filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
318K characters. Original on sec.gov · Markdown
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Aptiv PLC
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Aptiv PLC (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 7, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Uncertain Tax Positions | |||||
| Description of the Matter | As described in Notes 2 and 14, the Company establishes reserves for uncertain tax positions for positions that are taken on their income tax returns that might not be sustained upon examination by the taxing authorities. At December 31, 2021, the Company has recorded approximately $224 million relating to uncertain tax positions. In determining whether an uncertain tax position exists, the Company determines, based solely on its technical merits, whether the tax position is more likely than not to be sustained upon examination, and if so, a tax benefit is measured on a cumulative probability basis that is more likely than not to be realized upon the ultimate settlement. The Company identifies its certain and uncertain tax positions and then evaluates the recognition and measurement steps to determine the amount that should be recognized. The Company then evaluates uncertain tax positions in subsequent periods for recognition, de-recognition or re-measurement if changes have occurred, or when effective settlement or expiration of the statute of limitations occurs. |
| Auditing the uncertain tax positions is complex because of the judgmental nature of the tax accruals and various other tax return positions that might not be sustained upon review by taxing authorities. The Company files tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world due to its complex global footprint. Taxing jurisdictions significant to Aptiv include Barbados, China, Germany, Ireland, Luxembourg, Mexico, South Korea, the U.K. and the U.S. | |||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls related to the recognition, measurement and the evaluation of changes in uncertain tax positions. This included testing controls over management’s review of the tax positions, their evaluation of whether they met the measurement threshold and then recalculating the amounts recognized based upon a cumulative probability assessment performed by management. Our audit procedures to test the Company’s uncertain tax positions included, among others, involvement of our tax professionals, including transfer pricing professionals. This included evaluating tax opinions and third-party transfer pricing studies obtained by the Company and assessing the Company’s correspondence with the relevant tax authorities. We analyzed the Company’s assumptions and data used to determine the amount of tax benefit to recognize and tested the accuracy of the calculations. Our testing also included the evaluation of the ongoing positions and consideration of changes, the recording of penalties and interest and the ultimate settlement and payment of certain tax matters. | ||||
| Revenue Recognition | |||||
| Description of the Matter | As described in Notes 2 and 24, Aptiv occasionally enters into pricing agreements with its customers that provide for price reductions, some of which are conditional upon achieving certain joint cost saving targets. In addition, from time to time, Aptiv makes payments to customers in conjunction with ongoing business. Revenue is recognized based on the agreed-upon price at the time of shipment, and sales incentives, allowances and certain customer payments are recognized as a reduction to revenue at the time of the commitment to provide such incentives or make these payments. Certain other customer payments or upfront fees are considered to be a cost to obtain a contract as they are directly attributable to a contract, are incremental and management expects the payments to be recoverable. In these cases, the customer payment is capitalized and amortized to revenue based on the transfer of goods and services to the customer for which the upfront payment relates. As of December 31, 2021, Aptiv has recorded $92 million related to these capitalized upfront payments. Auditing the accounting for and completeness of arrangements containing elements such as sales incentives, allowances and customer payments, including the appropriate timing and presentation of adjustments to revenue as well as costs to obtain a contract is judgmental due to the unique facts and circumstances involved in each revenue arrangement, as well as on-going commercial negotiations with customers. | ||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the review of customer contracts. This included testing controls over the Company’s process to identify and evaluate customer contracts that contain sales incentives, allowances and customer payments that impact revenue recognition. Our audit procedures to test the completeness of the Company’s identification of such contracts included, among others, interviewing sales representatives who are responsible for negotiations with customers and testing cash payments to customers. To test management’s assessment of customer contracts containing sales incentives, allowances and customer payments, our procedures included, among others, selecting a sample of customer agreements, obtaining and reviewing source documentation, including master agreements, and other documents that were part of the agreement, and evaluating the contract terms to determine the appropriateness of the accounting treatment. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2006
Detroit, Michigan
February 7, 2022
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Aptiv PLC
Opinion on Internal Control Over Financial Reporting
We have audited Aptiv PLC’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Aptiv PLC (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule and our report dated February 7, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Detroit, Michigan
February 7, 2022
APTIV PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended December 31, | |||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||
| (in millions, except per share amounts) | |||||||||||||||||||||||||||||
| Net sales | $ | 15,618 | $ | 13,066 | $ | 14,357 | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||
| Cost of sales | 13,182 | 11,126 | 11,711 | ||||||||||||||||||||||||||
| Selling, general and administrative | 1,075 | 976 | 1,076 | ||||||||||||||||||||||||||
| Amortization | 148 | 144 | 146 | ||||||||||||||||||||||||||
| Restructuring (Note 10) | 24 | 136 | 148 | ||||||||||||||||||||||||||
| Gain on autonomous driving joint venture (Note 20) | — | (1,434) | — | ||||||||||||||||||||||||||
| Total operating expenses | 14,429 | 10,948 | 13,081 | ||||||||||||||||||||||||||
| Operating income | 1,189 | 2,118 | 1,276 | ||||||||||||||||||||||||||
| Interest expense | (150) | (164) | (164) | ||||||||||||||||||||||||||
| Other (expense) income, net (Note 19) | (129) | — | 14 | ||||||||||||||||||||||||||
| Income before income taxes and equity (loss) income | 910 | 1,954 | 1,126 | ||||||||||||||||||||||||||
| Income tax expense | (101) | (49) | (132) | ||||||||||||||||||||||||||
| Income before equity (loss) income | 809 | 1,905 | 994 | ||||||||||||||||||||||||||
| Equity (loss) income, net of tax | (200) | (83) | 15 | ||||||||||||||||||||||||||
| Net income | 609 | 1,822 | 1,009 | ||||||||||||||||||||||||||
| Net income attributable to noncontrolling interest | 19 | 18 | 19 | ||||||||||||||||||||||||||
| Net income attributable to Aptiv | 590 | 1,804 | 990 | ||||||||||||||||||||||||||
| Mandatory convertible preferred share dividends (Note 15) | (63) | (35) | — | ||||||||||||||||||||||||||
| Net income attributable to ordinary shareholders | $ | 527 | $ | 1,769 | $ | 990 | |||||||||||||||||||||||
| Basic net income per share: | |||||||||||||||||||||||||||||
| Basic net income per share attributable to ordinary shareholders | $ | 1.95 | $ | 6.72 | $ | 3.85 | |||||||||||||||||||||||
| Weighted average number of basic shares outstanding | 270.46 | 263.43 | 256.81 | ||||||||||||||||||||||||||
| Diluted net income per share (Note 15): | |||||||||||||||||||||||||||||
| Diluted net income per share attributable to ordinary shareholders | $ | 1.94 | $ | 6.66 | $ | 3.85 | |||||||||||||||||||||||
| Weighted average number of diluted shares outstanding | 271.22 | 270.70 | 257.39 |
See notes to consolidated financial statements.
APTIV PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year Ended December 31, | ||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Net income | $ | 609 | $ | 1,822 | $ | 1,009 | ||||||||||||||||||||||||||
| Other comprehensive (loss) income: | ||||||||||||||||||||||||||||||||
| Currency translation adjustments | (143) | 154 | (45) | |||||||||||||||||||||||||||||
| Net change in unrecognized (loss) gain on derivative instruments, net of tax (Note 17) | (57) | 27 | 56 | |||||||||||||||||||||||||||||
| Employee benefit plans adjustment, net of tax (Note 12) | 73 | (5) | (30) | |||||||||||||||||||||||||||||
| Other comprehensive (loss) income | (127) | 176 | (19) | |||||||||||||||||||||||||||||
| Comprehensive income | 482 | 1,998 | 990 | |||||||||||||||||||||||||||||
| Comprehensive income attributable to noncontrolling interests | 19 | 20 | 16 | |||||||||||||||||||||||||||||
| Comprehensive income attributable to Aptiv | $ | 463 | $ | 1,978 | $ | 974 |
See notes to consolidated financial statements.
APTIV PLC
CONSOLIDATED BALANCE SHEETS
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in millions) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 3,139 | $ | 2,821 | |||||||
| Restricted cash | — | 32 | |||||||||
| Accounts receivable, net of allowance for doubtful accounts of $37 million and $40 million, respectively (Note 2) | 2,784 | 2,812 | |||||||||
| Inventories (Note 3) | 2,014 | 1,297 | |||||||||
| Other current assets (Note 4) | 499 | 503 | |||||||||
| Total current assets | 8,436 | 7,465 | |||||||||
| Long-term assets: | |||||||||||
| Property, net (Note 6) | 3,294 | 3,301 | |||||||||
| Operating lease right-of-use assets (Note 25) | 383 | 380 | |||||||||
| Investments in affiliates (Note 5) | 1,797 | 2,011 | |||||||||
| Intangible assets, net (Note 7) | 964 | 1,091 | |||||||||
| Goodwill (Note 7) | 2,511 | 2,580 | |||||||||
| Other long-term assets (Note 4) | 622 | 694 | |||||||||
| Total long-term assets | 9,571 | 10,057 | |||||||||
| Total assets | $ | 18,007 | $ | 17,522 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Short-term debt (Note 11) | $ | 8 | $ | 90 | |||||||
| Accounts payable | 2,953 | 2,571 | |||||||||
| Accrued liabilities (Note 8) | 1,246 | 1,385 | |||||||||
| Total current liabilities | 4,207 | 4,046 | |||||||||
| Long-term liabilities: | |||||||||||
| Long-term debt (Note 11) | 4,059 | 4,011 | |||||||||
| Pension benefit obligations (Note 12) | 440 | 525 | |||||||||
| Long-term operating lease liabilities (Note 25) | 304 | 300 | |||||||||
| Other long-term liabilities (Note 8) | 436 | 540 | |||||||||
| Total long-term liabilities | 5,239 | 5,376 | |||||||||
| Total liabilities | 9,446 | 9,422 | |||||||||
| Commitments and contingencies (Note 13) | |||||||||||
| Shareholders’ equity: | |||||||||||
| Preferred shares, $0.01 par value per share, 50,000,000 shares authorized; 11,500,000 shares of 5.50% Mandatory Convertible Preferred Shares, Series A, issued and outstanding as of December 31, 2021 and 2020 | — | — | |||||||||
| Ordinary shares, $0.01 par value per share, 1,200,000,000 shares authorized, 270,514,140 and 270,025,374 issued and outstanding as of December 31, 2021 and 2020, respectively | 3 | 3 | |||||||||
| Additional paid-in-capital | 3,939 | 3,897 | |||||||||
| Retained earnings | 5,077 | 4,550 | |||||||||
| Accumulated other comprehensive loss (Note 16) | (672) | (545) | |||||||||
| Total Aptiv shareholders’ equity | 8,347 | 7,905 | |||||||||
| Noncontrolling interest | 214 | 195 | |||||||||
| Total shareholders’ equity | 8,561 | 8,100 | |||||||||
| Total liabilities and shareholders’ equity | $ | 18,007 | $ | 17,522 |
See notes to consolidated financial statements.
APTIV PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net income | $ | 609 | $ | 1,822 | $ | 1,009 | |||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Depreciation | 625 | 620 | 571 | ||||||||||||||
| Amortization | 148 | 144 | 146 | ||||||||||||||
| Amortization of deferred debt issuance costs | 8 | 9 | 6 | ||||||||||||||
| Restructuring expense, net of cash paid | (56) | (15) | 29 | ||||||||||||||
| Deferred income taxes | (60) | (52) | (33) | ||||||||||||||
| Pension and other postretirement benefit expenses | 39 | 38 | 44 | ||||||||||||||
| Loss (income) from equity method investments, net of dividends received | 206 | 92 | (6) | ||||||||||||||
| Loss on modification of debt | 1 | 4 | — | ||||||||||||||
| Loss on extinguishment of debt | 126 | — | 6 | ||||||||||||||
| Loss (gain) on sale of assets | — | 3 | (1) | ||||||||||||||
| Share-based compensation | 87 | 60 | 66 | ||||||||||||||
| Gain on autonomous driving joint venture, net | — | (1,434) | — | ||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Accounts receivable, net | 37 | (243) | (74) | ||||||||||||||
| Inventories | (710) | (8) | 8 | ||||||||||||||
| Other assets | 61 | 78 | (202) | ||||||||||||||
| Accounts payable | 265 | 186 | 133 | ||||||||||||||
| Accrued and other long-term liabilities | (110) | 173 | (9) | ||||||||||||||
| Other, net | (26) | (31) | (31) | ||||||||||||||
| Pension contributions | (28) | (33) | (38) | ||||||||||||||
| Net cash provided by operating activities | 1,222 | 1,413 | 1,624 | ||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Capital expenditures | (611) | (584) | (781) | ||||||||||||||
| Proceeds from sale of property | 9 | 10 | 14 | ||||||||||||||
| Cost of business acquisitions and other transactions, net of cash acquired | (130) | (49) | (334) | ||||||||||||||
| Proceeds from sale of technology investments | 22 | — | — | ||||||||||||||
| Cost of technology investments | (2) | (2) | (10) | ||||||||||||||
| Settlement of derivatives | (17) | (1) | — | ||||||||||||||
| Net cash used in investing activities | (729) | (626) | (1,111) | ||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Net (repayments) proceeds under other short-term debt agreements | (22) | (372) | 80 | ||||||||||||||
| Net repayments under other long-term debt agreements | (8) | (39) | (25) | ||||||||||||||
| Repayment of senior notes | (1,473) | — | (654) | ||||||||||||||
| Proceeds from issuance of senior notes, net of issuance costs | 1,450 | — | 641 | ||||||||||||||
| Fees related to modification of debt agreements | (6) | (18) | — | ||||||||||||||
| Proceeds from the public offering of ordinary shares, net of issuance costs | — | 1,115 | — | ||||||||||||||
| Proceeds from the public offering of preferred shares, net of issuance costs | — | 1,115 | — | ||||||||||||||
| Contingent consideration payments | (24) | — | — | ||||||||||||||
| Dividend payments of consolidated affiliates to minority shareholders | — | (10) | (11) | ||||||||||||||
| Repurchase of ordinary shares | — | (57) | (420) | ||||||||||||||
| Distribution of mandatory convertible preferred share cash dividends | (63) | (32) | — | ||||||||||||||
| Distribution of ordinary share cash dividends | — | (56) | (226) | ||||||||||||||
| Taxes withheld and paid on employees’ restricted share awards | (45) | (33) | (34) | ||||||||||||||
| Net cash (used in) provided by financing activities | (191) | 1,613 | (649) | ||||||||||||||
| Effect of exchange rate fluctuations on cash, cash equivalents and restricted cash | (16) | 24 | (3) | ||||||||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | 286 | 2,424 | (139) | ||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of the year | 2,853 | 429 | 568 | ||||||||||||||
| Cash, cash equivalents and restricted cash at end of the year | $ | 3,139 | $ | 2,853 | $ | 429 | |||||||||||
See notes to consolidated financial statements.
APTIV PLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ordinary Shares | Preferred Shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Amount of Shares | Number of Shares | Amount of Shares | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Aptiv Shareholders’ Equity | Noncontrolling Interest | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | (in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2021 | 270 | $ | 3 | 12 | $ | — | $ | 3,897 | $ | 4,550 | $ | (545) | $ | 7,905 | $ | 195 | $ | 8,100 | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 590 | — | 590 | 19 | 609 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (127) | (127) | — | (127) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Mandatory convertible preferred share cumulative dividends | — | — | — | — | — | (63) | — | (63) | — | (63) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Taxes withheld on employees’ restricted share award vestings | — | — | — | — | (45) | — | — | (45) | — | (45) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | 1 | — | — | — | 87 | — | — | 87 | — | 87 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 271 | $ | 3 | 12 | $ | — | $ | 3,939 | $ | 5,077 | $ | (672) | $ | 8,347 | $ | 214 | $ | 8,561 | |||||||||||||||||||||||||||||||||||||||||
| 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2020 | 255 | $ | 3 | — | $ | — | $ | 1,645 | $ | 2,890 | $ | (719) | $ | 3,819 | $ | 192 | $ | 4,011 | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 1,804 | — | 1,804 | 18 | 1,822 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 174 | 174 | 2 | 176 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on ordinary shares | — | — | — | — | 1 | (57) | — | (56) | — | (56) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend payments of consolidated affiliates to minority shareholders | — | — | — | — | — | — | — | — | (17) | (17) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Mandatory convertible preferred share cumulative dividends | — | — | — | — | — | (35) | — | (35) | — | (35) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Taxes withheld on employees’ restricted share award vestings | — | — | — | — | (33) | — | — | (33) | — | (33) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares | (1) | — | — | — | (6) | (51) | — | (57) | — | (57) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares | 15 | — | — | — | 1,115 | — | — | 1,115 | — | 1,115 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of mandatory convertible preferred shares | — | — | 12 | — | 1,115 | — | — | 1,115 | — | 1,115 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | 1 | — | — | — | 60 | — | — | 60 | — | 60 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment for recently adopted accounting pronouncements | — | — | — | — | — | (1) | — | (1) | — | (1) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 270 | $ | 3 | 12 | $ | — | $ | 3,897 | $ | 4,550 | $ | (545) | $ | 7,905 | $ | 195 | $ | 8,100 |
See notes to consolidated financial statements.
APTIV PLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Continued)
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ordinary Shares | Preferred Shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Amount of Shares | Number of Shares | Amount of Shares | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Aptiv Shareholders’ Equity | Noncontrolling Interest | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | (in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2019 | 260 | $ | 3 | — | $ | — | $ | 1,639 | $ | 2,511 | $ | (694) | $ | 3,459 | $ | 211 | $ | 3,670 | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 990 | — | 990 | 19 | 1,009 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (16) | (16) | (3) | (19) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on ordinary shares | — | — | — | — | 3 | (229) | — | (226) | — | (226) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend payments of consolidated affiliates to minority shareholders | — | — | — | — | — | — | — | — | (35) | (35) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Taxes withheld on employees’ restricted share award vestings | — | — | — | — | (34) | — | — | (34) | — | (34) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares | (5) | — | — | — | (29) | (391) | — | (420) | — | (420) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 66 | — | — | 66 | — | 66 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment for recently adopted accounting pronouncements | — | — | — | — | — | 9 | (9) | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 255 | $ | 3 | — | $ | — | $ | 1,645 | $ | 2,890 | $ | (719) | $ | 3,819 | $ | 192 | $ | 4,011 |
See notes to consolidated financial statements.
APTIV PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
General and basis of presentation—“Aptiv,” the “Company,” “we,” “us” and “our” refer to Aptiv PLC (formerly known as Delphi Automotive PLC), a public limited company formed under the laws of Jersey on May 19, 2011, which completed an initial public offering on November 22, 2011, and its consolidated subsidiaries. On December 4, 2017, following the spin-off of Delphi Technologies, the Company changed its name to Aptiv PLC and its NYSE symbol to “APTV.”
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Nature of operations—Aptiv is a leading global technology and mobility architecture company primarily serving the automotive sector. We deliver end-to-end mobility solutions enabling our customers' transition to more electrified, software-defined vehicles. We design and manufacture vehicle components and provide electrical, electronic and active safety technology solutions to the global automotive and commercial vehicle markets. Aptiv is one of the largest vehicle technology suppliers and our customers include the 25 largest automotive original equipment manufacturers (“OEMs”) in the world. Aptiv operates 127 major manufacturing facilities and 12 major technical centers utilizing a regional service model that enables the Company to efficiently and effectively serve its global customers from best cost countries. Aptiv has a presence in 46 countries and has approximately 18,900 scientists, engineers and technicians focused on developing market relevant product solutions for its customers.
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation—The consolidated financial statements include the accounts of Aptiv and the subsidiaries in which Aptiv holds a controlling financial or management interest and variable interest entities of which Aptiv has determined that it is the primary beneficiary. Aptiv’s share of the earnings or losses of non-controlled affiliates, over which Aptiv exercises significant influence (generally a 20% to 50% ownership interest), is included in the consolidated operating results using the equity method of accounting. When Aptiv does not have the ability to exercise significant influence (generally when ownership interest is less than 20%), investments in non-consolidated affiliates without readily determinable fair value are measured at cost, less impairments, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer, while investments in publicly traded equity securities are measured at fair value based on quoted prices for identical assets on active market exchanges as of each reporting date. The Company monitors its investments in affiliates for indicators of other-than-temporary declines in value on an ongoing basis. If the Company determines that such a decline has occurred, an impairment loss is recorded, which is measured as the difference between carrying value and estimated fair value. Estimated fair value is generally determined using an income approach based on discounted cash flows or negotiated transaction values.
Intercompany transactions and balances between consolidated Aptiv businesses have been eliminated.
During the years ended December 31, 2021, 2020 and 2019, Aptiv received dividends of $6 million, $9 million and $9 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.
Aptiv's equity investments without readily determinable fair value totaled $30 million and $113 million as of December 31, 2021 and 2020, respectively, and are classified within other long-term assets in the consolidated balance sheets. Aptiv's investments in publicly traded equity securities totaled $66 million as of December 31, 2021 and are classified within other long-term assets in the consolidated balance sheet. There were no publicly traded equity securities held as of December 31, 2020. Refer to Note 5. Investments in Affiliates for further information regarding Aptiv's equity investments.
Use of estimates—Preparation of consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect amounts reported therein. Generally, matters subject to estimation and judgment include amounts related to accounts receivable realization, inventory obsolescence, asset impairments, useful lives of intangible and fixed assets, deferred tax asset valuation allowances, income taxes, pension benefit plan assumptions, accruals related to litigation, warranty costs, environmental remediation costs, contingent consideration arrangements, worker’s compensation accruals and healthcare accruals. Due to the inherent uncertainty involved in making estimates, including the duration and severity of the impacts of the COVID-19 pandemic and the ongoing global supply chain disruptions, actual results reported in future periods may be based upon amounts that differ from those estimates.
Revenue recognition—Revenue is measured based on consideration specified in a contract with a customer. Customer contracts generally are represented by a combination of a current purchase order and a current production schedule issued by the customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. From time to time, Aptiv enters into pricing agreements with its customers that provide for
price reductions, some of which are conditional upon achieving certain joint cost saving targets. In these instances, revenue is recognized based on the agreed-upon price at the time of shipment.
Sales incentives and allowances are recognized as a reduction to revenue at the time of the related sale. In addition, from time to time, Aptiv makes payments to customers in conjunction with ongoing business. These payments to customers are generally recognized as a reduction to revenue at the time of the commitment to make these payments. However, certain other payments to customers, or upfront fees, meet the criteria to be considered a cost to obtain a contract as they are directly attributable to a contract, are incremental and management expects the fees to be recoverable.
Aptiv collects and remits taxes assessed by different governmental authorities that are both imposed on and concurrent with a revenue-producing transaction between the Company and the Company’s customers. These taxes may include, but are not limited to, sales, use, value-added, and some excise taxes. Aptiv reports the collection of these taxes on a net basis (excluded from revenues). Shipping and handling fees billed to customers are included in net sales, while costs of shipping and handling are included in cost of sales. Refer to Note 24. Revenue for further information.
