# Ryerson Holding Corp (RYZ) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Ryerson Holding Corp's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1481582/000095017024018005/ryi-20231231.htm
Accession: 0000950170-24-018005
Filing date: 2024-02-21
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/RYZ/
All MD&A years: /company/RYZ/mda/
Previous year: /company/RYZ/mda/fy2022/ (FY 2022)
Next year: /company/RYZ/mda/fy2024/ (FY 2024)

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

The following discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements of Ryerson Holding Corporation and Subsidiaries and the Notes thereto in Item 8. “Financial Statements and Supplementary Data.” This discussion contains forward-looking statements that involve risks and uncertainties. See the section entitled “Special Note Regarding Forward-Looking Statements.” Our actual results and the timing of selected events could differ materially from those discussed in these forward-looking statements as a result of certain factors, including those discussed in Item 1A. “Risk Factors” and elsewhere in this Form 10-K.

This section of this Form 10-K generally discusses 2023 and 2022 items and year-over-year comparisons between 2023 and 2022. Discussions of 2021 items and year-over-year comparisons between 2022 and 2021 that are not included in this Form 10-K 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, 2022.

Overview

Business

Ryerson Holding Corporation (“Ryerson Holding”), a Delaware corporation, is the parent company of Joseph T. Ryerson & Son, Inc. (“JT Ryerson”), a Delaware corporation. Affiliates of Platinum Equity, LLC (“Platinum”) own approximately 3,924,478 shares of our common stock, which is approximately 11.5% of our issued and outstanding common stock.

We are a leading value-added processor and distributor of industrial metals with operations in the United States ("U.S.") through JT Ryerson and other U.S. subsidiaries, in Canada through our indirect wholly-owned subsidiary Ryerson Canada, Inc., a Canadian corporation (“Ryerson Canada”), and in Mexico through our indirect wholly-owned subsidiary Ryerson Metals de Mexico, S. de R.L. de C.V., a Mexican corporation (“Ryerson Mexico”). In addition to our North American operations, we conduct metal processing and distribution operations in China through an indirect wholly-owned subsidiary, Ryerson China Limited, a Chinese limited liability company (“Ryerson China”). Unless the context indicates otherwise, Ryerson Holding, JT Ryerson, Ryerson Canada, Ryerson Mexico, and Ryerson China together with their subsidiaries, are collectively referred to herein as “Ryerson,” “we,” “us,” “our,” or the “Company.”

Industry and Operating Trends

We are a metals service center providing value-added processing and distribution of industrial metals with operations in the U.S., Canada, Mexico, and China. We purchase large quantities of metal products from primary producers and sell these materials in smaller quantities to a wide variety of metals-consuming industries. We carry a full line of approximately 75,000 products in stainless steel, aluminum, carbon steel, and alloy steels and a limited line of nickel and red metals in various shapes and forms. In addition to our metals products, we offer numerous value-added processing and fabrication services, and nearly 80% of the metals products we sell are processed by us by bending, beveling, blanking, blasting, burning, cutting-to-length, drilling, embossing, flattening, forming, grinding, laser cutting, machining, notching, painting, perforating, polishing, punching, rolling, sawing, scribing, shearing, slitting, stamping, tapping, threading, welding, or other techniques to process materials to a specified thickness, length, width, shape, and surface quality pursuant to specific customer orders.

Similar to other metals service centers, we maintain substantial inventories of metals to accommodate the short lead times and just-in-time delivery requirements of our customers. Accordingly, we purchase metals to maintain our inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon customer forecasts, historic buying practices, supply agreements with customers, mill lead times, and market conditions. Our commitments to purchase metals are generally at prevailing market prices in effect at the time we place our orders. At the request of our customers, we have entered into swaps in order to mitigate our customers’ risk of volatility in the price of metals and we have entered into metals hedges to mitigate our own risk of volatility in the price of metals. We have no long-term, fixed-price metals purchase contracts. When metals prices decline, customer demands for lower prices and our competitors’ responses to those demands could result in lower sale prices and, consequently, lower gross profits and earnings as we sell existing metals inventory. When metals prices increase, competitive conditions will influence how much of the price increase we may pass on to our customers.

The metals service center industry is cyclical and volatile in both demand and pricing, and difficult to predict. In 2023, Ryerson experienced a decline in average selling prices of 15.7% and a decline in shipments of 4.2% when compared to 2022 as the period was characterized by normalizing global supply and declining demand during 2023, with higher inflation and high interest rates contributing to slower economic conditions for industrial manufacturing. Changes in average selling prices are primarily driven by commodity metals prices, which impact Ryerson’s selling prices over the subsequent three to six-month period.

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Throughout 2023, indicators in the key steel industry end markets reported contraction in industrial activity. This is evidenced by the Institute for Supply Management’s Purchasing Managers’ Index (“PMI”), which reported contracting activity during the year with readings below the growth threshold of 50%, indicating a slowdown in factory activity. Similarly, U.S. Industrial Production, which reports year-over-year industrial sector business output, reported low or slowing growth in output for most of the year.

According to the Metal Service Center Institute, North American service center volumes increased by 1.5% in 2023 compared to 2022. On a North American basis, Ryerson's North American volumes declined 4.8% over the same period. While most sectors experienced declines in volumes, Ryerson experienced demand growth in commercial ground transportation and oil & gas on a year-over-year basis.

2023 Performance

These key metrics illustrate Ryerson’s financial performance for the full year 2023 compared to 2022:

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[[/GREPCENT_TABLE]]

A reconciliation of diluted EPS to adjusted diluted EPS is provided below.

