UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________________________________

FORM 10-Q

____________________________________

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 033-90866

____________________________________

WESTINGHOUSE AIR BRAKE TECHNOLOGIES

CORPORATION

(Exact name of registrant as specified in its charter)

____________________________________

Delaware	25-1615902
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
30 Isabella Street Pittsburgh, Pennsylvania	15212
(Address of principal executive offices)	(Zip code)

412-825-1000

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

____________________________________

Securities registered pursuant to Section 12(b) of the Act:

Class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.01 par value per share	WAB	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐	Non-accelerated filer	☐
Emerging growth company	☐	Smaller reporting company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of July 21, 2023, there were 179,130,334 shares of common stock, par value $.01 per share, of the registrant outstanding.

WESTINGHOUSE AIR BRAKE

TECHNOLOGIES CORPORATION

June 30, 2023

FORM 10-Q

TABLE OF CONTENTS

		Page
	PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements - (Unaudited)	3
	Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022	3
	Condensed Consolidated Statements of Income for the three and six months ended June 30, 2023 and 2022	4
	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2023 and 2022	5
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022	6
	Condensed Consolidated Statements of Shareholders' Equity for the three and six months ended June 30, 2023 and 2022	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	43
Item 4.	Controls and Procedures	43
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 4.	Mine Safety Disclosures	44
Item 6.	Exhibits	45
	Signatures	46

2

PART I—FINANCIAL INFORMATION

Item 1.    FINANCIAL STATEMENTS

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

	Unaudited
In millions, except par value	June 30, 2023		December 31, 2022
Assets
Assets
Cash, cash equivalents and restricted cash	$	371	$	541
Accounts receivable	1,015		975
Unbilled accounts receivable	683		544
Inventories, net	2,317		2,034
Other current assets	277		233
Total current assets	4,663		4,327
Property, plant and equipment, net	1,443		1,429
Goodwill	8,657		8,508
Other intangible assets, net	3,359		3,402
Other noncurrent assets	863		850
Total noncurrent assets	14,322		14,189
Total Assets	$	18,985	$	18,516
Liabilities and Shareholders’ Equity
Liabilities
Accounts payable	$	1,307	$	1,301
Customer deposits	731		772
Accrued compensation	249		300
Accrued warranty	223		215
Current portion of long-term debt	989		251
Other accrued liabilities	674		628
Total current liabilities	4,173		3,467
Long-term debt	3,401		3,751
Accrued postretirement and pension benefits	64		57
Deferred income taxes	359		326
Contingent consideration	48		47
Other long-term liabilities	713		721
Total Liabilities	8,758		8,369
Commitments and contingencies (Note 14)
Equity
Common stock, $.01 par value; 500.0 shares authorized and 226.9 shares issued: 179.1 and 181.2 outstanding at June 30, 2023 and December 31, 2022, respectively	2		2
Additional paid-in capital	7,949		7,953
Treasury stock, at cost, 47.8 and 45.7 shares, at June 30, 2023 and December 31, 2022, respectively	(2,014)		(1,769)
Retained earnings	4,875		4,577
Accumulated other comprehensive loss	(624)		(661)
Total Westinghouse Air Brake Technologies Corporation shareholders’ equity	10,188		10,102
Noncontrolling interest	39		45
Total Equity	10,227		10,147
Total Liabilities and Equity	$	18,985	$	18,516

The accompanying notes are an integral part of these statements.

3

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	Unaudited				Unaudited
	Three Months Ended June 30,				Six Months Ended June 30,
In millions, except per share data	2023		2022		2023		2022
Net sales:
Sales of goods	$	1,899	$	1,584	$	3,583	$	3,089
Sales of services	508		464		1,018		886
Total net sales	2,407		2,048		4,601		3,975
Cost of sales:
Cost of goods	(1,400)		(1,147)		(2,657)		(2,231)
Cost of services	(284)		(256)		(556)		(504)
Total cost of sales	(1,684)		(1,403)		(3,213)		(2,735)
Gross profit	723		645		1,388		1,240
Operating expenses:
Selling, general and administrative expenses	(285)		(259)		(548)		(497)
Engineering expenses	(53)		(50)		(104)		(95)
Amortization expense	(73)		(72)		(148)		(145)
Total operating expenses	(411)		(381)		(800)		(737)
Income from operations	312		264		588		503
Other income and expenses:
Interest expense, net	(55)		(44)		(103)		(87)
Other income, net	2		7		7		11
Income before income taxes	259		227		492		427
Income tax expense	(66)		(58)		(126)		(108)
Net income	193		169		366		319
Less: Net income attributable to noncontrolling interest	(2)		(3)		(6)		(4)
Net income attributable to Wabtec shareholders	$	191	$	166	$	360	$	315
Earnings Per Common Share
Basic
Net income attributable to Wabtec shareholders	$	1.06	$	0.91	$	2.00	$	1.71
Diluted
Net income attributable to Wabtec shareholders	$	1.06	$	0.91	$	2.00	$	1.71
Weighted average shares outstanding
Basic	178.9		181.9		179.4		183.2
Diluted	179.4		182.4		180.0		183.7

The accompanying notes are an integral part of these statements.

4

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Unaudited				Unaudited
	Three Months Ended June 30,				Six Months Ended June 30,
In millions	2023		2022		2023		2022
Net income attributable to Wabtec shareholders	$	191	$	166	$	360	$	315
Foreign currency translation (loss) gain	(1)		(195)		24		(182)
Unrealized gain on derivative contracts	13		—		18		3
Unrealized (loss) gain on pension benefit plans and post-retirement benefit plans	(3)		4		(2)		5
Other comprehensive income (loss) before tax	9		(191)		40		(174)
Income tax expense related to components of other comprehensive income	(2)		(1)		(3)		(1)
Other comprehensive income (loss), net of tax	7		(192)		37		(175)
Comprehensive income (loss) attributable to Wabtec shareholders	$	198	$	(26)	$	397	$	140

The accompanying notes are an integral part of these statements.

5

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Unaudited
	Six Months Ended June 30,
In millions	2023		2022
Operating Activities
Net income	$	366	$	319
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	246		240
Stock-based compensation expense	22		20
Below market intangible amortization	(26)		(25)
Net loss on disposal of property, plant and equipment	3		3
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable and unbilled accounts receivable	(150)		45
Inventories	(248)		(256)
Accounts payable	(5)		185
Accrued income taxes	(30)		32
Accrued liabilities and customer deposits	(73)		(93)
Other assets and liabilities	(15)		(46)
Net cash provided by operating activities	90		424
Investing Activities
Acquisitions of businesses, net of cash acquired	(223)		(69)
Purchase of property, plant and equipment	(70)		(50)
Proceeds from disposal of property, plant and equipment	—		2
Net cash used for investing activities	(293)		(117)
Financing Activities
Proceeds from debt, net of issuance costs	2,964		3,416
Payments of debt	(2,590)		(3,216)
Repurchase of stock	(252)		(399)
Cash dividends	(62)		(55)
Payment of income tax withholding on share-based compensation	(15)		(1)
Distribution to noncontrolling interest	(12)		—
Other financing activities	(3)		(1)
Net cash provided by (used for) financing activities	30		(256)
Effect of changes in currency exchange rates	3		(23)
(Decrease) increase in cash	(170)		28
Cash, cash equivalents and restricted cash, beginning of period	541		473
Cash, cash equivalents and restricted cash, end of period	$	371	$	501

The accompanying notes are an integral part of these statements.