Net income per share—Basic net income per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted net income per share reflects the weighted average dilutive impact of all potentially dilutive securities from the date of issuance and is computed using the treasury stock and if-converted methods. The if-converted method is used to determine if the impact of conversion of the 5.50% Mandatory Convertible Preferred Shares, Series A, $0.01 par value per share (the “MCPS”) into ordinary shares is more dilutive than the MCPS dividends to net income per share. If so, the MCPS are assumed to have been converted at the later of the beginning of the period or the time of issuance, and the resulting ordinary shares are included in the denominator and the MCPS dividends are added back to the numerator. Unless otherwise noted, share and per share amounts included in these notes are on a diluted basis. Refer to Note 15. Shareholders’ Equity and Net Income Per Share for additional information including the calculation of basic and diluted net income per share.
Research and development—Costs are incurred in connection with research and development programs that are expected to contribute to future earnings. Such costs are charged against income as incurred. Total research and development expenses, including engineering, net of customer reimbursements, were approximately $1,030 million, $1,024 million and $1,165 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Cash and cash equivalents—Cash and cash equivalents are defined as short-term, highly liquid investments with original maturities of three months or less, for which the book value approximates fair value.
Restricted cash—Restricted cash includes balances on deposit at financial institutions that have issued letters of credit in favor of Aptiv and cash deposited into escrow accounts. Refer to Note 18. Fair Value of Financial Instruments for further information regarding amounts previously deposited into an escrow account.
Accounts receivable—Aptiv enters into agreements to sell certain of its accounts receivable, primarily in Europe. Sales of receivables are accounted for in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 860, Transfers and Servicing (“ASC 860”). Agreements which result in true sales of the transferred receivables, as defined in ASC 860, which occur when receivables are transferred without recourse to the Company, are excluded from amounts reported in the consolidated balance sheets. Cash proceeds received from such sales are included in operating cash flows. Agreements that allow Aptiv to maintain effective control over the transferred receivables and which do not qualify as a sale, as defined in ASC 860, are accounted for as secured borrowings and recorded in the consolidated balance sheets within accounts receivable, net and short-term debt. The expenses associated with receivables factoring are recorded in the consolidated statements of operations within interest expense.
The Company exchanges certain amounts of accounts receivable, primarily in the Asia Pacific region, for bank notes with original maturities greater than three months. The collection of such bank notes are included in operating cash flows based on the substance of the underlying transactions, which are operating in nature. Bank notes held by the Company with original maturities of three months or less are classified as cash and cash equivalents within the consolidated balance sheets, and those with original maturities of greater than three months are classified as notes receivable within other current assets. The Company may hold such bank notes until maturity, exchange them with suppliers to settle liabilities, or sell them to third-party financial institutions in exchange for cash.
Credit losses—Aptiv is exposed to credit losses primarily through the sale of vehicle components and services. Aptiv assesses the creditworthiness of a counterparty by conducting ongoing credit reviews, which considers the Company’s expected billing exposure and timing for payment, as well as the counterparty’s established credit rating. When a credit rating is not available, the Company’s assessment is based on an analysis of the counterparty’s financial statements. Aptiv also considers contract terms and conditions, country and political risk, and business strategy in its evaluation. Based on the outcome of this review, the Company establishes a credit limit for each counterparty. The Company continues to monitor its ongoing credit exposure through active review of counterparty balances against contract terms and due dates, which includes timely account
reconciliation, payment confirmation and dispute resolution. The Company may also employ collection agencies and legal counsel to pursue recovery of defaulted receivables, if necessary.
Aptiv primarily utilizes historical loss and recovery data, combined with information on current economic conditions and reasonable and supportable forecasts to develop the estimate of the allowance for doubtful accounts in accordance with ASC Topic 326, Financial Instruments – Credit Losses (“ASC 326”). As of December 31, 2021 and December 31, 2020, the Company reported $2,784 million and $2,812 million, respectively, of accounts receivable, net of the allowances, which includes the allowance for doubtful accounts of $37 million and $40 million, respectively. The provision for doubtful accounts was $22 million, $39 million, and $9 million for the years ended December 31, 2021, 2020 and 2019, respectively. Other changes in the allowance were not material for the year ended December 31, 2021.
Inventories—As of December 31, 2021 and 2020, inventories are stated at the lower of cost, determined on a first-in, first-out basis, or net realizable value, including direct material costs and direct and indirect manufacturing costs. Refer to Note 3. Inventories for additional information. Obsolete inventory is identified based on analysis of inventory for known obsolescence issues, and, generally, the market value of inventory on hand in excess of one year’s supply is fully-reserved.
From time to time, payments may be received from suppliers. These payments from suppliers are recognized as a reduction of the cost of the material acquired during the period to which the payments relate. In some instances, supplier rebates are received in conjunction with or concurrent with the negotiation of future purchase agreements and these amounts are amortized over the prospective agreement period.
Property—Major improvements that materially extend the useful life of property are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is determined based on a straight-line method over the estimated useful lives of groups of property. Leasehold improvements under finance leases are depreciated over the period of the lease or the life of the property, whichever is shorter. Refer to Note 6. Property, Net and Note 25. Leases for additional information.
Pre-production costs related to long-term supply agreements—The Company incurs pre-production engineering, development and tooling costs related to products produced for its customers under long-term supply agreements. Engineering, testing and other costs incurred in the design and development of production parts are expensed as incurred, unless the costs are reimbursable, as specified in a customer contract. As of December 31, 2021 and 2020, $286 million and $355 million of such contractually reimbursable costs were capitalized, respectively. These amounts are recorded within other current and other long-term assets in the consolidated balance sheets, as further detailed in Note 4. Assets.
Special tools represent Aptiv-owned tools, dies, jigs and other items used in the manufacture of customer components that will be sold under long-term supply arrangements, the costs of which are capitalized within property, plant and equipment if the Company has title to the assets. Special tools also include capitalized unreimbursed pre-production tooling costs related to customer-owned tools for which the customer has provided Aptiv a non-cancellable right to use the tool. Aptiv-owned special tool balances are depreciated over the expected life of the special tool or the life of the related vehicle program, whichever is shorter. The unreimbursed costs incurred related to customer-owned special tools that are not subject to reimbursement are capitalized and depreciated over the expected life of the special tool or the life of the related vehicle program, whichever is shorter. At December 31, 2021 and 2020, the special tools balance, net of accumulated depreciation, was $405 million and $447 million, respectively, included within property, net in the consolidated balance sheets. As of December 31, 2021 and 2020, the Aptiv-owned special tools balance was $303 million and $323 million, respectively, and the customer-owned special tools balance was $102 million and $124 million, respectively.
Valuation of long-lived assets—The carrying value of long-lived assets held for use, including definite-lived intangible assets, is periodically evaluated when events or circumstances warrant such a review. The carrying value of a long-lived asset held for use is considered impaired when the anticipated separately identifiable undiscounted cash flows from the asset are less than the carrying value of the asset. In that event, a loss is recognized based on the amount by which the carrying value exceeds the estimated fair value of the long-lived asset. Impairment losses on long-lived assets held for sale are recognized if the carrying value of the asset is in excess of the asset’s estimated fair value, reduced for the cost to dispose of the asset. Fair value of long-lived assets is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved (an income approach), and in certain situations Aptiv’s review of appraisals (a market approach). Refer to Note 6. Property, Net and Note 7. Intangible Assets and Goodwill for additional information.
Leases—The Company accounts for leases in accordance with FASB ASC Topic 842, Leases. The Company determines whether an arrangement is a lease at inception. For leases where the Company is the lessee, a lease liability and a right-of-use asset is recognized for all leases, with the exception of short-term leases with terms of twelve months or less. The lease liability represents the lessee’s obligation to make lease payments arising from a lease, and is measured as the present value of the lease payments. As the rate implicit in the lease is usually not known at lease commencement, the Company uses its incremental borrowing rate to discount the lease obligation. The right-of-use asset represents the lessee’s right to use a specified asset for the
lease term, and is measured at the lease liability amount, adjusted for lease prepayment, lease incentives received and the Company’s initial direct costs.
The Company applies the short-term lease exception, which results in a single lease cost being allocated over the lease term, generally on a straight-line basis, for leases with a term of 12 months or less. These leases are not presented in the consolidated balance sheets. Additionally, the Company applies the practical expedient to not separate lease components from non-lease components and instead accounts for both as a single lease component for all asset classes. Refer to Note 25. Leases for additional information.
Intangible assets—The Company amortizes definite-lived intangible assets over their estimated useful lives. The Company has definite-lived intangible assets related to patents and developed technology, customer relationships and trade names. Indefinite-lived in-process research and development intangible assets are not amortized, but are tested for impairment annually, or more frequently when indicators of potential impairment exist, until the completion or abandonment of the associated research and development efforts. Upon completion of the projects, the assets will be amortized over the expected economic life of the asset, which will be determined on that date. Should the project be determined to be abandoned, and if the asset developed has no alternative use, the full value of the asset will be charged to expense. The Company also has intangible assets related to acquired trade names that are classified as indefinite-lived when there are no foreseeable limits on the periods of time over which they are expected to contribute cash flows. These indefinite-lived trade name assets are tested for impairment annually, or more frequently when indicators of potential impairment exist. Costs to renew or extend the term of acquired intangible assets are recognized as expense as incurred. No intangible asset impairment charges were recorded during the years ended December 31, 2021 and 2020. The Company recorded intangible asset impairment charges of $8 million during the year ended December 31, 2019. Refer to Note 7. Intangible Assets and Goodwill for additional information.
Goodwill—Goodwill is the excess of the purchase price over the estimated fair value of identifiable net assets acquired in business combinations. The Company tests goodwill for impairment annually in the fourth quarter, or more frequently when indications of potential impairment exist. The Company monitors the existence of potential impairment indicators throughout the fiscal year. The Company tests for goodwill impairment at the reporting unit level. Our reporting units are the components of operating segments which constitute businesses for which discrete financial information is available and is regularly reviewed by segment management.
The impairment test involves first qualitatively assessing goodwill for impairment. If the qualitative assessment is not met the Company then performs a quantitative assessment by comparing the estimated fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit. If the estimated fair value exceeds carrying value, then we conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its estimated fair value, the Company recognizes an impairment loss in an amount equal to the excess, not to exceed the amount of goodwill allocated to the reporting unit. Refer to Note 20. Acquisitions and Divestitures, for further information on the goodwill attributable to the Company’s acquisitions.
Goodwill impairment—In the fourth quarter of 2021, 2020 and 2019, the Company completed a qualitative goodwill impairment assessment, and after evaluating the results, events and circumstances of the Company, we concluded that sufficient evidence existed to assert qualitatively that it was more likely than not that the estimated fair value of each reporting unit remained in excess of its carrying values. Therefore, a quantitative impairment assessment was not necessary. No goodwill impairments were recorded in 2021, 2020 or 2019. Refer to Note 7. Intangible Assets and Goodwill for additional information.
Warranty and product recalls—Expected warranty costs for products sold are recognized at the time of sale of the product based on an estimate of the amount that eventually will be required to settle such obligations. These accruals are based on factors such as past experience, production changes, industry developments and various other considerations. Costs of product recalls, which may 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, are accrued as part of our warranty accrual at the time an obligation becomes probable and can be reasonably estimated. These estimates are adjusted from time to time based on facts and circumstances that impact the status of existing claims. Refer to Note 9. Warranty Obligations for additional information.
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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized. In the event the Company determines it is more likely than not that the deferred tax assets will not be realized in the future, the valuation allowance adjustment to the deferred tax assets will be charged to earnings in the period in which the Company makes such a determination. In determining whether an uncertain tax position exists, the Company determines, based solely on its technical merits, whether the tax position is more likely than not to be sustained upon examination, and if so, a tax benefit is measured on a cumulative probability basis that is more likely than not to be realized upon the ultimate settlement. In determining the provision for income taxes for financial
statement purposes, the Company makes certain estimates and judgments which affect its evaluation of the carrying value of its deferred tax assets, as well as its calculation of certain tax liabilities. Refer to Note 14. Income Taxes for additional information.
Foreign currency translation—Assets and liabilities of non-U.S. subsidiaries that use a currency other than U.S. dollars as their functional currency are translated to U.S. dollars at end-of-period currency exchange rates. The consolidated statements of operations of non-U.S. subsidiaries are translated to U.S. dollars at average-period currency exchange rates. The effect of translation for non-U.S. subsidiaries is generally reported in other comprehensive income (“OCI”). The accumulated foreign currency translation adjustment related to an investment in a foreign subsidiary is reclassified to net income upon sale or upon complete or substantially complete liquidation of the respective entity. The effect of remeasurement of assets and liabilities of non-U.S. subsidiaries that use the U.S. dollar as their functional currency is primarily included in cost of sales. Also included in cost of sales are gains and losses arising from transactions denominated in a currency other than the functional currency of a particular entity. There were no net foreign currency transaction gains or losses for the year ended December 31, 2021. Net foreign currency transaction losses of $20 million and $3 million were included in the consolidated statements of operations for the years ended December 31, 2020 and 2019, respectively.
Restructuring—Aptiv continually evaluates alternatives to align the business with the changing needs of its customers and to lower operating costs. This includes the realignment of its existing manufacturing capacity, facility closures, or similar actions, either in the normal course of business or pursuant to significant restructuring programs. These actions may result in employees receiving voluntary or involuntary employee termination benefits, which are mainly pursuant to union or other contractual agreements or statutory requirements. Voluntary termination benefits are accrued when an employee accepts the related offer. Involuntary termination benefits are accrued upon the commitment to a termination plan and when the benefit arrangement is communicated to affected employees, or when liabilities are determined to be probable and estimable, depending on the existence of a substantive plan for severance or termination. Contract termination costs and certain early termination lease costs are recorded when contracts are terminated. All other exit costs are expensed as incurred. Refer to Note 10. Restructuring for additional information.
Environmental liabilities—Environmental remediation liabilities are recognized when a loss is probable and can be reasonably estimated. Such liabilities generally are not subject to insurance coverage. The cost of each environmental remediation is estimated by engineering, financial, and legal specialists based on current law and considers the estimated cost of investigation and remediation required and the likelihood that, where applicable, other responsible parties will be able to fulfill their commitments. The process of estimating environmental remediation liabilities is complex and dependent primarily on the nature and extent of historical information and physical data relating to a contaminated site, the complexity of the site, the uncertainty as to what remediation and technology will be required, and the outcome of discussions with regulatory agencies and, if applicable, other responsible parties at multi-party sites. In future periods, new laws or regulations, advances in remediation technologies and additional information about the ultimate remediation methodology to be used could significantly change estimates by Aptiv. Refer to Note 13. Commitments and Contingencies for additional information.
Asset retirement obligations—Asset retirement obligations are recognized in accordance with FASB ASC 410, Asset Retirement and Environmental Obligations. Conditional retirement obligations have been identified primarily related to asbestos abatement at certain sites. To a lesser extent, conditional retirement obligations also exist at certain sites related to the removal of storage tanks and disposal costs. Asset retirement obligations were $1 million and $1 million at December 31, 2021 and 2020, respectively.
Customer concentrations—As reflected in the table below, net sales to Stellantis N.V. (“Stellantis”), Volkswagen Group (“VW”) and General Motors (“GM”), Aptiv’s three largest customers, totaled approximately 28%, 31% and 31% of our total net sales for the years ended December 31, 2021, 2020 and 2019, respectively.
| Percentage of Total Net Sales | Accounts Receivable | |||||||||||||||||||||||||||||||
| Year Ended December 31, | December 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Stellantis (1) | 11 | % | 12 | % | 13 | % | $ | 317 | $ | 352 | ||||||||||||||||||||||
| VW | 9 | % | 10 | % | 9 | % | 163 | 216 | ||||||||||||||||||||||||
| GM | 8 | % | 9 | % | 9 | % | 208 | 200 |
(1)On January 16, 2021, Fiat Chrysler Automobiles N.V. (“FCA”) and PSA Peugeot Citroën (“PSA”) executed a merger agreement to form a new, combined company (“Stellantis”). Net sales to FCA and PSA before the date of the merger are included in net sales to Stellantis in the table above for each year presented. As of December 31, 2020, accounts receivable due from FCA and PSA are shown on a combined basis as accounts receivable due from Stellantis.
Derivative financial instruments—All derivative instruments are required to be reported on the balance sheet at fair value unless the transactions qualify and are designated as normal purchases or sales. Changes in fair value are reported currently through earnings unless they meet hedge accounting criteria.
Exposure to fluctuations in currency exchange rates, interest rates and certain commodity prices are managed by entering into a variety of forward and option contracts and swaps with various counterparties. Such financial exposures are managed in accordance with the policies and procedures of Aptiv. Aptiv does not enter into derivative transactions for speculative or trading purposes. As part of the hedging program approval process, Aptiv identifies the specific financial risk which the derivative transaction will minimize, the appropriate hedging instrument to be used to reduce the risk and the correlation between the financial risk and the hedging instrument. Purchase orders, sales contracts, letters of intent, capital planning forecasts and historical data are used as the basis for determining the anticipated values of the transactions to be hedged. Aptiv does not enter into derivative transactions that do not have a high correlation with the underlying financial risk. Hedge positions, as well as the correlation between the transaction risks and the hedging instruments, are reviewed on an ongoing basis.
Foreign exchange forward contracts are accounted for as hedges of firm or forecasted foreign currency commitments or foreign currency exposure of the net investment in certain foreign operations to the extent they are designated and assessed as highly effective. All foreign exchange contracts are marked to market on a current basis. Commodity swaps are accounted for as hedges of firm or anticipated commodity purchase contracts to the extent they are designated and assessed as effective. All other commodity derivative contracts that are not designated as hedges are either marked to market on a current basis or are exempted from mark to market accounting as normal purchases. At December 31, 2021 and 2020, the Company’s exposure to movements in interest rates was not hedged with derivative instruments. Refer to Note 17. Derivatives and Hedging Activities and Note 18. Fair Value of Financial Instruments for additional information.
Extended disability benefits—Costs associated with extended disability benefits provided to inactive employees are accrued throughout the duration of their active employment. Workforce demographic data and historical experience are utilized to develop projections of time frames and related expense for post-employment benefits.
Workers’ compensation benefits—Workers’ compensation benefit accruals are actuarially determined and are subject to the existing workers’ compensation laws that vary by location. Accruals for workers’ compensation benefits represent the discounted future cash expenditures expected during the period between the incidents necessitating the employees to be idled and the time when such employees return to work, are eligible for retirement or otherwise terminate their employment.
Share-based compensation—The Company’s share-based compensation arrangements consist of the Aptiv PLC Long Term Incentive Plan, as amended and restated effective April 23, 2015 (the “PLC LTIP”), under which grants of restricted stock units (“RSUs”) have been made each year. The RSU awards include a time-based vesting portion and a performance-based vesting portion. The performance-based vesting portion includes performance and market conditions in addition to service conditions. The grant date fair value of the RSUs is determined based on the closing price of the Company’s ordinary shares on the date of the grant of the award, including an estimate for forfeitures, or a contemporaneous valuation performed by an independent valuation specialist with respect to awards with market conditions. Compensation expense is recognized based upon the grant date fair value of the awards applied to the Company’s best estimate of ultimate performance against the respective targets on a straight-line basis over the requisite vesting period of the awards. The performance conditions require management to make assumptions regarding the likelihood of achieving certain performance goals. Changes in these performance assumptions, as well as differences in actual results from management’s estimates, could result in estimated or actual values different from previously estimated fair values. Refer to Note 21. Share-Based Compensation for additional information.
Business combinations—The Company accounts for its business combinations in accordance with the accounting guidance in FASB ASC 805, Business Combinations. The purchase price of an acquired business is allocated 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. Determining the fair values of assets acquired and liabilities assumed requires management’s judgment, the utilization of independent appraisal firms and often involves the use of significant estimates and assumptions with respect to the timing and amount of future cash flows, market rate assumptions, actuarial assumptions, and appropriate discount rates, among other items. Refer to Note 20. Acquisitions and Divestitures for additional information.
Recently adopted accounting pronouncements—Aptiv adopted Accounting Standards Update (“ASU”) 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 in the first quarter of 2021 on a prospective basis. This guidance clarifies the interactions between accounting for equity securities under the measurement alternative in Topic 321 and the equity method of accounting in Topic 323, as well as the accounting for certain forward contracts and purchased options to purchase securities that, upon settlement or exercise, would be accounted for under the equity method of accounting. The adoption of this guidance did not have a significant impact on Aptiv’s financial statements.
Recently issued accounting pronouncements not yet adopted—In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This guidance is intended to improve the transparency of government assistance received by most business entities by requiring disclosure of: (1) the types of government assistance received; (2) the accounting for such assistance; and (3) the effect of the assistance on the
registrant’s financial statements. The new guidance is effective for fiscal years beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the effects that the adoption of ASU 2021-10 will have on the Company’s consolidated financial statements.
3. INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or net realizable value, including direct material costs and direct and indirect manufacturing costs. A summary of inventories is shown below:
| December 31, 2021 | December 31, 2020 | ||||||||||
| (in millions) | |||||||||||
| Productive material | $ | 1,311 | $ | 745 | |||||||
| Work-in-process | 172 | 111 | |||||||||
| Finished goods | 531 | 441 | |||||||||
| Total | $ | 2,014 | $ | 1,297 |
4. ASSETS
Other current assets consisted of the following:
| December 31, 2021 | December 31, 2020 | ||||||||||
| (in millions) | |||||||||||
| Value added tax receivable | $ | 178 | $ | 155 | |||||||
| Prepaid insurance and other expenses | 63 | 47 | |||||||||
| Reimbursable engineering costs | 110 | 169 | |||||||||
| Notes receivable | 16 | 8 | |||||||||
| Income and other taxes receivable | 54 | 41 | |||||||||
| Deposits to vendors | 6 | 5 | |||||||||
| Derivative financial instruments (Note 17) | 38 | 48 | |||||||||
| Capitalized upfront fees (Note 24) | 34 | 30 | |||||||||
| Total | $ | 499 | $ | 503 |
Other long-term assets consisted of the following:
| December 31, 2021 | December 31, 2020 | ||||||||||
| (in millions) | |||||||||||
| Deferred income taxes, net (Note 14) | $ | 159 | $ | 174 | |||||||
| Unamortized Revolving Credit Facility debt issuance costs | 11 | 11 | |||||||||
| Income and other taxes receivable | 28 | 25 | |||||||||
| Reimbursable engineering costs | 176 | 186 | |||||||||
| Value added tax receivable | 20 | 29 | |||||||||
| Equity investments (Note 5) | 96 | 113 | |||||||||
| Derivative financial instruments (Note 17) | 3 | 22 | |||||||||
| Capitalized upfront fees (Note 24) | 58 | 86 | |||||||||
| Other | 71 | 48 | |||||||||
| Total | $ | 622 | $ | 694 |
5. INVESTMENTS IN AFFILIATES
As part of Aptiv’s operations, it has investments in four non-consolidated affiliates accounted for under the equity method of accounting. These affiliates are not publicly traded companies and are located primarily in North America and Asia Pacific. Aptiv’s ownership percentages vary generally from approximately 20% to 50%, with the most significant investments being in Motional, Inc. (“Motional”) (of which Aptiv owns 50%) and in Promotora de Partes Electricas Automotrices, S.A. de C.V. (of which Aptiv owns approximately 40%). The Motional joint venture was formed in a transaction with Hyundai Motor Group (“Hyundai”) to focus on the design, development and commercialization of autonomous driving technologies. Refer to Note 20. Acquisitions and Divestitures for additional information on the formation of Motional. The Company’s aggregate investments in affiliates was $1,797 million and $2,011 million at December 31, 2021 and 2020, respectively. Dividends of $6 million, $9 million and $9 million for the years ended December 31, 2021, 2020 and 2019, respectively, have been received from these non-consolidated affiliates. No impairment charges were recorded for the years ended December 31, 2021, 2020 and 2019.
