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. The Company’s ordinary shares are publicly traded on the New York Stock Exchange under the symbol “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 131 major manufacturing facilities and 11 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 48 countries and has approximately 22,000 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, 2022, 2021 and 2020, Aptiv received dividends of $5 million, $6 million and $9 million, respectively, from one of its equity method investments. The dividends were recognized as a reduction to the investment and represented a return on investment in cash flows from operating activities.
Aptiv's equity investments without readily determinable fair value totaled $67 million and $30 million as of December 31, 2022 and 2021, respectively, and are classified within other long-term assets in the consolidated balance sheets. Aptiv's investments in publicly traded equity securities totaled $17 million and $66 million as of December 31, 2022 and 2021, respectively, and are classified within other long-term assets in the consolidated balance sheet. Refer to Note 5. Investments in Affiliates for further information regarding Aptiv's equity investments.
In 2022, the Company acquired 85% of the equity interests of Intercable Automotive Solutions (“Intercable Automotive”). Concurrent with the acquisition, the Company entered into an agreement with the noncontrolling interest holders that provides the Company with the right to purchase, and the noncontrolling interest holders with the right to sell, the remaining 15% of Intercable Automotive for cash at a contractually defined value beginning in 2026. As a result of this redemption feature, the Company recorded the redeemable noncontrolling interest at its acquisition-date fair value to temporary equity in the consolidated balance sheet. The redeemable noncontrolling interest is adjusted each reporting period for the income (loss) attributable to the noncontrolling interest, and for any measurement period adjustments necessary to record the redeemable noncontrolling interest at the higher of its redemption value, assuming it was redeemable at the reporting date, or its carrying value. Any measurement period adjustments are recorded to retained earnings, with a corresponding increase or reduction to net income attributable to Aptiv. Refer to Note 20. Acquisitions and Divestitures for further information regarding this acquisition and the redeemable noncontrolling interest.
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, redeemable noncontrolling interest, 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 ongoing global supply chain disruptions and the conflict between Ukraine and Russia, 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 for production parts generally are represented by a combination of a current purchase order and a current production schedule issued by the customer. Customer contracts for software licenses are generally represented by a sales contract or purchase order. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. Revenue from software licenses is generally recognized at a point in time upon delivery while revenue from post delivery support and maintenance for software contracts are recognized over time on a ratable basis over the contract term. 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 $1,120 million, $1,030 million and $1,024 million for the years ended December 31, 2022, 2021 and 2020, 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.
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, 2022 and December 31, 2021, the Company reported $3,433 million and $2,784 million, respectively, of accounts receivable, net of the allowances, which includes the allowance for doubtful accounts of $52 million and $37 million, respectively. The provision for doubtful accounts was $27 million, $22 million, and $39 million for the years ended December 31, 2022, 2021 and 2020, respectively. Other changes in the allowance were not material for the year ended December 31, 2022.
Inventories—As of December 31, 2022 and 2021, 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, 2022 and 2021, $250 million and $286 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, 2022 and 2021, the special tools balance, net of accumulated depreciation, was $437 million and $405 million, respectively, included within property, net in the consolidated balance sheets. As of December 31, 2022 and 2021, the Aptiv-owned special tools balance was $350 million and $303 million, respectively, and the customer-owned special tools balance was $87 million and $102 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 twelve 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.
Assets and liabilities held for sale—The Company considers assets to be held for sale when management, having the appropriate authority, approves and commits to a formal plan to actively market the assets for sale at a price reasonable in relation to their estimated fair value, the assets are available for immediate sale in their present condition, an active program to locate a buyer and other actions required to complete the sale have been initiated, the sale of the assets is probable and expected to be completed within one year and it is unlikely that significant changes will be made to the plan. Upon designation as held for sale, the Company records the assets at the lower of their carrying value or their estimated fair value, less cost to sell, and ceases to record depreciation expense on the assets.
Assets and liabilities of a discontinued operation are reclassified as held for sale for all comparative periods presented in the consolidated balance sheets. For assets that meet the held for sale criteria but do not meet the definition of a discontinued operation, the Company reclassifies the assets and liabilities in the period in which the held for sale criteria are met, but does not reclassify prior period amounts.
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, 2022, 2021 and 2020. 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 2022, 2021 and 2020, 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 2022, 2021 or 2020. 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. As it relates to changes in accumulated other comprehensive income (loss), the Company’s policy is to release tax effects from accumulated other comprehensive income (loss) when the underlying components affect earnings. 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. Net foreign currency transaction losses of $30 million were included in the consolidated statements of operations for the year ended December 31, 2022. 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 were included in the consolidated statements of operations for the year ended December 31, 2020.
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.
Customer concentrations—As reflected in the table below, net sales to General Motors (“GM”), Stellantis N.V. (“Stellantis”), Ford Motor Company (“Ford”) and Volkswagen Group (“VW”), Aptiv’s four largest customers, totaled approximately 34%, 35% and 38% of our total net sales for the years ended December 31, 2022, 2021 and 2020, respectively. Both of Aptiv’s operating segments recognized net sales to these customers during each period presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Percentage of Total Net Sales | | | Accounts Receivable |
| Year Ended December 31, | | | December 31,
2022 | | December 31,
2021 |
| 2022 | | 2021 | | 2020 | | | |
| | | | | | | | | (in millions) |
| GM | 9 | % | | 8 | % | | 9 | % | | | $ | 231 | | | $ | 208 | |
| Stellantis (1) | 9 | % | | 11 | % | | 12 | % | | | 325 | | | 317 | |
| Ford | 8 | % | | 7 | % | | 7 | % | | | 250 | | | 220 | |
| VW | 8 | % | | 9 | % | | 10 | % | | | 186 | | | 163 | |
(1)On January 16, 2021, Fiat Chrysler Automobiles N.V. (“FCA”) and Peugeot Citroën (“PSA”) merged to form 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 the years ended December 31, 2021 and 2020.
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, 2022 and 2021, 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.
Government incentives—From time to time, Aptiv receives government incentives in the form of cash grants and other incentives in return for past or future compliance with certain conditions. The Company accounts for funds received from government grants that are not in the form of an income tax credit, revenue from a contract with a customer or a loan, by analogy to International Accounting Standards 20, Accounting for Government Grants and Disclosure of Government Assistance. Accordingly, we recognize funds we receive from government grants in the consolidated statement of operations when there is reasonable assurance that Aptiv will comply with the conditions associated with the grant and the grants will be received. Recognition occurs on a systematic basis over the periods in which Aptiv recognizes, as expenses, the related costs for which the grants are intended to defray.
Aptiv is eligible to receive certain government grants because we engage in qualifying capital investments and other activities as defined by the relevant governmental entities awarding the grants. Typically, grant agreements require that Aptiv complies with certain conditions, including committing to minimum levels of capital investment and maintenance of a minimum level of headcount at the impacted manufacturing site. Aptiv generally recognizes government grants of an operating nature as a reduction to operating expenses (primarily cost of sales) in the consolidated statements of operations. During the year ended December 31, 2022, government grants were recognized as reductions to operating expenses of approximately $20 million.
Aptiv records capital-related grants as a reduction to property, plant and equipment, net in the consolidated balance sheets, which ultimately results in a reduction to depreciation expense over the useful life of the corresponding asset. Capital-related grants reduced gross property, plant and equipment by approximately $10 million during the year ended December 31, 2022. Amounts recorded as due from and due to governmental entities in the consolidated balance sheets were not significant for any period presented.
Our agreements with governmental entities have an average duration of five years and certain of these agreements include provisions for the recapture of funding if the Company fails to comply with various aspects of the agreement.
Recently adopted accounting pronouncements—In June 2022, the FASB issued Accounting Standards Update (“ASU”) 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The amendments in this update clarify the guidance when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. As permitted, the Company elected to early adopt this guidance effective in the second quarter of 2022. The adoption of this guidance resulted in incremental disclosures in the Company’s financial statements.
Aptiv adopted ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance in the first quarter of 2022. 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 adoption of this guidance resulted in insignificant incremental disclosures in the Company’s financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This guidance requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). At the acquisition date, an acquirer should account for the related revenue contracts in accordance with ASC 606 as if it had originated the contracts. As permitted, the Company elected to early adopt this guidance effective January 1, 2022. This guidance was applied to the Company’s 2022 business combinations and will be applied to any business combinations that occur in future periods.
Recently issued accounting pronouncements not yet adopted—In September 2022, the FASB issued ASU 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. The amendments in this update intend to improve the transparency of supplier finance programs by requiring a buyer in a supplier finance program to disclose sufficient information about the program to allow a user of the financial statements to understand the program’s nature, key terms, outstanding balances and activity during the period. The new guidance will be applied retrospectively and is effective for fiscal years beginning after December 15, 2022, except for the amendment on rollforward information, which is to be applied prospectively and is effective for fiscal years beginning after December 15, 2023. Early
adoption is permitted. The adoption of this guidance is not expected to have a significant impact on Aptiv’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,
2022 | | December 31,
2021 |
| | (in millions) |
| Productive material | $ | 1,570 | | | $ | 1,311 | |
| Work-in-process | 164 | | | 172 | |
| Finished goods | 606 | | | 531 | |
| Total | $ | 2,340 | | | $ | 2,014 | |
4. ASSETS
Other current assets consisted of the following:
| | | | | | | | | | | |
| December 31,
2022 | | December 31,
2021 |
| | (in millions) |
| Value added tax receivable | $ | 167 | | | $ | 178 | |
| | | |
| Prepaid insurance and other expenses | 75 | | | 63 | |
| Reimbursable engineering costs | 90 | | | 110 | |
| Notes receivable | 8 | | | 16 | |
| Income and other taxes receivable | 40 | | | 54 | |
| Deposits to vendors | 7 | | | 6 | |
| Derivative financial instruments (Note 17) | 44 | | | 38 | |
| Capitalized upfront fees (Note 24) | 17 | | | 34 | |
| Contract assets (Note 24) | 24 | | | — | |
| Other | 8 | | | — | |
| Total | $ | 480 | | | $ | 499 | |
Other long-term assets consisted of the following:
| | | | | | | | | | | |
| December 31,
2022 | | December 31,
2021 |
| | (in millions) |
| Deferred income taxes, net (Note 14) | $ | 259 | | | $ | 159 | |
| Unamortized Revolving Credit Facility debt issuance costs | 8 | | | 11 | |
| Income and other taxes receivable | 30 | | | 28 | |
| Reimbursable engineering costs | 160 | | | 176 | |
| Value added tax receivable | 2 | | | 20 | |
| Equity investments (Note 5) | 84 | | | 96 | |
| Derivative financial instruments (Note 17) | 14 | | | 3 | |
| Capitalized upfront fees (Note 24) | 61 | | | 58 | |
| Contract assets (Note 24) | 43 | | | — | |
| Other | 79 | | | 71 | |
| Total | $ | 740 | | | $ | 622 | |
5. INVESTMENTS IN AFFILIATES
Equity Method Investments
As part of Aptiv’s operations, it has investments in five 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, Europe and Asia Pacific. Aptiv’s ownership percentages vary generally from approximately 20% to 50%, with the most significant investments being in Motional AD LLC (“Motional”) (of which Aptiv owns 50%), TTTech Auto AG (“TTTech Auto”) (of which Aptiv owns approximately 20%) and in Promotora de Partes Electricas Automotrices, S.A. de C.V. (of which Aptiv owns approximately 40%). Refer to Note 20. Acquisitions and Divestitures for additional information on the formation of Motional. The Company’s aggregate investments in affiliates was $1,723 million and $1,797 million at December 31, 2022 and 2021, respectively. Dividends of $5 million, $6 million and $9 million for the years ended December 31, 2022, 2021 and 2020, respectively, have been received from these non-consolidated affiliates. No impairment charges were recorded for the years ended December 31, 2022, 2021 and 2020.
