filings.toolsItem 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) is intended to help you understand the business operations and financial condition of the Company for the period ended December 31, 2019. This discussion should be read in conjunction with Item 8. Financial Statements and Supplementary Data. Our MD&A is presented in seven sections:
| • | Executive Overview |
| • | Consolidated Results of Operations |
| • | Results of Operations by Segment |
| • | Liquidity and Capital Resources |
| • | Off-Balance Sheet Arrangements and Other Matters |
| • | Significant Accounting Policies and Critical Accounting Estimates |
| • | Recently Issued Accounting Pronouncements |
Within the MD&A, “Aptiv,” the “Company,” “we,” “us” and “our” refer to Aptiv PLC, a public limited company formed under the laws of Jersey on May 19, 2011 as Delphi Automotive PLC, which, through its subsidiaries, acquired certain assets of the former Delphi Corporation (now known as DPH Holdings Corp. (“DPHH”)) and completed an initial public offering on November 22, 2011. On December 4, 2017 (the “Distribution Date”), the Company completed the separation (the “Separation”) of its former Powertrain Systems segment by distributing to Aptiv shareholders on a pro rata basis all of the issued and outstanding ordinary shares of Delphi Technologies PLC (“Delphi Technologies”), a public limited company formed to hold the spun-off business. To effect the Separation, the Company distributed to its shareholders one ordinary share of Delphi Technologies for every three Aptiv ordinary shares outstanding as of November 22, 2017, the record date for the distribution. Following the Separation, the remaining company changed its name to Aptiv PLC and New York Stock Exchange (“NYSE”) symbol to “APTV.” Aptiv did not retain any equity interest in Delphi Technologies. Delphi Technologies’ historical financial results through the Distribution Date are reflected in the Company’s consolidated financial statements as a discontinued operation, as more fully described in Note 25. Discontinued Operations and Held For Sale to the audited consolidated financial statements included herein. The completion of the Separation positioned Aptiv as a new mobility provider focused on solving the complex challenges associated with safer, greener and more connected transportation. At the core of our capabilities is the software and vehicle architecture expertise that enables the advanced safety, automated driving, user experience, and connected services that are enabling the future of mobility.
As the disposal of the Powertrain Systems business represented a strategic shift that will have a major effect on the Company’s operations and financial results, the assets and liabilities, operating results, and operating and investing cash flows for the previously reported Powertrain Systems segment are presented as discontinued operations separate from the Company’s continuing operations for all periods presented. This Management’s Discussion and Analysis reflects the results of continuing operations, unless otherwise noted.
Executive Overview
Our Business
We are a leading global technology and mobility company primarily serving the automotive sector. We design and manufacture vehicle components and provide electrical, electronic and active safety technology solutions to the global automotive market, creating the software and hardware foundation for vehicle features and functionality. We enable and deliver end-to-end smart mobility solutions, active safety and autonomous driving technologies and provide enhanced user experience and connected services. Our Advanced Safety and User Experience segment is focused on providing the necessary software and advanced computing platforms, and our Signal and Power Solutions segment is focused on providing the requisite networking architecture required to support the integrated systems in today’s complex vehicles. Together, our businesses develop the ‘brain’ and the ‘nervous system’ of increasingly complex vehicles, providing integration of the vehicle into its operating environment.
We are one of the largest vehicle component manufacturers, and our customers include 23 of the 25 largest automotive original equipment manufacturers (“OEMs”) in the world.
Business Strategy
We believe the Company is well-positioned for growth from increasing global vehicle production volumes, increased demand for our Safe, Green and Connected products which are being added to vehicle content, and new business wins with existing and new customers. We are focused on accelerating the commercialization of active safety, autonomous driving, enhanced user experiences and connected services, providing the software, advanced computing platforms and networking architecture required to do so. We have successfully created a competitive cost structure while investing in research and
development to grow our product offerings, which are aligned with the high-growth industry mega-trends, and re-aligned our manufacturing footprint into an efficient, low-cost regional service model, focused on increasing our profit margins.
Our achievements in 2019 include the following:
| • | Furthering our leadership position in automated driving through the agreement with Hyundai to form a new joint venture focused on the design, development and commercialization of autonomous driving technologies; |
| • | Expanding our platforms for growth in key industrial markets and executing on our end-market diversification strategy through the acquisitions of gabo Systemtechnik GmbH and Falmat Inc.; |
| • | Leveraging our investment grade credit metrics to further refine our capital structure and increase our financial flexibility by successfully issuing $300 million of 10-year, 4.35% senior unsecured notes and $350 million of 30-year, 5.40% senior unsecured notes, utilizing the combined proceeds to redeem our $650 million, 3.15% senior notes; |
| • | Continuing to grow our revenues, excluding the impacts of foreign currency exchange and commodity costs, despite global automotive vehicle production declines of 6% during the year; |
| • | Returning $646 million to shareholders through share repurchases and dividends; |
| • | Generating gross business bookings of over $22 billion, based upon expected volumes and pricing; |
| • | Generating $1.6 billion of cash from operations and net income of $1.0 billion; and |
| • | Maximizing our operational flexibility and profitability at all points in the normal automotive business cycle, by having approximately 96% of our hourly workforce based in best cost countries and approximately 15% of our hourly workforce composed of temporary employees. |
Our strategy is to build on these accomplishments and continue to develop and manufacture innovative market-relevant products for a diverse base of customers around the globe and leverage our lean and flexible cost structure to achieve strong and disciplined earnings growth and returns on invested capital. Through our culture of innovation and world class engineering capabilities we intend to employ our rigorous, forward-looking product development process to deliver new technologies that provide solutions to our customers. We are committed to creating value for our shareholders. We repurchased $420 million of ordinary shares in 2019, and in January 2019 announced a new share repurchase program of up to $2.0 billion of ordinary shares. We also continued to return cash to our shareholders, paying cash dividends totaling $226 million in 2019. Our key strategic priorities include:
Commercializing the high-tech evolution of the automotive industry. The automotive industry is increasingly evolving towards the implementation of software-dependent components and solutions. In particular, the industry is focused on the development of advanced driver assistance technologies, with the goal of developing and introducing a commercially-viable, fully automated driving experience. We expect automated driving technologies will provide strong societal benefit as well as the opportunity for long-term growth for our product offerings in this space. We are focused on enabling and delivering end-to-end smart mobility solutions, accelerating the commercialization of active safety and autonomous driving technologies and providing enhanced user experience and connected services. Our Advanced Safety and User Experience segment is focused on providing the necessary software and advanced computing platforms, and our Signal and Power Solutions segment is focused on providing the requisite networking architecture required to support the integrated systems in today’s complex vehicles. Together, our businesses develop the ‘brain’ and the ‘nervous system’ of increasingly complex vehicles, providing integration of the vehicle into its operating environment.
We are continuing to invest in the automated driving space, and have continued to develop market-leading automated driving platform solutions such as automated driving software, key active safety sensing technologies and our Multi-Domain Controller, which fuses information from sensing systems as well as mapping and navigation data to make driving decisions. We believe we are well-aligned with industry technology trends that will result in sustainable future growth in this space, and have partnered with leaders in their respective fields to advance the pace of development and commercialization of these emerging technologies. Additionally, in 2017 we acquired nuTonomy, Inc. (“nuTonomy”) in order to further accelerate the commercialization of automated driving solutions. The acquisition of nuTonomy is the latest in a series of investments we have made to expand our position in the new mobility space, including the 2015 acquisition of automated driving software developer Ottomatika.
There has also been increasing societal demand for mobility on demand (“MoD”) services, such as car and ride-sharing, and an increasing number of traditional automotive companies have made investments in the MoD space. We believe the increasing societal demand for MoD services will accelerate the development of autonomous driving technologies, strongly benefiting the MoD space. In 2018, we announced a partnership with Lyft, Inc. (“Lyft”) by launching a fleet of autonomous vehicles in Las Vegas which operate on Aptiv’s fully-integrated autonomous driving platform and are available to the public on the Lyft network. This partnership leverages our connected services capabilities and Lyft’s ride-hailing experience to provide valuable insights on self-driving fleet operations and management. In addition, we have entered into agreements with the
Singapore Land Transport Authority and with the city of Boston to develop fully-autonomous vehicles and associated infrastructure as part of automated MoD pilots.
In an effort to further our leadership position in the automated driving space, in September 2019 we entered into a definitive agreement with Hyundai to form a new joint venture focused on the design, development and commercialization of autonomous driving technologies. We expect this partnership to advance the development of production-ready autonomous driving systems for commercialization by bringing together our innovative vehicle technologies in the new mobility space with one of the world’s largest vehicle manufacturers. The joint venture anticipates it will begin testing fully driverless systems in 2020 and have a production-ready autonomous driving platform available for robotaxi providers, fleet operators and automotive manufacturers in 2022. As a result of our substantial investments and strategic partnerships, we believe we are well-aligned with industry technology trends that will result in sustainable future growth in these evolving areas. The transaction is subject to the satisfaction of customary closing conditions and the receipt of regulatory and other approvals, and is expected to close in the first quarter of 2020.
However, there are many risks associated with these evolving areas, including the high development costs of active safety and autonomous driving technologies, the uncertain timing of customer and consumer adoption of these technologies, increased competition from entrants outside the traditional automotive industry and new and emerging regulations, such as the recently released federal guidance for automated driving systems published by the U.S. Department of Transportation. While we believe we are well-positioned in these markets, the high development cost of active safety and autonomous driving technologies may result in a higher risk of exposure to the success of new or disruptive technologies different than those being developed by us or our partners.
Leveraging our engineering and technological capabilities. We seek to leverage our strong product portfolio tied to the industry’s key mega-trends with our global footprint to increase our revenues, as well as committing to substantial annual investment in research and development to maintain and enhance our leadership in new mobility solutions across each of our product lines.
Targeting the right business with the right customers. We intend to be strategic in our pursuit of new business and customers in order to achieve disciplined, above-market growth. We conduct in-depth analysis of market share and product trends by region in order to prioritize research, development and engineering spend for the customers that we believe will be successful. Collaboration with customers in our 15 major technical centers around the world helps us develop innovative product solutions designed to meet their needs. As more OEMs design vehicles for global platforms, where the same vehicle architecture is shared among different regions, we are well suited to provide global design and engineering support while manufacturing these products for a specific regional market.
Capitalizing on our scale, global footprint and established position in emerging markets. We intend to generate sustained growth by capitalizing on the breadth and scale of our operating capabilities. Our global footprint provides us important proximity to our customers’ manufacturing facilities and allows us to serve them in every region in which they operate. We anticipate that we will continue to build upon our extensive geographic reach to capitalize on growing automotive markets, particularly in China. In addition, our presence in best cost countries positions us to realize incremental margin improvements as the global balance of automotive production shifts towards emerging markets.
Leveraging our lean and flexible cost structure to deliver profitability and cash flow. We recognize the importance of maintaining a lean and flexible cost structure in order to deliver stable earnings and cash flow in a cyclical industry. Our focus is on maximizing and optimizing manufacturing output to meet increasing production requirements with minimal additions to our fixed-cost base. Additionally, we are continuing to use a meaningful amount of temporary workers to ensure we have the appropriate operational flexibility to scale our operations so that we can maintain our profitability as industry production levels increase or contract.
Advancing and maintaining an efficient capital structure. We actively manage our capital structure in order to maintain an investment grade credit rating and healthy capital ratios to support our business and maximize shareholder value. We will continue to make adjustments to our capital structure in light of changes in economic conditions or as opportunities arise to provide us with additional financial flexibility to invest in our business and execute our strategic objectives going forward.
Pursuing selected acquisitions and strategic investments. During 2019, we continued to complete selected acquisitions and strategic investments in order to continue to enhance our product offerings and competitive position in growing market segments. We intend to continue to pursue selected transactions that leverage our technology capabilities and enhance and expand our commercialization of new mobility solutions, product offerings, customer base, geographic penetration and scale to complement our current businesses.