The following is a summary of the combined financial information of significant affiliates accounted for under the equity method as of December 31, 2021 and 2020 and for the years ended December 31, 2021, 2020 and 2019:
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in millions) | |||||||||||
| Current assets | $ | 794 | $ | 1,140 | |||||||
| Non-current assets | 3,163 | 3,210 | |||||||||
| Total assets | $ | 3,957 | $ | 4,350 | |||||||
| Current liabilities | $ | 194 | $ | 166 | |||||||
| Non-current liabilities | 112 | 101 | |||||||||
| Shareholders’ equity | 3,651 | 4,083 | |||||||||
| Total liabilities and shareholders’ equity | $ | 3,957 | $ | 4,350 |
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Net sales | $ | 599 | $ | 553 | $ | 531 | |||||||||||
| Gross (loss) profit | (244) | (71) | 59 | ||||||||||||||
| Net (loss) income | (393) | (154) | 35 |
A summary of transactions with affiliates is shown below:
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Sales to affiliates | $ | 30 | $ | 7 | $ | 6 | |||||||||||
| Purchases from affiliates | 19 | 32 | 37 |
A summary of amounts recorded in the Company’s consolidated balance sheets related to its affiliates is shown below:
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in millions) | |||||||||||
| Receivables due from affiliates | $ | 11 | $ | 12 | |||||||
| Payables due to affiliates | 20 | 38 |
Technology Investments
The Company has made technology investments in certain non-consolidated affiliates for ownership interests of less than 20%, as described in Note 2. Significant Accounting Policies. Certain of 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. The Company also holds technology investments in publicly traded equity securities. These investments are measured at fair value based on quoted prices for identical assets on active market exchanges.
The following is a summary of technology investments, which are classified within other long-term assets in the consolidated balance sheets, as of December 31, 2021 and 2020:
| December 31, | |||||||||||||||||||||||||||||
| Investment Name | Segment | 2021 | 2020 | ||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| Equity investments without readily determinable fair values: | |||||||||||||||||||||||||||||
| Krono-Safe, SAS (1) | Advanced Safety and User Experience | $ | — | $ | 6 | ||||||||||||||||||||||||
| Affectiva, Inc. (2) | Advanced Safety and User Experience | — | 15 | ||||||||||||||||||||||||||
| Innoviz Technologies (2) | Advanced Safety and User Experience | — | 25 | ||||||||||||||||||||||||||
| LeddarTech, Inc. | Advanced Safety and User Experience | 19 | 10 | ||||||||||||||||||||||||||
| Valens Semiconductor Ltd. (2) | Signal and Power Solutions | — | 10 | ||||||||||||||||||||||||||
| Otonomo Technologies Ltd. (2) | Advanced Safety and User Experience | — | 37 | ||||||||||||||||||||||||||
| Quanergy Systems, Inc | Advanced Safety and User Experience | 6 | 6 | ||||||||||||||||||||||||||
| Other investments | Various | 5 | 4 | ||||||||||||||||||||||||||
| Total equity investments without readily determinable fair values | 30 | 113 | |||||||||||||||||||||||||||
| Publicly traded equity securities: | |||||||||||||||||||||||||||||
| Smart Eye AB (2) | Advanced Safety and User Experience | 11 | — | ||||||||||||||||||||||||||
| Otonomo Technologies Ltd. (2) | Advanced Safety and User Experience | 39 | — | ||||||||||||||||||||||||||
| Valens Semiconductor Ltd. (2) | Signal and Power Solutions | 16 | — | ||||||||||||||||||||||||||
| Total publicly traded equity securities | 66 | — | |||||||||||||||||||||||||||
| Total investments | $ | 96 | $ | 113 |
(1)During the year ended December 31, 2021, Aptiv exchanged its investment in Krono-Safe, SAS as part of the consideration paid to acquire Krono-Safe Automotive, SAS. See below for further details.
(2)Each of these equity investments experienced a change in measurement basis due to an underlying transaction during the year ended December 31, 2021. See below for further details on each respective transaction. In the case of Innoviz Technologies, we liquidated our entire investment in the company after the transaction and during the year ended December 31, 2021.
In September 2021, Valens Semiconductor Ltd. (“Valens”) merged with a publicly traded Special Purpose Acquisition Company (“SPAC”) and shares of Valens began trading on the NYSE under the symbol VLN. As part of the SPAC merger, our preferred shares in Valens were converted into Valens ordinary shares.
In August 2021, Otonomo Technologies Ltd. (“Otonomo”), a connected car data marketplace developer, merged with a publicly traded SPAC and shares of Otonomo began trading on the Nasdaq Capital Market under the symbol OTMO. As part of the SPAC merger, our preferred shares in Otonomo were converted into Otonomo ordinary shares. During the remainder of 2021, the Company sold a portion of its Otonomo ordinary shares for net proceeds of approximately $3 million. The Company’s Advanced Safety and User Experience segment had previously made a $3 million investment in Otonomo during 2019, which was in addition to the Company’s $15 million investment made during 2017.
In June 2021, Affectiva, Inc. (“Affectiva”) was acquired by Smart Eye AB (“Smart Eye”), which is publicly traded on the Nasdaq Stockholm AB stock exchange. As part of the acquisition, Aptiv received shares of Smart Eye in exchange for Aptiv’s Affectiva preferred shares.
In April 2021, Innoviz Technologies (“Innoviz”) merged with a publicly traded SPAC and shares of Innoviz began trading on the Nasdaq Capital Market under the symbol INVZ. As part of the SPAC merger, our preferred shares in Innoviz were converted into Innoviz ordinary shares. During the remainder of 2021, the Company sold all of its Innoviz ordinary shares for net proceeds of approximately $18 million. The Company’s Advanced Safety and User Experience segment had previously made a $15 million investment in Innoviz during 2017.
Following each of the transactions described above, the fair value of each respective investment is measured on a recurring basis, with changes in fair value recorded to other income (expense), net.
On November 9, 2021, Aptiv acquired 100% of the equity interests of Krono-Safe Automotive, SAS (“Krono-Safe Automotive”), a leading software developer of safety-critical real-time embedded systems, for total consideration of $13 million, which was comprised of Aptiv’s previous investment of $6 million in Krono-Safe, SAS and $7 million of cash. The Company’s Advanced Safety and User Experience segment had previously made a $6 million investment in Krono-Safe, SAS during 2019. Refer to Note 20. Acquisitions and Divestitures for additional information on this transaction.
In December 2021, Aptiv agreed to invest €200 million in TTTech Auto AG, a leading provider of safety-critical middleware solutions for advanced driver-assistance systems and autonomous driving applications, in exchange for an approximate 20% equity share in the business. The investment is subject to the satisfaction of customary closing conditions and the receipt of regulatory and other approvals, and is expected to close during the first quarter of 2022. The Company expects to make this investment utilizing cash on hand.
During the year ended December 31, 2021, the Company’s investment in LeddarTech, Inc., was remeasured to a fair value of $19 million, based on a subsequent round of financing observed for identical or similar investments of the same issuer. As a result, the Company recorded a pre-tax unrealized gain of $9 million to other income, net during the year ended December 31, 2021.
During the year ended December 31, 2020, the Company’s investment in Innoviz, while being classified as an equity investment without readily determinable fair value, was remeasured to a fair value of $25 million, based on a subsequent round of financing observed for identical or similar investments of the same issuer. As a result, the Company recorded a pre-tax unrealized gain of $10 million to other income, net during the year ended December 31, 2020.
During the year ended December 31, 2019, the Company’s investment in Otonomo, while being classified as an equity investment without readily determinable fair value, was remeasured to a fair value of $37 million, based on a subsequent round of financing observed for identical or similar investments of the same issuer. As a result, the Company recorded a pre-tax unrealized gain of $19 million to other income, net during the year ended December 31, 2019.
There were no other material transactions, events or changes in circumstances requiring an impairment or an observable price change adjustment to these investments without readily determinable fair value. The Company continues to monitor these investments to identify potential transactions which may indicate an impairment or an observable price change requiring an adjustment to its carrying value.
6. PROPERTY, NET
Property, net consisted of:
| Estimated Useful Lives | December 31, | ||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| (Years) | (in millions) | ||||||||||||||||
| Land | — | $ | 82 | $ | 85 | ||||||||||||
| Land and leasehold improvements | 3-20 | 186 | 171 | ||||||||||||||
| Buildings | 40 | 679 | 691 | ||||||||||||||
| Machinery, equipment and tooling | 3-20 | 4,899 | 4,677 | ||||||||||||||
| Furniture and office equipment | 3-10 | 802 | 724 | ||||||||||||||
| Construction in progress | — | 365 | 263 | ||||||||||||||
| Total | 7,013 | 6,611 | |||||||||||||||
| Less: accumulated depreciation | (3,719) | (3,310) | |||||||||||||||
| Total property, net | $ | 3,294 | $ | 3,301 |
For the years ended December 31, 2021, 2020 and 2019, Aptiv recorded non-cash asset impairment charges of $2 million, $10 million and $3 million, respectively, in cost of sales related to declines in the fair values of certain fixed assets.
As of December 31, 2021, 2020 and 2019, capital expenditures recorded in accounts payable totaled $280 million, $164 million and $247 million, respectively.
7. INTANGIBLE ASSETS AND GOODWILL
The changes in the carrying amount of intangible assets and goodwill were as follows as of December 31, 2021 and 2020. See Note 20. Acquisitions and Divestitures for a further description of the goodwill and intangible assets resulting from Aptiv’s acquisitions in 2021 and 2020.
| As of December 31, 2021 | As of December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
| Estimated Useful Lives | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||||||||
| (Years) | (in millions) | (in millions) | |||||||||||||||||||||||||||||||||||||||
| Amortized intangible assets: | |||||||||||||||||||||||||||||||||||||||||
| Patents and developed technology | 3-15 | $ | 673 | $ | 506 | $ | 167 | $ | 672 | $ | 461 | $ | 211 | ||||||||||||||||||||||||||||
| Customer relationships | 9-14 | 1,186 | 578 | 608 | 1,179 | 495 | 684 | ||||||||||||||||||||||||||||||||||
| Trade names | 15-20 | 75 | 50 | 25 | 76 | 48 | 28 | ||||||||||||||||||||||||||||||||||
| Total | 1,934 | 1,134 | 800 | 1,927 | 1,004 | 923 | |||||||||||||||||||||||||||||||||||
| Unamortized intangible assets: | |||||||||||||||||||||||||||||||||||||||||
| In-process research and development | — | 4 | — | 4 | — | — | — | ||||||||||||||||||||||||||||||||||
| Trade names | — | 160 | — | 160 | 168 | — | 168 | ||||||||||||||||||||||||||||||||||
| Goodwill | — | 2,511 | — | 2,511 | 2,580 | — | 2,580 | ||||||||||||||||||||||||||||||||||
| Total | $ | 4,609 | $ | 1,134 | $ | 3,475 | $ | 4,675 | $ | 1,004 | $ | 3,671 |
Estimated amortization expense for the years ending December 31, 2022 through 2026 is presented below:
| Year Ending December 31, | |||||||||||||||||||||||||||||
| 2022 | 2023 | 2024 | 2025 | 2026 | |||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| Estimated amortization expense | $ | 149 | $ | 126 | $ | 111 | $ | 108 | $ | 108 |
A roll-forward of the gross carrying amounts of intangible assets for the years ended December 31, 2021 and 2020 is presented below.
| 2021 | 2020 | ||||||||||
| (in millions) | |||||||||||
| Balance at January 1 | $ | 4,675 | $ | 4,427 | |||||||
| Acquisitions (1) | 132 | 17 | |||||||||
| Foreign currency translation and other | (198) | 231 | |||||||||
| Balance at December 31 | $ | 4,609 | $ | 4,675 |
(1)Primarily attributable to the 2021 acquisitions of El-Com, Krono-Safe and Ulti-Mate and the 2020 acquisition of Dynawave, as further described in Note 20. Acquisitions and Divestitures.
A roll-forward of the accumulated amortization for the years ended December 31, 2021 and 2020 is presented below:
| 2021 | 2020 | ||||||||||
| (in millions) | |||||||||||
| Balance at January 1 | $ | 1,004 | $ | 834 | |||||||
| Amortization | 148 | 144 | |||||||||
| Foreign currency translation and other | (18) | 26 | |||||||||
| Balance at December 31 | $ | 1,134 | $ | 1,004 |
A roll-forward of the carrying amount of goodwill, by operating segment, for the years ended December 31, 2021 and 2020 is presented below:
| Signal and Power Solutions | Advanced Safety and User Experience | Total | |||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Balance at January 1, 2020 | $ | 2,381 | $ | 26 | $ | 2,407 | |||||||||||||||||
| Acquisitions (1) | 10 | — | 10 | ||||||||||||||||||||
| Foreign currency translation and other | 162 | 1 | 163 | ||||||||||||||||||||
| Balance at December 31, 2020 | $ | 2,553 | $ | 27 | $ | 2,580 | |||||||||||||||||
| Acquisitions (2) | $ | 65 | $ | 9 | $ | 74 | |||||||||||||||||
| Foreign currency translation and other | (143) | — | (143) | ||||||||||||||||||||
| Balance at December 31, 2021 | $ | 2,475 | $ | 36 | $ | 2,511 |
(1)Primarily attributable to the acquisition of Dynawave, as further described in Note 20. Acquisitions and Divestitures.
(2)Primarily attributable to the acquisitions of El-Com, Krono-Safe and Ulti-Mate, as further described in Note 20. Acquisitions and Divestitures.
8. LIABILITIES
Accrued liabilities consisted of the following:
| December 31, 2021 | December 31, 2020 | ||||||||||
| (in millions) | |||||||||||
| Payroll-related obligations | $ | 286 | $ | 293 | |||||||
| Employee benefits, including current pension obligations | 83 | 84 | |||||||||
| Income and other taxes payable | 157 | 177 | |||||||||
| Warranty obligations (Note 9) | 41 | 51 | |||||||||
| Restructuring (Note 10) | 42 | 82 | |||||||||
| Customer deposits | 83 | 62 | |||||||||
| Derivative financial instruments (Note 17) | 13 | 8 | |||||||||
| Accrued interest | 30 | 48 | |||||||||
| MCPS dividends payable | 3 | 3 | |||||||||
| Operating lease liabilities (Note 25) | 92 | 100 | |||||||||
| Other | 416 | 477 | |||||||||
| Total | $ | 1,246 | $ | 1,385 |
Other long-term liabilities consisted of the following:
| December 31, 2021 | December 31, 2020 | ||||||||||
| (in millions) | |||||||||||
| Environmental (Note 13) | $ | 4 | $ | 4 | |||||||
| Extended disability benefits | 5 | 5 | |||||||||
| Warranty obligations (Note 9) | 8 | 8 | |||||||||
| Restructuring (Note 10) | 21 | 43 | |||||||||
| Payroll-related obligations | 11 | 11 | |||||||||
| Accrued income taxes | 153 | 156 | |||||||||
| Deferred income taxes, net (Note 14) | 153 | 207 | |||||||||
| Derivative financial instruments (Note 17) | 7 | 1 | |||||||||
| Other | 74 | 105 | |||||||||
| Total | $ | 436 | $ | 540 |
9. WARRANTY OBLIGATIONS
Expected warranty costs for products sold are recognized principally at the time of sale of the product based on an estimate of the amount that eventually will be required to settle such obligations. These accruals are based on factors such as past experience, production changes, industry developments and various other considerations. The estimated costs related to product recalls based on a formal campaign soliciting return of that product are accrued at the time an obligation becomes probable and can be reasonably estimated. These estimates are adjusted from time to time based on facts and circumstances that impact the status of existing claims. Aptiv has recognized its best estimate for its total aggregate warranty reserves, including product recall costs, across all of its operating segments as of December 31, 2021. The Company estimates the reasonably possible amount to ultimately resolve all matters in excess of the recorded reserves as of December 31, 2021 to be zero to $10 million.
The table below summarizes the activity in the product warranty liability for the years ended December 31, 2021 and 2020:
| Year Ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in millions) | |||||||||||
| Accrual balance at beginning of year | $ | 59 | $ | 37 | |||||||
| Provision for estimated warranties incurred during the year | 36 | 36 | |||||||||
| Changes in estimate for pre-existing warranties | 15 | 36 | |||||||||
| Settlements made during the year (in cash or in kind) | (59) | (52) | |||||||||
| Foreign currency translation and other | (2) | 2 | |||||||||
| Accrual balance at end of year | $ | 49 | $ | 59 |
10. RESTRUCTURING
Aptiv’s restructuring activities are undertaken as necessary to implement management’s strategy, streamline operations, take advantage of available capacity and resources, and ultimately achieve net cost reductions. These activities generally relate to the realignment of existing manufacturing capacity and closure of facilities and other exit or disposal activities, as it relates to executing Aptiv’s strategy, either in the normal course of business or pursuant to significant restructuring programs.
As part of the Company’s continued efforts to optimize its cost structure, it has undertaken several restructuring programs which include workforce reductions as well as plant closures. These programs are primarily 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 $24 million during the year ended December 31, 2021. None of the Company’s individual restructuring programs initiated during 2021 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. The Company expects to incur additional restructuring costs of approximately $15 million (which primarily relate to the Signal and Power Solutions segment) for programs approved as of December 31, 2021, which are expected to be incurred within the next two years.
During the year ended December 31, 2020, the Company recorded employee-related and other restructuring charges totaling approximately $136 million, of which $62 million was recognized for programs implemented in the North America region and $57 million was recognized for programs implemented in the European region. The charges recorded during the year ended December 31, 2020 included the recognition of approximately $90 million of employee-related and other costs related to actions taken as a result of the global impacts of the COVID-19 pandemic. During the year ended December 31, 2019, the Company recorded employee-related and other restructuring charges totaling approximately $148 million, of which $74 million was recognized for programs implemented in the European region, pursuant to the Company’s ongoing overhead reduction strategy.
Restructuring charges for employee separation and termination benefits are paid either over the severance period or in a lump sum in accordance with either statutory requirements or individual agreements. Aptiv incurred cash expenditures related to its restructuring programs of approximately $80 million, $151 million and $119 million in the years ended December 31, 2021, 2020 and 2019, respectively.
The following table summarizes the restructuring charges recorded for the years ended December 31, 2021, 2020 and 2019 by operating segment:
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Signal and Power Solutions | $ | 8 | $ | 90 | $ | 104 | |||||||||||
| Advanced Safety and User Experience | 16 | 46 | 44 | ||||||||||||||
| Total | $ | 24 | $ | 136 | $ | 148 |
The table below summarizes the activity in the restructuring liability for the years ended December 31, 2021 and 2020:
| Employee Termination Benefits Liability | Other Exit Costs Liability | Employee Termination Benefits | |||||||||||||||
| (in millions) | |||||||||||||||||
| Accrual balance at January 1, 2020 | $ | 134 | $ | — | $ | 134 | |||||||||||
| Provision for estimated expenses incurred during the year | 136 | — | 136 | ||||||||||||||
| Payments made during the year | (151) | — | (151) | ||||||||||||||
| Foreign currency and other | 6 | — | 6 | ||||||||||||||
| Accrual balance at December 31, 2020 | $ | 125 | $ | — | $ | 125 | |||||||||||
| Provision for estimated expenses incurred during the year | $ | 24 | $ | — | $ | 24 | |||||||||||
| Payments made during the year | (80) | — | (80) | ||||||||||||||
| Foreign currency and other | (6) | — | (6) | ||||||||||||||
| Accrual balance at December 31, 2021 | $ | 63 | $ | — | $ | 63 |
11. DEBT
The following is a summary of debt outstanding, net of unamortized issuance costs and discounts, as of December 31, 2021 and 2020:
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in millions) | |||||||||||
| 4.15%, senior notes, due 2024 (net of $0 and $1 unamortized issuance costs and $0 and $1 discount, respectively) | $ | — | $ | 698 | |||||||
| 1.50%, Euro-denominated senior notes, due 2025 (net of $2 and $2 unamortized issuance costs and $1 and $2 discount, respectively) | 790 | 857 | |||||||||
| 4.25%, senior notes, due 2026 (net of $0 and $2 unamortized issuance costs, respectively) | — | 648 | |||||||||
| 1.60%, Euro-denominated senior notes, due 2028 (net of $3 and $3 unamortized issuance costs, respectively) | 563 | 612 | |||||||||
| 4.35%, senior notes, due 2029 (net of $2 and $3 unamortized issuance costs, respectively) | 298 | 297 | |||||||||
| 4.40%, senior notes, due 2046 (net of $3 and $3 unamortized issuance costs and $1 and $1 discount, respectively) | 296 | 296 | |||||||||
| 5.40%, senior notes, due 2049 (net of $4 and $4 unamortized issuance costs and $1 and $1 discount, respectively) | 345 | 345 | |||||||||
| 3.10%, senior notes, due 2051 (net of $17 and $0 unamortized issuance costs and $33 and $0 discount, respectively) | 1,450 | — | |||||||||
| Tranche A Term Loan, due 2026 (net of $2 and $1 unamortized issuance costs, respectively) | 311 | 320 | |||||||||
| Finance leases and other | 14 | 28 | |||||||||
| Total debt | 4,067 | 4,101 | |||||||||
| Less: current portion | (8) | (90) | |||||||||
| Long-term debt | $ | 4,059 | $ | 4,011 |
The principal maturities of debt, at nominal value, are as follows:
| Debt and Finance Lease Obligations | |||||
| (in millions) | |||||
| 2022 | $ | 8 | |||
| 2023 | 15 | ||||
| 2024 | 27 | ||||
| 2025 | 810 | ||||
| 2026 | 260 | ||||
| Thereafter | 3,016 | ||||
| Total | $ | 4,136 |
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 billion (the “Revolving Credit Facility”). During 2020, Aptiv Global Financing Limited (“AGFL”), a wholly-owned subsidiary of Aptiv PLC, executed a joinder agreement to the Credit Agreement, which allows it to act as a borrower under the Credit Agreement, and a guaranty supplement, under which AGFL guarantees the obligations under the Credit Agreement, subject to certain exceptions.
The Credit Agreement was entered into in March 2011 and has been subsequently amended and restated on several occasions, most recently on June 24, 2021. The June 2021 amendment, among other things, (1) refinanced and replaced the existing term loan A and revolver with a new term loan A that matures in five years, and a new five-year revolving credit facility with aggregate commitments of $2 billion, (2) utilized the Company’s existing sustainability-linked metrics and commitments, that, if achieved, would change the facility fee and interest rate margins as described below, (3) removed prior
provisions from the May 2020 amendment that had increased the leverage ratio maintenance covenant from 3.5 to 1.0 to 4.5 to 1.0 until July 1, 2021 and restricted dividends and other payments on equity, and (4) included a financial maintenance covenant that requires the Company to maintain total net leverage (as calculated in accordance with the Credit Agreement) of less than 3.5 to 1.0 (or 4.0 to 1.0 for four full fiscal quarters following completion of material acquisitions, as defined in the Credit Agreement). Losses on modification of debt totaled $1 million and $4 million during the years ended December 31, 2021 and 2020, respectively, related to the June 2021 amendment and May 2020 amendment. Aptiv paid amendment fees of $6 million and $18 million during the years ended December 31, 2021 and 2020, respectively, which are reflected as financing activities in the consolidated statements of cash flows.