Motional was deemed a significant equity investee under Rule 3-09 of Regulation S-X for the year ended December 31, 2022. Accordingly, separate audited financial statements of Motional have been included as Exhibit 99.1 in Part IV Item 15 of this Annual Report on Form 10-K.
The following is a summary of the combined financial information of significant affiliates accounted for under the equity method as of December 31, 2022 and 2021 and for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| | (in millions) |
| Current assets | $ | 1,059 | | | $ | 794 | |
| Non-current assets | 2,672 | | | 3,163 | |
| Total assets | $ | 3,731 | | | $ | 3,957 | |
| Current liabilities | $ | 252 | | | $ | 194 | |
| Non-current liabilities | 87 | | | 112 | |
| Shareholders’ equity | 3,392 | | | 3,651 | |
| Total liabilities and shareholders’ equity | $ | 3,731 | | | $ | 3,957 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | (in millions) |
| Net sales | $ | 761 | | | $ | 599 | | | $ | 553 | |
| Gross loss | (357) | | | (244) | | | (71) | |
| Net loss | (589) | | | (393) | | | (154) | |
A summary of transactions with affiliates is shown below:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | (in millions) |
| Sales to affiliates | $ | 35 | | | $ | 30 | | | $ | 7 | |
| Purchases from affiliates | 18 | | | 19 | | | 32 | |
A summary of amounts recorded in the Company’s consolidated balance sheets related to its affiliates is shown below:
| | | | | | | | | | | |
| December 31, |
| | 2022 | | 2021 |
| | (in millions) |
| Receivables due from affiliates | $ | 8 | | | $ | 11 | |
| Payables due to affiliates | 18 | | | 20 | |
Motional Cybersecurity Incident
In October 2022, Motional experienced a cybersecurity incident involving unauthorized access to, and theft of data from, certain Motional systems. Upon discovering the unauthorized activity, Motional took immediate action, including terminating the unauthorized access and pausing certain operations. With assistance from forensic information technology firms and legal counsel, Motional conducted an investigation of the incident, communicated with law enforcement authorities regarding this matter, subsequently resumed its testing operations and determined that the incident did not have a material impact to its operations or financial results and financial condition.
Investment in TTTech Auto AG
On March 15, 2022, Aptiv acquired approximately 20% of the equity interests of TTTech Auto, a leading provider of safety-critical middleware solutions for advanced driver-assistance systems and autonomous driving applications, for €200 million (approximately $220 million, using foreign currency rates on the investment date). The Company made the investment in TTTech Auto utilizing cash on hand.
The carrying value of the Company’s investment in TTTech Auto was $205 million as of December 31, 2022, which is included in the Advanced Safety and User Experience segment. As of December 31, 2022, the difference between the amount at which the Company’s investment is carried and the amount of the Company’s share of the underlying equity in net assets of TTTech Auto was approximately $151 million. The basis difference is primarily attributable to equity method goodwill associated with the investment, which is not amortized.
Technology Investments
The Company has made technology investments in certain non-consolidated affiliates for ownership interests of less than 20% (where Aptiv does not have the ability to exercise significant influence) 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, 2022 and 2021: | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | December 31, |
| Investment Name | | Segment | | | | | 2022 | | 2021 |
| | | | | | | (in millions) |
| Equity investments without readily determinable fair values: | | | | | | | |
| StradVision, Inc. | | Advanced Safety and User Experience | | | | | $ | 40 | | | $ | — | |
| LeddarTech, Inc. | | Advanced Safety and User Experience | | | | | 19 | | | 19 | |
| Quanergy Systems, Inc (1) | | Advanced Safety and User Experience | | | | | — | | | 6 | |
| Other investments | | Various | | | | | 8 | | | 5 | |
| Total equity investments without readily determinable fair values | | | | | 67 | | | 30 | |
| | | | | | | | | |
| Publicly traded equity securities: | | | | | | | | | |
| | | | | | | | | |
| Smart Eye AB | | Advanced Safety and User Experience | | | | | 2 | | | 11 | |
| Otonomo Technologies Ltd. | | Advanced Safety and User Experience | | | | | 4 | | | 39 | |
| Valens Semiconductor Ltd. | | Signal and Power Solutions | | | | | 11 | | | 16 | |
| | | | | | | | | |
| Total publicly traded equity securities | | | | | 17 | | | 66 | |
| | | | | | | | | |
| Total investments | | | $ | 84 | | | $ | 96 | |
(1)Quanergy Systems, Inc. experienced a change in measurement basis due to an underlying transaction during the year ended December 31, 2022 and we liquidated our entire investment in the company after the transaction during the year ended December 31, 2022. See below for further details on the transaction.
In May 2022, the Company’s Advanced Safety and User Experience segment made an investment totaling 50 billion South Korean Won (approximately $40 million, using foreign currency rates on the investment date) in StradVision, Inc., a provider of deep learning-based camera perception software for automotive applications.
In February 2022, Quanergy Systems, Inc. (“Quanergy”) merged with a publicly traded special purpose acquisition company (“SPAC”) and shares of Quanergy began trading on the NYSE under the symbol QNGY. As part of the SPAC merger, our preferred shares in Quanergy were converted into Quanergy ordinary shares. During the remainder of 2022, the Company sold all of its Quanergy 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 Quanergy during 2016, which was in addition to the Company’s $3 million investment made during 2015.
In September 2021, Valens Semiconductor Ltd. (“Valens”) merged with a publicly traded 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”) 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 second half 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 second half 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 for Quanergy, Valens, Otonomo, Smart Eye and Innoviz, the fair value of each respective investment is measured on a recurring basis, with changes in fair value recorded to other income (expense), net.
Certain of the equity securities measured at fair value disclosed above are subject to contractual sale restrictions which prohibit the sale of the security over contractually defined periods of time. The fair value of equity securities with contractual sale restrictions was approximately $1 million as of December 31, 2022. These contractual sale restrictions will fully expire during the next twelve months as of December 31, 2022.
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.
There were no other material transactions, events or changes in circumstances requiring an impairment or an observable price change adjustment to our 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, |
| | 2022 | | 2021 |
| | (Years) | | (in millions) |
| Land | — | | $ | 79 | | | $ | 82 | |
| Land and leasehold improvements | 3-20 | | 200 | | | 186 | |
| Buildings | 40 | | 699 | | | 679 | |
| Machinery, equipment and tooling | 3-20 | | 5,263 | | | 4,899 | |
| Furniture and office equipment | 3-10 | | 871 | | | 802 | |
| Construction in progress | — | | 463 | | | 365 | |
| Total | | | 7,575 | | | 7,013 | |
| Less: accumulated depreciation | | | (4,080) | | | (3,719) | |
| Total property, net | | | $ | 3,495 | | | $ | 3,294 | |
For the years ended December 31, 2022, 2021 and 2020, Aptiv recorded non-cash asset impairment charges of $8 million, $2 million and $10 million, respectively, in cost of sales related to declines in the fair values of certain fixed assets.
As of December 31, 2022, 2021 and 2020, capital expenditures recorded in accounts payable totaled $300 million, $280 million and $164 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, 2022 and 2021. See Note 20. Acquisitions and Divestitures for a further description of the goodwill and intangible assets resulting from Aptiv’s acquisitions in 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of December 31, 2022 | | As of December 31, 2021 |
| | 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 | 3-16 | | $ | 1,504 | | | $ | 551 | | | $ | 953 | | | $ | 673 | | | $ | 506 | | | $ | 167 | |
| Customer relationships | 9-22 | | 1,981 | | | 661 | | | 1,320 | | | 1,186 | | | 578 | | | 608 | |
| Trade names | 15-20 | | 206 | | | 52 | | | 154 | | | 75 | | | 50 | | | 25 | |
| Total | | | 3,691 | | | 1,264 | | | 2,427 | | | 1,934 | | | 1,134 | | | 800 | |
| Unamortized intangible assets: | | | | | | | | | | | | | |
| In-process research and development | — | | 4 | | | — | | | 4 | | | 4 | | | — | | | 4 | |
| Trade names | — | | 154 | | | — | | | 154 | | | 160 | | | — | | | 160 | |
| Goodwill | — | | 5,106 | | | — | | | 5,106 | | | 2,511 | | | — | | | 2,511 | |
| Total | | | $ | 8,955 | | | $ | 1,264 | | | $ | 7,691 | | | $ | 4,609 | | | $ | 1,134 | | | $ | 3,475 | |
Estimated amortization expense for the years ending December 31, 2023 through 2027 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ending December 31, |
| | 2023 | | 2024 | | 2025 | | 2026 | | 2027 |
| | (in millions) |
| Estimated amortization expense | $ | 230 | | | $ | 210 | | | $ | 210 | | | $ | 210 | | | $ | 195 | |
A roll-forward of the gross carrying amounts of intangible assets for the years ended December 31, 2022 and 2021 is presented below.
| | | | | | | | | | | |
| 2022 | | 2021 |
| | (in millions) |
| Balance at January 1 | $ | 4,609 | | | $ | 4,675 | |
| Acquisitions (1) | 4,434 | | | 132 | |
| | | |
| | | |
| Foreign currency translation and other | (88) | | | (198) | |
| Balance at December 31 | $ | 8,955 | | | $ | 4,609 | |
(1)Primarily attributable to the 2022 acquisitions of Wind River and Intercable Automotive and the 2021 acquisitions of El-Com, Krono-Safe and Ulti-Mate, as further described in Note 20. Acquisitions and Divestitures.
A roll-forward of the accumulated amortization for the years ended December 31, 2022 and 2021 is presented below:
| | | | | | | | | | | |
| 2022 | | 2021 |
| | (in millions) |
| Balance at January 1 | $ | 1,134 | | | $ | 1,004 | |
| Amortization | 149 | | | 148 | |
| | | |
| | | |
| Foreign currency translation and other | (19) | | | (18) | |
| Balance at December 31 | $ | 1,264 | | | $ | 1,134 | |
A roll-forward of the carrying amount of goodwill, by operating segment, for the years ended December 31, 2022 and 2021 is presented below:
| | | | | | | | | | | | | | | | | | | |
| Signal and Power Solutions | | | | Advanced Safety and User Experience | | Total |
| | (in millions) |
| Balance at January 1, 2021 | $ | 2,553 | | | | | $ | 27 | | | $ | 2,580 | |
| Acquisitions (1) | 65 | | | | | 9 | | | 74 | |
| | | | | | | |
| Foreign currency translation and other | (143) | | | | | — | | | (143) | |
| Balance at December 31, 2021 | $ | 2,475 | | | | | $ | 36 | | | $ | 2,511 | |
| Acquisitions (2) | $ | 357 | | | | | $ | 2,302 | | | $ | 2,659 | |
| | | | | | | |
| Foreign currency translation and other | (76) | | | | | 12 | | | (64) | |
| Balance at December 31, 2022 | $ | 2,756 | | | | | $ | 2,350 | | | $ | 5,106 | |
(1)Primarily attributable to the acquisitions of El-Com, Krono-Safe and Ulti-Mate, as further described in Note 20. Acquisitions and Divestitures.
