# Archer-Daniels-Midland Co (ADM) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Archer-Daniels-Midland Co's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/7084/000000708422000008/adm-20211231.htm
Accession: 0000007084-22-000008
Filing date: 2022-02-17
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ADM/
All MD&A years: /company/ADM/mda/
Next year: /company/ADM/mda/fy2022/ (FY 2022)

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This MD&A should be read in conjunction with the accompanying consolidated financial statements.

The Company’s recent significant portfolio actions and announcements include:

•the announcement in March 2021 of a new ADM policy to protect forests, biodiversity and communities, furthering the Company’s commitment to sustainable, ethical, and responsible production;

•the announcement in April 2021 of the resumption of dry mill ethanol production;

•the acquisition in April 2021 of Golden Farm Production & Commerce Company Limited;

•the announcement in May 2021 of ADM’s participation as a signatory to the German Charter for Diversity in the Workplace which aims to advance the recognition and inclusion of diversity in companies;

•the announcement in May 2021 of a plan to build a dedicated soybean crushing plant and refinery in North Dakota to meet fast-growing demand from food, feed, industrial and biofuel customers, including producers of renewable diesel, which is expected to be open in 2023;

•the announcement in June 2021 of ADM Ventures, the corporate venture capital arm of ADM, joining the Genesis Consortium, a global alliance of venture capital firms and corporations dedicated to supporting startups that leverage biology to promote human and planetary health;

•the acquisition in September 2021 of a 75% majority stake in P4, premier providers of private label pet treats and supplements;

•the announcement in September 2021 of a memorandum of understanding with LG Chem, a leading global diversified chemical company, to explore US-based production of lactic acid to meet growing demand for a wide variety of plant-based products, including bioplastics, through the creation of two joint ventures;

•the unveiling in September 2021 of a state-of-the-art, fully automated flavor production facility situated in Pinghu, Zhejiang Province, China;

•the announcement in October 2021 of an agreement with Qingdao Vland Biotech Group Co., Ltd., a leading producer of enzymes and probiotics, to form a joint venture, subject to regulatory approval, to manufacture and sell human probiotics to serve growing Chinese demand;

•the announcement in October 2021 of an equity investment in Acies Bio, a Slovenia-based biotechnology company specializing in research and development and manufacturing services for developing and scaling synthetic biology and precision fermentation technologies for food, agriculture, and industrial applications;

•the announcement in October 2021 of a memorandum of understanding with Gevo, Inc., a pioneer in transforming renewable energy into low carbon, energy-dense liquid hydrocarbons, to support the production of up to 500 million gallons of sustainable aviation fuel and other low carbon-footprint hydrocarbon fuels;

•the announcement in November 2021 of an agreement to form a 50-50 joint venture with Asia Sustainable Foods Platform, a wholly-owned company of Temasek, to provide technology development and precision fermentation for companies serving the growing consumer demand for a wide variety of bio-based products, including alternative protein, in Singapore and the wider Asia-Pacific region;

•the announcement in November 2021 of an equity investment in Farmers Business Network, a global farmer-to-farmer network and AgTech company, and a letter of intent to expand the existing relationship through a wide range of potential future areas of cooperation;

•the acquisition in November 2021 of Deerland, a leader in probiotic, prebiotic, and enzyme technology;

•the acquisition in November 2021 of Sojaprotein, a leading European provider of non-GMO soy ingredients;

•the sale in November 2021 of the Company’s ethanol production complex in Peoria, Illinois to BioUrja Group;

•the formation in December 2021 of a joint venture with Marathon Petroleum Corp. for the production of soybean oil to supply rapidly growing demand for renewable diesel fuel;

•the acquisition in December 2021 of Flavor Infusion International, S.A., a full-range provider of flavor and specialty ingredient solutions for customers across Latin America and the Caribbean; and

•the acquisition in February 2022 of Comhan, a leading South African flavour distributor.

Sustainability is a key driver of ADM’s expanding portfolio of environmentally responsible, plant-derived products. Consumers today increasingly expect their food and drink to come from sustainable ingredients, produced by companies that share their values and ADM is continually finding new ways to meet those needs through its portfolio actions.

27

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The next phase of the Company’s strategic transformation is focused on two strategic pillars: Productivity and Innovation.

The Productivity pillar includes (1) advancing the roles of the Company’s Centers of Excellence in procurement, supply chain, and operations to deliver additional efficiencies across the enterprise; (2) continued roll out of the 1ADM business transformation program and implementation of improved standardized business processes; and (3) increased use of technology, analytics, and automation at production facilities, in offices, and with customers.

Innovation activities include expansions and investments in (1) improving the customer experience, including leveraging producer relationships and enhancing the use of state-of-the-art digital technology to help customers grow; (2) sustainability-driven innovation, which encompasses the full range of products, solutions, capabilities, and commitments to serve customers’ needs; and (3) growth initiatives, including organic growth to support additional capacity and meet growing demand, and mergers and acquisitions opportunities.

ADM will support both pillars with investments in technology, which include expanding digital capabilities and investing further in product research and development. All of these efforts will continue to be strengthened by the Company’s ongoing commitment to Readiness.

Operating Performance Indicators

The Company’s Ag Services and Oilseeds operations are principally agricultural commodity-based businesses where changes in selling prices move in relationship to changes in prices of the commodity-based agricultural raw materials. As a result, changes in agricultural commodity prices have relatively equal impacts on both revenues and cost of products sold. Therefore, changes in revenues of these businesses do not necessarily correspond to the changes in margins or gross profit. Thus, gross margins per volume or metric ton are more meaningful than gross margins as percentage of revenues.

The Company’s Carbohydrate Solutions operations and Nutrition businesses also utilize agricultural commodities (or products derived from agricultural commodities) as raw materials. However, in these operations, agricultural commodity market price changes do not necessarily correlate to changes in cost of products sold. Therefore, changes in revenues of these businesses may correspond to changes in margins or gross profit. Thus, gross margin rates are more meaningful as a performance indicator in these businesses.

