THE AMERICAN NATIONAL RED CROSS Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) (With Independent Auditors’ Report Thereon) KPMG LLP 1676 International Drive McLean, VA 22102 Independent Auditors’ Report The Board of Governors The American National Red Cross: We have audited the accompanying consolidated financial statements of The American National Red Cross (the Organization), which comprise the consolidated statement of financial position as of June 30, 2013, and the related consolidated statements of activities, functional expenses and cash flows for the year then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The American National Red Cross as of June 30, 2013, and the changes in their net assets, their functional expenses and cash flows for the year then ended in accordance with U.S. generally accepted accounting principles. KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity. Report on Summarized Comparative Information We have previously audited The American National Red Cross 2012 consolidated financial statements, and expressed an unmodified audit opinion on those audited consolidated financial statements in our report dated October 25, 2012. In our opinion, the summarized comparative information presented herein as of and for the year ended June 30, 2012 is consistent, in all material respects, with the audited consolidated financial statements from which it has been derived. October 23, 2013 2 THE AMERICAN NATIONAL RED CROSS Consolidated Statement of Financial Position June 30, 2013 (with comparative information as of June 30, 2012) (In thousands) Assets 2013 Current assets: Cash and cash equivalents Investments (Note 8) Trade receivables, including grants, net of allowance for doubtful accounts of $6,963 in 2013 and $5,657 in 2012 (Note 11) Contributions receivable (Note 2) Inventories, net of allowance for obsolescence of $4,714 in 2013 and $4,105 in 2012 Other current assets $ 82,721 618,139 2012 $ 52,905 626,872 233,089 80,303 216,517 70,011 112,950 23,230 113,876 24,922 Total current assets 1,150,432 1,105,103 Investments (Note 8) Contributions receivable (Note 2) Land, buildings, and other property, net (Note 3) Other assets (Note 9) 1,466,762 12,205 1,018,454 250,982 1,356,851 16,030 1,050,793 249,184 Total assets 3,898,835 3,777,961 Current liabilities: Accounts payable and accrued expenses Current portion of debt (Note 4) Postretirement benefits (Note 10) Other current liabilities (Note 9 and 11) 325,810 18,236 3,734 154,398 281,012 14,400 3,991 164,121 Total current liabilities 502,178 463,524 Debt (Note 4) Pension and postretirement benefits (Note 10) Other liabilities (Notes 4 and 9) 695,755 554,645 156,200 538,958 1,001,636 178,620 1,908,778 2,182,738 398,444 861,605 730,008 133,687 757,513 704,023 1,990,057 1,595,223 Liabilities and Net Assets Total liabilities Net assets (Notes 6 and 7): Unrestricted net assets Temporarily restricted net assets Permanently restricted net assets Total net assets Commitments and contingencies (Notes 4, 5, 8, 10, and 11) Total liabilities and net assets $ See accompanying notes to the consolidated financial statements. 3 3,898,835 $ 3,777,961 THE AMERICAN NATIONAL RED CROSS Consolidated Statement of Activities Year ended June 30, 2013 (with summarized information for the year ended June 30, 2012) (In thousands) Unrestricted Operating revenues and gains: Contributions: Corporate, foundation and individual giving United Way and other federated Legacies and bequests Services and materials Products and services: Biomedical Program materials Contracts, including federal government Investment income (Note 8) Other revenues Net assets released from restrictions $ 278,866 32,905 64,022 16,212 Temporarily Restricted Permanently Restricted $ $ 552,132 62,625 10,191 38,290 22,011 - Totals 2013 $ 830,998 95,530 96,224 54,502 2012 $ 437,768 100,227 94,629 37,424 2,037,732 125,153 73,132 16,781 73,575 636,997 31,916 398 (636,997) - 2,037,732 125,153 73,132 48,697 73,973 - 2,153,870 136,876 82,552 58,100 69,071 - Total operating revenues and gains 3,355,375 58,555 22,011 3,435,941 3,170,517 Operating expenses: Program services: Services to the Armed Forces Biomedical services (Note 12) Community services Domestic disaster services Health and safety services International relief and development services 56,645 2,164,815 57,200 467,245 216,222 92,742 - - 56,645 2,164,815 57,200 467,245 216,222 92,742 53,045 2,239,784 77,538 279,190 195,596 186,726 3,054,869 - - 3,054,869 3,031,879 189,431 136,283 - - 189,431 136,283 172,407 140,847 325,714 - - 325,714 313,254 3,380,583 - - 3,380,583 3,345,133 Total program services Supporting services: Fund raising Management and general Total supporting services Total operating expenses Change in net assets from operations (25,208) 58,555 22,011 55,358 (174,616) Nonoperating gains (losses) (Notes 4 and 8) Pension-related changes other than net periodic benefit cost (Note 10) 42,670 247,295 45,537 - 3,974 - 92,181 247,295 (36,514) (385,570) Change in net assets 264,757 104,092 25,985 394,834 Net assets, beginning of year 133,687 757,513 704,023 1,595,223 730,008 $ 1,990,057 Net assets, end of year $ 398,444 See accompanying notes to the consolidated financial statements. 4 $ 861,605 $ (596,700) 2,191,923 $ 1,595,223 THE AMERICAN NATIONAL RED CROSS Statement of Functional Expenses Year ended June 30, 2013 (with summarized information for the year ended June 30, 2012) (In thousands) Program Services Services to Armed Forces Salaries and wages Employee benefits $ 25,439 8,460 Biomedical Services $ 930,432 309,418 Domestic Disaster Services Community Services $ 20,971 6,974 $ 94,331 31,370 Health and Safety Services $ 89,853 29,881 International Relief & Development Services $ 19,093 6,350 Total Program Services $ 1,180,119 392,453 Subtotal 33,899 1,239,850 27,945 125,701 119,734 25,443 1,572,572 Travel and maintenance Equipment maintenance and rental Supplies and materials Contractual services Financial and material assistance Depreciation and amortization 2,067 859 1,744 10,192 6,751 1,133 34,031 69,246 483,630 298,438 3,564 36,056 877 2,899 3,196 10,031 10,058 2,194 62,112 21,662 6,941 67,883 170,947 11,999 6,496 1,920 12,222 69,821 25 6,004 3,580 1,156 494 7,877 53,366 826 109,163 97,742 508,227 464,242 244,711 58,212 Total expenses $ 56,645 $ 2,164,815 $ 57,200 $ 467,245 $ 216,222 $ 92,742 Supporting Services Management and General Fund Raising Salaries and wages Employee benefits $ Subtotal Travel and maintenance Equipment maintenance and rental Supplies and materials Contractual services Financial and material assistance Depreciation and amortization Total expenses $ 80,071 26,628 $ 73,329 24,386 Total Supporting Services $ 153,400 51,014 Total Expenses 2013 $ 2012 1,333,519 443,467 $ 1,328,117 400,334 106,699 97,715 204,414 1,776,986 1,728,451 5,455 1,103 4,096 67,628 1,503 2,947 2,928 3,458 33 29,769 334 2,046 8,383 4,561 4,129 97,397 1,837 4,993 117,546 102,303 512,356 561,639 246,548 63,205 75,088 104,162 541,692 582,402 234,413 78,925 189,431 $ 136,283 See accompanying notes to the consolidated financial statements. 5 $ 325,714 $ 3,380,583 $ 3,345,133 $ 3,054,869 THE AMERICAN NATIONAL RED CROSS Consolidated Statement of Cash Flows Year ended June 30, 2013 (with comparative information for the year ended June 30, 2012) (In thousands) 2013 Cash flows from operating activities: Change in net assets Adjustments to reconcile change in net assets to net cash used in operating activities: Depreciation and amortization Provision for doubtful accounts receivable Provision for obsolete inventory Net gain on sales of property Net investment and derivative (gain)/loss Pension related changes other than net periodic benefit costs Permanently restricted contributions Changes in operating assets and liabilities: Receivables Inventories Other assets Accounts payable and accrued expenses Other liabilities Pension and postretirement benefits $ 394,834 2012 $ (596,700) 63,205 1,195 610 (4,965) (86,778) (247,295) (22,011) 78,925 2,954 2,930 (938) 24,784 385,570 (34,748) (24,234) 316 (106) 44,798 (27,943) (199,953) (1,971) 9,576 (17,434) (52,211) (35,949) (52,077) Net cash used in operating activities (108,327) (287,289) Cash flows from investing activities: Purchases of property Proceeds from sales of property Purchases of investments Proceeds from sales of investments (39,035) 13,134 (320,896) 302,296 (55,299) 4,464 (277,416) 281,058 Net cash used in investing activities (44,501) (47,193) Cash flows from financing activities: Permanently restricted contributions Proceeds from borrowings Repayments of debt 22,011 175,000 (14,367) 34,748 (20,023) Net cash provided by financing activities 182,644 14,725 29,816 (319,757) Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year 52,905 372,662 Cash and cash equivalents, end of year $ 82,721 $ 52,905 Supplemental disclosures of cash flow information: Cash paid during the year for interest $ 17,903 $ 18,950 See accompanying notes to the consolidated financial statements. 