Ingersoll Rand Inc.: Form 10-Q for the period ended Sep 30, 2023

The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section of our 2022 Annual Report. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q.

Overview

Our Company

Ingersoll Rand is a global market leader with a broad range of innovative and mission-critical air, fluid, energy and medical technologies, providing services and solutions to increase industrial productivity and efficiency. We manufacture one of the broadest and most complete ranges of compressor, pump, vacuum and blower products in our markets, which, when combined with our global geographic footprint and application expertise, allows us to provide differentiated product and service offerings to our customers. Our products are sold under a collection of premier, market-leading brands, including Ingersoll Rand, Gardner Denver, Nash, CompAir, Thomas, Milton Roy, Seepex, Elmo Rietschle, ARO, Robuschi, Emco Wheaton and Runtech Systems, which we believe are globally recognized in their respective end-markets and known for product quality, reliability, efficiency and superior customer service.

We operate with two reportable segments: Industrial Technologies and Services and Precision and Science Technologies. See Note 19 “Segment Results” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q for a description of our reportable segments.

Items Affecting our Business, Industry and End Markets

Cybersecurity Incident Status

On April 27, 2023, the Company detected a cybersecurity incident that resulted in a disruption of several of our information technology systems. We immediately launched a thorough investigation with the assistance of external cybersecurity experts to assess and mitigate impacts of the incident. The Company proactively took immediate actions to maintain business continuity and to minimize disruption to operations and customers, including isolating systems and implementing workarounds. As a result, we do not expect this incident to have a material impact on our business, results of operations or financial condition. Although an investigation is ongoing, the Company is not aware of any confidential customer information having been exfiltrated. If the Company becomes aware of any such information having been exfiltrated, it will make appropriate notifications. For a discussion of the risks and uncertainties that cybersecurity incidents may have on us, see “Risk Factors: Information systems failure or disruption, due to cyber terrorism or other actions, may adversely impact our business and result in financial loss to the Company or liability to our customers” in our 2022 Annual Report and “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q.

General Economic Conditions

Our financial results closely follow changes in the industries and end-markets we serve. Demand for most of our products depends on the level of new capital investment and planned and unplanned maintenance expenditures by our customers. The level of capital expenditures depends, in turn, on the general economic conditions as well as access to capital at reasonable cost.

The ongoing conflict between Russia and Ukraine and the related sanctions and export controls have adversely affected economic conditions in Eastern Europe and certain global industry sectors dependent on those countries. We have limited physical operations and sales in Russia and Ukraine and, to date, have not experienced a material adverse impact on our results of operations or financial condition. Further escalation or prolonged conflict may amplify several of the risks identified in Part I, Item 1A. “Risk Factors” in our 2022 Annual Report.

Foreign Currency Fluctuations

A significant portion of our revenues, approximately 56% for the nine month period ended September 30, 2023, was denominated in currencies other than the U.S. dollar. Because much of our manufacturing facilities and labor force costs are outside of the

United States, a significant portion of our costs are also denominated in currencies other than the U.S. dollar. Changes in foreign exchange rates can therefore impact our results of operations and are quantified when significant to our discussion.

The COVID-19 Pandemic and Related Supply Chain Disruptions

We continue to assess and actively manage the impact of the COVID-19 pandemic on our global operations and also the operations of our suppliers and customers. In order to position ourselves to fulfill demand, we continue to monitor the supply chain closely and are taking proactive steps to ensure continuity of supply. The degree to which the pandemic will continue to impact our operations, and the operations of our customers and suppliers remains uncertain. See “The COVID-19 pandemic could have a material and adverse effect on our business, results of operations and financial condition in the future” in Part I, Item 1A. “Risk Factors” in our 2022 Annual Report and this Form 10-Q.

Factors Affecting the Comparability of our Results of Operations

Key factors affecting the comparability of our results of operations are summarized below.

Acquisitions

Part of our strategy for growth is to acquire complementary businesses that provide access to new technologies or geographies or expand our offerings. While acquisitions, as discussed further in Note 3, are not individually significant or significant in the aggregate, they may be relevant when comparing our results from period to period.

See Note 3 “Acquisitions” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q for further discussion of these acquisitions.

Restructuring and Other Business Transformation Initiatives

We continue to execute business transformation initiatives. A key element of those initiatives are restructuring programs within our Industrial Technologies and Services and Precision and Science Technologies segments, as well as at the Corporate level. Restructuring charges, program related facility reorganization, relocation and other costs, and related capital expenditures were impacted most significantly.

How We Assess the Performance of Our Business

We manage operations through the two business segments described above. In addition to our consolidated GAAP financial measures, we review various non-GAAP financial measures, including Adjusted EBITDA, Adjusted Net Income and Free Cash Flow.