Trends, Uncertainties and Opportunities
Economic conditions. Our business is directly related to automotive sales and automotive vehicle production by our customers. Automotive sales depend on a number of factors, including global and regional economic conditions. Global
automotive vehicle production decreased 6% from 2018 to 2019, representing automotive vehicle production declines across all major regions during the year. Compared to 2018, vehicle production in 2019 decreased by 9% in China, 4% in North America, 4% in Europe and 4% in South America, our smallest region. Refer to Note 23. Segment Reporting of the notes to the consolidated financial statements, included in Item 8. Financial Statements and Supplementary Data of this Annual Report for financial information concerning principal geographic areas.
Economic volatility or weakness in North America, Europe, China or South America, could result in a significant reduction in automotive sales and production by our customers, which would have an adverse effect on our business, results of operations and financial condition. There is also potential that geopolitical factors could adversely impact the U.S. and other economies, and specifically the automotive sector. In particular, changes to international trade agreements, such as the United States-Mexico-Canada Agreement and its predecessor agreement, the North American Free Trade Agreement, or other political pressures could affect the operations of our OEM customers, resulting in reduced automotive production in certain regions or shifts in the mix of production to higher cost regions. Increases in interest rates could also negatively impact automotive production as a result of increased consumer borrowing costs or reduced credit availability. Additionally, economic weakness may result in shifts in the mix of future automotive sales (from vehicles with more content such as luxury vehicles, trucks and sport utility vehicles toward smaller passenger cars). While our diversified customer and geographic revenue base, along with our flexible cost structure, have well positioned us to withstand the impact of industry downturns and benefit from industry upturns, shifts in the mix of global automotive production to higher cost regions or to vehicles with less content could adversely impact our profitability.
There have also been periods of increased market volatility and currency exchange rate fluctuations, both globally and most specifically within the United Kingdom (“U.K.”) and Europe, as a result of the U.K.’s exit from the European Union (“E.U.”), commonly referred to as “Brexit,” the terms of which remain undetermined. The withdrawal has created significant uncertainty about the future relationship between the U.K. and the E.U. These developments, or the perception that any of them could occur, may adversely affect European and worldwide economic and market conditions, including vehicle production, significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets and could contribute to instability in global financial and foreign exchange markets, including increased volatility in interest rates and foreign exchange rates. Although we do not have a material physical presence in the U.K., with less than 1% of our workforce located in the U.K. and approximately 2% of our annual net sales generated in the U.K., the potential impacts of Brexit could adversely impact other global economies, and in particular, the European economy, a region which accounted for approximately 33% of our total net sales for the year ended December 31, 2019. We continue to actively monitor the ongoing potential impacts of Brexit and will seek to minimize its impact on our business through review of our existing contractual arrangements and obligations, particularly in the European region.
Key growth markets. There have been periods of increased market volatility and moderations in the level of economic growth in China, which resulted in periods of lower automotive production growth rates in China than those previously experienced, as evidenced by the reduction in volumes in the region during the year ended December 31, 2019. Despite the 2019 vehicle production declines and the recent moderations in the level of economic growth in China, rising income levels in China and other key growth markets are expected to result in stronger growth rates in these markets over the long-term. Our strong global presence, and presence in these markets, has positioned us to experience above-market growth rates over the long-term. We continue to expand our established presence in key growth markets, positioning us to benefit from the expected long-term growth opportunities in these regions. We are capitalizing on our long-standing relationships with the global OEMs and further enhancing our positions with the key growth market OEMs to continue expanding our worldwide leadership. We continue to build upon our extensive geographic reach to capitalize on fast-growing automotive markets. We believe that our presence in best cost countries positions us to realize incremental margin improvements as the global balance of automotive production shifts towards the key growth markets.
We have a strong local presence in China, including a major manufacturing base and well-established customer relationships. Each of our business segments have operations and sales in China. Our business in China remains sensitive to economic and market conditions that impact automotive sales volumes in China, and may be affected if the pace of growth slows as the Chinese market matures or if there are reductions in vehicle demand in China. However, we continue to believe there is long-term growth potential in this market based on increasing long-term automotive and vehicle content demand.
Market driven products. Our product offerings satisfy the OEMs’ needs to meet increasingly stringent government regulations and meet consumer preferences for products that address the mega-trends of Safe, Green and Connected, leading to increased content per vehicle, greater profitability and higher margins. With these offerings, we believe we are well-positioned to benefit from the growing demand for vehicle content and technology related to safety, electrification, high speed data, connectivity to the global information network and automated driving technologies. We are benefiting from the substantial increase in vehicle content, software and electrification that requires a complex and reliable electrical architecture and systems to operate, such as automated advanced driver assistance technologies, electrical vehicle monitoring, active safety systems, lane departure warning systems, integrated vehicle cockpit displays, navigation systems and technologies that enable connected
infotainment in vehicles. Our ability to design a reliable electrical architecture that optimizes power distribution and/or consumption is key to satisfying the OEMs’ needs to reduce emissions while continuing to meet consumer demand for increased vehicle content and technology.
Global capabilities. Many OEMs are continuing to adopt global vehicle platforms to increase standardization, reduce per unit cost and increase capital efficiency and profitability. As a result, OEMs are selecting suppliers that have the capability to manufacture products on a worldwide basis, as well as the flexibility to adapt to regional variations. Suppliers with global scale and strong design, engineering and manufacturing capabilities, are best positioned to benefit from this trend. Our global footprint enables us to serve the global OEMs on a worldwide basis as we gain market share with the emerging market OEMs. This regional model principally services the North American market out of Mexico, the South American market out of Brazil, the European market out of Eastern Europe and North Africa and the Asia Pacific market out of China, and we have continued to rotate our manufacturing footprint to best cost locations within these regions.
Our global operations are subject to certain risks inherent in doing business abroad, including unexpected changes in laws, regulations, trade or monetary or tax fiscal policy, including tariffs, quotas, customs and other import or export restrictions and other trade barriers. For instance, recent government changes in Mexico have yielded requirements that call for increases in minimum wages at the border as well as the interior of Mexico. These or any further political or governmental developments in Mexico or other countries in which we operate could result in social, economic and labor instability. In addition, existing free trade laws and regulations, such as the United States-Mexico-Canada Agreement and its predecessor agreement, the North American Free Trade Agreement, provide certain beneficial duties and tariffs for qualifying imports and exports, subject to compliance with the applicable classification and other requirements. Changes in laws or policies governing the terms of foreign trade, and in particular increased trade restrictions, tariffs or taxes on imports from countries where we manufacture products, such as China and Mexico, could have a material adverse affect on our business and financial results. For instance, beginning in 2018, the U.S. and Chinese governments have imposed a series of significant incremental retaliatory tariffs to certain imported products. Most notably with respect to the automotive industry, the U.S. imposed tariffs on imports of certain steel, aluminum and automotive components, and China imposed retaliatory tariffs on imports of U.S. vehicles and certain automotive components. While these tariffs could have potentially adverse economic impacts, particularly with respect to the automotive industry and vehicle production levels, we do not anticipate a significant impact to our operations, as we have developed and implemented strategies to mitigate adverse tariff impacts, such as production localization and relocation, contract review and renegotiation and working with the appropriate governmental agencies. Further, our global footprint and regional model serves to minimize our exposure to cross-border transactions. However, despite recent trade negotiations between the U.S. and Chinese governments, the scope and duration of the imposed tariffs remain uncertain.
Product development. The automotive technology and components industry is highly competitive, both domestically and internationally, and is characterized by rapidly changing technology, evolving industry standards and changes in customer needs. Our ability to anticipate changes in technology and regulatory standards and to successfully develop and introduce new and enhanced products on a timely and cost competitive basis will be a significant factor in our ability to remain competitive. To compete effectively in the automotive technology and components industry, we must be able to develop and launch new products to meet our customers’ demands in a timely manner. Our innovative technologies and robust global engineering and development capabilities have well positioned us to meet the increasingly stringent vehicle manufacturer demands and consumer preferences for high-technology content in automobiles.
OEMs are increasingly looking to their suppliers to simplify vehicle design and assembly processes to reduce costs and weight. As a result, suppliers that sell vehicle components directly to manufacturers (Tier I suppliers) have assumed many of the design, engineering, research and development and assembly functions traditionally performed by vehicle manufacturers. Suppliers that can provide fully-engineered solutions, systems and pre-assembled combinations of component parts are positioned to leverage the trend toward system sourcing.
Engineering, design and development. Our history and culture of innovation have enabled us to develop significant intellectual property and design and development expertise to provide advanced technology solutions that meet the demands of our customers. We have a team of approximately 20,200 scientists, engineers and technicians focused on developing leading product solutions for our key markets, located at 15 major technical centers in China, Germany, India, Mexico, Poland, Singapore and the United States. Our total investment in research and development, including engineering, was approximately $1.5 billion, $1.4 billion and $1.1 billion for the years ended December 31, 2019, 2018 and 2017, respectively, which includes approximately $381 million, $288 million and $204 million of co-investment by customers and government agencies. Each year we share some engineering expenses with OEMs and government agencies. While this amount varies from year-to-year, it is generally in the range of 15% to 20% of engineering expenses. We also encourage “open innovation” and collaborate extensively with peers in the industry, government agencies and academic institutions. Our technology competencies are recognized by both customers and government agencies, who co-invested approximately $381 million in 2019 to support new product development, accelerating the pace of innovation and reducing the risk associated with successful commercialization of technological breakthroughs.
In the past, suppliers often incurred the initial cost of engineering, designing and developing automotive component parts, and recovered their investments over time by including a cost recovery component in the price of each part based on expected volumes. Recently, we and many other suppliers have negotiated for cost recovery payments independent of volumes. This trend reduces our economic risk.
We utilize a Technology Advisory Council, a panel of prominent global technology thought leaders, which guides our product strategies and investments in technology with a focus on developing advanced technologies to drive growth. We believe that our engineering and technical expertise, together with our emphasis on continuing research and development, allow us to use the latest technologies, materials and processes to solve problems for our customers and to bring new, innovative products to market. We believe that continued engineering activities are critical to maintaining our pipeline of technologically advanced products. Given our strong financial discipline, we seek to effectively manage fixed costs and efficiently rationalize capital spending by critically evaluating the profit potential of new and existing customer programs, including investment in innovation and technology. We maintain our engineering activities around our focused product portfolio and allocate our capital and resources to those products with distinctive technologies. We expect expenditures for research and development activities, including engineering, net of co-investment, to be approximately $1.0 billion for the year ended December 31, 2020, a decrease from 2019 primarily as a result of the anticipated formation of the autonomous driving joint venture with Hyundai, which is expected to close in the first quarter of 2020.
We maintain a large portfolio of approximately 7,600 patents and protective rights in the operation of our business as of December 31, 2019. While no individual patent or group of patents, taken alone, is considered material to our business, taken in the aggregate, these patents provide meaningful protection for our products and technical innovations. Similarly, while our trademarks are important to identify our position in the industry, we do not believe that any of these are individually material to our business. We are actively pursuing marketing opportunities to commercialize and license our technology to both automotive and non-automotive industries and we have selectively taken licenses from others to support our business interests. These activities foster optimization of intellectual property rights.
Pricing. Cost-cutting initiatives adopted by our customers result in increased downward pressure on pricing. Our customer supply agreements generally require step-downs in component pricing over the periods of production and OEMs have historically possessed significant leverage over their outside suppliers because the automotive component supply industry is fragmented and serves a limited number of automotive OEMs. Our profitability depends in part on our ability to generate sufficient production cost savings in the future to offset price reductions.