The Company has consolidated subsidiaries in more than 70 countries.  For the majority of the Company’s subsidiaries located outside the United States, the local currency is the functional currency except certain significant subsidiaries in Switzerland where Euro is the functional currency, and Brazil and Argentina where U.S. dollar is the functional currency. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars at the weighted average exchange rates for the applicable periods. For the majority of the Company’s business activities in Brazil and Argentina, the functional currency is the U.S. dollar; however, certain transactions, including taxes, occur in local currency and require remeasurement to the functional currency. Changes in revenues are expected to be correlated to changes in expenses reported by the Company caused by fluctuations in the exchange rates of foreign currencies, primarily the Euro, British pound, Canadian dollar, and Brazilian real, as compared to the U.S. dollar.

The Company measures its performance using key financial metrics including net earnings, gross margins, segment operating profit, return on invested capital, earnings before taxes, interest, and depreciation and amortization (EBITDA), economic value added, manufacturing expenses, and selling, general, and administrative expenses. The Company’s financial results can vary significantly due to changes in factors such as fluctuations in energy prices, weather conditions, crop plantings, government programs and policies, trade policies, changes in global demand, general global economic conditions, changes in standards of living, and global production of similar and competitive crops. Due to these unpredictable factors, the Company undertakes no responsibility for updating any forward-looking information contained within “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

28

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

This section of the Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 are not included in this Form 10-K, and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Market Factors Influencing Operations or Results in the Twelve Months Ended December 31, 2021

The Company is subject to a variety of market factors which affect the Company's operating results. In Ag Services and Oilseeds, North American origination volumes benefited from strong export demand throughout the year while South American origination volumes were impacted by a delayed harvest and low farmer selling activity. Crushing margins benefited from strong demand and tight soybean and canola/rapeseed stocks. Demand for refined oils was strong, driven by the regional lifting of COVID-19 restrictions in the U.S. and demand for renewable green diesel. In Carbohydrate Solutions, margins in starches and sweeteners were solid despite softer sweetener demand early in the year due to continued COVID-19 restrictions. Starch demand continued to be robust. Co-product prices were strong. Ethanol demand returned closer to pre-pandemic levels. For most of year, ethanol margins were volatile initially supported by improving domestic demand, then challenged in the summer months prior to harvest due to limited availability of corn. Ethanol inventory levels were at a five-year low for the majority of the fourth quarter due to strong domestic demand and some supply chain bottlenecks resulting in elevated margins for the industry late in the year. Nutrition benefited from overall strong demand in various product categories. In Human Nutrition, demand for flavors, flavor systems, specialty proteins, bioactives, and fibers were strong. In Animal Nutrition, weak demand and higher input costs as a result of COVID-19 in South America and Asia were partially offset by the growing demand in complete food for petfood. Amino acids pricing and margins improved due to a tighter global supply environment.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Net earnings attributable to controlling interests increased 53% or $0.9 billion, to $2.7 billion. Segment operating profit increased 34% or $1.2 billion, to $4.6 billion, and included a net charge of $136 million consisting of asset impairment, restructuring, and settlement charges of $213 million, partially offset by gains on the sale of certain assets of $77 million. Included in segment operating profit in the prior year was net income of $7 million consisting of gains on the sale of a portion of the Company’s shares in Wilmar and certain other assets, partially offset by asset impairment, restructuring, and settlement charges. Adjusted segment operating profit increased $1.3 billion to $4.8 billion due primarily to higher results in most businesses except in Ag Services and Other Business. Corporate results in the current year were a net charge of $1.3 billion and included a pension settlement charge of $83 million, loss on debt extinguishment of $36 million, a mark-to-market gain of $19 million on the conversion option of the exchangeable bonds issued in August 2020, acquisition-related expenses of $7 million, and a restructuring charge of $4 million. Corporate results in the prior year were a net charge of $1.6 billion and included early debt retirement charges of $409 million, a mark-to-market loss of $17 million on the conversion option of the exchangeable bonds issued in August 2020, impairment and restructuring charges of $16 million, acquisition-related expenses of $4 million, gains on the sale of certain assets of $7 million, and a credit of $91 million from the elimination of the last-in, first-out (LIFO) reserve in connection with the accounting change effective January 1, 2020.

Income taxes of $578 million increased $477 million. The Company’s effective tax rate for 2021 was 17.4% compared to 5.4% for 2020. The increase in rate for 2021 was due primarily to changes in the geographic mix of earnings and current year discrete tax items, including valuation allowance and return to provision adjustments. The 2020 tax rate also included the impact of U.S. tax credits signed into law in December 2019, including a $73 million discrete tax benefit related to 45G railroad tax credits recognized in the quarter ended March 31, 2020. The 45G railroad tax credits had an offsetting impact in cost of products sold.

29

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Analysis of Statements of Earnings

Processed volumes by product for the years ended December 31, 2021 and 2020 are as follows (in metric tons):

[[GREPCENT_TABLE]]
[["(In thousands)","2021","","2020","","Change"],["Oilseeds","35,125","","","36,565","","","(1,440)"],["Corn","19,126","","","17,885","","","1,241"],["Total","54,251","","","54,450","","","(199)"]]
[[/GREPCENT_TABLE]]

The Company generally operates its production facilities, on an overall basis, at or near capacity, adjusting facilities individually, as needed, to react to the current margin environment and seasonal local supply and demand conditions. The overall decrease in oilseeds processed volumes was due to cold weather and natural gas curtailments in North America, delays in soybean harvest in South America, and some production challenges in certain North American oilseeds processing plants. The overall increase in corn processed volumes was primarily related to the idling of two dry mill facilities in the second quarter of 2020. The Company restarted these idled facilities in April 2021.