(2)Primarily attributable to the acquisitions of Wind River and Intercable Automotive, as further described in Note 20. Acquisitions and Divestitures.
8. LIABILITIES
Accrued liabilities consisted of the following:
| | | | | | | | | | | |
| December 31,
2022 | | December 31,
2021 |
| | (in millions) |
| Payroll-related obligations | $ | 330 | | | $ | 286 | |
| Employee benefits, including current pension obligations | 151 | | | 83 | |
| | | |
| Income and other taxes payable | 188 | | | 157 | |
| Warranty obligations (Note 9) | 43 | | | 41 | |
| Restructuring (Note 10) | 65 | | | 42 | |
| Customer deposits | 82 | | | 83 | |
| | | |
| Derivative financial instruments (Note 17) | 29 | | | 13 | |
| Accrued interest | 51 | | | 30 | |
| MCPS dividends payable | 3 | | | 3 | |
| | | |
| Contract liabilities (Note 24) | 90 | | | — | |
| Operating lease liabilities (Note 25) | 109 | | | 92 | |
| Other | 543 | | | 416 | |
| Total | $ | 1,684 | | | $ | 1,246 | |
Other long-term liabilities consisted of the following:
| | | | | | | | | | | |
| December 31,
2022 | | December 31,
2021 |
| | (in millions) |
| Environmental (Note 13) | $ | 1 | | | $ | 4 | |
| | | |
| Extended disability benefits | 4 | | | 5 | |
| Warranty obligations (Note 9) | 9 | | | 8 | |
| Restructuring (Note 10) | 18 | | | 21 | |
| Payroll-related obligations | 10 | | | 11 | |
| Accrued income taxes | 161 | | | 153 | |
| Deferred income taxes, net (Note 14) | 481 | | | 153 | |
| Contract liabilities (Note 24) | 9 | | | — | |
| Derivative financial instruments (Note 17) | 7 | | | 7 | |
| | | |
| Other | 50 | | | 74 | |
| Total | $ | 750 | | | $ | 436 | |
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, 2022. The Company estimates the reasonably possible amount to ultimately resolve all matters in excess of the recorded reserves as of December 31, 2022 to be zero to $10 million.
The table below summarizes the activity in the product warranty liability for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| (in millions) |
| Accrual balance at beginning of year | $ | 49 | | | $ | 59 | |
| Provision for estimated warranties incurred during the year | 44 | | | 36 | |
| Changes in estimate for pre-existing warranties | 3 | | | 15 | |
| Settlements made during the year (in cash or in kind) | (43) | | | (59) | |
| Foreign currency translation and other | (1) | | | (2) | |
| Accrual balance at end of year | $ | 52 | | | $ | 49 | |
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 reducing global overhead costs and the continued rotation of our manufacturing footprint to best cost locations in Europe. During the year ended December 31, 2022, the Company recorded employee-related and other restructuring charges related to these programs totaling approximately $85 million, of which $61 million was recognized for programs implemented in the European region and $23 million was recognized for programs implemented in the North America region. None of the Company’s individual restructuring programs initiated during 2022 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 $10 million (of which approximately $5 million relates to the Advanced Safety and User Experience segment and approximately $5 million relates to the Signal and Power Solutions segment) for programs approved as of December 31, 2022, which are expected to be incurred within the next twelve months.
During the year ended December 31, 2021, the Company recorded employee-related and other restructuring charges totaling approximately $24 million. 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.
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 $67 million, $80 million and $151 million in the years ended December 31, 2022, 2021 and 2020, respectively.
The following table summarizes the restructuring charges recorded for the years ended December 31, 2022, 2021 and 2020 by operating segment:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | (in millions) |
| Signal and Power Solutions | $ | 30 | | | $ | 8 | | | $ | 90 | |
| | | | | |
| Advanced Safety and User Experience | 55 | | | 16 | | | 46 | |
| Total | $ | 85 | | | $ | 24 | | | $ | 136 | |
The table below summarizes the activity in the restructuring liability for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | |
| Employee Termination Benefits Liability | | Other Exit Costs Liability | | Employee Termination Benefits |
| | (in millions) |
| Accrual balance at January 1, 2021 | $ | 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 | |
| Provision for estimated expenses incurred during the year | $ | 85 | | | $ | — | | | $ | 85 | |
| Payments made during the year | (67) | | | — | | | (67) | |
| Foreign currency and other | 2 | | | — | | | 2 | |
| Accrual balance at December 31, 2022 | $ | 83 | | | $ | — | | | $ | 83 | |
11. DEBT
The following is a summary of debt outstanding, net of unamortized issuance costs and discounts, as of December 31, 2022 and 2021:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| | (in millions) |
| | | |
| | | |
| | | |
| | | |
2.396%, senior notes, due 2025 (net of $3 and $0 unamortized issuance costs, respectively) | $ | 697 | | | $ | — | |
1.50%, Euro-denominated senior notes, due 2025 (net of $1 and $2 unamortized issuance costs and $1 and $1 discount, respectively) | 747 | | | 790 | |
1.60%, Euro-denominated senior notes, due 2028 (net of $2 and $3 unamortized issuance costs, respectively) | 533 | | | 563 | |
4.35%, senior notes, due 2029 (net of $2 and $2 unamortized issuance costs, respectively) | 298 | | | 298 | |
3.25%, senior notes, due 2032 (net of $7 and $0 unamortized issuance costs and $3 and $0 discount, respectively) | 790 | | | — | |
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 $16 and $17 unamortized issuance costs and $32 and $33 discount, respectively) | 1,452 | | | 1,450 | |
4.15%, senior notes, due 2052 (net of $11 and $0 unamortized issuance costs and $2 and $0 discount, respectively) | 987 | | | — | |
Tranche A Term Loan, due 2026 (net of $1 and $2 unamortized issuance costs, respectively) | 308 | | | 311 | |
| Finance leases and other | 38 | | | 14 | |
| Total debt | 6,491 | | | 4,067 | |
| Less: current portion | (31) | | | (8) | |
| Long-term debt | $ | 6,460 | | | $ | 4,059 | |
The principal maturities of debt, at nominal value, are as follows:
| | | | | |
| Debt and Finance Lease Obligations |
| | (in millions) |
| 2023 | $ | 31 | |
| 2024 | 32 | |
| 2025 | 1,469 | |
| 2026 | 262 | |
| 2027 | 2 | |
| Thereafter | 4,785 | |
| Total | $ | 6,581 | |
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”). Subsequently, 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 2026, 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, and (3) established the leverage ratio 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) and allowed for dividends and other payments on equity. 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 in the third quarter of 2022, Aptiv was obligated to begin making 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, 2022, 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, 2022 | | December 31, 2021 |
| LIBOR plus | | ABR plus | | LIBOR plus | | ABR plus |
| Revolving Credit Facility | 1.06 | % | | 0.06 | % | | 1.10 | % | | 0.10 | % |
| | | | | | | |
| Tranche A Term Loan | 1.105 | % | | 0.105 | % | | 1.125 | % | | 0.125 | % |
| | | | | | | |
| | | | | | | |
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 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 Company achieved the sustainability-linked targets for the 2021 calendar year, and the interest rate margins and facility fees were reduced by the amounts specified above, effective in third quarter of 2022.
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, 2022, Aptiv selected the one-month LIBOR interest rate option on the Tranche A Term Loan, and the rate effective as of December 31, 2022, 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, 2022 | | Rates effective as of |
| Applicable Rate | | (in millions) | | December 31, 2022 |
| | | | | |
| | | | | |
| Tranche A Term Loan | LIBOR plus 1.105% | | $ | 309 | | | 5.48 | % |
| | | | | |
| | | | | |
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). Following completion of the acquisition of Wind River in December 2022, the Company elected to increase the ratio of Consolidated Total Indebtedness to Consolidated EBITDA to 4.0 to 1.0 commencing with the fiscal quarter ending December 31, 2022. Refer to Note 20. Acquisitions and Divestitures for further information on this acquisition.
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, 2022.
As of December 31, 2022, 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 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 of 1933, as amended (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 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 $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 $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 $650 million of 3.15% senior unsecured notes due 2020. 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 $700 million of 4.15% senior unsecured notes due 2024 (the “2014 Senior Notes”) and $650 million of 4.25% senior unsecured notes due 2026 (the “4.25% Senior Notes”). As a result of the redemption of the 2014 Senior Notes 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. 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.
On February 18, 2022, Aptiv PLC and Aptiv Corporation (together, the “Issuers”) issued $2.5 billion in aggregate principal amount of senior unsecured notes in a transaction registered under the Securities Act, comprised of $700 million of 2.396% senior unsecured notes due 2025 (the “2.396% Senior Notes”), $800 million of 3.25% senior unsecured notes due 2032 (the “3.25% Senior Notes”) and $1.0 billion of 4.15% senior unsecured notes due 2052 (the “4.15% Senior Notes”) (collectively, the “2022 Senior Notes”). The 2022 Senior Notes are guaranteed by AGFL. The 2.396% Senior Notes were priced at 100% of par, resulting in a yield to maturity of 2.396%; the 3.25% Senior Notes were priced at 99.600% of par, resulting in a yield to maturity of 3.297%; and the 4.15% Senior Notes were priced at 99.783% of par, resulting in a yield to maturity of 4.163%. On or after February 18, 2023, the 2.396% Senior Notes may be optionally redeemed at a price equal to their principal amount plus accrued and unpaid interest thereon. The proceeds from the 2022 Senior Notes were utilized to fund a portion of the cash consideration payable in connection with the acquisition of Wind River.
Aptiv incurred approximately $22 million of issuance costs in connection with the 2022 Senior Notes. Interest on the 2.396% Senior Notes, 3.25% Senior Notes and 4.15% Senior Notes is payable semi-annually on February 18 and August 18 (commencing August 18, 2022), March 1 and September 1 (commencing September 1, 2022) and May 1 and November 1 (commencing May 1, 2022), respectively, of each year to holders of record at the close of business on February 3 or August 3, February 15 or August 15, April 15 or October 15, respectively, immediately preceding the interest payment date.
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. In February 2022, Aptiv Corporation and AGFL were added as guarantors on each series of outstanding senior notes previously issued by Aptiv PLC. As of December 31, 2022, 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 is accounted for as short-term debt and borrowings are subject to the availability of eligible accounts receivable. Collateral is not required related to these trade accounts receivable. This facility became effective on January 1, 2021 and has an initial 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 bear interest at the three-month Euro Interbank Offered Rate (“EURIBOR”) plus 0.50% and USD borrowings 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, 2022 and 2021, Aptiv had no amounts outstanding under the European accounts receivable factoring facility.