6

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

In millions	Common Stock Shares	Common Stock Amount		Additional Paid-in Capital		Treasury Stock Shares	Treasury Stock Amount		Retained Earnings		Accumulated Other Comprehensive Loss		Non-controlling Interest		Total
Balance, December 31, 2022	226.9	$	2	$	7,953	(45.7)	$	(1,769)	$	4,577	$	(661)	$	45	$	10,147
Cash dividends ($0.17 dividend per share)	—	—		—		—	—		(31)		—		—		(31)
Proceeds from treasury stock issued from the exercise of stock options and other benefit plans, net of tax	—	—		(23)		0.3	6		—		—		—		(17)
Stock based compensation	—	—		10		—	—		—		—		—		10
Net income	—	—		—		—	—		169		—		4		173
Other comprehensive income, net of tax	—	—		—		—	—		—		30		—		30
Stock repurchase	—	—		—		(1.7)	(178)		—		—		—		(178)
Balance, March 31, 2023	226.9	$	2	$	7,940	(47.1)	$	(1,941)	$	4,715	$	(631)	$	49	$	10,134
Cash dividends ($0.17 dividend per share)	—	—		—		—	—		(31)		—		—		(31)
Proceeds from treasury stock issued from the exercise of stock options and other benefit plans, net of tax	—	—		(3)		0.1	3		—		—		—		—
Stock based compensation	—	—		12		—	—		—		—		—		12
Net income	—	—		—		—	—		191		—		2		193
Other comprehensive income, net of tax	—	—		—		—	—		—		7		—		7
Stock repurchase	—	—		—		(0.8)	(76)		—		—		—		(76)
Distribution to noncontrolling interest	—	—		—		—	—		—		—		(12)		(12)
Balance, June 30, 2023	226.9	$	2	$	7,949	(47.8)	$	(2,014)	$	4,875	$	(624)	$	39	$	10,227

In millions	Common Stock Shares	Common Stock Amount		Additional Paid-in Capital		Treasury Stock Shares	Treasury Stock Amount		Retained Earnings		Accumulated Other Comprehensive Loss		Non-controlling Interest		Total
Balance, December 31, 2021	226.9	$	2	$	7,916	(41.1)	$	(1,306)	$	4,055	$	(466)	$	38	$	10,239
Cash dividends ($0.15 dividend per share)	—	—		—		—	—		(28)		—		—		(28)
Proceeds from treasury stock issued from the exercise of stock options and other benefit plans, net of tax	—	—		(9)		0.2	5		—		—		—		(4)
Stock based compensation	—	—		10		—	—		—		—		—		10
Net income	—	—		—		—	—		149		—		1		150
Other comprehensive income, net of tax	—	—		—		—	—		—		17		—		17
Stock repurchase	—	—		—		(3.1)	(296)		—		—		—		(296)
Balance, March 31, 2022	226.9	$	2	$	7,917	(44.0)	$	(1,597)	$	4,176	$	(449)	$	39	$	10,088
Cash dividends ($0.15 dividend per share)	—	—		—		—	—		(27)		—		—		(27)
Proceeds from treasury stock issued from the exercise of stock options and other benefit plans, net of tax	—	—		(1)		0.1	4		—		—		—		3
Stock based compensation	—	—		10		—	—		—		—		—		10
Net income	—	—		—		—	—		166		—		3		169
Other comprehensive loss, net of tax	—	—		—		—	—		—		(192)		—		(192)
Stock repurchase	—	—		—		(1.1)	(103)		—		—		—		(103)
Balance, June 30, 2022	226.9	$	2	$	7,926	(45.0)	$	(1,696)	$	4,314	$	(641)	$	42	$	9,947

The accompanying notes are an integral part of these statements.

7

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2023 (UNAUDITED)

1. BUSINESS

Except as the context otherwise requires, all references to “we”, “our”, “us”, the “Company” and “Wabtec” refer to Westinghouse Air Brake Technologies Corporation and its consolidated subsidiaries. References to the “Parent Company” refer to Westinghouse Air Brake Technologies Corporation alone. Wabtec is one of the world’s largest providers of value-added, technology-based locomotives, equipment, systems, and services for the global freight rail and passenger transit industries, as well as the mining, marine and industrial markets. Our highly engineered products, which are intended to enhance safety, improve productivity and reduce maintenance costs for customers, can be found on most locomotives, freight cars, passenger transit cars, and buses around the world. Our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. Wabtec is a global company with operations in over 50 countries and our products can be found in more than 100 countries throughout the world. In the first six months of 2023, approximately 55% of the Company’s Net sales came from customers outside the United States.

2. ACCOUNTING POLICIES

Basis of Presentation The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States of America and the rules and regulations of the Securities and Exchange Commission and include the accounts of Wabtec and its subsidiaries in which Wabtec has a controlling interest. These condensed consolidated interim financial statements do not include all of the information and footnotes required for complete financial statements. In management’s opinion, these financial statements reflect all adjustments of a normal, recurring nature necessary for a fair presentation of the results for the interim periods presented. Certain prior year amounts have been reclassified, where necessary, to conform to the current year presentation.

Results for these interim periods are not necessarily indicative of results to be expected for the full year particularly in light of ongoing volatility in the macroeconomic environment caused by supply chain disruptions, labor availability, broad-based inflation, and the impacts resulting from Russia's invasion of Ukraine. These factors continue to impact our sales channels, supply chain, manufacturing operations, workforce, and other key aspects of our operations. We are unable to reasonably predict the full impact of these factors due to the high degree of uncertainty regarding their duration and severity, their potential impact on global economic activity, and the impact that current and new sanctions may have on our business, global supply chain operations and our customers, suppliers, and end-markets.

As of June 30, 2023, Wabtec had approximately $8 million of cash related to Russian operations which will be utilized to settle remaining obligations in Russia. During the second quarter of 2023, based on changes in facts and circumstances, management determined that assets related to Russian operations, excluding cash, were not expected to be recoverable and, as a result, a charge of approximately $3 million was recorded. Assets related to Ukraine and Belarus operations are not significant.

The Company operates on a four-four-five week accounting quarter, and the quarters end on or about March 31, June 30, September 30, and December 31.