6 THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) (1) Summary of Significant Accounting Policies Organization and Basis of Presentation: The American National Red Cross (the Organization) was established by an Act of the United States Congress on January 5, 1905 for the primary purposes of furnishing volunteer aid to the sick and wounded of the Armed Forces in time of war and to carry on a system of national and international relief in time of peace to mitigate the suffering caused by fire, famine, floods and other great natural calamities. The mission of the Organization has expanded since that time to help people prevent, prepare for, and respond to emergencies. The accompanying consolidated financial statements present the consolidated financial position and changes in net assets, functional expenses and cash flows of the Organization. The Organization has national and international programs that are conducted by its headquarters, biomedical services, and chartered local chapters. Also included in the consolidated financial statements are the net assets and operations of Boardman Indemnity Ltd., a 100% owned captive insurance subsidiary, and ARC Receivables Company, LLC, a wholly owned bankruptcy-remote special purpose entity. All significant intra-organizational accounts and transactions have been eliminated. Program activities include services to the Armed Forces, biomedical services, community services, disaster services, health and safety services, and international services. Biomedical services includes activities associated with the collection, processing, testing, and distribution of whole blood and components at 36 local blood services region operations, five national testing laboratories, a biomedical research facility, and related national support functions. Net assets, revenues, gains, and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, the net assets of the Organization and changes therein are classified and reported as follows: Unrestricted net assets – Net assets that are not subject to any donor-imposed stipulations. Temporarily restricted net assets – Net assets subject to donor-imposed restrictions on their use that may be met either by actions of the Organization or the passage of time. Permanently restricted net assets – Net assets subject to donor-imposed or other legal restrictions requiring that the principal be maintained permanently by the Organization. Generally, the donors permit the Organization to use all or part of the income earned for either general or donor-specified purposes. The consolidated financial statements are presented with certain prior year summarized comparative information. Such information does not include sufficient detail to constitute a presentation in conformity with generally accepted accounting principles. Accordingly, such information should be read in conjunction with the Organization’s consolidated financial statements for the year ended June 30, 2012 from which the summarized information was derived. Use of Estimates: The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements. Estimates and assumptions may also 7 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) affect disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses. Actual results could differ from management’s estimates. Cash Equivalents: The Organization considers all highly liquid investments purchased with an original maturities of three months or less to be cash equivalents. Cash equivalents consist of money market mutual funds and overnight investments of approximately $66 million and $17 million as of June 30, 2013 and 2012, respectively. Investments: Investments are reported at fair value except for certain commingled funds and alternative funds that, as a practical expedient, and in accordance with Accounting Standard Codification (ASC) 820-10-35-59, are reported at estimated fair value utilizing net asset values. Net asset value, in many instances may not equal the fair value that would be calculated pursuant to ASC 820. The Organization does not intend to sell any of the funds at an amount different from net asset value per share at June 30, 2013. The Organization reviews and evaluates the net asset values provided by the general partners and fund managers and agrees with the valuation methods and assumptions used in determining net asset values of these funds. The separately managed endowment fund accumulates realized gains and losses on security transactions, which are available to meet current expenses to the extent approved by the Board of Governors. Amounts annually available for expenditure are based on the Board of Governors’ approved spending rate using the total-return method. Investment income classified as operating revenue consists of interest and dividend income on investments and any gains approved for use in operations (note 8). All other realized and unrealized gains or losses are classified as nonoperating activity and are available to support operations in future years and to offset potential market declines. Investments classified as current are available for operations in the next fiscal year. Derivative Financial Instruments: The Organization makes use of derivative financial instruments in order to mitigate certain risks. Derivative financial instruments are recorded at fair value. Endowment Fund: The Organization has maintained a national endowment fund since 1905. Since 1910, as stated in the bylaws of the Organization and because of public declarations as to their intended use, gifts to The American National Red Cross national headquarters under wills, trusts, and similar instruments which do not direct some other use of such funds are recorded as permanently restricted endowment funds to be kept and invested in perpetuity. Based upon the manner in which the Organization has solicited and continues to solicit such gifts, it has been determined by independent legal counsel that such gifts must be placed in the endowment fund and, accordingly, reported as permanently restricted net assets. Inventories: Inventories of supplies purchased for use in program and supporting services are valued using the average cost method. Whole blood and its components are valued at the lower of average cost or market. Land, Buildings, and Other Property: Purchases of land, buildings, and other property having a unit cost per established guidelines and a useful life of three or more years are capitalized at cost. Donated assets are capitalized at the estimated fair value at date of receipt. Interest expense incurred during a period of construction, less related interest income earned on proceeds of tax-exempt borrowings, is capitalized. 8 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) Property under capital leases is amortized over the lease term. Any gain or loss on the sale of land, buildings and other property is reported as other revenues on the consolidated statement of activities. Application development costs incurred to develop internal-use software are capitalized and amortized over the expected useful life of the software application. Activities that are considered application development include design of software configuration and interfaces, coding, installation of hardware, and testing. All other expenses incurred to develop internal-use software are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows: Class of property Buildings Building improvements Equipment and software Useful life in years 45 10 3 – 15 Long-Lived Assets: Long-lived assets, such as land, building and other property, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Organization first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment loss is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Property and Casualty Insurance: The Organization maintains various insurance policies under which it assumes a portion of each insured loss. Assumed losses are retained by the Organization through its wholly owned insurance subsidiary, Boardman Indemnity, Ltd. (Boardman). The Organization also purchases insurance to supplement the coverage by Boardman. The liabilities for outstanding losses and incurred but not reported claims have been determined based on actuarial studies and are reported as other liabilities in the consolidated statement of financial position, and were approximately $104 million and $113 million as of June 30, 2013 and 2012, respectively. Revenue Recognition: Contributions, which include unconditional promises to give (pledges), are recognized as revenues in the period received or promised. Contributions receivable due beyond one year are stated at net present value of the estimated cash flows using a risk-adjusted rate. Conditional contributions are recorded when the conditions have been substantially met. Contributions are considered to be unrestricted unless specifically restricted by the donor. The Organization reports contributions in the temporarily or permanently restricted net asset class if they are received with donor stipulations as to their use. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are released and reclassified to unrestricted net assets in the consolidated statement of activities. 