Revenues by segment for the years ended December 31, 2021 and 2020 are as follows:

[[GREPCENT_TABLE]]
[["(In millions)","2021","","2020","","Change"],["Ag Services and Oilseeds"],["Ag Services","$","45,017","","","$","32,726","","","$","12,291"],["Crushing","11,368","","","9,593","","","1,775"],["Refined Products and Other","10,662","","","7,397","","","3,265"],["Total Ag Services and Oilseeds","67,047","","","49,716","","","17,331"],["Carbohydrate Solutions"],["Starches and Sweeteners","7,611","","","6,387","","","1,224"],["Vantage Corn Processors","3,499","","","2,085","","","1,414"],["Total Carbohydrate Solutions","11,110","","","8,472","","","2,638"],["Nutrition"],["Human Nutrition","3,189","","","2,812","","","377"],["Animal Nutrition","3,523","","","2,988","","","535"],["Total Nutrition","6,712","","","5,800","","","912"],["Other Business","380","","","367","","","13"],["Total Other Business","380","","","367","","","13"],["Total","$","85,249","","","$","64,355","","","$","20,894"]]
[[/GREPCENT_TABLE]]

Revenues and cost of products sold in agricultural merchandising and processing businesses are significantly correlated to the underlying commodity prices and volumes. In periods of significant changes in market prices, the underlying performance of the Company is better evaluated by looking at margins since both revenues and cost of products sold, particularly in Ag Services and Oilseeds, generally have a relatively equal impact from market price changes which generally result in an insignificant impact to gross profit.

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Revenues increased $20.9 billion to $85.2 billion due to higher sales prices ($21.0 billion), partially offset by lower sales volumes ($0.1 billion). Higher sales prices of oils, soybeans, corn, meal, animal feed, alcohol, biodiesel, wheat, and flavors and higher sales volumes of wheat and processed cotton, were partially offset by lower sales volumes of soybeans and oils. Ag Services and Oilseeds revenues increased 35% to $67.0 billion due to higher sales prices ($17.3 billion). Carbohydrate Solutions revenues increased 31% to $11.1 billion due to higher sales prices ($2.6 billion). Nutrition revenues increased 16% to $6.7 billion due to higher sales prices ($1.0 billion), partially offset by lower sales volumes of ($0.1 billion).

Cost of products sold increased $19.4 billion to $79.3 billion due principally to higher average commodity costs. Included in cost of products sold in the prior year was a credit of $91 million from the effect of the elimination of the LIFO reserve in connection with the accounting change effective January 1, 2020. Manufacturing expenses increased $0.5 billion to $6.1 billion due principally to higher maintenance and energy costs and salaries and benefits, partially offset by lower railroad maintenance expenses.

Foreign currency translation impacts increased revenues by $0.9 billion and cost of products sold by $0.8 billion.

Gross profit increased $1.5 billion or 34%, to $6.0 billion due to higher results in Ag Services and Oilseeds ($737 million), Carbohydrate Solutions ($577 million), Nutrition ($199 million), and Other ($47 million). These factors are explained in the segment operating profit discussion on page 33. In Corporate, the elimination of the LIFO reserve in connection with the accounting change effective January 1, 2020 had a positive impact on gross profit of $91 million in the prior year.

Selling, general, and administrative expenses increased 11% to $3.0 billion due principally to higher salaries and benefits, performance-based compensation accruals, IT expenses, and a legal settlement.

Asset impairment, exit, and restructuring costs increased $84 million to $164 million. Charges in the current year consisted of $125 million of impairments related to certain long-lived assets, goodwill, and other intangible assets and $35 million of restructuring charges, presented as specified items within segment operating profit, and $4 million of restructuring charges in Corporate. Charges in the prior year consisted primarily of $47 million of impairments related to certain intangible and other long-lived assets and $17 million of individually insignificant restructuring charges presented as specified items within segment operating profit, $7 million of individually insignificant impairments and $9 million of individually insignificant restructuring charges in Corporate.

Interest expense decreased $74 million to $265 million due to lower interest rates and the favorable liability management actions taken in the prior year. Interest expense in the current year also included a $19 million mark-to-market gain adjustment related to the conversion option of the Wilmar exchangeable bonds issued in August 2020 compared to a $17 million mark-to-market loss adjustment in the prior period.

Equity in earnings of unconsolidated affiliates increased $16 million to $595 million due to higher earnings from the Company’s investment in Stratas Foods LLC, partially offset by lower earnings from the Company’s investments in SoyVen, Hungrana Ltd., and Almidones Mexicanos S.A.

Loss on debt extinguishment in the current year of $36 million was related to the early redemption of $500 million aggregate principal amount of 2.750% notes due in March 2025. Loss on debt extinguishment of $409 million in the prior year related to multiple early debt redemptions including the $0.7 billion debt tender in September 2020.

Investment income decreased $15 million to $96 million due to lower interest rates on segregated funds in the Company’s futures commission and brokerage business and lower interest earned on financing receivables, partially offset by a $49 million investment revaluation gain in the current year compared to a $23 million investment revaluation gain in the prior year.

Other income - net of $94 million decreased $161 million. Current year income included gains on the sale of certain ethanol and other assets and disposals of individually insignificant assets in the ordinary course of business, foreign exchange gains, the non-service components of net pension benefit income, and other income, partially offset by a non-cash pension settlement charge related to the purchase of group annuity contracts that irrevocably transferred the future benefit obligations and annuity administration for certain salaried and hourly retirees and terminated vested participants under the Company’s ADM Retirement Plant and ADM Pension Plan for Hourly-Wage Employees. Prior year income included gains related to the sale of a portion of the Company’s shares in Wilmar and certain other assets, the non-service components of net pension benefit income, foreign exchange gains, and other income.