Finance leases and other—As of December 31, 2022 and 2021, approximately $38 million and $14 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 $190 million, $159 million and $154 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Letter of credit facilities—In addition to the letters of credit issued under the Credit Agreement, Aptiv had approximately $3 million and $3 million outstanding through other letter of credit facilities as of December 31, 2022 and 2021, 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 United Kingdom (“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 2022 and 2021.
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| | (in millions) |
| Benefit obligation at beginning of year | $ | 5 | | | $ | 8 | |
| | | |
| Actuarial gain | (1) | | | — | |
| Benefits paid | (1) | | | (3) | |
| | | |
| Benefit obligation at end of year | $ | 3 | | | $ | 5 | |
| Change in plan assets: | | | |
| Fair value of plan assets at beginning of year | $ | — | | | $ | — | |
| Aptiv contributions | 1 | | | 3 | |
| Benefits paid | (1) | | | (3) | |
| | | |
| Fair value of plan assets at end of year | $ | — | | | $ | — | |
| Underfunded status | $ | (3) | | | $ | (5) | |
| Amounts recognized in the consolidated balance sheets consist of: | | | |
| Current liabilities | $ | (1) | | | $ | (1) | |
| Long-term liabilities | (2) | | | (4) | |
| Total | $ | (3) | | | $ | (5) | |
| Amounts recognized in accumulated other comprehensive loss consist of (pre-tax): | | | |
| Actuarial loss | $ | 4 | | | $ | 6 | |
| Total | $ | 4 | | | $ | 6 | |
The amounts shown below reflect the change in the non-U.S. defined benefit pension obligations during 2022 and 2021.
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| | (in millions) |
| Benefit obligation at beginning of year | $ | 861 | | | $ | 977 | |
| | | |
| Service cost | 15 | | | 18 | |
| Interest cost | 23 | | | 19 | |
| | | |
| Actuarial gain | (171) | | | (62) | |
| Benefits paid | (35) | | | (36) | |
| Impact of curtailments | — | | | (3) | |
| | | |
| | | |
| | | |
| Exchange rate movements and other | (42) | | | (52) | |
| Benefit obligation at end of year | $ | 651 | | | $ | 861 | |
| Change in plan assets: | | | |
| Fair value of plan assets at beginning of year | $ | 438 | | | $ | 438 | |
| Actual return on plan assets | (89) | | | 23 | |
| Aptiv contributions | 23 | | | 25 | |
| | | |
| Benefits paid | (35) | | | (36) | |
| | | |
| | | |
| Exchange rate movements and other | (30) | | | (12) | |
| Fair value of plan assets at end of year | $ | 307 | | | $ | 438 | |
| Underfunded status | $ | (344) | | | $ | (423) | |
| Amounts recognized in the consolidated balance sheets consist of: | | | |
| Long-term assets | $ | 25 | | | $ | 29 | |
| Current liabilities | (18) | | | (17) | |
| Long-term liabilities | (351) | | | (435) | |
| Total | $ | (344) | | | $ | (423) | |
| Amounts recognized in accumulated other comprehensive loss consist of (pre-tax): | | | |
| Actuarial loss | $ | 17 | | | $ | 101 | |
| | | |
| Total | $ | 17 | | | $ | 101 | |
The benefit obligations were impacted by actuarial gains of $172 million and $62 million during the years ended December 31, 2022 and 2021, 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 |
| | 2022 | | 2021 | | 2022 | | 2021 |
| (in millions)
Plans with ABO in Excess of Plan Assets |
| PBO | $ | 3 | | | $ | 5 | | | $ | 449 | | | $ | 445 | |
| ABO | 3 | | | 5 | | | 398 | | | 405 | |
| Fair value of plan assets at end of year | — | | | — | | | 80 | | | 7 | |
| | Plans with Plan Assets in Excess of ABO |
| PBO | $ | — | | | $ | — | | | $ | 202 | | | $ | 416 | |
| ABO | — | | | — | | | 193 | | | 393 | |
| Fair value of plan assets at end of year | — | | | — | | | 227 | | | 431 | |
| | Total |
| PBO | $ | 3 | | | $ | 5 | | | $ | 651 | | | $ | 861 | |
| ABO | 3 | | | 5 | | | 591 | | | 798 | |
| Fair value of plan assets at end of year | — | | | — | | | 307 | | | 438 | |
Benefit costs presented below were determined based on actuarial methods and included the following:
| | | | | | | | | | | | | | | | | |
| | U.S. Plans |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | (in millions) |
| | | | | |
| | | | | |
| | | | | |
| Amortization of actuarial losses | $ | 1 | | | $ | 1 | | | $ | 1 | |
| Net periodic benefit cost | $ | 1 | | | $ | 1 | | | $ | 1 | |
| | | | | | | | | | | | | | | | | |
| | Non-U.S. Plans |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | (in millions) |
| Service cost | $ | 15 | | | $ | 18 | | | $ | 18 | |
| Interest cost | 23 | | | 19 | | | 20 | |
| Expected return on plan assets | (17) | | | (17) | | | (17) | |
| Settlement loss | — | | | 1 | | | 1 | |
| Curtailment loss | — | | | 3 | | | — | |
| Amortization of actuarial losses | 8 | | | 14 | | | 14 | |
| Other | — | | | — | | | 1 | |
| Net periodic benefit cost | $ | 29 | | | $ | 38 | | | $ | 37 | |
Other postretirement benefit obligations were approximately $1 million and $1 million at December 31, 2022 and 2021, 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 |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Weighted-average discount rate | 5.20 | % | | 1.90 | % | | 5.95 | % | | 3.09 | % |
| Weighted-average rate of increase in compensation levels | N/A | | N/A | | 2.82 | % | | 2.47 | % |
Assumptions used to determine net expense for years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits |
| | U.S. Plans | | Non-U.S. Plans |
| | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Weighted-average discount rate | 1.90 | % | | 1.20 | % | | 2.40 | % | | 3.09 | % | | 2.21 | % | | 2.87 | % |
Weighted-average rate of increase in compensation levels | N/A | | N/A | | N/A | | 2.47 | % | | 3.64 | % | | 3.69 | % |
Weighted-average expected long-term rate of return on plan assets | N/A | | N/A | | N/A | | 4.46 | % | | 4.29 | % | | 4.68 | % |
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 2022 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 2023 is determined at the 2022 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 | | Less than + $1 million | | ‘+ $16 million |
25 bp increase in discount rate | | ‘- $1 million | | ‘- $15 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) |
| 2023 | $ | 1 | | | $ | 49 | |
| 2024 | 1 | | | 41 | |
| 2025 | 1 | | | 43 | |
| 2026 | — | | | 49 | |
| 2027 | — | | | 53 | |
| 2028 – 2032 | — | | | 285 | |
Aptiv anticipates making pension contributions and benefit payments of approximately $36 million in 2023.
Aptiv sponsors defined contribution plans for certain hourly and salaried employees. Expense related to the contributions for these plans was $39 million, $37 million, and $17 million for the years ended December 31, 2022, 2021 and 2020, 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, 2022 and 2021, by asset category, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at December 31, 2022 |
| 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 and cash equivalents | | $ | 12 | | | $ | 4 | | | $ | 8 | | | $ | — | |
| Time deposits | | 28 | | | — | | | 28 | | | — | |
| Equity mutual funds | | 6 | | | — | | | 6 | | | — | |
| Bond mutual funds | | 110 | | | — | | | 110 | | | — | |
| Real estate trust funds | | 36 | | | — | | | — | | | 36 | |
| Private debt funds | | 17 | | | — | | | — | | | 17 | |
| | | | | | | | |
| | | | | | | | |
| Insurance contracts | | 2 | | | — | | | — | | | 2 | |
| Debt securities | | 59 | | | 59 | | | — | | | — | |
| Equity securities | | 37 | | | 37 | | | — | | | — | |
| Total | | $ | 307 | | | $ | 100 | | | $ | 152 | | | $ | 55 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 and cash equivalents | | $ | 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 | |
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.
Private debt funds—The fair value of the private debt funds is determined by the fund administrator based on available market quotes on the subject securities or an income approach valuation in order to estimate fair value. 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 | | Private Lending Funds |
| | (in millions) |
| Beginning balance at January 1, 2021 | $ | 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 | | | $ | — | |
| Actual return on plan assets: | | | | | | | | | |
| Relating to assets still held at the reporting date | $ | 5 | | | | | $ | 1 | | | $ | — | | | $ | (2) | |
| Purchases, sales and settlements | — | | | | | (10) | | | — | | | 19 | |
| Foreign currency translation and other | (4) | | | | | (2) | | | (2) | | | — | |
| Ending balance at December 31, 2022 | $ | 36 | | | | | $ | — | | | $ | 2 | | | $ | 17 | |
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 in 2023. 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, 2022. 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, 2022, 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, 2022, claims totaling approximately $105 million (using December 31, 2022 foreign currency rates) have been asserted against Aptiv in Brazil. As of December 31, 2022, the Company maintains accruals for these asserted claims of $5 million (using December 31, 2022 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 $40 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, 2022 and 2021, the undiscounted reserve for environmental investigation and remediation recorded in other liabilities was approximately $2 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, 2022 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, |
| | 2022 | | 2021 | | 2020 |
| | (in millions) |
| U.S. income (loss) | $ | 24 | | | $ | (2) | | | $ | (65) | |
| Non-U.S. income | 966 | | | 912 | | | 2,019 | |
| Income before income taxes and equity loss | $ | 990 | | | $ | 910 | | | $ | 1,954 | |
The provision (benefit) for income taxes is comprised of:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | (in millions) |
| Current income tax expense (benefit): | | | | | |
| U.S. federal | $ | 45 | | | $ | 1 | | | $ | (53) | |
| Non-U.S. | 205 | | | 156 | | | 154 | |
| U.S. state and local | 15 | | | 4 | | | — | |
| Total current | 265 | | | 161 | | | 101 | |
| Deferred income tax expense (benefit), net: | | | | | |
| U.S. federal | (43) | | | (17) | | | (14) | |
| Non-U.S. | (90) | | | (43) | | | (37) | |
| U.S. state and local | (11) | | | — | | | (1) | |
| Total deferred | (144) | | | (60) | | | (52) | |
| Total income tax provision | $ | 121 | | | $ | 101 | | | $ | 49 | |
Cash paid or withheld for income taxes was $194 million, $172 million and $106 million for the years ended December 31, 2022, 2021 and 2020, 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, |
| | 2022 | | 2021 | | 2020 |
| | (in millions) |
| Notional U.S. federal income taxes at statutory rate | $ | 208 | | | $ | 191 | | | $ | 410 | |
| Income taxed at other rates | (61) | | | (81) | | | (339) | |
| Change in valuation allowance | (63) | | | (17) | | | 10 | |
| Other change in tax reserves | 10 | | | 19 | | | 30 | |
| Intragroup reorganizations | — | | | (7) | | | (49) | |
| Withholding taxes | 38 | | | 37 | | | 26 | |
| Tax credits | (19) | | | (23) | | | (16) | |
| Change in tax law | — | | | (7) | | | (2) | |
| | | | | |
| Other adjustments | 8 | | | (11) | | | (21) | |
| Total income tax expense | $ | 121 | | | $ | 101 | | | $ | 49 | |
| Effective tax rate | 12 | % | | 11 | % | | 3 | % |
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 $12 million in 2022, $10 million in 2021 and $5 million in 2020, 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 2023 through 2041. The income tax benefits attributable to these tax holidays are approximately $3 million ($0.01 per share) in 2022, $1 million (less than $0.01 per share) in 2021 and $1 million (less than $0.01 per share) in 2020.