9 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) Donor-restricted contributions are initially reported in the temporarily restricted net asset class, even if it is anticipated such restrictions will be met in the current reporting period. Products and services revenue, which arises principally from sales of whole blood and components and health and safety course fees, is generally recognized upon shipment of the product or delivery of the services to the customer. Revenues from federal agencies are generally reported as unrestricted contract revenue and are recognized as qualifying expenses are incurred under the agreement. Gains and losses on investments and other assets and liabilities are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation or by law. Contributed Services and Materials: Contributed services are reported at fair value in the financial statements for voluntary donations of services when those services (1) create or enhance nonfinancial assets or (2) require specialized skills provided by individuals possessing those skills and are services which would be typically purchased if not provided by donation. The Organization recorded contributed services revenue and related expense for the years ended June 30, 2013 and 2012 of approximately $13 million and $8 million, respectively, mostly in support of the disaster services program. Donated materials are recorded at their fair value at the date of the gift. Gifts of long-lived assets are recorded as restricted support. This restriction is released ratably over the useful life of the asset. Income Taxes: The American National Red Cross is a not-for-profit organization incorporated by the U.S. Congress through the issuance of a federal charter. The Organization is exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code, except on net income derived from unrelated business activities. At June 30, 2013 and 2012, the Organization has determined that no income taxes are due for its activities. Accordingly, no provision for income taxes has been recorded in the accompanying financial statements. Management annually reviews its tax positions and has determined that there are no material uncertain tax positions that require recognition in the consolidated financial statements. Accounts Receivable Securitization: The Organization has an accounts receivable securitization program that is accounted under Accounting Standards Update (ASU) No. 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets (note 11). 10 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) (2) Contributions Receivable The Organization anticipates collection of outstanding contributions receivable as follows at June 30, 2013 and 2012 (in thousands): 2013 Amounts receivable within one year Amounts receivable in 1 to 5 years (net of discount of $601 and $843 for 2013 and 2012, respectively) $ Total contributions receivable before allowance for uncollectible amounts Less allowance for uncollectible amounts Contributions receivable, net Less current portion Contributions receivable, net, noncurrent $ 2012 82,390 71,778 12,205 16,030 94,595 87,808 (2,087) (1,767) 92,508 86,041 80,303 70,011 12,205 16,030 Amounts presented above have been discounted to present value using various discount rates ranging between 0.13% and 5.53%. (3) Land, Buildings, and Other Property The cost and accumulated depreciation of land, buildings, and other property were as follows at June 30, 2013 and 2012 (in thousands): 2013 Land Buildings and improvements Equipment and software Buildings and equipment under capital lease $ Total cost of assets placed in service Less accumulated depreciation and amortization Construction-in-progress Land, buildings, and other property, net 11 $ 2012 118,199 1,152,054 712,042 1,787 119,391 1,157,229 583,705 3,762 1,984,082 1,864,087 (985,284) 19,656 (949,336) 136,042 1,018,454 1,050,793 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) (4) Debt Debt consists of the following at June 30, 2013 and 2012 (in thousands): Fixed rate debt: Bearing interest rates ranging from 1.3% to 5.85%, due 2013 through 2036 Variable rate debt: Bearing interest rates ranging from 0.06% to 0.92%, due 2013 through 2034: Variable rate debt with demand repayment rights Variable rate debt without demand repayment rights $ Total bonds and notes payable Obligations under capital leases (note 5) Total debt Less current portion Debt, noncurrent portion $ 2013 2012 459,505 291,342 194,295 60,000 201,741 60,000 713,800 553,083 191 275 713,991 553,358 18,236 14,400 695,755 538,958 The Organization’s debt is generally backed only by the full faith and credit of The American National Red Cross. Certain bonds are subject to redemption prior to the maturity at the option of the Organization. The repayment terms of the variable rate debt generally require monthly payments of interest and annual principal reduction. The registered owners of the bonds and notes with demand repayment rights may demand repurchase of the bonds and notes for an amount equal to the principal plus accrued interest. Letters of credit or standby credit facilities have been established with multiple banks in the aggregate amount of $217 million and $220 million for fiscal years 2013 and 2012, respectively, to provide liquidity in the event other funding is not available for repurchasing. As of June 30, 2013, the maturity dates for these liquidity facilities are from 2014 through 2016. Approximately $94 million of the debt with demand repayment rights bears interest at flexible rates with flexible rate periods of any duration up to 270 days. The remaining debt with demand repayment rights is remarketed on a weekly basis bearing interest rates that are reset weekly. 12 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) Scheduled maturities and sinking fund requirements of the debt and credit agreements as of June 30, 2013 are as follows (in thousands): 2014 2015 2016 2017 2018 Thereafter Total $ 18,236 18,533 17,180 31,666 42,173 586,203 $ 713,991 The carrying value estimated fair value of the Organization’s noncurrent debt as of June 30, 2013 and 2012 are summarized as follows (in thousands): 2013 Noncurrent debt $ 2012 Carrying amount Fair value Level 2 Carrying amount Fair value Level 2 695,755 723,795 538,958 596,275 The fair value estimate is based on quoted prices for bond issues with similar maturities and credit quality (level 2). See note 8 for definitions of Level 1, 2 and 3. The market prices utilized reflect the rate the Organization would have to pay a credit worthy third party to assume its obligation and do not reflect an additional liability to the Organization. Interest expense was approximately $25 million and $26 million for the years ended June 30, 2013 and 2012, respectively, which is included in contractual services on the statement of functional expenses. Bank Lines of Credit: The Organization maintained several committed and uncommitted lines of credit with various banks for its working capital requirements. As of June 30, 2013 and 2012, there were no borrowings outstanding under lines of credit. The Organization had unused lines of credit outstanding of approximately $215 million and $315 million at June 30, 2013 and 2012, respectively. The amounts available to be borrowed on the lines of credit are subject to the limitations of the Organization’s debt covenants. Interest Rate Swap Agreements: The Organization held variable rate debt of approximately $254 million and $262 million at June 30, 2013 and 2012, respectively. Interest rate swap agreements are used by the Organization to mitigate the risk of changes in interest rates associated with variable interest rate indebtedness. Under such arrangements, a portion of variable rate indebtedness is converted to fixed rates based on a notional principal amount. The interest rate swap agreements are derivative instruments that are recognized at fair value and recorded on the statement of financial position. At June 30, 2013, the aggregate notional principal amount under the interest rate swap agreements, with maturity dates ranging from 2013 through 2021, totaled $118 million. At June 30, 2012, the aggregate notional principal amount 13 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) under the interest rate swap agreements, with maturity dates ranging from 2013 through 2022, totaled $121 million. The estimated fair value of the interest rate swap agreements was a liability of approximately $8 million and $12 million, respectively, and is included in other liabilities in the accompanying consolidated statement of financial position as of June 30, 2013 and 2012. The change in fair value on these interest rate swap agreements was a gain of approximately $4 million and a loss of approximately $7 million for the years ended June 30, 2013 and 2012, respectively, and is included in nonoperating gains/(losses) in the consolidated statements of activities. The following table represents the interest rate swap liabilities that are measured at fair value on a recurring basis at June 30, 2013 and 2012 (in thousands): Level 1 Interest rate swap liabilities at June 30, 2013 Interest rate swap liabilities at June 30, 2012 $ Fair value measurements Level 2 Level 3 — 7,852 — — 11,852 — For the valuation of the interest rate swap at June 30, 2013 and 2012, the Organization used significant other observable inputs as of the valuation date (Level 2), including prices of instruments with similar maturities and characteristics, interest rate yield curves and measures of interest rate volatility. The value was determined and adjusted to reflect nonperformance risk of both the counterparty and the Organization. See note 8 for definitions of Levels 1, 2 and 3. Letters of Credit: The Organization had unused letters of credit outstanding of approximately $60 million and $59 million at June 30, 2013 and 2012, respectively. 