Lower commodity prices and slower economic conditions in metals markets in 2023 caused lower average selling prices and lower volumes. Compared to 2022, average selling prices decreased by 15.7% and tons shipped decreased by 4.2%, resulting in a year-over-year revenue decrease of 19.2%. Gross margin contracted by 70 bps from 2022 as decreasing market prices, and therefore selling prices, outpaced the decrease in inventory costs. Warehousing, delivery, selling, general, and administrative expenses for 2023 increased by $58.3 million compared to 2022 driven primarily by inclusion of operating expenses from companies acquired in 2022 and 2023 and increased reorganization costs, primarily due to increased system conversion activity as well as start up costs associated with our new state of the art University Park location. We generated net income attributable to Ryerson Holding Corporation of $145.7 million, or $4.10 per diluted share, in 2023. This compares to net income attributable to Ryerson Holding Corporation of $391.0 million, or earnings of $10.21 per diluted share, for 2022. The year over year decreases are a result of the decline in commodity prices and slower economic conditions,

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To provide greater insight into the Company’s 2023 operating trends apart from the year’s one-time transactions, Ryerson provides adjusted net income and adjusted diluted earnings per share figures, which are not U.S. generally accepted accounting principles (“GAAP”) financial measures, to compliment the reported GAAP net income and diluted earnings per share figures. Management uses these metrics to assess year-over-year performance excluding non-recurring transactions. Adjusted net income and adjusted diluted earnings per share do not represent, and should not be used as a substitute for, net income or earnings per share determined in accordance with GAAP. Illustrated in the below table, the 2023 net income attributable to Ryerson Holding Corporation of $145.7 million includes a $0.8 million curtailment gain related to various retirement benefit plans. After adjusting for this non-core business transaction and the related income taxes, the adjusted net income attributable to Ryerson Holding Corporation for 2023 is $145.1 million, a decrease of $258.5 million compared to the prior year’s adjusted net income attributable to Ryerson Holding Corporation of $403.6 million which included $21.3 million of expenses related to the redemption of $300.0 million of the 8.50% senior secured notes due 2028 (the “2028 Notes”), a $3.8 million gain on the sale of assets, and a $0.6 million bargain purchase gain related to the acquisition of Ford Tool Steels, Inc., and related income taxes.

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[[/GREPCENT_TABLE]]

Ryerson generated cash from operating activities of $365.1 million in 2023, a decrease compared to $501.2 million generated in 2022. The decrease in cash generation year over year is primarily due to lower net income generation. See further details within the the section titled "Liquidity and Capital Resources" within this Item.

Ryerson’s 2023 Strategy Achievements

Ryerson’s market strategy focuses on providing excellent customer experiences consistently with speed at scale. Our culture is based on our trademarked “say yes, figure it out” mantra as we strive to grow volume and sustainably expand margins by increasing our fabrication business, transactional sales and improving our speed through our use of both tools and analytics. Ryerson’s financial strategy includes a focus on generating cash from operating activities and continuously improving a “through the cycle” operating model in order to maintain a strong balance sheet, re-invest in the growth of the business, and generate returns to shareholders.

During the year, the Company invested in optimizing its service center network through organic growth investments as well as strategic acquisitions. In 2023, Ryerson’s newly constructed 214,000 square foot service center facility in Centralia, Washington became fully operational, which serves the Pacific Northwest market and features advanced processing capabilities for sheet, plate, and long products. Over the year, Ryerson also progressed with construction on a 900,000 square foot service center facility for its wholly-owned subsidiary, Central Steel & Wire Company, located in University Park, IL, which will feature expanded bar and tube processing capabilities and is expected to be operational by the second quarter of 2024.

In addition, Ryerson augmented its service center network through the acquisition of four companies, BLP Holdings, LLC ("BLP"), Norlen Incorporated ("Norlen"), TSA Processing ("TSA"), and Hudson Tool Steel Corporation ("Hudson"). These acquisitions bolster value-added processing capabilities in custom engineering and robotic manufacturing, broaden supply chain networks and service points, and diversify Ryerson’s transactional customer portfolio to secular end markets, which include HVAC, Agriculture, Oil & Gas, and Aerospace-related applications. Please refer to the section titled "Acquisitions" within this Item as well as Note 2 — “Acquisitions” of Part II, Item 8 "Financial Statements and Supplementary Data" for further consolidated information on our 2023 acquisitions.

During 2023, the Company repurchased $113.9 million of its common stock including the repurchase of 2.9 million shares from its largest shareholder, Platinum Equity. Overall, Platinum Equity's sale of shares increased the share free float to 88.5% of shares outstanding, up from 57% as of December 31, 2022. As of May 1, 2023, $20 million of $75 million remained under the existing share repurchase authorization and the Board of Directors authorized increasing and extending the Company's share repurchase program by $80.0 million to $100.0 million expiring in April 2025. Throughout the year, Ryerson’s Board of Directors increased the quarterly cash dividend consecutively across all four quarters, and returned $24.8 million to shareholders in the form of dividends. In 2023, through share repurchases and dividends, Ryerson returned approximately $139 million to shareholders.

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In December of 2023, Ryerson published its second Sustainability Report, which describes the Company’s commitment to making meaningful progress in five key focus areas: diversity, equity and inclusion, energy and emissions, talent and future workforce, circular economy, and data security. Additionally, the report highlights Ryerson’s scope 1 and 2 emissions, relative emissions comparisons to metals and distribution peers, commitment to employee safety and continued outperformance of industry average OSHA rates, as well as initiatives by the Company’s talent management office to develop its workforce.

In 2023, the Company progressed in its financial strategy. In adherence with a core pillar of our financial priorities announced at our investor day in 2022, we maintained our leverage ratio within the target range between 0.5x to 2.0x throughout the year. In recognition of the Company’s substantial reduction in debt in 2022, achieved by retiring the remaining $300 million of the 2028 Notes, Ryerson received a credit upgrade from Fitch in February of 2023. Two of its covering agencies also gave the Company an upgrade in 2022. Moody’s upgraded Ryerson’s corporate rating to Ba3 from B1, Standard & Poor’s (“S&P”) upgraded it to BB- from B+, and Fitch issued an upgrade to BB from BB-. The following table summarizes the Company’s current ratings by agency.