The effective tax rate in the year ended December 31, 2022 was impacted by favorable changes in valuation allowances offset by changes in reserves and provision to return adjustments. The effective tax rate was also impacted by impairments and charges related to our planned exit from our majority owned Russian subsidiary and other charges in Ukraine for which no tax benefit was recognized.
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.
On August 16, 2022, the Inflation Reduction Act (“IRA”) was signed into law in the U.S. Among other provisions, the IRA includes a 15% corporate minimum tax rate applied to certain large corporations and a 1% excise tax on corporate stock repurchases made after December 31, 2022. The IRA is not expected to have a significant impact on Aptiv’s consolidated financial statements.
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, |
| | 2022 | | 2021 |
| | (in millions) |
| Deferred tax assets: | | | |
| Pension | $ | 56 | | | $ | 76 | |
| Employee benefits | 26 | | | 30 | |
| Net operating loss carryforwards | 735 | | | 699 | |
| Warranty and other liabilities | 85 | | | 77 | |
| Operating lease liabilities | 98 | | | 78 | |
| Capitalized R&D | 111 | | | — | |
| Other | 222 | | | 184 | |
| Total gross deferred tax assets | 1,333 | | | 1,144 | |
| Less: valuation allowances | (756) | | | (766) | |
| Total deferred tax assets (1) | $ | 577 | | | $ | 378 | |
| Deferred tax liabilities: | | | |
| Fixed assets | $ | 45 | | | $ | 55 | |
| Tax on unremitted profits of certain foreign subsidiaries | 69 | | | 65 | |
| Intangibles | 588 | | | 174 | |
| Operating lease right-of-use assets | 97 | | | 78 | |
| Total gross deferred tax liabilities | 799 | | | 372 | |
| Net deferred tax (liabilities) assets | $ | (222) | | | $ | 6 | |
(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, |
| | 2022 | | 2021 |
| | (in millions) |
| | | |
| | | |
| Long-term assets | $ | 259 | | | $ | 159 | |
| Long-term liabilities | (481) | | | (153) | |
| Total deferred tax (liability) asset | $ | (222) | | | $ | 6 | |
The net deferred tax liability of $222 million as of December 31, 2022 is primarily comprised of deferred tax liability amounts in the U.S., Italy, Korea and Singapore partially offset by deferred tax assets primarily in Luxembourg, Mexico and the U.K.
Net Operating Loss and Tax Credit Carryforwards
As of December 31, 2022, the Company has gross deferred tax assets of approximately $715 million for non-U.S. net operating loss (“NOL”) carryforwards with recorded valuation allowances of $596 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., France and Ireland. The NOL carryforwards have expiration dates ranging from one year to an indefinite period.
Deferred tax assets include $68 million and $87 million of tax credit carryforwards with recorded valuation allowances of $61 million and $71 million at December 31, 2022 and 2021, respectively. These tax credit carryforwards expire at various times from 2023 through 2042.
Cumulative Undistributed Foreign Earnings
No income taxes have been provided on indefinitely reinvested earnings of certain foreign subsidiaries at December 31, 2022.
Withholding taxes of $69 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, |
| 2022 | | 2021 | | 2020 |
| | (in millions) |
| Balance at beginning of year | $ | 224 | | | $ | 231 | | | $ | 217 | |
| | | | | |
| Additions related to current year | 12 | | | 12 | | | 35 | |
| Additions related to prior years | 29 | | | 20 | | | 31 | |
| Reductions related to prior years | (33) | | | (36) | | | (20) | |
| Reductions due to expirations of statute of limitations | (7) | | | (3) | | | (28) | |
| Settlements | (1) | | | — | | | (4) | |
| | | | | |
| Balance at end of year | $ | 224 | | | $ | 224 | | | $ | 231 | |
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, 2022 and 2021, the amounts of unrecognized tax benefit that would reduce the Company’s effective tax rate were $214 million and $207 million, respectively. For 2022 and 2021, respectively, $83 million and $105 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 $25 million and $28 million at December 31, 2022 and 2021, respectively. Total interest and penalties recognized as part of income tax expense were a benefit of $2 million, and expenses of $4 million and $13 million for the years ended December 31, 2022, 2021 and 2020, 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 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 are 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. For the years ended December 31, 2022 and 2021, the impact of the MCPS calculated under the if-converted method was anti-dilutive, and as such 12.37 million and 12.37 million ordinary shares underlying the MCPS, respectively, were excluded from the diluted net 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, |
| | | | | | 2022 | | 2021 | | 2020 |
| | | | | | | (in millions, except per share data) |
| Numerator, basic: | | | | | | | | | | |
| Net income attributable to ordinary shareholders | | | | | | $ | 531 | | | $ | 527 | | | $ | 1,769 | |
| Numerator, diluted: | | | | | | | | | | |
| Net income attributable to Aptiv | | | | | | $ | 594 | | | $ | 590 | | | $ | 1,804 | |
| | | | | | | | | | |
| | | | | | | | | | |
| MCPS dividends (1) | | | | | | (63) | | | (63) | | | — | |
| Numerator, diluted | | | | | | $ | 531 | | | $ | 527 | | | $ | 1,804 | |
| Denominator: | | | | | | | | | | |
| Weighted average ordinary shares outstanding, basic | | | | | | 270.90 | | | 270.46 | | | 263.43 | |
Dilutive shares related to RSUs | | | | | | 0.28 | | | 0.76 | | | 0.44 | |
| Weighted average MCPS converted shares (1) | | | | | | — | | | — | | | 6.83 | |
Weighted average ordinary shares outstanding, including dilutive shares | | | | | | 271.18 | | | 271.22 | | | 270.70 | |
| | | | | | | | | | |
| Net income per share attributable to ordinary shareholders: | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Basic | | | | | | $ | 1.96 | | | $ | 1.95 | | | $ | 6.72 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Diluted | | | | | | $ | 1.96 | | | $ | 1.94 | | | $ | 6.66 | |
(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 years ended December 31, 2022 and 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 years ended December 31, 2022 and 2021. A summary of the ordinary shares repurchased during the year ended December 31, 2020 is as follows:
| | | | | | | | | |
| | | | | |
| | | | | |
| Total number of shares repurchased | | | 1,059,075 | | | |
| Average price paid per share | | | $ | 53.73 | | | |
| Total (in millions) | | | $ | 57 | | | |
As of December 31, 2022, 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 previously 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.
Preferred Dividends
The Company has declared and paid cash dividends per preferred share during the periods presented as follows:
| | | | | | | | | | | | | | | |
| | | | | Dividend | | Amount |
| | | | | Per Share | | (in millions) |
| 2022: | | | | | | | |
| Fourth quarter | | | | | $ | 1.375 | | | $ | 16 | |
| Third quarter | | | | | 1.375 | | | 15 | |
| Second quarter | | | | | 1.375 | | | 16 | |
| First quarter | | | | | 1.375 | | | 16 | |
| Total | | | | | $ | 5.500 | | | $ | 63 | |
| 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 | |
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, |
| 2022 | | 2021 | | 2020 |
| (in millions) |
| Foreign currency translation adjustments: | | | | | |
| Balance at beginning of year | $ | (588) | | | $ | (445) | | | $ | (597) | |
| Aggregate adjustment for the year (1) | (202) | | | (143) | | | 152 | |
| Balance at end of year | (790) | | | (588) | | | (445) | |
| | | | | |
| Gains (losses) on derivatives: | | | | | |
| Balance at beginning of year | $ | (17) | | | $ | 40 | | | $ | 13 | |
Other comprehensive income before reclassifications (net tax effect of $10, $0 and $0 ) | 37 | | | 8 | | | 6 | |
Reclassification to income (net tax effect of $1, $0 and $0) | (13) | | | (65) | | | 21 | |
| Balance at end of year | 7 | | | (17) | | | 40 | |
| | | | | |
| Pension and postretirement plans: | | | | | |
| Balance at beginning of year | $ | (67) | | | $ | (140) | | | $ | (135) | |
Other comprehensive income (loss) before reclassifications (net tax effect of $(26), $(23) and $7) | 51 | | | 57 | | | (18) | |
Reclassification to income (net tax effect of $(2), $(4) and $(3)) | 8 | | | 16 | | | 13 | |
| Balance at end of year | (8) | | | (67) | | | (140) | |
| | | | | |
| Accumulated other comprehensive loss, end of year | $ | (791) | | | $ | (672) | | | $ | (545) | |
(1)Includes gains of $74 million and $116 million and losses of $132 million for the years ended December 31, 2022, 2021 and 2020, respectively, related to non-derivative net investment hedges. Refer to Note 17. Derivatives and Hedging Activities for further description of these hedges. Includes $6 million of accumulated currency translation adjustment losses reclassified to net income as a result of the liquidation of a foreign subsidiary for the year ended December 31, 2022.
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 |
| 2022 | | 2021 | | 2020 | |
| | (in millions) | | |
| Foreign currency translation adjustments: | | | | | | | | |
| Liquidation of foreign subsidiary (1) | | $ | (6) | | | $ | — | | | $ | — | | | Other expense, net |
| | (6) | | | — | | | — | | | Income before income taxes |
| | — | | | — | | | — | | | Income tax expense |
| | (6) | | | — | | | — | | | Net income |
| | — | | | — | | | — | | | Net (loss) income attributable to noncontrolling interest |
| | $ | (6) | | | $ | — | | | $ | — | | | Net income attributable to Aptiv |
| | | | | | | | |
| Gains (losses) on derivatives: | | | | | | | | |
| Commodity derivatives | | $ | (5) | | | $ | 68 | | | $ | (7) | | | Cost of sales |
| Foreign currency derivatives | | 19 | | | (3) | | | (14) | | | Cost of sales |
| | | | | | | | |
| | 14 | | | 65 | | | (21) | | | Income before income taxes |
| | (1) | | | — | | | — | | | Income tax expense |
| | 13 | | | 65 | | | (21) | | | Net income |
| | — | | | — | | | — | | | Net (loss) income attributable to noncontrolling interest |
| | $ | 13 | | | $ | 65 | | | $ | (21) | | | Net income attributable to Aptiv |
| | | | | | | | |
| Pension and postretirement plans: | | | | | | | | |
| Actuarial loss | | $ | (10) | | | $ | (15) | | | $ | (16) | | | Other expense, net (2) |
| | | | | | | | |
| Curtailment loss | | — | | | (5) | | | — | | | Other expense, net (2) |
| | (10) | | | (20) | | | (16) | | | Income before income taxes |
| | 2 | | | 4 | | | 3 | | | Income tax expense |
| | (8) | | | (16) | | | (13) | | | Net income |
| | — | | | — | | | — | | | Net (loss) income attributable to noncontrolling interest |
| | $ | (8) | | | $ | (16) | | | $ | (13) | | | Net income attributable to Aptiv |
| | | | | | | | |
| Total reclassifications for the year | | $ | (1) | | | $ | 49 | | | $ | (34) | | | |
(1)Represents accumulated currency translation adjustment losses reclassified to net income as a result of the liquidation of a foreign subsidiary during the year ended December 31, 2022.