We believe Adjusted EBITDA and Adjusted Net Income are helpful supplemental measures to assist us and investors in evaluating our operating results as they exclude certain items whose fluctuation from period to period do not necessarily correspond to changes in the operations of our business. Adjusted EBITDA represents net income (loss) before interest, taxes, depreciation, amortization and certain non-cash, non-recurring and other adjustment items. We believe that the adjustments applied in presenting Adjusted EBITDA are appropriate to provide additional information to investors about certain material non-cash items and about non-recurring items that we do not expect to continue at the same level in the future. Adjusted Net Income is defined as net income (loss) including interest, depreciation and amortization of non-acquisition related intangible assets and excluding other items used to calculate Adjusted EBITDA and further adjusted for the tax effect of these exclusions.

We use Free Cash Flow to review the liquidity of our operations. We measure Free Cash Flow as cash flows from operating activities less capital expenditures. We believe Free Cash Flow is a useful supplemental financial measure for us and investors in assessing our ability to pursue business opportunities and investments and to service our debt. Free Cash Flow is not a measure of our liquidity under GAAP and should not be considered as an alternative to cash flows from operating activities.

Management and our board of directors regularly use these measures as tools in evaluating our operating and financial performance and in establishing discretionary annual compensation. Such measures are provided in addition to, and should not be considered to be a substitute for, or superior to, the comparable measures under GAAP. In addition, we believe that Adjusted EBITDA, Adjusted Net Income and Free Cash Flow are frequently used by investors and other interested parties in the evaluation of issuers, many of which also present Adjusted EBITDA, Adjusted Net Income and Free Cash Flow when reporting their results in an effort to facilitate an understanding of their operating and financial results and liquidity.

Adjusted EBITDA, Adjusted Net Income and Free Cash Flow should not be considered as alternatives to net income (loss) or any other performance measure derived in accordance with GAAP, or as alternatives to cash flow from operating activities as a measure of our liquidity. Adjusted EBITDA, Adjusted Net Income and Free Cash Flow have limitations as analytical tools, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under GAAP.

See “Non-GAAP Financial Measures” below for reconciliation information.

Results of Continuing Operations

Consolidated results should be read in conjunction with the segment results section herein and Note 19 “Segment Results” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q, which provides more detailed discussions concerning certain components of our Condensed Consolidated Statements of Operations. All intercompany accounts and transactions have been eliminated within the consolidated results.The following table presents selected Condensed Consolidated Results of Operations of our business for the three and nine month periods ended September 30, 2023 and 2022.

(1) See the “Non-GAAP Financial Measures” section for a reconciliation to comparable GAAP measure.

Revenues

Revenues for the three month period ended September 30, 2023 were $1,738.9 million, an increase of $223.2 million, or 14.7%, compared to $1,515.7 million for the same three month period in 2022. The increase in revenues was primarily due to acquisitions of $104.3 million, higher pricing of $86.6 million, favorable impact of foreign currencies of $22.2 million, and higher organic volumes of $10.1 million. The percentage of consolidated revenues derived from aftermarket parts and services was 36.2% in the three month period ended September 30, 2023 compared to 35.3% in the same three month period in 2022.

Revenues for the nine month period ended September 30, 2023 were $5,054.7 million, an increase of $762.1 million, or 17.8%, compared to $4,292.6 million for the same nine month period in 2022. The increase in revenues was primarily due to higher pricing of $331.0 million, acquisitions of $266.6 million, and higher organic volumes of $216.9 million, partially offset by the unfavorable impact of foreign currencies of $52.4 million. The percentage of consolidated revenues derived from aftermarket parts and services was 36.1% in the nine month period ended September 30, 2023 compared to 35.6% in the same nine month period in 2022.

Gross Profit

Gross profit for the three month period ended September 30, 2023 was $739.3 million, an increase of $164.0 million, or 28.5%, compared to $575.3 million for the same three month period in 2022, and as a percentage of revenues was 42.5% for the three month period ended September 30, 2023 and 38.0% for the same three month period in 2022. The increase in gross profit is primarily due to higher pricing and acquisitions discussed above. The increase in gross profit as a percentage of revenues is primarily due to the benefits of pricing changes in excess of inflation in material and labor costs.

Gross profit for the nine month period ended September 30, 2023 was $2,101.0 million, an increase of $429.8 million, or 25.7%, compared to $1,671.2 million for the same nine month period in 2022, and as a percentage of revenues was 41.6% for the nine month period ended September 30, 2023 and 38.9% for the same nine month period in 2022. The increase in gross profit is primarily due to higher pricing, acquisitions, and higher organic volumes discussed above. The increase in gross profit as a percentage of revenues is primarily due to the benefits of pricing changes in excess of inflation in material and labor costs.