The notes included herein should be read in conjunction with the audited consolidated financial statements included in Wabtec’s Annual Report on Form 10-K for the year ended December 31, 2022. The December 31, 2022 information has been derived from the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Use of Estimates The preparation of financial statements in conformity with GAAP in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from the estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Revenue Recognition A majority of the Company’s revenues are derived from performance obligations that are satisfied at a point in time when control passes to the customer. The remaining revenues are earned over time. Generally, for performance obligations satisfied at a point in time control passes at the time of shipment in accordance with agreed upon delivery terms.

The Company also has long-term customer agreements involving the design and production of highly engineered products that require revenue to be recognized over time because these products have no alternative use without significant economic loss and the agreements contain an enforceable right to payment including a reasonable profit margin from the customer in the event of contract termination. Additionally, the Company has customer agreements involving the creation or enhancement of an asset that the customer controls which also require revenue to be recognized over time. Generally, the Company uses an input method for determining the amount of revenue, cost and gross margin to recognize over time for these

8

customer agreements. The input methods used for these agreements include costs of material and labor, both of which give an accurate representation of the progress made toward complete satisfaction of a particular performance obligation. The company may also use the output method which recognizes revenue based on direct measurements of the value transferred to the customer. Contract revenues and cost estimates are reviewed and revised periodically throughout the year and adjustments are reflected in the accounting period as such amounts are determined.

Due to the nature of work required to be performed on the Company’s long-term projects, the estimation of total revenue and cost at completion is subject to many variables and requires significant judgment. Contract estimates related to long-term projects are based on various assumptions to project the outcome of future events that could span several years. These assumptions include cost of materials; labor availability and productivity; complexity of the work to be performed; and the performance of suppliers, customers and subcontractors that may be associated with the contract. We have a disciplined process where management reviews the progress of long term-projects periodically throughout the year. As part of this process, management reviews information including key contract matters, progress towards completion, identified risks and opportunities and any other information that could impact the Company’s estimates of revenue and costs. After completing this analysis, any adjustments to net sales, cost of goods sold, and the related impact to operating income are recognized as necessary in the period they become known.

Generally, the Company’s revenue contains a single performance obligation for each distinct good or service; however, a single contract may have multiple performance obligations comprising multiple promises to customers. When there are multiple performance obligations, revenue is allocated based on the relative stand-alone selling price. Pricing is defined in our contracts on a line item basis and includes an estimate of variable consideration when required by the terms of the individual customer contract. Types of variable consideration the Company typically has include volume discounts, prompt payment discounts, price escalation clauses, liquidating damages and performance bonuses. Sales returns and allowances are also estimated and recognized in the same period the related revenue is recognized, based upon the Company’s experience and future expectations.

Remaining performance obligations represent the allocated transaction price of unsatisfied or partially unsatisfied performance obligations. As of June 30, 2023, the Company's remaining performance obligations were approximately $22.3 billion. The Company expects to recognize revenue of approximately 30% of the remaining performance obligations over the next 12 months, with the remainder recognized thereafter.

Revolving Receivables Program The Company utilizes a revolving facility to sell up to $350 million of certain receivables of the Company and certain of its subsidiaries (the "Originators"). The Originators contribute receivables to our bankruptcy-remote subsidiary, which sells the receivables to a financial institution on a recurring basis in exchange for cash equal to the gross receivables sold. The bankruptcy remote subsidiary is a separate legal entity with its own creditors, and its assets are not available to pay creditors of the Company or any other affiliates of the Company. As customers pay their balances, we transfer additional receivables into the program, which could result in our gross receivables sold being higher or lower than collections reinvested for any applicable period. The sold receivables are fully guaranteed by our bankruptcy-remote subsidiary, which holds additional receivables that are pledged as collateral under this facility. The Company has agreed to guarantee the performance of the Originators respective obligations under the revolving agreement. Neither the Company (except for the bankruptcy-remote consolidated subsidiary referenced above) nor the Originators guarantees the collectability of the receivables under the revolving agreements.

At June 30, 2023 and December 31, 2022, the bankruptcy-remote subsidiary held receivables of $599 million and $458 million, respectively, which are included in the Company's Condensed Consolidated Balance Sheets. The receivables held by the bankruptcy-remote subsidiary collateralize the outstanding receivables sold, which were $235 million and $80 million at June 30, 2023 and December 31, 2022, respectively. The transfers are recorded at the fair value of the proceeds received and obligations assumed less derecognized receivables. No obligation was recorded at June 30, 2023 or December 31, 2022 as the estimated expected credit losses on receivables sold is insignificant. Our maximum exposure to losses related to these receivables transferred is limited to the amount outstanding.

The following table sets forth a summary of receivables sold:

In millions	Six Months Ended June 30, 2023		Six Months Ended June 30, 2022
Gross receivables sold/cash proceeds received	$	1,216	$	864
Collections reinvested under revolving receivables agreement	(1,061)		(684)
Net cash proceeds received	$	155	$	180

Restricted Cash At June 30, 2023 and December 31, 2022, the Company classified cash of $7 million as restricted for cash held in escrow related to a 2022 acquisition.

9

Depreciation Expense Depreciation of property, plant and equipment related to the manufacturing of products or services provided is included in Cost of goods or Cost of services. Depreciation of other property, plant and equipment that is not attributable to the manufacturing of products or services provided is included in Selling, general and administrative expenses or Engineering expenses to the extent the property, plant, and equipment is used for research and development purposes.

Goodwill and Intangible Assets Goodwill and other intangible assets with indefinite lives are not amortized. Other intangibles (with definite lives) are amortized on a straight-line basis over their estimated economic lives. Amortizable intangible assets are reviewed for impairment when indicators of impairment are present. The Company tests goodwill and indefinite-lived intangible assets for impairment at the reporting unit level and at least annually. The Company performs its annual impairment test during the fourth quarter after the annual forecasting process is completed, and also tests for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Periodically, management of the Company assesses whether or not an indicator of impairment is present that would necessitate an impairment analysis to be performed.

Accounting Standards Recently Adopted In September 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Obligations. The amendments in this update outline specific quantitative and qualitative disclosure requirements for entities that use supplier finance programs in connection with the purchase of goods or services. The amendments in this update do not affect the recognition, measurement, or financial statement presentation of obligations covered by supplier finance programs. The amendments in this update were effective for Wabtec's reporting periods beginning January 1, 2023, except for the amendments on roll forward information which will be effective for reporting periods beginning January 1, 2024. The amendments will require increased interim and annual disclosures be provided on current and comparable reporting periods presented in annual and interim company filings.

Supply Chain Financing Program

The Company has entered into supply chain financing arrangements with third-party financial institutions to provide our vendors with enhanced payment options while providing the Company with added working capital flexibility. The Company does not provide any guarantees under these arrangements, does not have an economic interest in our supplier's voluntary participation, does not receive an economic benefit from the financial institutions, and no assets are pledged under the arrangements. The arrangements do not change the payable terms negotiated by the Company and our vendors, which range between net 45 and net 180 days, and does not result in a change in the classification of amounts due as Accounts payable in the Condensed Consolidated Balance Sheets. Suppliers utilized the program to accelerate receipt of payment from these financial institutions for $341 million and $296 million of the Company's outstanding Accounts payable as of June 30, 2023 and December 31, 2022, respectively. The supplier invoices included under the program require payment in full to the financial institutions consistent with the Company’s normal terms and conditions as agreed upon with the vendor.