The Tranche A Term Loan and the Revolving Credit Facility mature on June 24, 2026. Beginning on September 30, 2022, Aptiv is obligated to make quarterly principal payments on 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 upon Aptiv’s request, the agreement of the lenders participating in the increase, and the approval of the Administrative Agent.
As of December 31, 2021, Aptiv had no amounts outstanding under the Revolving Credit Facility and less than $1 million in letters of credit were issued under the Credit Agreement. Letters of credit issued under the Credit Agreement reduce availability under the Revolving Credit Facility.
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 June 2021 amendment also contains provisions to facilitate the replacement of the LIBOR-based rate with a Secured Overnight Financing Rate (“SOFR”) based rate upon the discontinuation or unavailability of LIBOR. The Applicable Rates under the Credit Agreement on the specified dates are set forth below:
| December 31, 2021 | December 31, 2020 | ||||||||||||||||||||||
| LIBOR plus | ABR plus | LIBOR plus | ABR plus | ||||||||||||||||||||
| Revolving Credit Facility | 1.10 | % | 0.10 | % | 1.10 | % | 0.10 | % | |||||||||||||||
| Tranche A Term Loan | 1.125 | % | 0.125 | % | 1.25 | % | 0.25 | % | |||||||||||||||
Under the June 2021 amendment, the Applicable Rate under the Credit Agreement, as well as the facility fee, may increase or decrease from time to time based on changes in the Company’s credit ratings and whether the Company achieves or fails to achieve certain sustainability-linked targets with respect to greenhouse gas emissions and workplace safety. Such adjustments may be up to 0.04% per annum on interest rate margins on the Revolving Credit Facility, 0.02% per annum on interest rate margins on the Tranche A Term Loan and up to 0.01% per annum on the facility fee. Accordingly, the interest rate is subject to fluctuation during the term of the Credit Agreement based on changes in the ABR, LIBOR, changes in the Company’s corporate credit ratings or whether the Company achieves or fails to achieve its sustainability-linked targets. The Credit Agreement also requires that Aptiv pay certain facility fees on the Revolving Credit Facility, which are also subject to adjustment based on the sustainability-linked targets as described above, 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-, 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, 2021, Aptiv selected the one-month LIBOR interest rate option on the Tranche A Term Loan, and the rate effective as of December 31, 2021, 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, 2021 | Rates effective as of | ||||||||||||||||
| Applicable Rate | (in millions) | December 31, 2021 | |||||||||||||||
| Tranche A Term Loan | LIBOR plus 1.125% | $ | 313 | 1.25 | % | ||||||||||||
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, under the June 2021 amendment, 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 not more than
3.5 to 1.0 (or 4.0 to 1.0 for four full fiscal quarters following completion of material acquisitions, as defined in the Credit Agreement). 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, 2021.
As of December 31, 2021, all obligations under the Credit Agreement were borrowed by Aptiv Corporation and jointly and severally guaranteed by AGFL and Aptiv PLC, subject to certain exceptions set forth in the Credit Agreement.
Senior Unsecured Notes
On March 3, 2014, Aptiv Corporation issued $700 million in aggregate principal amount of 4.15% senior unsecured notes due 2024 (the “2014 Senior Notes”) in a transaction registered under the Securities Act of 1933, as amended (the “Securities Act”). The 2014 Senior Notes were priced at 99.649% of par, resulting in a yield to maturity of 4.193%. The proceeds were primarily utilized to redeem $500 million of 5.875% senior unsecured notes due 2019 and to repay a portion of the Tranche A Term Loan. Aptiv paid approximately $6 million of issuance costs in connection with the 2014 Senior Notes. Interest was 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. In November 2021, Aptiv redeemed for cash the entire $700 million aggregate principal amount outstanding of the 2014 Senior Notes, financed by the proceeds received from the issuance of the 2021 Senior Notes, as defined below.
On March 10, 2015, Aptiv PLC issued €700 million in aggregate principal amount of 1.50% Euro-denominated senior unsecured notes due 2025 (the “2015 Euro-denominated Senior Notes”) in a transaction registered under the Securities Act. The 2015 Euro-denominated Senior Notes were priced at 99.54% of par, resulting in a yield to maturity of 1.55%. The proceeds were primarily utilized to redeem $500 million of 6.125% senior unsecured notes due 2021, and to fund growth initiatives, such as acquisitions, and share repurchases. Aptiv incurred approximately $5 million of issuance costs in connection with the 2015 Euro-denominated Senior Notes. Interest is payable annually on March 10. The Company has designated the 2015 Euro-denominated Senior Notes as a net investment hedge of the foreign currency exposure of its investments in certain Euro-denominated wholly-owned subsidiaries. Refer to Note 17. Derivatives and Hedging Activities for further information.
On November 19, 2015, Aptiv PLC issued $1.3 billion in aggregate principal amount of senior unsecured notes in a transaction registered under the Securities Act, comprised of $650 million of 3.15% senior unsecured notes due 2020 (the “3.15% Senior Notes”) and $650 million of 4.25% senior unsecured notes due 2026 (the “4.25% Senior Notes”) (collectively, the “2015 Senior Notes”). The 3.15% Senior Notes were priced at 99.784% of par, resulting in a yield to maturity of 3.197%, and the 4.25% Senior Notes were priced at 99.942% of par, resulting in a yield to maturity of 4.256%. The proceeds were primarily utilized to fund a portion of the cash consideration for the acquisition of HellermannTyton PLC, and for general corporate purposes, including the payment of fees and expenses associated with the HellermannTyton PLC acquisition and the related financing transaction. Aptiv incurred approximately $8 million of issuance costs in connection with the 2015 Senior Notes. Interest on the 3.15% Senior Notes was payable semi-annually on May 19 and November 19 of each year to holders of record at the close of business on May 4 or November 4 immediately preceding the interest payment date. Interest on the 4.25% Senior Notes was payable semi-annually on January 15 and July 15 of each year to holders of record at the close of business on January 1 or July 1 immediately preceding the interest payment date. In March 2019, Aptiv redeemed for cash the entire $650 million aggregate principal amount outstanding of the 3.15% Senior Notes, financed by the proceeds received from the issuance of the 2019 Senior Notes, as defined below. 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. In November 2021, Aptiv redeemed for cash the entire $650 million aggregate principal amount outstanding of the 4.25% Senior Notes, financed by the proceeds received from the issuance of the 2021 Senior Notes, as defined below. As a result of the redemption of the 2014 Senior Notes, as described above, and the 4.25% Senior Notes, Aptiv recognized a loss on debt extinguishment of approximately $126 million during the year ended December 31, 2021 within other expense, net in the consolidated statement of operations.
On September 15, 2016, Aptiv PLC issued €500 million in aggregate principal amount of 1.60% Euro-denominated senior unsecured notes due 2028 (the “2016 Euro-denominated Senior Notes”) in a transaction registered under the Securities Act. The 2016 Euro-denominated Senior Notes were priced at 99.881% of par, resulting in a yield to maturity of 1.611%. The proceeds, together with proceeds from the 2016 Senior Notes described below, were utilized to redeem the $800 million of 5.00% senior unsecured notes due 2023. Aptiv incurred approximately $4 million of issuance costs in connection with the 2016 Euro-denominated Senior Notes. Interest is payable annually on September 15. The Company has designated the 2016 Euro-denominated Senior Notes as a net investment hedge of the foreign currency exposure of its investments in certain Euro-denominated wholly-owned subsidiaries. Refer to Note 17. Derivatives and Hedging Activities for further information.
On September 20, 2016, Aptiv PLC issued $300 million in aggregate principal amount of 4.40% senior unsecured notes due 2046 (the “2016 Senior Notes”) in a transaction registered under the Securities Act. The 2016 Senior Notes were priced at 99.454% of par, resulting in a yield to maturity of 4.433%. The proceeds, together with proceeds from the 2016 Euro-denominated Senior Notes, were utilized to redeem the $800 million of 5.00% senior unsecured notes due 2023. Aptiv incurred
approximately $3 million of issuance costs in connection with the 2016 Senior Notes. Interest is payable semi-annually on April 1 and October 1 of each year to holders of record at the close of business on March 15 or September 15 immediately preceding the interest payment date.
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.
On November 23, 2021, Aptiv PLC issued $1.5 billion in aggregate principal amount of 3.10% senior unsecured notes due 2051 (the “2021 Senior Notes”) in a transaction registered under the Securities Act. The 2021 Senior Notes were priced at 97.814% of par, resulting in a yield to maturity of 3.214%. The proceeds were utilized to redeem the 2014 Senior Notes and 4.25% Senior Notes. Aptiv incurred approximately $17 million of issuance costs in connection with the 2021 Senior Notes. Interest on the 2021 Senior Notes is payable semi-annually on June 1 and December 1 of each year (commencing on June 1, 2022) to holders of record at the close of business on May 15 or November 15 immediately preceding the interest payment date. On December 27, 2021, Aptiv PLC entered into a supplemental indenture to add AGFL as a joint and several co-issuer of the 2021 Senior Notes effective as of the date of issuance.
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, 2021, the Company was in compliance with the provisions of all series of the outstanding senior notes.
Other Financing
Receivable factoring—Aptiv maintains a €450 million European accounts receivable factoring facility that is available on a committed basis and allows for factoring of receivables denominated in both Euros and U.S. dollars (“USD”). This facility became effective on January 1, 2021 and replaced Aptiv’s previous €300 million European accounts receivable factoring facility. 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. The program is for a term of three years, subject to Aptiv’s right to terminate at any time with three months’ notice. After expiration of the three year term, either party can terminate with three months’ notice. Borrowings denominated in Euros under the facility will bear interest at the three-month Euro Interbank Offered Rate (“EURIBOR”) plus 0.50% and USD borrowings will bear interest at two-month LIBOR plus 0.50%, with borrowings under either denomination carrying a minimum interest rate of 0.20%. As of December 31, 2021, Aptiv had no amounts outstanding on the European accounts receivable factoring facility. As of December 31, 2020, Aptiv had no amounts outstanding outstanding on the previous European accounts receivable factoring facility.
Finance leases and other—As of December 31, 2021 and 2020, approximately $14 million and $28 million, respectively, of other debt primarily issued by certain non-U.S. subsidiaries and finance lease obligations were outstanding.
Interest—Cash paid for interest related to debt outstanding totaled $159 million, $154 million and $153 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Letter of credit facilities—In addition to the letters of credit issued under the Credit Agreement, Aptiv had approximately $3 million and $2 million outstanding through other letter of credit facilities as of December 31, 2021 and 2020, respectively, primarily to support arrangements and other obligations at certain of its subsidiaries.
12. PENSION BENEFITS
Certain of Aptiv’s non-U.S. subsidiaries sponsor defined benefit pension plans, which generally provide benefits based on negotiated amounts for each year of service. Aptiv’s primary non-U.S. plans are located in France, Germany, Mexico, Portugal and the U.K. The U.K. and certain Mexican plans are funded. In addition, Aptiv has 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.
Aptiv sponsors a Supplemental Executive Retirement Program (“SERP”) for those employees who were U.S. executives of the former Delphi Corporation 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 five years after an involuntary or voluntary separation from Aptiv. The SERP is closed to new members.
Funded Status
The amounts shown below reflect the change in the U.S. defined benefit pension obligations during 2021 and 2020.
| Year Ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in millions) | |||||||||||
| Benefit obligation at beginning of year | $ | 8 | $ | 11 | |||||||
| Actuarial loss | — | 2 | |||||||||
| Benefits paid | (3) | (5) | |||||||||
| Benefit obligation at end of year | 5 | 8 | |||||||||
| Change in plan assets: | |||||||||||
| Fair value of plan assets at beginning of year | — | — | |||||||||
| Aptiv contributions | 3 | 5 | |||||||||
| Benefits paid | (3) | (5) | |||||||||
| Fair value of plan assets at end of year | — | — | |||||||||
| Underfunded status | (5) | (8) | |||||||||
| Amounts recognized in the consolidated balance sheets consist of: | |||||||||||
| Current liabilities | (1) | (3) | |||||||||
| Non-current liabilities | (4) | (5) | |||||||||
| Total | (5) | (8) | |||||||||
| Amounts recognized in accumulated other comprehensive loss consist of (pre-tax): | |||||||||||
| Actuarial loss | 6 | 7 | |||||||||
| Total | $ | 6 | $ | 7 |
The amounts shown below reflect the change in the non-U.S. defined benefit pension obligations during 2021 and 2020.
| Year Ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in millions) | |||||||||||
| Benefit obligation at beginning of year | $ | 977 | $ | 900 | |||||||
| Service cost | 18 | 18 | |||||||||
| Interest cost | 19 | 20 | |||||||||
| Actuarial (gain) loss | (62) | 36 | |||||||||
| Benefits paid | (36) | (38) | |||||||||
| Impact of curtailments | (3) | — | |||||||||
| Exchange rate movements and other | (52) | 41 | |||||||||
| Benefit obligation at end of year | 861 | 977 | |||||||||
| Change in plan assets: | |||||||||||
| Fair value of plan assets at beginning of year | 438 | 403 | |||||||||
| Actual return on plan assets | 23 | 40 | |||||||||
| Aptiv contributions | 25 | 28 | |||||||||
| Benefits paid | (36) | (38) | |||||||||
| Exchange rate movements and other | (12) | 5 | |||||||||
| Fair value of plan assets at end of year | 438 | 438 | |||||||||
| Underfunded status | (423) | (539) | |||||||||
| Amounts recognized in the consolidated balance sheets consist of: | |||||||||||
| Non-current assets | 29 | 1 | |||||||||
| Current liabilities | (17) | (21) | |||||||||
| Non-current liabilities | (435) | (519) | |||||||||
| Total | (423) | (539) | |||||||||
| Amounts recognized in accumulated other comprehensive loss consist of (pre-tax): | |||||||||||
| Actuarial loss | 101 | 197 | |||||||||
| Prior service cost | — | 5 | |||||||||
| Total | $ | 101 | $ | 202 |
The benefit obligations were impacted by actuarial gains of $62 million and losses of $36 million during the years ended December 31, 2021 and 2020, respectively, primarily due to changes in the discount rates used to measure the benefit obligation.
The projected benefit obligation (“PBO”), accumulated benefit obligation (“ABO”), and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets and with plan assets in excess of accumulated benefit obligations are as follows:
| U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in millions) Plans with ABO in Excess of Plan Assets | |||||||||||||||||||||||
| PBO | $ | 5 | $ | 8 | $ | 445 | $ | 838 | |||||||||||||||
| ABO | 5 | 8 | 405 | 784 | |||||||||||||||||||
| Fair value of plan assets at end of year | — | — | 7 | 314 | |||||||||||||||||||
| Plans with Plan Assets in Excess of ABO | |||||||||||||||||||||||
| PBO | $ | — | $ | — | $ | 416 | $ | 139 | |||||||||||||||
| ABO | — | — | 393 | 113 | |||||||||||||||||||
| Fair value of plan assets at end of year | — | — | 431 | 124 | |||||||||||||||||||
| Total | |||||||||||||||||||||||
| PBO | $ | 5 | $ | 8 | $ | 861 | $ | 977 | |||||||||||||||
| ABO | 5 | 8 | 798 | 897 | |||||||||||||||||||
| Fair value of plan assets at end of year | — | — | 438 | 438 |
Benefit costs presented below were determined based on actuarial methods and included the following:
| U.S. Plans | |||||||||||||||||
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Interest cost | $ | — | $ | — | $ | 1 | |||||||||||
| Amortization of actuarial losses | 1 | 1 | 1 | ||||||||||||||
| Net periodic benefit cost | $ | 1 | $ | 1 | $ | 2 |
| Non-U.S. Plans | |||||||||||||||||
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Service cost | $ | 18 | $ | 18 | $ | 17 | |||||||||||
| Interest cost | 19 | 20 | 25 | ||||||||||||||
| Expected return on plan assets | (17) | (17) | (18) | ||||||||||||||
| Settlement loss | 1 | 1 | 1 | ||||||||||||||
| Curtailment loss | 3 | — | 7 | ||||||||||||||
| Amortization of actuarial losses | 14 | 14 | 9 | ||||||||||||||
| Other | — | 1 | 1 | ||||||||||||||
| Net periodic benefit cost | $ | 38 | $ | 37 | $ | 42 |
Other postretirement benefit obligations were approximately $1 million and $1 million at December 31, 2021 and 2020, respectively.
Experience gains and losses, as well as the effects of changes in actuarial assumptions and plan provisions are recognized in other comprehensive income. Cumulative gains and losses in excess of 10% of the 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 | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Weighted-average discount rate | 1.90 | % | 1.20 | % | 3.09 | % | 2.21 | % | |||||||||||||||
| Weighted-average rate of increase in compensation levels | N/A | N/A | 2.47 | % | 3.64 | % |
Assumptions used to determine net expense for years ended December 31:
| Pension Benefits | |||||||||||||||||||||||||||||||||||
| U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||
| Weighted-average discount rate | 1.20 | % | 2.40 | % | 3.80 | % | 2.21 | % | 2.87 | % | 3.53 | % | |||||||||||||||||||||||
| Weighted-average rate of increase in compensation levels | N/A | N/A | N/A | 3.64 | % | 3.69 | % | 3.74 | % | ||||||||||||||||||||||||||
| Weighted-average expected long-term rate of return on plan assets | N/A | N/A | N/A | 4.29 | % | 4.68 | % | 4.95 | % |
Aptiv selects 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 or Moody’s.
Aptiv does not have any U.S. pension assets; therefore no U.S. asset rate of return calculation was necessary. The primary funded non-U.S. plans are in the U.K. and Mexico. For the determination of 2021 expense, Aptiv assumed a long-term expected asset rate of return of approximately 3.75% and 7.50% for the U.K. and Mexico, respectively. Aptiv 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 long-term, prospective rates. To determine the expected return on plan assets, the market-related value of our plan assets is actual fair value.
Aptiv’s pension expense for 2022 is determined at the 2021 year end measurement date. For purposes of analysis, the following table highlights the sensitivity of the Company’ pension obligations and expense to changes in key assumptions:
| Change in Assumption | Impact on Pension Expense | Impact on PBO | ||||||||||||
| 25 basis point (“bp”) decrease in discount rate | + $1 million | + $28 million | ||||||||||||
| 25 bp increase in discount rate | - $1 million | - $27 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.
Pension Funding
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
| Projected Pension Benefit Payments | |||||||||||
| U.S. Plans | Non-U.S. Plans | ||||||||||
| (in millions) | |||||||||||
| 2022 | $ | 1 | $ | 44 | |||||||
| 2023 | 1 | 41 | |||||||||
| 2024 | 1 | 42 | |||||||||
| 2025 | 1 | 45 | |||||||||
| 2026 | — | 49 | |||||||||
| 2027 – 2031 | 1 | 286 |
Aptiv anticipates making pension contributions and benefit payments of approximately $35 million in 2022.
Aptiv sponsors defined contribution plans for certain hourly and salaried employees. Expense related to the contributions for these plans was $37 million, $17 million, and $40 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Plan Assets
Certain pension plans sponsored by Aptiv invest in a diversified portfolio consisting of an array of asset classes that attempts to maximize returns while minimizing volatility. These asset classes include developed market equities, emerging market equities, private equity, global high quality and high yield fixed income, real estate and absolute return strategies.
The fair values of Aptiv’s pension plan assets weighted-average asset allocations at December 31, 2021 and 2020, by asset category, are as follows:
| Fair Value Measurements at December 31, 2021 | ||||||||||||||||||||||||||
| Asset Category | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| Cash | $ | 13 | $ | 13 | $ | — | $ | — | ||||||||||||||||||
| Time deposits | 29 | — | 29 | — | ||||||||||||||||||||||
| Equity mutual funds | 33 | — | 33 | — | ||||||||||||||||||||||
| Bond mutual funds | 216 | — | 216 | — | ||||||||||||||||||||||
| Real estate trust funds | 35 | — | — | 35 | ||||||||||||||||||||||
| Hedge funds | 11 | — | — | 11 | ||||||||||||||||||||||
| Insurance contracts | 4 | — | — | 4 | ||||||||||||||||||||||
| Debt securities | 56 | 56 | — | — | ||||||||||||||||||||||
| Equity securities | 41 | 41 | — | — | ||||||||||||||||||||||
| Total | $ | 438 | $ | 110 | $ | 278 | $ | 50 |
| Fair Value Measurements at December 31, 2020 | ||||||||||||||||||||||||||
| Asset Category | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| Cash | $ | 45 | $ | 45 | $ | — | $ | — | ||||||||||||||||||
| Time deposits | 28 | — | 28 | — | ||||||||||||||||||||||
| Equity mutual funds | 33 | — | 33 | — | ||||||||||||||||||||||
| Bond mutual funds | 186 | — | 186 | — | ||||||||||||||||||||||
| Real estate trust funds | 34 | — | — | 34 | ||||||||||||||||||||||
| Hedge funds | 9 | — | — | 9 | ||||||||||||||||||||||
| Insurance contracts | 7 | — | — | 7 | ||||||||||||||||||||||
| Debt securities | 55 | 55 | — | — | ||||||||||||||||||||||
| Equity securities | 41 | 41 | — | — | ||||||||||||||||||||||
| Total | $ | 438 | $ | 141 | $ | 247 | $ | 50 |
Following is a description of the valuation methodologies used for pension assets measured at fair value.
Time deposits—The fair value of fixed-maturity certificates of deposit was estimated using the rates offered for deposits of similar remaining maturities.
Equity mutual funds—The fair value of the equity mutual funds is determined by the indirect quoted market prices on regulated financial exchanges of the underlying investments included in the fund.
Bond mutual funds—The fair value of the bond mutual funds is determined by the indirect quoted market prices on regulated financial exchanges of the underlying investments included in the fund.
Real estate—The fair value of real estate properties is estimated using an annual appraisal provided by the administrator of the property investment. Management believes this is an appropriate methodology to obtain the fair value of these assets.
Hedge funds—The fair value of the hedge funds is accounted for by a custodian. The custodian obtains valuations from the underlying hedge fund managers based on market quotes for the most liquid assets and alternative methods for assets that do not have sufficient trading activity to derive prices. Management and the custodian review the methods used by the underlying managers to value the assets. Management believes this is an appropriate methodology to obtain the fair value of these assets.
Insurance contracts—The insurance contracts are invested in a fund with guaranteed minimum returns. The fair values of these contracts are based on the net asset value underlying the contracts.
Debt securities—The fair value of debt securities is determined by direct quoted market prices on regulated financial exchanges.
Equity securities—The fair value of equity securities is determined by direct quoted market prices on regulated financial exchanges.