(2)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, 2022, 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 | | 96,785 | | | pounds | | $ | 365 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Foreign Currency | | Quantity Hedged | | Unit of Measure | | Notional Amount (Approximate USD Equivalent) |
| | | (in millions) |
| Mexican Peso | | 22,516 | | | MXN | | $ | 1,155 | |
| Chinese Yuan Renminbi | | 3,223 | | | RMB | | 465 | |
| Euro | | 128 | | | EUR | | 135 | |
| Polish Zloty | | 730 | | | PLN | | 165 | |
| | | | | | |
| Hungarian Forint | | 24,013 | | | HUF | | 65 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
As of December 31, 2022, Aptiv has entered into derivative instruments to hedge cash flows extending out to December 2024.
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, 2022 were $29 million (approximately $40 million, net of tax). Of this total, approximately $15 million of gains are expected to be included in cost of sales within the next 12 months and approximately $14 million of gains 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, 2022, 2021 and 2020, the Company received $7 million, and made net payments of $17 million and $1 million, respectively, at settlement related to these series of forward contracts which matured throughout each respective year. In December 2022, the Company entered into forward contracts with a total notional amount of 700 million RMB (approximately $100 million, using December 31, 2022 foreign currency rates), which mature in March 2023. 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, 2022 and 2021, $74 million and $116 million of gains, respectively, were recognized within the cumulative translation adjustment component of OCI. Included in accumulated OCI related to these net investment hedges were cumulative gains of $37 million as of December 31, 2022 and losses of $37 million as of December 31, 2021.
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, 2022 and 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Asset Derivatives | | Liability Derivatives | | Net Amounts of Assets and (Liabilities) Presented in the Balance Sheet |
| | Balance Sheet Location | | December 31,
2022 | | Balance Sheet Location | | December 31,
2022 | | December 31,
2022 |
| | (in millions) |
Derivatives designated as cash flow hedges: | | | | | | | | |
| Commodity derivatives | Other current assets | | $ | — | | | Accrued liabilities | | $ | 28 | | | |
| Foreign currency derivatives* | Other current assets | | 54 | | | Other current assets | | 11 | | | $ | 43 | |
| | | | | | | | | |
| Commodity derivatives | Other long-term assets | | — | | | Other long-term liabilities | | 7 | | | |
| Foreign currency derivatives* | Other long-term assets | | 17 | | | Other long-term assets | | 3 | | | 14 | |
| Foreign currency derivatives* | Other long-term liabilities | | 1 | | | Other long-term liabilities | | 1 | | | — | |
| Derivatives designated as net investment hedges: | | | | | | | |
| Foreign currency derivatives | Other current assets | | — | | | Accrued liabilities | | 1 | | | |
| Total derivatives designated as hedges | | $ | 72 | | | | | $ | 51 | | | |
| | | | | | | | | |
| Derivatives not designated: | | | | | | | | | |
| | | | | | | | | |
| Foreign currency derivatives* | Other current assets | | $ | 1 | | | Other current assets | | $ | — | | | 1 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total derivatives not designated as hedges | | $ | 1 | | | | | $ | — | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | | |
* 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 were in a net asset position as of December 31, 2022 and 2021.
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, 2022, 2021 and 2020 are as follows:
| | | | | | | | | | | | | |
| Year Ended December 31, 2022 | (Loss) Gain Recognized in OCI | | (Loss) Gain Reclassified from OCI into Income | | |
| | (in millions) |
| Derivatives designated as cash flow hedges: | | | | | |
| Commodity derivatives | $ | (70) | | | $ | (5) | | | |
| Foreign currency derivatives | 90 | | | 19 | | | |
| Derivatives designated as net investment hedges: | | | | | |
| Foreign currency derivatives | 7 | | | — | | | |
| Total | $ | 27 | | | $ | 14 | | | |
| | | | | |
| | Loss Recognized
in Income |
| (in millions) |
| Derivatives not designated: | |
| |
| Foreign currency derivatives | $ | (8) | |
| Total | $ | (8) | |
| | | | | | | | | | | | | |
| 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 | $ | — | |
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, 2022, 2021 and 2020.
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, 2022 and 2021, Aptiv was in a net derivative asset position of $22 million and $21 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 is 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 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. The Company regularly reviews these assumptions and makes adjustments to the fair value measurements as required by facts and circumstances. As of December 31, 2022, the Company has determined that all earn-out provisions have been achieved under existing agreements.
As of December 31, 2022 and 2021, the liability for contingent consideration was $10 million (which was classified within other current liabilities) and $10 million (which was classified within other long-term liabilities), respectively, representing the maximum required amounts to be paid under existing agreements. 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, 2022 and 2021 were as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| | (in millions) |
| Fair value at beginning of year | $ | 10 | | | $ | 52 | |
| Additions | — | | | 10 | |
| Payments | — | | | (52) | |
| | | |
| | | |
| Fair value at end of year | $ | 10 | | | $ | 10 | |
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 a total of $52 million from 2019 to 2021 related to the contingent consideration liability into an escrow account, which was classified as restricted cash in the consolidated balance sheet upon deposit. 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, 2022 and 2021, 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, 2022 | |
| | | | | | | |
| Foreign currency derivatives | $ | 58 | | | $ | — | | | $ | 58 | | | $ | — | |
| Publicly traded equity securities | 17 | | | 17 | | | — | | | — | |
| Total | $ | 75 | | | $ | 17 | | | $ | 58 | | | $ | — | |
| 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, 2022 and 2021, 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, 2022 | |
| Commodity derivatives | $ | 35 | | | $ | — | | | $ | 35 | | | $ | — | |
| Foreign currency derivatives | 1 | | | — | | | 1 | | | — | |
| Contingent consideration | 10 | | | — | | | — | | | 10 | |
| Total | $ | 46 | | | $ | — | | | $ | 36 | | | $ | 10 | |
| As of December 31, 2021 | | | | | | | |
| | | | | | | |
| Foreign currency derivatives | $ | 20 | | | $ | — | | | $ | 20 | | | $ | — | |
| Contingent consideration | 10 | | | — | | | — | | | 10 | |
| Total | $ | 30 | | | $ | — | | | $ | 20 | | | $ | 10 | |
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, 2022 and 2021, total debt was recorded at $6,491 million and $4,067 million, respectively, and had estimated fair values of $5,241 million and $4,297 million, respectively. For all other financial instruments recorded as of December 31, 2022 and 2021, 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 inventories, long-lived assets, assets and liabilities held for sale, intangible assets, equity investments without readily determinable fair values and liabilities for exit or disposal activities measured at fair value upon initial recognition. During the year ended December 31, 2022, Aptiv recorded non-cash long-lived asset impairment charges of $8 million and other charges of $3 million. These charges were primarily related to the conflict between Ukraine and Russia and were recorded within cost of sales. During the years ended December 31, 2021 and 2020, Aptiv recorded non-cash asset impairment charges totaling $2 million and $10 million, respectively, within cost of sales related to declines in the fair values of certain fixed assets. In addition, Aptiv determined that our majority owned subsidiary in Russia met the held for sale criteria as of December 31, 2022. Consequently, during the year ended December 31, 2022, the Company recorded a charge of $51 million to reduce the carrying value of the subsidiary to fair value, which was recorded primarily within cost of sales. Fair value of long-lived and other 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 other assets fall in Level 3 of the fair value hierarchy.
19. OTHER INCOME, NET
Other income (expense), net included:
| | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | (in millions) |
| Interest income | | | | | $ | 86 | | | $ | 9 | | | $ | 8 | |
| | | | | | | | | |
| Loss on extinguishment of debt (Note 11) | | | | | — | | | (126) | | | — | |
| Loss on modification of debt | | | | | — | | | (1) | | | (4) | |
| Components of net periodic benefit cost other than service cost | | | | | (15) | | | (21) | | | (20) | |
| Costs associated with acquisitions and other transactions | | | | | (61) | | | — | | | — | |
| Change in fair value of equity investments without readily determinable fair value (Note 5) | | | | | — | | | 9 | | | 10 | |
| Loss on change in fair value of publicly traded equity securities (Note 5) | | | | | (52) | | | — | | | — | |
| Other, net | | | | | (12) | | | 1 | | | 6 | |
| Other expense, net | | | | | $ | (54) | | | $ | (129) | | | $ | — | |
During the years ended December 31, 2022 and 2021, Aptiv recognized net unrealized losses of $49 million and gains of $5 million, respectively, for publicly traded equity securities still held as of December 31, 2022. As further discussed in Note 20. Acquisitions and Divestitures, Aptiv also incurred approximately $43 million and $10 million in transaction costs related to the acquisitions of Wind River and Intercable Automotive, respectively, during the year ended December 31, 2022.
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.
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.
20. ACQUISITIONS AND DIVESTITURES
Acquisition of Wind River Systems, Inc.
On December 23, 2022, Aptiv acquired 100% of the equity interests of Wind River Systems, Inc. (“Wind River”), a global leader in delivering software for the intelligent edge, for total consideration of approximately $3.5 billion, instead of the initial purchase price of $4.3 billion agreed to in January 2022. Aptiv and the seller agreed to the amended purchase price, in part, as a result of certain changes in Wind River's current operating structure required to bring the regulatory approval process to a satisfactory conclusion. The results of operations of Wind River are reported within the Advanced Safety and User Experience segment from the date of acquisition. The Company acquired Wind River utilizing cash on hand, which included proceeds from the 2022 Senior Notes. Refer to Note 11. Debt for additional information regarding the 2022 Senior Notes. Upon completion of the acquisition, Aptiv incurred transaction related expenses totaling approximately $43 million, which were recorded within other expense, net in the statement of operations.
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 2022. The preliminary purchase price and related allocation to the acquired net assets of Wind River based on their estimated fair values is shown below (in millions):
Assets acquired and liabilities assumed | | | | | |
| Purchase price, cash consideration, net of cash acquired (1) | $ | 3,519 | |
| |
| |
| |
| Accounts receivable, net | $ | 91 | |
| Contract assets | 67 | |
| Property, plant and equipment | 14 | |
| Intangible assets | 1,490 | |
| Contract liabilities | (101) | |
| Accrued liabilities | (62) | |
| Deferred tax liabilities | (287) | |
| Other assets, net | 5 | |
| Identifiable net assets acquired | 1,217 | |
| Goodwill resulting from purchase | 2,302 | |
| Total purchase price allocation | $ | 3,519 | |
(1)Approximately $35 million of the cash consideration was unpaid as of December 31, 2022 and was therefore not recognized as a cash outflow from investing activities for the year ended December 31, 2022. This amount is expected to be paid during the first quarter of 2023.