31

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Segment operating profit, adjusted segment operating profit (a non-GAAP measure), and earnings before income taxes for the years ended December 31, 2021 and 2020 are as follows:

[[GREPCENT_TABLE]]
[["Segment Operating Profit","2021","","2020","","Change"],["","(In millions)"],["Ag Services and Oilseeds"],["Ag Services","$","770","","","$","828","","","$","(58)"],["Crushing","975","","","466","","","509"],["Refined Products and Other","652","","","439","","","213"],["Wilmar","378","","","372","","","6"],["Total Ag Services and Oilseeds","2,775","","","2,105","","","670"],["Carbohydrate Solutions"],["Starches and Sweeteners","913","","","762","","","151"],["Vantage Corn Processors","370","","","(45)","","","415"],["Total Carbohydrate Solutions","1,283","","","717","","","566"],["Nutrition"],["Human Nutrition","537","","","462","","","75"],["Animal Nutrition","154","","","112","","","42"],["Total Nutrition","691","","","574","","","117"],["Other Business","25","","","52","","","(27)"],["Total Other","25","","","52","","","(27)"],["Specified Items:"],["Gain on sales of assets","77","","","83","","","(6)"],["Impairment, restructuring, and settlement charges","(213)","","","(76)","","","(137)"],["Total Specified Items","(136)","","","7","","","(143)"],["Total Segment Operating Profit","$","4,638","","","$","3,455","","","$","1,183"],["Adjusted Segment Operating Profit(1)","$","4,774","","","$","3,448","","","$","1,326"],["Segment Operating Profit","$","4,638","","","$","3,455","","","$","1,183"],["Corporate","(1,325)","","","(1,572)","","","247"],["Earnings Before Income Taxes","$","3,313","","","$","1,883","","","$","1,430"]]
[[/GREPCENT_TABLE]]

(1) Adjusted segment operating profit is segment operating profit excluding the listed specified items.

32

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Ag Services and Oilseeds operating profit increased 32%. Ag Services results were lower than the prior year. In North America, strong Chinese demand and favorable positions in a dynamic pricing environment delivered significantly higher results. South American origination results were significantly lower due to decreased farmer selling activity versus the prior year and the effects from a slightly delayed harvest and higher freight costs. Global Trade results were impacted by lower margins in structured trade finance and negative timing effects related to ocean freight positions which are expected to reverse in the coming quarters. Crushing results were significantly higher. In North America and Europe, tight supplies and strong demand that drove higher crush margins were partially offset by results in South America which were impacted by slower farmer selling and higher cost of beans. Refined Products and Other results were higher year-over-year on stronger margins in North America and Europe, Middle East, Africa, and India (EMEAI), partially offset by impacts related to the reduction in Brazilian biodiesel mandates. Equity earnings from Wilmar were higher versus the prior year.

Carbohydrate Solutions operating profit increased 79%. Starches and Sweeteners results, including ethanol production from the wet mills, were significantly higher than the prior year. The business capitalized on rising prices in the ethanol complex and favorable co-product values in an industry environment of improving margins, falling inventories, and higher input costs. Corn oil results significantly improved from the prior year, which had been impacted by significant mark-to-market effects. Current year results benefited from strong risk management gains that enhanced margins and trading opportunities. Demand for flour by the foodservice sector remained below the prior year. Vantage Corn Processors results were substantially higher, driven by improved margins on the distribution of fuel ethanol and strong performance in USP-grade alcohol and the resumption of production at the two dry mills.

Nutrition operating profit increased 20%. Human Nutrition results were higher than the prior year. Flavors results were up, driven by strong sales across various market segments. In North America and EMEAI, the flavors business delivered strong volumes and improved product mix, particularly in the beverage segment. Specialty Ingredients delivered sales growth in specialty proteins and improved pricing and product mix, though results were negatively impacted by the effects of higher production costs, normalization of prices in the wholesale ingredients business, and COVID-related shifts in demand across the portfolio. Health and Wellness results were strong, with robust demand driving strong results in probiotics and fibers. Animal Nutrition results were higher on favorable results in amino acids, driven by improved margins and product mix, partially offset by lower demand and higher input costs as a result of pandemic effects in South America and Asia.

Other Business operating profit decreased 52% primarily due to lower underwriting results from the captive insurance operations, most of which were offset by corresponding recoveries in other business segments.

Corporate results are as follows:

[[GREPCENT_TABLE]]
[["(In millions)","2021","","2020","","Change"],["LIFO credit (charge)","$","\u2014","","","$","91","","","$","(91)"],["Interest expense - net","(277)","","","(313)","","","36"],["Unallocated corporate costs","(957)","","","(857)","","","(100)"],["Gain (loss) on sale of assets","\u2014","","","7","","","(7)"],["Expenses related to acquisitions","(7)","","","(4)","","","(3)"],["Loss on debt extinguishment","(36)","","","(409)","","","373"],["Gain (loss) on debt conversion option","19","","","(17)","","","36"],["Impairment, restructuring, and settlement charges","(87)","","","(16)","","","(71)"],["Other charges","20","","","(54)","","","74"],["Total Corporate","$","(1,325)","","","$","(1,572)","","","$","247"]]
[[/GREPCENT_TABLE]]

33

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Corporate results were a net charge of $1.3 billion in the current year compared to $1.6 billion in the prior year. The elimination of the LIFO reserve in connection with the accounting change effective January 1, 2020 resulted in a credit of $91 million in the prior year. Interest expense-net decreased $36 million due principally to lower interest rates and the favorable liability management actions taken in the prior year. Unallocated corporate costs increased $100 million due primarily to higher variable performance-related compensation expense accruals, the continued cost centralization in procurement, supply chain, and operations, and additional investments in IT and related projects. Loss on debt extinguishment in the current year related to the early redemption of $500 million aggregate principal amount of 2.750% notes due in March 2025. Loss on debt extinguishment in the prior year related to multiple early debt redemptions. Gain (loss) on debt conversion option was related to the mark-to-market adjustment of the conversion option of the exchangeable bonds issued in August 2020. Impairment, restructuring, and settlement charges in the current year included a non-cash pension settlement charge of $83 million related to the purchase of group annuity contracts that irrevocably transferred the future benefit obligations and annuity administration for certain salaried and hourly retirees and terminated vested participants under the Company’s ADM Retirement Plan and ADM Pension Plan for Hourly-Wage Employees to independent third parties, and individually insignificant restructuring charges. Impairment, restructuring, and settlement charges in the prior year were related to impairment of certain assets and individually insignificant restructuring charges. Other charges in the current year included railroad maintenance expenses of $67 million partially offset by the non-service components of net pension benefit income of $16 million and an investment revaluation gain of $49 million. Other charges in the prior year included railroad maintenance expenses of $138 million, partially offset by foreign exchange gains, an investment revaluation gain of $23 million, and the non-service components of net pension benefit income of $33 million.