14 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) (5) Leases The Organization leases certain buildings and equipment for use in its operations. The following summarizes minimum future rental payments under capital and operating leases for the fiscal years ending June 30 (in thousands): 2014 2015 2016 2017 2018 Thereafter $ Total minimum lease payments $ Operating 21,426 16,531 13,370 11,163 7,365 16,457 Capital 98 98 1 1 1 9 86,312 208 Less amounts representing interest (17) Present value of net minimum lease payments (note 4) $ 191 Total rent expense was approximately $48 million and $52 million for the years ended June 30, 2013 and 2012, respectively and is included in contractual services on the consolidated statement of functional expenses. Future minimum rental payments to be received by the Organization for office space leased at the National Headquarters building as of June 30, 2013, are as follows (in thousands): 2014 2015 2016 2017 2018 Thereafter Total minimum lease payments to be received $ 13,496 13,658 13,826 13,998 14,175 28,903 $ 98,056 Total rental income was approximately $13 million and $12 million for the years ended June 30, 2013 and 2012, respectively, and is included in other revenues on the consolidated statement of activities. 15 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) (6) Net Assets Temporarily restricted net assets are available for the following purposes or periods at June 30, 2013 and 2012 (in thousands): 2013 2012 Disaster services Biomedical services Health and safety services International relief and development services Community services Buildings and equipment Endowment inflation adjustment reserve Endowment assets available for future appropriation Other specific purposes Time restricted $ 169,197 541 1,215 259,651 3,318 8,412 187,200 142,277 27,868 61,926 49,490 554 1,259 304,569 4,826 9,481 176,500 108,968 21,471 80,395 Total temporarily restricted net assets $ 861,605 757,513 Permanently restricted net assets at June 30, 2013 and 2012 consist primarily of endowed contributions, the income from which is available principally to fund general operations. Other permanently restricted net assets consist of beneficial interests in perpetual trusts and other split interest agreements (note 9). (7) Endowments Effective January 23, 2008, the District of Columbia enacted the Uniform Prudent Management of Institutional Funds Act (UPMIFA), the provisions of which apply to endowment funds existing on or established after that date. Based on its interpretation of the provisions of UPMIFA, the Organization is required to act prudently when making decisions to spend or accumulate donor restricted endowment assets and in doing so to consider a number of factors including the duration and preservation of its donor restricted endowment funds. The Organization classifies as permanently restricted net assets the original value of gifts donated to be held in perpetuity. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Organization in a manner consistent with the standard of prudence prescribed by UPMIFA. The Organization has adopted and the Governing Board has approved the Statement of Investment Policies and Objectives for the endowment fund. This policy has identified an appropriate risk posture for the fund, stated expectations and objectives for the fund, provides asset allocation guidelines and establishes criteria to monitor and evaluate the performance results of the fund’s managers. The Organization expects the endowment fund to provide an average real rate of return of 5% annually subject to annual review and adjustment as may be appropriate and prudent under the circumstances at the time. To satisfy its long term rate of return objectives, the Organization relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). 16 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) The Organization makes distributions from income earned on the endowment fund for current operations using the total return method. In establishing this method, the Organization considered the long-term expected return on its funds. To the extent that distributions exceed net investment income, they are made from accumulated gains. The Board of Governors approves the spending rate, calculated as a percentage of the five-year calendar trailing average fair value of the endowment fund at the beginning of each fiscal year. A spending rate of approximately 3.8% for both 2013 and 2012 of the trailing five-year market value was applied to each unit of the endowment fund and resulted in total distributions of approximately $31 million for each of the years ended June 30, 2013 and 2012, respectively. Approximately $26 million and $22 million of the amounts represent utilization of accumulated realized gains, for the years ended June 30, 2013 and 2012, respectively. A spending rate of approximately 3.9% of the trailing five-year market value has been approved for 2014. Net asset classification by type of endowment as of June 30, 2013, is as follows (in thousands): Unrestricted Donor-restricted endowment funds $ — Temporarily restricted 329,477 Permanently restricted 561,835 Total 891,312 Changes in endowment net assets for the year ended June 30, 2013 (in thousands): Unrestricted Endowment net assets, beginning of year $ Investment return: Investment income Net appreciation (net realized and unrealized gains/losses) Total investment return Contributions Appropriation of endowment assets for expenditure Endowment net assets, end of year $ Temporarily restricted Permanently restricted Total — 285,468 542,602 828,070 — 31,343 — 31,343 — 44,009 — 44,009 — 75,352 — 75,352 — — 19,233 19,233 — (31,343) — (31,343) — 329,477 561,835 891,312 17 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) Net asset classification by type of endowment as of June 30, 2012 (in thousands): Unrestricted Donor-restricted endowment funds $ — Temporarily restricted 285,468 Permanently restricted 542,602 Total 828,070 Changes in endowment net assets for the year ended June 30, 2012 (in thousands): Unrestricted Endowment net assets, beginning of year $ Investment return: Investment income Net depreciation (net realized and unrealized losses) Total investment return Contributions Appropriation of endowment assets for expenditure Endowment net assets, end of year (8) $ Temporarily restricted Permanently restricted Total — 309,872 520,542 830,414 — 30,459 — 30,459 — (24,285) — (24,285) — 6,174 — 6,174 — — 22,060 22,060 — (30,578) — (30,578) — 285,468 542,602 828,070 Investments and Fair Value Measurements The Organization applies the provisions of ASC 820, Fair Value Measurements and Disclosures, for fair value measurements of investments that are recognized and disclosed at fair value in the financial statements on a recurring basis. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires the Organization to maximize the use of observable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Organization’s market assumptions. The three levels of the fair value hierarchy are as follows:  Level 1 – Quoted prices for identical assets or liabilities in active markets. 18 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012)  Level 2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; or market – corroborated inputs.  Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. In certain cases, the inputs to measure fair value may result in an asset or liability falling into more than one level of the fair value hierarchy. In such cases, the determination of the classification of an asset or liability within the fair value hierarchy is based on the least determinate input that is significant to the fair value measurement. Investments measured using net asset value are classified as Level 2 if they are redeemable at or near year-end otherwise they are considered Level 3. Transfers between levels may occur when there is a change in the observability of significant inputs. A transfer between Level l and Level 2 generally occurs when the availability of quoted prices changes or when market activity of an investment significantly changes to active or inactive. A transfer between Level 2 and Level 3 generally occurs when the underlying inputs become, or can no longer be, corroborated with market observable data. Transfers between levels are recognized on the date they occur. For the years ended June 30, 2013 and 2012, there were no transfers in or out of Level 1, 2 or 3. The Organization’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. 19 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) The following table represents investments that are measured at fair value on a recurring basis at June 30, 2013 and 2012 (in thousands): June 30, 2013 U.S. government securities Corporate and foreign sovereign bonds and notes Common and preferred stocks Mortgage-backed assets Other asset-backed assets Fund of hedge funds Global macro hedge funds Hedged equity funds Multistrategy and other hedge funds Buyout and growth equity funds Distressed debt and turnaround funds Private real estate funds Venture capital funds Commodity sensitive private equity and infrastructure funds Commodities Derivative contracts Money market and other Total investments $ $ Level 1 Level 2 Level 3 203,755 12,889 190,866 — 194,849 359,441 9,656 400 42,092 32,434 203,224 115,400 124,279 34,336 38,605 12,673 28,190 299,285 — — — — — — — — — — 166,659 60,156 9,656 — — — — — — — — — — — — 400 42,092 32,434 203,224 115,400 124,279 34,336 38,605 12,673 33,793 4,209 (595) 676,350 — — — 5,336 — 4,209 (595) 671,014 33,793 — — — 2,084,901 345,700 1,101,965 637,236 20 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) June 30, 2012 U.S. government securities Corporate and foreign sovereign bonds and notes Common and preferred stocks Mortgage-backed assets Other asset-backed assets Fund of hedge funds Global macro hedge funds Hedged equity funds Multistrategy and other hedge funds Buyout and growth equity funds Distressed debt and turnaround funds Private real estate funds Venture capital funds Commodity sensitive private equity and infrastructure funds