[[GREPCENT_TABLE]]
[["Agency","Corporate","Revolving Credit Facility","Outlook"],["Moody's","Ba3","Ba3","Stable"],["S&P","BB-","N/A","Stable"],["Fitch","BB","BBB-","Stable"]]
[[/GREPCENT_TABLE]]

Industry Developments

On February 24, 2023, the US government announced trade actions targeting goods and entities from Russia, which included a proclamation to impose 200% ad valorem tariffs on Russian-origin aluminum products and derivative products and other articles made from Russian primary aluminum or Russian aluminum castings. The duties will be imposed under section 232 of the Trade Expansion Act ("Section 232") and cited by the White House due to (1) challenges faced by US aluminum producers in the face of high levels of aluminum imports and high energy prices; (2) recent increases in imports of aluminum from Russia, whose market is especially export-oriented, by 53 percent between March and July 2022; and (3) the fact that the Russian aluminum industry is a key part of Russia's defense industrial base. Ryerson has communicated to all vendors that we will not accept any Russian originating metal. The trade actions announced by the US government should support prices for Ryerson's product sales mix prices as the underlying domestic and North American supply-demand balance is protected from oversupply.

After the Russian forces invaded Ukraine on February 24, 2022, the Biden administration issued executive orders prohibiting

the importation of goods from covered regions related to Ukraine and Russia. Ryerson takes this very seriously and has reviewed our

direct and indirect material purchases to ensure compliance. On April 8, 2022, President Biden signed into law the Suspending Normal

Trade Relations with Russia and Belarus Act, which denies "most-favored nation" tariff treatment to products of Russia and Belarus

and extends the President’s authority to impose sanctions under the Global Magnitsky Human Rights Accountability Act. Beginning

April 9, 2022, the Act imposes a 10.5% import duty on unalloyed primary aluminum and 11.0% on value-add aluminum products. The

import duties are not expected to have a meaningful impact on the availability of aluminum for Ryerson. In 2023, the Company has

not purchased material from Russia or the named Ukrainian regions and has no open purchases orders issued to Russian suppliers as

of December 31, 2023.

Acquisitions

On March 1, 2023, JT Ryerson acquired BLP. Based out of Houston, Texas, BLP is comprised of three divisions: Absolute Metal Products, Metal Cutting Specialists, and Houston Water Jet, serving various industries such as oil & gas, aerospace, telecommunications, and structural fabrication. BLP provides complex fabrication services in addition to toll processing, including saw cutting, machining, and water jet cutting. The total amount paid by JT Ryerson for the acquisition amounted to $39.9 million.

On October 2, 2023, JT Ryerson acquired Norlen. Based out of Schofield, Wisconsin, Norlen is a full-service metal fabricator, providing stamping, machining, painting, and additional value-added fabrication services to industries including agriculture, HVAC, and defense. The total amount paid by JT Ryerson, net of cash acquired, for the acquisition amounted to $30.5 million.

On November 1, 2023, JT Ryerson acquired TSA. Headquartered in Houston, Texas, with five other locations across the Midwest and Southern United States, TSA is a stainless steel and aluminum coil and sheet processor. The total amount paid by JT Ryerson, net of cash acquired, for the acquisition amounted to $37.7 million.

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On December 1, 2023, JT Ryerson acquired Hudson. Hudson is headquartered in Cerritos, California, with two facilities located in the Midwest and Northeast. Hudson is a supplier of tool steels and high-speed, carbon, and alloy steels. The total amount paid by JT Ryerson, net of cash acquired, for the acquisition amounted to $19.4 million.

Additionally, during the first six months of 2023, JT Ryerson completed the purchase of certain assets from ExOne Operating, LLC. The total amount paid by JT Ryerson for the acquired assets was $9.7 million.

The 2023 acquisitions strengthen and expand JT Ryerson's valued-add services within our industry-leading stainless and aluminum franchises as well as our tool steel capabilities which will allow us to increase our offerings to better serve our diverse customer base across our entire network. The 2023 acquisitions are not individually significant to the consolidated financial statements. Please refer to Note 2 — “Acquisitions” of Part II, Item 8 "Financial Statements and Supplementary Data" for further consolidated information on our 2023 acquisitions.

Components of Results of Operations

We generate substantially all of our revenue from sales of our metals products. The majority of revenue is recognized upon delivery of product to customers. The timing of shipment is substantially the same as the timing of delivery to customers given the proximity of our distribution sites to our customers. Revenues associated with products which we believe have no alternative use, and where the Company has an enforceable right to payment, are recognized on an over-time basis. Over-time revenues are recorded in proportion with the progress made toward completing the performance obligation.

Sales, cost of materials sold, gross profit, and operating expense control are the principal factors that impact our profitability:

Net Sales. Our sales volume and pricing are driven by market demand, which is largely determined by overall industrial production and conditions in specific industries in which our customers operate. Sales prices are also primarily driven by market factors such as overall demand and availability of product. Our net sales include revenue from product sales, net of returns, allowances, customer discounts, and incentives.

Cost of materials sold. Cost of materials sold includes metal purchase and in-bound freight costs, third-party processing costs, and direct and indirect internal processing costs. The cost of materials sold fluctuates with our sales volume and our ability to purchase metals at competitive prices. Increases in sales volume generally enable us to improve purchasing leverage with suppliers as we buy larger quantities of metals inventories.

Gross profit. Gross profit is the difference between net sales and the cost of materials sold. Our sales prices to our customers are subject to market competition. Achieving acceptable levels of gross profit is dependent on our acquiring metals at competitive prices, our ability to manage the impact of changing prices, and efficiently managing our internal and external processing costs.

Operating expenses. Optimizing business processes and asset utilization to lower fixed expenses such as employee, facility, and truck fleet costs, which cannot be rapidly reduced in times of declining volume, and maintaining low fixed cost structure in times of increasing sales volume, have a significant impact on our profitability. Operating expenses include costs related to warehousing and distributing our products as well as selling, general, and administrative expenses.