Non-GAAP Financial Measures

The Company uses adjusted earnings per share (EPS), adjusted EBITDA, and adjusted segment operating profit, non-GAAP financial measures as defined by the SEC, to evaluate the Company’s financial performance. These performance measures are not defined by accounting principles generally accepted in the United States and should be considered in addition to, and not in lieu of, GAAP financial measures.

Adjusted EPS is defined as diluted EPS adjusted for the effects on reported diluted EPS of specified items. Adjusted EBITDA is defined as earnings before taxes, interest, and depreciation and amortization, adjusted for specified items. The Company calculates adjusted EBITDA by removing the impact of specified items and adding back the amounts of interest expense and depreciation and amortization to earnings before income taxes. Adjusted segment operating profit is segment operating profit adjusted, where applicable, for specified items.

Management believes that adjusted EPS, adjusted EBITDA, and adjusted segment operating profit are useful measures of the Company’s performance because they provide investors additional information about the Company’s operations allowing better evaluation of underlying business performance and better period-to-period comparability. Adjusted EPS, adjusted EBITDA, and adjusted segment operating profit are not intended to replace or be an alternative to diluted EPS, earnings before income taxes, and segment operating profit, respectively, the most directly comparable amounts reported under GAAP.

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The table below provides a reconciliation of diluted EPS to adjusted EPS for the years ended December 31, 2021 and 2020.

[[GREPCENT_TABLE]]
[["","2021","","2020"],["","In millions","Per share","","In millions","Per share"],["Average number of shares outstanding - diluted","566","","","","563"],["Net earnings and reported EPS (fully diluted)","$","2,709","","$","4.79","","","$","1,772","","$","3.15"],["Adjustments:"],["LIFO charge (credit) (net of tax of $22 million in 2020) (1)","\u2014","","\u2014","","","(69)","","(0.12)"],["(Gain) loss on sales of assets (net of tax of $20 million in 2021 and $10 million in 2020) (2)","(57)","","(0.10)","","","(80)","","(0.14)"],["Asset impairment, restructuring, and settlement charges (net of tax of $63 million in 2021 and $23 million in 2020) (2)","237","","0.42","","","69","","0.12"],["Expenses related to acquisitions (net of tax of $2 million in 2021 and $1 million in 2020) (2)","5","","0.01","","","3","","0.01"],["Loss on debt extinguishment (net of tax of $9 million in 2021 and $99 million in 2020) (2)","27","","0.05","","","310","","0.55"],["(Gain) loss on debt conversion option (net of tax of $0) (2)","(19)","","(0.03)","","","17","","0.03"],["Tax adjustments","33","","0.05","","","(3)","","(0.01)"],["Adjusted net earnings and adjusted EPS","$","2,935","","$","5.19","","","$","2,019","","$","3.59"]]
[[/GREPCENT_TABLE]]

(1) Tax effected using the Company’s U.S. tax rate. LIFO accounting was discontinued effective January 1, 2020.

(2) Tax effected using the applicable tax rates.

The tables below provide a reconciliation of earnings before income taxes to adjusted EBITDA and adjusted EBITDA by segment for the years ended December 31, 2021 and 2020.

[[GREPCENT_TABLE]]
[["(In millions)","2021","","2020","","Change"],["Earnings before income taxes","$","3,313","","","$","1,883","","","$","1,430"],["Interest expense","265","","","339","","","(74)"],["Depreciation and amortization","996","","","976","","","20"],["LIFO charge (credit)","\u2014","","","(91)","","","91"],["(Gain) loss on sales of assets","(77)","","","(90)","","","13"],["Asset impairment, restructuring, and settlement charges","300","","","92","","","208"],["Railroad maintenance expense","67","","","138","","","(71)"],["Expenses related to acquisitions","7","","","4","","","3"],["Loss on debt extinguishment","36","","","409","","","(373)"],["Adjusted EBITDA","$","4,907","","","$","3,660","","","$","1,247"],["(In millions)","2021","","2020","","Change"],["Ag Services and Oilseeds","$","3,145","","","$","2,469","","","676"],["Carbohydrate Solutions","1,616","","","1,029","","","587"],["Nutrition","912","","","802","","","110"],["Other Business","32","","","61","","","(29)"],["Corporate","(798)","","","(701)","","","(97)"],["Adjusted EBITDA","$","4,907","","","$","3,660","","","$","1,247"]]
[[/GREPCENT_TABLE]]

35

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources

A Company objective is to have sufficient liquidity, balance sheet strength, and financial flexibility to fund the operating and capital requirements of a capital intensive agricultural commodity-based business.  The Company depends on access to credit markets, which can be impacted by its credit rating and factors outside of ADM’s control, to fund its working capital needs and capital expenditures. The primary source of funds to finance ADM’s operations, capital expenditures, and advancement of its growth strategy is cash generated by operations and lines of credit, including a commercial paper borrowing facility and accounts receivable securitization programs.  In addition, the Company believes it has access to funds from public and private equity and debt capital markets in both U.S. and international markets.

Cash provided by operating activities was $6.6 billion in 2021 compared to a use of $2.4 billion in 2020. Working capital changes as described below increased cash by $2.7 billion in the current year compared to a decrease of $5.5 billion in the prior year which included the impact of deferred consideration. During 2020, the Company restructured its accounts receivable securitization programs from a deferred purchase price to a pledge structure. As a result, operating cash flows in the current year no longer include the impact of deferred consideration in securitized receivables which decreased operating cash flows in previous years.

Trade receivables increased $0.6 billion primarily due to higher revenues. Inventories increased $2.8 billion primarily due to higher inventory prices and, to a lesser extent, higher volumes. Other current assets decreased $1.3 billion primarily due to decreases in contracts and futures gains. Trade payables increased $1.9 billion due principally to increased grain purchases. Payables to brokerage customers increased $2.5 billion due to increased customer trading activity in the Company’s futures commission and brokerage business.

Deferred consideration in securitized receivables of $4.6 billion in 2020 was offset by the same amount of net consideration received for beneficial interest obtained for selling trade receivables.