Accumulated Other Comprehensive Loss Comprehensive income (loss) comprises both Net income and Other comprehensive (loss) income resulting from the change in equity from transactions and other events and circumstances from non-owner sources.

The changes in Accumulated other comprehensive loss by component, including any tax impacts, for the three months ended June 30, 2023 and 2022 are as follows:

	Foreign currency translation				Derivative contracts				Pension and postretirement benefit plans				Total
In millions	2023		2022		2023		2022		2023		2022		2023		2022
Balance at March 31	$	(571)	$	(383)	$	(5)	$	(2)	$	(55)	$	(64)	$	(631)	$	(449)
Other comprehensive (loss) income before reclassifications	(1)		(195)		9		—		(1)		3		7		(192)
Amounts reclassified from Accumulated other comprehensive loss	—		—		—		—		—		—		—		—
Other comprehensive (loss) income, net	(1)		(195)		9		—		(1)		3		7		(192)
Balance at June 30	$	(572)	$	(578)	$	4	$	(2)	$	(56)	$	(61)	$	(624)	$	(641)

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The changes in Accumulated other comprehensive loss by component, including any tax impacts, for the six months ended June 30, 2023 and 2022 are as follows:

	Foreign currency translation				Derivative contracts				Pension and postretirement benefit plans				Total
In millions	2023		2022		2023		2022		2023		2022		2023		2022
Balance at beginning of year	$	(596)	$	(396)	$	(9)	$	(5)	$	(56)	$	(65)	$	(661)	$	(466)
Other comprehensive income (loss) before reclassifications	24		(182)		13		3		(1)		3		36		(176)
Amounts reclassified from Accumulated other comprehensive loss	—		—		—		—		1		1		1		1
Other comprehensive income (loss), net	24		(182)		13		3		—		4		37		(175)
Balance at June 30	$	(572)	$	(578)	$	4	$	(2)	$	(56)	$	(61)	$	(624)	$	(641)

Amounts reclassified from Accumulated other comprehensive loss are recognized in "Other income, net" with the tax impact recognized in "Income tax expense" on the Condensed Consolidated Statements of Income.

3. ACQUISITIONS

During the second quarter of 2023, the Company acquired L&M Radiator, Inc., a leading manufacturer of heavy-duty equipment radiators and heat exchangers for the mining sector, for a purchase price of approximately $239 million.

The following table summarizes the preliminary fair value of the L&M Radiator, Inc. assets acquired and liabilities assumed:

In millions
Assets acquired
Cash and cash equivalents	$	16
Accounts receivable	20
Inventory	26
Other current assets	1
Property, plant and equipment	31
Goodwill	102
Other intangible assets	88
Other noncurrent assets	1
Total assets acquired	285
Liabilities assumed
Current liabilities	16
Noncurrent liabilities	30
Total liabilities assumed	46
Net assets acquired	$	239

The fair values of the assets acquired and liabilities assumed were determined using the income, cost and market approaches. Discounted cash flow models were used to estimate the fair values of acquired intangibles. The fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3 in the fair value hierarchy. Intangible assets acquired include customer relationships and acquired technology that are subject to amortization, and trade names that were assigned an indefinite life and are not subject to amortization. Contingent liabilities assumed as part of the transaction were not material. These estimates are preliminary in nature and subject to adjustments,

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which could be material as the Company has not completed its valuation of acquired assets and liabilities. Any necessary adjustments will be finalized within one year from the date of acquisition.

Goodwill was calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the assembled workforce and the future economic benefits, including synergies, that are expected to be achieved as a result of the acquisition. The purchased goodwill is not expected to be deductible for tax purposes. The pro forma impact on Wabtec’s sales and results of operations, including the pro forma effect of events that are directly attributable to the acquisition, was not significant.

During the twelve months ended December 31, 2022, the Freight Segment made three strategic acquisitions for a combined purchase price of $89 million. Two of the acquisitions are reported in the Digital Intelligence product line and one is reported in the Services product line. Each of the acquisitions in 2022 are individually and collectively immaterial.

4. INVENTORIES

The components of inventory, net of reserves, were:

In millions	June 30, 2023		December 31, 2022
Raw materials	$	1,006	$	878
Work-in-progress	545		515
Finished goods	766		641
Total inventories	$	2,317	$	2,034

5. GOODWILL AND INTANGIBLE ASSETS

The change in the carrying amount of goodwill by segment is as follows:

In millions	Freight Segment		Transit Segment		Total
Balance at December 31, 2022	$	7,085	$	1,423	$	8,508
Additions/adjustments	109		—		109
Foreign currency impact	15		25		40
Balance at June 30, 2023	$	7,209	$	1,448	$	8,657

As of June 30, 2023 and December 31, 2022, the Company’s trade names had a net carrying amount of $626 million and $602 million, respectively. The Company believes these intangibles have indefinite lives, with the exception of the right to use the GE Transportation trade name, to which the Company has assigned a useful life of 5 years.

Intangible assets of the Company, other than goodwill and trade names, consist of the following:

	June 30, 2023						December 31, 2022
In millions	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Backlog	$	1,432	$	(472)	$	960	$	1,425	$	(415)	$	1,010
Customer relationships	1,325		(396)		929		1,274		(362)		912
Acquired technology	1,290		(446)		844		1,273		(395)		878
Total	$	4,047	$	(1,314)	$	2,733	$	3,972	$	(1,172)	$	2,800

At June 30, 2023 the weighted average remaining useful lives of backlog, customer relationships and acquired technology were 9 years, 16 years and 8 years, respectively. The backlog intangible asset primarily consists of in-place long-term service agreements acquired by the Company in conjunction with the acquisition of GE Transportation. Amortization expense for intangible assets was $73 million and $148 million for the three and six months ended June 30, 2023, respectively, and $72 million and $145 million for the three and six months ended June 30, 2022, respectively.

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Amortization expense for the five succeeding years is estimated to be as follows:

In millions
Remainder of 2023	$	149
2024	$	288
2025	$	271
2026	$	267
2027	$	263

6. CONTRACT ASSETS AND CONTRACT LIABILITIES

Contract assets include unbilled amounts resulting from sales under long-term contracts where revenue is recognized over time and revenue exceeds the amount that can be billed to the customer based on the terms of the contract. The current portion of the contract assets are classified as current assets under the caption “Unbilled accounts receivable” while the noncurrent contract assets are classified as other assets under the caption "Other noncurrent assets" on the Condensed Consolidated Balance Sheets. Noncurrent contract assets were $176 million at June 30, 2023 and $162 million at December 31, 2022. Included in noncurrent contract assets are certain costs that are specifically related to a contract but do not directly contribute to the transfer of control of the tangible product being created, such as non-recurring engineering costs. The Company has elected to use the practical expedient and does not consider unbilled amounts anticipated to be paid within one year as significant financing components.