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Results of Operations

The following table sets forth our Consolidated Statements of Operations data (certain percentages may not calculate due to rounding):

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[[/GREPCENT_TABLE]]

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The following charts show the Company’s percentage of sales by major product lines for 2023 and 2022:

Comparison of the year ended December 31, 2023 with the year ended December 31, 2022

Net Sales

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[[/GREPCENT_TABLE]]

Revenue for the year ended December 31, 2023, decreased from the same period a year ago due to lower average selling prices caused by lower commodity prices and to lower volume caused by slower economic conditions in metal markets in 2023. Commodity prices were at cyclical highs in 2021 and 2022 before beginning to decline in the second half of 2022. Compared to the year ago period, average selling price decreased for all of our product lines in 2023 with the largest decreases in our carbon flat, stainless flat, and carbon plate products. Tons sold decreased in 2023 overall, with the largest decreases in our stainless flat, aluminum long, and carbon long product lines partially offset by an increase in our stainless, aluminum, and carbon plate shipments. Tons sold per ship day were 7,741 in 2023 compared to 8,084 in 2022.

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Cost of Materials Sold

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[[/GREPCENT_TABLE]]

The decrease in cost of materials sold in 2023 compared to the year ago period is primarily due to a decrease in average cost of materials sold per ton and to lower tons sold. The average cost of materials sold decreased across all of our product lines with the average cost of materials sold for our carbon product lines decreasing more than our other product lines during 2023.

During 2023, LIFO income was $98 million related to decreases in pricing for all product lines, with the largest impact from carbon products, slightly offset by the liquidation of older LIFO layers for stainless and aluminum products that were at a net higher cost. During 2022, LIFO income was $58 million related to a decrease in pricing for carbon product lines, partially offset by increases in pricing in stainless and aluminum products as well as the impact of a reduction in carbon tons in inventory, which led to the liquidation of older LIFO layers that were at a higher cost.

Gross Profit

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[[/GREPCENT_TABLE]]

Gross profit dollars decreased in 2023 compared to 2022 as average selling price decreased faster than the decrease in the average cost of materials sold resulting in a decrease in gross margin.

Operating Expenses

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Warehousing, delivery, selling, general, and administrative expenses increased $58.3 million in 2023 compared to 2022 with $28.4 million of the increase driven by including the expenses of companies acquired during 2022 and 2023. Excluding the impact of acquisitions, expenses changed in the following categories:

•
higher reorganization costs of $28.7 million in 2023 primarily due to increased system conversion activity as well as start up costs associated with our new state of the art University Park location;

•
higher employee benefit costs of $8.3 million in 2023, primarily due to higher medical costs and stock compensation;

•
higher salaries and wage expense of $4.9 million in 2023 primarily due to compensation increases;

•
higher operating expenses of $4.3 million in 2023 primarily due to higher repair & maintenance costs, higher information technology expenses, and higher insurance expense; and

•
higher selling, general, and administrative expenses of $1.3 million in 2023 resulting from higher travel and entertainment expenses;

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•
partially offset by lower incentive compensation expense of $21.2 million.

In 2022, we recorded a gain on sale of assets of $3.8 million from the sale of a facility in Texas that Ryerson had an option to purchase.

On a per ton basis, total operating expenses increased to $408 per ton in 2023 from $360 per ton in 2022.

Operating Profit

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Our operating profit decreased in 2023 compared to 2022 primarily due to the decrease in average selling prices and gross profit and the increase in operating expenses as discussed above.

Other Expenses

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[[/GREPCENT_TABLE]]

Interest and other expense on debt increased in 2023 compared to 2022 primarily due to higher interest rates on credit facility borrowings under our $1.3 billion revolving credit facility (“the Ryerson Credit Facility”) and a higher level of borrowings outstanding under the Ryerson Credit Facility compared to the prior year. Partially offsetting this increase was the redemption and repurchase of $300.0 million principal amount of our 8.50% senior secured notes due 2028 (the “2028 Notes”) during 2022, bringing the outstanding principal balance to zero in July 2022. Interest expense in 2022 included $2.6 million in charges to write-off unamortized bond issuance costs related to the $300.0 million of 2028 Notes redeemed in 2022.

The other income and (expense), net in 2023 includes a $0.8 million gain on the curtailment of certain Central Steel & Wire ("CSW") pension and other post-employment benefit plans. The curtailment is due to a reduction in future years of service resulting from workforce reductions at CSW as the CSW headquarters is closing and operations are moving to a new facility in University Park, IL. The other income and (expense), net in 2022 includes foreign currency translation losses of $1.3 million. In addition, the year 2022 includes losses of $21.3 million on the redemption and repurchase of $300.0 million of the 2028 Notes.

Provision for Income Taxes

The $47.3 million income tax provision in 2023 and the $131.4 million tax provision in 2022 primarily represent taxes at federal and local statutory rates where the Company operates, but generally exclude any tax benefit for losses in jurisdictions with historical losses.

Noncontrolling Interest

In both 2023 and 2022, Ryerson China’s results of operations was income and the portion attributable to the noncontrolling interest was $0.7 million and $0.5 million, respectively.

Earnings Per Share

Basic and diluted earnings per share was $4.17 and $4.10, respectively, in 2023. Basic and diluted earnings per share was $10.41 and $10.21, respectively, in 2022. The changes in earnings per share are due to the results of operations discussed above as

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well as having fewer shares outstanding in 2023 after the repurchase in 2023 of 3,253,313 shares of common stock, including 2,882,720 shares from Platinum, in addition to the repurchase of 1,700,766 shares of common stock during 2022.

Liquidity and Capital Resources

The Company’s primary sources of liquidity are cash and cash equivalents, cash flows from operations, and borrowing availability under the Ryerson Credit Facility. Our principal source of operating cash is from the sale of metals and other materials. Our principal uses of cash are for payments associated with the procurement and processing of metals and other materials inventories, costs incurred for the warehousing and delivery of inventories, the selling and administrative costs of the business, capital expenditures, and for interest payments on debt.