Cash used in investing activities was $2.7 billion this year compared to cash provided of $4.5 billion last year. Capital expenditures in the current year were $1.2 billion compared to $0.8 billion in the prior year. Net assets of businesses acquired were $1.6 billion this year compared to $15 million last year primarily due to the acquisitions of P4, Sojaprotein, and Deerland in 2021. Proceeds from sales of businesses and assets of $0.2 billion in the current year related to the sale of the ethanol production complex in Peoria, Illinois and certain other assets compared to $0.7 billion in the prior year which related to the sale of a portion of the Company shares in Wilmar and certain other assets. Net consideration received for beneficial interest obtained for selling trade receivables was $4.6 billion in 2020.

Cash used in financing activities was $1.1 billion this year compared to $0.4 billion last year. Long-term debt borrowings in the current year of $1.3 billion consisted of the $750 million aggregate principal amount of 2.700% Notes due 2051 issued on September 10, 2021 and the €0.5 billion aggregate principal amount of Fixed-to-Floating Rate Senior Notes due 2022 issued in a private placement on March 25, 2021. Long-term debt borrowings in the prior year of $1.8 billion consisted of $0.5 billion and $1.0 billion aggregate principal amounts of 2.75% Notes due in 2025 and 3.25% Notes due in 2030, respectively, issued on March 27, 2020 and the $0.3 billion aggregate principal amount of zero coupon exchangeable bonds due in 2023 issued on August 26, 2020. Proceeds from the borrowings in 2021 and 2020 were used to redeem debt and for general corporate purposes. Commercial paper net payments were $1.1 billion in the current year compared to net borrowings of $0.8 billion in the prior year. Long-term debt payments in the current year of $0.5 billion consisted of the early redemption of the $500 million aggregate principal amount of 2.750% notes due 2025 in September 2021. Long-term debt payments in the prior year of $2.1 billion related primarily to the early redemption of the $0.5 billion and $0.4 billion aggregate principal amounts of 4.479% debentures due in 2021 and 3.375% debentures due in 2022, respectively, the repurchase of $0.7 billion aggregate principal amount of certain outstanding notes and debentures, and the redemption of $0.2 billion aggregate principal amount of private placement notes due in 2021 and 2024. Share repurchases in the current year were insignificant compared to $0.1 billion in the prior year. Dividends paid in the current year of $0.8 billion were comparable to the prior year.

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

At December 31, 2021, ADM had $0.9 billion of cash, cash equivalents, and short-term marketable securities and a current ratio, defined as current assets divided by current liabilities, of 1.5 to 1.  Included in working capital is $9.8 billion of readily marketable commodity inventories.  At December 31, 2021, the Company’s capital resources included shareholders’ equity of $22.5 billion and lines of credit, including the accounts receivable securitization programs described below, totaling $11.2 billion, of which $8.1 billion was unused.  ADM’s ratio of long-term debt to total capital (the sum of long-term debt and shareholders’ equity) was 26% and 28% at December 31, 2021 and 2020, respectively. The Company uses this ratio as a measure of ADM’s long-term indebtedness and an indicator of financial flexibility.  The Company’s ratio of net debt (the sum of short-term debt, current maturities of long-term debt, and long-term debt less the sum of cash and cash equivalents and short-term marketable securities) to capital (the sum of net debt and shareholders’ equity) was 28% and 32% at December 31, 2021 and 2020, respectively.  Of the Company’s total lines of credit, $5.0 billion supported the commercial paper borrowing programs, against which there was $0.8 billion of commercial paper outstanding at December 31, 2021.

During the second half of 2020, the global credit market stabilized with corporate credit spreads below pre-pandemic levels. Continued actions by central banks provided additional support in both the short-term and long-term funding markets further stabilizing corporate credit markets. Low benchmark yields and favorable credit spreads coupled with continued strong cash flow generation during the second half of 2020 presented opportunities for ADM to re-balance the company’s liability portfolio to pre-pandemic levels. Starting in June 2020, ADM began a series of liability management transactions including multiple early debt redemptions to capitalize on all-time low interest rates. 

As of December 31, 2021, the Company had $0.9 billion of cash and cash equivalents, $0.5 billion of which is cash held by foreign subsidiaries whose undistributed earnings are considered indefinitely reinvested. Based on the Company’s historical ability to generate sufficient cash flows from its U.S. operations and unused and available U.S. credit capacity of $5.2 billion, the Company has asserted that these funds are indefinitely reinvested outside the U.S.

The Company has accounts receivable securitization programs (the “Programs”) with certain commercial paper conduit purchasers and committed purchasers. The Programs provide the Company with up to $2.3 billion in funding against accounts receivable transferred into the Programs and expand the Company’s access to liquidity through efficient use of its balance sheet assets (see Note 19 in Item 8 for more information and disclosures on the Programs). As of December 31, 2021, the Company utilized $2.2 billion of its facility under the Programs.

On November 5, 2014, the Company’s Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to 100,000,000 shares of the Company’s common stock during the period commencing January 1, 2015 and ending December 31, 2019. On August 7, 2019, the Company’s Board of Directors approved the extension of the stock repurchase program through December 31, 2024 and the repurchase of up to an additional 100,000,000 shares under the extended program. The Company has acquired approximately 95.5 million shares under this program as of December 31, 2021.

In 2022, the Company expects capital expenditures of $1.3 billion and additional cash outlays of approximately $0.9 billion in dividends and up to $150 million in share repurchases, subject to other strategic uses of capital and the evolution of operating cash flows and the working capital position throughout the year.

The Company’s purchase obligations as of December 31, 2021 and 2020 were $18.6 billion and $19.7 billion, respectively.  The decrease is primarily related to obligations to purchase lower quantities of agricultural commodity inventories. As of December 31, 2021, the Company expects to make payments related to purchase obligations of $15.8 billion within the next twelve months. The Company's other material cash requirements within the next 12 months include commercial paper outstanding of $0.8 billion, current maturities of long-term debt of $570 million, interest payments of $305 million, operating lease payments of $310 million, transition tax liability of $20 million, and pension and other postretirement plan contributions of $100 million. The Company expects to make payments related to purchase obligations and other material cash requirements beyond the next twelve months of $18.2 billion.

The Company’s credit facilities and certain debentures require the Company to comply with specified financial and non-financial covenants including maintenance of minimum tangible net worth as well as limitations related to incurring liens, secured debt, and certain other financing arrangements.  The Company was in compliance with these covenants as of December 31, 2021.

The three major credit rating agencies have maintained the Company’s credit ratings at solid investment grade levels with stable outlooks.

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Critical Accounting Policies

The process of preparing financial statements requires management to make estimates and judgments that affect the carrying values of the Company’s assets and liabilities as well as the recognition of revenues and expenses.  These estimates and judgments are based on the Company’s historical experience and management’s knowledge and understanding of current facts and circumstances.  Certain of the Company’s accounting policies are considered critical, as these policies are important to the depiction of the Company’s financial statements and require significant or complex judgment by management.  Management has discussed with the Company’s Audit Committee the development, selection, disclosure, and application of these critical accounting policies.  Following are the accounting policies management considers critical to the Company’s financial statements.

Fair Value Measurements - Inventories and Commodity Derivatives

Certain of the Company’s inventory and commodity derivative assets and liabilities as of December 31, 2021 are valued at estimated fair values, including $9.8 billion of merchandisable agricultural commodity inventories, $1.4 billion of commodity derivative assets, $1.8 billion of commodity derivative liabilities, and $1.0 billion of inventory-related payables.  Commodity derivative assets and liabilities include forward purchase and sales contracts for agricultural commodities. Merchandisable agricultural commodities are freely traded, have quoted market prices, and may be sold without significant additional processing.  Management estimates fair value for its commodity-related assets and liabilities based on exchange-quoted prices, adjusted for differences in local markets.  The Company’s inventory and derivative commodity fair value measurements are mainly based on observable market quotations without significant adjustments and are therefore reported as Level 2 within the fair value hierarchy.  Level 3 fair value measurements of approximately $3.5 billion of assets and $0.9 billion of liabilities represent fair value estimates where unobservable price components represent 10% or more of the total fair value price.  For more information concerning amounts reported as Level 3, see Note 4 in Item 8.  Changes in the market values of these inventories and commodity contracts are recognized in the statement of earnings as a component of cost of products sold.  If management used different methods or factors to estimate market value, amounts reported as inventories and cost of products sold could differ materially.  Additionally, if market conditions change subsequent to year-end, amounts reported in future periods as inventories and cost of products sold could differ materially.

Derivatives – Designated Hedging Activities

The Company, from time to time, uses derivative contracts designated as cash flow hedges to hedge the purchase or sales price of anticipated volumes of commodities to be purchased and processed in a future month. Assuming normal market conditions, the change in the market value of such derivative contracts has historically been, and is expected to continue to be, highly effective at offsetting changes in price movements of the hedged item.  Gains and losses arising from open and closed hedging transactions are deferred in accumulated other comprehensive income, net of applicable income taxes, and recognized as a component of cost of products sold and revenues in the statement of earnings when the hedged item is recognized in earnings.  If it is determined that the derivative instruments used are no longer effective at offsetting changes in the price of the hedged item, then the changes in the market value of these exchange-traded futures and exchange-traded and over-the-counter option contracts would be recorded immediately in the statement of earnings as a component of revenues and/or cost of products sold.  See Note 5 in Item 8 for additional information.

Investments in Affiliates

The Company applies the equity method of accounting for investments over which the Company has the ability to exercise significant influence.  These investments are carried at cost plus equity in undistributed earnings and are adjusted, where appropriate, for amortizable basis differences between the investment balance and the underlying net assets of the investee.  Generally, the minimum ownership threshold for asserting significant influence is 20% ownership of the investee.  However, the Company considers all relevant factors in determining its ability to assert significant influence including, but not limited to, ownership percentage, board membership, customer and vendor relationships, and other arrangements.  

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Income Taxes

The Company accounts for income taxes in accordance with the applicable accounting standards. These standards prescribe a minimum threshold a tax position is required to meet before being recognized in the consolidated financial statements. The Company recognizes in its consolidated financial statements tax positions determined more likely than not to be sustained upon examination, based on the technical merits of the position. The Company faces challenges from U.S. and foreign tax authorities regarding the amount of taxes due.  These challenges include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions.  In evaluating the exposure associated with various tax filing positions, the Company records reserves for estimates of potential additional tax owed by the Company.  For example, the Company has received tax assessments from tax authorities in Argentina and the Netherlands, challenging income tax positions taken by subsidiaries of the Company.  The Company evaluated its tax positions for these matters and concluded, based in part upon advice from legal counsel, that it was appropriate to recognize the tax benefits of these positions (see Note 13 in Item 8 for additional information).

Deferred tax assets represent items to be used as tax deductions or credits in future tax returns where the related tax benefit has already been recognized in the Company’s income statement.  The realization of the Company’s deferred tax assets is dependent upon future taxable income in specific tax jurisdictions, the timing and amount of which are uncertain.  The Company evaluates all available positive and negative evidence including estimated future reversals of existing temporary differences, projected future taxable income, tax planning strategies, and recent financial results. Valuation allowances related to these deferred tax assets have been established to the extent the realization of the tax benefit is not likely. During 2021, the Company decreased valuation allowances by $52 million primarily related to expired state attributes. To the extent the Company were to favorably resolve matters for which valuation allowances have been established or is unable to realize amounts in excess of the aforementioned valuation allowances, the Company’s effective tax rate in a given financial statement period may be impacted.

Undistributed earnings of the Company’s foreign subsidiaries and corporate joint ventures amounting to approximately $12.7 billion at December 31, 2021, are considered to be indefinitely reinvested.

The Company has a responsibility to ensure that all ADM businesses within the Company follow responsible tax practices. ADM manages its tax affairs based upon the following key principles:

–a commitment to paying tax in compliance with all applicable laws and regulations in the jurisdictions in which the Company operates;

–a commitment to the effective, sustainable, and active management of the Company's tax affairs; and

–developing and sustaining open and honest relationships with the governments and jurisdictions in which the Company operates regarding the formulation of tax laws.