Commodities Swap contracts Money market and other Total investments $ $ Level 1 Level 2 Level 3 238,547 12,337 226,210 — 202,660 314,646 20,048 916 58,095 30,227 166,766 64,584 117,128 45,497 33,438 15,124 21,143 230,230 — — — — — — — — — — 181,517 84,416 20,048 562 — — — — — — — — — — — 354 58,095 30,227 166,766 64,584 117,128 45,497 33,438 15,124 28,281 4,429 (416) 643,753 — — — 320 — 4,429 (416) 643,433 28,281 — — — 1,983,723 264,030 1,160,199 559,494 For the valuation of certain government, corporate and foreign sovereign bonds and notes, common and preferred stocks, and money market and other at June 30, 2013 and 2012, the Organization used quoted prices in principal active markets for identical assets as of the valuation date (Level 1). For the valuation of certain government, corporate and foreign sovereign bonds and notes, which includes commingled funds, common and preferred stocks, mortgage and other asset-backed securities, commodities, and money market and other at June 30, 2013 and 2012, the Organization used significant other observable inputs, particularly dealer market prices for comparable investments as of the valuation date (Level 2). Commingled funds are classified as Level 2 as they are redeemable at net asset value at or near year-end. The valuation of hedge funds, buyout and growth equity funds, distressed debt and turnaround funds, private real estate funds, venture capital funds, commodity sensitive private equity and infrastructure funds at June 30, 2013 and 2012, are reported at estimated fair value utilizing the net asset values provided by fund managers as a practical expedient. While these funds’ net asset values utilize significant unobservable inputs (Level 3), management reviews and evaluates the values provided by the fund managers and general partners and agrees with the valuation methods and assumptions used in determining the fair value of the alternative investments. 21 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) The following table presents the Organization’s activity for investments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as defined in ASC 820 for the years ended June 30, 2013 and 2012 (in thousands): Balance a t June 30, 20 12 Other asset backed securities Fund of hedge funds Global macro hedge fund s Hedged equity fu nds Multistrategy and other hedge funds Buyout and growth equ ity funds Distressed debt and turnaround funds Private real estate fun ds Venture capital funds Commodity sensitive private equity and infras tru cture funds $ $ $ $ Settlements Change in unrealized gains (losses) Balance at June 30, 2013 354 5 8,095 3 0,227 16 6,766 — — — 1,829 — (22,641) (544) (4,692) — — 9 1 ,023 46 6 ,638 2 ,742 38 ,298 400 42, 092 32, 434 203, 224 6 4,584 11 7,128 4 8,870 1 8,680 (6,579) (20,715) 852 9 ,425 7 ,673 (239) 115, 400 124, 279 4 5,497 3 3,438 1 5,124 4,586 6,673 692 (22,201) (3,177) (3,180) 1 ,039 379 2 ,701 5 ,415 1 ,292 (2,664) 34, 336 38, 605 12, 673 2 8,281 8,654 (3,481) 1 ,549 (1,210) 33, 793 55 9,494 8 9,984 (87,210) 16 ,977 57 ,991 637, 236 Balance a t June 30, 20 11 Other asset backed securities Fund of hedge funds Global macro hedge fund s Hedged equity fu nds Multistrategy and other hedge funds Buyout and growth equ ity funds Distressed debt and turnaround funds Private real estate fun ds Venture capital funds Commodity sensitive private equity and infras tru cture funds Purchases Realized gains (losses) Purchases Settlements Realized gains (losses) Change in unrealized gains (losses) Balance at June 30, 2012 353 7 4,419 2 9,168 15 9,470 — — — 3,000 — (14,926) (310) (7,810) — — — 5 ,650 1 (1,398) 1 ,369 6 ,456 354 58, 095 30, 227 166, 766 6 4,135 9 9,985 4,000 2 3,443 (1,284) (15,317) (9) 8 ,901 (2,258) 116 64, 584 117, 128 4 4,190 2 6,943 1 5,634 3,979 4,814 1,017 (2,765) (1,646) (3,135) 126 581 2 ,440 (33) 2 ,746 (832) 45, 497 33, 438 15, 124 2 7,280 4,822 (4,086) 1 ,243 (978) 28, 281 54 1,577 4 5,075 (51,279) 18 ,932 5 ,189 559, 494 22 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) The following summarizes the nature and risk of those investments that are reported at estimated fair value utilizing net asset value as of June 30, 2013 (in thousands): Fair value Fund of hedge funds (a) $ Unfunded commitments Redemption frequency Redemption notice period 42,092 — annually 100 days 32,434 — monthly, quarterly, annually 5-90 days Hedged equity funds (c) 203,224 — quarterly, annually 45-90 days Multistrategy and other hedge funds (d) — monthly, quarterly, annually, bi-annually, tri-annually 10-90 days 115,400 Buyout and growth equity funds (e) 124,279 49,366 None — Distressed debt and turnaround funds (f) Private real estate funds (g) Venture capital funds (h) 34,336 38,605 12,673 16,801 19,316 5,627 None None None — — — Commodity sensitive private equity and infrastructure funds (i) 33,793 13,229 None — Public equity commingled funds (j) 60,156 — weekly, monthly 1-30 days Fixed income commingled funds (k) 211,040 — weekly, monthly 1-30 days 908,032 104,339 Global macro hedge funds (b) Total $ (a) The strategies of the underlying hedge funds in this category primarily include hedged equity, multistrategy, relative value, event driven and arbitrage strategies. (b) The funds in this category invest primarily in liquid instruments such as fixed income, currency, commodities, equities, and derivatives. The funds include long and short positions and may use leverage. Two funds have legacy investments that have been segregated into illiquid vehicles – the value of these vehicles make up a minimal amount of the value of the investments in this category. The time at which these segregated investments will be liquidated is unknown. 23 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) (c) This category is invested in hedge funds that invest primarily in U.S. and international equities as well as derivatives. The funds include long and short positions and may use leverage. Some funds may invest in illiquid investments, which are typically segregated into “side pockets” (a separate share class) and are not available for redemption until the investment is liquidated by the manager. The time at which the investments in side pockets will be liquidated is unknown. (d) The strategies of the funds in this category include relative value, event driven, and arbitrage strategies. Underlying investments are typically the same as the types invested in both the public equity, fixed income commingled, bank debt, convertible bonds and derivatives. The funds include long and short positions and may use leverage. Some funds may invest in illiquid investments which are typically segregated into “side pockets” (a separate share class) and are not available for redemption until the investment is liquidated by the manager. The time at which the investments in side pockets will be liquidated is unknown. (e) This category is invested in both US and international private equity funds and funds of funds whose mandates include leveraged buyouts and growth equity investments in companies. (f) This category is invested in funds which primarily invest in distressed situations. Investments include marketable securities such as debt obligations and asset backed securities as well as nonmarketable investments such as nonperforming and sub performing real estate loans, consumer loans, and distressed debt. Some funds include short positions. (g) This category includes funds and funds of funds which invest in private real estate internationally and in the U.S. Property types are primarily office, industrial, residential and retail. (h) This category is invested in venture capital funds and funds of venture capital funds. Underlying investments are primarily private investments in early stage companies. (i) This category is invested in funds and a fund of funds which make investments primarily in private oil and gas partnerships, timber, mineral and mining companies, and infrastructure such as ports, toll roads, airports and utilities. (j) This category primarily includes investments in publicly traded equity securities and instruments. (k) This category is invested primarily in publicly traded fixed income securities and instruments including debt obligations of the U.S. government and agencies, non U.S. sovereign debt, corporate bonds, mortgage and asset backed securities. (e), (f), (g), (h), (i) These nonmarketable funds do not permit redemptions. The timing of the return of capital is at the manager’s discretion, subject to provisions documented in limited partnership agreements. In general, capital and realized gains are distributed to investors when an investment is liquidated. Interim distributions of interest, operating income and dividends are made by some funds. Some funds are able to recall distributions. It is estimated that the majority of underlying assets of the funds will be liquidated over the next ten years. The fair values of the investments in this category have been estimated using the net asset value of the Organization’s ownership interest in the partners’ capital. 