We are focused on maintaining a low fixed cost structure that provides us flexibility to remain profitable at all points of the traditional vehicle industry production cycle. As a result, approximately 96% of our hourly workforce is located in best cost countries. Furthermore, we have substantial operational flexibility by leveraging a large workforce of temporary workers, which represented approximately 15% of the hourly workforce as of December 31, 2019. However, we will continue to adjust our cost structure and optimize our manufacturing footprint in response to changes in the global and regional automotive markets and in order to increase investment in advanced technologies and engineering, as evidenced by our ongoing restructuring programs focused on the continued rotation of our manufacturing footprint to best cost locations in Europe and on reducing our global overhead costs. As we continue to operate in a cyclical industry that is impacted by movements in the global and regional economies, we continually evaluate opportunities to further refine our cost structure. Assuming constant product mix and pricing, based on our 2019 results, we estimate that our EBITDA breakeven level would be reached if we experienced a 45% downturn to current product volumes.
We have a strong balance sheet with gross debt of approximately $4.4 billion and substantial available liquidity of approximately $2.4 billion of cash and cash equivalents and available financing under our Revolving Credit Facility and committed European accounts receivable factoring facility (as defined below in Liquidity and Capital Resources) as of December 31, 2019, and no significant U.S. defined benefit or workforce postretirement health care benefits and employer-paid postretirement basic life insurance benefits (“OPEB”) liabilities. We intend to maintain strong financial discipline targeting industry-leading earnings growth, cash flow generation and return on invested capital and to maintain sufficient liquidity to sustain our financial flexibility throughout the industry cycle.
OEM product recalls. The number of vehicles recalled globally by OEMs has increased above historical levels. These recalls can either be initiated by the OEMs or influenced by regulatory agencies. Although there are differing rules and regulations across countries governing recalls for safety issues, the overall transition towards global vehicle platforms may also contribute to increased recalls outside of the U.S., as automotive components are increasingly standardized across regions. Given the sensitivity to safety issues in the automotive industry, including increased focus from regulators and consumers, we anticipate the number of automotive recalls may remain above historical levels in the near future. Although we engage in extensive product quality programs and processes, it is possible that we may be adversely affected in the future if the pace of these recalls continues.
Efficient use of capital. The global vehicle components industry is generally capital intensive and a portion of a supplier’s capital equipment is frequently utilized for specific customer programs. Lead times for procurement of capital equipment are long and typically exceed start of production by one to two years. Substantial advantages exist for suppliers that can leverage their prior investments in capital equipment or amortize the investment over higher volume global customer programs.
Industry consolidation. Consolidation among worldwide suppliers is expected to continue as suppliers seek to achieve operating synergies and value stream efficiencies, acquire complementary technologies and build stronger customer relationships as OEMs continue to expand globally. Additionally, new entrants from outside the traditional automotive industry may seek to gain access to certain vehicle component markets, as evidenced by the acquisition of Harman International Industries, Incorporated by Samsung Electronics Co., Ltd. and the acquisition of Mobileye N.V. by Intel Corporation. We believe companies with strong balance sheets and financial discipline are in the best position to take advantage of the industry consolidation trend.
Consolidated Results of Operations
Our total net sales during the year ended December 31, 2019 were $14.4 billion, a decrease of approximately 1% compared to 2018. This compares to total global OEM production decreases of 6% in 2019. We experienced volume growth of 4% for the period, primarily as a result of increases in Europe and Asia Pacific. Volume was also impacted by increased net sales of approximately $320 million as a result of the acquisitions of KUM and Winchester in mid and late-2018, respectively, and adverse impacts of approximately $200 million resulting from the GM labor strike. Our overall lean cost structure, along with above-market sales growth in all major regions, has enabled us to maintain strong levels of operating income, while continuing to strategically invest in the future.
Aptiv typically experiences fluctuations in revenue due to changes in OEM production schedules, vehicle sales mix and the net of new and lost business (which we refer to collectively as volume), increased prices attributable to escalation clauses in our supply contracts for recovery of increased commodity costs (which we refer to as commodity pass-through), fluctuations in foreign currency exchange rates (which we refer to as “FX”), contractual reductions of the sales price to the OEM (which we refer to as contractual price reductions) and engineering changes. Changes in sales mix can have either favorable or unfavorable impacts on revenue. Such changes can be the result of shifts in regional growth, shifts in OEM sales demand, as well as shifts in consumer demand related to vehicle segment purchases and content penetration. For instance, a shift in sales demand favoring a particular OEM’s vehicle model for which we do not have a supply contract may negatively impact our revenue. A shift in regional sales demand toward certain markets could favorably impact the sales of those of our customers that have a large market share in those regions, which in turn would be expected to have a favorable impact on our revenue.
We typically experience (as described below) fluctuations in operating income due to:
| • | Volume, net of contractual price reductions—changes in volume offset by contractual price reductions (which typically range from 1% to 3% of net sales) and changes in mix; |
| • | Operational performance—changes to costs for materials and commodities or manufacturing and engineering variances; and |
| • | Other—including restructuring costs and any remaining variances not included in Volume, net of contractual price reductions or Operational performance. |
The automotive technology and component supply industry is traditionally subject to inflationary pressures with respect to raw materials and labor which may place operational and profitability burdens on the entire supply chain. We will continue to work with our customers and suppliers to mitigate the impact of these inflationary pressures in the future. In addition, we expect commodity cost volatility, particularly related to copper and petroleum-based resin products, to have a continual impact on future earnings and/or operating cash flows. As such, we continually seek to mitigate both inflationary pressures and our material-related cost exposures using a number of approaches, including combining purchase requirements with customers and/or other suppliers, using alternate suppliers or product designs, negotiating cost reductions and/or commodity cost contract escalation clauses into our vehicle manufacturer supply contracts and hedging.
This section discusses our consolidated results of operations and results of operations by segment for the years ended December 31, 2019 versus 2018. A detailed discussion of our consolidated results of operations and results of operations by segment for the years ended December 31, 2018 versus 2017 can be found under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on February 4, 2019.
2019 versus 2018
The results of operations for the years ended December 31, 2019 and 2018 were as follows:
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | Favorable/ (unfavorable) | |||||||||
| (dollars in millions) | |||||||||||
| Net sales | $ | 14,357 | $ | 14,435 | $ | (78 | ) | ||||
| Cost of sales | 11,711 | 11,706 | (5 | ) | |||||||
| Gross margin | 2,646 | 18.4% | 2,729 | 18.9% | (83 | ) | |||||
| Selling, general and administrative | 1,076 | 993 | (83 | ) | |||||||
| Amortization | 146 | 154 | 8 | ||||||||
| Restructuring | 148 | 109 | (39 | ) | |||||||
| Operating income | 1,276 | 1,473 | (197 | ) | |||||||
| Interest expense | (164 | ) | (141 | ) | (23 | ) | |||||
| Other income, net | 14 | 2 | 12 | ||||||||
| Income from continuing operations before income taxes and equity income | 1,126 | 1,334 | (208 | ) | |||||||
| Income tax expense | (132 | ) | (250 | ) | 118 | ||||||
| Income from continuing operations before equity income | 994 | 1,084 | (90 | ) | |||||||
| Equity income, net of tax | 15 | 23 | (8 | ) | |||||||
| Income from continuing operations | 1,009 | 1,107 | (98 | ) | |||||||
| Income from discontinued operations, net of tax | — | — | — | ||||||||
| Net income | 1,009 | 1,107 | (98 | ) | |||||||
| Net income attributable to noncontrolling interest | 19 | 40 | (21 | ) | |||||||
| Net income attributable to Aptiv | $ | 990 | $ | 1,067 | $ | (77 | ) |
Total Net Sales
Below is a summary of our total net sales for the years ended December 31, 2019 versus 2018.
| Year Ended December 31, | Variance Due To: | |||||||||||||||||||||||||||||||
| 2019 | 2018 | Favorable/ (unfavorable) | Volume, net of contractual price reductions | FX | Commodity pass- through | Other | Total | |||||||||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||||||||||
| Total net sales | $ | 14,357 | $ | 14,435 | $ | (78 | ) | $ | 371 | $ | (394 | ) | $ | (55 | ) | $ | — | $ | (78 | ) |
Total net sales for the year ended December 31, 2019 decreased 1% compared to the year ended December 31, 2018. We experienced volume growth of 4% for the period, primarily as a result of increases in Europe and Asia Pacific. Volume growth was also impacted by increased net sales of approximately $320 million as a result of the acquisitions of KUM and Winchester in mid and late-2018, respectively, and adverse impacts of approximately $200 million resulting from the GM labor strike. Volume growth was offset by unfavorable foreign currency impacts, primarily related to the Euro and Chinese Yuan Renminbi, and contractual price reductions. Refer to Note 20. Acquisitions and Divestitures to the audited consolidated financial statements included herein for further information regarding acquisitions and divestitures.
Cost of Sales
Cost of sales is primarily comprised of material, labor, manufacturing overhead, freight, fluctuations in foreign currency exchange rates, product engineering, design and development expenses, depreciation and amortization, warranty costs and other operating expenses. Gross margin is revenue less cost of sales and gross margin percentage is gross margin as a percentage of net sales.
Cost of sales increased $5 million for the year ended December 31, 2019 compared to the year ended December 31, 2018, as summarized below. The Company’s material cost of sales was approximately 50% of net sales in both the years ended December 31, 2019 and 2018.
| Year Ended December 31, | Variance Due To: | |||||||||||||||||||||||||||||||
| 2019 | 2018 | Favorable/ (unfavorable) | Volume (a) | FX | Operational performance | Other | Total | |||||||||||||||||||||||||
| (dollars in millions) | (in millions) | |||||||||||||||||||||||||||||||
| Cost of sales | $ | 11,711 | $ | 11,706 | $ | (5 | ) | $ | (548 | ) | $ | 303 | $ | 155 | $ | 85 | $ | (5 | ) | |||||||||||||
| Gross margin | $ | 2,646 | $ | 2,729 | $ | (83 | ) | $ | (177 | ) | $ | (91 | ) | $ | 155 | $ | 30 | $ | (83 | ) | ||||||||||||
| Percentage of net sales | 18.4 | % | 18.9 | % |
| (a) | Presented net of contractual price reductions for gross margin variance. |
The increase in cost of sales reflects increased volumes and incremental investment in advanced technologies and engineering, partially offset by the impacts from currency exchange and operational performance improvements. The increase in cost of sales is also attributable to the following items in Other above:
| • | $55 million of decreased commodity pass-through costs; and |
| • | $5 million of decreased warranty costs. |
Selling, General and Administrative Expense
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | Favorable/ (unfavorable) | |||||||||
| (dollars in millions) | |||||||||||
| Selling, general and administrative expense | $ | 1,076 | $ | 993 | $ | (83 | ) | ||||
| Percentage of net sales | 7.5 | % | 6.9 | % |
Selling, general and administrative expense (“SG&A”) includes administrative expenses, information technology costs and incentive compensation related costs. SG&A increased as a percentage of net sales for the year ended December 31, 2019 as compared to 2018, primarily as a result of our acquisitions and increased information technology costs, partially offset by cost reduction initiatives, including our continued rotation to best cost manufacturing locations in Europe and initiatives focused on reducing global overhead costs.
Amortization
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | Favorable/ (unfavorable) | |||||||||
| (in millions) | |||||||||||
| Amortization | $ | 146 | $ | 154 | $ | 8 |
Amortization expense reflects the non-cash charge related to definite-lived intangible assets and intangible asset impairment charges recorded during the period. The decrease in amortization during the year ended December 31, 2019 compared to 2018 reflects decreased intangible asset impairment charges recorded during the year ended December 31, 2019 as compared to 2018 and the continued amortization of our definite-lived intangible assets, which resulted primarily from our acquisitions, over their estimated useful lives. Refer to Note 20. Acquisitions and Divestitures to the audited consolidated financial statements included herein for further detail of our business acquisitions, including details of the intangible assets recorded in each transaction.
In 2020, we expect to incur non-cash amortization charges of approximately $145 million.