We had cash and cash equivalents of $54.3 million at December 31,2023, compared to $39.2 million at December 31, 2022. Our total debt outstanding at December 31, 2023 increased to $436.5 million compared to $367.0 million of total debt outstanding at December 31, 2022 due to acquisitions, capital expenditures, share repurchases and dividends paid, partially offset by income from operations in 2023. We had a debt-to-capitalization ratio of 32% and 29% at December 31, 2023 and at December 31, 2022, respectively. We had total liquidity (defined as cash and cash equivalents, and availability under the Ryerson Credit Facility and foreign debt facilities) of $656 million at December 31, 2023 versus $909 million at December 31, 2022. Our net debt (defined as total debt less cash and cash equivalents) was $382 million and $328 million at December 31, 2023 and December 31, 2022, respectively. Total liquidity and net debt are not U.S. generally accepted accounting principles (“GAAP”) financial measures. We believe that total liquidity provides additional information for measuring our ability to fund our operations. Total liquidity does not represent, and should not be used as a substitute for, net income or cash flows from operations as determined in accordance with GAAP and total liquidity is not necessarily an indication of whether cash flow will be sufficient to fund our cash requirements. We believe that net debt provides a clearer perspective of the Company’s overall debt situation. Net debt should not be used as a substitute for total debt outstanding as determined in accordance with GAAP.

Below is a reconciliation of cash and cash equivalents to total liquidity:

[[GREPCENT_TABLE]]
[["","","December 31, 2023","","","December 31, 2022","","","December 31, 2021"],["","","(In millions)"],["Cash and cash equivalents","","$","54","","","$","39","","","$","51"],["Availability under Ryerson Credit Facility and foreign debt facilities","","","602","","","","870","","","","690"],["Total liquidity","","$","656","","","$","909","","","$","741"]]
[[/GREPCENT_TABLE]]

Below is a reconciliation of total debt to net debt:

[[GREPCENT_TABLE]]
[["","","December 31, 2023","","","December 31, 2022","","","December 31, 2021"],["","","(In millions)"],["Total debt","","$","436","","","$","367","","","$","639"],["Less: cash and cash equivalents","","","(54",")","","","(39",")","","","(51",")"],["Net debt","","$","382","","","$","328","","","$","588"]]
[[/GREPCENT_TABLE]]

Of the total cash and cash equivalents, as of December 31, 2023, $34.2 million was held in subsidiaries outside the U.S. that is deemed to be permanently reinvested. Ryerson does not currently foresee a need to repatriate earnings from its non-U.S. subsidiaries. Although Ryerson has historically satisfied needs for more capital in the U.S. through debt or equity issuances and a significant portion of the earnings held in foreign jurisdictions is deemed to have been repatriated under the 2017 U.S. Tax Cuts and Jobs Act, Ryerson could elect to repatriate additional earnings, which could result in foreign withholding taxes and potential U.S. state income taxes. We have not recorded a deferred tax liability for the effect of a possible repatriation of these earnings as management intends to permanently reinvest these earnings outside of the U.S. Specific plans for reinvestment include funding for future international acquisitions and funding of existing international operations.

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The following table summarizes the Company’s cash flows:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","","2022"],["","","(In millions)"],["Net income","","$","146.4","","","$","391.5"],["Depreciation and amortization","","","62.5","","","","59.0"],["Loss on retirement of debt","","","\u2014","","","","21.3"],["Change in operating assets and liabilities:"],["Receivables","","","67.9","","","","126.7"],["Inventories","","","28.8","","","","39.9"],["Accounts payable","","","24.8","","","","(72.1",")"],["Accrued taxes payable/receivable","","","23.3","","","","(52.9",")"],["Tenant improvement allowance","","","15.9","","","","\u2014"],["Other operating asset and liability balances","","","(22.5",")","","","(6.0",")"],["All other operating cash flows","","","18.0","","","","(6.2",")"],["Net cash provided by operating activities","","","365.1","","","","501.2"],["Acquisitions","","","(137.8",")","","","(57.0",")"],["Capital expenditures","","","(121.9",")","","","(105.1",")"],["Proceeds from sale of property, plant, and equipment","","","0.5","","","","8.0"],["Other investing activities","","","(2.9",")","","","(5.9",")"],["Net cash used in investing activities","","","(262.1",")","","","(160.0",")"],["Repayment of debt","","","(1.7",")","","","(321.3",")"],["Net proceeds from short-term borrowings","","","69.8","","","","26.1"],["Net increase (decrease) in book overdrafts","","","(7.1",")","","","29.6"],["Dividends paid to shareholders","","","(24.8",")","","","(19.9",")"],["Share repurchases","","","(113.9",")","","","(50.0",")"],["All other financing cash flows","","","(10.6",")","","","(14.6",")"],["Net cash used in financing activities","","","(88.3",")","","","(350.1",")"],["Effect of exchange rates on cash and cash equivalents","","","0.2","","","","(3.0",")"],["Net increase (decrease) in cash and cash equivalents","","$","14.9","","","$","(11.9",")"]]
[[/GREPCENT_TABLE]]

Operating activities. In 2023, average selling prices were 15.7% lower than in 2022 resulting in lower cash generated from operations. Working capital fluctuates throughout the year based on business needs. Working capital needs tend to be counter-cyclical, meaning that in periods of expansion the Company will use cash to fund working capital requirements, but in periods of contraction the Company will generate cash from reduced working capital requirements. Working capital requirements decreased in 2023 primarily due to a decline in average selling prices and lower shipments in the fourth quarter of 2023 compared to the fourth quarter of 2022, which resulted in lower sales and the related accounts receivable. Additionally, inventory costs decreased as market prices for metals decreased in 2023, resulting in a lower inventory investment. Material purchases were higher at the end of the fourth quarter of 2023 compared to the end of the fourth quarter of 2022 resulting in an increase in accounts payable in the fourth quarter of 2023. In 2022, average selling prices were 15.1% higher than in 2021 resulting in significantly higher operating profits and higher cash generated from operations. Working capital requirements in 2022 decreased due to lower shipments and a decline in average selling prices in the fourth quarter of 2022, which resulted in lower sales and the related accounts receivable. Inventory quantities on hand decreased to align with softer demand conditions. The lower inventory investment also decreased accounts payable balances. In 2022, we made estimated tax payments based on our forecasted income. Sales slowed in the fourth quarter of 2022, creating a tax overpayment, which was applied toward 2023 taxes due causing less cash payments for taxes in 2023.

