Foreign Currency Risk
The translated values of revenue and expense from the Company’s international operations are subject to fluctuations due to changes in currency exchange rates. The non-U.S. based revenue that is exposed to foreign exchange fluctuations is approximately 56% of total revenue. We periodically use forward contracts and options to limit foreign currency exchange rate exposure on net income and cash flows for specific, clearly defined transactions arising in the ordinary course of business. Although the Company has significant revenue generated in foreign locations which is subject to foreign exchange rate fluctuations, in most cases both the foreign currency revenue and expenses are in the functional currency of the foreign location. As such, the U.S. dollar translation of both the revenues and expenses, as well as the potentially offsetting movements of various currencies against the U.S. dollar, generally tends to mitigate the impact on net operating income of foreign currency risk. The Company estimates that a 10% movement of major foreign currencies (Euro, Sterling, Australian dollar and Canadian dollar) in the same direction against the U.S. dollar that held constant over the course of the year would increase or decrease full year net operating income by approximately $60 million.
Equity Price Risk
The Company holds investments in both public and private companies as well as private equity funds that invest primarily in financial services companies. Publicly traded investments of $19 million are classified as available for sale. Non-publicly traded investments of $16 million are accounted for using the cost method and $59 million are accounted for using the equity method. The investments that are classified as available for sale or that are not publicly traded are subject to risk of changes in market value, which if determined to be other than temporary, could result in realized impairment losses. The Company periodically reviews the carrying value of such investments to determine if any valuation adjustments are appropriate under the applicable accounting pronouncements.
Other
A number of lawsuits and regulatory proceedings are pending. See Note 15 to the consolidated financial statements included elsewhere in this report.

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Part I – Item 4. Controls & Procedures
a. Evaluation of Disclosure Controls and Procedures
Based on their evaluation, as of the end of the period of this report, the Company’s Chief Executive Officer and Chief Financial Officer have concluded the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective.
b. Changes in Internal Controls
There were no changes in the Company’s internal controls over financial reporting that were identified in connection with the evaluation referred to under Part I – Item 4a above that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION
 
Item 1.        Legal Proceedings.
The information set forth in Note 15 to the consolidated financial statements provided in Part I of this report is incorporated herein by reference.
 
Item 1A.     Risk Factors.
The Company and its subsidiaries face a number of risks and uncertainties. In addition to the other information in this report and our other filings with the SEC, readers should consider carefully the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012. If any of the risks described in our Annual Report on Form 10-K or such other risks actually occur, our business, results of operations or financial condition could be materially adversely affected.
 
Item 2.         Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Repurchases of Equity Securities

In August 2011, the Board of Directors of the Company authorized share repurchases up to a dollar value of $500 million of the Company's common stock. This was in addition to a September 2010 authorization to repurchase shares of the Company's common stock up to a dollar value of $500 million. The Company repurchased approximately 2.7 million shares of its common stock for $100 million during the first quarter of 2013. The Company remains authorized to repurchase shares of its common stock up to a dollar value of approximately $224 million. There is no time limit on the authorization. 
Period
(a)
Total
Number of
Shares (or
Units)
Purchased

 
(b)
Average
Price
Paid per
Share
(or Unit)

 
(c)
Total Number of
Shares (or
Units)
Purchased as
Part of Publicly
Announced
Plans or
Programs

 
(d)
Maximum
Number (or
Approximate
Dollar Value) of
Shares (or
Units) that May
Yet Be
Purchased
Under the Plans
or Programs

January 1-31, 2013
__

 
__

 
__

 
 
February 1-28, 2013
350,000

 
$
37.0668

 
350,000

 
$
310,631,593

March 1-31, 2013
2,346,258
 
$
37.0891

 
2,346,258
 
$
223,605,897

Total Q1 2013
2,696,258

 
$
37.0881

 
2,696,258

 
$
223,605,897



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Item 3.         Defaults Upon Senior Securities.
None.
 
Item 4.         Mine Safety Disclosure.
Not Applicable.
 
Item 5.         Other Information.
None.

Item 6.         Exhibits.
See the Exhibit Index immediately following the signature page of this report, which is incorporated herein by reference.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Date:
May 8, 2013
/s/ J. Michael Bischoff
 
 
J. Michael Bischoff
 
 
Chief Financial Officer
 
 
 
Date:
May 8, 2013
/s/ Robert J. Rapport
 
 
Robert J. Rapport
 
 
Senior Vice President & Controller
 
 
(Chief Accounting Officer)


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EXHIBIT INDEX
 
Exhibit No.
  
Exhibit Name
 
 
10.1
 
Form of 2013 Long-term Incentive Award under the Marsh & McLennan Companies, Inc. 2011 Incentive and Stock Award Plan
 
 
 
10.2
 
Form of Deferred Stock Unit Award, dated as of March 1, 2013, under the Marsh & McLennan Companies, Inc. 2011 Incentive and Stock Award Plan
 
 
 
10.3
 
Letter Agreement, dated as of January 3, 2012, between Marsh & McLennan Companies, Inc. and Julio A. Portalatin

 
 
 
10.4
 
Non-Competition and Non-Solicitation Agreement, effective as of February 1, 2012, between Marsh & McLennan Companies, Inc. and Julio A. Portalatin

 
 
 
12.1
  
Statement Re: Computation of Ratio of Earnings to Fixed Charges
 
 
31.1
  
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
 
 
31.2
  
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
 
 
32.1
  
Section 1350 Certifications
 
 
101.INS
  
XBRL Instance Document
 
 
101.SCH
  
XBRL Taxonomy Extension Schema
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase


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