Intangible assets primarily include $750 million of technology-related assets with approximate useful lives of sixteen years, $630 million for the fair value of customer-based assets with approximate useful lives ranging from sixteen to twenty-two years and $110 million recognized for the fair value of the acquired trade name with an approximate useful life of eighteen years. The estimated fair value of these assets was based on third-party valuations and management’s estimates, generally utilizing income and market approaches and is sensitive to certain assumptions including discount rates, projected revenue growth rates and profit margin. These assumptions are forward-looking in nature and are dependent on the future performance of Wind River and could be affected by future economic and market conditions. Goodwill recognized in this transaction is primarily attributable to expanded market opportunities, including integrating Wind River’s product offerings with existing Company offerings, synergies expected to arise after the acquisition and the assembled workforce of Wind River 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 valuations related to 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 Controlling Interest in Intercable Automotive Solutions
On November 30, 2022, Aptiv acquired 85% of the equity interests of Intercable Automotive Solutions S.r.l. (“Intercable Automotive”), a manufacturer of high-voltage busbars and interconnect solutions, for total consideration of $606 million. Intercable Automotive was formerly a subsidiary of Intercable S.r.l. The results of operations of Intercable Automotive are reported within the Signal and Power Solutions segment from the date of acquisition. The Company acquired its interest in Intercable Automotive utilizing cash on hand. Upon completion of the acquisition, Aptiv incurred transaction related expenses totaling approximately $10 million, which were recorded within other expense, net in the statement of operations.
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 2022. The preliminary purchase price and related allocation to the acquired net assets of Intercable Automotive based on their estimated fair values is shown below (in millions):
Assets acquired and liabilities assumed
| | | | | |
| Purchase price, cash consideration, net of cash acquired | $ | 606 | |
| |
| |
| Inventory | $ | 77 | |
| Property, plant and equipment | 77 | |
| Intangible assets | 285 | |
| Deferred tax liabilities | (82) | |
| Other liabilities, net | (13) | |
| Identifiable net assets acquired | 344 | |
| Goodwill resulting from purchase | 357 | |
| Total | 701 | |
| Less: redeemable noncontrolling interest | (95) | |
| Total purchase price allocation | $ | 606 | |
Intangible assets include $201 million recognized for the fair value of customer-based assets with approximate useful lives of nineteen years, $63 million of technology-related assets with estimated useful lives of approximately fifteen years and $21 million recognized for the fair value of the trade name license with an approximate useful life of fifteen 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 Intercable Automotive and is not deductible for tax purposes.
Concurrent with the acquisition, the Company entered into an agreement with the noncontrolling interest holders that provides the Company with the right to purchase, and the noncontrolling interest holders with the right to sell, the remaining 15% of Intercable Automotive for cash of up to €155 million, beginning in 2026. The final purchase price is contractually defined and will be determined based on Intercable Automotive’s 2025 operating results. Due to the noncontrolling interest holders’ redemption rights, the noncontrolling interest has been classified as redeemable noncontrolling interest in the temporary equity section of the consolidated balance sheet. The fair value of the noncontrolling interest was determined using a Monte Carlo simulation approach and includes several assumptions including estimated future profitability, expected volatility rate and risk free rate.
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 valuations related to 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 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 purchase price and related allocation were finalized in the fourth quarter of 2022, 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 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 | $ | 35 | |
| Other assets, net | 10 | |
| Identifiable net assets acquired | 45 | |
| Goodwill resulting from purchase | 43 | |
| 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 and is expected to be partially 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 Krono-Safe Automotive, SAS
On November 9, 2021, Aptiv acquired 100% of the equity interests of Krono-Safe Automotive (“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 were finalized in the fourth quarter of 2022.
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. 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 purchase price and related allocation were finalized in the second quarter of 2022. The final 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 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.
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, Motional is expected to fund all of its future operating expenses and investments in autonomous driving technologies for the foreseeable future. Consequently, Aptiv is not 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.
The Company’s investment in Motional is accounted for using the equity method of accounting and Aptiv recognized an equity loss of $291 million, $215 million and $98 million, net of tax, during the years ended December 31, 2022, 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, was $41 million for the year ended December 31, 2020.
Planned Exit from Majority Owned Russian Subsidiary
Given the sanctions put in place by the European Union (the “E.U.”), U.S. and other governments, which restrict our ability to conduct business in Russia, we initiated a plan to exit our majority owned subsidiary in Russia in the second quarter of 2022. As a result, the Company determined that this subsidiary, which is reported within the Signal and Power Solutions segment, met the held for sale criteria as of December 31, 2022. Consequently, during the year ended December 31, 2022, the Company recorded a pre-tax charge of $51 million to impair the carrying value of the Russian subsidiary’s net assets to fair value, which was recorded primarily within cost of sales in the consolidated statement of operations. Approximately $25 million of these charges were attributable to the noncontrolling interest based on the noncontrolling shareholder’s economic interest. The remaining assets and liabilities of the subsidiary were reclassified as held for sale and reflect the appropriate valuation allowances. The net assets and liabilities are de minimis and are presented as other current assets and other current liabilities, respectively, in the consolidated balance sheet as of December 31, 2022. These assets and liabilities represent the only balances recorded as held for sale as of December 31, 2022.
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 2022 | | 23,387 | | | $ | 2 | | | April 2023 | | N/A | | N/A | | N/A |
| April 2021 | | 17,589 | | | 3 | | | April 2022 | | 15,633 | | | $ | 2 | | | 1,956 | |
| April 2020 | | 48,745 | | | 3 | | | April 2021 | | 41,896 | | | 6 | | | 6,849 | |
(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% (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 - 2022 Grants | | | 2018 - 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 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 |
| February 2022 | | 0.59 | | | 80 | | | Annually on anniversary of grant date, 2023 - 2025 | | December 31, 2024 |
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 2022 | | 354,600 | | | $ | 46 | | | 140,409 | | | 325,283 | | | $ | 42 | | | 136,143 | |
| Q1 2021 | | 449,426 | | | 67 | | | 177,825 | | | 288,074 | | | 43 | | | 121,609 | |
| Q1 2020 | | 468,240 | | | 37 | | | 181,495 | | | 580,390 | | | 45 | | | 243,080 | |
| | | | | | | | | | | | |
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, 2020 | 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 | |
| Granted | 939 | | | 122.73 | |
| Vested | (713) | | | 109.36 | |
| Forfeited | (323) | | | 134.75 | |
| Nonvested, December 31, 2022 | 1,247 | | | 136.61 | |
As of December 31, 2022, there were approximately 318,000 Aptiv performance-based RSUs, with a weighted average grant date fair value of $121.04, that were vested but not yet distributed.
Aptiv recognized share-based compensation expense of $86 million ($85 million, net of tax), $87 million ($86 million, net of tax) and $60 million ($60 million net of tax) based on the Company’s best estimate of ultimate performance against the respective targets during the years ended December 31, 2022, 2021 and 2020, respectively. Aptiv will continue to recognize compensation expense, based on the grant 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, 2022, unrecognized compensation expense on a pre-tax basis of approximately $105 million is anticipated to be recognized over a weighted average period of approximately two years. For the years ended December 31, 2022, 2021 and 2020, respectively, approximately $36 million, $45 million and $33 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 services in advanced safety, user experience and connectivity and security solutions, as well as cloud-native software platforms, autonomous driving technologies and DevOps tools.
•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, amortization, 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 and other related charges and gains (losses) on business divestitures and other transactions (“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.
Effective on January 1, 2022, the Company now excludes amortization expense of intangible assets from the calculation of Adjusted Operating Income, as reflected in the definition above. The Company’s management believes that the updated calculation of this financial measure will be more useful to both management and investors in their analysis of the Company’s results of operations due to recent acquisitions. Amortization of intangible assets generally results from a write-up in the value of assets in connection with an acquisition. The Company believes that exclusion of amortization expense will facilitate more comparable operating results of the Company over time, between periods when the Company is more or less acquisitive and allows for improved comparison with both acquisitive and non-acquisitive peer companies. The historical presentation of Adjusted Operating Income in the tables below has been revised to be consistent with this updated calculation.
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, 2022, 2021 and 2020, as well as balance sheet data as of December 31, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Signal and Power Solutions | | | | Advanced Safety and User Experience | | Eliminations and Other (1) | | Total |
| | (in millions) |
| For the Year Ended December 31, 2022: | | | | | | | | | |
| Net sales | $ | 12,943 | | | | | $ | 4,587 | | | $ | (41) | | | $ | 17,489 | |
| Depreciation and amortization | $ | 584 | | | | | $ | 178 | | | $ | — | | | $ | 762 | |
| Adjusted operating income | $ | 1,441 | | | | | $ | 144 | | | $ | — | | | $ | 1,585 | |
| Operating income (2) | $ | 1,195 | | | | | $ | 68 | | | $ | — | | | $ | 1,263 | |
| Equity income (loss), net of tax | $ | 20 | | | | | $ | (299) | | | $ | — | | | $ | (279) | |
| Net loss attributable to noncontrolling interest | $ | (3) | | | | | $ | — | | | $ | — | | | $ | (3) | |
| Net loss attributable to redeemable noncontrolling interest | $ | (1) | | | | | $ | — | | | $ | — | | | $ | (1) | |
| Capital expenditures | $ | 573 | | | | | $ | 196 | | | $ | 75 | | | $ | 844 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 (3) | $ | 1,225 | | | | | $ | 153 | | | $ | — | | | $ | 1,378 | |
| Operating income (4) | $ | 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 (3) | $ | 900 | | | | | $ | 111 | | | $ | — | | | $ | 1,011 | |
| Operating income (5) | $ | 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 | |
(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 2022 related to costs associated with employee termination benefits and other exit costs of $30 million for Signal and Power Solutions and $55 million for Advanced Safety and User Experience.
(3)As described above, the calculation of adjusted operating income excludes amortization expense effective on January 1, 2022. The historical presentation of adjusted operating income as shown in this table has been revised to be consistent with the updated calculation.
(4)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.
(5)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.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Signal and Power Solutions | | | | Advanced Safety and User Experience | | Eliminations and Other (1) | | Total |
| | (in millions) |
| Balance as of December 31, 2022: | | | | | | | | | |
| Investment in affiliates | $ | 126 | | | | | $ | 1,597 | | | $ | — | | | $ | 1,723 | |
| Goodwill (2) | $ | 2,756 | | | | | $ | 2,350 | | | $ | — | | | $ | 5,106 | |
| Total segment assets (2) | $ | 14,575 | | | | | $ | 11,864 | | | $ | (4,555) | | | $ | 21,884 | |
| 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 | |
(1)Eliminations and Other includes the elimination of inter-segment transactions.
(2)Signal and Power Solutions includes amounts recognized as part of the preliminary purchase price allocation following the acquisition of Intercable Automotive in November 2022. Advanced Safety and User Experience includes amounts recognized as part of the preliminary purchase price allocation following the acquisition of Wind River in December 2022. Refer to Note 20. Acquisitions and Divestitures for additional information on these acquisitions.