Investing activities. The Company's main investing activities are acquisitions, capital expenditures, and proceeds from the sale of property, plant, and equipment. Capital expenditures increased year-over-year to $121.9 million in 2023 compared to $105.1 million in 2022, as the Company continued its investment in a new facility in University Park, Illinois, a project which began in 2022 and expanded and modernized its Shelbyville, Kentucky location in 2023. In 2023, the Company paid $127.5 million to acquire BLP, TSA, Norlen, and Hudson, and paid $9.7 million to purchase certain assets from ExOne Operating, LLC. See Note 2: Acquisitions within Part II, Item 8 of this report, for further discussion of the acquisitions. The Company paid $57.0 million in 2022 to acquire Apogee Steel Fabrication Incorporated, Ford Tool Steels, Inc., Howard Precision Metals, Inc., and Excelsior, Inc. The Company sold property, plant, and equipment and assets held for sale generating cash proceeds of $0.5 and $8.0 million in 2023 and 2022, respectively.

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Financing activities. The Company's main source of liquidity to fund working capital requirements is borrowings on our credit facility. In 2023, acquisitions and capital expenditures, as well as share repurchases and dividends paid, were in excess of cash from operations, which increased borrowings on the Ryerson Credit Facility. In 2022, we repurchased, redeemed, and retired $300.0 million principal of our 2028 Notes, which was partially offset by an increase of $49.0 million in Credit Facility borrowings. Book overdrafts fluctuate based on the timing of payments. Cash dividends paid in 2023 were $24.8 million compared to $19.9 million paid to shareholders in 2022. We repurchased $113.9 million of common stock during the 2023 compared to $50.0 of common stock repurchased in 2022.

In the normal course of business with customers, vendors, and others, we have entered into off-balance sheet arrangements, such as letters of credit, which totaled $10.9 million as of December 31, 2023. We do not have any other material off-balance sheet financing arrangements. Our off-balance sheet arrangements are not likely to have a material effect on our current or future financial condition, results of operations, liquidity, or capital resources.

Total Debt

Total debt at December 31, 2023 increased $69.5 million to $436.5 million from $367.0 million at December 31, 2022, mainly due to funding new acquisitions in 2023.

Total debt outstanding as of December 31, 2023 consisted of the following amounts: $433.0 million borrowings under the Ryerson Credit Facility, $6.0 million of foreign debt, and $2.2 million of other debt, less $4.7 million of unamortized debt issuance costs. Availability under the Ryerson Credit Facility was $560 million and $826 million at December 31, 2023 and December 31, 2022, respectively. For further information, see Note 9: Debt in Part II, Item 8 – Financial Statements and Supplementary Data.

Pension Funding

The Company made contributions of $8.8 million in 2023, $6.8 million in 2022, and $23.7 million in 2021 to improve the Company’s pension plans funded status. At December 31, 2023, as reflected in Part II. Item 8, Financial Statements and Supplementary Data, Note 10, pension liabilities exceeded plan assets by $63.9 million. The Company anticipates that it will have a minimum required pension contribution of approximately $11.0 million in 2024 under the Employee Retirement Income Security Act of 1974 (“ERISA”), Pension Protection Act in the U.S., and the Ontario Pension Benefits Act in Canada. The expected future contributions reflect pension funding relief measures under the American Rescue Plan Act (“ARPA”) passed in March 2021. Future contribution requirements depend on the investment returns on plan assets, the impact of discount rates on pension liabilities, and changes in regulatory requirements. The Company is unable to determine the amount or timing of any such contributions required by ERISA or whether any such contributions would have a material adverse effect on the Company’s financial position or cash flows.

Changes in returns on plan assets may affect our plan funding, cash flows, and financial condition. Differences between actual plan asset returns and the expected long-term rate of return on plan assets impact the measurement of the following year’s pension expense and pension funding requirements. However, we believe that cash flow from operations and the Ryerson Credit Facility described above will provide sufficient funds to make the minimum required contributions.

Income Tax Payments

The Company made income tax payments of $6.2 million in 2023, $176.9 million in 2022, and $70.2 million in 2021. Income tax payments in 2023 decreased due to lower pre-tax income year over year in addition to prior year tax over payments being applied toward 2023 taxes due. See Part II. Item 8, Financial Statements and Supplementary Data, Note 18: Income Taxes for further discussion.

Material Cash Requirements

The Company expects to make approximately $441 million in principal payments to satisfy its debt obligations, consisting of $6 million in foreign debt coming due in 2024, $2 million of other debt coming due in 2024, and $433 million for the Ryerson Credit Facility coming due in 2027. Please refer to Part II. Item 8, Financial Statements and Supplementary Data, Note 9: Debt for further information.

The Company expects to pay approximately $29 million of interest on the Ryerson Credit Facility, foreign debt, and other debt over the next 12 months and $72 million thereafter. Interest payments related to the variable rate debt were estimated using the weighted average interest rate for the respective debt instrument.

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The Company leases various assets including real estate, trucks, trailers, cars, mobile equipment, processing equipment, and IT equipment. We have noncancelable operating leases expiring at various times through 2043, and finance leases expiring at various times through 2030. The total amount of future lease payments is estimated to be $485 million with $48 million for the next 12 months. Please refer to Part II, Item 8 – Financial Statements and Supplementary Data, Note 6: Leases for further information.

Purchase obligations with suppliers are entered into when we receive firm sales commitments with certain of our customers. As of December 31, 2023, we had outstanding purchase obligations of approximately $20 million expiring in 2024.