Contract liabilities include customer deposits that are made prior to the incurrence of costs related to a newly agreed upon contract and advanced customer payments that are in excess of revenue recognized. The current portion of contract liabilities are classified as current liabilities under the caption “Customer deposits” while the noncurrent contract liabilities are classified as noncurrent liabilities under the caption "Other long-term liabilities" on the Condensed Consolidated Balance Sheets. Noncurrent contract liabilities were $106 million at June 30, 2023 and $86 million at December 31, 2022. These contract liabilities are not considered a significant financing component because they are used to meet working capital demands that can be higher in the early stages of a contract or revenue associated with the contract liabilities is expected to be recognized within one year. Contract liabilities also include provisions for estimated losses from uncompleted contracts. Provisions for loss contracts were $97 million and $98 million at June 30, 2023 and December 31, 2022, respectively. These provisions for estimated losses are classified as current liabilities and included within the caption “Other accrued liabilities” on the Condensed Consolidated Balance Sheets.

The change in the carrying amount of contract assets and contract liabilities for the six months ended June 30, 2023 and 2022 is as follows:

	Contract Assets
In millions	2023		2022
Balance at beginning of year	$	706	$	545
Recognized in current year	358		284
Reclassified to accounts receivable	(208)		(225)
Acquisitions/adjustments	(2)		28
Foreign currency impact	5		(20)
Balance at June 30	$	859	$	612
	Contract Liabilities
In millions	2023		2022
Balance at beginning of year	$	956	$	824
Recognized in current year	561		453
Amounts in beginning balance reclassified to revenue	(439)		(277)
Current year amounts reclassified to revenue	(149)		(169)
Acquisitions	1		12
Foreign currency impact	4		(17)
Balance at June 30	$	934	$	826

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7. LEASES

The Company leases certain property, buildings and equipment. For leases with terms greater than 12 months, the Company records the related asset and obligation at the present value of lease payments. Many of the Company's leases include rental escalation clauses, renewal options, and/or termination options that are factored into our determination of lease payments when appropriate. The right-of-use assets are classified as noncurrent and included within the caption "Other noncurrent assets" on the Condensed Consolidated Balance Sheets. The current portion of lease liabilities are classified under the caption "Other accrued liabilities," while the noncurrent portion of lease liabilities are classified under the caption "Other long-term liabilities" on the Condensed Consolidated Balance Sheets. The Company does not separate lease and non-lease components. As most of the Company's leases do not provide a readily stated discount rate, the Company must estimate the rate to discount lease payments using its incremental borrowing rate.

Operating lease expense was $16 million and $32 million for the three and six months ended June 30, 2023, respectively, and $14 million and $29 million for the three and six months ended June 30, 2022, respectively. New operating leases of $6 million and $20 million were added during the three and six months ended June 30, 2023, respectively, and $22 million and $24 million for the three and six months ended June 30, 2022, respectively. Wabtec does not have material financing leases, short-term or variable leases or sublease income.

Scheduled payments of lease liabilities are as follows:

In millions	Operating Leases
Remaining 2023	$	33
2024	57
2025	50
2026	44
2027	34
Thereafter	136
Total lease payments	354
Less: Present value discount	(26)
Present value of lease liabilities	$	328

The following table summarizes the remaining lease term and discount rate assumptions used to develop the present value of operating lease liabilities:

	June 30, 2023		December 31, 2022
Weighted-average remaining lease term (years)	8.1		8.3
Weighted-average discount rate	2.3	%	2.3	%

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8. LONG-TERM DEBT

Long-term debt consisted of the following:

	Effective Interest Rate		Face Value		June 30, 2023				December 31, 2022
In millions					Book Value		Fair Value1		Book Value		Fair Value1
Restated Credit Agreement:
Revolving Credit Facility	7.0	%	$	372	$	372	$	372	$	—	$	—
Senior Notes:
4.375% Senior Notes, due 2023	4.5	%	$	250	250		250		250		248
4.15% Senior Notes, due 2024	4.6	%	$	725	724		716		723		714
3.20% Senior Notes, due 2025	3.4	%	$	500	498		475		498		471
3.45% Senior Notes, due 2026	3.5	%	$	750	749		702		749		699
1.25% Senior Notes (EUR), due 2027	1.5	%	€	500	540		474		529		455
4.70% Senior Notes, due 2028	5.0	%	$	1,250	1,244		1,212		1,244		1,201
Other Borrowings					13		16		9		13
Total					4,390		4,217		4,002		3,801
Less: current portion					(989)		(980)		(251)		(249)
Long-term portion					$	3,401	$	3,237	$	3,751	$	3,552

1. See Note 13 for information on the fair value measurement of the Company's long-term debt.

Variances between Face Value and Book Value are the result of unamortized discounts and debt issuance fees as well as foreign exchange on the Euro Notes. Amortization of discounts and debt issuance fees are included in the calculation of Effective Interest Rate.

For those debt securities that have a premium or discount at the time of issuance, the Company amortizes the amount through interest expense based on the maturity date or the first date the holders may require the Company to repurchase the debt securities, if applicable. A premium would result in a decrease in interest expense, and a discount would result in an increase in interest expense in future periods. Additionally, the Company has debt issuance costs related to certain financing transactions which are also amortized through interest expense. As of June 30, 2023 and December 31, 2022, the Company had total combined unamortized discount and debt issuance costs of $18 million and $21 million, respectively.

Credit Agreement

On June 8, 2018, the Company entered into a credit agreement (“Original Credit Agreement”) consisting of (i) term loans denominated in euros and U.S. dollars ("Term Loans") and (ii) a multi-currency revolving loan facility, providing for an equivalent in U.S. dollars of up to $1.2 billion. On August 15, 2022, the Company entered into a new unsecured credit agreement ("Restated Credit Agreement"), which amended, restated and replaced the Original Credit Agreement. The Restated Credit Agreement is with a syndicate of lenders and provides for borrowings consisting of (i) a multi-currency revolving credit facility, providing for an equivalent in U.S. dollars of up to $1.5 billion (the “Revolving Credit Facility”) and (ii) a new $250 million delayed draw term loan facility (the “Delayed Draw Term Loan”), all pursuant to the terms and conditions of the Restated Credit Agreement (which are substantially similar with the terms of the Original Credit Agreement). The Restated Credit Agreement allows the Company to request, at prevailing market rates, an aggregate amount not to exceed $750 million, (a) increases to the borrowing commitments under the Revolving Credit Facility and/or (b) new incremental term loan commitments. The agreement contains affirmative, negative and financial covenants, and events of default customary for facilities of this type.

