Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included in Item 8 of this Report. In addition, this MD&A contains certain statements relating to future results that are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. See “Information Concerning Forward-Looking Statements” on page 3 of this Report and Part I, Item 1A. "Risk Factors" for a discussion of risks and uncertainties. Patrick’s results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022 along with components of change compared to the prior year that have been omitted under this item can be found in Part II, Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Form 10-K for the year ended December 31, 2023 filed with the SEC on February 29, 2024.
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EXECUTIVE SUMMARY
Overview of Markets and Related Industry Performance
Recreational Vehicle ("RV") Industry
The RV industry is our primary market and comprised 44% and 43% of the Company’s consolidated net sales for the years ended December 31, 2024 and 2023, respectively. Net sales to the RV industry increased 8% for the year ended December 31, 2024 compared to 2023. Following a dealer inventory restocking in the first half of 2024, OEMs reduced production slightly in the second half of 2024 as retail demand decreased, with dealers managing inventory levels and the OEMs demonstrating operating discipline to maintain a balanced inventory channel for the long-term health and stability of the industry.
According to the RV Industry Association (“RVIA”), RV industry wholesale unit shipments totaled approximately 333,700 units in 2024, an increase of 7% from approximately 313,200 units in 2023. According to Statistical Surveys, Inc. ("SSI"), RV industry retail unit sales totaled approximately 352,700 units in 2024, a decrease of 7% from approximately 380,700 units in 2023.
Marine Industry
Net sales to the marine industry comprised approximately 15% and 23% of the Company's consolidated net sales for the years ended December 31, 2024 and 2023, respectively. Net sales to the marine industry in the year ended December 31, 2024 decreased 27% compared to 2023. The decrease in net sales to the marine industry was in line with the decrease in wholesale powerboat unit shipments.
Our marine revenue is generally correlated to marine wholesale powerboat unit shipments. According to Company estimates based on data published by the National Marine Manufacturers Association ("NMMA"), wholesale powerboat unit shipments totaled approximately 143,900 units in 2024, a decrease of 25% compared to 192,300 units in 2023. According to SSI, we estimate marine retail powerboat shipments totaled approximately 165,000 units in 2024, a decrease of 8% from approximately 179,500 units in 2023.
Powersports Industry
Through acquisitions completed in recent years, the Company entered the powersports end market. Previously, our sales to the powersports end market were included in the Company’s marine end market sales. Effective with the first quarter of 2024, powersports net sales are being reported separately after the January 2024 acquisition of Sportech, LLC (“Sportech”), as disclosed in Note 2 "Revenue Recognition" of the Notes to Consolidated Financial Statements included herein.
Net sales to the powersports industry comprised approximately 10% and 4% of the Company's consolidated net sales for the years ended December 31, 2024 and 2023, respectively. Net sales to the powersports industry increased 189% during the year ended December 31, 2024 compared to 2023. The increase in net sales for this period is primarily attributable to the Company's acquisition of Sportech in January 2024.
Manufactured Housing ("MH") Industry
Net sales to the MH industry comprised approximately 18% and 16% of the Company's consolidated net sales for the years ended December 31, 2024 and 2023, respectively. Net sales to the MH industry increased 20% during the year ended December 31, 2024 compared to 2023. MH sales are generally correlated to MH industry wholesale unit shipments. According to Company estimates based on industry data from the Manufactured Housing Institute, MH industry wholesale unit shipments totaled approximately 103,300 units in 2024, an increase of 16% compared to 89,200 units in 2023, primarily driven by OEMs increasing production from significantly reduced levels in 2023 in anticipation of a recovery in demand.
Industrial Market
The industrial market is comprised primarily of kitchen cabinet, countertop, hospitality, retail and commercial fixtures, and office and household furniture markets and regional distributors. Net sales to the industrial market comprised approximately 13% and 14% of the Company's consolidated net sales for the years ended December 31, 2024 and 2023, respectively. Net sales to the industrial market decreased 1% during the year ended December 31, 2024 compared to 2023. Overall, our revenues in these markets are focused on residential and multifamily housing, hospitality, high-rise housing and office,
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commercial construction and institutional furniture markets. We estimate that approximately 75% to 85% of our industrial business is directly tied to the residential housing market, with the remaining industrial sales tied to the non-residential and commercial markets.
During the year ended December 31, 2024, combined new housing starts decreased 4% compared to 2023, reflecting a decrease in multifamily housing starts of 25%, partially offset by an increase in single-family housing starts of 6%. Our industrial products are generally among the last components installed in new unit construction and as such our related sales typically trail new housing starts by four to six months.
CONSOLIDATED OPERATING RESULTS
The following table sets forth the percentage relationship to net sales of certain items on the Company’s consolidated statements of income for the years ended December 31, 2024 and 2023.
Year Ended December 31, $
Change % Change
($ in thousands) 2024 2023
Net sales $ 3,715,683 100.0 % $ 3,468,045 100.0 % $ 247,638 7 %
Cost of goods sold 2,879,793 77.5 2,685,812 77.4 193,981 7
Gross profit 835,890 22.5 782,233 22.6 53,657 7
Warehouse and delivery expenses 155,821 4.2 143,921 4.1 11,900 8
Selling, general and administrative expenses 325,754 8.8 299,418 8.6 26,336 9
Amortization of intangible assets 96,275 2.6 78,694 2.3 17,581 22
Operating income 258,040 6.9 260,200 7.5 (2,160) (1)
Interest expense, net 79,470 2.1 68,942 2.0 10,528 15
Income taxes 40,169 1.1 48,361 1.5 (8,192) (17)
Net income $ 138,401 3.7 $ 142,897 4.1 $ (4,496) (3)
Year Ended December 31, 2024 Compared to 2023
Net Sales. Net sales in 2024 increased approximately $247.6 million, or 7%, to $3.72 billion compared to $3.47 billion in 2023. Net sales in 2024 increased due to increased sales to the powersports, RV and MH markets, partially offset by decreased sales to the marine and industrial markets. The Company's sales to the powersports market increased $230.3 million, or 189%, in 2024 compared to 2023, primarily attributable to the Company’s acquisition of Sportech in the first quarter of 2024. Sales to the RV market increased $121.9 million, or 8%, to $1.63 billion in 2024 compared to $1.50 billion in 2023, due to industry volume growth and the Company’s acquisition of ICON Direct LLC which does business as RecPro (“RecPro”) in the third quarter of 2024. Sales to the MH market increased $113.9 million, or 20%, to $682.1 million in 2024 compared to $568.2 million in 2023, primarily due to an increase in estimated MH industry wholesale unit shipments of approximately 16%. Sales to the marine market decreased $211.9 million, or 27%, to $570.7 million in 2024 compared to $782.6 million in 2023 primarily attributable to a decrease in estimated powerboat wholesale unit shipments of 25% compared to 2023. Sales to the industrial market decreased $6.5 million, or 1%, compared to 2023.
In 2024 and 2023 , net sales attributable to acquisitions completed in each of those years was $295.7 million and $17.7 million , respectively.
Cost of Goods Sold. Cost of goods sold increased $194.0 million, or 7%, to $2.88 billion in 2024 compared to $2.69 billion in 2023. As a percentage of net sales, cost of goods sold increased 10-basis points during 2024 to 77.5% compared to 77.4% in 2023.
Cost of goods sold as a percentage of net sales increased in 2024 compared to 2023 primarily as a result of a 50-basis point increase in overhead as a percentage of net sales due to higher research and development costs, partially offset by a 40-basis point decrease in labor as a percentage of net sales. In general, the Company's cost of goods sold percentage can be impacted from period-to-period by demand changes in certain market sectors that can result in fluctuating costs of certain raw materials and commodity-based components that are utilized in production.
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Gross Profit. Gross profit increased $53.7 million or 7%, to $835.9 million in 2024 compared to $782.2 million in 2023. As a percentage of net sales, gross profit decreased to 22.5% in 2024 compared to 22.6% in 2023. The decrease in gross profit as a percentage of net sales in 2024 compared to 2023 reflects the impact of the factors discussed above under “Cost of Goods Sold”.
Economic or industry-wide factors affecting the profitability of our sales to the RV, marine, powersports, MH and industrial markets include the costs of commodities and supply chain constraints and the labor used to manufacture our products, the competitive environment and the impact of different gross margin profiles of acquired companies, all of which can cause gross margins to fluctuate from quarter-to-quarter and year-to-year.
Warehouse and Delivery Expenses. Warehouse and delivery expenses increased $11.9 million, or 8%, to $155.8 million in 2024 compared to $143.9 million in 2023. As a percentage of net sales, warehouse and delivery expenses increased 10 basis points to 4.2% in 2024 compared to 4.1% in 2023.
The increase in warehouse and delivery expenses in 2024 compared to 2023 is primarily attributable to the increase in sales, and the increase as a percentage of net sales is primarily related to an increase in certain expenses that are fixed in nature, including fleet and insurance expenses.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses increased $26.3 million, or 9%, to $325.8 million in 2024 compared to $299.4 million in 2023. As a percentage of net sales, SG&A expenses were 8.8% in 2024 and 8.6% in 2023.
The increase in SG&A expenses in 2024 compared to 2023 is primarily due to increased wages, $5.0 million of transaction costs associated with the acquisition of Sportech, increased technology expenses and the $2.5 million write-off of deferred financing costs due to early payment debt, partially offset by decreased incentive compensation and insurance expenses.
The increase in SG&A expenses as a percentage of net sales in 2024 compared to 2023 is primarily attributable to the Sportech acquisition-related costs, increased technology expenses and deferred financing costs write-off mentioned above, partially offset by decreased incentive compensation, wages and insurance expenses. Additionally, certain 2023 and 2024 acquisitions operate with comparatively higher SG&A as a percentage of sales when compared to the consolidated percentage.
Amortization of Intangible Assets. Amortization of intangible assets increased $17.6 million, or 22%, in 2024 compared to 2023. The increase in 2024 compared to 2023 primarily reflect the impact of the Sportech acquisition as well as other acquisitions completed in 2024 and 2023.
Operating Income. Operating income decreased $2.2 million, or 1%, to $258.0 million in 2024 compared to $260.2 million in 2023. Operating income in 2024 and 2023 included $47.2 million and $1.0 million, respectively, from the businesses acquired in each respective year. Operating income as a percentage of net sales decreased 60 basis points to 6.9% in 2024 compared to 7.5% in 2023. The decrease in operating income as a percentage of net sales is primarily attributable to the items discussed above.
Interest Expense, Net. Interest expense, net, increased $10.5 million, or 15%, to $79.5 million in 2024 compared to $68.9 million in 2023. The increase primarily reflects interest associated with the issuance of our 6.375% Senior Notes due 2032 (the “6.375% Senior Notes”) in October 2024, higher debt levels and higher interest rates on our term loan and revolver balances.
Income Taxes. Income tax expense decreased $8.2 million, or 17%, to $40.2 million in 2024 compared to $48.4 million in 2023 as a result of the decrease in pre-tax income and a decrease in the effective tax rate. For 2024, the effective tax rate was 22.5% compared to 25.3% in 2023. The decrease in the effective tax rate in 2024 is primarily related to increased excess tax benefits on share-based compensation.
BUSINESS SEGMENTS
The Company's reportable segments, manufacturing and distribution, are based on its method of internal reporting. The Company regularly evaluates the performance of the manufacturing and distribution segments and allocates resources to them based on a variety of indicators including net sales and operating income. The Company does not measure profitability at the
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end market (RV, marine, powersports, MH and industrial) level. See Notes 17 "Segment Information" of the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K for additional details.
Net sales pertaining to the manufacturing and distribution segments as stated in the table below and in the following discussions include intersegment sales. Gross profit includes the impact of intersegment operating activity.
The table below presents information about the net sales, gross profit, and operating income of the Company’s segments. Reconciliations of the amounts below to consolidated totals are presented in Note 17 "Segment Information" of the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K.
Year Ended December 31, $
Change % Change
($ in thousands) 2024 2023
Sales
Manufacturing $ 2,756,547 $ 2,653,257 $ 103,290 4%
Distribution $ 980,127 $ 889,408 $ 90,719 10%
Gross Profit
Manufacturing $ 612,552 $ 577,284 $ 35,268 6%
Distribution $ 224,855 $ 195,506 $ 29,349 15%
Operating Income
Manufacturing $ 340,961 $ 321,096 $ 19,865 6%
Distribution $ 104,715 $ 90,095 $ 14,620 16%
Year Ended December 31, 2024 Compared to 2023
Manufacturing
Sales. Manufacturing sales increased $103.2 million, or 4%, to $2.76 billion in 2024 compared to $2.65 billion in 2023. The manufacturing segment accounted for approximately 74% of the Company’s consolidated net sales in 2024 compared to approximately 75% of the Company's consolidated net sales in 2023.
Manufacturing segment sales in 2024 compared to 2023 increased due to increased sales to the powersports, MH and RV markets, partially offset by decreased sales to the marine and industrial markets. Sales to the powersports market increased 210% in 2024 compared to 2023, primarily attributable to the Company’s acquisition of Sportech in the first quarter of 2024. Sales to the MH market increased 16% compared to 2023, primarily due to an increase in estimated MH industry wholesale unit shipments of approximately 16%. Sales to the RV market increased 10% compared to 2023, due to industry volume growth. Sales to the marine market decreased 29% compared to 2023, primarily attributable to a decrease in estimated powerboat wholesale unit shipments of 25%. Sales to the industrial market decreased 2% compared to 2023.
For 2024 and 2023, manufacturing segment sales attributable to acquisitions completed in each of those years were $275.4 million and $3.6 million, respectively.
Gross Profit. Manufacturing segment gross profit increased $35.3 million, or 6%, to $612.6 million in 2024 compared to $577.3 million in 2023. As a percentage of sales, gross profit increased 40 basis points to 22.2% in 2024 compared to 21.8% in 2023. The increase in gross profit as a percentage of sales in 2024 compared to 2023 is attributable to decreases in material and labor costs as a percentage of sales, partially offset by increased overhead costs as a percentage of sales.
Operating Income. Manufacturing segment operating income increased $19.9 million, or 6%, to $341.0 million in 2024 compared to $321.1 million in 2023. Manufacturing segment operating income in 2024 attributable to acquisitions completed in such year was approximately $46.5 million and manufacturing segment operating loss in 2023 attributable to acquisitions completed in such year was $(0.6) million. The increase in operating income in 2024 primarily reflects the items discussed above.
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Distribution
Sales. Distribution sales increased $90.7 million, or 10%, to $980.1 million in 2024 compared to $889.4 million in 2023. The distribution segment accounted for approximately 26% of the Company’s consolidated net sales for 2024 compared to 25% of the Company's consolidated net sales in 2023.
Distribution segment sales in 2024 compared to 2023 increased due to increased sales to all five of our end markets. Sales to the MH market increased 23% compared to 2023, primarily due to an increase in estimated MH industry wholesale unit shipments of approximately 16%. Sales to the powersports market increased 6% compared to 2023, primarily attributable to product mix shifts by certain customers. Sales to the RV market increased 4% compared to 2023, primarily attributable to the Company’s acquisition of RecPro in the third quarter of 2024. Sales to the marine market increased 3% compared to 2023. Sales to the industrial market increased 2% compared to 2023, primarily reflecting product mix shifts by certain customers.
For 2024 and 2023, distribution segment sales attributable to acquisitions completed in each of those years were $20.3 million and $14.1 million, respectively.
Gross Profit. Distribution segment gross profit increased $29.4 million, or 15%, to $224.9 million in 2024 compared to $195.5 million in 2023. As a percentage of sales, gross profit increased 90 basis points 22.9% in 2024 compared to 22.0% in 2023. The increase in gross profit as a percentage of net sales for 2024 is primarily attributed to decreases in material and labor costs as a percentage of net sales.
Operating Income. Distribution segment operating income increased $14.6 million, or 16%, to $104.7 million in 2024 compared to $90.1 million in 2023. For 2024 and 2023 distribution segment operating income attributable to acquisitions completed in each of those years was immaterial. The increase in operating income in 2024 primarily reflects the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements are primarily to support working capital demands, meet debt service requirements and support the Company's capital allocation strategy, which includes acquisitions, capital expenditures, dividends and repurchases of the Company’s common stock, among others. The Company's primary sources of liquidity are cash flows from operations, which includes selling its products and collecting receivables, available cash reserves and borrowing capacity available under the revolving credit and term loan facility (the “2024 Credit Facility”) as discussed in Note 7 "Debt" of the Notes to Consolidated Financial Statements.
During 2024, we expanded our access to capital and reduced our cost of debt by issuing $500 million in aggregate principal amount of 6.375% Senior Notes. The proceeds from the issuance, together with borrowings under the 2024 Credit Facility, were utilized to redeem all $300 million aggregate principal amount of the Company’s 7.50% Senior Notes due 2027 (the “7.50% Senior Notes”), to repay all borrowings under its existing senior secured credit facility and to pay related fees and expenses, as discussed in Note 7 "Debt" of the Notes to Consolidated Financial Statements .
As of December 31, 2024, our liquidity consisted of cash and cash equivalents of $33.6 million and $770.0 million of availability under our 2024 Credit Facility. As of December 31, 2024, the Company's existing cash and cash equivalents, cash generated from operations, and available borrowings under its 2024 Credit Facility are expected to be sufficient to meet anticipated cash needs for working capital and capital expenditures for at least the next 12 months, exclusive of any acquisitions, based on its current cash flow budgets and forecast of short-term and long-term liquidity needs.
Working capital requirements vary from period to period depending on manufacturing volumes primarily related to the RV, marine, powersports, MH and industrial markets we serve, the timing of deliveries, and the payment cycles of customers. In the event that operating cash flow is inadequate and one or more of the Company's capital resources were to become unavailable, the Company would seek to revise its operating strategies accordingly. The Company will continue to assess its liquidity position and potential sources of supplemental liquidity in view of operating performance, current economic and capital market conditions, and other relevant circumstances.
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As of and for the reporting period ended December 31, 2024, the Company was in compliance with its financial covenants under the Company’s Fifth Amended and Restated Credit Agreement (the "2024 Credit Agreement"). The required maximum consolidated secured net leverage ratio and the required minimum consolidated interest coverage ratio, as such ratios are defined in the 2024 Credit Agreement, compared to the actual amounts as of December 31, 2024 and for the fiscal period then ended are as follows:
Required Actual
Consolidated secured net leverage ratio (12-month period) 2.75 0.40
Consolidated interest coverage ratio (12-month period) 3.00 6.05
In addition, as of December 31, 2024, the Company's consolidated total net leverage ratio (12-month period) was 2.71. While this ratio is not a covenant under the 2024 Credit Agreement, it is used in determining the applicable borrowing margin under the 2024 Credit Agreement.
Cash Flows
Year Ended December 31, 2024 Compared to 2023
Operating Activities: Cash flows from operating activities are one of the Company's primary sources of liquidity, representing the net income the Company earned in the reported periods, adjusted for certain non-cash items and changes in operating assets and liabilities.
Net cash provided by operating activities decreased $81.9 million, or 20%, to $326.8 million in 2024 compared to $408.7 million in 2023. The decrease in operating cash flows is primarily attributable to a decrease in operating assets and liabilities, net of business acquisitions, as a source of cash of $93.3 million, from $98.9 million in 2023 compared to $5.6 million in 2024, a decrease in net income of $4.5 million and an increase in deferred income taxes of $5.9 million, partially offset by increased depreciation and amortization expense of $22.0 million and loss on extinguishment of debt of $2.5 million.
Investing Activities
Net cash used in investing activities increased $426.3 million, to $512.8 million in 2024 compared to $86.5 million in 2023 primarily due to an increase in cash used in business acquisitions, which were $411.7 million in 2024, primarily due to the acquisitions of Sportech and RecPro, compared to $25.9 million in 2023, an increase in cash used for capital expenditures of $16.7 million and an increase in other investing activities of $24.7 million.
Financing Activities
Net cash flows provided by financing activities was $208.2 million in 2024 compared to net cash flows used in financing activities of $333.6 million in 2023. The change in cash flow from financing activities was primarily due to net borrowings of $100 million under the Revolver due 2029 and proceeds from the issuance of $500 million aggregate principal amount of 6.375% Senior Notes in 2024 and compared to cash used in 2023 to redeem the $172.5 million 1.00% Convertible Senior Notes due 2023, partially offset by the redemption of the $300 million 7.50% Senior Notes in 2024.
Off-Balance Sheet Arrangements
None.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The SEC has defined a company’s critical accounting policies as those that are most important to the portrayal of its financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Although management believes that its estimates and assumptions are reasonable, they are based upon information available when they are made. Actual results may differ materially from these estimates under different assumptions or conditions. The Company has identified the following critical accounting policies and estimates:
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Goodwill and Other Intangible Assets. The Company’s acquisitions include purchased goodwill and other intangible assets. Goodwill represents the excess of cost over the fair value of the net assets acquired. Other intangible assets acquired are classified as customer relationships, non-compete agreements, patents and trademarks.
Goodwill and indefinite-lived intangible assets, representing acquired trademarks, are not amortized but are subject to an annual (or under certain circumstances more frequent) impairment test in the fourth quarter based on their estimated fair value. We test more frequently, if there are indicators of impairment, or whenever such circumstances suggest that the carrying value of goodwill or trademarks may not be recoverable. These indicators include a sustained material decline in our share price and market capitalization, a decline in expected future cash flows, or a material adverse change in the business climate. A material adverse change in the business climate could result in a material loss of market share or the inability to achieve previously projected revenue growth.
Impairment reviews of goodwill are performed at the reporting unit level. The Company’s reporting units are defined as one level below our operating segments, Manufacturing and Distribution, which are the same as our reportable segments. In evaluating goodwill for impairment, either a qualitative or quantitative assessment is performed. The Company performed a quantitative assessment for all reporting units in 2024. When estimating reporting unit fair value with a quantitative assessment, the Company uses a combination of market and income-based methodologies. The market approach includes a comparison of the multiple of a reporting unit's carrying value to its earnings before interest, taxes, depreciation and amortization with the multiples of similar businesses or guideline companies whose securities are actively traded in the public markets. When calculating the present value of future cash flows under the income approach, the Company takes into consideration multiple variables, including forecasted sales volumes and operating income, current industry and economic conditions, and historical results. The income approach fair value estimate also includes estimates of long-term growth rates and discount rates that are commensurate with the risks and uncertainty inherent in the respective reporting units and internally-developed forecasts.
Impairment reviews of indefinite-lived intangible assets (trademarks) consist of a comparison of the fair value of the trademark to its carrying value. Fair value is measured using a relief-from-royalty approach, a form of discounted cash flow method. Estimated royalty rates applied to projected revenues are based on comparable industry studies and consideration of operating margins. Discount rates are derived in a manner similar to what is done in testing goodwill for impairment.
Based on the results of the Company's analyses, the estimated fair value of each of the Company's reporting units and trademarks was determined to exceed the carrying value for each of the years ended December 31, 2024, 2023 and 2022 and so no impairments were recognized. Further, based on the results of the impairment analyses, none of the Company’s reporting units or trademarks were at risk of failing the impairment assessments discussed above that would have a material effect on the Company’s Consolidated Financial Statements for any period presented.
Business Combinations. From time to time, we may enter into business combinations. We recognize the identifiable assets acquired and the liabilities assumed at their fair values as of the date of acquisition. We measure goodwill as the excess of consideration transferred, which we also measure at fair value, over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. The acquisition method of accounting requires us to make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of property, plant and equipment, identifiable intangible assets, contingent consideration and other financial assets and liabilities. Significant estimates and assumptions include subjective and/or complex judgments regarding items such as discount rates, customer attrition rates, royalty rates, and other factors, including estimated future cash flows that we expect to generate from the acquired assets.
The acquisition method of accounting also requires us to refine these estimates over a measurement period not to exceed one year to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If we are required to adjust provisional amounts that we have recorded for the fair values of assets and liabilities in connection with acquisitions, these adjustments could have a material impact on our financial condition and results of operations. No changes in the year ended December 31, 2024 to provisional fair value estimates of assets acquired and liabilities assumed in acquisitions were material. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop the acquisition date fair value estimates, we could record future impairment charges. In addition, we estimate the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be increased or decreased, or the acquired assets could be impaired.
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