24 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) (b), (c), (d) Certain investments in these categories have gate provisions, which allow a manager to limit redemptions despite the normal liquidity provisions if they receive redemptions in excess of the gate (a level stated in their governing documents). (j), (k) Certain investments in these categories include gate provisions that do not exceed more than one year after the initial redemption request period, with the fund manager having ultimate discretion which may allow for halting all redemptions for an extended period. The Organization transacts in a variety of derivative instruments and contracts including both swaps and options for investment and hedging purposes in order to create or mitigate certain exposures. Each instrument’s primary underlying exposure is equities or commodities. Such contracts involve, to varying degrees, risks of loss from the possible inability of counterparties to meet the terms of their contracts. Use of swaps partially mitigates counterparty risk. The Organization’s derivatives are all transacted over-the-counter. Commodity swap agreements are derivatives instruments used by the Organization to gain exposure to various underlying commodity futures. The commodity swaps are recognized at fair value on a recurring basis. The Organization uses an equity swap agreement to invest in a number of mostly Asian exchange-traded funds. The Organization also uses equity collars to provide protection against market decline in the Organization’s equity portfolio. Both the equity swap and equity collar agreements are recognized at fair value on a recurring basis. The following table lists the notional/contractual amount of derivatives by contract type included in investments at June 30, 2013 and 2012 (in thousands): Derivative type Commodity contracts Equity contracts 2013 $ 2012 21,500 30,000 21,500 9,000 The following table lists fair value of derivatives by contract type included in investments as of June 30, 2013 and 2012 (in thousands): Asset derivatives 2013 2012 Derivative type Commodity contracts Equity contracts Fair value of derivaties included in investments Liability derivatives 2013 2012 $ 165 — 112 — 97 663 431 96 $ 165 112 760 527 25 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) The following table lists gains and losses on derivatives by contract type included in investment income as of June 30, 2013 and 2012 (in thousands): Realized gains/(losses) 2013 2012 Derivative type Commodity contracts Equity contracts Change in unrealized gains/(losses) 2013 2012 $ (224) 265 1,725 (1,366) 386 (567) (482) 24 $ 41 359 (181) (458) For the valuation of the Organization’s derivative contracts at June 30, 2013, the Organization used significant other observable inputs as of the valuation date (Level 2), including prices of instruments with similar maturities and characteristics, interest rate yield curves, measures of interest rate volatility and various market indices. The value was determined and adjusted to reflect nonperformance risk of both the counterparty and the Organization. See note 8 for definitions of Levels 1, 2 and 3. Investment securities are exposed to various risks, such as interest rate, market and credit. Due to the level of uncertainty related to changes in interest rates, market volatility and credit risks, it is at least reasonably possible that changes in these risks could materially affect the estimated fair value of investments reported in the consolidated statement of financial position as of June 30, 2013. However, the diversification of the Organization’s invested assets among these various asset classes is management’s strategy to mitigate the impact of any dramatic change on any one asset class. The following schedule summarizes the composition of investment return for the years ended June 30, 2013 and 2012 (in thousands): Unrestricted Dividends and interest Net operating investment gains $ Investment income available for operations Net nonoperating investment gains Total return on investments $ 2013 Temporarily Permanently restricted restricted Total 13,060 3,721 31,874 42 — — 44,934 3,763 16,781 31,916 — 48,697 42,670 45,537 3,974 92,181 59,451 77,453 3,974 140,878 26 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) Unrestricted Dividends and interest Net operating investment gains $ Investment income available for operations Net nonoperating investment gains (losses) Total return on investments (9) $ 2012 Temporarily Permanently restricted restricted Total 15,428 11,670 30,942 60 — — 46,370 11,730 27,098 31,002 — 58,100 (18,424) (21,597) 3,507 (36,514) 8,674 9,405 3,507 21,586 Split Interest Agreements The Organization is a beneficiary of split interest agreements in the form of charitable gift annuities, perpetual trusts held by third parties, charitable remainder trusts and pooled income funds. The value of split interest agreements is measured as the Organization’s share of fair value of the assets. Of the $244 million and $233 million in assets under these agreements as of June 30, 2013 and 2012, respectively, which are included in other assets on the consolidated statement of financial position, $41 million and $41 million, respectively, are charitable gift annuities and the remainder are assets for which the Organization is not the trustee. Liabilities associated with these agreements are $22 million and $24 million as of June 30, 2013 and 2012, respectively, of which $4 million and $3 million is included with other current liabilities and $18 million and $21 million is included with other noncurrent liabilities on the consolidated statement of financial position, respectively. 27 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) (10) Benefit Plans The Retirement System of the American National Red Cross: Before July 1, 2009, employees of the American Red Cross, including the employees of participating local chapters, were covered by the Retirement System of the American National Red Cross (the Plan) after one year of employment and completion of 1,000 hours of service during any consecutive 12 month period. Effective July 1, 2009, the Plan was closed to employees hired after June 30, 2009. Subject to provisions contained in collective bargaining agreements where applicable, the Retirement System was ‘frozen’ on December 31, 2012 (the freeze date). Employees who were participating in the Retirement System as of that date will keep their vested benefits earned, but will stop earning additional pension benefits. Prior to the freeze date, the benefit formula was based on years of service and the employees’ final average compensation. Final average compensation was calculated using the highest consecutive 48 months of the last 120 months of service before the earlier of retirement or the freeze date. The Red Cross offered a lump sum special election window from April 19 through May 31, 2013. This option was made available to former employees who terminated their employment prior to July 1, 2012, were vested in the Plan and were not receiving monthly payments. The special election window provided the terminated vested participants with the option to either cash out their retirement benefit or take an immediate annuity, which was actuarially reduced for early commencement. Special election window payments were made upon submission of election forms starting in June 2013. For funding purposes under the Plan, normal pension costs are determined by the projected unit credit method and are funded currently. The Plan provides a defined benefit pension, funded entirely by the employer. Prior to July 1, 2005, voluntary after tax contributions could be made by active members to fund an optional annuity benefit. The Organization’s funding policy is set to comply with the funding requirements established under the Pension Protection Act of 2006 and to meet the requirements of ERISA. During fiscal years 2013 and 2012, the Organization contributed 24.4% and 9.7% of covered payroll to the Plan, respectively. The American Red Cross Life and Health Benefits Plan: The Organization also provides medical and dental benefits to eligible retirees and their eligible dependents. Generally, retirees and the Organization each pay a portion of the premium costs. The medical and dental plans pay a stated percentage of expenses reduced by deductibles and other coverages. The Organization has the right to modify cost-sharing provisions at any time. In addition, life insurance benefits of $5,000 are provided with no contributions required from the retirees. The Organization’s postretirement benefit plans are unfunded. However, the Board of Governors has designated $101 million of unrestricted net assets to fund a portion of premiums for retirees’ postretirement medical benefits. Effective January 1, 2009, the Organization eliminated plan coverage (retiree medical and life benefits) for all future retirees that did not meet certain eligibility conditions as of that date. In addition, the plan was amended to transition Medicare eligible retirees to a private fee-for-service plan and to change the 28 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) premium supplement tables and indexing effective July 1, 2009. Beginning in calendar year 2011, most Medicare eligible retirees were offered a Healthcare Reimbursement Account to utilize in purchasing individual coverage through an external exchange program CMS approved Medicare, Part D Prescription Drug and Medicare Supplement offering. The following table presents the changes in benefit obligations, changes in Plan assets, and the composition of accrued benefit costs in the consolidated statements of financial position for the years ended June 30, 2013 and 2012 (in thousands): Pension benefits 2013 2012 Changes in benefit obligations: Benefit obligations at beginning of year Service cost Interest cost Actuarial (gain) loss Benefits paid Curtailments Settlements $ Benefit obligations at end of year Changes in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Benefits paid Settlements Fair