Deferred Tax Amounts

At December 31, 2023, the Company had a net deferred tax liability of $136 million comprised primarily of a deferred tax asset of $17 million related to pension liabilities, a deferred tax asset related to postretirement benefits other than pensions of $9 million, deferred tax assets of $7 million related to state, local, and foreign tax loss carryforwards, $93 million related to operating lease liabilities, and $22 million of other deferred taxes relating to accrued compensation and other items, offset by a valuation allowance of $4 million and deferred tax liabilities of $86 million related to fixed assets, $99 million related to inventory, $88 million related to operating lease assets, and $7 million related to intangibles. We may experience fluctuations in our forecasted earnings before income taxes as a result of events which cannot be predicted, which could affect our deferred tax balances.

In accordance with ASC Topic 740, “Income Taxes,” the Company assesses the realizability of its deferred tax assets. The Company records a valuation allowance when, based upon the evaluation of all available evidence, it is more-likely-than-not that all or a portion of the deferred tax assets will not be realized. In making this determination, we analyze, among other things, our recent history of earnings, the nature and timing of reversing book-tax temporary differences, tax planning strategies, and future income. As of December 31, 2021, the Company had a valuation allowance of $5.0 million, a decrease of $1.6 million from the prior year mainly related to a release of a valuation allowance on state NOL deferred tax assets, which we now expect to realize due to improved profitability. The valuation allowance did not change during 2022, remaining at $5.0 million as of December 31, 2022 related to U.S. federal tax credit deferred tax assets and foreign tax assets. As of December 31, 2023, the Company had a valuation allowance of $4.0 million, a decrease of $1.0 million from the prior year mainly related to an adjustment to certain U.S. federal tax credits and deferred tax assets which were fully reserved. As of December 31, 2023, the valuation allowance continues to be related to U.S. federal tax credit deferred tax assets and foreign tax assets.

As described in Note 1 to the Consolidated Financial Statements, the Company assesses the need for a valuation allowance considering all available positive and negative evidence, including past operating results, projections of future taxable income, and the feasibility of ongoing tax planning strategies.

The Company will continue to maintain a valuation allowance on certain U.S. federal and foreign deferred tax assets until such time as in management’s judgment, considering all available positive and negative evidence, the Company determines that these deferred tax assets are more likely than not realizable.

Critical Accounting Estimates

Preparation of this Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of sales and expenses during the reporting period. Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in Item 8 within Note 1: Summary of Accounting and Financial Policies. These policies have been consistently applied and address such matters as revenue recognition, depreciation methods, inventory valuation, asset impairment recognition, and pension and postretirement expense. While policies associated with estimates and judgments may be affected by different assumptions or conditions, we believe our estimates and judgments associated with the reported amounts are appropriate in the circumstances. Actual results may differ from those estimates.

We consider the policies discussed below as critical to an understanding of our financial statements, as application of these policies places the most significant demands on management’s judgment, with financial reporting results relying on estimation of matters that are uncertain.

Provision for allowances, claims, and doubtful accounts: We perform ongoing credit evaluations of customers and set credit limits based upon review of the customers’ current credit information, payment history, and the current economic and industry environments. We monitor customer payments and maintain a provision for estimated credit losses based on historical experience and specific customer collection issues that we have identified. Estimation of such losses requires adjusting historical loss experience for current economic conditions and judgments about the probable effects of economic conditions on certain customers. We cannot guarantee that the rate of future credit losses will be similar to past experience. Provisions for allowances and claims are based upon

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historical rates, expected trends, and estimates of potential returns, allowances, customer discounts, and incentives. We consider all available information when assessing the adequacy of the provision for allowances, claims, and doubtful accounts.

Inventory valuation: Our inventories are stated at the lower of cost or market. The valuation of our inventories at the lower of cost or market could be subject to certain estimates; however, the measurement is primarily based on historical purchasing and sales information rather than forecasted metals pricing. Inventory costs reflect metal and in-bound freight purchase costs, third-party processing costs, and internal direct and allocated indirect processing costs. Cost is primarily determined by the LIFO method. We regularly review inventory on hand and record provisions for obsolete and slow-moving inventory based on historical and current sales trends. Changes in product demand and our customer base may affect the value of inventory on hand which may require higher provisions for obsolete inventory.

Income Taxes: Our income tax expense, deferred tax assets and liabilities, and reserve for uncertain tax positions reflect our best estimate of taxes to be paid. The Company is subject to income taxes in the U.S. and several foreign jurisdictions. The determination of the consolidated income tax expense requires judgment and estimation by management. It is possible that actual results could differ from the estimates that management has used to determine its consolidated income tax expense.

We record operating loss and tax credit carryforwards and the estimated effect of temporary differences between the tax basis of assets and liabilities and the reported amounts in the Consolidated Balance Sheets. We follow detailed guidelines in each tax jurisdiction when reviewing tax assets recorded on the balance sheet and provide for valuation allowances as required. Deferred tax assets are reviewed for recoverability based on historical taxable income, the expected reversals of existing temporary differences, tax planning strategies, and on forecasts of future taxable income. The forecasts of future taxable income require assumptions regarding volume, selling prices, margins, expense levels, and industry cyclicality. If we are unable to generate sufficient future taxable income in certain tax jurisdictions, we may be required to record additional valuation allowances against our deferred tax assets related to those jurisdictions.

The Company’s income tax provisions are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. Although the Company believes that the positions taken on filed tax returns are reasonable, it has established tax and interest reserves in recognition that various taxing authorities may challenge the positions taken. For uncertain tax positions, the Company applies the provisions of relevant authoritative guidance, which requires application of a “more likely than not” threshold to the recognition and derecognition of tax positions. The Company’s ongoing assessments of the more likely than not outcomes of tax authority examinations and related tax positions require significant judgment and can increase or decrease the Company’s effective tax rate.