Selling and Administrative Expenses

Selling and administrative expenses were $315.2 million for the three month period ended September 30, 2023, an increase of $36.5 million, or 13.1%, compared to $278.7 million for the same three month period in 2022. The increase in selling and administrative expenses was mainly from businesses acquired in the second half of 2022 and first half of 2023 and higher incentive compensation expense. Selling and administrative expenses as a percentage of revenues decreased to 18.1% for the three month period ended September 30, 2023 from 18.4% in the same three month period in 2022.

Selling and administrative expenses were $941.9 million for the nine month period ended September 30, 2023, an increase of $122.1 million, or 14.9%, compared to $819.8 million for the same nine month period in 2022. The increase in selling and administrative expenses was mainly from businesses acquired in the second half of 2022 and first half of 2023 and higher incentive compensation expense. Selling and administrative expenses as a percentage of revenues decreased to 18.6% for the nine month period ended September 30, 2023 from 19.1% in the same nine month period in 2022.

Amortization of Intangible Assets

Amortization of intangible assets was $92.2 million for the three month period ended September 30, 2023, a decrease of $1.6 million, compared to $93.8 million in the same three month period in 2022. The decrease was primarily due to certain intangible assets becoming fully amortized during the period, partially offset by businesses acquired in the second half of 2022 and first half of 2023 discussed in Note 3 “Acquisitions” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q.

Amortization of intangible assets was $274.3 million for the nine month period ended September 30, 2023, an increase of $10.7 million, compared to $263.6 million in the same nine month period in 2022. The increase was primarily due to businesses acquired in the second half of 2022 and first half of 2023 discussed in Note 3 “Acquisitions” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q, partially offset by certain intangible assets becoming fully amortized during the period.

Other Operating Expense, Net

Other operating expense, net was $13.5 million for the three month period ended September 30, 2023, an increase of $0.7 million, compared to $12.8 million in the same three month period in 2022. The increase in expense was primarily due to lower foreign currency transaction gains, net of $7.8 million, partially offset by lower restructuring charges of $4.9 million and lower acquisition and other transaction related expenses and non-cash charges of $1.7 million.

Other operating expense, net was $53.7 million for the nine month period ended September 30, 2023, an increase of $10.3 million, compared to $43.4 million in the same nine month period in 2022. The increase was primarily due to higher acquisition and other transaction related expenses and non-cash charges of $13.4 million and lower foreign currency transaction gains, net of $13.3 million, partially offset by lower restructuring charges of $18.2 million.

Interest Expense

Interest expense was $39.6 million for the three month period ended September 30, 2023, an increase of $13.0 million, compared to $26.6 million in the same three month period in 2022. The increase was primarily due to an increase in the weighted-average interest rate, partially offset by the interest rate derivative contracts discussed in Note 13 “Hedging Activities and Derivative Instruments” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q. The weighted average interest rate, including the impact of the interest rate derivative contracts, was approximately 5.4% for the three month period ended September 30, 2023 and 4.0% in the same three month period in 2022.

Interest expense was $119.3 million for the nine month period ended September 30, 2023, an increase of $50.5 million, compared to $68.8 million in the same nine month period in 2022. The increase was primarily due to an increase in the weighted-average interest rate, partially offset by the prepayment of the Euro Term Loan on June 30, 2022, and the interest rate derivative contracts discussed in Note 13 “Hedging Activities and Derivative Instruments” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q. The weighted average interest rate, including the impact of the interest rate derivative contracts, was approximately 5.3% for the nine month period ended September 30, 2023 and 2.7% in the same period in 2022.

Other Income, Net

Other income, net was $7.6 million and $9.8 million in the three month periods ended September 30, 2023 and 2022, respectively. The decrease was primarily due to a gain from settling post-acquisition contingencies related to the Merger in the 2022 period that did not recur in the 2023 period, partially offset by an increase in interest income from holdings of cash and cash equivalents.

Other income, net was $25.4 million and $21.8 million in the nine month periods ended September 30, 2023 and 2022, respectively. The increase was primarily due to an increase in interest income from holdings of cash and cash equivalents, partially offset by a gain from settling post-acquisition contingencies related to the Merger in the 2022 period that did not recur in the 2023 period.