value of plan assets at end of year Funded status/accruesd benefit costs $ Postretirement benefits 2013 2012 2,835,677 27,531 129,174 (153,011) (257,617) (175,895) 42,596 2,436,222 62,446 137,269 285,344 (85,604) — — 85,104 615 3,699 (19,960) (3,210) — — 79,488 675 4,066 3,963 (3,088) — — 2,448,455 2,835,677 66,248 85,104 1,915,154 53,746 245,041 (95,842) (161,775) 1,843,576 61,787 95,395 (85,604) — — — — — — — — — — — 1,956,324 1,915,154 — — (492,131) (920,523) (66,248) (85,104) Pension-related changes other than net periodic benefit cost for 2013: 29 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) Pension benefits Prior service cost Amortized net loss Net actuarial gain Postretirement benefits Total $ — 13,190 247,524 (33,379) — 19,960 (33,379) 13,190 267,484 $ 260,714 (13,419) 247,295 Pension-related changes other than net periodic benefit cost for 2012: Pension benefits Prior service credit (cost) Amortized net loss Net actuarial loss Postretirement benefits Total $ 373 22,920 (371,521) (33,379) — (3,963) (33,006) 22,920 (375,484) $ (348,228) (37,342) (385,570) Items not yet recognized as a component of net periodic benefit cost for 2013: Pension benefits Postretirement benefits Total Unrecognized prior service credit $ Unrecognized net actuarial loss (gains) — 621,971 (21,900) (16,654) (21,900) 605,317 $ 621,971 (38,554) 583,417 Items not yet recognized as a component of net periodic benefit cost for 2012: Pension benefits Unrecognized prior service credit Unrecognized net actuarial loss Postretirement benefits Total $ — 882,685 (55,279) 3,306 (55,279) 885,991 $ 882,685 (51,973) 830,712 30 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) Estimated amounts to be amortized into net periodic benefit cost over the next fiscal year are as follows: Pension benefits Prior service cost Net actuarial loss (gain) Postretirement benefits Total $ — 11,859 (21,128) (1,986) (21,128) 9,873 $ 11,859 (23,114) (11,255) The accumulated benefit obligation for the pension plan was approximately $2.4 billion and $2.6 billion as of June 30, 2013 and 2012, respectively. The weighted average assumptions used to determine benefit obligations for 2013 and 2012 were as follows: Pension benefits 2013 2012 Discount rate Rate of compensation increase 5.44% 4.96% — 5.00 Postretirement benefits 2013 2012 4.86% 4.45% — — The weighted average assumptions used to determine net benefit cost for 2013 and 2012 were as follows: Pension benefits 2013 2012 Discount rate Expected return on plan assets Rate of compensation increase 4.96% 5.75% 6.75 5.00 Postretirement benefits 2013 2012 4.45% 5.25% 7.50 — — 5.00 — — The expected rate of return assumption on Plan assets was determined by considering current economic and market conditions and by reviewing asset class allocations, historical return analysis and forward looking capital market expectations. Asset class allocations were established by considering each class’ risk premium commensurate for the level of risk, duration that matches the Plan’s liabilities, and incremental diversification benefits. Historical returns and forward looking capital market expectations were gathered from, and compared among the Plan’s investment managers, and a sampling of the consultant community. For measurement purposes, approximately an 8.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for fiscal year 2013. The rate was assumed to decrease gradually to 5% for 2021 and remain at that level thereafter. An 8.5% annual rate of increase in the per capita cost of 31 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) covered health care benefits was assumed for fiscal year 2012. The rate was assumed to decrease gradually to 5% for 2019 and remain at that level thereafter. The components of net periodic benefit cost (credit) for the years ended June 30, 2013 and 2012 were as follows (in thousands): Pension benefits 2013 2012 Service cost Interest cost Expected return on plan assets Amortization of prior service cost (credit) Net amortization loss $ Net periodic benefit cost $ Postretirement benefits 2013 2012 27,531 129,174 62,446 137,269 615 3,699 675 4,066 (133,629) (147,965) — — — 13,190 373 22,920 (33,379) — (33,379) — 36,266 75,043 (29,065) (28,638) Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage point change in assumed health care cost trend rates would have the following effects (in thousands): Point increase Effect on total of service and interest cost components Effect on postretirement benefit obligation $ 9 183 Point decrease (12) (246) The Organization expects to contribute approximately $46.8 million to its pension plan and $3.7 million to its postretirement benefit plan during the year ending June 30, 2014. 32 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid, as of June 30, (in thousands): Pension benefits 2014 2015 2016 2017 2018 2019 – 2023 Postretirement benefits $ 158,808 127,719 135,969 143,322 149,858 811,637 3,734 3,942 4,138 4,329 4,502 23,280 $ 1,527,313 43,925 The Organization has investment guidelines for Plan assets. The overall objective of the guidelines is to ensure the Plan assets provide capital growth over an extended period of time, while also considering market risks and ensuring that the portfolio income and liquidity are appropriate to meet the Plan benefit payments and other expenses. The Plan investments are required to be diversified by asset class and within each asset class, in order to ensure that no single investment will have a disproportionate impact on the total portfolio. The Plan asset allocation is reviewed each year with current market assumptions to ensure the asset mix will achieve the long-term goals of the Plan. See note 8 for descriptions of the methodologies used to value plan assets. The Plan assets were invested in the following categories at June 30, 2013 and 2012: Pension assets 2013 Cash and short-term investments Domestic equity International equity Fixed income Commodities Marketable and nonmarketable alternative funds 2012 12% 4 12 32 1 39 9% 5 12 34 1 39 100% 100% The Plan assets were within authorized asset allocation ranges at June 30, 2013 and 2012. 33 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) The following tables represent pension plan assets that are measured at fair value on a recurring basis at June 30, 2013 and 2012 (in thousands): Fair value measurements at June 30, 2013 Level 1 Level 2 Level 3 Total U.S. government securities Corporate and foreign sovereign bonds and notes Common and preferred stocks Fund of hedge funds Global macro hedge funds Hedged equity funds Multistrategy and other hedge funds Buyout and growth equity funds Distressed debt and turnaround funds Private real estate funds Venture capital funds Commodity sensitive private equity and infrastructure funds Commodities Derivative contracts Money market and other Equity interest in par annuity Guaranteed accumulation fund Total $ $ 116,293 43,677 — 159,970 28,142 270,891 — — — 328,674 45,794 — — — — — 53,124 46,757 145,939 356,816 316,685 53,124 46,757 145,939 — — — — 181,661 148,879 181,661 148,879 — — — — — — 40,385 65,175 22,268 40,385 65,175 22,268 — — — 7,074 — — — 8,900 (52,008) 232,748 — — 113,548 — — — 65,173 43,230 113,548 8,900 (52,008) 239,822 65,173 43,230 422,400 607,785 926,139 1,956,324 34 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) Level 1 U.S. government securities Corporate and foreign sovereign bonds and notes Common and preferred stocks Fund of hedge funds Global macro hedge funds Hedged equity funds Multistrategy and other hedge funds Buyout and growth equity funds Distressed debt and turnaround funds Private real estate funds Venture capital funds Commodity sensitive private equity and infrastructure funds Commodities Derivative contracts Money market and other Equity interest in par annuity Guaranteed accumulation fund $ Total $ Fair value measurements at June 30, 2012 Level 2 Level 3 Total 144,747 68,502 — 213,249 28,519 238,771 — — — 316,304 95,937 — — — — — 62,761 34,862 151,372 344,823 334,708 62,761 34,862 151,372 — — — — 80,576 139,142 80,576 139,142 — — — — — — 51,140 61,807 24,432 51,140 61,807 24,432 — — — 26,939 — — — 9,765 27,936 144,859 — — 107,503 — — — 48,804 50,476 107,503 9,765 27,936 171,798 48,804 50,476 438,976 663,303 812,875 1,915,154 35 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) The following tables presents the activity of the assets of the Organization’s defined benefit plan for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended June 30, 2013 and 2012 (in thousands): Balance at June 30, 2 012 Fun d of hedge funds $ Global macro hedge fu nds Hedged equ ity funds Multistrategy and other hedge funds Bu yout and growth equity funds Distressed debt and turnaround funds Private real estate funds Venture capital funds Commodity sensitive p rivate equity and infrastructure funds Equity interests in par annuity Guaranteed accumulation fund $ $ Sales Cha nge in unrealized g ains (losses) — 10,000 — (16 ,698) (398) (14 ,215) — — 9 ,122 80,576 1 61,461 (84 ,863) 1 ,047 23,440 181,66 1 139,142 23,604 (25 ,151) 11 ,145 139 148,87 9 51,140 61,807 24,432 6,258 8,260 1,580 (24 ,765) (9 ,360) (4 ,879) 950 2 ,838 3 ,820 6,802 1,630 (2,68 5) 40,38 5 65,17 5 22,26 8 107,503 48,804 50,476 17,775 — — (15 ,863) — — 2 ,712 — — 1,421 16,369 (7,24 6) 113,54 8 65,17 3 43,23 0 812,875 2 28,938 (196 ,192) 31 ,634 48,884 926,13 9 Purcha ses Sales Realized gains 7,061 2,293 (34 0) Balance at June 30, 2 013 62,761 34,862 151,372 Balance at June 30, 2011 Fun d of hedge funds $ Global macro hedge fu nds Hedged