The Revolving Credit Facility matures on August 15, 2027. The Delayed Draw Term Loan is available for borrowings until February 15, 2024 and any borrowings under the Delayed Draw Term Loan will mature on August 15, 2027. Amounts borrowed and repaid under the Delayed Draw Term Loan may not be reborrowed. The applicable interest rate for borrowings under the Restated Credit Agreement includes a base rate (per the Interest Election terms of the agreement) plus an interest rate spread up to 1.75% based on the lower of the pricing corresponding to (i) the Company’s financial leverage or (ii) the Company’s public rating. Obligations under the Restated Credit Agreement have been guaranteed by certain of the Company’s subsidiaries.

Under the Restated Credit Agreement, the Company has agreed to maintain an Interest Coverage Ratio of at least 3.0 to 1.0, and a Leverage Ratio not to exceed 3.5 to 1.0. The Interest Coverage Ratio is defined as EBITDA (earnings before interest, taxes, depreciation, and amortization) to Interest Expense for the four quarters then ended. The Leverage Ratio is defined as Net Debt as of the last day of such fiscal quarter to EBITDA for the four quarters then ended. Additionally, the Company may

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submit a request for an increased maximum Leverage Ratio in contemplation of a Material Acquisition. All terms are as defined in the Restated Credit Agreement.

The Company was in compliance with all financial covenants in the Restated Credit Agreement as of June 30, 2023.

The following table presents availability under the Restated Credit Agreement at June 30, 2023:

In millions
Maximum Revolving Credit Facility Availability	$	1,500
Delayed Draw Term Loan	250
Outstanding Borrowings	(372)
Letters of Credit Under Credit Agreement	(1)
Current Availability	$	1,377

Senior Notes

The Company or its subsidiaries may issue senior notes from time to time. These notes are comprised of our 4.375% Senior Notes due 2023 (the "2023 Notes"), 4.15% Senior Notes due 2024 (the "2024 Notes"), 3.20% Senior Notes due 2025 (the "2025 Notes"), 3.45% Senior Notes due 2026 (the "2026 Notes"), 1.25% Senior Notes (EUR) due 2027 (the "Euro Notes"), and 4.70% Senior Notes due 2028 (the "2028 Notes"). The 2023 Notes, 2024 Notes, 2025 Notes, 2026 Notes and 2028 Notes are the “US Notes”, and collectively with the Euro Notes, the “Senior Notes.” Interest on the US Notes is payable semi-annually and interest on the Euro Notes is paid annually. Each series of the Senior Notes may be redeemed at any time in whole or from time to time in part in accordance with the provisions of the indenture, under which such series of notes was issued. Each of the Senior Notes may be redeemed at a redemption price of 100% of the principal amount plus a specified make-whole premium and accrued interest. The US Notes and the Company's guarantee of the Euro Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt, and are senior to all existing and future subordinated indebtedness of the Company.

Beginning September 15, 2023, the effective interest rates for the 2024 Notes and the 2028 Notes will each be reduced by 0.25% due to a favorable change in Wabtec's corporate bond rating.

During the second quarter of 2022, the Company redeemed $25 million of principal from the 2024 Notes plus a premium and the related accrued interest.

The indentures under which the Senior Notes were issued contain covenants and restrictions which limit, subject to certain exceptions, certain sale and leaseback transactions with respect to principal properties, the incurrence of secured debt without equally and ratably securing the Senior Notes, and certain merger and consolidation transactions. The covenants do not require the Company to maintain any financial ratios or specified levels of net worth or liquidity. The US Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis by each of the Company's subsidiaries that is a guarantor under the Restated Credit Agreement. The Euro Notes were issued by Wabtec Transportation Netherlands B.V. and are fully and unconditionally guaranteed by the Company.

The Company is in compliance with the restrictions and covenants in the indentures under which the Senior Notes were issued and expects that these restrictions and covenants will not be any type of limiting factor in executing our operating activities.

9. STOCK-BASED COMPENSATION

The Company maintains employee stock-based compensation plans for stock options, restricted stock, and incentive stock units as governed by the 2011 Stock Incentive Compensation Plan, as amended and restated (the “2011 Plan”) and the 2000 Stock Incentive Plan, as amended (the “2000 Plan”). The 2011 Plan has a term through May 10, 2027, and as of June 30, 2023, the number of shares available for future grants under the 2011 Plan was approximately 4.9 million shares. The Company also maintains a 1995 Non-Employee Directors’ Fee and Stock Option Plan as amended and restated (“the Directors Plan”).

Stock-based compensation expense was $14 million and $26 million for the three and six months ended June 30, 2023, respectively, and $12 million and $23 million for the three and six months ended June 30, 2022, respectively. At June 30, 2023, unamortized compensation expense related to stock options, non-vested restricted shares and incentive stock units expected to vest is approximately $80 million.

Stock Options Stock options are granted to eligible employees and directors at an exercise price equal to fair market value, which is the average of the high and low Wabtec stock price on the date of grant. Under the 2011 Plan and the 2000 Plan, options become exercisable over a three-year vesting period and expire 10 years from the date of grant. No stock options were granted during the six months ended June 30, 2023 or the twelve months ended December 31, 2022.

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The following table summarizes the Company’s stock option activity and related information for the 2011 Plan, the 2000 Plan and the Directors Plan for the six months ended June 30, 2023:

	Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic value (in millions)
Outstanding at December 31, 2022	399,938	$	77.32	5.9	$	11
Exercised	(32,498)	$	72.87
Canceled	(1,319)	$	78.94
Outstanding at June 30, 2023	366,121	$	77.71	5.5	$	12
Exercisable at June 30, 2023	330,639	$	77.50	5.5	$	11

Restricted Stock, Restricted Stock Units and Incentive Stock As provided for under the 2011 Plan and 2000 Plan, eligible employees are granted restricted stock that generally vests over three years from the date of grant. Under the Directors Plan, restricted stock awards vest one year from the date of grant. The restricted stock units are liability-classified equity awards as they can be settled in cash.

In addition, the Company has issued incentive stock units to eligible employees that vest upon attainment of certain cumulative three-year performance goals. Significant judgments and estimates are used in determining the estimated three-year performance, which is then used to estimate the total shares expected to vest over the three year vesting cycle and corresponding expense based on the grant date fair value of the award. When determining the estimated three-year performance, the Company utilizes a combination of historical actual results, budgeted results and forecasts. Upon the initial grant of a performance cycle, the Company estimates the three-year performance at 100%. Quarterly, the Company reviews and updates performance estimates based on actual performance results and current projections. Based on the Company’s performance for each three-year period then ended, the incentive stock units can vest and be awarded ranging from 0% to 200% of the initial incentive stock units granted. The incentive stock units included in the table below represent the number of incentive stock units that are expected to vest based on the Company’s estimate for meeting those established performance targets. As of June 30, 2023, the Company estimates that it will achieve 125%, 122% and 101% for the incentive stock awards expected to vest based on performance for the three-year periods ending December 31, 2023, 2024, and 2025, respectively, and has recorded incentive compensation expense accordingly. If the estimates of the number of these incentive stock units expected to vest changes in a future accounting period, cumulative compensation expense could increase or decrease and will be recognized in the current period for the elapsed portion of the vesting period and would change future expense for the remaining vesting period.