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |||||||||||||||||||||||
| Real Estate Trust Fund | Hedge Funds | Insurance Contracts | |||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Beginning balance at January 1, 2020 | $ | 31 | $ | 15 | $ | 7 | |||||||||||||||||
| Actual return on plan assets: | |||||||||||||||||||||||
| Relating to assets still held at the reporting date | 1 | (1) | — | ||||||||||||||||||||
| Purchases, sales and settlements | — | (6) | — | ||||||||||||||||||||
| Foreign currency translation and other | 2 | 1 | — | ||||||||||||||||||||
| Ending balance at December 31, 2020 | $ | 34 | $ | 9 | $ | 7 | |||||||||||||||||
| Actual return on plan assets: | |||||||||||||||||||||||
| Relating to assets still held at the reporting date | $ | 3 | $ | 2 | $ | — | |||||||||||||||||
| Purchases, sales and settlements | (1) | — | (3) | ||||||||||||||||||||
| Foreign currency translation and other | (1) | — | — | ||||||||||||||||||||
| Ending balance at December 31, 2021 | $ | 35 | $ | 11 | $ | 4 |
13. COMMITMENTS AND CONTINGENCIES
Ordinary Business Litigation
Aptiv is from time to time subject to various legal actions and claims incidental to its business, including those arising out of alleged defects, alleged breaches of contracts, product warranties, intellectual property matters, and employment-related matters. It is the opinion of Aptiv that the outcome of such matters will not have a material adverse impact on the consolidated financial position, results of operations, or cash flows of Aptiv. With respect to warranty matters, although Aptiv cannot ensure that the future costs of warranty claims by customers will not be material, Aptiv believes its established reserves are adequate to cover potential warranty settlements.
Matters Related to Global Supply Chain Disruptions
Due to various factors that are beyond our control, there are currently global supply chain disruptions, including a worldwide semiconductor supply shortage. The semiconductor supply shortage, due in part to increased demand across multiple industries, is impacting production in automotive and other industries. We anticipate these supply chain disruptions will persist throughout 2022. We, along with most automotive component manufacturers that use semiconductors, have been unable to fully meet the vehicle production demands of OEMs because of events which are outside our control, including but not limited to, the COVID-19 pandemic, the global semiconductor shortage, fires in our suppliers’ facilities, unprecedented weather events in the southwestern United States, and other extraordinary events. Although we are working closely with suppliers and customers to minimize any potential adverse impacts of these events, some of our customers have indicated that they expect us to bear at least some responsibility for their lost production and other costs. While no assurances can be made as to the ultimate outcome of these customer expectations or any other future claims, we do not currently believe a loss is probable, and accordingly, no reserve has been made as of December 31, 2021. We will continue to actively monitor all direct and indirect potential impacts of these supply chain disruptions, and will seek to aggressively mitigate and minimize their impact on our business.
Brazil Matters
Aptiv conducts business operations in Brazil that are subject to the Brazilian federal labor, social security, environmental, health and safety, tax and customs laws, as well as a variety of state and local laws. While Aptiv believes it complies with such laws, they are complex, subject to varying interpretations, and the Company is often engaged in litigation with government agencies regarding the application of these laws to particular circumstances. As of December 31, 2021, the majority of claims asserted against Aptiv in Brazil relate to such litigation. The remaining claims in Brazil relate to commercial and labor litigation with private parties. As of December 31, 2021, claims totaling approximately $95 million (using December 31, 2021 foreign currency rates) have been asserted against Aptiv in Brazil. As of December 31, 2021, the Company maintains accruals for these asserted claims of $20 million (using December 31, 2021 foreign currency rates). The amounts accrued represent claims that are deemed probable of loss and are reasonably estimable based on the Company’s analyses and assessment of the asserted claims and prior experience with similar matters. While the Company believes its accruals are adequate, the final amounts required to
resolve these matters could differ materially from the Company’s recorded estimates and Aptiv’s results of operations could be materially affected. The Company estimates the reasonably possible loss in excess of the amounts accrued related to these claims to be zero to $75 million.
Environmental Matters
Aptiv is subject to the requirements of U.S. federal, state, local and non-U.S. environmental, health and safety laws and regulations. As of December 31, 2021 and 2020, the undiscounted reserve for environmental investigation and remediation recorded in other long-term liabilities was approximately $4 million and $4 million, respectively. 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. At December 31, 2021 the difference between the recorded liabilities and the reasonably possible range of potential loss was not material.
14. INCOME TAXES
Income before income taxes and equity income for U.S. and non-U.S. operations are as follows:
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (in millions) | |||||||||||||||||
| U.S. loss | $ | (2) | $ | (65) | $ | (1) | |||||||||||
| Non-U.S. income | 912 | 2,019 | 1,127 | ||||||||||||||
| Income before income taxes and equity loss | $ | 910 | $ | 1,954 | $ | 1,126 |
The provision (benefit) for income taxes is comprised of:
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Current income tax expense (benefit): | |||||||||||||||||
| U.S. federal | $ | 1 | $ | (53) | $ | 8 | |||||||||||
| Non-U.S. | 156 | 154 | 156 | ||||||||||||||
| U.S. state and local | 4 | — | 1 | ||||||||||||||
| Total current | 161 | 101 | 165 | ||||||||||||||
| Deferred income tax expense (benefit), net: | |||||||||||||||||
| U.S. federal | (17) | (14) | (23) | ||||||||||||||
| Non-U.S. | (43) | (37) | (8) | ||||||||||||||
| U.S. state and local | — | (1) | (2) | ||||||||||||||
| Total deferred | (60) | (52) | (33) | ||||||||||||||
| Total income tax provision | $ | 101 | $ | 49 | $ | 132 |
Cash paid or withheld for income taxes was $172 million, $106 million and $189 million for the years ended December 31, 2021, 2020 and 2019, respectively.
For purposes of comparability and consistency, the Company uses the notional U.S. federal income tax rate when presenting the Company’s reconciliation of the income tax provision. The Company is an Irish resident taxpayer. A reconciliation of the provision for income taxes compared with the amounts at the notional U.S. federal statutory rate was:
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Notional U.S. federal income taxes at statutory rate | $ | 191 | $ | 410 | $ | 236 | |||||||||||
| Income taxed at other rates | (81) | (339) | (92) | ||||||||||||||
| Change in valuation allowance | (17) | 10 | (18) | ||||||||||||||
| Other change in tax reserves | 19 | 30 | 20 | ||||||||||||||
| Intragroup reorganizations | (7) | (49) | — | ||||||||||||||
| Withholding taxes | 37 | 26 | 19 | ||||||||||||||
| Tax credits | (23) | (16) | (18) | ||||||||||||||
| Change in tax law | (7) | (2) | 1 | ||||||||||||||
| Other adjustments | (11) | (21) | (16) | ||||||||||||||
| Total income tax expense | $ | 101 | $ | 49 | $ | 132 | |||||||||||
| Effective tax rate | 11 | % | 3 | % | 12 | % |
The Company’s tax rate is affected by the tax rates in Ireland 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. Included in the non-U.S. income taxed at other rates are tax incentives obtained in various non-U.S. countries, primarily the High and New Technology Enterprise (“HNTE”) status in China and a Free Trade Zone exemption in Honduras which totaled $10 million in 2021, $5 million in 2020 and $19 million in 2019, as well as tax benefit for income earned, and no tax benefit for losses incurred, in jurisdictions where a valuation allowance has been recorded. The Company currently benefits from tax holidays in various non-U.S. jurisdictions with expiration dates from 2022 through 2041. The income tax benefits attributable to these tax holidays are approximately $1 million (less than $0.01 per share) in 2021, $1 million (less than $0.01 per share) in 2020 and $7 million ($0.03 per share) in 2019.
The effective tax rate in the year ended December 31, 2021 was impacted by favorable provision to return adjustments as well as 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. The Company also accrued $19 million of reserve adjustments for uncertain tax positions.
The effective tax rate in the year ended December 31, 2020 was impacted by changes in reserves, provision to return adjustments, changes in valuation allowances and the tax impact of certain intragroup reorganizations meant to streamline and simplify the Company’s operating and legal structure, which resulted in the recognition of losses for tax purposes. The effective tax rate was also impacted by the beneficial impact from the gain on the formation of the Motional autonomous driving joint venture. The tax expense associated with the gain was insignificant as Aptiv’s aggregate autonomous driving assets were exempt from capital gains tax in the jurisdiction from which they were sold. The aggregate autonomous driving assets had been acquired, purchased or developed in taxable transactions in prior periods and reflect changes made to the corporate entity operating structure for intellectual property following the separation of its former Powertrain Systems segment.
The effective tax rate in 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 Tax Cuts and Jobs Act, which was enacted in the U.S. in 2017, created a provision known as Global Intangible Low-Taxed Income (“GILTI”) that imposes a tax on certain earnings of foreign subsidiaries. U.S. GAAP allows companies to make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred. We have elected to account for GILTI in the year the tax is incurred.
As described above, certain of the Company’s Chinese subsidiaries benefit from a reduced corporate income tax rate as a result of their HNTE status. Aptiv regularly submits applications to reapply for HNTE status as they expire. The Company believes each of the applicable entities will continue to renew HNTE status going forward and has reflected this in calculating total income tax expense.
Deferred Income Taxes
The Company accounts for income taxes and the related accounts under the liability method. Deferred income tax assets and liabilities reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and the bases of such assets and liabilities as measured by tax laws. Significant components of the deferred tax assets and liabilities are as follows:
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in millions) | |||||||||||
| Deferred tax assets: | |||||||||||
| Pension | $ | 76 | $ | 106 | |||||||
| Employee benefits | 30 | 29 | |||||||||
| Net operating loss carryforwards | 699 | 746 | |||||||||
| Warranty and other liabilities | 77 | 69 | |||||||||
| Operating lease right-of-use assets | 78 | 77 | |||||||||
| Other | 184 | 171 | |||||||||
| Total gross deferred tax assets | 1,144 | 1,198 | |||||||||
| Less: valuation allowances | (766) | (832) | |||||||||
| Total deferred tax assets (1) | $ | 378 | $ | 366 | |||||||
| Deferred tax liabilities: | |||||||||||
| Fixed assets | $ | 55 | $ | 57 | |||||||
| Tax on unremitted profits of certain foreign subsidiaries | 65 | 64 | |||||||||
| Intangibles | 174 | 201 | |||||||||
| Operating lease liabilities | 78 | 77 | |||||||||
| Total gross deferred tax liabilities | 372 | 399 | |||||||||
| Net deferred tax assets (liabilities) | $ | 6 | $ | (33) |
(1)Reflects gross amount before jurisdictional netting of deferred tax assets and liabilities.
Deferred tax assets and liabilities are classified as long-term in the consolidated balance sheets. Net deferred tax assets and liabilities are included in the consolidated balance sheets as follows:
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in millions) | |||||||||||
| Long-term assets | $ | 159 | $ | 174 | |||||||
| Long-term liabilities | (153) | (207) | |||||||||
| Total deferred tax asset (liability) | $ | 6 | $ | (33) |
The net deferred tax asset of $6 million as of December 31, 2021 is primarily comprised of deferred tax assets in Mexico, Germany, the U.K. and the U.S. offset by deferred tax liability amounts primarily in Korea, China, Singapore and Japan.
Net Operating Loss and Tax Credit Carryforwards
As of December 31, 2021, the Company has gross deferred tax assets of approximately $695 million for non-U.S. net operating loss (“NOL”) carryforwards with recorded valuation allowances of $640 million. These NOLs are available to offset future taxable income and realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. The NOLs primarily relate to Luxembourg, Poland, Germany, the U.K., Ireland and France. The NOL carryforwards have expiration dates ranging from one year to an indefinite period.
Deferred tax assets include $87 million and $93 million of tax credit carryforwards with recorded valuation allowances of $71 million and $86 million at December 31, 2021 and 2020, respectively. These tax credit carryforwards expire at various times from 2022 through 2041.
Cumulative Undistributed Foreign Earnings
No income taxes have been provided on indefinitely reinvested earnings of certain foreign subsidiaries at December 31, 2021.
Withholding taxes of $65 million have been accrued on undistributed earnings that are not indefinitely reinvested and are primarily related to China, Honduras, Morocco and Germany. There are no other material liabilities for income taxes on the undistributed earnings of foreign subsidiaries, as the Company has concluded that such earnings are either indefinitely reinvested or should not give rise to additional income tax liabilities as a result of the distribution of such earnings.
Uncertain Tax Positions
The Company recognizes tax benefits only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.
A reconciliation of the gross change in the unrecognized tax benefits balance, excluding interest and penalties is as follows:
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Balance at beginning of year | $ | 231 | $ | 217 | $ | 209 | |||||||||||
| Additions related to current year | 12 | 35 | 20 | ||||||||||||||
| Additions related to prior years | 20 | 31 | 51 | ||||||||||||||
| Reductions related to prior years | (36) | (20) | (46) | ||||||||||||||
| Reductions due to expirations of statute of limitations | (3) | (28) | (11) | ||||||||||||||
| Settlements | — | (4) | (6) | ||||||||||||||
| Balance at end of year | $ | 224 | $ | 231 | $ | 217 |
A portion of the Company’s unrecognized tax benefits would, if recognized, reduce its effective tax rate. The remaining unrecognized tax benefits relate to tax positions that, if recognized, would result in an offsetting change in valuation allowance and for which only the timing of the benefit is uncertain. Recognition of these tax benefits would reduce the Company’s effective tax rate only through a reduction of accrued interest and penalties. As of December 31, 2021 and 2020, the amounts of unrecognized tax benefit that would reduce the Company’s effective tax rate were $207 million and $213 million, respectively. For the year ended December 31, 2019, the Company recorded approximately $26 million of additional reserves for uncertain tax positions, primarily related to prior year net operating loss and other carryforwards on which full valuation allowances have been recorded. For 2021 and 2020, respectively, $105 million and $103 million of reserves for uncertain tax positions would be offset by the write-off of a related deferred tax asset, if recognized.
The Company recognizes interest and penalties relating to unrecognized tax benefits as part of income tax expense. Total accrued liabilities for interest and penalties were $28 million and $25 million at December 31, 2021 and 2020, respectively. Total interest and penalties recognized as part of income tax expense were expenses of $4 million, $13 million and $7 million for the years ended December 31, 2021, 2020 and 2019, respectively.
The Company files tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world. Taxing jurisdictions significant to Aptiv include Barbados, China, Germany, Ireland, Luxembourg, Mexico, South Korea, the U.K. and the U.S. Open tax years related to these taxing jurisdictions remain subject to examination and could result in additional tax liabilities. In general, the Company’s affiliates are no longer subject to income tax examinations by foreign tax authorities for years before 2002. It is reasonably possible that audit settlements, the conclusion of current examinations or the expiration of the statute of limitations in several jurisdictions could impact the Company’s unrecognized tax benefits. A reversal of approximately $5 million is reasonably possible in the next 12 months, due to the running of statutes of limitations in various taxing jurisdictions.
15. SHAREHOLDERS’ EQUITY AND NET INCOME PER SHARE
2020 Public Equity Offering
In June 2020, the Company completed the underwritten public offering of approximately 15.1 million ordinary shares at a price of $75.91 per share, resulting in net proceeds of approximately $1,115 million, after deducting expenses and the underwriters’ discount of $35 million. Simultaneously, the Company completed the underwritten public offering of 11.5 million 5.50% Mandatory Convertible Preferred Shares, Series A, $0.01 par value per share (the “MCPS”) with a liquidation preference of $100 per share, resulting in net proceeds of approximately $1,115 million, after deducting expenses and the underwriters’ discount of $35 million.
Each share of MCPS will mandatorily convert on the mandatory conversion date of June 15, 2023, into between 1.0754 and 1.3173 shares of the Company’s ordinary shares, subject to customary anti-dilution adjustments, and further adjustment if there are any accumulated and unpaid MCPS dividends at the conversion date. The number of the Company’s ordinary shares issuable upon conversion will be determined based on the volume-weighted average price per share of the Company’s ordinary shares over the 20 consecutive trading day period beginning on, and including the 21st scheduled trading day immediately before June 15, 2023. Subject to certain exceptions, at any time prior to June 15, 2023, holders of the MCPS may elect to convert each share into 1.0754 ordinary shares, subject to further anti-dilution adjustments. In the event of a fundamental change, the MCPS will convert at the fundamental change rates specified in the statement of rights, and the holders of the MCPS would be entitled to a fundamental change make-whole dividend.
Holders of the MCPS will be entitled to receive, when and if declared by the Company’s Board of Directors, cumulative dividends at the annual rate of 5.50% of the liquidation preference of $100 per share (equivalent to $5.50 annually per share), payable in cash or, subject to certain limitations, by delivery of the Company’s ordinary shares or any combination of cash and the Company’s ordinary shares, at the Company’s election. If declared, dividends on the MCPS will be payable quarterly on March 15, June 15, September 15 and December 15 of each year (commencing on September 15, 2020 to, and including June 15, 2023), to the holders of record of the MCPS as they appear on the Company’s share register at the close of business on the immediately preceding March 1, June 1, September 1 or December 1, respectively.
Net Income Per Share
Basic net income per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted net income per share reflects the weighted average dilutive impact of all potentially dilutive securities from the date of issuance and is computed using the treasury stock and if-converted methods. The if-converted method is used to determine if the impact of the conversion of the MCPS into ordinary shares is more dilutive than the MCPS dividends to net income per share. If so, the MCPS are assumed to have been converted at the later of the beginning of the period or the time of issuance, and the resulting ordinary shares are included in the denominator and the MCPS dividends are added back to the numerator. Unless otherwise noted, share and per share amounts included in these notes are on a diluted basis. For the year ended December 31, 2021, the impact of the MCPS calculated under the if-converted method was anti-dilutive, and as such, 12.37 million ordinary shares underlying the MCPS were excluded from the diluted income per share calculation. For the year ended December 31, 2020, the calculation of net income per share includes the dilutive impacts of the MCPS under the if-converted method. For all periods presented, the calculation of net income per share also contemplates the dilutive impacts, if any, of the Company’s share-based compensation plans. Refer to Note 21. Share-Based Compensation for additional information.
Weighted Average Shares
The following table illustrates net income per share attributable to ordinary shareholders and the weighted average shares outstanding used in calculating basic and diluted income per share:
| Year Ended December 31, | ||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||
| (in millions, except per share data) | ||||||||||||||||||||||||||||||||
| Numerator, basic: | ||||||||||||||||||||||||||||||||
| Net income attributable to ordinary shareholders | $ | 527 | $ | 1,769 | $ | 990 | ||||||||||||||||||||||||||
| Numerator, diluted: | ||||||||||||||||||||||||||||||||
| Net income attributable to Aptiv | $ | 590 | $ | 1,804 | $ | 990 | ||||||||||||||||||||||||||
| MCPS dividends (1) | (63) | — | — | |||||||||||||||||||||||||||||
| Numerator, diluted | $ | 527 | $ | 1,804 | $ | 990 | ||||||||||||||||||||||||||
| Denominator: | ||||||||||||||||||||||||||||||||
| Weighted average ordinary shares outstanding, basic | 270.46 | 263.43 | 256.81 | |||||||||||||||||||||||||||||
| Dilutive shares related to RSUs | 0.76 | 0.44 | 0.58 | |||||||||||||||||||||||||||||
| Weighted average MCPS converted shares (1) | — | 6.83 | — | |||||||||||||||||||||||||||||
| Weighted average ordinary shares outstanding, including dilutive shares | 271.22 | 270.70 | 257.39 | |||||||||||||||||||||||||||||
| Net income per share attributable to ordinary shareholders: | ||||||||||||||||||||||||||||||||
| Basic | $ | 1.95 | $ | 6.72 | $ | 3.85 | ||||||||||||||||||||||||||
| Diluted | $ | 1.94 | $ | 6.66 | $ | 3.85 |
(1)For purposes of calculating net income per share under the if-converted method, the Company has included the impact of the MCPS dividends for the year ended December 31, 2021 as the impact was more dilutive to net income per share than the impact of assuming the conversion of the MCPS into ordinary shares on a weighted average basis. The Company has excluded the impact of the MCPS dividends for the year ended December 31, 2020, as the assumed conversion of the MCPS into ordinary shares on a weighted average basis was more dilutive to net income per share than the impact of the MCPS dividends.
Share Repurchase Programs
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.
There were no shares repurchased during the year ended December 31, 2021. A summary of the ordinary shares repurchased during the years ended December 31, 2020 and 2019 is as follows:
| Year Ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| Total number of shares repurchased | 1,059,075 | 5,387,533 | |||||||||||||||||||||
| Average price paid per share | $ | 53.73 | $ | 77.93 | |||||||||||||||||||
| Total (in millions) | $ | 57 | $ | 420 |
As of December 31, 2021, approximately $13 million of share repurchases remained available under the April 2016 share repurchase program, which is in addition to the share repurchase program of up to $2.0 billion that was previously announced in January 2019. This program, which will commence following the completion of the April 2016 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. 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.
Dividends
The Company has declared and paid cash dividends per ordinary and preferred share during the periods presented as follows:
| Ordinary Shares | Preferred Shares | ||||||||||||||||||||||
| Dividend | Amount | Dividend | Amount | ||||||||||||||||||||
| Per Share | (in millions) | Per Share | (in millions) | ||||||||||||||||||||
| 2021: | |||||||||||||||||||||||
| Fourth quarter | $ | — | $ | — | $ | 1.375 | $ | 16 | |||||||||||||||
| Third quarter | — | — | 1.375 | 15 | |||||||||||||||||||
| Second quarter | — | — | 1.375 | 16 | |||||||||||||||||||
| First quarter | — | — | 1.375 | 16 | |||||||||||||||||||
| Total | $ | — | $ | — | $ | 5.500 | $ | 63 | |||||||||||||||
| 2020: | |||||||||||||||||||||||
| Fourth quarter | $ | — | $ | — | $ | 1.375 | $ | 16 | |||||||||||||||
| Third quarter | — | — | 1.421 | 16 | |||||||||||||||||||
| Second quarter | — | — | — | — | |||||||||||||||||||
| First quarter | 0.22 | 56 | — | — | |||||||||||||||||||
| Total | $ | 0.22 | $ | 56 | $ | 2.796 | $ | 32 |
16. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in accumulated other comprehensive income (loss) attributable to Aptiv (net of tax) are shown below.
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Foreign currency translation adjustments: | |||||||||||||||||
| Balance at beginning of year | $ | (445) | $ | (597) | $ | (555) | |||||||||||
| Aggregate adjustment for the year (1) | (143) | 152 | (42) | ||||||||||||||
| Balance at end of year | (588) | (445) | (597) | ||||||||||||||
| Gains (losses) on derivatives: | |||||||||||||||||
| Balance at beginning of year | $ | 40 | $ | 13 | $ | (35) | |||||||||||
| Other comprehensive income before reclassifications (nil net tax effect for all periods presented) | 8 | 6 | 50 | ||||||||||||||
| Reclassification to income (nil net tax effect for all periods presented) | (65) | 21 | 6 | ||||||||||||||
| Adoption of ASU 2018-02 | — | — | (8) | ||||||||||||||
| Balance at end of year | (17) | 40 | 13 | ||||||||||||||
| Pension and postretirement plans: | |||||||||||||||||
| Balance at beginning of year | $ | (140) | $ | (135) | $ | (104) | |||||||||||
| Other comprehensive income (loss) before reclassifications (net tax expense (benefit) of $23 million, $(7) million and $(17) million) | 57 | (18) | (37) | ||||||||||||||
| Reclassification to income (net tax benefit of $4 million, $3 million and $3 million) | 16 | 13 | 7 | ||||||||||||||
| Adoption of ASU 2018-02 | — | — | (1) | ||||||||||||||
| Balance at end of year | (67) | (140) | (135) | ||||||||||||||
| Accumulated other comprehensive loss, end of year | $ | (672) | $ | (545) | $ | (719) |
(1)Includes $116 million of gains, $132 million of losses and $29 million of gains for the years ended December 31, 2021, 2020 and 2019, respectively, related to non-derivative net investment hedges. Refer to Note 17. Derivatives and Hedging Activities for further description of these hedges.