equ ity funds Multistrategy and other hedge funds Bu yout and growth equity funds Distressed debt and turnaround funds Private real estate funds Venture capital funds Commodity sensitive p rivate equity and infrastructure funds Equity interests in par annuity Guaranteed accumulation fund Purchases Realized ga ins Change in unrealized gains (losses) 889 1,743 11,002 53,12 4 46,75 7 145,93 9 Balance at June 30, 2012 4 6,872 3 3,244 12 8,077 15,000 — 17,500 — (125) (5,207) — — — 62,761 34,862 1 51,372 6 6,053 13,454 (372) 4,168 (2,727) 80,576 12 2,855 21,844 (7,351) 9,486 (7,692) 1 39,142 4 8,673 4 9,979 2 2,913 4,917 8,876 2,117 (2,465) (1,841) (924) 343 1,906 2,762 (328) 2,887 (2,436) 51,140 61,807 24,432 10 6,561 4 4,360 5 4,750 8,598 — — (6,515) — — 2,731 — — (3,872) 4,444 (4,274) 1 07,503 48,804 50,476 72 4,337 92,306 (24,800) 21,396 (364) 8 12,875 The Plan transacts in a variety of derivative instruments and contracts including both swaps and options for investment and hedging purposes in order to create or mitigate certain exposures. Each instrument’s primary underlying exposure is interest rates, equities, commodities, or currencies. Such contracts involve, to varying degrees, risks of loss from the possible inability of counterparties to meet the terms of their 36 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) contracts. Use of swaps partially mitigates counterparty risk. The Plan’s derivatives are all transacted over-the-counter. The Plan uses interest rate swaps and swaptions to hedge interest rate exposure for a portion of its liabilities. The liabilities are valued via a “discount rate” of investment grade corporate bonds. Uncertainty of future discount rates adds variability to Plan valuations and future cash flows. Interest rate swap and swaption agreements are derivative instruments used by the Plan to mitigate these uncertainties. The interest rate swap and swaption agreements are required to be marked to fair value on a recurring basis. The Plan held U.S. Treasury and Agency securities to fully collateralize the swap and swaption positions as of June 30, 2013 and 2012. Commodity swap agreements are derivatives instruments used by the Plan to gain exposure to various underlying commodity futures. The commodity swaps are required to be marked to fair value on a recurring basis. The Plan uses an equity swap agreement to invest in a number of mostly Asian exchange-traded funds. The Plan also uses three equity collars to provide protection against market decline in the Plan’s equity portfolio. Both the equity swap and equity collar agreements are required to be marked to fair value on a recurring basis. The Plan uses a foreign exchange option to reduce the impact of certain low probability extreme events (tail risk) on the Plan’s assets or liabilities. The purchase price of the exchange option at inception was $7.5 million. The Plan’s maximum potential loss is the initial investment cost (option premium). Subsequent to inception, the option is required to be marked to fair value on a recurring basis. The following table lists the notional/contractual amount of derivatives by contract type included in pension plan asset at June 30, 2013 and 2012 (in thousands): Derivative type 2013 Interest rate contracts Commodity contracts Equity contracts Tail risk contracts $ 37 1,645,000 52,000 75,000 320,000 2012 640,000 52,000 190,000 374,950 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) The following table lists fair value of derivatives by contract type included in pension plan assets as of June 30, 2013 and 2012 (in thousands): Asset derivatives 2013 2012 Derivative type Interest rate contracts Commodity contracts Equity contracts Tail risk contracts Fair value of derivatives included in pension plan assets Liability derivatives 2013 2012 $ 67,190 400 — 386 68,006 1,109 513 5,471 116,858 239 2,726 — 44,276 199 1,659 — $ 67,976 75,099 119,823 46,134 The following table lists gains and losses on derivatives by contract type included in actual return on plan assets available for plan benefits as of June 30, 2013 and 2012 (in thousands): Realized gains/(losses) 2013 2012 Derivative type Interest rate contracts Commodity contracts Equity contracts Tail risk contracts Change in unrealized gains/(losses) 2013 2012 $ (6,113) (786) (6,786) (4,500) 22,031 4,001 (3,565) — (74,982) (749) (1,461) (85) 15,491 (242) (1,290) (7,661) $ (18,185) 22,467 (77,277) 6,298 For the valuation of the Plan’s derivative contracts at June 30, 2013, the Plan used significant other observable inputs as of the valuation date (Level 2), including prices of instruments with similar maturities and characteristics, interest rate yield curves, measures of interest rate volatility and various market indices. The value was determined and adjusted to reflect nonperformance risk of both the counterparty and the Plan. See note 8 for definitions of Levels 1, 2 and 3. American National Red Cross Savings Plan – 401(k) Plan: The Organization sponsors the American National Red Cross Savings Plan (the Savings Plan 401(k)), a defined contribution plan. Employees are eligible to participate upon hire and vest on a 3 year cliff schedule. There were $42.1 million and $17 million in contributions to the Savings Plan in 2013 and 2012, respectively. For employees impacted by the freeze of the Retirement System, the Red Cross will make an annual Points-Based Employer Contribution (PBEC) to the Savings Plan 401(k) based on a participants’ age and years of service as of June 30 each year. To be eligible to receive the PBEC, an eligible employee must be paid for at least 1,000 hours of employment during the fiscal year and be actively employed on June 30. The first annual PBEC of $15 million was made on September 4, 2013 which covered the period January 1 through June 30, 2013. 38 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) Employees not eligible to participate in the Retirement System continue to receive the Annual Red Cross Contribution (ARCC), provided they have been paid for at least 1,000 hours during the prior fiscal year. The fourth annual ARCC of $6 million was made on September 4, 2013 which covered the period July 1, 2012 through June 30, 2013. For the 2013 calendar year, contribution limits were based on a maximum annual compensation of $255,000. As of June 30, 2013, there were 20 investment options that an employee could choose from and a self-managed brokerage account option. (11) Receivables Securitization Program The Organization has an asset securitization program. The program is structured to sell the eligible biomedical hospital account receivables, without legal recourse, to a third party investor, through a wholly owned bankruptcy-remote special purpose entity that is consolidated for financial reporting purposes. The Organization continues servicing the sold receivables. Proceeds received under the securitization program are treated as secured borrowings. The maximum amount of the agreement is $150 million and the total cost of the program approximates the 30 day Libor plus 1.35%. At June 30, 2013 and 2012, the amount of outstanding borrowings under the securitization program was $134 million and $141 million, respectively, and are included in other liabilities on the statement of financial position. (12) Commitments and Contingencies Litigation: The Organization is a defendant in a number of lawsuits incidental to its operations. In the opinion of management, the outcome of such lawsuits will not have a materially adverse effect on the Organization’s financial position. Consent Decree: In April 2003, The American National Red Cross signed an amended consent decree (the Decree) with the United States Food and Drug Administration (FDA) affecting Biomedical Services and its blood services regional operations. The Decree requires compliance with specific standards on how the Organization will manage and monitor its Biomedical Services’ operations and formalized management of compliance related issues and provides timelines for their resolution. The Decree subjects the Organization to potential monetary penalties if it fails to meet the compliance standards. The compliance penalty provisions cover two general areas: (1) penalties for violations of the Decree, including violation of the Food Drug and Cosmetic Act and FDA regulations; and (2) penalties for the release of unsuitable blood products. Potential penalty amounts are limited to one percent of gross annual revenues generated by Biomedical Services for products and services in the first year (April 15, 2003 through April 14, 2004) of the Decree. The limit is increased to two percent in the second year, three percent in the third year, and four percent starting in the fourth year and annually thereafter. It is the opinion of management that the consolidated financial statements reflect adequate accrual for potential penalties resulting from noncompliance with the requirements of the Decree. 39 (Continued) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2013 (with summarized information for the year ended June 30, 2012) Government Grants: Costs charged to the federal government under cost-reimbursement grants and contracts are subject to government audit. Therefore, all such costs are subject to adjustment. Management believes that adjustments, if any, would not have a significant effect on the consolidated financial statements. (13) Subsequent Events The Organization has evaluated subsequent events through the date the consolidated financial statements were issued, October 23, 2013. 40