Restructuring
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | Favorable/ (unfavorable) | |||||||||
| (dollars in millions) | |||||||||||
| Restructuring | $ | 148 | $ | 109 | $ | (39 | ) | ||||
| Percentage of net sales | 1.0 | % | 0.8 | % |
Restructuring charges recorded during 2019 were primarily related to programs focused on the continued rotation of our manufacturing footprint to best cost locations in Europe and on reducing global overhead costs. The Company recorded employee-related and other restructuring charges related to these programs totaling approximately $148 million during the year ended December 31, 2019, of which $74 million was recognized for programs implemented in the European region, pursuant to the Company’s ongoing overhead cost reduction strategy. None of the Company’s individual restructuring programs initiated during 2019 were material and there have been no changes in previously initiated programs that have resulted (or are expected to result) in a material change to our restructuring costs. We expect to make cash payments of approximately $85 million in 2020 pursuant to currently implemented restructuring programs.
Restructuring charges recorded during 2018 were primarily related to programs focused on the continued rotation of our manufacturing footprint to best cost locations in Europe and on reducing global overhead costs, including realignment of the Company’s organizational structure due to changes in roles and workforce resulting from the spin-off of the Powertrain Systems segment. The Company recorded employee-related and other restructuring charges related to these programs totaling approximately $109 million during the year ended December 31, 2018, of which $64 million was recognized for programs focused on the continued rotation of our manufacturing footprint to best cost locations in Europe and reducing overhead costs in the region.
We expect to continue to incur additional restructuring expense in 2020, primarily related to programs focused on the continued rotation of our manufacturing footprint to best cost locations in Europe and to reduce global overhead costs, which includes approximately $35 million (of which approximately $20 million relates to the Signal and Power Solutions segment and approximately $15 million relates to the Advanced Safety and User Experience segment) of restructuring costs related to programs approved as of December 31, 2019. Additionally, as we continue to operate in a cyclical industry that is impacted by movements in the global and regional economies, we continually evaluate opportunities to further adjust our cost structure and optimize our manufacturing footprint. The Company plans to implement additional restructuring activities in the future, if necessary, in order to align manufacturing capacity and other costs with prevailing regional automotive production levels and locations, to improve the efficiency and utilization of other locations and in order to increase investment in advanced technologies and engineering. Such future restructuring actions are dependent on market conditions, customer actions and other factors.
Refer to Note 10. Restructuring to the audited consolidated financial statements included herein for additional information.
Interest Expense
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | Favorable/ (unfavorable) | |||||||||
| (in millions) | |||||||||||
| Interest expense | $ | 164 | $ | 141 | $ | (23 | ) |
The increase in interest expense during the year ended December 31, 2019 compared to 2018 reflects the issuance of the 2019 Senior Notes in the first quarter of 2019, which were utilized to redeem the 3.15% Senior Notes, and increased short-term borrowings. Refer to Note 11. Debt to the audited consolidated financial statements included herein for additional information.
Other Income, Net
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | Favorable/ (unfavorable) | |||||||||
| (in millions) | |||||||||||
| Other income, net | $ | 14 | $ | 2 | $ | 12 |
During the year ended December 31, 2019, Aptiv recorded $13 million of interest income and a pre-tax unrealized gain of $19 million related to increases in fair value of its equity investments without readily determinable fair values, as further discussed in Note 5. Investments in Affiliates to the consolidated financial statements contained herein. Aptiv also redeemed for cash the entire $650 million aggregate principal amount outstanding of the 3.15% Senior Notes during the year ended December 31, 2019, resulting in a loss on debt extinguishment of approximately $6 million, as further discussed in Note 11. Debt to the consolidated financial statements contained herein, and incurred approximately $5 million in transaction costs related to the acquisition of gabocom. The Company also recorded $27 million during the year ended December 31, 2019 related to the components of net periodic pension and postretirement benefit cost other than service costs.
During the year ended December 31, 2018, Aptiv incurred approximately $18 million in transaction costs related to the acquisitions of KUM and Winchester and, as further discussed in Note 17. Derivatives and Hedging Activities to the audited consolidated financial statements included herein, recorded a gain of $4 million on forward contracts entered into in order to hedge portions of the currency risk associated with the cash payment for the acquisition of KUM. During the year ended December 31, 2018, Aptiv also recorded $21 million of interest income and $11 million for certain fees earned pursuant to the transition services agreement in connection with the Separation of the Company’s former Powertrain Systems segment, as further discussed in Note 25. Discontinued Operations and Held For Sale to the audited consolidated financial statements included herein. The Company also recorded $18 million during the year ended December 31, 2018 related to the components of net periodic pension and postretirement benefit cost other than service costs.
Refer to Note 19. Other Income, Net to the audited consolidated financial statements included herein for additional information.
Income Taxes
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | Favorable/ (unfavorable) | |||||||||
| (in millions) | |||||||||||
| Income tax expense | $ | 132 | $ | 250 | $ | 118 |
The Company’s tax rate is affected by the fact that its parent entity was formerly a U.K. resident taxpayer and became an Irish resident taxpayer in April 2018, the tax rates in Ireland, the U.K. and other jurisdictions in which the Company operates, the relative amount of income earned by jurisdiction and the relative amount of losses or income for which no tax benefit or expense was recognized due to a valuation allowance. The Company’s effective tax rate is also impacted by the receipt of certain tax incentives and holidays that reduce the effective tax rate for certain subsidiaries below the statutory rate.
The effective tax rate was 12% and 19% for the years ended December 31, 2019 and 2018, respectively. The effective tax rate for the year ended December 31, 2019 was impacted by releases of valuation allowances as a result of the Company’s determination that it was more likely than not that certain deferred tax assets would be realized, as well as favorable provision to return adjustments. The Company also accrued $20 million of reserve adjustments for uncertain tax positions, which included reserves for ongoing audits in foreign jurisdictions, as well as for changes in estimates based on relevant new or additional evidence obtained related to certain of the Company’s tax positions, including tax authority administrative pronouncements and court decisions.
The effective tax rate for the year ended December 31, 2018 was impacted by approximately $30 million recorded as an adjustment to the provisional amounts recorded due to the enactment of the Tax Cuts and Jobs Act (“the Tax Legislation”) in the U.S. and approximately $30 million recorded related to the Company’s intellectual property transfer, partially offset by favorable changes in geographic income mix, primarily due to changes in the underlying operations of the business.
Refer to Note 14. Income Taxes to the audited consolidated financial statements included herein for additional information.
Equity Income
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | Favorable/ (unfavorable) | |||||||||
| (in millions) | |||||||||||
| Equity income, net of tax | $ | 15 | $ | 23 | $ | (8 | ) |
Equity income, net of tax reflects the Company’s interest in the results of ongoing operations of entities accounted for as equity method investments. Equity income decreased during the year ended December 31, 2019 as compared to the year ended December 31, 2018, primarily attributable to the performance of our joint ventures in North America and Asia Pacific as compared to the prior period.
Results of Operations by Segment
We operate our core business along the following operating segments, which are grouped on the basis of similar product, market and operating factors:
| • | Signal and Power Solutions, which includes complete electrical architecture and component products. |
| • | Advanced Safety and User Experience, which includes component and systems integration expertise in advanced safety, user experience and connectivity and security solutions, as well as advanced software development and autonomous driving technologies. |
| • | Eliminations and Other, which includes i) the elimination of inter-segment transactions, and ii) certain other expenses and income of a non-operating or strategic nature. |
As described in Note 25. Discontinued Operations and Held For Sale to the audited consolidated financial statements contained herein, the Company’s previously reported Powertrain Systems segment has been classified as discontinued operations for all periods presented. Certain original equipment service businesses that were previously included within the Powertrain Systems segment but which was not included in the spin-off, are reported in continuing operations and have been reclassified within the Advanced Safety and User Experience and Signal and Power Solutions segments for all periods presented. Amounts for shared general and administrative operating expenses that were allocated to the Powertrain Systems segment in prior periods have been re-allocated to the Company’s reportable operating segments. No amounts for shared general and administrative operating expense or interest expense were allocated to discontinued operations.
Our management utilizes Adjusted Operating Income as the key performance measure of segment income or loss to evaluate segment performance, and for planning and forecasting purposes to allocate resources to the segments, as management believes this measure is most reflective of the operational profitability or loss of our operating segments. Segment Adjusted Operating Income should not be considered a substitute for results prepared in accordance with U.S. GAAP and should not be considered an alternative to net income attributable to Aptiv, which is the most directly comparable financial measure to Adjusted Operating Income that is prepared in accordance with U.S. GAAP. Segment Adjusted Operating Income, as determined and measured by Aptiv, should also not be compared to similarly titled measures reported by other companies.
The reconciliation of Adjusted Operating Income to operating income includes, as applicable, restructuring, other acquisition and portfolio project costs (which includes costs incurred to integrate acquired businesses and to plan and execute product portfolio transformation actions, including business and product acquisitions and divestitures), asset impairments, gains (losses) on business divestitures and deferred compensation related to acquisitions. The reconciliations of Adjusted Operating Income to net income attributable to Aptiv for the years ended December 31, 2019 and 2018 are as follows:
| Signal and Power Solutions | Advanced Safety and User Experience | Eliminations and Other | Total | ||||||||||||
| (in millions) | |||||||||||||||
| For the Year Ended December 31, 2019: | |||||||||||||||
| Adjusted operating income | $ | 1,274 | $ | 274 | $ | — | $ | 1,548 | |||||||
| Restructuring | (104 | ) | (44 | ) | — | (148 | ) | ||||||||
| Other acquisition and portfolio project costs | (44 | ) | (27 | ) | — | (71 | ) | ||||||||
| Asset impairments | (2 | ) | (9 | ) | — | (11 | ) | ||||||||
| Deferred compensation related to nuTonomy acquisition | — | (42 | ) | — | (42 | ) | |||||||||
| Operating income | $ | 1,124 | $ | 152 | $ | — | 1,276 | ||||||||
| Interest expense | (164 | ) | |||||||||||||
| Other income, net | 14 | ||||||||||||||
| Income from continuing operations before income taxes and equity income | 1,126 | ||||||||||||||
| Income tax expense | (132 | ) | |||||||||||||
| Equity income, net of tax | 15 | ||||||||||||||
| Income from continuing operations | 1,009 | ||||||||||||||
| Income from discontinued operations, net of tax | — | ||||||||||||||
| Net income | 1,009 | ||||||||||||||
| Net income attributable to noncontrolling interest | 19 | ||||||||||||||
| Net income attributable to Aptiv | $ | 990 |
| Signal and Power Solutions | Advanced Safety and User Experience | Eliminations and Other | Total | ||||||||||||
| (in millions) | |||||||||||||||
| For the Year Ended December 31, 2018: | |||||||||||||||
| Adjusted operating income | $ | 1,424 | $ | 327 | $ | — | $ | 1,751 | |||||||
| Restructuring | (90 | ) | (19 | ) | — | (109 | ) | ||||||||
| Other acquisition and portfolio project costs | (54 | ) | (24 | ) | — | (78 | ) | ||||||||
| Asset impairments | (1 | ) | (33 | ) | — | (34 | ) | ||||||||
| Deferred compensation related to nuTonomy acquisition | — | (57 | ) | — | (57 | ) | |||||||||
| Operating income | $ | 1,279 | $ | 194 | $ | — | 1,473 | ||||||||
| Interest expense | (141 | ) | |||||||||||||
| Other income, net | 2 | ||||||||||||||
| Income from continuing operations before income taxes and equity income | 1,334 | ||||||||||||||
| Income tax expense | (250 | ) | |||||||||||||
| Equity income, net of tax | 23 | ||||||||||||||
| Income from continuing operations | 1,107 | ||||||||||||||
| Income from discontinued operations, net of tax | — | ||||||||||||||
| Net income | 1,107 | ||||||||||||||
| Net income attributable to noncontrolling interest | 40 | ||||||||||||||
| Net income attributable to Aptiv | $ | 1,067 |
Net sales, gross margin as a percentage of net sales and Adjusted Operating Income by segment for the years ended December 31, 2019 and 2018 are as follows:
Net Sales by Segment
| Year Ended December 31, | Variance Due To: | |||||||||||||||||||||||||||||||
| 2019 | 2018 | Favorable/ (unfavorable) | Volume, net of contractual price reductions | FX | Commodity Pass-through | Other | Total | |||||||||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||||||||||
| Signal and Power Solutions | $ | 10,302 | $ | 10,402 | $ | (100 | ) | $ | 256 | $ | (301 | ) | $ | (55 | ) | $ | — | $ | (100 | ) | ||||||||||||
| Advanced Safety and User Experience | 4,092 | 4,078 | 14 | 109 | (95 | ) | — | — | 14 | |||||||||||||||||||||||
| Eliminations and Other | (37 | ) | (45 | ) | 8 | 6 | 2 | — | — | 8 | ||||||||||||||||||||||
| Total | $ | 14,357 | $ | 14,435 | $ | (78 | ) | $ | 371 | $ | (394 | ) | $ | (55 | ) | $ | — | $ | (78 | ) |
Gross Margin Percentage by Segment
| Year Ended December 31, | |||||
| 2019 | 2018 | ||||
| Signal and Power Solutions | 20.9 | % | 21.4 | % | |
| Advanced Safety and User Experience | 12.0 | % | 12.4 | % | |
| Eliminations and Other | — | % | — | % | |
| Total | 18.4 | % | 18.9 | % |
Adjusted Operating Income by Segment
| Year Ended December 31, | Variance Due To: | |||||||||||||||||||||||||||
| 2019 | 2018 | Favorable/ (unfavorable) | Volume, net of contractual price reductions | Operational performance | Other | Total | ||||||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||||||
| Signal and Power Solutions | $ | 1,274 | $ | 1,424 | $ | (150 | ) | $ | (151 | ) | $ | 80 | $ | (79 | ) | $ | (150 | ) | ||||||||||
| Advanced Safety and User Experience | 274 | 327 | (53 | ) | (26 | ) | 60 | (87 | ) | (53 | ) | |||||||||||||||||
| Eliminations and Other | — | — | — | — | — | — | — | |||||||||||||||||||||
| Total | $ | 1,548 | $ | 1,751 | $ | (203 | ) | $ | (177 | ) | $ | 140 | $ | (166 | ) | $ | (203 | ) |
As noted in the table above, Adjusted Operating Income for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was impacted by volume and contractual price reductions, including product mix, and the adverse volume and operational impacts of approximately $110 million resulting from the GM labor strike, as well as other operational performance improvements, which were partially offset by incremental investment in advanced technologies and engineering, as well as the following items included in Other in the table above:
| • | $88 million of increased SG&A expense, not including the impact of other acquisition and portfolio project costs, primarily as a result of our acquisitions and increased information technology costs; |
| • | Unfavorable foreign currency impacts of $64 million, primarily related to the Euro and Chinese Yuan Renminbi; and |
| • | $29 million of increased depreciation and amortization, not including the impact of asset impairments, primarily as a result of a higher fixed asset base. |
Liquidity and Capital Resources
Overview of Capital Structure
Our liquidity requirements are primarily to fund our business operations, including capital expenditures and working capital requirements, as well as to fund debt service requirements, operational restructuring activities and dividends on share capital. Our primary sources of liquidity are cash flows from operations, our existing cash balance, and as necessary, borrowings under available credit facilities and issuance of long-term debt. To the extent we generate discretionary cash flow we may consider using this additional cash flow for optional prepayments of existing indebtedness, strategic acquisitions or investments, additional share repurchases, and/or general corporate purposes. We will also continually explore ways to enhance our capital structure.
As of December 31, 2019, we had cash and cash equivalents of $0.4 billion and net debt (defined as outstanding debt less cash and cash equivalents) of $4.0 billion. We also have access to additional liquidity pursuant to the terms of the $2.0 billion Revolving Credit Facility and the €300 million committed European accounts receivable factoring facility, as described below.
The following table summarizes our available liquidity, which includes cash, cash equivalents and funds available under our significant committed credit facilities, as of December 31, 2019. The amounts disclosed as available under the Company’s significant committed credit facilities are available without violating our existing debt covenants, which are described below.
| December 31, 2019 | |||
| (in millions) | |||
| Cash and cash equivalents | $ | 412 | |
| Revolving Credit Facility, unutilized portion (1) | 1,910 | ||
| Committed European accounts receivable factoring facility, unutilized portion (2) | 70 | ||
| Total available liquidity | $ | 2,392 |
| (1) | Availability reduced by less than $1 million in letters of credit issued under the Credit Agreement as of December 31, 2019. |
| (2) | Based on December 31, 2019 foreign currency rates, subject to the availability of eligible accounts receivable. |
We expect existing cash, available liquidity and cash flows from operations to continue to be sufficient to fund our global operating activities, including restructuring payments, any mandatory payments required under the Credit Agreement as described below, dividends on ordinary shares and capital expenditures. In addition, we expect to continue to repurchase outstanding ordinary shares pursuant to our authorized ordinary share repurchase program, as further described below.
We also continue to expect to be able to move funds between different countries to manage our global liquidity needs without material adverse tax implications, subject to current monetary policies and to the terms of the Credit Agreement. While a substantial portion of our operating income is generated by our non-U.S. subsidiaries, and as of December 31, 2019, the Company’s cash and cash equivalents held by our non-U.S. subsidiaries totaled $396 million, we utilize a combination of strategies, including dividends, cash pooling arrangements, intercompany loan repayments and other distributions and advances to provide the funds necessary to meet our global liquidity needs. There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Aptiv. If additional non-U.S. cash was needed for our U.S. operations, we may be required to accrue and pay withholding if we were to distribute such funds from non-U.S. subsidiaries to the U.S.; however, based on our current liquidity needs and strategies, we do not anticipate a need to accrue and pay such additional amounts.
Based on these factors, we believe we possess sufficient liquidity to fund our global operations and capital investments in 2020 and beyond.
Spin-Off of Powertrain Systems Segment into Delphi Technologies
On December 4, 2017, the Company completed the Separation of its former Powertrain Systems segment by distributing to Aptiv shareholders on a pro rata basis all of the issued and outstanding ordinary shares of Delphi Technologies, a public limited company formed to hold the spun-off business. To effect the Separation, the Company distributed to its shareholders one ordinary share of Delphi Technologies for every three Aptiv ordinary shares outstanding as of November 22, 2017, the record date for the distribution.
On December 4, 2017, pursuant to the Separation and Distribution Agreement, the Company transferred to Delphi Technologies the assets and liabilities that comprised Delphi Technologies’ business. In connection with the Separation, the Company received a dividend of approximately $1,148 million from Delphi Technologies. The Company used the proceeds received from the dividend to fund growth initiatives, including increased investment in advanced technologies and engineering, and for general corporate purposes. The requirements for presenting Delphi Technologies as a discontinued
operation were met when the Separation was completed. Accordingly, the accompanying consolidated financial statements reflect this business as a discontinued operation for all periods presented. Refer to Note 25. Discontinued Operations and Held For Sale to the audited consolidated financial statements contained herein for further disclosure related to the Company’s discontinued operations.
In connection with the Separation, Aptiv and Delphi Technologies entered into various agreements to effect the Separation and to provide a framework for their relationship following the Separation, which included a Separation and Distribution Agreement, a Transition Services Agreement, a Tax Matters Agreement, an Employee Matters Agreement and Contract Manufacturing Services Arrangements. The transition services primarily involve Aptiv providing certain services to Delphi Technologies related to information technology and human resource infrastructure for terms of up to 24 months following the Separation. Aptiv recorded $4 million and $11 million to other income, net during the years ended December 31, 2019 and 2018, respectively, for certain fees earned pursuant to the Transition Services Agreement. In addition, Aptiv is also party to various commercial agreements with Delphi Technologies entities. In connection with the Separation, the Company received $180 million in cash from Delphi Technologies pursuant to the Tax Matters Agreement.
As a result of the Separation, the Company incurred approximately $118 million in separation costs during the year ended December 31, 2017, which are included within earnings from discontinued operations, net of income taxes in the accompanying consolidated statements of operations. These costs primarily related to professional fees associated with planning the Separation, as well as Separation activities within finance, tax, legal and information system functions and certain investment banking fees incurred upon the Separation.
Indebtedness Related to the Delphi Technologies Separation
As described above, the Company received a dividend of approximately $1,148 million from Delphi Technologies in connection with the Separation. Delphi Technologies financed this dividend through the issuance of approximately $1.55 billion of debt, consisting of a senior secured five-year $750 million term loan facility that was issued upon the Separation and $800 million aggregate principal amount of 5.00% senior unsecured notes due 2025 that were issued in September 2017 (collectively, the “Delphi Technologies Debt”). In connection with the Separation, the Delphi Technologies Debt was transferred to Delphi Technologies and is no longer reflected in the Company’s consolidated financial statements.
Share Repurchases
In April 2016, the Board of Directors authorized a share repurchase program of up to $1.5 billion of ordinary shares, which commenced in September 2016. This share repurchase program provides for share purchases in the open market or in privately negotiated transactions, depending on share price, market conditions and other factors, as determined by the Company.
A summary of the ordinary shares repurchased during the years ended December 31, 2019, 2018 and 2017 is as follows:
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Total number of shares repurchased | 5,387,533 | 6,530,369 | 4,667,193 | ||||||||
| Average price paid per share | $ | 77.93 | $ | 76.44 | $ | 82.00 | |||||
| Total (in millions) | $ | 420 | $ | 499 | $ | 383 |
As of December 31, 2019, approximately $70 million of share repurchases remained available under the April 2016 share repurchase program. All repurchased shares were retired, and are reflected as a reduction of ordinary share capital for the par value of the shares, with the excess applied as reductions to additional paid-in-capital and retained earnings.
New Share Repurchase Program
In January 2019, the Board of Directors authorized a new share repurchase program of up to $2.0 billion of ordinary shares. This share repurchase program provides for share purchases in the open market or in privately negotiated transactions, depending on share price, market conditions and other factors, as determined by the Company. This program will commence following the completion of the Company’s April 2016 share repurchase program described above.
Dividends from Equity Investments
During the years ended December 31, 2019, 2018 and 2017, Aptiv received dividends of $9 million, $12 million and $15 million, respectively, from its equity method investments. The dividends were recognized as a reduction to the investment and represented a return on investment included in cash flows from operating activities from continuing operations.
Acquisitions
gabocom—On November 19, 2019, Aptiv acquired 100% of the equity interests of gabo Systemtechnik GmbH (“gabocom”), a leading provider of highly-engineered cable management and protection solutions for the telecommunications industry, for total consideration of $311 million, net of cash acquired. The acquisition was accounted for as a business combination, with the operating results of gabocom included within the Company’s Signal and Power Solutions segment from the date of acquisition. The Company acquired gabocom utilizing cash on hand.
Falmat—On May 14, 2019, Aptiv acquired 100% of the equity interests of Falmat Inc. (“Falmat”), a leading manufacturer of high performance custom cable and cable assemblies for industrial applications, for total consideration of $25 million, net of cash acquired. The acquisition was accounted for as a business combination, with the operating results of Falmat included within the Company’s Signal and Power Solutions segment from the date of acquisition. The Company acquired Falmat utilizing cash on hand.
Winchester—On October 24, 2018, Aptiv acquired 100% of the equity interests of Winchester Interconnect (“Winchester”), a leading provider of custom engineered interconnect solutions for harsh environment applications, for total consideration of $680 million, net of cash acquired. The acquisition was accounted for as a business combination, with the operating results of Winchester included within the Company’s Signal and Power Solutions segment from the date of acquisition. The Company acquired Winchester utilizing cash on hand and short-term borrowings.
KUM—On June 14, 2018, Aptiv acquired 100% of the equity interests of KUM, a specialized manufacturer of connectors for the automotive industry, for total consideration of $526 million, net of cash acquired. The acquisition was accounted for as a business combination, with the operating results of KUM included within the Company’s Signal and Power Solutions segment from the date of acquisition. The Company acquired KUM utilizing cash on hand.
nuTonomy—On November 21, 2017, Aptiv acquired 100% of the equity interests of nuTonomy, Inc. (“nuTonomy”), a leading provider of autonomous driving software and technology, for total consideration of up to $454 million. Of the total consideration, $284 million of the purchase price was paid at closing, subject to certain post-closing adjustments, and $109 million of the purchase price will vest to certain selling shareholders in annual installments over a 3-year period from the acquisition date, subject to such shareholders’ compliance with certain employment conditions. Of the $109 million, approximately $7 million was payable after one year and approximately $51 million is payable after each of the second and third years following the acquisition date. These remaining installments will be recorded as a component of cost of sales ratably over the respective installment period. The acquisition was accounted for as a business combination, with the operating results of nuTonomy included within the Company’s Advanced Safety and User Experience segment from the date of acquisition. The Company acquired nuTonomy utilizing cash on hand.
Movimento—On January 3, 2017, Aptiv acquired 100% of the equity interests of Movimento Group (“Movimento”), a leading provider of Over-the-Air software and data management for the automotive sector, for a purchase price of $40 million at closing and an additional cash payment of up to $10 million contingent upon the achievement of certain performance metrics over a future 2-year period. The acquisition was accounted for as a business combination, with the operating results of Movimento included within the Company’s Advanced Safety and User Experience segment from the date of acquisition. The Company acquired Movimento utilizing cash on hand.
Refer to Note 20. Acquisitions and Divestitures to the audited consolidated financial statements included herein for further detail of the Company’s business acquisitions.
Technology Investments—During the fourth quarter of 2019, the Company’s Advanced Safety and User Experience segment made a $6 million investment in Krono-Safe, SAS, a leading software developer of safety-critical real-time embedded systems. During the first quarter of 2019, the Company’s Advanced Safety and User Experience segment made an additional $3 million investment in Otonomo Technologies Ltd., a connected car data marketplace developer. This investment was in addition to the Company’s $15 million investment made in the first quarter of 2017.
During the fourth quarter of 2018, the Company’s Advanced Safety and User Experience segment made a $15 million investment in Affectiva, Inc., a leader in human perception artificial intelligence technology. During the third quarter of 2017, the Company’s Advanced Safety and User Experience segment made investments in two leading developers of LiDAR technology; a $15 million investment in Innoviz Technologies and a $10 million investment in LeddarTech, Inc. During the second quarter of 2017, the Company’s Signal and Power Solutions segment made a $10 million investment in Valens Semiconductor Ltd., a leading provider of signal processing technology for high frequency data transmission of connected car content.
These investments do not have readily determinable fair values and are measured at cost, less impairments, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer. Refer to Note 5. Investments in Affiliates to the audited consolidated financial statements included herein for further detail of the Company’s technology investments.
Divestitures
Powertrain Systems Spin-Off—As described above, on December 4, 2017, the Company completed the spin-off of its former Powertrain Systems segment into a new publicly traded company, Delphi Technologies PLC. In connection with the Separation, the Company received a dividend of approximately $1,148 million from Delphi Technologies. The Company used the proceeds received from the dividend to fund growth initiatives, including increased investment in advanced technologies and engineering. The requirements for presenting Delphi Technologies as a discontinued operation were met when the Separation was completed. Accordingly, the accompanying consolidated financial statements reflect this business as a discontinued operation for all periods presented. Refer to Note 25. Discontinued Operations and Held For Sale to the audited consolidated financial statements contained herein for further disclosure related to the Company’s discontinued operations.
Autonomous Driving Joint Venture
In September 2019, the Company entered into a definitive agreement with Hyundai to form a new joint venture focused on the design, development and commercialization of autonomous driving technologies. Under the terms of the agreement, Aptiv will contribute to the joint venture autonomous driving technology, intellectual property and approximately 700 employees for a 50% ownership interest in the newly formed entity. Hyundai will contribute to the joint venture approximately $1.6 billion in cash at closing and approximately $0.4 billion in vehicle engineering services, research and development resources and access to intellectual property for a 50% ownership interest in the newly formed entity. Upon closing of the transaction, Aptiv anticipates it will deconsolidate the carrying value of the associated assets and liabilities contributed to the joint venture, recognize an asset for the fair value of its investment in the newly formed joint venture and recognize any difference between the carrying value of its contribution and the fair value of its investment in earnings. Aptiv anticipates recognizing its investment in the newly formed entity prospectively using the equity method of accounting. The transaction is subject to the satisfaction of customary closing conditions and the receipt of regulatory and other approvals, and is expected to close in the first quarter of 2020.
The Company determined that the assets and liabilities associated with Aptiv’s contribution to the joint venture, which are reported within the Advanced Safety and User Experience segment, met the held for sale criteria as of December 31, 2019. Accordingly, the held for sale assets and liabilities were reclassified in the consolidated balance sheet as of December 31, 2019 to current assets held for sale and current liabilities held for sale, respectively, as the contribution of such assets and liabilities to the joint venture is expected to occur within one year. Upon designation as held for sale, the Company ceased recording depreciation of the held for sale assets. Refer to Note 25. Discontinued Operations and Held For Sale to the audited consolidated financial statements contained herein for additional information.
Credit Agreement
Aptiv PLC and its wholly-owned subsidiary Aptiv Corporation entered into a credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent (the “Administrative Agent”), under which it maintains senior unsecured credit facilities currently consisting of a term loan (the “Tranche A Term Loan”) and a revolving credit facility of $2.0 billion (the “Revolving Credit Facility”). The Credit Agreement was entered into in March 2011 and has been subsequently amended and restated on several occasions, most recently on August 17, 2016. The 2016 amendment extended the maturity of the Revolving Credit Facility and the Tranche A Term Loan from 2018 to 2021, increased the capacity of the Revolving Credit Facility from $1.5 billion to $2.0 billion and permitted Aptiv PLC to act as a borrower on the Revolving Credit Facility.
The Tranche A Term Loan and the Revolving Credit Facility mature on August 17, 2021. Beginning in the fourth quarter of 2017, Aptiv was obligated to begin making quarterly principal payments throughout the term of the Tranche A Term Loan according to the amortization schedule in the Credit Agreement. The Credit Agreement also contains an accordion feature that permits Aptiv to increase, from time to time, the aggregate borrowing capacity under the Credit Agreement by up to an additional $1 billion (or a greater amount based upon a formula set forth in the Credit Agreement) upon Aptiv’s request, the agreement of the lenders participating in the increase, and the approval of the Administrative Agent and existing lenders.
As of December 31, 2019, $90 million was outstanding under the Revolving Credit Facility and less than $1 million in letters of credit issued under the Credit Agreement. Letters of credit issued under the Credit Agreement reduce availability under the Revolving Credit Facility. The maximum amount drawn under the Revolving Credit Facility during the year ended December 31, 2019 was $710 million, primarily to manage intra-month working capital requirements.
Loans under the Credit Agreement bear interest, at Aptiv’s option, at either (a) the Administrative Agent’s Alternate Base Rate (“ABR” as defined in the Credit Agreement) or (b) the London Interbank Offered Rate (the “Adjusted LIBO Rate” as defined in the Credit Agreement) (“LIBOR”) plus in either case a percentage per annum as set forth in the table below (the “Applicable Rate”). The Applicable Rates under the Credit Agreement on the specified dates are set forth below:
| December 31, 2019 | December 31, 2018 | ||||||||||
| LIBOR plus | ABR plus | LIBOR plus | ABR plus | ||||||||
| Revolving Credit Facility | 1.10 | % | 0.10 | % | 1.10 | % | 0.10 | % | |||
| Tranche A Term Loan | 1.25 | % | 0.25 | % | 1.25 | % | 0.25 | % |
The Applicable Rate under the Credit Agreement may increase or decrease from time to time based on changes in the Company’s credit ratings. Accordingly, the interest rate will fluctuate during the term of the Credit Agreement based on changes in the ABR, LIBOR or future changes in the Company’s corporate credit ratings. The Credit Agreement also requires that Aptiv pay certain facility fees on the Revolving Credit Facility and certain letter of credit issuance and fronting fees.
The interest rate period with respect to LIBOR interest rate options can be set at one-, two-, three-, or six-months as selected by Aptiv in accordance with the terms of the Credit Agreement (or other period as may be agreed by the applicable lenders). Aptiv may elect to change the selected interest rate option in accordance with the provisions of the Credit Agreement. As of December 31, 2019, Aptiv selected the one-month LIBOR interest rate option on the Tranche A Term Loan, and the rate effective as of December 31, 2019, as detailed in the table below, was based on the Company’s current credit rating and the Applicable Rate for the Credit Agreement:
| Borrowings as of | ||||||||
| December 31, 2019 | Rates effective as of | |||||||
| Applicable Rate | (in millions) | December 31, 2019 | ||||||
| Revolving Credit Facility | ABR plus 0.10% | $ | 40 | 4.85 | % | |||
| Revolving Credit Facility | LIBOR plus 1.10% | $ | 50 | 2.85 | % | |||
| Tranche A Term Loan | LIBOR plus 1.25% | $ | 360 | 3.00 | % |
Borrowings under the Credit Agreement are prepayable at Aptiv’s option without premium or penalty.
The Credit Agreement contains certain covenants that limit, among other things, the Company’s (and the Company’s subsidiaries’) ability to incur certain additional indebtedness or liens or to dispose of substantially all of its assets. In addition, the Credit Agreement requires that the Company maintain a consolidated leverage ratio (the ratio of Consolidated Total Indebtedness to Consolidated EBITDA, each as defined in the Credit Agreement) of less than 3.50 to 1.0. The Credit Agreement also contains events of default customary for financings of this type. The Company was in compliance with the Credit Agreement covenants as of December 31, 2019.
As of December 31, 2019, all obligations under the Credit Agreement were borrowed by Aptiv Corporation and jointly and severally guaranteed by its direct and indirect parent companies, subject to certain exceptions set forth in the Credit Agreement. Refer to Note 22. Supplemental Guarantor and Non-Guarantor Condensed Consolidating Financial Statements to the audited consolidated financial statements contained herein for additional information.
Senior Unsecured Notes
As of December 31, 2019, the Company had the following senior unsecured notes issued and outstanding:
| Aggregate Principal Amount (in millions) | Stated Coupon Rate | Issuance Date | Maturity Date | Interest Payment Date | ||||||
| $ | 700 | 4.15% | March 2014 | March 2024 | March 15 and September 15 | |||||
| 784 | 1.50% | March 2015 | March 2025 | March 10 | ||||||
| 650 | 4.25% | November 2015 | January 2026 | January 15 and July 15 | ||||||
| 559 | 1.60% | September 2016 | September 2028 | September 15 | ||||||
| 300 | 4.35% | March 2019 | March 2029 | March 15 and September 15 | ||||||
| 300 | 4.40% | September 2016 | October 2046 | April 1 and October 1 | ||||||
| 350 | 5.40% | March 2019 | March 2049 | March 15 and September 15 |
On March 14, 2019, Aptiv PLC issued $650 million in aggregate principal amount of senior unsecured notes in a transaction registered under the Securities Act, comprised of $300 million of 4.35% senior unsecured notes due 2029 (the “4.35% Senior Notes”) and $350 million of 5.40% senior unsecured notes due 2049 (the “5.40% Senior Notes”) (collectively, the “2019 Senior Notes”). The 4.35% Senior Notes were priced at 99.879% of par, resulting in a yield to maturity of 4.365%, and the 5.40% Senior Notes were priced at 99.558% of par, resulting in a yield to maturity of 5.430%. The proceeds were
utilized to redeem the 3.15% Senior Notes. Aptiv incurred approximately $7 million of issuance costs in connection with the 2019 Senior Notes. Interest on the 2019 Senior Notes is payable semi-annually on March 15 and September 15 of each year to holders of record at the close of business on March 1 or September 1 immediately preceding the interest payment date. As a result of the redemption of the 3.15% Senior Notes, Aptiv recognized a loss on debt extinguishment of approximately $6 million during the year ended December 31, 2019 within other expense, net in the consolidated statements of operations.
Although the specific terms of each indenture governing each series of senior notes vary, the indentures contain certain restrictive covenants, including with respect to Aptiv’s (and Aptiv’s subsidiaries) ability to incur liens, enter into sale and leaseback transactions and merge with or into other entities. As of December 31, 2019, the Company was in compliance with the provisions of all series of the outstanding senior notes. Refer to Note 11. Debt to the audited consolidated financial statements contained herein for further information.
Other Financing
Receivable factoring—Aptiv maintains a €300 million European accounts receivable factoring facility that is available on a committed basis. This facility is accounted for as short-term debt and borrowings are subject to the availability of eligible accounts receivable. Collateral is not required related to these trade accounts receivable. This program renews on a non-committed, indefinite basis unless terminated by either party. Borrowings bear interest at Euro Interbank Offered Rate (“EURIBOR”) plus 0.42% for borrowings denominated in Euros. The rate effective on amounts outstanding as of December 31, 2019 was 0.42%. As of December 31, 2019 and 2018, Aptiv had $266 million and $279 million, respectively, outstanding on the European accounts receivable factoring facility. The maximum amount drawn under the European facility during the year ended December 31, 2019 was $335 million, primarily to manage intra-month working capital requirements.
Finance leases and other—As of December 31, 2019 and 2018, approximately $33 million and $32 million, respectively, of other debt primarily issued by certain non-U.S. subsidiaries and finance lease obligations were outstanding.
Letter of credit facilities—In addition to the letters of credit issued under the Credit Agreement, Aptiv had approximately $2 million and $2 million outstanding through other letter of credit facilities as of December 31, 2019 and 2018, respectively, primarily to support arrangements and other obligations at certain of its subsidiaries.
Contractual Commitments
The following table summarizes our expected cash outflows resulting from financial contracts and commitments as of December 31, 2019, with amounts denominated in foreign currencies translated using foreign currency rates as of December 31, 2019. We have not included information on our recurring purchases of materials for use in our manufacturing operations. These amounts are generally consistent from year to year, closely reflect our levels of production, and are not long-term in nature. The amounts below exclude the gross liability for uncertain tax positions of $217 million as of December 31, 2019. We do not expect a significant payment related to these obligations to be made within the next twelve months. We are not able to provide a reasonably reliable estimate of the timing of future payments relating to the non-current portion of obligations associated with uncertain tax positions. For more information, refer to Note 14. Income Taxes to the audited consolidated financial statements included herein.
| Payments due by Period | |||||||||||||||||||
| Total | 2020 | 2021 & 2022 | 2023 & 2024 | Thereafter | |||||||||||||||
| (in millions) | |||||||||||||||||||
| Debt and finance lease obligations (excluding interest) | $ | 4,392 | $ | 393 | $ | 346 | $ | 704 | $ | 2,949 | |||||||||
| Estimated interest costs related to debt and finance lease obligations | 1,525 | 138 | 255 | 231 | 901 | ||||||||||||||
| Operating lease obligations | 470 | 106 | 173 | 98 | 93 | ||||||||||||||
| Contractual commitments for capital expenditures | 192 | 192 | — | — | — | ||||||||||||||
| Other contractual purchase commitments, including information technology | 238 | 147 | 89 | 1 | 1 | ||||||||||||||
| Total | $ | 6,817 | $ | 976 | $ | 863 | $ | 1,034 | $ | 3,944 |
In addition to the obligations discussed above, certain of our non-U.S. subsidiaries sponsor defined benefit pension plans, some of which are funded. We have minimum funding requirements with respect to certain of our pension obligations and may periodically elect to make discretionary contributions to the plans in support of risk management initiatives. We will also have payments due with respect to our other postretirement benefit obligations. We do not fund our other postretirement benefit obligations and payments are made as costs are incurred by covered retirees. Refer to Note 12. Pension Benefits to the audited consolidated financial statements included herein for additional detail regarding our expected contributions to our pension plans and expected distributions to participants in future periods.
Capital Expenditures
Supplier selection in the automotive industry is generally finalized several years prior to the start of production of the vehicle. Therefore, current capital expenditures are based on customer commitments entered into previously, generally several years ago when the customer contract was awarded. As of December 31, 2019, we had approximately $192 million in outstanding cancellable and non-cancellable capital commitments. Capital expenditures by operating segment and geographic region for the periods presented were:
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Signal and Power Solutions | $ | 495 | $ | 534 | $ | 477 | |||||
| Advanced Safety and User Experience | 250 | 245 | 196 | ||||||||
| Other (1) | 36 | 67 | 25 | ||||||||
| Total capital expenditures | $ | 781 | $ | 846 | $ | 698 | |||||
| North America | $ | 257 | $ | 314 | $ | 301 | |||||
| Europe, Middle East & Africa | 292 | 300 | 234 | ||||||||
| Asia Pacific | 218 | 220 | 151 | ||||||||
| South America | 14 | 12 | 12 | ||||||||
| Total capital expenditures | $ | 781 | $ | 846 | $ | 698 |
| (1) | Other includes capital expenditures attributable to corporate administrative and support functions, including corporate headquarters and certain technical centers. |
Cash Flows
Intra-month cash flow cycles vary by region, but in general we are users of cash through the first half of a typical month and we generate cash during the latter half of a typical month. Due to this cycle of cash flows, we may utilize short-term financing, including our Revolving Credit Facility and European accounts receivable factoring facility, to manage our intra-month working capital needs. Our cash balance typically peaks at month end.
We utilize a combination of strategies, including dividends, cash pooling arrangements, intercompany loan structures and other distributions and advances to provide the funds necessary to meet our global liquidity needs. We utilize a global cash pooling arrangement to consolidate and manage our global cash balances, which enables us to efficiently move cash into and out of a number of the countries in which we operate.
Operating activities—Net cash provided by operating activities from continuing operations totaled $1,624 million and $1,640 million for the years ended December 31, 2019 and 2018, respectively. Cash flow from operating activities from continuing operations for the year ended December 31, 2019 consisted primarily of net earnings from continuing operations of $1,009 million, increased by $767 million for non-cash charges for depreciation, amortization, pension costs and extinguishment of debt, partially offset by $184 million related to changes in operating assets and liabilities, net of restructuring and pension contributions. Cash flow from operating activities from continuing operations for the year ended December 31, 2018 consisted primarily of net earnings from continuing operations of $1,107 million, increased by $711 million for non-cash charges for depreciation, amortization and pension costs, partially offset by $216 million related to changes in operating assets and liabilities, net of restructuring and pension contributions.
Investing activities—Net cash used in investing activities from continuing operations totaled $1,111 million and $2,048 million for the years ended December 31, 2019 and 2018, respectively. The decrease in usage is primarily attributable to $344 million paid for business acquisitions and technology investments, as compared to $1,213 million paid for business acquisitions and technology investments during the year ended December 31, 2018. Additionally, capital expenditures decreased $65 million during the year ended December 31, 2019 as compared to the year ended December 31, 2018.
Financing activities—Net cash used in financing activities totaled $649 million and $555 million for the years ended December 31, 2019 and 2018, respectively. Cash flows used in financing activities for the year ended December 31, 2019 primarily included net proceeds of $641 million received from the issuance of the 2019 Senior Notes, which were utilized to redeem the $650 million 3.15% Senior Notes, as well as $420 million paid to repurchase ordinary shares and $226 million of dividend payments. Cash flows used in financing activities for the year ended December 31, 2018 primarily included $499 million paid to repurchase ordinary shares and $233 million of dividend payments, partially offset by $268 million in borrowings under other short-term debt agreements.
Off-Balance Sheet Arrangements and Other Matters
We do not engage in any off-balance sheet financial arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Pension Benefits
Certain of our non-U.S. subsidiaries sponsor defined benefit pension plans, which generally provide benefits based on negotiated amounts for each year of service. Our primary non-U.S. plans are located in France, Germany, Mexico, Portugal and the United Kingdom (“U.K.”). The U.K. and certain Mexican plans are funded. In addition, we have defined benefit plans in South Korea, Turkey and Italy for which amounts are payable to employees immediately upon separation. The obligations for these plans are recorded over the requisite service period. We anticipate making pension contributions and benefit payments of approximately $45 million for non-U.S. plans in 2020.
Aptiv sponsors a Supplemental Executive Retirement Program (“SERP”) for those employees who were U.S. executives of DPHH prior to September 30, 2008 and were still U.S. executives of the Company on October 7, 2009, the effective date of the program. This program is unfunded. Executives receive benefits over 5 years after an involuntary or voluntary separation from Aptiv. The SERP is closed to new members and was frozen effective September 30, 2008. There are no required contributions for the SERP in 2019, although we anticipate making benefit payments of approximately $5 million for the SERP in 2020.
Refer to Note 12. Pension Benefits to the audited consolidated financial statements included herein for further information on (1) historical benefit costs of the pension plans, (2) the principal assumptions used to determine the pension benefit expense and the actuarial value of the projected benefit obligation for the U.S. and non-U.S. pension plans, (3) a sensitivity analysis of potential changes to pension obligations and expense that would result from changes in key assumptions and (4) funding obligations.
Environmental Matters
We are subject to the requirements of U.S. federal, state, local and non-U.S. environmental and safety and health laws and regulations. These include laws regulating air emissions, water discharge, hazardous materials and waste management. We have an environmental management structure designed to facilitate and support our compliance with these requirements globally. Although it is our intent to comply with all such requirements and regulations, we cannot provide assurance that we are at all times in compliance. Environmental requirements are complex, change frequently and have tended to become more stringent over time, and we therefore cannot ensure that our eventual environmental remediation costs and liabilities will not be material.
Certain environmental laws assess liability on current or previous owners or operators of real property for the cost of removal or remediation of hazardous substances. In addition to clean-up actions brought by U.S. federal, state, local and non-U.S. agencies, plaintiffs could raise personal injury or other private claims due to the presence of hazardous substances on or from a property. At this time, we are involved in various stages of investigation and cleanup related to environmental remediation matters at certain of our present and former facilities. In addition, there may be soil or groundwater contamination at several of our properties resulting from historical, ongoing or nearby activities.
As of December 31, 2019 and 2018, the undiscounted reserve for environmental investigation and remediation was approximately $4 million (of which $1 million was recorded in accrued liabilities and $3 million was recorded in other long-term liabilities) and $4 million (of which $1 million was recorded in accrued liabilities and $3 million was recorded in other long-term liabilities). Aptiv cannot ensure that environmental requirements will not change or become more stringent over time or that its eventual environmental remediation costs and liabilities will not exceed the amount of its current reserves. In the event that such liabilities were to significantly exceed the amounts recorded, Aptiv’s results of operations could be materially affected.
Legal Proceedings
For a description of our legal proceedings, see Item 3. Legal Proceedings and Note 13. Commitments and Contingencies to the audited consolidated financial statements included herein.
Significant Accounting Policies and Critical Accounting Estimates
Our significant accounting policies are described in Note 2. Significant Accounting Policies to the audited consolidated financial statements included herein. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate.
We consider an accounting estimate to be critical if:
| • | It requires us to make assumptions about matters that were uncertain at the time we were making the estimate, and |
| • | Changes in the estimate or different estimates that we could have selected would have had a material impact on our financial condition or results of operations. |
Acquisitions
In accordance with accounting guidance for the provisions in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, we allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. In addition, an acquisition may include a contingent consideration component. The fair value of the contingent consideration is estimated as of the date of the acquisition and is recorded as part of the purchase price. This estimate is updated in future periods and any changes in the estimate, which are not considered an adjustment to the purchase price, are recorded in our consolidated statements of operations.
We use all available information to estimate fair values. We typically engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets and any other significant assets or liabilities. We adjust the preliminary purchase price allocation, as necessary, up to one year after the acquisition closing date as we obtain more information regarding asset valuations and liabilities assumed.
Our purchase price allocation methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. Management estimates the fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies.
Other estimates used in determining fair value include, but are not limited to, future cash flows or income related to intangibles, market rate assumptions, actuarial assumptions for benefit plans and appropriate discount rates. Our estimates of fair value are based upon assumptions believed to be reasonable, but that are inherently uncertain, and therefore, may not be realized. Accordingly, there can be no assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially.
Warranty Obligations and Product Recall Costs
Estimating warranty obligations requires us to forecast the resolution of existing claims and expected future claims on products sold. We base our estimate on historical trends of units sold and payment amounts, combined with our current understanding of the status of existing claims and discussions with our customers. The key factors which impact our estimates are (1) the stated or implied warranty period; (2) OEM source; (3) OEM policy decisions regarding warranty claims; and (4) OEMs seeking to hold suppliers responsible for product warranties. These estimates are re-evaluated on an ongoing basis. Actual warranty obligations could differ from the amounts estimated requiring adjustments to existing reserves in future periods. Due to the uncertainty and potential volatility of the factors contributing to developing these estimates, changes in our assumptions could materially affect our results of operations.
In addition to our ordinary warranty provisions with customers, we are also at risk for product recall costs, which are costs incurred when a customer or the Company recalls a product through a formal campaign soliciting return of that product. In addition, the National Highway Traffic Safety Administration (“NHTSA”) has the authority, under certain circumstances, to require recalls to remedy safety concerns. Product recall costs typically include the cost of the product being replaced as well as the customer’s cost of the recall, including labor to remove and replace the recalled part. The Company accrues for costs related to product recalls as part of our warranty accrual at the time an obligation becomes probable and can be reasonably estimated. Actual costs incurred could differ from the amounts estimated, requiring adjustments to these reserves in future periods. It is possible that changes in our assumptions or future product recall issues could materially affect our financial position, results of operations or cash flows.
Legal and Other Contingencies
We are involved from time to time in various legal proceedings and claims, including commercial or contractual disputes, product liability claims, government investigations, product warranties and environmental and other matters, that arise in the normal course of business. We routinely assess the likelihood of any adverse judgments or outcomes related to these matters, as well as ranges of probable losses, by consulting with internal personnel involved with such matters as well as with outside legal counsel handling such matters. We have accrued for estimated losses for those matters where we believe that the likelihood of a loss has occurred, is probable and the amount of the loss is reasonably estimable. The determination of the amount of such reserves is based on knowledge and experience with regard to past and current matters and consultation with internal personnel involved with such matters and with outside legal counsel handling such matters. The amount of such reserves may change in the future due to new developments or changes in circumstances. The inherent uncertainty related to the outcome of these matters can result in amounts materially different from any provisions made with respect to their resolution. Refer to Note 13. Commitments and Contingencies to the audited consolidated financial statements included herein for additional information.
Restructuring
Accruals have been recorded in conjunction with our restructuring actions. These accruals include estimates primarily related to employee termination costs, contract termination costs and other related exit costs in conjunction with workforce reduction and programs related to the rationalization of manufacturing and engineering processes. Actual costs may vary from these estimates. These accruals are reviewed on a quarterly basis and changes to restructuring actions are appropriately recognized when identified.
Pensions
We use actuarial estimates and related actuarial methods to calculate our obligation and expense. We are required to select certain actuarial assumptions, which are determined based on current market conditions, historical information and consultation with and input from our actuaries and asset managers. Refer to Note 12. Pension Benefits to the audited consolidated financial statements included herein for additional details. The key factors which impact our estimates are (1) discount rates; (2) asset return assumptions; and (3) actuarial assumptions such as retirement age and mortality which are determined as of the current year measurement date. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when appropriate. Experience gains and losses, as well as the effects of changes in actuarial assumptions and plan provisions are recognized in other comprehensive income. Cumulative actuarial gains and losses in excess of 10% of the projected benefit obligation (“PBO”) for a particular plan are amortized over the average future service period of the employees in that plan.
The principal assumptions used to determine the pension expense and the actuarial value of the projected benefit obligation for the U.S. and non-U.S. pension plans were:
Assumptions used to determine benefit obligations at December 31:
| Pension Benefits | |||||||||||
| U.S. Plans | Non-U.S. Plans | ||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||
| Weighted-average discount rate | 2.40 | % | 3.80 | % | 2.87 | % | 3.53 | % | |||
| Weighted-average rate of increase in compensation levels | N/A | N/A | 3.69 | % | 3.74 | % |
Assumptions used to determine net expense for years ended December 31:
| Pension Benefits | |||||||||||||||||
| U.S. Plans | Non-U.S. Plans | ||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||
| Weighted-average discount rate | 3.80 | % | 2.70 | % | 2.70 | % | 3.53 | % | 3.39 | % | 2.83 | % | |||||
| Weighted-average rate of increase in compensation levels | N/A | N/A | N/A | 3.74 | % | 3.65 | % | 3.86 | % | ||||||||
| Weighted-average expected long-term rate of return on plan assets | N/A | N/A | N/A | 4.95 | % | 5.63 | % | 5.84 | % |
We select discount rates by analyzing the results of matching each plan’s projected benefit obligations with a portfolio of high-quality fixed income investments rated AA- or higher by Standard and Poor’s.
Aptiv does not have any U.S. pension assets; therefore no U.S. asset rate of return calculation was necessary for 2019, 2018 or 2017. The primary funded non-U.S. plans are in the United Kingdom (“U.K.”) and Mexico. For the determination of 2019 expense, we assumed a long-term expected asset rate of return of approximately 4.50% and 7.50% for the U.K. and Mexico, respectively. We evaluated input from local actuaries and asset managers, including consideration of recent fund performance and historical returns, in developing the long-term rate of return assumptions. The assumptions for the U.K. and Mexico are primarily conservative long-term, prospective rates. To determine the expected return on plan assets, the market-related value of our plan assets is actual fair value.
Our pension expense for 2020 is determined at the December 31, 2019 measurement date. For purposes of analysis, the following table highlights the sensitivity of our pension obligations and expense attributable to continuing operations to changes in key assumptions:
| Change in Assumption | Impact on Pension Expense | Impact on PBO | ||
| 25 basis point (“bp”) decrease in discount rate | + $2 million | + $31 million | ||
| 25 bp increase in discount rate | - $2 million | - $30 million | ||
| 25 bp decrease in long-term expected return on assets | + $1 million | — | ||
| 25 bp increase in long-term expected return on assets | - $1 million | — |
The above sensitivities reflect the effect of changing one assumption at a time. It should be noted that economic factors and conditions often affect multiple assumptions simultaneously and the effects of changes in key assumptions are not necessarily linear. The above sensitivities also assume no changes to the design of the pension plans and no major restructuring programs.
Based on information provided by our actuaries and asset managers, we believe that the assumptions used are reasonable; however, changes in these assumptions could impact our financial position, results of operations or cash flows. Refer to Note 12. Pension Benefits to the audited consolidated financial statements included herein for additional information.
Valuation of Long-Lived Assets, Intangible Assets and Investments in Affiliates and Expected Useful Lives
We monitor our long-lived and definite-lived assets for impairment indicators on an ongoing basis based on projections of anticipated future cash flows, including future profitability assessments of various manufacturing sites when events and circumstances warrant such a review. If impairment indicators exist, we perform the required impairment analysis by comparing the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values. If the net book value exceeds the undiscounted cash flows, an impairment loss is measured and recognized. An impairment loss is measured as the difference between the net book value and the estimated fair value of the long-lived assets. Even if an impairment charge is not required, a reassessment of the useful lives over which depreciation or amortization is being recognized may be appropriate based on our assessment of the recoverability of these assets. We estimate cash flows and fair value using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments and review of appraisals. The key factors which impact our estimates are (1) future production estimates; (2) customer preferences and decisions; (3) product pricing; (4) manufacturing and material cost estimates; and (5) product life / business retention. Any differences in actual results from the estimates could result in fair values different from the estimated fair values, which could materially impact our future results of operations and financial condition. We believe that the projections of anticipated future cash flows and fair value assumptions are reasonable; however, changes in assumptions underlying these estimates could affect our valuations.
Goodwill and Intangible Assets
We periodically review goodwill for impairment indicators. We review goodwill for impairment annually in the fourth quarter or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The Company performs the goodwill impairment review at the reporting unit level. We perform a qualitative assessment (step 0) of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If not, no further goodwill impairment testing is performed. If so, we perform the step 1 and step 2 tests discussed hereafter. Our qualitative assessment involves significant estimates, assumptions, and judgments, including, but not limited to, macroeconomic conditions, industry and market conditions, financial performance of the Company, reporting unit specific events and changes in the Company’s share price.
If the fair value of the reporting unit is greater than its carrying amount (step 1), goodwill is not considered to be impaired and the second step is not required. We estimate the fair value of our reporting units using a combination of a future discounted cash flow valuation model and, if possible, a comparable market transaction model. Estimating fair value requires the Company to make judgments about appropriate discount rates, growth rates, relevant comparable company earnings multiples and the
amount and timing of expected future cash flows. If the fair value of the reporting unit is less than its carrying amount, an entity must perform the second step to measure the amount of the impairment loss, if any. The second step requires a reporting unit to compare its implied fair value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, the reporting unit would recognize an impairment loss for that excess. We estimate implied fair value of goodwill in the same way as goodwill is recognized in a business combination. We estimate fair value of the reporting unit’s identifiable net assets excluding goodwill is compared to the fair value of the reporting unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
We review indefinite-lived intangible assets for impairment annually or more frequently if events or changes in circumstances indicate the assets might be impaired. Similar to the goodwill assessment described above, the Company first performs a qualitative assessment of whether it is more likely than not that an indefinite-lived intangible asset is impaired. If necessary, the Company then performs a quantitative impairment test by comparing the estimated fair value of the asset, based upon its forecasted cash flows, to its carrying value. Other intangible assets with definite lives are amortized over their useful lives and are subject to impairment testing only if events or circumstances indicate that the asset might be impaired, as described above.
Income Taxes
Deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. Such amounts are adjusted, as appropriate, to reflect changes in tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is recorded to reduce our deferred tax assets to the amount that is more likely than not to be realized. Changes in tax laws or accounting standards and methods may affect recorded deferred taxes in future periods.
When establishing a valuation allowance, we consider future sources of taxable income such as “future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards” and “tax planning strategies.” A tax planning strategy is defined as “an action that: is prudent and feasible; an enterprise ordinarily might not take, but would take to prevent an operating loss or tax credit carryforward from expiring unused; and would result in realization of deferred tax assets.” In the event we determine it is more likely than not that the deferred tax assets will not be realized in the future, the valuation adjustment to the deferred tax assets will be charged to earnings in the period in which we make such a determination. The valuation of deferred tax assets requires judgment and accounting for the deferred tax effect of events that have been recorded in the financial statements or in tax returns and our future projected profitability. Changes in our estimates, due to unforeseen events or otherwise, could have a material impact on our financial condition and results of operations.
We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified. The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities. Our estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. We use a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We record a liability for the difference between the benefit recognized and measured and tax position taken or expected to be taken on our tax return. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. We report tax-related interest and penalties as a component of income tax expense. We do not believe there is a reasonable likelihood that there will be a material change in the tax related balances or valuation allowance balances. However, due to the complexity of some of these uncertainties, the ultimate resolution may be materially different from the current estimate. Refer to Note 14. Income Taxes to the audited consolidated financial statements included herein for additional information.
Recently Issued Accounting Pronouncements
Refer to Note 2. Significant Accounting Policies to the audited consolidated financial statements included herein for a complete description of recent accounting standards which we have not yet been required to implement which may be applicable to our operations. Additionally, the significant accounting standards that have been adopted during the year ended December 31, 2019 are described.
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