Property, Plant, and Equipment and Asset Abandonments and Write-Downs

The Company is principally engaged in the business of procuring, transporting, storing, processing, and merchandising agricultural commodities and products.  This business is global in nature and is highly capital-intensive.  Both the availability of the Company’s raw materials and the demand for the Company’s finished products are driven by factors such as weather, plantings, government programs and policies, changes in global demand, changes in standards of living, and global production of similar and competitive crops.  These aforementioned factors may cause a shift in the supply/demand dynamics for the Company’s raw materials and finished products.  Any such shift will cause management to evaluate the efficiency and cash flows of the Company’s assets in terms of geographic location, size, and age of its facilities.  The Company, from time to time, will also invest in equipment, technology, and companies related to new, value-added products produced from agricultural commodities and products.  These new products are not always successful from either a commercial production or marketing perspective.  Management evaluates the Company’s property, plant, and equipment for impairment whenever indicators of impairment exist.  In addition, assets are written down to fair value after consideration of the ability to utilize the assets for their intended purpose or to employ the assets in alternative uses or sell the assets to recover the carrying value.  If management used different estimates and assumptions in its evaluation of these assets, then the Company could recognize different amounts of expense over future periods. During the years ended December 31, 2021, 2020, and 2019, asset abandonment and impairment charges for property, plant, and equipment were $73 million, $28 million, and $131 million, respectively.

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Business Combinations

The Company’s acquisitions are accounted for in accordance with Accounting Standards Codification (ASC) Topic 805, Business Combinations, as amended. The consideration transferred is allocated to various assets acquired and liabilities assumed at their estimated fair values as of the acquisition date with the residual allocated to goodwill. Fair values allocated to assets acquired and liabilities assumed in business combinations require management to make significant judgments, estimates, and assumptions, especially with respect to intangible assets. Management makes estimates of fair values based upon assumptions it believes to be reasonable. These estimates are based upon historical experience and information obtained from the management of the acquired companies and are inherently uncertain. The estimated fair values related to intangible assets primarily consist of customer relationships, trademarks, and developed technology which are determined primarily using discounted cash flow models. Estimates in the discounted cash flow models include, but are not limited to, certain assumptions that form the basis of the forecasted results (e.g. revenue growth rates, customer attrition rates, and royalty rates). These significant assumptions are forward looking and could be affected by future economic and market conditions. During the measurement period, which may take up to one year from the acquisition date, adjustments due to changes in the estimated fair value of assets acquired and liabilities assumed may be recorded as adjustments to the consideration transferred and related allocations. Upon the conclusion of the measurement period or the final determination of the values of assets acquired and liabilities assumed, whichever comes first, any such adjustments are charged to the consolidated statements of earnings. The Company accounts for any redeemable noncontrolling interest in temporary equity - redeemable noncontrolling interest at redemption value with periodic changes recorded in retained earnings.

Goodwill and Other Intangible Assets

Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests.  The Company evaluates goodwill for impairment at the reporting unit level annually on October 1 or whenever there are indicators that the carrying value may not be fully recoverable.  The Company has seven reporting units identified at one level below the operating segment using the criteria in ASC 350, Intangibles - Goodwill and Other (Topic 350). The Company adopted the provisions of Topic 350, which permits, but does not require, a company to qualitatively assess indicators of a reporting unit’s fair value. If after completing the qualitative assessment, a company believes it is likely that a reporting unit is impaired, a discounted cash flow analysis is prepared to estimate fair value. Critical estimates in the determination of the fair value of each reporting unit include, but are not limited to, future expected cash flows, revenue growth, and discount rates. During the year ended December 31, 2021, the Company evaluated goodwill for impairment using a qualitative assessment in six reporting units and using a quantitative assessment in one reporting unit. The estimated fair value of the reporting unit evaluated for impairment using a quantitative assessment was substantially in excess of its carrying value. Definite-lived intangible assets, including capitalized expenses related to the Company’s 1ADM program such as third-party configuration costs and internal labor, are amortized over their estimated useful lives of 1 to 50 years and are reviewed for impairment whenever there are indicators that the carrying values may not be fully recoverable. The Company recorded impairment charges totaling $52 million related to goodwill and other intangibles, $26 million related to customer lists, and $11 million related goodwill and other intangibles during the years ended December 31, 2021, 2020, and 2019, respectively (see Note 18 in Item 8 for more information). If management used different estimates and assumptions in its impairment tests, then the Company could recognize different amounts of expense over future periods.

Employee Benefit Plans

The Company provides substantially all U.S. employees and employees at certain international subsidiaries with retirement benefits including defined benefit pension plans and defined contribution plans.  The Company provides certain eligible U.S. employees who retire under qualifying conditions with subsidized postretirement health care coverage or Health Care Reimbursement Accounts.

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

In order to measure the expense and funded status of these employee benefit plans, management makes several estimates and assumptions, including interest rates used to discount certain liabilities, rates of return on assets set aside to fund these plans, rates of compensation increases, employee turnover rates, anticipated mortality rates, and anticipated future health care costs.  These estimates and assumptions are based on the Company’s historical experience combined with management’s knowledge and understanding of current facts and circumstances.  Management also uses third-party actuaries to assist in measuring the expense and funded status of these employee benefit plans.  If management used different estimates and assumptions regarding these plans, the funded status of the plans could vary significantly, and the Company could recognize different amounts of expense over future periods. A 25 basis point increase in the discount rate assumption would result in a $90 million decrease to the Company's pension benefit obligation improving the funded status by the same amount while a 25 basis point decrease in the expected return on plan assets assumption would increase the Company’s pension expense by $4 million.

The Company uses the corridor approach when amortizing actuarial losses. Under the corridor approach, net unrecognized actuarial losses in excess of 10% of the greater of the projected benefit obligation or the market related value of plan assets are amortized over future periods. For plans with little to no active participants, the amortization period is the remaining average life expectancy of the participants. For plans with active participants, the amortization period is the remaining average service period of the active participants. The amortization periods range from 2 to 28 years for the Company’s defined benefit pension plans and from 6 to 21 years for the Company’s postretirement benefit plans.