Compensation expense for the non-vested restricted stock and incentive stock units is based on the closing price of the Company's common stock on the date of grant and recognized over the applicable vesting period. Expense for incentive stock units is updated as necessary based on the Company's performance.

The following table summarizes the restricted stock activity and related information for the 2011 Plan, the 2000 Plan, and Directors Plan, and incentive stock units activity and related information for the 2011 Plan and the 2000 Plan with related information for the six months ended June 30, 2023:

	Restricted Stock and Units	Incentive Stock Units	Weighted Average Grant Date Fair Value
Outstanding at December 31, 2022	689,420	744,844	$	84.73
Granted	352,584	192,751	$	104.51
Vested	(228,203)	(265,678)	$	81.40
Adjustment for incentive stock awards expected to vest	—	(842)	$	85.98
Canceled	(12,198)	(1,938)	$	89.08
Outstanding at June 30, 2023	801,603	669,137	$	93.13

10. INCOME TAXES

The overall effective tax rate of 25.5% for the three and six months ended June 30, 2023 differs from the U.S. federal statutory rate of 21.0% primarily due to the impact of state and foreign taxes.

On August 16, 2022, the Inflation Reduction Act of 2022 was signed into law. This act includes a new book minimum tax on certain large corporations and an excise tax on corporate stock buybacks among other provisions. This act has not had, and is not expected to have, a material impact on our consolidated financial position, results of operations, or cash flows.

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11. EARNINGS PER SHARE

The computation of basic and diluted earnings per share for Net income attributable to Wabtec shareholders is as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
In millions, except per share data	2023		2022		2023		2022
Numerator
Net income attributable to Wabtec shareholders	$	191	$	166	$	360	$	315
Denominator
Weighted average shares outstanding - basic	178.9		181.9		179.4		183.2
Effect of dilutive securities:
Assumed conversion of dilutive stock-based compensation plans	0.5		0.5		0.6		0.5
Weighted average shares outstanding - diluted	179.4		182.4		180.0		183.7
Net income attributable to Wabtec shareholders per common share
Basic	$	1.06	$	0.91	$	2.00	$	1.71
Diluted	$	1.06	$	0.91	$	2.00	$	1.71

12. WARRANTIES

The following table reconciles the changes in the Company’s product warranty reserve for the six months ended June 30, 2023 and 2022:

In millions	2023		2022
Balance at beginning of year	$	242	$	259
Warranty expense	55		41
Warranty claim payments	(48)		(49)
Acquisitions	—		3
Foreign currency impact/other	1		(10)
Balance at June 30	$	250	$	244

13. FAIR VALUE MEASUREMENT AND DERIVATIVE INSTRUMENTS

ASC 820 “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value and explains the related disclosure requirements. ASC 820 indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability and defines fair value based upon an exit price model.

Valuation Hierarchy. ASC 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The Company’s cash, cash equivalents and restricted cash are highly liquid investments purchased with an original maturity of three months or less and are considered Level 1 on the fair value valuation hierarchy. The fair value of cash, cash equivalents and restricted cash approximated the carrying value at June 30, 2023 and December 31, 2022. The Senior Notes are considered Level 2 based on the fair value valuation hierarchy. Contingent consideration related to the GE Transportation acquisition is considered Level 3 based on the fair value valuation hierarchy. At June 30, 2023 and December 31, 2022, $105 million was classified as "Other accrued liabilities" on the Company's Condensed Consolidated Balance Sheets and $48 million and $47 million, respectively, was included within long-term liabilities classified as "Contingent consideration" on the Company's Condensed Consolidated Balance Sheets. The fair value approximates the carrying value at June 30, 2023 and December 31, 2022.

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Hedging Activities In the normal course of business, the Company is exposed to market risk related to interest rates, commodity prices and foreign currency exchange rate fluctuations, which may adversely affect our operating results and financial position. At times, we limit these risks through the use of derivatives such as cross-currency swaps, foreign currency forward contracts, interest rate swaps, commodity swaps and options. These hedging contracts are valued using broker quotations, or market transactions in either the listed or over-the-counter markets. As such, these derivative instruments are classified within level 2. In accordance with our policy, derivatives are only used for hedging purposes. We do not use derivatives for trading or speculative purposes.

Foreign Currency Exchange Risk

The Company uses forward contracts to hedge forecasted foreign currency denominated sales of finished goods and future settlement of foreign currency denominated assets and liabilities. Derivatives used to hedge firm commitments relevant to sales and purchases and forecasted transactions to be realized with high probability that meet the criteria for hedge accounting are designated as cash flow hedges. The effective portion of gains and losses is deferred as a component of Accumulated other comprehensive loss and is recognized in earnings at the time the hedged item affects earnings, in the same line item as the underlying hedged item. For the three and six months ended June 30, 2023 and 2022, the amounts reclassified into income were not material.

The Company has also established balance sheet risk management and net investment hedging programs to protect its balance sheet against foreign currency exchange rate volatility. We conduct our business worldwide in U.S. dollars and the functional currencies of our foreign subsidiaries, including euro, Indian rupee, British pound sterling, Australian dollars and several other foreign currencies. Changes in these foreign currency exchange rates could have a material adverse impact on our financial results that are reported in U.S. dollars. We are also exposed to foreign currency exchange rate risk related to our foreign subsidiaries, including intercompany loans denominated in non-functional currencies. We hedge these exposures using foreign currency swap contracts and cross-currency swaps to offset the potential income statement effects on intercompany loans denominated in non-functional currencies. These programs reduce but do not eliminate foreign currency exchange rate risk entirely.

The Company enters into certain derivative contracts in accordance with its risk management strategy that do not meet the criteria for hedge accounting, but which have the impact of largely mitigating foreign currency exposure. These foreign exchange contracts are accounted for on a full mark to market basis through earnings, with gains and losses recorded as a component of Other income, net. The net gain related to these contracts was $1 million and $2 million for the three and six months ended June 30, 2023, and the net loss related to these contracts was $7 million and $8 million for the three and six months ended June 30, 2022, respectively. These contracts typically mature within one year.

The following table summarizes the assets, liabilities, gross notional amounts, fair values, and fair value hierarchy classification of the designated and non-designated hedges discussed in the above sections as of June 30, 2023, which are included in other current assets and liabilities on the Condensed Consolidated Balance Sheets:

		Fair Value				Gross Notional Amount
In millions	Level	Designated		Non-Designated		Designated		Non-Designated
Foreign Exchange Contracts
Other current assets	2	$	8	$	1	$	481	$	61
Other current liabilities	2	(13)		(2)		559		230
Interest Rate Contracts
Other current assets	2	7		—		250		—
Total		$	2	$	(1)	$	1,290	$	291

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The following table summarizes the assets, liabilities, gross notional amounts, fair values, and fair value hierarchy classification of the designated and non-designated hedges discussed in the above sections as of December 31, 2022, which are included in other current assets and liabilities on the Condensed Consolidated Balance Sheets:

		Fair Value				Gross Notional Amount
In millions	Level	Designated		Non-Designated		Designated		Non-Designated
Foreign Exchange Contracts
Other current assets	2	$	8	$	3	$	278	$	156
Other current liabilities	2	(11)		(3)		769		152
Total		$	(3)	$	—	$	1,047	$	308

Interest Rate Risk

The Company may use interest rate hedge contracts on certain investing and borrowing transactions to manage its net exposure to interest rate changes and to manage its overall cost of borrowing. Accordingly, the Company has entered into interest rate hedges to manage interest rate risk for a portion of future expected debt transactions. The Company does not use leveraged swaps and, in general, does not leverage any of its investment activities that would put principal capital at risk. For the six months ended June 30, 2023 and 2022 the amounts reclassified into income were not material.

Commodity Price Risk

The Company may use commodity forward swaps to manage its exposure to commodity price changes and to reduce its overall cost of manufacturing. For the six months ended June 30, 2023 and 2022 the amounts recognized as income or expense were not material.

14. COMMITMENTS AND CONTINGENCIES

The Company is subject to a variety of environmental laws and regulations governing discharges to air and water, the handling, storage and disposal of hazardous or solid waste materials and the remediation of contamination associated with releases of hazardous substances. The Company believes its operations currently comply in all material respects with all of the various environmental laws and regulations applicable to our business; however, there can be no assurance that environmental requirements will not change in the future or that we will not incur significant costs to comply with such requirements.

Claims have been filed against the Company and certain of its affiliates in various jurisdictions across the United States by persons alleging bodily injury as a result of exposure to asbestos-containing products. The vast majority of the claims are submitted to insurance carriers for defense and indemnity, or to non-affiliated companies that retain the liabilities for the asbestos-containing products at issue. We cannot, however, assure that all of these claims will be fully covered by insurance, or that the indemnitors or insurers will remain financially viable. Our ultimate legal and financial liability with respect to these claims, as is the case with other pending litigation, cannot be estimated. A limited number of claims are not covered by insurance, nor are they subject to indemnity from non-affiliated parties. Management believes that the costs of the Company’s asbestos-related cases will not be material to the Company’s overall financial position, results of operations and cash flows.

Xorail, Inc., a wholly owned subsidiary of the Company (“Xorail”), has received notices from Denver Transit Constructors (“DTC”) alleging breach of contract related to the operating of constant warning wireless crossings, and late delivery of the Train Management & Dispatch System (“TMDS”) for the Denver Eagle P3 Project, which is owned by the Denver Regional Transit District ("RTD"). No damages have been asserted for the alleged late delivery of the TMDS, and no formal claim has been filed; Xorail has successfully completed a remediation plan concerning the TMDS issues. With regard to the wireless crossing issue, as of September 8, 2017, DTC alleged that total damages were $37 million through July 31, 2017 and were continuing to accumulate. The majority of the damages stems from a delay in approval of the wireless crossing system by the Federal Railway Administration ("FRA") and the Public Utility Commission ("PUC"), resulting in the use of flaggers at all of the crossings pending approval of the wireless crossing system and certification of the crossings. DTC has alleged that the delay is due to Xorail's failure to achieve constant warning times for the crossings in accordance with the approval requirements imposed by the FRA and PUC. Xorail has denied DTC's assertions, stating that its system satisfied the contractual requirements. Xorail has worked with DTC to modify its system and implement the FRA's and PUC's previously undefined approval requirements; the FRA and PUC have both approved modified wireless crossing system, and as of August 2018, DTC completed the process of certifying the crossings and eliminated the use of flaggers. DTC has not updated its claim notices or alleged damages against Xorail, nor have they filed any formal claim against Xorail. On September 21, 2018, DTC filed a complaint against RTD in Colorado state court for breach of contract related to non-payments and the costs for the flaggers, asserting a change-in-law arising from the FRA/PUC’s new certification requirements. DTC's claim against RTD proceeded to trial on September 21, 2020. On February 10, 2023, the court issued a decision in favor of RTD, denying DTC's damages claim. DTC has filed a Notice of Appeal.

20

From time to time the Company is involved in litigation relating to claims arising out of its operations in the ordinary course of business. As of the date hereof, the Company is involved in no litigation that the Company believes will have a material adverse effect on its financial condition, results of operations or liquidity.

15. SEGMENT INFORMATION

The Company has two reportable segments—the Freight Segment and the Transit Segment. The key factors used to identify these reportable segments are the organization and alignment of the Company’s internal operations, the nature of the products and services and customer type. The Company's business segments are:

Freight Segment builds, rebuilds, upgrades, and overhauls locomotives, services locomotives and freight cars, and provides a range of component and digital solutions for customers in the freight and transit rail, mining, and marine industries. It also manufactures and services components for new and existing freight cars and locomotives, supplies railway electronics, positive train control equipment, signal design and engineering services, maintenance of way, and provides heat exchange and cooling systems for locomotives and power generation equipment. Customers include large, publicly traded railroads, leasing companies, manufacturers of original equipment such as locomotives and freight cars, and utilities, and also serves companies in the mining, marine, and industrial markets. We refer to sales of both goods, such as spare parts and equipment upgrades, and related services, such as monitoring, maintenance and repairs, as sales in our Services product line.

Transit Segment primarily manufactures and services components for new and existing passenger transit vehicles, typically regional trains, high speed trains, subway cars, light-rail vehicles, and buses. It also refurbishes subway cars and provides heating, ventilation, and air conditioning equipment and doors for buses and subway cars. Customers include public transit authorities and municipalities, leasing companies and manufacturers of subway cars and buses around the world.

The Company evaluates its business segments’ operating results based on income from operations. Intersegment sales are accounted for at prices that are generally established by reference to similar transactions with unaffiliated customers. Corporate activities include general corporate expenses, elimination of intersegment transactions, interest income and expense, and other unallocated charges.

Segment financial information for the three months ended June 30, 2023 is as follows:

In millions	Freight Segment		Transit Segment		Corporate Activities and Elimination		Total
Sales to external customers	$	1,708	$	699	$	—	$	2,407
Intersegment sales/(elimination)	16		11		(27)		—
Total sales	$	1,724	$	710	$	(27)	$	2,407
Income (loss) from operations	$	271	$	66	$	(25)	$	312
Interest expense and other, net	—		—		(53)		(53)
Income (loss) before income taxes	$	271	$	66	$	(78)	$	259

Segment financial information for the three months ended June 30, 2022 is as follows:

In millions	Freight Segment		Transit Segment		Corporate Activities and Elimination		Total
Sales to external customers	$	1,490	$	558	$	—	$	2,048
Intersegment sales/(elimination)	12		9		(21)		—
Total sales	$	1,502	$	567	$	(21)	$	2,048