Reclassifications from accumulated other comprehensive income (loss) to income were as follows:
| Reclassification Out of Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||||||
| Details About Accumulated Other Comprehensive Income Components | Year Ended December 31, | Affected Line Item in the Statement of Operations | ||||||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| Gains (losses) on derivatives: | ||||||||||||||||||||||||||
| Commodity derivatives | $ | 68 | $ | (7) | $ | (15) | Cost of sales | |||||||||||||||||||
| Foreign currency derivatives | (3) | (14) | 9 | Cost of sales | ||||||||||||||||||||||
| 65 | (21) | (6) | Income before income taxes | |||||||||||||||||||||||
| — | — | — | Income tax expense | |||||||||||||||||||||||
| 65 | (21) | (6) | Net income | |||||||||||||||||||||||
| — | — | — | Net income attributable to noncontrolling interest | |||||||||||||||||||||||
| $ | 65 | $ | (21) | $ | (6) | Net income attributable to Aptiv | ||||||||||||||||||||
| Pension and postretirement plans: | ||||||||||||||||||||||||||
| Actuarial loss | $ | (15) | $ | (16) | $ | (10) | Other (expense) income, net (1) | |||||||||||||||||||
| Curtailment loss | (5) | — | — | Other (expense) income, net (1) | ||||||||||||||||||||||
| (20) | (16) | (10) | Income before income taxes | |||||||||||||||||||||||
| 4 | 3 | 3 | Income tax expense | |||||||||||||||||||||||
| (16) | (13) | (7) | Net income | |||||||||||||||||||||||
| — | — | — | Net income attributable to noncontrolling interest | |||||||||||||||||||||||
| $ | (16) | $ | (13) | $ | (7) | Net income attributable to Aptiv | ||||||||||||||||||||
| Total reclassifications for the year | $ | 49 | $ | (34) | $ | (13) |
(1)These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (see Note 12. Pension Benefits for additional details).
17. DERIVATIVES AND HEDGING ACTIVITIES
Cash Flow Hedges
Aptiv is exposed to market risk, such as fluctuations in foreign currency exchange rates, commodity prices and changes in interest rates, which may result in cash flow risks. To manage the volatility relating to these exposures, Aptiv aggregates the exposures on a consolidated basis to take advantage of natural offsets. For exposures that are not offset within its operations, Aptiv enters into various derivative transactions pursuant to its risk management policies, which prohibit holding or issuing derivative financial instruments for speculative purposes, and designation of derivative instruments is performed on a transaction basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the fair value or cash flows of the underlying exposures being hedged. Aptiv assesses the initial and ongoing effectiveness of its hedging relationships in accordance with its documented policy.
As of December 31, 2021, the Company had the following outstanding notional amounts related to commodity and foreign currency forward and option contracts designated as cash flow hedges that were entered into to hedge forecasted exposures:
| Commodity | Quantity Hedged | Unit of Measure | Notional Amount (Approximate USD Equivalent) | |||||||||||||||||
| (in thousands) | (in millions) | |||||||||||||||||||
| Copper | 81,578 | pounds | $ | 355 | ||||||||||||||||
| Foreign Currency | Quantity Hedged | Unit of Measure | Notional Amount (Approximate USD Equivalent) | |||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Mexican Peso | 21,122 | MXN | $ | 1,030 | ||||||||||||||||
| Chinese Yuan Renminbi | 2,709 | RMB | 425 | |||||||||||||||||
| Euro | 107 | EUR | 120 | |||||||||||||||||
| Polish Zloty | 571 | PLN | 140 | |||||||||||||||||
| Hungarian Forint | 17,594 | HUF | 55 | |||||||||||||||||
As of December 31, 2021, Aptiv has entered into derivative instruments to hedge cash flows extending out to December 2023.
Gains and losses on derivatives qualifying as cash flow hedges are recorded in accumulated OCI, to the extent that hedges are effective, until the underlying transactions are recognized in earnings. Unrealized amounts in accumulated OCI will fluctuate based on changes in the fair value of hedge derivative contracts at each reporting period. Net gains on cash flow hedges included in accumulated OCI as of December 31, 2021 were $22 million (approximately $22 million, net of tax). Of this total, approximately $26 million of gains are expected to be included in cost of sales within the next 12 months and approximately $4 million of losses are expected to be included in cost of sales in subsequent periods. Cash flow hedges are discontinued when Aptiv determines it is no longer probable that the originally forecasted transactions will occur. Cash flows from derivatives used to manage commodity and foreign exchange risks designated as cash flow hedges are classified as operating activities within the consolidated statements of cash flows.
Net Investment Hedges
The Company is also exposed to the risk that adverse changes in foreign currency exchange rates could impact its net investment in non-U.S. subsidiaries. To manage this risk, the Company designates certain qualifying derivative and non-derivative instruments, including foreign currency forward contracts and foreign currency-denominated debt, as net investment hedges of certain non-U.S. subsidiaries. The gains or losses on instruments designated as net investment hedges are recognized within OCI to offset changes in the value of the net investment in these foreign currency-denominated operations. Gains and losses reported in accumulated OCI are reclassified to earnings only when the related currency translation adjustments are required to be reclassified, usually upon sale or liquidation of the investment. Cash flows from derivatives designated as net investment hedges are classified as investing activities within the consolidated statements of cash flows.
The Company has entered into a series of forward contracts, each of which have been designated as net investment hedges of the foreign currency exposure of the Company’s investments in certain Chinese Yuan Renminbi (“RMB”)-denominated subsidiaries. During the years ended December 31, 2021, 2020 and 2019, the Company made net payments of $17 million, $1 million and zero, respectively, at settlement related to these series of forward contracts which matured throughout each respective year. In December 2021, the Company entered into forward contracts with a total notional amount of 1.4 billion RMB (approximately $215 million, using December 31, 2021 foreign currency rates), which mature in March 2022. Refer to the tables below for details of the fair value recorded in the consolidated balance sheets and the effects recorded in the consolidated statements of operations and consolidated statements of comprehensive income related to these derivative instruments.
The Company has designated the €700 million 2015 Euro-denominated Senior Notes and the €500 million 2016 Euro-denominated Senior Notes, as more fully described in Note 11. Debt, as net investment hedges of the foreign currency exposure of its investments in certain Euro-denominated subsidiaries. Due to changes in the value of the Euro-denominated debt instruments designated as net investment hedges, during the years ended December 31, 2021 and 2020, $116 million of gains and $132 million of losses, respectively, were recognized within the cumulative translation adjustment component of OCI. Included in accumulated OCI related to these net investment hedges were cumulative losses of $37 million as of December 31, 2021 and $153 million as of December 31, 2020.
Derivatives Not Designated as Hedges
In certain occasions the Company enters into certain foreign currency and commodity contracts that are not designated as hedges. When hedge accounting is not applied to derivative contracts, gains and losses are recorded to other income (expense), net and cost of sales in the consolidated statements of operations.
Fair Value of Derivative Instruments in the Balance Sheet
The fair value of derivative financial instruments recorded in the consolidated balance sheets as of December 31, 2021 and 2020 are as follows:
| Asset Derivatives | Liability Derivatives | Net Amounts of Assets and (Liabilities) Presented in the Balance Sheet | |||||||||||||||||||||||||||
| Balance Sheet Location | December 31, 2021 | Balance Sheet Location | December 31, 2021 | December 31, 2021 | |||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| Derivatives designated as cash flow hedges: | |||||||||||||||||||||||||||||
| Commodity derivatives | Other current assets | $ | 27 | Accrued liabilities | $ | — | |||||||||||||||||||||||
| Foreign currency derivatives* | Other current assets | 15 | Other current assets | 9 | $ | 6 | |||||||||||||||||||||||
| Foreign currency derivatives* | Accrued liabilities | 5 | Accrued liabilities | 16 | (11) | ||||||||||||||||||||||||
| Commodity derivatives | Other long-term assets | 2 | Other long-term liabilities | — | |||||||||||||||||||||||||
| Foreign currency derivatives* | Other long-term assets | 2 | Other long-term assets | 1 | 1 | ||||||||||||||||||||||||
| Foreign currency derivatives* | Other long-term liabilities | 1 | Other long-term liabilities | 8 | (7) | ||||||||||||||||||||||||
| Derivatives designated as net investment hedges: | |||||||||||||||||||||||||||||
| Foreign currency derivatives | Other current assets | — | Accrued liabilities | 1 | |||||||||||||||||||||||||
| Total derivatives designated as hedges | $ | 52 | $ | 35 | |||||||||||||||||||||||||
| Derivatives not designated: | |||||||||||||||||||||||||||||
| Commodity derivatives | Other current assets | $ | 5 | Accrued liabilities | $ | — | |||||||||||||||||||||||
| Foreign currency derivatives* | Accrued liabilities | — | Accrued liabilities | 1 | (1) | ||||||||||||||||||||||||
| Total derivatives not designated as hedges | $ | 5 | $ | 1 |
| Asset Derivatives | Liability Derivatives | Net Amounts of Assets and (Liabilities) Presented in the Balance Sheet | |||||||||||||||||||||||||||
| Balance Sheet Location | December 31, 2020 | Balance Sheet Location | December 31, 2020 | December 31, 2020 | |||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| Derivatives designated as cash flow hedges: | |||||||||||||||||||||||||||||
| Commodity derivatives | Other current assets | $ | 26 | Accrued liabilities | $ | — | |||||||||||||||||||||||
| Foreign currency derivatives* | Other current assets | 24 | Other current assets | 5 | $ | 19 | |||||||||||||||||||||||
| Foreign currency derivatives* | Accrued liabilities | 7 | Accrued liabilities | 13 | (6) | ||||||||||||||||||||||||
| Commodity derivatives | Other long-term assets | 9 | Other long-term liabilities | — | |||||||||||||||||||||||||
| Foreign currency derivatives* | Other long-term assets | 17 | Other long-term assets | 4 | 13 | ||||||||||||||||||||||||
| Foreign currency derivatives* | Other long-term liabilities | — | Other long-term liabilities | 1 | (1) | ||||||||||||||||||||||||
| Derivatives designated as net investment hedges: | |||||||||||||||||||||||||||||
| Foreign currency derivatives | Other current assets | — | Accrued liabilities | 2 | |||||||||||||||||||||||||
| Total derivatives designated as hedges | $ | 83 | $ | 25 | |||||||||||||||||||||||||
| Derivatives not designated: | |||||||||||||||||||||||||||||
| Foreign currency derivatives* | Other current assets | $ | 3 | Other current assets | $ | — | 3 | ||||||||||||||||||||||
| Total derivatives not designated as hedges | $ | 3 | $ | — |
- Derivative instruments within this category are subject to master netting arrangements and are presented on a net basis in the consolidated balance sheets in accordance with accounting guidance related to the offsetting of amounts related to certain contracts.
The fair value of Aptiv’s derivative financial instruments was in a net asset position as of December 31, 2021 and 2020.
Effect of Derivatives on the Statements of Operations and Statements of Comprehensive Income
The pre-tax effects of derivative financial instruments in the consolidated statements of operations and consolidated statements of comprehensive income for the years ended December 31, 2021, 2020 and 2019 are as follows:
| Year Ended December 31, 2021 | Gain (Loss) Recognized in OCI | Gain (Loss) Reclassified from OCI into Income | |||||||||||||||
| (in millions) | |||||||||||||||||
| Derivatives designated as cash flow hedges: | |||||||||||||||||
| Commodity derivatives | $ | 60 | $ | 68 | |||||||||||||
| Foreign currency derivatives | (35) | (3) | |||||||||||||||
| Derivatives designated as net investment hedges: | |||||||||||||||||
| Foreign currency derivatives | (17) | — | |||||||||||||||
| Total | $ | 8 | $ | 65 |
| Gain (Loss) Recognized in Income | |||||
| (in millions) | |||||
| Derivatives not designated: | |||||
| Commodity derivatives | $ | 3 | |||
| Foreign currency derivatives | (5) | ||||
| Total | $ | (2) |
| Year Ended December 31, 2020 | Gain (Loss) Recognized in OCI | Loss Reclassified from OCI into Income | |||||||||||||||
| (in millions) | |||||||||||||||||
| Derivatives designated as cash flow hedges: | |||||||||||||||||
| Commodity derivatives | $ | 31 | $ | (7) | |||||||||||||
| Foreign currency derivatives | (23) | (14) | |||||||||||||||
| Derivatives designated as net investment hedges: | |||||||||||||||||
| Foreign currency derivatives | (2) | — | |||||||||||||||
| Total | $ | 6 | $ | (21) |
| Gain Recognized in Income | |||||
| (in millions) | |||||
| Derivatives not designated: | |||||
| Foreign currency derivatives | $ | — | |||
| Total | $ | — |
| Year Ended December 31, 2019 | Gain (Loss) Recognized in OCI | (Loss) Gain Reclassified from OCI into Income | |||||||||||||||
| (in millions) | |||||||||||||||||
| Derivatives designated as cash flow hedges: | |||||||||||||||||
| Commodity derivatives | $ | 7 | $ | (15) | |||||||||||||
| Foreign currency derivatives | 44 | 9 | |||||||||||||||
| Derivatives designated as net investment hedges: | |||||||||||||||||
| Foreign currency derivatives | (1) | — | |||||||||||||||
| Total | $ | 50 | $ | (6) |
| Gain Recognized in Income | |||||
| (in millions) | |||||
| Derivatives not designated: | |||||
| Foreign currency derivatives | $ | 1 | |||
| Total | $ | 1 |
The gain or loss recognized in income for designated and non-designated derivative instruments was recorded to cost of sales and other income (expense), net in the consolidated statements of operations for the years ended December 31, 2021, 2020 and 2019.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements are based on one or more of the following three valuation techniques:
Market—This approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Income—This approach uses valuation techniques to convert future amounts to a single present value amount based on current market expectations.
Cost—This approach is based on the amount that would be required to replace the service capacity of an asset (replacement cost).
Aptiv uses the following fair value hierarchy prescribed by U.S. GAAP, which prioritizes the inputs used to measure fair value as follows:
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Typically, assets and liabilities are considered to be fair valued on a recurring basis if fair value is measured regularly. However, if the fair value measurement of an instrument does not necessarily result in a change in the amount recorded on the consolidated balance sheets, assets and liabilities are considered to be fair valued on a nonrecurring basis. This generally occurs when accounting guidance requires assets and liabilities to be recorded at the lower of cost or fair value, or assessed for impairment.
Fair Value Measurements on a Recurring Basis
Derivative instruments—All derivative instruments are required to be reported on the balance sheet at fair value unless the transactions qualify and are designated as normal purchases or sales. Changes in fair value are reported currently through earnings unless they meet hedge accounting criteria. Aptiv’s derivative exposures are with counterparties with long-term investment grade credit ratings. Aptiv estimates the fair value of its derivative contracts using an income approach based on valuation techniques to convert future amounts to a single, discounted amount. Estimates of the fair value of foreign currency and commodity derivative instruments are determined using exchange traded prices and rates. Aptiv also considers the risk of non-performance in the estimation of fair value, and includes an adjustment for non-performance risk in the measure of fair value of derivative instruments. The non-performance risk adjustment reflects the credit default spread (“CDS”) applied to the net commodity by counterparty and foreign currency exposures by counterparty. When Aptiv is in a net derivative asset position, the counterparty CDS rates are applied to the net derivative asset position. When Aptiv is in a net derivative liability position, estimates of peer companies’ CDS rates are applied to the net derivative liability position.
In certain instances where market data is not available, Aptiv uses management judgment to develop assumptions that are used to determine fair value. This could include situations of market illiquidity for a particular currency or commodity or where observable market data may be limited. In those situations, Aptiv generally surveys investment banks and/or brokers and utilizes the surveyed prices and rates in estimating fair value.
As of December 31, 2021 and 2020, Aptiv was in a net derivative asset position of $21 million and $61 million, respectively, and no significant adjustments were recorded for nonperformance risk based on the application of peer companies’ CDS rates, evaluation of our own nonperformance risk and because Aptiv’s exposures were to counterparties with investment grade credit ratings. Refer to Note 17. Derivatives and Hedging Activities for further information regarding derivatives.
Contingent consideration—The liability for contingent consideration is estimated as of the date of the acquisition and is recorded as part of the purchase price, and is subsequently re-measured to fair value at each reporting date, based on a probability-weighted analysis using a rate that reflects the uncertainty surrounding the expected outcomes, which the Company believes is appropriate and representative of market participant assumptions. The measurement of the liability for contingent consideration is based on significant inputs that are not observable in the market, and was therefore classified as a Level 3 measurement in accordance with ASC Topic 820-10-35. Examples of utilized unobservable inputs are estimated future earnings or milestone achievements of the acquired businesses and applicable discount rates. The estimate of the liability may fluctuate if there are changes in the forecast of the acquired businesses’ future earnings or milestone achievements, as a result of actual earnings or milestone achievements or in the discount rates used to determine the present value of contingent future cash flows. As of December 31, 2021, earn-out provisions associated with the Company’s recorded contingent consideration liability may be achieved during 2022. The Company regularly reviews these assumptions, and makes adjustments to the fair value measurements as required by facts and circumstances.
As of December 31, 2021 and 2020, the liability for contingent consideration classified within other long-term liabilities was $10 million (which was classified within other long-term liabilities) and $52 million (which was classified within other current liabilities), respectively. Adjustments to this liability for interest accretion are recognized in interest expense, and any other changes in the fair value of this liability are recognized within other income (expense), net in the consolidated statement of operations.
The changes in the contingent consideration liability classified as a Level 3 measurement for the years ended December 31, 2021 and 2020 were as follows:
| Year Ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in millions) | |||||||||||
| Fair value at beginning of year | $ | 52 | $ | 51 | |||||||
| Additions | 10 | — | |||||||||
| Payments | (52) | — | |||||||||
| Interest accretion | — | 1 | |||||||||
| Fair value at end of year | $ | 10 | $ | 52 |
During the year ended December 31, 2021, Aptiv recorded liabilities of $10 million for the estimated fair values of contingent consideration related to our acquisitions, as further described in Note 20. Acquisitions and Divestitures.
In accordance with previous agreements, the Company was required to deposit $52 million related to the contingent consideration liability into an escrow account (of which $16 million was deposited in 2019, $16 million was deposited in 2020 and $20 million was deposited in 2021). These amounts were classified as restricted cash in the consolidated balance sheets upon being deposited into the escrow account. During the year ended December 31, 2021, the Company released $52 million from the escrow account which represented the maximum required amount to be paid under these agreements. In accordance with ASC Topic 230-10-45, $24 million of this payment was recorded as a cash outflow from financing activities in the consolidated statement of cash flows, which represents the acquisition date fair value of the contingent consideration liability, with the remaining $28 million recorded as a cash outflow from operating activities for year ended December 31, 2021.
Publicly traded equity securities—All publicly traded equity securities are reported at fair value as of each reporting date. The measurement of the asset is based on quoted prices for identical assets on active market exchanges. Gains and losses from changes in the fair value of these securities are recorded within other income (expense), net on the consolidated statement of operations.
As of December 31, 2021 and 2020, Aptiv had the following assets measured at fair value on a recurring basis:
| Total | Quoted Prices in Active Markets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| As of December 31, 2021 | |||||||||||||||||||||||
| Commodity derivatives | $ | 34 | $ | — | $ | 34 | $ | — | |||||||||||||||
| Foreign currency derivatives | 7 | — | 7 | — | |||||||||||||||||||
| Publicly traded equity securities | 66 | 66 | — | — | |||||||||||||||||||
| Total | $ | 107 | $ | 66 | $ | 41 | $ | — | |||||||||||||||
| As of December 31, 2020 | |||||||||||||||||||||||
| Commodity derivatives | $ | 35 | $ | — | $ | 35 | $ | — | |||||||||||||||
| Foreign currency derivatives | 35 | — | 35 | — | |||||||||||||||||||
| Total | $ | 70 | $ | — | $ | 70 | $ | — |
As of December 31, 2021 and 2020, Aptiv had the following liabilities measured at fair value on a recurring basis:
| Total | Quoted Prices in Active Markets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| As of December 31, 2021 | |||||||||||||||||||||||
| Foreign currency derivatives | $ | 20 | $ | — | $ | 20 | $ | — | |||||||||||||||
| Contingent consideration | 10 | — | — | 10 | |||||||||||||||||||
| Total | $ | 30 | $ | — | $ | 20 | $ | 10 | |||||||||||||||
| As of December 31, 2020 | |||||||||||||||||||||||
| Foreign currency derivatives | $ | 9 | $ | — | $ | 9 | $ | — | |||||||||||||||
| Contingent consideration | 52 | — | — | 52 | |||||||||||||||||||
| Total | $ | 61 | $ | — | $ | 9 | $ | 52 |
Non-derivative financial instruments—Aptiv’s non-derivative financial instruments include cash and cash equivalents, accounts and notes receivable, accounts payable, as well as debt, which consists of its accounts receivable factoring arrangement, finance leases and other debt issued by Aptiv’s non-U.S. subsidiaries, the Revolving Credit Facility, the Tranche A Term Loan and all series of outstanding senior notes. The fair value of debt is based on quoted market prices for instruments with public market data or significant other observable inputs for instruments without a quoted public market price (Level 2). As of December 31, 2021 and 2020, total debt was recorded at $4,067 million and $4,101 million, respectively, and had estimated fair values of $4,297 million and $4,490 million, respectively. For all other financial instruments recorded as of December 31, 2021 and 2020, fair value approximates book value.
Fair Value Measurements on a Nonrecurring Basis
In addition to items that are measured at fair value on a recurring basis, Aptiv also has items in its balance sheet that are measured at fair value on a nonrecurring basis. As these items are not measured at fair value on a recurring basis, they are not included in the tables above. Financial and nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis include certain long-lived assets, intangible assets, equity investments without readily determinable fair values, asset retirement obligations, share-based compensation and liabilities for exit or disposal activities measured at fair value upon initial recognition. During the years ended December 31, 2021, 2020 and 2019, Aptiv recorded non-cash asset impairment charges totaling $2 million, $10 million and $3 million, respectively, within cost of sales related to declines in the fair values of certain fixed assets. During the year ended December 31, 2019, Aptiv recorded non-cash asset impairment charges totaling $8 million within amortization related to declines in the fair values of certain intangible assets. Fair value of long-lived and intangible assets is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved and a review of appraisals or other market indicators and management estimates. As such, Aptiv has determined that the fair value measurements of long-lived and intangible assets fall in Level 3 of the fair value hierarchy.