The reconciliation of Adjusted Operating Income to operating income includes, as applicable, amortization, 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 and other related charges and gains (losses) on business divestitures and other transactions. The reconciliations of Adjusted Operating Income to net income attributable to Aptiv for the years ended December 31, 2022, 2021 and 2020 are as follows:
| | | | | | | | | | | | | | | | | | | | | |
| Signal and Power Solutions | | | | Advanced Safety and User Experience | | | | Total |
| | (in millions) |
| For the Year Ended December 31, 2022: | | | | | | | | | |
| Adjusted operating income | $ | 1,441 | | | | | $ | 144 | | | | | $ | 1,585 | |
| Amortization | (139) | | | | | (10) | | | | | (149) | |
| Restructuring | (30) | | | | | (55) | | | | | (85) | |
| Other acquisition and portfolio project costs | (15) | | | | | (11) | | | | | (26) | |
| | | | | | | | | |
| Asset impairments | (8) | | | | | — | | | | | (8) | |
| | | | | | | | | |
| | | | | | | | | |
| Other charges related to Ukraine/Russia conflict (1) | (54) | | | | | — | | | | | (54) | |
| Operating income | $ | 1,195 | | | | | $ | 68 | | | | | 1,263 | |
| Interest expense | | | | | | | | | (219) | |
| Other expense, net | | | | | | | | | (54) | |
| Income before income taxes and equity loss | | | | | | | | | 990 | |
| Income tax expense | | | | | | | | | (121) | |
| Equity loss, net of tax | | | | | | | | | (279) | |
| | | | | | | | | |
| | | | | | | | | |
| Net income | | | | | | | | | 590 | |
| Net loss attributable to noncontrolling interest | | | | | | | | | (3) | |
| Net loss attributable to redeemable noncontrolling interest | | | | | | | | | (1) | |
| Net income attributable to Aptiv | | | | | | | | | $ | 594 | |
(1)Primarily consists of charges related to the designation of our majority owned Russian subsidiary as held for sale as of December 31, 2022. Refer to Note 20. Acquisitions and Divestitures for further information.
| | | | | | | | | | | | | | | | | | | | | |
| Signal and Power Solutions | | | | Advanced Safety and User Experience | | | | Total |
| | (in millions) |
| For the Year Ended December 31, 2021: | | | | | | | | | |
| Adjusted operating income | $ | 1,225 | | | | | $ | 153 | | | | | $ | 1,378 | |
| Amortization | (141) | | | | | (7) | | | | | (148) | |
| 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 | $ | 900 | | | | | $ | 111 | | | | | $ | 1,011 | |
| Amortization | (138) | | | | | (6) | | | | | (144) | |
| 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 | |
Information concerning principal geographic areas is set forth below. Net sales reflects the manufacturing location and is for the years ended December 31, 2022, 2021 and 2020. Long-lived assets is as of December 31, 2022, 2021 and 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| | Net Sales | | Long-Lived Assets (1) | | Net Sales | | Long-Lived Assets (1) | | Net Sales | | Long-Lived Assets (1) |
| (in millions) |
| United States (2) | $ | 6,292 | | | $ | 1,136 | | | $ | 5,196 | | | $ | 1,010 | | | $ | 4,382 | | | $ | 985 | |
| Other North America | 159 | | | 291 | | | 136 | | | 248 | | | 112 | | | 253 | |
| Europe, Middle East & Africa (3) | 5,372 | | | 1,429 | | | 5,179 | | | 1,390 | | | 4,483 | | | 1,440 | |
| Asia Pacific (4) | 5,274 | | | 1,031 | | | 4,829 | | | 978 | | | 3,898 | | | 953 | |
| South America | 392 | | | 59 | | | 278 | | | 51 | | | 191 | | | 50 | |
| Total | $ | 17,489 | | | $ | 3,946 | | | $ | 15,618 | | | $ | 3,677 | | | $ | 13,066 | | | $ | 3,681 | |
(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 $1,485 million, $1,436 million and $1,248 million in Germany for the years ended December 31, 2022, 2021 and 2020, 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, 2022 and 2021.
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Three Months Ended December 31, |
| | | | | | | | 2022 | | | 2021 |
| | | | | | | | (in millions, except per share amounts) |
| | | | | | | | | | |
| Net sales | | | | | | | $ | 4,640 | | | | $ | 4,134 | |
| Cost of sales | | | | | | | 3,827 | | | | 3,543 | |
| Gross margin | | | | | | | $ | 813 | | | | $ | 591 | |
| Operating income | | | | | | | $ | 440 | | | | $ | 260 | |
| Net income (1) | | | | | | | 266 | | | | 39 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Net income attributable to Aptiv | | | | | | | 249 | | | | 31 | |
| Net income attributable to ordinary shareholders | | | | | | | 233 | | | | 15 | |
| Basic net income per share: | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Basic net income per share attributable to ordinary shareholders | | | | | | | $ | 0.86 | | | | $ | 0.06 | |
| Weighted average number of basic shares outstanding | | | | | | | 270.95 | | | | 270.52 | |
| Diluted net income per share: | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Diluted net income per share attributable to ordinary shareholders | | | | | | | $ | 0.86 | | | | $ | 0.06 | |
| Weighted average number of diluted shares outstanding | | | | | | | 271.40 | | | | 271.47 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
(1)In the fourth quarter of 2022, Aptiv incurred approximately $53 million in transaction costs related to the acquisitions of Wind River and Intercable Automotive. In the fourth quarter of 2021, Aptiv recognized a loss on 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.
The Company also generates revenue from the sale of software licenses, post delivery support and maintenance and professional software services, primarily from Wind River, which the Company acquired in December 2022. Refer to Note 20. Acquisitions and Divestitures for further information on this acquisition. The Company generally recognizes revenue for software licenses and professional software services at a point in time upon delivery or when the services are provided. Revenue from post delivery support and maintenance for software contracts are recognized over time on a ratable basis over the contract term. Under certain of these arrangements, timing may differ between revenue recognition and billing.
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, 2022, 2021 and 2020. Information concerning geographic market reflects the manufacturing location.
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, 2022: | Signal and Power Solutions | | Advanced Safety and User Experience | | Eliminations and Other | | Total |
| | | | | | | |
| (in millions) |
| Geographic Market | | | | | | | |
| | | | | | | |
| North America | $ | 5,026 | | | $ | 1,435 | | | $ | (10) | | | $ | 6,451 | |
| Europe, Middle East and Africa | 3,289 | | | 2,094 | | | (11) | | | 5,372 | |
| Asia Pacific | 4,236 | | | 1,058 | | | (20) | | | 5,274 | |
| South America | 392 | | | — | | | — | | | 392 | |
| Total net sales | $ | 12,943 | | | $ | 4,587 | | | $ | (41) | | | $ | 17,489 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Contract Balances
As of December 31, 2022, the balance of contract liabilities, which solely consisted of deferred revenue, was $99 million (of which $90 million was recorded in other current liabilities and $9 million was recorded in other long-term liabilities). There were no contract liabilities recorded as of December 31, 2021.
Contract assets include amounts related to the Company’s contractual right to consideration for both completed and partially completed performance obligations that have not been invoiced. As of December 31, 2022, the balance of contract assets was $67 million (of which $24 million was recorded in other current assets and $43 million was recorded in other long-term assets). There were no contract assets recorded as of December 31, 2021.
The increase in our contract liabilities and contract assets during the year ended December 31, 2022 is due to the acquisition of Wind River.
Remaining Performance Obligations
For production parts, customer contracts generally are represented by a combination of a current purchase order and a current production schedule issued by the customer. There are no contracts for production parts 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 for production parts.
Customer contracts for sales of software and related services are generally represented by a sales contract or purchase order with contract durations typically ranging from one to three years. Remaining performance obligations include contract liabilities and unbilled amounts that will be recognized as revenue in future periods. Transaction price allocated to the remaining performance obligation is based on the standalone selling price. The value of the transaction price allocated to remaining performance obligations under software and related service contracts as of December 31, 2022 was approximately $135 million. The Company expects to recognize approximately 67% of remaining performance obligations as revenue in the next twelve months, and the remainder thereafter.
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, 2022 and 2021, Aptiv has recorded $78 million (of which $17 million was classified within other current assets and $61 million was classified within other long-term assets) and $92 million (of which $34 million was classified within other current assets and $58 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 $28 million, $31 million and $18 million for the years ended December 31, 2022, 2021 and 2020, 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 six years as of December 31, 2022. Total income under the agreement was $4 million, $3 million and $3 million during the years ended December 31, 2022, 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, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| | (in millions) |
| Lease cost: | | | | | |
| Finance lease cost: | | | | | |
| Amortization of right-of-use assets | $ | 4 | | | $ | 4 | | | $ | 5 | |
| Interest on lease liabilities | 1 | | | 1 | | | 1 | |
| Total finance lease cost | 5 | | | 5 | | | 6 | |
| Operating lease cost | 122 | | | 119 | | | 111 | |
| Short-term lease cost | 14 | | | 13 | | | 13 | |
| Variable lease cost | 1 | | | — | | | — | |
| Sublease income (1) | (5) | | | (4) | | | (4) | |
| Total lease cost | $ | 137 | | | $ | 133 | | | $ | 126 | |
(1)Sublease income excludes rental income from owned properties of $8 million, $10 million and $10 million for the years ended December 31, 2022, 2021 and 2020, respectively, which is included in other income, net.
Supplemental cash flow and other information related to leases was as follows:
| | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | | | | | | |
| | | | (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 | | | 116 | | | 122 | | | 107 | |
| Financing cash flows for finance leases | | | 4 | | | 4 | | | 4 | |
| Right-of-use assets obtained in exchange for lease obligations: | | | | | | | |
| Operating leases | | | $ | 102 | | | $ | 74 | | | $ | 35 | |
| Finance leases | | | 3 | | | 1 | | | 1 | |
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 |
| | | | | |
| | | (dollars in millions) |
| Operating leases: | | | | | |
| Operating lease right-of-use assets | | | $ | 451 | | | $ | 383 | |
Accrued liabilities (Note 8) | | | $ | 109 | | | $ | 92 | |
| Long-term operating lease liabilities | | | 361 | | | 304 | |
| Total operating lease liabilities | | | $ | 470 | | | $ | 396 | |
| | | | | |
| Finance leases: | | | | | |
| Property and equipment | | | $ | 35 | | | $ | 26 | |
| Less: accumulated depreciation | | | (19) | | | (15) | |
| Total property, net | | | $ | 16 | | | $ | 11 | |
Short-term debt (Note 11) | | | $ | 6 | | | $ | 3 | |
Long-term debt (Note 11) | | | 12 | | | 10 | |
| Total finance lease liabilities | | | $ | 18 | | | $ | 13 | |
| | | | | |
| Weighted average remaining lease term: | | | | | |
| Operating leases | | | 6 years | | 6 years |
| Finance leases | | | 4 years | | 5 years |
| | | | | |
| Weighted average discount rate: | | | | | |
| Operating leases | | | 3.25 | % | | 3.00 | % |
| Finance leases | | | 4.00 | % | | 3.50 | % |
Maturities of lease liabilities were as follows:
| | | | | | | | | | | |
| Operating
Leases | | Finance
Leases |
| | | |
| | (in millions) |
| As of December 31, 2022 | | | |
| 2023 | $ | 121 | | | $ | 6 | |
| 2024 | 95 | | | 5 | |
| 2025 | 78 | | | 4 | |
| 2026 | 65 | | | 3 | |
| 2027 | 49 | | | 2 | |
| Thereafter | 106 | | | 1 | |
| Total lease payments | 514 | | | 21 | |
| Less: imputed interest | (44) | | | (3) | |
| Total | $ | 470 | | | $ | 18 | |
| | | |
As of December 31, 2022, the Company has entered into additional operating leases, primarily for real estate, that have not yet commenced of approximately $55 million. These operating leases are anticipated to commence primarily in 2023 with lease terms of five to ten years.