Provision for Income Taxes

The provision for income taxes was $60.3 million resulting in a 22.0% effective income tax provision rate for the three month period ended September 30, 2023, compared to a provision for income taxes of $30.3 million resulting in a 17.5% effective income tax provision rate in the same three month period in 2022. The increase in the tax provision for the three month period ended September 30, 2023 is primarily due to an increase in the pretax book income in jurisdictions with higher effective tax rates combined with decreased earnings in jurisdictions with lower tax rates.

The provision for income taxes was $168.9 million resulting in a 23.3% effective income tax provision rate for the nine month period ended September 30, 2023, compared to a provision for income taxes of $104.6 million resulting in a 21.1% effective income tax provision rate in the same nine month period in 2022. The increase in the tax provision for the nine month period ended September 30, 2023 is primarily due to an increase in the pretax book income in jurisdictions with higher effective tax rates combined with decreased earnings in jurisdictions with lower tax rates and a change in tax law guidance causing a discrete tax cost in the second quarter.

Net Income

Net income was $209.6 million for the three month period ended September 30, 2023 compared to net income of $146.0 million in the same three month period in 2022. The increase in net income was primarily due to higher gross profit on increased revenues, partially offset by higher selling and administrative expenses, higher provision for income taxes, and higher interest expense.

Net income was $553.6 million for the nine month period ended September 30, 2023 compared to net income of $389.8 million in the same nine month period in 2022. The increase in net income was primarily due to higher gross profit on increased revenues, partially offset by higher selling and administrative expenses, higher provision for income taxes, and higher interest expense.

Adjusted EBITDA

Adjusted EBITDA increased $85.4 million to $461.5 million for the three month period ended September 30, 2023 compared to $376.1 million in the same three month period in 2022. Adjusted EBITDA as a percentage of revenues increased 170 basis points to 26.5% for the three month period ended September 30, 2023 from 24.8% for the same three month period in 2022. The increase in Adjusted EBITDA was primarily due to higher pricing of $86.6 million, favorable impact of foreign currencies of $4.4 million, and higher organic sales volume of $2.2 million, partially offset by higher selling and administrative costs of $19.4 million and unfavorable cost inflation and product mix of $10.8 million. The increase in Adjusted EBITDA as a percentage of revenues is primarily attributable to higher pricing, partially offset by unfavorable cost inflation and product mix.

Adjusted EBITDA increased $271.7 million to $1,286.3 million for the nine month period ended September 30, 2023 compared to $1,014.6 million in the same nine month period in 2022. Adjusted EBITDA as a percentage of revenues increased 180 basis points to 25.4% for the nine month period ended September 30, 2023 from 23.6% for the same nine month period in 2022. The increase in Adjusted EBITDA was primarily due to higher pricing of $331.0 million and higher organic sales volume of $81.4 million, partially offset by unfavorable cost inflation and product mix of $96.7 million, higher selling and administrative costs of $88.5 million, and the unfavorable impact of foreign currencies of $16.1 million. The increase in Adjusted EBITDA as a percentage of revenues is primarily attributable to higher pricing and volume, partially offset by unfavorable cost inflation and product mix.

Adjusted Net Income

Adjusted Net Income increased $62.9 million to $316.0 million for the three month period ended September 30, 2023 compared to $253.1 million in the same three month period in 2022. The increase was primarily due to increased Adjusted EBITDA, partially offset by a higher income tax provision, as adjusted, and higher interest expense.

Adjusted Net Income increased $184.4 million to $861.2 million for the nine month period ended September 30, 2023 compared to $676.8 million in the same nine month period in 2022. The increase was primarily due to increased Adjusted EBITDA, partially offset by a higher income tax provision, as adjusted, and higher interest expense.

Non-GAAP Financial Measures

Set forth below are the reconciliations of Net Income to Adjusted EBITDA and Adjusted Net Income and Cash Flows from Operating Activities to Free Cash Flow.

(a) Depreciation expense excludes $1.1 million and $0.8 million of depreciation of rental equipment for the three month periods ended September 30, 2023 and 2022, respectively, and excludes $2.8 million and $2.6 million for the nine month periods ended September 30, 2023 and 2022.

(b) Represents $89.8 million and $84.8 million of amortization of intangible assets arising from acquisitions (customer relationships, technology, tradenames and backlog) and $2.4 million and $9.0 million of amortization of non-acquisition related intangible assets, in each case, for the three month periods ended September 30, 2023 and 2022, respectively.

Represents $266.7 million and $248.2 million of amortization of intangible assets arising from acquisitions (customer relationships, technology, tradenames and backlog) and $7.6 million and $15.4 million of amortization of non-acquisition related intangible assets, in each case, for the nine month periods ended September 30, 2023 and 2022, respectively.

(c) Restructuring and related business transformation costs consisted of the following.

(d) Represents costs associated with successful and/or abandoned acquisitions and divestitures, including third-party expenses, post-closure integration costs, and non-cash charges and credits arising from fair value purchase accounting adjustments.

(e) Represents stock-based compensation expense recognized for the three and nine month periods ended September 30, 2022 of $20.1 million and $62.3 million, respectively, and increased by $7.0 million for the three and nine month periods ended September 30, 2022, due to costs associated with employer taxes related to the All-Employee Equity Grant.

(f) Represents non-recoverable costs associated with a cybersecurity event.

(g) Represents a gain from settling post-acquisition contingencies related to the Merger outside of the measurement period.

(h) Includes (i) pension and other postemployment plan costs other than service cost, (ii) interest income on cash and cash equivalents and (iii) other miscellaneous adjustments.

(i) Represents our income tax provision adjusted for the tax effect of pre-tax items excluded from Adjusted Net Income and the removal of the applicable discrete tax items. The tax effect of pre-tax items excluded from Adjusted Income is computed using the statutory tax rate related to the jurisdiction that was impacted by the adjustment after taking into account the impact of permanent differences and valuation allowances. Discrete tax items include changes in tax laws or rates, changes in uncertain tax positions relating to prior years and changes in valuation allowances. The adjusted amounts are then used to calculate an adjusted provision for the quarter.

The income tax provision, as adjusted for each of the periods presented below consisted of the following.

Segment Results

We classify our business into two segments: Industrial Technologies and Services and Precision and Science Technologies. Our Corporate operations are not discussed separately as any results that had a significant impact on operating results are included in the “Results of Operations” discussion above.

We evaluate the performance of our segments based on Segment Revenues and Segment Adjusted EBITDA. Segment Adjusted EBITDA is indicative of operational performance and ongoing profitability. Our management closely monitors Segment Adjusted EBITDA to evaluate past performance and identify actions required to improve profitability.

The segment measurements provided to and evaluated by the chief operating decision maker are described in Note 19 “Segment Results” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q.

Segment Results for the Three and Nine Month Periods Ended September 30, 2023 and 2022

The following tables display Segment Orders, Segment Revenues, Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin (Segment Adjusted EBITDA as a percentage of Segment Revenues) for each of our Segments.

Industrial Technologies and Services Segment Results

Segment Orders for the three month period ended September 30, 2023 were $1,346.9 million, a decrease of $8.3 million, or 0.6%, compared to $1,355.2 million in the same three month period in 2022. The decrease in Segment Orders was due to organic decline of $117.6 million or 8.7%, partially offset by acquisitions of $96.3 million or 7.1% and the favorable impact of foreign currencies of $13.0 million or 1.0%.

Segment Revenues for the three month period ended September 30, 2023 were $1,428.4 million, an increase of $228.8 million, or 19.1%, compared to $1,199.6 million in the same three month period in 2022. The increase in Segment Revenues was due to acquisitions of $98.7 million or 8.2%, higher pricing of $67.0 million or 5.6%, higher organic volumes of $46.6 million or 3.9%, and favorable impact of foreign currencies of $16.5 million or 1.4%. The percentage of Segment Revenues derived from aftermarket parts and service was 39.6% in the three month period ended September 30, 2023 compared to 39.7% in the same three month period in 2022.

Segment Adjusted EBITDA for the three month period ended September 30, 2023 was $410.9 million, an increase of $96.9 million, or 30.9%, from $314.0 million in the same three month period in 2022. Segment Adjusted EBITDA Margin increased 260 basis points to 28.8% from 26.2% in 2022. The increase in Segment Adjusted EBITDA was primarily due to higher pricing of $67.0 million or 21.3%, acquisitions of $20.1 million or 6.4%, higher organic sales volume of $18.6 million or 5.9%, and favorable impact of foreign currencies of $3.7 million or 1.2%, partially offset by higher selling and administrative costs of $9.7 million or 3.1% and unfavorable cost inflation and product mix of $2.9 million or 0.9%.

Segment Orders for the nine month period ended September 30, 2023 were $4,241.5 million, an increase of $312.9 million, or 8.0%, compared to $3,928.6 million in the same nine month period in 2022. The increase in Segment Orders was due to acquisitions of $251.9 million or 6.4% and organic growth of $116.6 million or 3.0%, partially offset by the unfavorable impact of foreign currencies of $55.6 million or 1.4%.

Segment Revenues for the nine month period ended September 30, 2023 were $4,124.0 million, an increase of $734.3 million, or 21.7%, compared to $3,389.7 million in the same nine month period in 2022. The increase in Segment Revenues was due to higher organic volumes of $277.8 million or 8.2%, higher pricing of $255.6 million or 7.5%, and acquisitions of $246.8 million or 7.3%, partially offset by unfavorable impact of foreign currencies of $45.9 million or 1.4%. The percentage of Segment Revenues derived from aftermarket parts and service was 39.5% in the nine month period ended September 30, 2023 compared to 39.9% in the same nine month period in 2022.

Segment Adjusted EBITDA for the nine month period ended September 30, 2023 was $1,134.0 million, an increase of $280.6 million, or 32.9%, from $853.4 million in the same nine month period in 2022. Segment Adjusted EBITDA Margin increased 230 basis points to 27.5% from 25.2% in 2022. The increase in Segment Adjusted EBITDA was primarily due to higher pricing of $255.6 million or 30.0%, higher organic sales volume of $108.6 million or 12.7%, and acquisitions of $54.2 million or 6.4%, partially offset by unfavorable cost inflation and product mix of $71.6 million or 8.4%, higher selling and administrative costs of $52.9 million or 6.2%, and unfavorable impact of foreign currencies of $13.6 million or 1.6%.

Precision and Science Technologies Segment Results

Segment Orders for the three month period ended September 30, 2023 were $290.9 million, a decrease of $8.4 million, or 2.8%, compared to $299.3 million in the same three month period in 2022. The decrease in Segment Orders was due to the unfavorable impact of lower organic orders of $18.0 million or 6.0%, partially offset by foreign currencies of $5.0 million or 1.7% and acquisitions of $4.6 million or 1.5%.

Segment Revenues for the three month period ended September 30, 2023 were $310.5 million, a decrease of $5.6 million, or 1.8%, compared to $316.1 million in the same three month period in 2022. The decrease in Segment Revenues was primarily due to lower organic volumes of $36.5 million or 11.5%, partially offset by higher pricing of $19.6 million or 6.2%, favorable impact of foreign currencies of $5.7 million or 1.8%, and acquisitions of $5.6 million or 1.8%. The percentage of Segment Revenues derived from aftermarket parts and service was 20.6% in the three month period ended September 30, 2023 compared to 18.7% in the same three month period in 2022.

Segment Adjusted EBITDA for the three month period ended September 30, 2023 was $94.2 million, an increase of $2.2 million, or 2.4%, from $92.0 million in the same three month period in 2022. Segment Adjusted EBITDA Margin increased 120 basis points to 30.3% from 29.1% in 2022. The increase in Segment Adjusted EBITDA was primarily due to higher pricing of $19.6 million or 21.3%, acquisitions of $2.1 million or 2.3%, lower selling and administrative costs of $2.0 million or 2.2%, and favorable impact of foreign currencies of $1.5 million or 1.6%, partially offset by lower organic sales volume of $16.4 million or 17.8% and unfavorable cost inflation and product mix of $6.3 million or 6.8%.

Segment Orders for the nine month period ended September 30, 2023 were $910.5 million, a decrease of $44.1 million, or 4.6%, compared to $954.6 million in the same nine month period in 2022. The decrease in Segment Orders was due to lower organic orders of $56.2 million or 5.9% and the unfavorable impact of foreign currencies of $8.2 million or 0.9%, partially offset by acquisitions of $20.3 million or 2.1%.

Segment Revenues for the nine month period ended September 30, 2023 were $930.7 million, an increase of $27.8 million, or 3.1%, compared to $902.9 million in the same nine month period in 2022. The increase in Segment Revenues was due to higher pricing of $75.4 million or 8.4% and acquisitions of $19.8 million or 2.2%, partially offset by lower organic volumes of $60.9 million or 6.7% and unfavorable impact of foreign currencies of $6.5 million or 0.7%. The percentage of Segment Revenues derived from aftermarket parts and service was 20.9% in the nine month period ended September 30, 2023 compared to 19.1% in the same nine month period in 2022.

Segment Adjusted EBITDA for the nine month period ended September 30, 2023 was $278.7 million, an increase of $23.9 million, or 9.4%, from $254.8 million in the same nine month period in 2022. Segment Adjusted EBITDA Margin increased 170 basis points to 29.9% from 28.2% in 2022. The increase in Segment Adjusted EBITDA was primarily due to higher pricing of $75.4 million or 29.6% and acquisitions of $7.3 million or 2.9%, partially offset by unfavorable cost inflation and product mix of $27.6 million or 10.8%, lower organic sales volume of $27.2 million or 10.7%, unfavorable impact of foreign currencies of $2.2 million or 0.9%, and higher selling and administrative costs of $2.1 million or 0.8%.

Results of Discontinued Operations

Income from discontinued operations, net of tax was $0.5 million and $0.6 million for the three and nine month periods ended September 30, 2022 and consisted primarily of expenses incurred to finalize separation and fulfill transition services.

Liquidity and Capital Resources

Our investment resources include cash on hand, cash generated from operations and borrowings under our Revolving Credit Facility. We also have the ability to seek additional secured and unsecured borrowings, subject to Credit Agreement restrictions.

As of September 30, 2023, we had $2,000.0 million of unused availability under the Revolving Credit Facility.

See the description of these line-of-credit resources in Note 11 “Debt” to the consolidated financial statements in our 2022 Annual Report and Note 10 “Debt” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q.

As of September 30, 2023, we were in compliance with all of our debt covenants and no event of default had occurred or was ongoing.

Liquidity

A substantial portion of our liquidity needs arise from debt service requirements, and from the ongoing cost of operations, working capital and capital expenditures.

We can increase the borrowing availability under the Senior Secured Credit Facilities by up to $1,600.0 million in the form of additional commitments under the Revolving Credit Facility and/or incremental term loans plus an additional amount so long as we do not exceed a specified senior secured leverage ratio. We can incur additional secured indebtedness under the term loan facilities if certain specified conditions are met under the Credit Agreement. Our liquidity requirements are significant primarily due to debt service requirements. See Note 11 “Debt” to the consolidated financial statements in our 2022 Annual Report and Note 10 “Debt” to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q for further details.

Our principal sources of liquidity have been existing cash and cash equivalents, cash generated from operations and borrowings under the Senior Notes and Senior Secured Credit Facilities. Our principal uses of cash will be to provide working capital, meet debt service requirements, fund capital expenditures, dividend payments, and finance strategic plans, including possible acquisitions. We may also seek to finance capital expenditures under capital leases or other debt arrangements that provide liquidity or favorable borrowing terms. We continue to consider acquisition opportunities, but the size and timing of any future acquisitions and the related potential capital requirements cannot be predicted. In the event that suitable businesses are available for acquisition upon acceptable terms, we may obtain all or a portion of the necessary financing through the incurrence of additional long-term borrowings. As market conditions warrant, we may from time to time, seek to repay loans that we have borrowed, including the borrowings under the Senior Notes and Senior Secured Credit Facilities. Based on our current level of operations and available cash, we believe our cash flow from operations, together with availability under the Revolving Credit Facility, will provide sufficient liquidity to fund our current obligations, projected working capital requirements, debt service requirements and capital spending requirements for the foreseeable future. Our business may not generate sufficient cash flows from operations or future borrowings may not be available to us under our Revolving Credit Facility in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs. Our ability to do so depends on, among other factors, prevailing economic conditions, many of which are beyond our control. In addition, upon the occurrence of certain events, such as a change in control, we could be required to repay or refinance our indebtedness. We may not be able to refinance any of our indebtedness, including the Senior Notes and Senior Secured Credit Facilities, on commercially reasonable terms or at all. Any future acquisitions, joint ventures, or other similar transactions may require additional capital and there can be no assurance that any such capital will be available to us on acceptable terms or at all.

We may from time to time repurchase shares of our common stock in the open market at prevailing market prices (including through Rule 10b5-1 plans), in privately negotiated transactions, a combination thereof or through other transactions. The actual timing, number, manner and value of any shares repurchased will depend on several factors, including the market price of our stock, general market and economic conditions, our liquidity requirements, applicable legal requirement and other business considerations.

A substantial portion of our cash is in jurisdictions outside of the United States. We do not assert ASC 740-30 (formerly APB 23) indefinite reinvestment of our historical non-U.S. earnings or future non-U.S. earnings. The Company records a deferred foreign tax liability to cover all estimated withholding, state income tax and foreign income tax associated with repatriating all non-U.S. earnings back to the United States. Our deferred income tax liability as of September 30, 2023 was $41.4 million which primarily consisted of withholding taxes.

Working Capital

Net working capital decreased $214.6 million to $2,078.7 million as of September 30, 2023 from $2,293.3 million as of December 31, 2022. Operating working capital increased $229.5 million to $1,423.7 million as of September 30, 2023 from $1,194.2 million as of December 31, 2022. The increase in operating working capital is primarily due to lower accounts payable, higher accounts receivable, and higher inventories, partially offset by higher contract liabilities and lower contract assets.

The increase in accounts receivable was primarily due to the timing of revenues in the quarter and seasonal changes in collection timing. The increase in inventories was primarily due to acquisitions and to support fourth quarter backlog. The decrease in contract assets was primarily due to the timing of revenue recognition and billing on our overtime contracts. The decrease in accounts payable was primarily due to the timing of vendor cash disbursements. The increase in contract liabilities was primarily due to the timing of customer milestone payments for in-process engineered to order contracts.

Cash Flows

The following table reflects the major categories of cash flows for the nine month periods ended September 30, 2023 and 2022, respectively.

(1) See the “Non-GAAP Financial Measures” section included in this Quarterly Report for a reconciliation to the nearest GAAP measure.

Operating Activities

Cash provided by operating activities increased $285.4 million to $796.0 million for the nine month period ended September 30, 2023 from $510.6 million in the same nine month period in 2022. This increase is primarily attributable to higher income from continuing operations.

Investing Activities

Cash used in investing activities included capital expenditures of $75.8 million and $61.1 million for the nine month periods ended September 30, 2023 and 2022, respectively. Net cash paid in acquisitions was $923.8 million and $62.5 million in the nine month periods ended September 30, 2023 and 2022, respectively. The nine month period ended September 30, 2023 also included proceeds of $7.6 million related to the sale of a closed facility.

Financing Activities

Cash used in financing activities of $193.8 million for the nine month period ended September 30, 2023 primarily reflected net repayments of long term debt of $20.4 million, purchases of treasury stock of $132.9 million, and cash dividends on common stock of $24.3 million, payments of deferred and contingent acquisition consideration of $17.4 million, and payments of debt issuance costs of $17.3 million, partially offset by proceeds from stock option exercises of $21.9 million.

Cash used in financing activities of $934.8 million for the nine month period ended September 30, 2022 primarily reflected repayments of long-term debt of $647.1 million, purchases of treasury stock of $257.8 million, cash dividends on common stock of $24.3 million, and payments of interest rate cap premiums of $13.4 million, partially offset by proceeds from stock option exercises of $14.7 million.

Discontinued Operations

Cash used in discontinued operations was $0.6 million for the nine month period ended September 30, 2022 and related primarily to separation related expenses.

Free Cash Flow

Free cash flow increased $270.7 million to $720.2 million in the nine month period ended September 30, 2023 from $449.5 million in the same nine month period in 2022 due to increased cash provided by operating activities, partially offset by higher capital expenditures.

Critical Accounting Estimates

Management has evaluated the accounting estimates used in the preparation of the Company’s condensed consolidated financial statements and related notes and believe those estimates to be reasonable and appropriate. Certain of these accounting estimates require the application of significant judgment by management in selecting appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, trends in the industry, information provided by customers and information available from other outside sources, as appropriate. The most significant areas involving management judgments and estimates may be found in the section “Critical Accounting Estimates” of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 1 “Summary of Significant Accounting Policies” of “Item 8. Financial Statements and Supplementary Data” included in our 2022 Annual Report.

Environmental Matters

Information with respect to the effect of compliance with environmental protection requirements and resolution of environmental claims on us and our manufacturing operations is contained in Note 18 “Contingencies” to the condensed consolidated financial statements included elsewhere in this Form 10-Q. We believe that as of September 30, 2023, there have been no material changes to the environmental matters disclosed in our 2022 Annual Report.

Recent Accounting Pronouncements

The information set forth in Note 1 “Basis of Presentation and Recent Accounting Pronouncements” to our condensed consolidated financial statements under Part 1, Item 1 “Financial Statements” under the heading “Recently Issued Accounting Pronouncements” is incorporated herein by reference.

We are exposed to interest rate risk as a result of our variable-rate borrowings. We manage our exposure to interest rate risk by using interest rate swap and cap contracts, from time to time, as cash flow hedges of our variable rate debt in order to adjust the relative fixed and variable portions.

In addition, we are exposed to foreign currency risks that arise from our global business operations. Changes in foreign currency exchange rates affect the translation of local currency balances of foreign subsidiaries, transaction gains and losses associated with intercompany loans with foreign subsidiaries and transactions denominated in currencies other than a subsidiary’s functional currency. While future changes in foreign currency exchange rates are difficult to predict, our revenues and earnings may be adversely affected if the U.S. dollar further strengthens.

We seek to minimize our exposure to foreign currency risks through a combination of normal operating activities, including by conducting our international business operations primarily in their functional currencies to match expenses with revenues, and the use of cross currency interest rate swap contracts and foreign currency forward exchange contracts. In addition, to mitigate the risk arising from entering into transactions in currencies other than our functional currencies, we typically settle intercompany trading balances at least quarterly.

As of September 30, 2023, there have been no material changes to our market risk assessment previously disclosed in the 2022 Annual Report.

Disclosure Controls and Procedures

The Company maintains a set of disclosure controls and procedures as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. The design of any disclosure controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures. Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q, were effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.