19. OTHER INCOME, NET
Other income (expense), net included:
| Year Ended December 31, | |||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| Interest income | $ | 9 | $ | 8 | $ | 13 | |||||||||||||||||||||||
| Loss on extinguishment of debt (Note 11) | (126) | — | (6) | ||||||||||||||||||||||||||
| Loss on modification of debt | (1) | (4) | — | ||||||||||||||||||||||||||
| Components of net periodic benefit cost other than service cost | (21) | (20) | (27) | ||||||||||||||||||||||||||
| Costs associated with acquisitions | — | — | (5) | ||||||||||||||||||||||||||
| Change in fair value of equity investments without readily determinable fair value (Note 5) | 9 | 10 | 19 | ||||||||||||||||||||||||||
| Other, net | 1 | 6 | 20 | ||||||||||||||||||||||||||
| Other (expense) income, net | $ | (129) | $ | — | $ | 14 |
As further discussed in Note 11. Debt, during the year ended December 31, 2021, Aptiv redeemed for cash the entire $700 million aggregate principal amount outstanding of the 2014 Senior Notes and the entire $650 million aggregate principal amount outstanding of the 4.25% Senior Notes, resulting in a loss on debt extinguishment of approximately $126 million. As further discussed in Note 5. Investments in Affiliates, during the year ended December 31, 2021, Aptiv recorded a pre-tax unrealized gain of $9 million related to increases in fair value of its equity investments without readily determinable fair values. During the year ended December 31, 2021, Aptiv also recognized a net unrealized gain of $5 million for publicly traded equity securities still held as of December 31, 2021.
As further discussed in Note 5. Investments in Affiliates, during the year ended December 31, 2020, Aptiv recorded a pre-tax unrealized gain of $10 million related to increases in fair value of its equity investments without readily determinable fair values. Also, during the year ended December 31, 2020, Aptiv recorded a loss on modification of debt of $4 million, in conjunction with the May 2020 amendment to the Credit Agreement.
As further discussed in Note 5. Investments in Affiliates, during the year ended December 31, 2019, Aptiv recorded a pre-tax unrealized gain of $19 million related to increases in fair value of its equity investments without readily determinable fair values. Additionally, during the year ended December 31, 2019, Aptiv redeemed for cash the entire $650 million aggregate principal amount outstanding of the 3.15% Senior Notes, resulting in a loss on debt extinguishment of approximately $6 million. Aptiv also incurred approximately $5 million in transaction costs related to the acquisition of gabocom during the year ended December 31, 2019.
20. ACQUISITIONS AND DIVESTITURES
Acquisition of El-Com, Inc.
On December 30, 2021, Aptiv acquired 100% of the equity interests of El-Com, Inc. (“El-Com”), a manufacturer of custom wire harnesses and cable assemblies for high-reliability products and industries, for total consideration of up to $88 million.
The total consideration includes a cash payment of up to $10 million, contingent upon the achievement of certain performance metrics over a one-year period following the acquisition. The range of the undiscounted amounts the Company could be required to pay under this arrangement is between zero and $10 million. As of the closing date of the acquisition, the contingent consideration was assigned a fair value of approximately $10 million. Refer to Note 18. Fair Value of Financial Instruments for additional information regarding the measurement of the contingent consideration liability. The results of operations of El-Com are reported within the Signal and Power Solutions segment from the date of acquisition. The Company acquired El-Com utilizing cash on hand.
The acquisition was accounted for as a business combination, with the total purchase price allocated on a preliminary basis using information available, in the fourth quarter of 2021. The preliminary purchase price and related allocation to the acquired net assets of El-Com based on their estimated fair values is shown below (in millions):
Assets acquired and liabilities assumed
| Purchase price, cash consideration, net of cash acquired | $ | 78 | |||
| Purchase price, fair value of contingent consideration | 10 | ||||
| Total consideration, net of cash acquired | $ | 88 | |||
| Intangible assets | $ | 36 | |||
| Other assets, net | 10 | ||||
| Identifiable net assets acquired | 46 | ||||
| Goodwill resulting from purchase | 42 | ||||
| Total purchase price allocation | $ | 88 |
Intangible assets primarily include amounts recognized for the fair value of customer-based assets, which will be amortized over their estimated useful lives of approximately nine years. The estimated fair value of these assets was based on third-party valuations and management’s estimates, generally utilizing income and market approaches. Goodwill recognized in this transaction is primarily attributable to synergies expected to arise after the acquisition. The deductibility of goodwill for tax purposes will depend on, among other factors, future integration and organizational activities concerning the acquired business.
The purchase price and related allocation are preliminary and could be revised as a result of adjustments made to the purchase price, additional information obtained regarding liabilities assumed, including, but not limited to, contingent liabilities, revisions of provisional estimates of fair values, including, but not limited to, the completion of independent appraisals and valuations related to property, plant and equipment and intangible assets and certain tax attributes.
The pro forma effects of this acquisition would not materially impact the Company’s reported results for any period presented, and as a result no pro forma financial statements were presented.
Acquisition of Krono-Safe Automotive, SAS
On November 9, 2021, Aptiv acquired 100% of the equity interests of Krono-Safe Automotive, a leading software developer of safety-critical real-time embedded systems, for total consideration of $13 million, which was comprised of Aptiv’s previous investment of $6 million in Krono-Safe, SAS that was previously made in 2019 and $7 million of cash. The results of operations of Krono-Safe Automotive are reported within the Advanced Safety and User Experience segment from the date of acquisition.
The acquisition was accounted for as a business combination, with the total purchase price allocated on a preliminary basis using information available, in the fourth quarter of 2021, which primarily resulted in the recognition of goodwill of $9 million and intangible assets of $4 million. Goodwill recognized in this transaction is primarily attributable to synergies expected to arise after the acquisition and is not deductible for tax purposes.
The purchase price and related allocation are preliminary and could be revised as a result of adjustments made to the purchase price, additional information obtained regarding liabilities assumed, including, but not limited to, contingent liabilities, revisions of provisional estimates of fair values, including, but not limited to, the completion of independent appraisals and valuations related to property, plant and equipment and intangible assets and certain tax attributes.
The pro forma effects of this acquisition would not materially impact the Company’s reported results for any period presented, and as a result no pro forma financial statements were presented.
Acquisition of Ulti-Mate Connector, Inc.
On April 30, 2021, Aptiv acquired certain assets of Ulti-Mate Connector, Inc. (“Ulti-Mate”), a manufacturer of miniature and micro-miniature connectors and cable assemblies, for total consideration of $45 million, net of cash acquired. The results of the operations of Ulti-Mate are reported within the Signal and Power Solutions segment from the date of acquisition. The Company acquired Ulti-Mate utilizing cash on hand.
The acquisition was accounted for as a business combination, with the total purchase price allocated on a preliminary basis using information available, in the second quarter of 2021. The preliminary purchase price and related allocation to the acquired net assets of Ulti-Mate based on their estimated fair values is shown below (in millions):
Assets acquired and liabilities assumed
| Purchase price, cash consideration, net of cash acquired | $ | 45 | |||
| Intangible assets | $ | 17 | |||
| Other assets, net | 5 | ||||
| Identifiable net assets acquired | 22 | ||||
| Goodwill resulting from purchase | 23 | ||||
| Total purchase price allocation | $ | 45 |
Intangible assets primarily include amounts recognized for the fair value of customer-based assets, which will be amortized over their estimated useful lives of approximately nine years. The estimated fair value of these assets was based on third-party valuations and management’s estimates, generally utilizing income and market approaches. Goodwill recognized in this transaction is primarily attributable to synergies expected to arise after the acquisition, and an insignificant portion of the goodwill is expected to be deductible for tax purposes.
The purchase price and related allocation are preliminary and could be revised as a result of adjustments made to the purchase price, additional information obtained regarding liabilities assumed, including, but not limited to, contingent liabilities, revisions of provisional estimates of fair values, including, but not limited to, the completion of independent appraisals and valuations related to property, plant and equipment and intangible assets and certain tax attributes.
The pro forma effects of this acquisition would not materially impact the Company’s reported results for any period presented, and as a result no pro forma financial statements were presented.
Acquisition of Dynawave Inc.
On August 4, 2020, Aptiv acquired 100% of the equity interests of Dynawave Inc. (“Dynawave”), a specialized manufacturer of custom-engineered interconnect solutions for a wide range of industries, for total consideration of $22 million. The results of the operations of Dynawave are reported within the Signal and Power Solutions segment from the date of the acquisition. The Company acquired Dynawave utilizing cash on hand.
The acquisition was accounted for as a business combination, with the total purchase price allocated on a preliminary basis using information available, in the third quarter of 2020. The purchase price and related allocation were finalized in the third quarter of 2021, and resulted in minor adjustments from the amounts previously disclosed. These adjustments were not significant for any period presented after the acquisition date. The final purchase price and related allocation to the acquired net assets of Dynawave based on their estimated fair values is shown below (in millions):
Assets acquired and liabilities assumed
| Purchase price, cash consideration, net of cash acquired | $ | 22 | |||
| Intangible assets | $ | 8 | |||
| Other assets, net | 4 | ||||
| Identifiable net assets acquired | 12 | ||||
| Goodwill resulting from purchase | 10 | ||||
| Total purchase price allocation | $ | 22 |
Intangible assets primarily include amounts recognized for the fair value of customer-based assets, which will be amortized over their estimated useful lives of approximately nine years. The estimated fair value of these assets was based on third-party valuations and management’s estimates, generally utilizing income and market approaches. Goodwill recognized in this transaction is primarily attributable to synergies expected to arise after the acquisition and the assembled workforce of Dynawave, and an insignificant portion of the goodwill is expected to be deductible for tax purposes.
The pro forma effects of this acquisition would not materially impact the Company’s reported results for any period presented, and as a result no pro forma financial statements were presented.
Acquisition of gabo Systemtechnik GmbH
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 results of operations of gabocom are reported within the Signal and Power Solutions segment from the date of acquisition. The Company acquired gabocom utilizing cash on hand.
The acquisition was accounted for as a business combination, with the total purchase price allocated on a preliminary basis using information available, in the fourth quarter of 2019. The purchase price and related allocation were finalized in the fourth quarter of 2020, and resulted in minor adjustments from the amounts previously disclosed. These adjustments were not significant for any period presented after the acquisition date. The final purchase price and related allocation to the acquired net assets of gabocom based on their estimated fair values is shown below (in millions):
Assets acquired and liabilities assumed
| Purchase price, cash consideration, net of cash acquired | $ | 311 | |||
| Property, plant and equipment | $ | 25 | |||
| Intangible assets | 75 | ||||
| Other liabilities, net | (10) | ||||
| Identifiable net assets acquired | 90 | ||||
| Goodwill resulting from purchase | 221 | ||||
| Total purchase price allocation | $ | 311 |
Intangible assets include $66 million recognized for the fair value of customer-based assets with estimated useful lives of approximately nine years and $9 million recognized for the fair value of the acquired trade name, which has an estimated useful life of approximately 15 years. The estimated fair value of these assets was based on third-party valuations and management’s estimates, generally utilizing income and market approaches. Goodwill recognized in this transaction is primarily attributable to synergies expected to arise after the acquisition and the assembled workforce of gabocom, and is not deductible for tax purposes.
The pro forma effects of this acquisition would not materially impact the Company’s reported results for any period presented, and as a result no pro forma financial statements were presented.
Acquisition of Falmat Inc.
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 results of operations of Falmat are reported within the Signal and Power Solutions segment from the date of acquisition. The Company acquired Falmat utilizing cash on hand.
The acquisition was accounted for as a business combination, with the total purchase price allocated on a preliminary basis using information available, in the second quarter of 2019. The purchase price and related allocation were finalized in the second quarter of 2020, and resulted in minor adjustments from the amounts previously disclosed. These adjustments were not significant for any period presented after the acquisition date. The final purchase price and related allocation to the acquired net assets of Falmat based on their estimated fair values is shown below (in millions):
Assets acquired and liabilities assumed
| Purchase price, cash consideration, net of cash acquired | $ | 25 | |||
| Intangible assets | $ | 12 | |||
| Other assets, net | 5 | ||||
| Identifiable net assets acquired | 17 | ||||
| Goodwill resulting from purchase | 8 | ||||
| Total purchase price allocation | $ | 25 |
Intangible assets primarily include amounts recognized for the fair value of customer-based assets, which will be amortized over their estimated useful lives of approximately nine years. The estimated fair value of these assets was based on third-party valuations and management’s estimates, generally utilizing income and market approaches. Goodwill recognized in this transaction is primarily attributable to synergies expected to arise after the acquisition and the assembled workforce of Falmat, and is not deductible for tax purposes.
The pro forma effects of this acquisition would not materially impact the Company’s reported results for any period presented, and as a result no pro forma financial statements were presented.
Proposed Acquisition of Wind River Systems, Inc.
In January 2022, Aptiv entered into a definitive agreement to acquire 100% of the equity interests of Wind River, a global leader in delivering software for the intelligent edge, for approximately $4.3 billion, subject to customary post-closing adjustments. The transaction is expected to close in mid-2022, subject to regulatory approvals and customary closing conditions. Upon completion, Wind River will become part of Aptiv’s Advanced Safety and User Experience segment. The Company intends to acquire Wind River utilizing a combination of cash on hand and new indebtedness.
Autonomous Driving Joint Venture
On March 26, 2020, Aptiv completed a transaction with Hyundai to form Motional, a joint venture focused on the design, development and commercialization of autonomous driving technologies. Under the terms of the agreement, Aptiv contributed to Motional autonomous driving technology, intellectual property and approximately 700 employees for a 50% ownership interest in Motional. Hyundai contributed to Motional approximately $1.6 billion in cash, along with vehicle engineering services, research and development resources and access to intellectual property for a 50% ownership interest in Motional. As a result, subsequent to the closing of the transaction, Motional is expected to fund all of its future operating expenses and investments in autonomous driving technologies for the foreseeable future. Consequently, Aptiv is no longer required to fund these investments and expenses, which approximated $180 million for the year ended December 31, 2019 prior to Motional’s formation. Upon closing of the transaction, Aptiv deconsolidated the carrying value of the associated assets and liabilities contributed to Motional, previously classified as held for sale, and recognized an asset of approximately $2 billion within
investments in affiliates in the consolidated balance sheet, based on the preliminary fair value of its investment in Motional. The Company recognized a pre-tax gain of approximately $1.4 billion in the consolidated statement of operations (approximately $5.32 per diluted share for the year ended December 31, 2020), net of transaction costs of $22 million, based on the difference between the carrying value of its contribution to Motional and the preliminary fair value of its investment in Motional. The estimated fair value of Aptiv’s ownership interest in Motional was determined primarily based on third-party valuations and management estimates, generally utilizing income and market approaches. Determining the fair value of Motional and the underlying assets required the use of management’s judgment and involved significant estimates and assumptions with respect to the timing and amount of future cash flows, market rate assumptions, projected growth rates and margins, and appropriate discount rates, among other items. The estimated fair value was determined on a preliminary basis using information available in the first quarter of 2020 and was finalized in the first quarter of 2021. The effects of this transaction would not materially impact the Company’s reported results for any period presented, and the transaction did not meet the criteria to be reflected as a discontinued operation.
In connection with the closing of the transaction, Aptiv and Motional entered into various agreements to facilitate an orderly transition and to provide a framework for their relationship going forward, which included a transition services agreement. The transition services primarily involve Aptiv providing certain administrative services to Motional for a period of up to 24 months after the closing date. These agreements are not material to Aptiv.
The Company’s investment in Motional is accounted for using the equity method of accounting and Aptiv recognized an equity loss of $215 million and $98 million, net of tax, during the years ended December 31, 2021 and 2020, respectively. Refer to Note 5. Investments in Affiliates for further information on Aptiv’s equity method investments. The pre-tax loss of Aptiv’s autonomous driving operations that were contributed to the joint venture on March 26, 2020, included within Aptiv’s consolidated operating results, were $41 million and $172 million for the years ended December 31, 2020 and 2019, respectively.
21. SHARE-BASED COMPENSATION
Long Term Incentive Plan
The PLC LTIP allows for the grant of awards of up to 25,665,448 ordinary shares for long-term compensation. The PLC LTIP is designed to align the interests of management and shareholders. The awards can be in the form of shares, options, stock appreciation rights, restricted stock, RSUs, performance awards and other share-based awards to the employees, directors, consultants and advisors of the Company. The Company has awarded annual long-term grants of RSUs under the PLC LTIP in order to align management compensation with Aptiv’s overall business strategy. In addition, the Company has competitive and market-appropriate ownership requirements for its directors and officers. All of the RSUs granted under the PLC LTIP are eligible to receive dividend equivalents for any dividend paid from the grant date through the vesting date. Dividend equivalents are generally paid out in ordinary shares upon vesting of the underlying RSUs.
Board of Director Awards
Aptiv has granted RSUs to the Board of Directors as detailed in the table below:
| Grant Date | RSUs granted | Grant Date Fair Value (1) | Vesting Date | Shares Issued Upon Vesting | Fair Value of Shares at Issuance | Shares Withheld to Cover Withholding Taxes | ||||||||||||||||||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||||||||||||||||||||
| April 2021 | 17,589 | $ | 3 | April 2022 | N/A | N/A | N/A | |||||||||||||||||||||||||||||||
| April 2020 | 48,745 | 3 | April 2021 | 41,896 | 6 | 6,849 | ||||||||||||||||||||||||||||||||
| April 2019 | 20,765 | 2 | April 2020 | 23,816 | 1 | 2,041 |
(1)Determined based on the closing price of the Company’s ordinary shares on the date of the grant.
Executive Awards
Aptiv has made annual grants of RSUs to its executives in February of each year beginning in 2012. These awards include a time-based vesting portion and a performance-based vesting portion, as well as continuity awards in certain years. The time-based RSUs, which make up 40% (25% prior to 2021) of the awards for Aptiv’s officers and 50% for Aptiv’s other executives, vest ratably over three years beginning on the first anniversary of the grant date. The performance-based RSUs, which make up 60% (75% prior to 2021) of the awards for Aptiv’s officers and 50% for Aptiv’s other executives, vest at the completion of a three-year performance period if certain targets are met. Each executive will receive between 0% and 200% (0% to 150% for the 2019 and 2020 grants based on the executive performance grant modification in 2020 described below) of his or her target
performance-based award based on the Company’s performance against established company-wide performance metrics, which are:
| Metric | 2020 - 2021 Grants | 2017 - 2019 Grants | |||||||||||||||||||||
| Average return on net assets (1) | 33% | 50% | |||||||||||||||||||||
| Cumulative net income | 33% | 25% | |||||||||||||||||||||
| Relative total shareholder return (2) | 33% | 25% |
(1)Average return on net assets is measured by tax-affected operating income divided by average net working capital plus average net property, plant and equipment for each calendar year during the respective performance period.
(2)Relative total shareholder return is measured by comparing the average closing price per share of the Company’s ordinary shares for the specified trading days in the fourth quarter of the end of the performance period to the average closing price per share of the Company’s ordinary shares for the specified trading days in the fourth quarter of the year preceding the grant, including dividends, and assessed against a comparable measure of competitor and peer group companies.
The details of the executive grants were as follows:
| Grant Date | RSUs Granted | Grant Date Fair Value | Time-Based Award Vesting Dates | Performance-Based Award Vesting Date | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| February 2017 | 0.80 | $ | 63 | Annually on anniversary of grant date, 2018 - 2020 | December 31, 2019 | |||||||||||||||||||||
| February 2018 | 0.63 | 61 | Annually on anniversary of grant date, 2019 - 2021 | December 31, 2020 | ||||||||||||||||||||||
| February 2019 | 0.71 | 62 | Annually on anniversary of grant date, 2020 - 2022 | December 31, 2021 | ||||||||||||||||||||||
| February 2020 | 0.75 | 62 | Annually on anniversary of grant date, 2021 - 2023 | December 31, 2022 | ||||||||||||||||||||||
| February 2021 | 0.44 | 72 | Annually on anniversary of grant date, 2022 - 2024 | December 31, 2023 |
The grant date fair value of the RSUs is determined based on the target number of awards issued, the closing price of the Company’s ordinary shares on the date of the grant of the award, including an estimate for forfeitures, and a contemporaneous valuation performed by an independent valuation specialist with respect to the relative total shareholder return awards.
Any new executives hired after the annual executive RSU grant date may be eligible to participate in the PLC LTIP. The Company has also granted additional awards to employees in certain periods under the PLC LTIP. Any off cycle grants made for new hires or to other employees are valued at their grant date fair value based on the closing price of the Company’s ordinary shares on the date of such grant.
The details of the shares issued upon vesting of the executive grants are as follows:
| Time-Based Awards | Performance-Based Awards | |||||||||||||||||||||||||||||||||||||
| Vesting Date | Ordinary Shares Issued Upon Vesting | Grant Date Fair Value | Ordinary Shares Withheld to Cover Withholding Taxes | Ordinary Shares Issued Upon Vesting | Fair Value of Shares at Issuance | Ordinary Shares Withheld to Cover Withholding Taxes | ||||||||||||||||||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||||||||||||||||||||
| Q1 2021 | 449,426 | $ | 67 | 177,825 | 288,074 | $ | 43 | 121,609 | ||||||||||||||||||||||||||||||
| Q1 2020 | 468,240 | 37 | 181,495 | 580,390 | 45 | 243,080 | ||||||||||||||||||||||||||||||||
| Q1 2019 | 529,812 | 44 | 203,839 | 493,674 | 41 | 199,547 | ||||||||||||||||||||||||||||||||
As a result of the impacts of the COVID-19 pandemic on the Company’s industry and operations, during the fourth quarter of 2020 the financial performance targets associated with February 2018, 2019 and 2020 executive performance grants were modified, which impacted approximately 300 award recipients and resulted in the recognition of approximately $22 million of incremental compensation expense during the year ended December 31, 2020.
A summary of RSU activity, including award grants, vesting and forfeitures is provided below:
| RSUs | Weighted Average Grant Date Fair Value | ||||||||||
| (in thousands) | |||||||||||
| Nonvested, January 1, 2019 | 1,879 | $ | 81.24 | ||||||||
| Granted | 1,363 | 83.93 | |||||||||
| Vested | (1,131) | 70.78 | |||||||||
| Forfeited | (289) | 83.97 | |||||||||
| Nonvested, December 31, 2019 | 1,822 | 89.32 | |||||||||
| Granted | 934 | 99.14 | |||||||||
| Vested | (773) | 98.90 | |||||||||
| Forfeited | (197) | 82.93 | |||||||||
| Nonvested, December 31, 2020 | 1,786 | 102.95 | |||||||||
| Granted | 661 | 161.90 | |||||||||
| Vested | (829) | 98.55 | |||||||||
| Forfeited | (274) | 118.97 | |||||||||
| Nonvested, December 31, 2021 | 1,344 | 131.40 |
As of December 31, 2021, there were approximately 322,000 Aptiv performance-based RSUs, with a weighted average grant date fair value of $127.22, that were vested but not yet distributed.
