PATRICK INDUSTRIES INC 10-Q

ITEM 1. FINANCIAL STATEMENTS PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Third Quarter Ended Nine Months Ended (thousands except per share data) September 25, 2022 September 26, 2021 September 25, 2022 September 26, 2021 NET SALES $ 1,112,089 $ 1,060,177 $ 3,929,957 $ 2,930,613 Cost of goods sold 875,638 852,016 3,071,057 2,356,443 GROSS PROFIT 236,451 208,161 858,900 574,170 Operating Expenses: Warehouse and delivery 39,997 35,885 125,213 100,613 Selling, general and administrative 84,924 64,245 250,969 175,842 Amortization of intangible assets 18,769 14,758 54,175 40,695 Total operating expenses 143,690 114,888 430,357 317,150 OPERATING INCOME 92,761 93,273 428,543 257,020 Interest expense, net 15,302 15,436 44,990 41,195 Income before income taxes 77,459 77,837 383,553 215,825 Income taxes 18,640 20,440 95,537 51,930 NET INCOME $ 58,819 $ 57,397 $ 288,016 $ 163,895 BASIC NET INCOME PER COMMON SHARE $ 2.66 $ 2.52 $ 12.93 $ 7.18 DILUTED NET INCOME PER COMMON SHARE $ 2.43 $ 2.45 $ 11.78 $ 7.01 Weighted average shares outstanding – Basic 22,087 22,789 22,274 22,826 Weighted average shares outstanding – Diluted 24,413 23,403 24,573 23,375 See accompanying Notes to Condensed Consolidated Financial Statements. 3 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Third Quarter Ended Nine Months Ended (thousands) September 25, 2022 September 26, 2021 September 25, 2022 September 26, 2021 NET INCOME $ 58,819 $ 57,397 $ 288,016 $ 163,895 Other comprehensive income, net of tax: Unrealized gain of hedge derivatives — 1,031 757 3,024 Other ( 118 ) 74 ( 164 ) 4 Total other comprehensive income ( 118 ) 1,105 593 3,028 COMPREHENSIVE INCOME $ 58,701 $ 58,502 $ 288,609 $ 166,923 See accompanying Notes to Condensed Consolidated Financial Statements. 4 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) As of (thousands) September 25, 2022 December 31, 2021 ASSETS Current Assets Cash and cash equivalents $ 53,269 $ 122,849 Trade and other receivables, net 285,734 172,392 Inventories 733,970 614,356 Prepaid expenses and other 34,448 64,478 Total current assets 1,107,421 974,075 Property, plant and equipment, net 343,262 319,493 Operating lease right-of-use assets 164,725 158,183 Goodwill 597,625 551,377 Intangible assets, net 675,440 640,456 Other non-current assets 8,177 7,147 TOTAL ASSETS $ 2,896,650 $ 2,650,731 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Current maturities of long-term debt $ 7,500 $ 7,500 Current operating lease liabilities 43,352 40,301 Accounts payable 188,691 203,537 Accrued liabilities 196,361 181,439 Total current liabilities 435,904 432,777 Long-term debt, less current maturities, net 1,333,455 1,278,989 Long-term operating lease liabilities 124,289 120,161 Deferred tax liabilities, net 42,812 36,453 Other long-term liabilities 13,514 14,794 TOTAL LIABILITIES 1,949,974 1,883,174 SHAREHOLDERS’ EQUITY Common stock 195,367 196,383 Additional paid-in-capital — 59,668 Accumulated other comprehensive loss ( 1,635 ) ( 2,228 ) Retained earnings 752,944 513,734 TOTAL SHAREHOLDERS’ EQUITY 946,676 767,557 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 2,896,650 $ 2,650,731 See accompanying Notes to Condensed Consolidated Financial Statements. 5 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended (thousands) September 25, 2022 September 26, 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 288,016 $ 163,895 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 96,256 76,298 Stock-based compensation expense 15,596 17,307 Amortization of convertible notes debt discount 1,399 5,528 Deferred income taxes 6 6,540 (Gain) loss on sale of property, plant and equipment ( 5,713 ) 27 Other non-cash items 5,043 1,617 Change in operating assets and liabilities, net of acquisitions of businesses: Trade and other receivables, net ( 92,199 ) ( 142,550 ) Inventories ( 85,091 ) ( 127,464 ) Prepaid expenses and other assets 31,058 ( 593 ) Accounts payable, accrued liabilities and other ( 24,563 ) 146,812 Net cash provided by operating activities 229,808 147,417 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures ( 63,437 ) ( 44,155 ) Proceeds from sale of property, plant and equipment 7,441 140 Business acquisitions, net of cash acquired ( 152,888 ) ( 297,701 ) Other — ( 2,000 ) Net cash used in investing activities ( 208,884 ) ( 343,716 ) CASH FLOWS FROM FINANCING ACTIVITIES Term debt borrowings — 58,750 Term debt repayments ( 3,750 ) ( 3,125 ) Borrowings on revolver 703,402 425,930 Repayments on revolver ( 703,402 ) ( 565,475 ) Proceeds from senior notes offering — 350,000 Stock repurchases under buyback program ( 46,984 ) ( 31,945 ) Cash dividends paid to shareholders ( 23,007 ) ( 19,487 ) Taxes paid for share-based payment arrangements ( 10,036 ) ( 14,898 ) Payment of deferred financing costs and other ( 2,142 ) ( 6,638 ) Payment of contingent consideration from a business acquisition ( 4,780 ) ( 1,600 ) Proceeds from exercise of common stock options 195 4,902 Net cash (used in) provided by financing activities ( 90,504 ) 196,414 (Decrease) increase in cash and cash equivalents ( 69,580 ) 115 Cash and cash equivalents at beginning of year 122,849 44,767 Cash and cash equivalents at end of period $ 53,269 $ 44,882 See accompanying Notes to Condensed Consolidated Financial Statements. 6 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) Third Quarter Ended September 25, 2022 (thousands) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Treasury Stock Retained Earnings Total Balance June 26, 2022 $ 191,295 $ — $ ( 1,517 ) $ — $ 707,812 $ 897,590 Net income — — — — 58,819 58,819 Dividends declared — — — — ( 7,540 ) ( 7,540 ) Other comprehensive loss, net of tax — — ( 118 ) — — ( 118 ) Stock repurchases under buyback program ( 1,293 ) — — — ( 6,147 ) ( 7,440 ) Repurchases of shares for tax payments related to the vesting and exercising of share-based grants ( 1 ) — — — — ( 1 ) Issuance of shares upon exercise of common stock options 14 — — — — 14 Stock-based compensation expense 5,352 — — — — 5,352 Balance September 25, 2022 $ 195,367 $ — $ ( 1,635 ) $ — $ 752,944 $ 946,676 Third Quarter Ended September 26, 2021 (thousands) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Treasury Stock Retained Earnings Total Balance June 27, 2021 $ 191,131 $ 24,387 $ ( 4,129 ) $ ( 21,550 ) $ 453,432 $ 643,271 Net income — — — — 57,397 57,397 Dividends declared — — — — ( 6,613 ) ( 6,613 ) Other comprehensive income, net of tax — — 1,105 — — 1,105 Share repurchases under buyback program ( 999 ) ( 135 ) — — ( 9,261 ) ( 10,395 ) Retirement of treasury stock ( 2,013 ) ( 271 ) — 21,550 ( 19,266 ) — Repurchases of shares for tax payments related to the vesting and exercise of share-based grants ( 13 ) — — — — ( 13 ) Issuance of shares upon exercise of common stock options 325 — 325 Stock-based compensation expense 6,971 — — — — 6,971 Balance September 26, 2021 $ 195,402 $ 23,981 $ ( 3,024 ) $ — $ 475,689 $ 692,048 7 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) Nine Months Ended September 25, 2022 (thousands) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Treasury Stock Retained Earnings Total Balance December 31, 2021 $ 196,383 $ 59,668 $ ( 2,228 ) $ — $ 513,734 $ 767,557 Impact of adoption of ASU 2020-06 — ( 59,668 ) — — 15,975 ( 43,693 ) Net income — — — — 288,016 288,016 Dividends declared — — — — ( 22,803 ) ( 22,803 ) Other comprehensive income, net of tax — — 593 — — 593 Share repurchases under buyback program ( 6,771 ) — — — ( 41,978 ) ( 48,749 ) Repurchases of shares for tax payments related to the vesting and exercise of share-based grants ( 10,036 ) — — — — ( 10,036 ) Issuance of shares upon exercise of common stock options 195 — — — — 195 Stock-based compensation expense 15,596 — — — — 15,596 Balance September 25, 2022 $ 195,367 $ — $ ( 1,635 ) $ — $ 752,944 $ 946,676 Nine Months Ended September 26, 2021 (thousands) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Treasury Stock Retained Earnings Total Balance December 31, 2020 $ 180,892 $ 24,387 $ ( 6,052 ) $ — $ 360,214 $ 559,441 Net income — — — — 163,895 163,895 Dividends declared — — — — ( 19,893 ) ( 19,893 ) Other comprehensive income, net of tax — — 3,028 — — 3,028 Share repurchases under buyback program ( 999 ) ( 135 ) — ( 21,550 ) ( 9,261 ) ( 31,945 ) Retirement of treasury stock ( 2,013 ) ( 271 ) — 21,550 ( 19,266 ) — Repurchases of shares for tax payments related to the vesting and exercise of share-based grants ( 14,898 ) — — — — ( 14,898 ) Issuance of shares in connection with a business combination 10,211 — — — — 10,211 Issuance of shares upon exercise of common stock options 4,902 — — — — 4,902 Stock-based compensation expense 17,307 — — — — 17,307 Balance September 26, 2021 $ 195,402 $ 23,981 $ ( 3,024 ) $ — $ 475,689 $ 692,048 See accompanying Notes to Condensed Consolidated Financial Statements. 8 PATRICK INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Patrick Industries, Inc. (“Patrick”, the “Company”, "we", "our") contain all adjustments (consisting of normal recurring adjustments) that we believe are necessary to present fairly the Company’s financial position as of September 25, 2022 and December 31, 2021, its results of operations for the third quarter and nine months ended September 25, 2022 and September 26, 2021, and its cash flows for the nine months ended September 25, 2022 and September 26, 2021. Patrick’s unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules or regulations. Certain immaterial reclassifications have been made to the prior period presentation to conform to the current period presentation of other non-cash items in the condensed consolidated statements of cash flows. Intercompany balances and transactions have been eliminated in consolidation. For a description of significant accounting policies used by the Company in the preparation of its consolidated financial statements, please refer to Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The December 31, 2021 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Operating results for the third quarter and nine months ended September 25, 2022 are not necessarily indicative of the results that we will realize or expect for the full year ending December 31, 2022. The Company maintains its financial records on the basis of a fiscal year ending on December 31, with the fiscal quarters spanning approximately thirteen weeks. The first quarter ends on the Sunday closest to the end of the first thirteen-week period. The second and third quarters are thirteen weeks in duration and the fourth quarter is the remainder of the year. The third quarter of fiscal year 2022 ended on September 25, 2022 and the third quarter of fiscal year 2021 ended on September 26, 2021. In preparation of Patrick’s condensed consolidated financial statements as of and for the third quarter and nine months ended September 25, 2022, management evaluated all subsequent events and transactions that occurred after the balance sheet date through the date of issuance of the Form 10-Q that required recognition or disclosure in the condensed consolidated financial statements. 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Accounting for Convertible Instruments and Contracts in an Entity's Own Equity In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-06, " Accounting for Convertible Instruments and Contracts in an Entity's Own Equity ", a new standard that simplifies certain accounting treatments for convertible debt instruments. The guidance eliminates certain requirements that require separate accounting for embedded conversion features and simplifies the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification. In addition, the new guidance requires entities use the if-converted method for all convertible instruments in the diluted net income per share calculation and include the effect of potential share settlement for instruments that may be settled in cash or shares, with certain exceptions. Furthermore, the guidance requires new disclosures about events that occur during the reporting period that cause conversion contingencies to be met and about the fair value of convertible debt at the instrument level, among other things. The guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. We adopted ASU 2020-06 on January 1, 2022 using a modified retrospective transition approach. The primary impact on our condensed consolidated financial statements as a result of the adoption of ASU 2020-06 was a reduction in 9 non-cash interest expense for our 1.00 % Convertible Notes due 2023, an increase in diluted shares outstanding used to calculate diluted net income per share and a resulting reduction in diluted net income per share for the third quarter and first nine months of 2022 attributable to the application of the if-converted method for such convertible notes. In addition, the adoption resulted in the recognition of a $ 56.0 million increase to the carrying value of convertible notes payable through a decrease in the convertible notes debt discount, a $ 12.4 million decrease in "Deferred tax liabilities, net", and a $ 59.7 million decrease in "Additional paid-in-capital", resulting in a cumulative adjustment to the opening balance of retained earnings as an increase of $ 16.0 million as of January 1, 2022. In line with the adoption, our diluted share count increased by approximately 2.1 million shares for the third quarter and nine months ended September 25, 2022, a 9 % increase. Net income used in the calculation of diluted net income per share increased $ 0.5 million and $ 1.4 million, respectively, for the third quarter and first nine months of 2022 in relation to the effect of interest on potentially dilutive convertible notes, as shown in Note 8. The adoption resulted in an overall decrease of $ 0.20 and $ 1.01 , respectively, to diluted net income per share for the third quarter and first nine months of 2022. There was no impact on the Company's condensed consolidated statement of cash flows upon adoption of ASU 2020-06. Reference Rate Reform In March 2020, the FASB issued ASU 2020-04, " Reference Rate Reform (Topic 848) ", a new standard providing final guidance to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London InterBank Offer Rate ("LIBOR") and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate ("SOFR"). Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. The guidance is effective upon issuance and generally can be applied through December 31, 2022. In the third quarter ended September 25, 2022, the Company amended its current credit agreement, which included a transition from a LIBOR-based rate to a SOFR-based rate. See Note 9 for further discussion of this amendment. The transition from LIBOR to SOFR in accordance with the amended agreement did not have a material impact on the Company's condensed consolidated financial statements. 3. REVENUE RECOGNITION In the following table, revenue from contracts with customers, net of intersegment sales, is disaggregated by market type and by reportable segment, consistent with how the Company believes the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors: Third Quarter Ended September 25, 2022 (thousands) Manufacturing Distribution Total Market type: Recreational Vehicle $ 355,791 $ 167,784 $ 523,575 Marine 256,357 14,768 271,125 Manufactured Housing 85,767 89,676 175,443 Industrial 130,495 11,451 141,946 Total $ 828,410 $ 283,679 $ 1,112,089 10 Third Quarter Ended September 26, 2021 (thousands) Manufacturing Distribution Total Market type: Recreational Vehicle $ 434,029 $ 199,208 $ 633,237 Marine 164,535 8,491 173,026 Manufactured Housing 65,785 68,840 134,625 Industrial 107,886 11,403 119,289 Total $ 772,235 $ 287,942 $ 1,060,177 Nine Months Ended September 25, 2022 (thousands) Manufacturing Distribution Total Market Type: Recreational Vehicle $ 1,501,151 $ 680,463 $ 2,181,614 Marine 736,854 45,568 782,422 Manufactured Housing 269,773 279,625 549,398 Industrial 384,216 32,307 416,523 Total $ 2,891,994 $ 1,037,963 $ 3,929,957 Nine Months Ended September 26, 2021 (thousands) Manufacturing Distribution Total Market type: Recreational Vehicle $ 1,161,254 $ 568,840 $ 1,730,094 Marine 453,223 23,105 476,328 Manufactured Housing 190,786 203,648 394,434 Industrial 296,769 32,988 329,757 Total $ 2,102,032 $ 828,581 $ 2,930,613 Contract Liabilities Contract liabilities, representing upfront payments from customers received prior to satisfying performance obligations, were immaterial as of the beginning and end of all periods presented and changes in contract liabilities were immaterial during all periods presented. 11 4. INVENTORIES Inventories consist of the following: (thousands) September 25, 2022 December 31, 2021 Raw materials $ 361,735 $ 315,269 Work in process 26,827 30,801 Finished goods 134,492 101,763 Less: reserve for inventory obsolescence ( 14,745 ) ( 9,573 ) Total manufactured goods, net 508,309 438,260 Materials purchased for resale (distribution products) 231,214 181,921 Less: reserve for inventory obsolescence ( 5,553 ) ( 5,825 ) Total materials purchased for resale (distribution products), net 225,661 176,096 Total inventories $ 733,970 $ 614,356 5. GOODWILL AND INTANGIBLE ASSETS Changes in the carrying amount of goodwill for the nine months ended September 25, 2022 by segment are as follows: (thousands) Manufacturing Distribution Total Balance - December 31, 2021 $ 481,906 $ 69,471 $ 551,377 Acquisitions 46,417 — 46,417 Adjustments to preliminary purchase price allocations ( 1,359 ) 1,190 ( 169 ) Balance - September 25, 2022 $ 526,964 $ 70,661 $ 597,625 Intangible assets, net consist of the following as of September 25, 2022 and December 31, 2021: (thousands) September 25, 2022 December 31, 2021 Customer relationships $ 680,153 $ 617,814 Non-compete agreements 20,372 21,284 Patents 59,640 50,038 Trademarks 184,027 165,897 944,192 855,033 Less: accumulated amortization ( 268,752 ) ( 214,577 ) Intangible assets, net $ 675,440 $ 640,456 Changes in the carrying value of intangible assets for the nine months ended September 25, 2022 by segment are as follows: (thousands) Manufacturing Distribution Total Balance - December 31, 2021 $ 534,827 $ 105,629 $ 640,456 Acquisitions 88,910 — 88,910 Amortization ( 46,327 ) ( 7,848 ) ( 54,175 ) Adjustments to preliminary purchase price allocations ( 1,888 ) 2,137 249 Balance - September 25, 2022 $ 575,522 $ 99,918 $ 675,440 12 6. ACQUISITIONS General The Company completed no acquisitions in the third quarter of 2022 and completed three acquisitions in the nine months ended September 25, 2022 (the "2022 Acquisitions"). For the third quarter and nine months ended September 25, 2022, net sales included in the Company's condensed consolidated statements of income related to the 2022 Acquisitions were $ 38.0 million and $ 87.3 million, respectively, and operating income was $ 6.9 million and $ 15.9 million, respectively. Acquisition-related costs associated with the 2022 Acquisitions were immaterial. Assets acquired and liabilities assumed in the acquisitions were recorded on the Company’s condensed consolidated balance sheet at their estimated fair values as of the respective dates of acquisition. For each acquisition, the Company completes its allocation of the purchase price to the fair value of acquired assets and liabilities within a one year measurement period. The Company completed three acquisitions in the third quarter of 2021 and completed ten acquisitions in the nine months ended September 26, 2021. For the third quarter and nine months ended September 26, 2021, net sales included in the Company's condensed consolidated statements of income related to the acquisitions completed in the first nine months of 2021 were $ 84.0 million and $ 146.1 million, respectively, and operating income was $ 6.6 million and $ 12.6 million, respectively. For each acquisition, the excess of the purchase consideration over the fair value of the net assets acquired is recorded as goodwill, which generally represents the combined value of the Company’s existing purchasing, manufacturing, sales, and systems resources with the organizational talent and expertise of the acquired companies’ respective management teams to maximize efficiencies, market share growth and net income. In connection with certain acquisitions, if certain financial results for the acquired businesses are achieved, the Company is required to pay additional cash consideration. The Company records a liability for the estimated fair value of the contingent consideration related to each of these acquisitions as part of the initial purchase price based on the present value of the expected future cash flows and the probability of future payments at the date of acquisition. As of September 25, 2022, the aggregate fair value of the estimated contingent consideration payments was $ 10.7 million, of which $ 7.2 million is included in "Accrued liabilities" and $ 3.5 million is included in “Other long-term liabilities” on the condensed consolidated balance sheet. At December 31, 2021, the fair value of the estimated contingent consideration payments was $ 12.3 million, of which $ 7.0 million was included in the line item "Accrued liabilities" and $ 5.3 million was included in "Other long-term liabilities". The liabilities for contingent consideration expire at various dates through December 2023. The contingent consideration arrangements are subject to a maximum payment amount of up to $ 15.0 million in the aggregate as of September 25, 2022. In the nine months ended September 25, 2022, the Company recorded $ 3.0 million in non-cash increases to contingent consideration liabilities, which are reflected as charges within selling, general and administrative expense in the condensed consolidated statement of income, representing changes in the amount of consideration expected to be paid. These charges relate to changes in projected performance of certain acquisitions compared to the projected performance originally used in calculating the projected fair values of the contingent consideration of such acquisitions. There were no non-cash increases to contingent consideration during the third quarter ended September 25, 2022. In the nine months ended September 25, 2022, the Company made cash payments of approximately $ 6.4 million related to contingent consideration liabilities, recording a corresponding reduction to accrued liabilities. The Company made no cash payments related to contingent consideration liabilities in the third quarter ended September 25, 2022. 13 2022 Acquisitions The Company completed three acquisitions in the nine months ended September 25, 2022, including the following two previously announced acquisitions: Company Segment Description Rockford Corporation Manufacturing Designer and manufacturer of audio systems and components through its brand Rockford Fosgate®, primarily serving the powersports and automotive aftermarkets, based in Tempe, Arizona, acquired in March 2022 Diamondback Towers, LLC Manufacturing Manufacturer of wakeboard/ski towers and accessories for marine original equipment manufacturers ("OEMs"), based in Cocoa, Florida, acquired in May 2022 Inclusive of one acquisition not discussed above, total cash consideration for the 2022 Acquisitions was approximately $ 152.2 million. One of the 2022 Acquisitions, Rockford Corporation, accounted for $ 132.6 million in total consideration, $ 20.6 million in trade receivables, $ 32.7 million in inventory, $ 1.4 million in prepaid expenses, $ 5.3 million in fixed assets, $ 2.9 million in operating right-of-use assets, $ 79.9 million in intangible assets, $ 24.3 million in accounts payable and accrued liabilities, $ 2.9 million in operating right-of-use obligations, $ 19.5 million in deferred tax liabilities, and $ 36.4 million in goodwill. The preliminary purchase price allocations are subject to valuation activities being finalized, and thus all required purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its estimates. Changes to preliminary purchase accounting estimates recorded in the third quarter ended September 25, 2022 related to the 2022 Acquisitions, individually and in the aggregate, were immaterial and relate primarily to the valuation of intangible assets. 14 2021 Acquisitions The Company completed 13 acquisitions in the year ended December 31, 2021, including the following seven previously announced acquisitions (together, the "2021 Acquisitions"): Company Segment Description Sea-Dog Corporation & Sea-Lect Plastics (collectively, "Sea-Dog") Distribution & Manufacturing Distributor of a variety of marine and powersports hardware and accessories to distributors, wholesalers, retailers, and manufacturers and provider of plastic injection molding, design, product development and tooling to companies and government entities, based in Everett, Washington, acquired in March 2021. Hyperform, Inc. Manufacturing Manufacturer of high-quality, non-slip foam flooring, operating under the SeaDek brand name, for the marine OEM market and aftermarket as well as serving the pool and spa, powersports and utility markets under the SwimDek and EndeavorDek brand names, with manufacturing facilities in Rockledge, Florida and Cocoa, Florida, acquired in April 2021. Alpha Systems, LLC Manufacturing & Distribution Manufacturer and distributor of component products and accessories for the RV, marine, manufactured housing and industrial end markets including adhesives, sealants, rubber roofing, roto/blow molding and injection molding products, flooring, insulation, shutters, skylights, and various other products and accessories, operating out of nine facilities in Elkhart, Indiana, acquired in May 2021. Coyote Manufacturing Company Manufacturing Designer, fabricator, and manufacturer of a variety of steel and aluminum products, including boat trailers, towers, T-tops, leaning posts, and other custom components primarily for the marine OEM market, based in Nashville, Georgia, acquired in August 2021. Tumacs Covers Manufacturing Manufacturer of custom designed boat covers, canvas frames, and bimini tops, primarily serving large marine OEMs and dealers, headquartered in Pittsburgh, Pennsylvania, with manufacturing facilities in Indiana and Pennsylvania, and a distribution/service center in Michigan, acquired in August 2021. Wet Sounds, Inc. & Katalyst Industries LLC (collectively "Wet Sounds") Manufacturing Designer, engineer, and fabricator of innovative audio systems and accessories, including amplifiers, tower speakers, soundbars, and subwoofers sold directly to OEMs and consumers, and to dealers and retailers, primarily within the marine market as well as to the home audio and powersports markets and aftermarkets, based in Rosenburg, Texas, acquired in November 2021. Williamsburg Marine LLC & Williamsburg Furniture, Inc. (collectively "Williamsburg") Manufacturing Manufacturer of seating for the RV and marine end markets sold primarily to OEMs, based in Milford and Nappanee, Indiana, acquired in November 2021. Inclusive of six acquisitions not discussed above, total cash consideration for the 2021 Acquisitions was approximately $ 509.3 million, plus contingent consideration over a one to three-year period based on future performance in connection with certain acquisitions. The preliminary purchase price allocations are subject to valuation activities being finalized, primarily related to the valuation of property, plant, and equipment and intangible assets, and thus certain purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its estimates. Purchase accounting adjustments are complete for all 2021 Acquisitions completed through September 26, 2021. Changes to preliminary purchase accounting estimates recorded in the third quarter ended September 25, 2022 related to the 2021 Acquisitions, individually and in the aggregate, were immaterial and relate primarily to the valuation of intangible and fixed assets. 15 The following table summarizes the fair values of the assets acquired and the liabilities assumed as of the date of acquisition for the 2022 Acquisitions and the 2021 Acquisitions: (thousands) 2022 Acquisitions 2021 Acquisitions Consideration Cash, net of cash acquired (1) $ 152,235 $ 509,263 Working capital holdback and other, net (2) 219 ( 190 ) Common stock issuance (3) — 10,211 Contingent consideration (4) 1,600 4,730 Total consideration $ 154,054 $ 524,014 Assets Acquired Trade receivables $ 21,454 $ 26,118 Inventories 34,680 69,343 Prepaid expenses & other 1,391 13,747 Property, plant & equipment 6,731 55,101 Operating lease right-of-use assets 3,516 25,530 Identifiable intangible assets 88,240 245,794 Liabilities Assumed Current portion of operating lease obligations ( 785 ) ( 5,518 ) Accounts payable & accrued liabilities ( 25,383 ) ( 32,326 ) Operating lease obligations ( 2,731 ) ( 20,012 ) Deferred tax liabilities and other long-term liabilities ( 19,476 ) ( 1,486 ) Total fair value of net assets acquired 107,637 376,291 Goodwill (5) 46,417 147,723 $ 154,054 $ 524,014 (1) Amounts include cash used to pay off outstanding debt obligations at the time of acquisition. (2) Certain acquisitions contain working capital holdbacks which are typically settled after a 90 -day period following the close of the acquisition. This value represents the remaining amounts due to sellers as of September 25, 2022. (3) In connection with one of the 2021 Acquisitions, the Company issued 113,961 shares of common stock at a closing price of $ 89.60 as of the acquisition date. (4) These amounts reflect the acquisition date fair value of contingent consideration based on expected future results relating to certain acquisitions. (5) Goodwill is tax-deductible for the 2022 Acquisitions, except Rockford Corporation (approximately $ 36.4 million), and for the 2021 Acquisitions, except Tumacs Covers (approximately $ 6.2 million). We estimate the value of acquired property, plant, and equipment using a combination of the income, cost, and market approaches, such as estimates of future income growth, capitalization rates, discount rates, and capital expenditure needs of the acquired businesses. We estimate the value of customer relationships using the multi-period excess earnings method, which is a variation on the income approach, calculating the present value of incremental after-tax cash flows attributable to the asset. Non-compete agreements are valued using a discounted cash flow approach, which is a variation of an income approach, with and without the individual counterparties to the non-compete agreements. Trademarks and patents are valued using the relief-from-royalty method, which applies an estimated royalty rate to forecasted future cash flows, discounted to present value. 16 The following table presents our estimates of identifiable intangible assets for the 2022 Acquisitions and the 2021 Acquisitions: (thousands, except year data) Estimated Useful Life (in years) 2022 Acquisitions 2021 Acquisitions Customer relationships 10 $ 62,880 $ 160,412 Non-compete agreements 5 640 3,843 Patents 10 - 18 7,500 28,850 Trademarks Indefinite 17,220 52,689 $ 88,240 $ 245,794 For the acquisition of Rockford Corporation previously mentioned, the $ 79.9 million of identifiable intangible assets consists of $ 56.0 million for customer relationships, $ 0.4 million for non-compete agreements, $ 7.5 million for patents (estimated useful life of 15 years), and $ 16.0 million for trademarks. These amounts were provisionally estimated at $ 70.0 million, consisting of $ 42.0 million for customer relationships, $ 2.1 million for non-compete agreements, $ 10.5 million for patents (estimated useful life of 15 years), and $ 15.4 million for trademarks in the prior two quarters but have been updated to the aforementioned values based on valuation procedures being performed. Pro Forma Information The following pro forma information for the third quarter and nine months ended September 25, 2022 and September 26, 2021 assumes the 2022 Acquisitions and the 2021 Acquisitions occurred as of the beginning of the year immediately preceding each such acquisition. The pro forma information contains the actual operating results of the 2022 Acquisitions and 2021 Acquisitions combined with the results prior to their respective acquisition dates, adjusted to reflect the pro forma impact of the acquisitions occurring as of the beginning of the year immediately preceding each such acquisition. The pro forma information includes financing and interest expense charges based on incremental borrowings incurred in connection with each transaction. In addition, the pro forma information includes amortization expense, in the aggregate, related to intangible assets acquired in connection with the transactions of $ 0.0 million and $ 1.1 million for the third quarter and nine months ended September 25, 2022, respectively, and $ 3.9 million and $ 14.6 million for the third quarter and nine months ended September 26, 2021, respectively. Third Quarter Ended Nine Months Ended (thousands, except per share data) September 25, 2022 September 26, 2021 September 25, 2022 September 26, 2021 Revenue $ 1,112,089 $ 1,145,730 $ 3,964,453 $ 3,253,080 Net income 58,819 67,288 290,262 193,258 Basic net income per common share 2.66 2.95 13.03 8.47 Diluted net income per common share 2.43 2.88 11.87 8.27 The pro forma information is presented for informational purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of the periods indicated above. 7. STOCK-BASED COMPENSATION The Company recorded expense of approximately $ 5.4 million and $ 15.6 million in the third quarter and nine months ended September 25, 2022, respectively, for its stock-based compensation plans in the condensed consolidated statements of income. Stock-based compensation expense of $ 7.0 million and $ 17.3 million was recorded in the third quarter and nine months ended September 26, 2021, respectively. 17 The Board approved various stock-based grants under the Company’s 2009 Omnibus Incentive Plan in the nine months ended September 25, 2022 totaling 237,069 shares in the aggregate at an average fair value of $ 64.73 at grant date for a total fair value at grant date of $ 15.3 million. As of September 25, 2022, there was approximately $ 26.4 million of total unrecognized compensation cost related to stock-based compensation arrangements granted under incentive plans. That cost is expected to be recognized over a weighted-average period of 13.4 months. 8. NET INCOME PER COMMON SHARE Net income per common share calculated for the third quarter and first nine months of 2022 and 2021 is as follows: Third Quarter Ended Nine Months Ended (thousands except per share data) September 25, 2022 September 26, 2021 September 25, 2022 September 26, 2021 Numerator: Net income for basic per share calculation $ 58,819 $ 57,397 $ 288,016 $ 163,895 Effect of interest on potentially dilutive convertible notes, net of tax 478 — 1,417 — Net income for dilutive per share calculation $ 59,297 $ 57,397 $ 289,433 $ 163,895 Denominator: Weighted average common shares outstanding - basic 22,087 22,789 22,274 22,826 Weighted average impact of potentially dilutive convertible notes 2,064 — 2,053 — Weighted average impact of potentially dilutive securities 262 614 246 549 Weighted average common shares outstanding - diluted 24,413 23,403 24,573 23,375 Net income per common share: Basic net income per common share $ 2.66 $ 2.52 $ 12.93 $ 7.18 Diluted net income per common share $ 2.43 $ 2.45 $ 11.78 $ 7.01 An immaterial amount of securities was not included in the computation of diluted income per share as they are considered anti-dilutive under the treasury stock method for all periods presented. 18 9. DEBT A summary of total debt outstanding at September 25, 2022 and December 31, 2021 is as follows: (thousands) September 25, 2022 December 31, 2021 Long-term debt: 1.00 % convertible notes due 2023 $ 172,500 $ 172,500 Term loan due 2027 140,625 144,375 Revolver due 2027 135,000 135,000 7.50 % senior notes due 2027 300,000 300,000 1.75 % convertible notes due 2028 258,750 258,750 4.75 % senior notes due 2029 350,000 350,000 Total long-term debt 1,356,875 1,360,625 Less: convertible notes debt discount, net ( 6,800 ) ( 64,245 ) Less: term loan deferred financing costs, net ( 740 ) ( 624 ) Less: senior notes deferred financing costs, net ( 8,380 ) ( 9,267 ) Less: current maturities of long-term debt ( 7,500 ) ( 7,500 ) Total long-term debt, less current maturities, net $ 1,333,455 $ 1,278,989 2021 Credit Facility On August 11, 2022, the Company entered into the first amendment of its Fourth Amended and Restated Credit Agreement (as amended, the “2021 Credit Agreement”) dated April 20, 2021, under which the senior secured credit facility was increased to $ 925 million from $ 700 million and the maturity date was extended to August 11, 2027 from April 20, 2026. The senior credit facility under the 2021 Credit Agreement is comprised of a $ 775 million revolving credit facility (the "Revolver due 2027") and the remaining balance of the $ 150 million term loan (the "Term Loan due 2027"). The Term Loan due 2027 quarterly repayment schedule was revised to be repaid in quarterly installments in the following amounts: (i) beginning June 30, 2021, through and including June 30, 2025, in the amount of $ 1,875,000 , and (ii) beginning September 30, 2025, and each quarter thereafter, in the amount of $ 3,750,000 , with the remaining balance due at maturity. The Company recorded a $ 0.3 million write-off of deferred financing costs pertaining to the amendment, which is included in "Selling, general and administrative" in the Company's condensed consolidated statements of income for the third quarter and first nine months of 2022. Interest rates for borrowings under the 2021 Credit Agreement transitioned to a SOFR-based option from a LIBOR-based option. The interest rate for incremental borrowings under the Revolver due 2027 at September 25, 2022 was SOFR plus 1.25 % (or 3.66 %) for the SOFR-based option. The fee payable on committed but unused portions of the Revolver due 2027 was 0.18 % at September 25, 2022. The Company intends to utilize available borrowing capacity under the Revolver due 2027 and cash on hand to satisfy its repayment obligation upon maturity of the 1.00 % Convertible Notes due 2023 if not previously converted or repurchased. Total cash interest paid for the third quarter of 2022 and 2021 was $ 3.8 million and $ 3.7 million, respectively, and $ 30.9 million and $ 21.2 million for the comparative nine month periods, respectively. 10. DERIVATIVE FINANCIAL INSTRUMENTS The Company's credit facility previously exposed the Company to risks associated with the variability in interest expense associated with fluctuations in LIBOR. To partially mitigate this risk, the Company previously entered into interest rate swaps, which matured in March 2022, and therefore have no further associated liability as of September 25, 2022. 19 The following table summarizes the fair value of derivative contracts included in the condensed consolidated balance sheets (in thousands): Fair value of derivative instruments Derivatives accounted for as cash flow hedges Balance sheet location September 25, 2022 December 31, 2021 Interest rate swaps Accrued liabilities $ — $ 1,017 The interest rate swaps were comprised of over-the-counter derivatives, which are valued using models that primarily rely on observable inputs such as yield curves and are classified as Level 2 in the fair value hierarchy. 11. LEASES Lease expense, supplemental cash flow information, and other information related to leases were as follows: Third Quarter Ended (thousands) September 25, 2022 September 26, 2021 Operating lease cost $ 12,801 $ 10,760 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 12,673 $ 10,440 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 10,297 $ 12,573 Nine Months Ended (thousands) September 25, 2022 September 26, 2021 Operating lease cost $ 37,528 $ 30,697 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 36,909 $ 29,945 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 40,029 $ 52,564 Balance sheet information related to leases was as follows: (thousands, except lease term and discount rate) September 25, 2022 December 31, 2021 Assets Operating lease right-of-use assets $ 164,725 $ 158,183 Liabilities Operating lease liabilities, current portion $ 43,352 $ 40,301 Long-term operating lease liabilities 124,289 120,161 Total lease liabilities $ 167,641 $ 160,462 Weighted average remaining lease term, operating leases (in years) 5.2 5.1 Weighted average discount rate, operating leases 4.1 % 3.8 % 20 Maturities of lease liabilities were as follows at September 25, 2022: (thousands) 2022 (excluding the nine months ended September 25, 2022) $ 12,678 2023 47,805 2024 39,505 2025 29,934 2026 21,242 Thereafter 36,903 Total lease payments 188,067 Less imputed interest ( 20,426 ) Total $ 167,641 As of September 25, 2022, outstanding leases have remaining lease terms ranging from 1 year to 17 years. The Company has additional operating leases that have not yet commenced as of September 25, 2022 and, therefore, were not included as operating right-of-use assets and corresponding operating lease liabilities on our condensed consolidated balance sheet at September 25, 2022. These operating leases are anticipated to commence between the fourth quarter of fiscal 2022 and the second quarter of fiscal 2023 with lease terms of 5 years to 7 years. The estimated fair value of these operating lease right-of-use assets and corresponding operating lease liabilities to be recorded on our balance sheet upon lease commencement is approximately $ 9.2 million. 12. FAIR VALUE MEASUREMENTS The following table presents fair values of certain assets and liabilities at September 25, 2022 and December 31, 2021: September 25, 2022 December 31, 2021 (in millions) Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Cash equivalents (1) $ 32.1 $ — $ — $ 118.4 $ — $ — 7.50 % senior notes due 2027 (2) — 276.8 — — 319.5 — 4.75 % senior notes due 2029 (2) — 265.1 — — 350.6 — 1.75 % convertible notes due 2028 (2) — 189.4 — — 269.8 — 1.00 % convertible notes due 2023 (2) — 167.1 — — 194.1 — Term loan due 2027 (3) — 140.6 — — 144.4 — Revolver due 2027 (3) — 135.0 — — 135.0 — Interest rate swaps (4) — — — — 1.0 — Contingent consideration (5) — — 10.7 — — 12.3 (1) The carrying amounts of cash equivalents, representing government and other money market funds traded in an active market with relatively short maturities, are reported on the condensed consolidated balance sheet as of September 25, 2022 and December 31, 2021 as a component of "Cash and cash equivalents". (2) The amounts of these notes listed above are the current fair values for disclosure purposes only, and they are recorded in the Company's condensed consolidated balance sheets as of September 25, 2022 and December 31, 2021 using the interest rate method. (3) The carrying amounts of our term loan and revolver approximate fair value as of September 25, 2022 and December 31, 2021 based upon their terms and conditions in comparison to the terms and conditions of debt instruments with similar terms and conditions available at those dates. (4) The interest rate swaps are discussed further in Note 10. (5) The estimated fair value of the Company's contingent consideration is discussed further in Note 6. 21 13. INCOME TAXES The effective tax rate in the third quarter of 2022 and 2021 was 24.1 % and 26.3 %, respectively, and the effective tax rate for the comparable nine month periods was 24.9 % and 24.1 %, respectively. The first nine months of 2022 and 2021 rates include the impact of the recognition of excess tax benefits on share-based compensation that was recorded as a reduction to income tax expense in the amount of $ 4.0 million and $ 5.7 million, respectively. Cash paid for income taxes, net of refunds, was $ 38.4 million and $ 114.9 million, respectively, in the third quarter and first nine months of 2022 and $ 19.7 million and $ 43.9 million, respectively, in the third quarter and first nine months of 2021. 14. SEGMENT INFORMATION The Company has two reportable segments, Manufacturing and Distribution, which are based on its method of internal reporting, which segregates its businesses based on the manner in which its chief operating decision maker allocates resources, evaluates financial results, and determines compensation. The tables below present information about the sales and operating income of those segments. Third Quarter Ended September 25, 2022 (thousands) Manufacturing Distribution Total Net outside sales $ 828,410 $ 283,679 $ 1,112,089 Intersegment sales 18,481 2,859 21,340 Total sales 846,891 286,538 1,133,429 Operating income 109,462 27,228 136,690 Third Quarter Ended September 26, 2021 (thousands) Manufacturing Distribution Total Net outside sales $ 772,235 $ 287,942 $ 1,060,177 Intersegment sales 20,064 1,880 21,944 Total sales 792,299 289,822 1,082,121 Operating income 91,370 31,187 122,557 Nine Months Ended September 25, 2022 (thousands) Manufacturing Distribution Total Net outside sales $ 2,891,994 $ 1,037,963 $ 3,929,957 Intersegment sales 62,426 7,943 70,369 Total sales 2,954,420 1,045,906 4,000,326 Operating income 460,691 116,835 577,526 Nine Months Ended September 26, 2021 (thousands) Manufacturing Distribution Total Net outside sales $ 2,102,032 $ 828,581 $ 2,930,613 Intersegment sales 49,914 4,800 54,714 Total sales 2,151,946 833,381 2,985,327 Operating income 269,227 83,563 352,790 22 The following table presents a reconciliation of segment operating income to consolidated operating income: Third Quarter Ended Nine Months Ended (thousands) September 25, 2022 September 26, 2021 September 25, 2022 September 26, 2021 Operating income for reportable segments $ 136,690 $ 122,557 $ 577,526 $ 352,790 Unallocated corporate expenses ( 25,160 ) ( 14,526 ) ( 94,808 ) ( 55,075 ) Amortization ( 18,769 ) ( 14,758 ) ( 54,175 ) ( 40,695 ) Consolidated operating income $ 92,761 $ 93,273 $ 428,543 $ 257,020 Unallocated corporate expenses include corporate general and administrative expenses comprised of wages and other compensation, insurance, taxes, supplies, travel and entertainment, professional fees, amortization of inventory step-up adjustments, and other. The following table presents an allocation of total assets to the reportable segments of the Company and a reconciliation to consolidated total assets: (thousands) September 25, 2022 December 31, 2021 Manufacturing assets $ 2,322,617 $ 2,031,465 Distribution assets 494,545 464,575 Assets for reportable segments 2,817,162 2,496,040 Corporate assets unallocated to segments 26,219 31,842 Cash and cash equivalents 53,269 122,849 Consolidated total assets $ 2,896,650 $ 2,650,731 15. STOCK REPURCHASE PROGRAMS In January 2022, the Company's Board authorized an increase in the amount of the Company's common stock that may be acquired over the next 24 months under the current stock repurchase program to $ 100 million, including the $ 11.0 million remaining under the previous authorization. Approximately $ 62.9 million remains in the amount of the Company's common stock that may be acquired under the current stock repurchase program as of September 25, 2022. The Company repurchased 154,388 shares of its common stock at an average price of $ 48.18 per share for an aggregate cost of $ 7.4 million in the third quarter ended September 25, 2022, and 808,642 shares of its common stock at an average price of $ 60.28 per share for an aggregate cost of $ 48.7 million in the nine months ended September 25, 2022. The Company repurchased 128,929 shares of its common stock at an average price of $ 80.62 per share for an aggregate cost of $ 10.4 million in the third quarter ended September 26, 2021 and repurchased 388,929 shares at an average price of $ 82.14 per share for an aggregate cost of $ 31.9 million in the nine months ended September 26, 2021. Accrued share repurchases included above were approximately $ 1.9 million and $ 0.1 million as of September 25, 2022 and December 31, 2021, respectively, to record trades executed on the Company's behalf but not settled. 16. COMMITMENTS AND CONTINGENCIES The Company is subject to proceedings, lawsuits, audits, and other claims arising in the normal course of business. All such matters are subject to uncertainties and outcomes that are not predictable with assurance. Accruals for these items, when applicable, have been provided to the extent that losses are deemed probable and are reasonably estimable. These accruals are adjusted from time to time as developments warrant. 23 Although the ultimate outcome of these matters cannot be ascertained, on the basis of present information, amounts already provided, availability of insurance coverage and legal advice received, it is the opinion of management that the ultimate resolution of these proceedings, lawsuits, and other claims will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows. The Company disclosed litigation concerning the Lusher Site Remediation Group in the Company's 2021 Form 10-K. The Company has also been named as a potentially responsible party for the related Lusher Street Groundwater Contamination Superfund Site (the "Superfund Site") by the U.S. Environmental Protection Agency (the "EPA"). The Company sold certain parcels of real property that the EPA contends are connected to the Superfund Site (the "Divested Properties") in January 2022 for a pretax gain on disposal of $ 5.5 million that is included in Selling, general and administrative expenses in the Company's condensed consolidated statements of income for the first nine months of 2022. The purchaser agreed to indemnify, defend and hold the Company harmless for all liability and exposure, both private and to all EPA claims, concerning and relating to the Divested Properties. No further proceedings have occurred in the first nine months of 2022. As to the real properties that were not among the Divested Properties but remain the subject of the litigation, the Company does not currently believe that the litigation or the Superfund Site matter are likely to have a material adverse impact on its financial condition, results of operations, or cash flows. However, any litigation is inherently uncertain, the EPA has yet to select a final remedy for the Superfund Site, and any judgment or injunctive relief entered against us or any adverse settlement could materially and adversely impact our business, results of operations, financial condition, and prospects. Certain of our customers in the RV end market initiated recalls in 2021 involving certain products that were produced by a third party and sold by our Distribution segment. Although we do not believe we are legally responsible for costs related to the product recall, based on discussions with our customers and other developments subsequent to when these recalls were initiated, the Company will bear a portion of the total cost of the recalls. In the fourth quarter of 2021, we recorded an estimate of the Company's cost related to this matter, and subsequently reached agreements with certain customers in the second quarter of 2022 on the maximum financial obligation we may face. We recorded an additional immaterial estimate of the Company's costs related to these agreements in the second quarter of 2022. No further settlements have occurred or charges have been recorded in the third quarter of 2022. We do not expect this matter to have a material adverse effect on our financial position, results of operations, or cash flows.