Long-lived Assets and Other Intangible Assets: Long-lived assets held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment is recognized. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which undiscounted cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any. Any related impairment loss is calculated based upon comparison of the fair value to the carrying value of the asset. Separate intangible assets that have finite useful lives are amortized over their useful lives. An impaired long-lived or intangible asset would be written down to fair value, based on various available valuation techniques, including the discounted cash flow method.

Goodwill: We assess the recoverability of the carrying value of recorded goodwill annually in the fourth quarter of each year or whenever indicators of potential impairment exist. We test for impairment of goodwill by assessing various qualitative factors with respect to developments in our business and the overall economy. Factors that may be considered indicators of impairment include: deterioration in general economic conditions; declines in the market conditions of our products, including metals prices; a sustained significant decline in our share price and market capitalization; reduced future cash flow estimates; and slower growth rates in our industry, among others. If we determine that it is more likely than not that the fair value of a reporting unit is less than the carrying value based on our qualitative assessment, we will proceed to the goodwill impairment test. We compare the fair value of the reporting unit in which goodwill resides to its carrying value. If the carrying amount exceeds the fair value, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of the goodwill. The fair value of the reporting unit is estimated using a combination of an income approach and a market approach as this combination is deemed to be the most indicative of our fair value in an orderly transaction between market participants. An income approach based on discounted future cash flows requires us to estimate income from operations based on projected results and discount rates based on a weighted average cost of capital of comparable companies. A market approach estimates fair value using market multiples of various financial measures of comparable public companies. If these estimates or their related assumptions for commodity prices and demand change in the future, we may be required to record impairment charges for these assets.

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Based on the impairment test performed on October 1, 2023, the Company concluded that the fair value of the reporting units tested for impairment exceeded the carrying value. The discount rate was estimated to be 13.5% at October 1, 2023. The Company determines a discount rate based on an estimate of a reasonable risk-adjusted return an investor would expect to realize on an investment in the reporting unit. Deterioration in market conditions in our industry or products, changes in expected future cash flows, expected growth rates, or to discount rates could result in impairment charges in future periods.

Purchase Price Accounting: Business combinations are accounted for using the acquisition method of accounting. This method requires the Company to record assets and liabilities of the business acquired at their estimated fair market values as of the acquisition date. Any excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. Any shortfall in the cost of the acquisition compared to the fair value of the net assets acquired is recorded in the Consolidated Statements of Operations as a bargain purchase gain. The Company uses valuation specialists, where necessary, to perform appraisals and assist in the determination of the fair values of the assets acquired and liabilities assumed. These valuations require management to make estimates and assumptions that are critical in determining the fair values of the assets and liabilities.

Assets acquired and liabilities assumed that do not constitute a business are accounted for using the cost accumulation and allocation model under which the cost of the acquisition is allocated to the assets acquired and liabilities assumed.

Pension and postretirement benefit plan assumptions: We sponsor various benefit plans covering a portion of our employees for pension and postretirement medical costs. Statistical methods are used to anticipate future events when calculating expenses and liabilities related to the plans. The statistical methods include assumptions about, among other things, the discount rate, expected return on plan assets, rate of increase of health care costs, and the rate of future compensation increases. Our actuarial consultants also use subjective factors such as withdrawal and mortality rates when estimating expenses and liabilities. The discount rate used for U.S. plans reflects the market rate for high-quality fixed-income investments on our annual measurement date (December 31) and is subject to change each year. The discount rate is determined by matching, on an approximate basis, the coupons and maturities for a portfolio of corporate bonds (rated Aa or better by Moody’s Investor Services or AA or better by Standard and Poor’s) to the expected plan benefit payments defined by the projected benefit obligation. The discount rates used for plans outside the U.S. are based on the yield of long term high quality corporate bonds, the duration of the liability, and appropriate judgment.

When calculating pension expense for 2023, we assumed the pension plans’ assets would generate a long-term rate of return of 6.05% for the JT Ryerson plan and 3.80% for the Central Steel and Wire Company plan, and between 4.25% and 6.00% for the Canadian plans. The expected long-term rate of return assumption was developed based on historical experience and input from the trustee managing the plans’ assets. The expected long-term rate of return on plan assets is based on a target allocation of assets, which is based on a goal of earning the highest rate of return while maintaining risk at acceptable levels. The plans strive to have assets sufficiently diversified so that adverse or unexpected results from one security class will not have an unduly detrimental impact on the entire portfolio. We regularly review actual asset allocation and the pension plans’ investments are periodically rebalanced to the targeted allocation when considered appropriate. Pension expense increases as the expected rate of return on plan assets decreases. Lowering the expected long-term rate of return on plan assets by 50 basis points would have increased 2023 pension expense by approximately $1 million.

Future pension obligations for the U.S. plans were discounted using rates between of 5.05% and 5.24% at December 31, 2023. Future pension obligations for the Canadian plans were discounted using 4.64% at December 31, 2023. Lowering the discount rate by 50 basis points would increase the pension liability at December 31, 2023 by approximately $15 million.

The calculation of other postretirement benefit obligations requires the use of a number of assumptions, including the assumed discount rate between 4.63% and 5.06% at December 31, 2023 for measuring future payment obligations. A decrease in the weighted average discount rate of 50 basis points would increase the postretirement benefit liability by approximately $2 million.

The assumptions used in the actuarial calculation of expenses and liabilities may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants. These differences may result in a significant impact on the amount of pension or postretirement benefit expense we may record in the future.

Legal contingencies: We are involved in a number of legal and regulatory matters including those discussed in Item 8 within Note 12: Commitments and Contingencies. We determine whether an estimated loss from a loss contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We analyze our legal matters based on available information to assess potential liability. We consult with outside counsel involved in our legal matters when analyzing potential outcomes. We cannot determine at this time whether any potential liability related to this litigation would materially affect our financial position, results of operations, or cash flows.

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Recent Accounting Pronouncements

Recent accounting pronouncements are discussed within Note 1: Summary of Accounting and Financial Policies in Part II, Item 8 Financial Statements and Supplementary Data.