Aptiv recognized compensation expense of $87 million ($86 million, net of tax), $60 million ($60 million, net of tax) and $66 million ($65 million net of tax) based on the Company’s best estimate of ultimate performance against the respective targets during the years ended December 31, 2021, 2020 and 2019, respectively. Aptiv will continue to recognize compensation expense, based on the grant date and modification date fair value of the awards applied to the Company’s best estimate of ultimate performance against the respective targets, over the requisite vesting periods of the awards. Based on the grant date fair value of the awards and the Company’s best estimate of ultimate performance against the respective targets as of December 31, 2021, unrecognized compensation expense on a pre-tax basis of approximately $103 million is anticipated to be recognized over a weighted average period of approximately two years. For the years ended December 31, 2021, 2020 and 2019, respectively, approximately $45 million, $33 million and $34 million of cash was paid and reflected as a financing activity in the statements of cash flows related to the tax withholding for vested RSUs.
22. SEGMENT REPORTING
Aptiv operates its 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 vehicle technology 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.
The accounting policies of the segments are the same as those described in Note 2. Significant Accounting Policies, except that the disaggregated financial results for the segments have been prepared using a management approach, which is consistent with the basis and manner in which management internally disaggregates financial information for which Aptiv’s chief operating decision maker regularly reviews financial results to assess performance of, and make internal operating decisions about allocating resources to, the segments.
Generally, Aptiv evaluates segment performance based on stand-alone segment net income before interest expense, other income (expense), net, income tax (expense) benefit, equity income (loss), net of tax, 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 other transactions and deferred compensation related to acquisitions (“Adjusted Operating Income”) and accounts for inter-segment sales and transfers as if the sales or transfers were to third parties, at current market prices.
Aptiv’s 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 Aptiv’s 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.
Included below are sales and operating data for Aptiv’s segments for the years ended December 31, 2021, 2020 and 2019, as well as balance sheet data as of December 31, 2021 and 2020.
| Signal and Power Solutions | Advanced Safety and User Experience | Eliminations and Other (1) | Total | ||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| For the Year Ended December 31, 2021: | |||||||||||||||||||||||||||||
| Net sales | $ | 11,598 | $ | 4,056 | $ | (36) | $ | 15,618 | |||||||||||||||||||||
| Depreciation and amortization | $ | 595 | $ | 178 | $ | — | $ | 773 | |||||||||||||||||||||
| Adjusted operating income | $ | 1,084 | $ | 146 | $ | — | $ | 1,230 | |||||||||||||||||||||
| Operating income (2) | $ | 1,064 | $ | 125 | $ | — | $ | 1,189 | |||||||||||||||||||||
| Equity income (loss), net of tax | $ | 15 | $ | (215) | $ | — | $ | (200) | |||||||||||||||||||||
| Net income attributable to noncontrolling interest | $ | 19 | $ | — | $ | — | $ | 19 | |||||||||||||||||||||
| Capital expenditures | $ | 434 | $ | 124 | $ | 53 | $ | 611 |
| Signal and Power Solutions | Advanced Safety and User Experience | Eliminations and Other (1) | Total | ||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| For the Year Ended December 31, 2020: | |||||||||||||||||||||||||||||
| Net sales | $ | 9,522 | $ | 3,573 | $ | (29) | $ | 13,066 | |||||||||||||||||||||
| Depreciation and amortization | $ | 588 | $ | 176 | $ | — | $ | 764 | |||||||||||||||||||||
| Adjusted operating income | $ | 762 | $ | 105 | $ | — | $ | 867 | |||||||||||||||||||||
| Operating income (3) | $ | 656 | $ | 1,462 | $ | — | $ | 2,118 | |||||||||||||||||||||
| Equity income (loss), net of tax | $ | 15 | $ | (98) | $ | — | $ | (83) | |||||||||||||||||||||
| Net income attributable to noncontrolling interest | $ | 18 | $ | — | $ | — | $ | 18 | |||||||||||||||||||||
| Capital expenditures | $ | 355 | $ | 173 | $ | 56 | $ | 584 |
| Signal and Power Solutions | Advanced Safety and User Experience | Eliminations and Other (1) | Total | ||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| For the Year Ended December 31, 2019: | |||||||||||||||||||||||||||||
| Net sales | $ | 10,302 | $ | 4,092 | $ | (37) | $ | 14,357 | |||||||||||||||||||||
| Depreciation and amortization | $ | 538 | $ | 179 | $ | — | $ | 717 | |||||||||||||||||||||
| Adjusted operating income | $ | 1,274 | $ | 274 | $ | — | $ | 1,548 | |||||||||||||||||||||
| Operating income (4) | $ | 1,124 | $ | 152 | $ | — | $ | 1,276 | |||||||||||||||||||||
| Equity income, net of tax | $ | 15 | $ | — | $ | — | $ | 15 | |||||||||||||||||||||
| Net income attributable to noncontrolling interest | $ | 19 | $ | — | $ | — | $ | 19 | |||||||||||||||||||||
| Capital expenditures | $ | 495 | $ | 250 | $ | 36 | $ | 781 |
(1)Eliminations and Other includes the elimination of inter-segment transactions. Capital expenditures amounts are attributable to corporate administrative and support functions, including corporate headquarters and certain technical centers.
(2)Includes charges recorded in 2021 related to costs associated with employee termination benefits and other exit costs of $8 million for Signal and Power Solutions and $16 million for Advanced Safety and User Experience.
(3)Includes a pre-tax gain in 2020 of $1.4 billion within Advanced Safety and User Experience for the completion of the Motional autonomous driving joint venture. Also, includes charges recorded in 2020 related to costs associated with employee termination benefits and other exit costs of $90 million for Signal and Power Solutions and $46 million for Advanced Safety and User Experience.
(4)Includes charges recorded in 2019 related to costs associated with employee termination benefits and other exit costs of $104 million for Signal and Power Solutions and $44 million for Advanced Safety and User Experience.
| Signal and Power Solutions | Advanced Safety and User Experience | Eliminations and Other (1) | Total | ||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| Balance as of December 31, 2021: | |||||||||||||||||||||||||||||
| Investment in affiliates | $ | 110 | $ | 1,687 | $ | — | $ | 1,797 | |||||||||||||||||||||
| Goodwill | $ | 2,475 | $ | 36 | $ | — | $ | 2,511 | |||||||||||||||||||||
| Total segment assets | $ | 13,385 | $ | 7,244 | $ | (2,622) | $ | 18,007 | |||||||||||||||||||||
| Balance as of December 31, 2020: | |||||||||||||||||||||||||||||
| Investment in affiliates | $ | 109 | $ | 1,902 | $ | — | $ | 2,011 | |||||||||||||||||||||
| Goodwill | $ | 2,553 | $ | 27 | $ | — | $ | 2,580 | |||||||||||||||||||||
| Total segment assets | $ | 13,159 | $ | 7,066 | $ | (2,703) | $ | 17,522 |
(1)Eliminations and Other includes the elimination of inter-segment transactions.
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 other transactions and deferred compensation related to acquisitions. The reconciliations of Adjusted Operating Income to net income attributable to Aptiv for the years ended December 31, 2021, 2020 and 2019 are as follows:
| Signal and Power Solutions | Advanced Safety and User Experience | Total | |||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| For the Year Ended December 31, 2021: | |||||||||||||||||||||||||||||
| Adjusted operating income | $ | 1,084 | $ | 146 | $ | 1,230 | |||||||||||||||||||||||
| Restructuring | (8) | (16) | (24) | ||||||||||||||||||||||||||
| Other acquisition and portfolio project costs | (11) | (4) | (15) | ||||||||||||||||||||||||||
| Asset impairments | (1) | (1) | (2) | ||||||||||||||||||||||||||
| Operating income | $ | 1,064 | $ | 125 | 1,189 | ||||||||||||||||||||||||
| Interest expense | (150) | ||||||||||||||||||||||||||||
| Other expense, net | (129) | ||||||||||||||||||||||||||||
| Income before income taxes and equity loss | 910 | ||||||||||||||||||||||||||||
| Income tax expense | (101) | ||||||||||||||||||||||||||||
| Equity loss, net of tax | (200) | ||||||||||||||||||||||||||||
| Net income | 609 | ||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interest | 19 | ||||||||||||||||||||||||||||
| Net income attributable to Aptiv | $ | 590 |
| Signal and Power Solutions | Advanced Safety and User Experience | Total | |||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||
| For the Year Ended December 31, 2020: | |||||||||||||||||||||||||||||
| Adjusted operating income | $ | 762 | $ | 105 | $ | 867 | |||||||||||||||||||||||
| Restructuring | (90) | (46) | (136) | ||||||||||||||||||||||||||
| Other acquisition and portfolio project costs | (12) | (11) | (23) | ||||||||||||||||||||||||||
| Asset impairments | (4) | (6) | (10) | ||||||||||||||||||||||||||
| Deferred compensation related to acquisitions | — | (14) | (14) | ||||||||||||||||||||||||||
| Gain on business divestitures and other transactions | — | 1,434 | 1,434 | ||||||||||||||||||||||||||
| Operating income | $ | 656 | $ | 1,462 | 2,118 | ||||||||||||||||||||||||
| Interest expense | (164) | ||||||||||||||||||||||||||||
| Income before income taxes and equity loss | 1,954 | ||||||||||||||||||||||||||||
| Income tax expense | (49) | ||||||||||||||||||||||||||||
| Equity loss, net of tax | (83) | ||||||||||||||||||||||||||||
| Net income | 1,822 | ||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interest | 18 | ||||||||||||||||||||||||||||
| Net income attributable to Aptiv | $ | 1,804 |
| Signal and Power Solutions | Advanced Safety and User Experience | 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 acquisitions | — | (42) | (42) | ||||||||||||||||||||||||||
| Operating income | $ | 1,124 | $ | 152 | 1,276 | ||||||||||||||||||||||||
| Interest expense | (164) | ||||||||||||||||||||||||||||
| Other income, net | 14 | ||||||||||||||||||||||||||||
| Income before income taxes and equity income | 1,126 | ||||||||||||||||||||||||||||
| Income tax expense | (132) | ||||||||||||||||||||||||||||
| Equity income, net of tax | 15 | ||||||||||||||||||||||||||||
| Net income | 1,009 | ||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interest | 19 | ||||||||||||||||||||||||||||
| Net income attributable to Aptiv | $ | 990 |
Information concerning principal geographic areas is set forth below. Net sales reflects the manufacturing location and is for the years ended December 31, 2021, 2020 and 2019. Long-lived assets is as of December 31, 2021, 2020 and 2019.
| Year Ended December 31, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | |||||||||||||||||||||||||||||||||
| Net Sales | Long-Lived Assets (1) | Net Sales | Long-Lived Assets (1) | Net Sales | Long-Lived Assets (1) | ||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| United States (2) | $ | 5,196 | $ | 1,010 | $ | 4,382 | $ | 985 | $ | 5,308 | $ | 1,029 | |||||||||||||||||||||||
| Other North America | 136 | 248 | 112 | 253 | 136 | 264 | |||||||||||||||||||||||||||||
| Europe, Middle East & Africa (3) | 5,179 | 1,390 | 4,483 | 1,440 | 4,791 | 1,398 | |||||||||||||||||||||||||||||
| Asia Pacific (4) | 4,829 | 978 | 3,898 | 953 | 3,876 | 970 | |||||||||||||||||||||||||||||
| South America | 278 | 51 | 191 | 50 | 246 | 61 | |||||||||||||||||||||||||||||
| Total | $ | 15,618 | $ | 3,677 | $ | 13,066 | $ | 3,681 | $ | 14,357 | $ | 3,722 |
(1)Includes property, plant and equipment, net of accumulated depreciation and operating lease right-of-use assets.
(2)Includes net sales and machinery, equipment and tooling that relate to the Company’s maquiladora operations located in Mexico. These assets are utilized to produce products sold to customers located in the U.S.
(3)Includes Aptiv’s country of domicile, Jersey. The Company had no sales or long-lived assets in Jersey in any period. The largest portion of net sales in the Europe, Middle East & Africa region was $1,436 million, $1,248 million and $1,340 million in Germany for the years ended December 31, 2021, 2020 and 2019, respectively.
(4)Net sales and long-lived assets in Asia Pacific are primarily attributable to China.
23. FOURTH QUARTER DATA (UNAUDITED)
The following is a condensed summary of the Company’s unaudited results of operations for the three months ended December 31, 2021 and 2020.
| Three Months Ended December 31, | ||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||
| (in millions, except per share amounts) | ||||||||||||||||||||||||||||||||
| Net sales | $ | 4,134 | $ | 4,212 | ||||||||||||||||||||||||||||
| Cost of sales | 3,543 | 3,433 | ||||||||||||||||||||||||||||||
| Gross margin | $ | 591 | $ | 779 | ||||||||||||||||||||||||||||
| Operating income (1) | $ | 260 | $ | 446 | ||||||||||||||||||||||||||||
| Net income (2) | 39 | 315 | ||||||||||||||||||||||||||||||
| Net income attributable to Aptiv | 31 | 299 | ||||||||||||||||||||||||||||||
| Net income attributable to ordinary shareholders | 15 | 283 | ||||||||||||||||||||||||||||||
| Basic net income per share: | ||||||||||||||||||||||||||||||||
| Basic net income per share attributable to ordinary shareholders | $ | 0.06 | $ | 1.05 | ||||||||||||||||||||||||||||
| Weighted average number of basic shares outstanding | 270.52 | 270.03 | ||||||||||||||||||||||||||||||
| Diluted net income per share: | ||||||||||||||||||||||||||||||||
| Diluted net income per share attributable to ordinary shareholders | $ | 0.06 | $ | 1.04 | ||||||||||||||||||||||||||||
| Weighted average number of diluted shares outstanding | 271.47 | 270.91 | ||||||||||||||||||||||||||||||
(1)Aptiv recorded incremental compensation expense of $22 million during the three months ended December 31, 2020 as a result of adjustments made to the financial performance targets associated with the Company’s 2018, 2019 and 2020 executive performance grants due to the impacts of the COVID-19 pandemic, as further described in Note 21. Share-Based Compensation.
(2)In the fourth quarter of 2021, Aptiv recognized losses on the extinguishment of debt of $126 million.
24. REVENUE
Refer to Note 2. Significant Accounting Policies for a complete description of the Company’s revenue recognition accounting policy.
Nature of Goods and Services
The principal activity from which the Company generates its revenue is the manufacturing of production parts for OEM customers. Aptiv recognizes revenue for production parts at a point in time, rather than over time, as the performance obligation is satisfied when customers obtain control of the product upon title transfer and not as the product is manufactured or developed.
Although production parts are highly customized with no alternative use, Aptiv does not have an enforceable right to payment as customers have the right to cancel a product program without a notification period. The amount of revenue recognized is based on the purchase order price and adjusted for revenue allocated to variable consideration (i.e. estimated rebates and price discounts), as applicable. Customers typically pay for production parts based on customary business practices with payment terms averaging 60 days.
Disaggregation of Revenue
Revenue generated from Aptiv’s operating segments is disaggregated by primary geographic market in the following tables for the years ended December 31, 2021, 2020 and 2019. Information concerning geographic market reflects the manufacturing location.
| For the Year Ended December 31, 2021: | Signal and Power Solutions | Advanced Safety and User Experience | Eliminations and Other | Total | |||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Geographic Market | |||||||||||||||||||||||
| North America | $ | 4,135 | $ | 1,204 | $ | (7) | $ | 5,332 | |||||||||||||||
| Europe, Middle East and Africa | 3,387 | 1,802 | (10) | 5,179 | |||||||||||||||||||
| Asia Pacific | 3,798 | 1,050 | (19) | 4,829 | |||||||||||||||||||
| South America | 278 | — | — | 278 | |||||||||||||||||||
| Total net sales | $ | 11,598 | $ | 4,056 | $ | (36) | $ | 15,618 | |||||||||||||||
| For the Year Ended December 31, 2020: | Signal and Power Solutions | Advanced Safety and User Experience | Eliminations and Other | Total | |||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Geographic Market | |||||||||||||||||||||||
| North America | $ | 3,527 | $ | 970 | $ | (3) | $ | 4,494 | |||||||||||||||
| Europe, Middle East and Africa | 2,869 | 1,625 | (11) | 4,483 | |||||||||||||||||||
| Asia Pacific | 2,935 | 978 | (15) | 3,898 | |||||||||||||||||||
| South America | 191 | — | — | 191 | |||||||||||||||||||
| Total net sales | $ | 9,522 | $ | 3,573 | $ | (29) | $ | 13,066 | |||||||||||||||
| For the Year Ended December 31, 2019: | Signal and Power Solutions | Advanced Safety and User Experience | Eliminations and Other | Total | |||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Geographic Market | |||||||||||||||||||||||
| North America | $ | 4,187 | $ | 1,260 | $ | (3) | $ | 5,444 | |||||||||||||||
| Europe, Middle East and Africa | 3,045 | 1,758 | (12) | 4,791 | |||||||||||||||||||
| Asia Pacific | 2,828 | 1,070 | (22) | 3,876 | |||||||||||||||||||
| South America | 242 | 4 | — | 246 | |||||||||||||||||||
| Total net sales | $ | 10,302 | $ | 4,092 | $ | (37) | $ | 14,357 | |||||||||||||||
Contract Balances
Consistent with the recognition of production parts revenue at a point in time as title transfers to the customer, Aptiv has no contract assets or contract liabilities balances as of December 31, 2021 and 2020.
Outstanding Performance Obligations
As customer contracts generally are represented by a combination of a current purchase order and a current production schedule issued by the customer for a production part, there are no contracts outstanding beyond one year. Aptiv does not enter into fixed long-term supply agreements.
As permitted, Aptiv does not disclose information about remaining performance obligations that have original expected durations of one year or less.
Costs to Obtain a Contract
From time to time, Aptiv makes payments to customers in conjunction with ongoing business. These payments to customers are generally recognized as a reduction to revenue at the time of the commitment to make these payments. However, certain other payments to customers, or upfront fees, meet the criteria to be considered a cost to obtain a contract as they are directly attributable to a contract, are incremental and management expects the fees to be recoverable. As of December 31, 2021 and 2020, Aptiv has recorded $92 million (of which $34 million was classified within other current assets and $58 million was classified within other long-term assets) and $116 million (of which $30 million was classified within other current assets and $86 million was classified within other long-term assets), respectively, related to these capitalized upfront fees.
Capitalized upfront fees are amortized to revenue based on the transfer of goods and services to the customer for which the upfront fees relate, which typically range from three to five years. There have been no impairment losses in relation to the costs capitalized. The amount of amortization to net sales was $31 million, $18 million and $11 million for the years ended December 31, 2021, 2020 and 2019, respectively.
25. LEASES
Lease Portfolio
The Company has operating and finance leases for real estate, office equipment, automobiles, forklifts and certain other equipment. The Company's leases have remaining lease terms of one year to 30 years, some of which include options to extend the leases for up to eight years, and some of which include options to terminate the leases within one year. Certain of our lease agreements include rental payments which are adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. When available, we use the rate implicit in the lease to discount lease payments to present value; however, most of our leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement. The incremental borrowing rate is not a quoted rate and is primarily derived by applying a spread over U.S. Treasury rates with a similar duration to the Company’s lease payments. The spread utilized is based on the Company’s credit rating and the impact of full collateralization.
Related Party Lease Agreement
Aptiv subleases certain office space to Motional, our autonomous driving joint venture, which has a remaining lease term of approximately seven years as of December 31, 2021. Total income under the agreement was $3 million and $3 million during the years ended December 31, 2021 and 2020, respectively. The sublease income and Aptiv’s associated operating lease cost are recorded to cost of sales in the consolidated statement of operations. The Company believes the terms of the lease agreement have not significantly been affected by the fact the Company and the lessee are related parties.
The components of lease expense were as follows:
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Lease cost: | |||||||||||||||||
| Finance lease cost: | |||||||||||||||||
| Amortization of right-of-use assets | $ | 4 | $ | 5 | $ | 4 | |||||||||||
| Interest on lease liabilities | 1 | 1 | 1 | ||||||||||||||
| Total finance lease cost | 5 | 6 | 5 | ||||||||||||||
| Operating lease cost | 119 | 111 | 114 | ||||||||||||||
| Short-term lease cost | 13 | 13 | 13 | ||||||||||||||
| Variable lease cost | — | — | 1 | ||||||||||||||
| Sublease income (1) | (4) | (4) | — | ||||||||||||||
| Total lease cost | $ | 133 | $ | 126 | $ | 133 |
(1)Sublease income excludes rental income from owned properties of $10 million, $10 million and $11 million for the years ended December 31, 2021, 2020 and 2019, respectively, which is included in other income, net.
Supplemental cash flow and other information related to leases was as follows:
| Year Ended December 31, | |||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||||||||||||||
| Operating cash flows for finance leases | $ | 1 | $ | 1 | $ | 1 | |||||||||||||||||
| Operating cash flows for operating leases | 122 | 107 | 112 | ||||||||||||||||||||
| Financing cash flows for finance leases | 4 | 4 | 3 | ||||||||||||||||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||||||||||||||
| Operating leases | $ | 74 | $ | 35 | $ | 86 | |||||||||||||||||
| Finance leases | 1 | 1 | 5 |
Supplemental balance sheet information related to leases was as follows:
| December 31, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| (dollars in millions) | |||||||||||||||||
| Operating leases: | |||||||||||||||||
| Operating lease right-of-use assets | $ | 383 | $ | 380 | |||||||||||||
| Accrued liabilities (Note 8) | $ | 92 | $ | 100 | |||||||||||||
| Long-term operating lease liabilities | 304 | 300 | |||||||||||||||
| Total operating lease liabilities | $ | 396 | $ | 400 | |||||||||||||
| Finance leases: | |||||||||||||||||
| Property and equipment | $ | 26 | $ | 31 | |||||||||||||
| Less: accumulated depreciation | (15) | (13) | |||||||||||||||
| Total property, net | $ | 11 | $ | 18 | |||||||||||||
| Short-term debt (Note 11) | $ | 3 | $ | 4 | |||||||||||||
| Long-term debt (Note 11) | 10 | 14 | |||||||||||||||
| Total finance lease liabilities | $ | 13 | $ | 18 | |||||||||||||
| Weighted average remaining lease term: | |||||||||||||||||
| Operating leases | 6 years | 6 years | |||||||||||||||
| Finance leases | 5 years | 6 years | |||||||||||||||
| Weighted average discount rate: | |||||||||||||||||
| Operating leases | 3.00 | % | 3.25 | % | |||||||||||||
| Finance leases | 3.50 | % | 3.50 | % |
Maturities of lease liabilities were as follows:
| Operating Leases | Finance Leases | ||||||||||
| (in millions) | |||||||||||
| As of December 31, 2021 | |||||||||||
| 2022 | $ | 103 | $ | 3 | |||||||
| 2023 | 86 | 3 | |||||||||
| 2024 | 62 | 3 | |||||||||
| 2025 | 50 | 2 | |||||||||
| 2026 | 38 | 2 | |||||||||
| Thereafter | 92 | 2 | |||||||||
| Total lease payments | 431 | 15 | |||||||||
| Less: imputed interest | (35) | (2) | |||||||||
| Total | $ | 396 | $ | 13 | |||||||
As of December 31, 2021, the Company has entered into additional operating leases, primarily for real estate, that have not yet commenced of approximately $15 million. These operating leases are anticipated to commence primarily in 2022 with lease terms of approximately 10 years.
Previous: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK · Next: Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE